The world economy is increasingly being held hostage to US trade policy. So far, the economic effects have been benign. Companies have published positive earnings results for Q2, and equity markets are close to their all-time highs in many countries.
While we have revised up our US GDP estimates for this year, we expect the negative effects of higher tariffs to become visible in the coming months – both in the US inflation, trade and production data of its trading partners. Switzerland will be hit especially hard as it faces a 39% tariff rate on most of its goods and potentially even a higher rate on its pharma exports. Higher tariffs will make many companies uncompetitive in the US market and could lead to severe job losses.
We remain neutral on Swiss equities in our regional allocation, despite the potential negative impact of the 39% US tariff rate. Softer global economic momentum over the next few months could favour the more defensive Swiss market. Also, if a trade deal at a significantly lower tariff rate were to be signed, upside risks for Swiss equities may materialise.
Switzerland is in shock
Switzerland, unlike other advanced economies, has failed to negotiate a trade deal with the US, even after its President and Vice-President travelled to Washington this week. It has been treated much worse than the EU despite the seemingly solid relations with the US and a widely held belief that not being a member of the EU is economically advantageous for Switzerland. And finally, the tariff rate of 39% it faces now exceeds by far any worst-case scenario it had considered up until last week. It is clear that this would make many Swiss manufacturing companies uncompetitive in the US market and drive out production to neighbouring EU countries. Producers of non-essential goods like luxury watches will suffer in particular as potential buyers might postpone purchases in expectation of lower tariffs at a later stage. Food products are another important export category. While clearly essential in nature, there are many substitutes from other countries that face lower tariffs and most likely lower production costs.
Lower drug prices key to a better trade deal?
The elephant in the room is the pharma sector that may face even higher tariffs. It is also the most likely reason why Switzerland is hit so hard. President Trump has vowed to lower health care costs in the US. He could do so by having more companies produce drugs in the US, or by reducing import prices for pharmaceutical goods that are produced abroad. Hence, a possible trade deal that might lead to a lower tariff rate than 39% likely incorporates the pharma sector. Trump might want the Swiss government to make concessions to the pharma sector such as higher prices or weaker regulation within Switzerland in order to compensate them for lower export prices to the US.
No expectation of a negative policy rate
While tariffs will weigh on investment spending, exports and private consumption in the second half of the year,we believe that an outright recession is still unlikely given the flexibility of the economy and its ability to adjust to external shocks. Still, unemployment is going to increase and wage growth will slow down further. Obviously, this increases the likelihood of negative policy rates at the coming SNB meetings, though we regard this as rather unlikely for the following reasons:
- Inflation has exceeded expectations for two successive months such that we had to increase our inflation forecast for 2025 to 0.3% from 0.2%.
- At 0%, the policy stance is clearly expansionary.
- The marginal benefits of cutting the policy rate to below zero are declining while potential negative side-effects especially for financial stability are increasing.
- The SNB clearly communicated at its last meeting that the hurdle for lower policy rates is high – given their unpopularity and their side effects. This does not make a rate cut impossible in September but would show how unfortunate the SNB communication was in June.
- Negative policy rates could reinforce the US view that Switzerland manipulates its exchange rate, which would not be a helpful signal in its current trade dispute. Rather than cutting by 25bp in September, the odds of a 50bp rate cut have increased for December if tariffs stay at their elevated level, even if that is not our base case.
How will the Swiss franc fare?
FX interventions remain unlikely in the coming months. The Swiss franc has remained almost unchanged versus the euro for many months and interventions versus the US dollar might not help the negotiations with the US administration. They are also unlikely for economic reasons. The US dollar is rather overvalued such that any depreciation will bring it down to a more reasonable level. There is no point in trying to intervene to slow down that process.
By Karsten Junius, chief economist at J. Safra Sarasin Sustainable Asset Management
