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Will Switzerland catch the economic flu as Germany coughs?

International trade disputes dampened German economic production in the second quarter. Switzerland will not go unnoticed.

René Höltschi

Swiss suppliers suffer from the weakness of the German industry. (Denis Balibouse / equilibreplus.com)

Swiss suppliers suffer from the weakness of the German industry. (Denis Balibouse / equilibreplus.com)

Germany's economic development towards Switzerland cannot be indifferent: out loud In the second quarter of 2019, according to the Federal Customs Administration, nearly 20% of all goods were exported to the neighboring country north. The entire EU, at 55%, accounted for more than half of all Swiss exports. Measured by this, even the weight of the US and China with shares of 18%, or slightly less than 6%, is quite modest. Moreover, as a shining example of a small open economy, Switzerland is more dependent on foreign trade than larger countries. For this reason, they will never be able to fully depend on the economic cycle in Germany, says Ronald Indergand, Head of the Economic Sector at the Secretary of State for Economic Affairs (Seco).

Europe is losing money

According to the Federal Bureau of Statistics, the fact that German gross domestic product (GDP) fell by 0.1% in the second quarter in real terms compared to the previous quarter is therefore not good news for the Swiss economy. German GDP grew 0.4% in the first quarter. Although the EU's largest economy has temporarily acted as a driver of growth, it is now one of its backlogs, according to a report released by the Eurostat statistical office on Wednesday.

However, other EU countries also weakened in the second quarter: With stagnation in Italy and modest GDP growth of only 0.2% compared to the previous period in France and Austria, all other neighboring countries in Switzerland also lost power. Gross domestic product (GDP) fell by as much as 0.2% from the previous period, and that of Sweden by 0.1% (see chart). Higher growth rates can still be found in the eastern part of the EU. EU GDP growth declined from 0.5% in the first quarter to 0.2% in the second quarter, while euro area growth also halved to 0.2%.

The big surprise is not this development. On the one hand, the first quarter was relatively good due to specific factors, including mild winter, on the other, the global economy has been slowing down for a long time, especially because of the persistent trade dispute between the US and China and the weakening domestic economy, China is contributing.

Seco already assumed in the June economic forecast that the first quarter was positive in Switzerland and in Europe, Indergand explains. However, since then, some leading indicators have deteriorated. At the same time, it is warning of alarms: since the world recession, one has been a long way off.

MEM industries are suffering

Swiss GDP grew 0.6% in the first quarter compared to the previous period, slightly stronger than in the EU; Data for the second quarter follow on September 5. Is a diver similar to that expected in Germany? Switzerland is even more dependent on foreign trade than its main neighbors and is therefore subject to similar global economic impacts. However, it does not have a car industry that is particularly under pressure in Germany because of its own structural problems with global impacts. However, it may also affect Swiss suppliers.

Among the local sectors most likely to respond to the downturn in Germany (and beyond) are Indergand and Klaus Abberger of the Swiss Federal Institute for Economic Research (KOF), the mechanical, electrical and metal industries (MEM). Their operations are intertwined with value chains, but also with R&D closely with neighboring regions. A study commissioned by the Swissmem Industry Association, published in June by Basel Institute for Economic Research BAK Economics, concluded that MEM exports to neighboring regions (Baden-Württemberg, Bavaria, Vorarlberg, North and South Tyrol, Lombardy, Piedmont and neighboring France ports) Departments) in value are almost as extensive as those after the US and taken together to China.

Abberger, on the other hand, believes that the pharmaceutical and food industries are relatively strong, that they do not meet the slow investment needs but still strong consumer demand. The Swiss pharmaceutical industry is benefiting from the growth of the middle class in Asia and demographic development, Indergand adds. Accordingly, Switzerland benefits from the fact that, according to Seco, the share of the pharmaceutical and chemical industries in total exports has increased significantly in the last ten years (to 47% in 2018). On the other hand, the shares in the machinery, appliance and electronics industry as well as in the metal industry decreased to 14.8% and 6.4% respectively.

The service sector that is currently boosting development is also considered strong. However, an extended period of weakness in the industry sooner or later would also radiate services such as logistics and transportation, which are closely linked to the manufacturing sector.

What's next?

For the full current year, Seco forecast moderate economic growth of 1.2% in June, while KOF was much more optimistic than 1.6%. For 2020, both bodies expect a rebound in economic performance. Whether these forecasts are still realistic depends primarily on developments this fall. Significant risks assume a potential escalation in a trade dispute. In addition, a dislocation across Europe could result in the UK leaving the EU without a withdrawal agreement (without a Brexit agreement).

In Switzerland, domestic insecurity is being added as early signing of a framework agreement with the EU is becoming increasingly unlikely, threatening a creepy erosion of relations with a major economic partner. The more this situation happens, the more likely it is to be threatened by the "economic flu".

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