Economic and Financial Analysis 21 October 2019 Swiss Quarterly: Greens make strong election Article gains, but don’t expect much change Green parties have won the legislative elections in Switzerland, but we don’t expect major changes in government policies. Swiss growth is negatively impacted by the global slowdown and uncertainties The elections were great news for Swiss Greens Content - Victory of the Greens in the elections - Tensions between Switzerland and the EU remain - Growth slows - The SNB remains ultra-accommodative Victory of the Greens in the elections Sunday's parliamentary elections in Switzerland gave Green parties a big breakthrough, as we've seen in other European countries, and they're considered the winners. First, the Green Party (left), obtained 17 additional deputies, with a total of 28 seats (13% of the votes) and they're now the fourth largest political force in Switzerland. The Green Liberal party (right) jumped to 16 seats with 9 deputies (8% of the vote). The campaign for these legislative elections has been largely marked by the issue of climate change. Swedish activist Greta Thunberg's calls were particularly resonant in the country where many towns and cities have proclaimed a "climate emergency". Tens of thousands of people have also participated in climate strikes. The main political force remains the right-wing populists of the SVP, but they are weakened by losing 12 seats, from 30% of the vote in 2015 to 26% this year. We now need to wait until December 11 for the elected members of both Houses of Parliament to designate the seven ministers to the government. Since the portfolios will be divided among the major parties on the basis of a political consensus, it is unclear whether the Green parties will have ministerial positions or not. Therefore, the impact of the election results on the policy pursued by the Federal Council should not be major. Tensions between Switzerland and the EU remain If the Eurosceptic right party lost ground, tensions with the EU are not over yet. The SVP has already proposed a referendum to stop the free movement of people with the EU. This should take place in May 2020, and could have a strong impact on the future relationship between the EU and Switzerland. Meanwhile, the negotiations for the institutional framework agreement, which must define future relations between the two blocs, are completely stuck. Yet the stakes are high. According to the EU, the institutional framework agreement is the only way to extend the lifespan of the specific relationship between Switzerland and the European Union which is currently regulated by more than 120 bilateral treaties. For the Swiss, it's more complicated. The framework agreement involves adaptations of the law in such sensitive areas as wage protection, dispute resolution and state aid. As the EU ruled out any renegotiation of the draft Treaty, the Swiss Federal Council asked for clarification on the sensitivities at the beginning of June 2019. Since then, negotiations have not progressed because it is politically explosive. It was decided to wait for the formation of the new Swiss government and the new European Commission. The prolongation of uncertainties is not great for Swiss economic growth The EU, however, hoped to put pressure and accelerate negotiations by not renewing the stock market equivalence of the Swiss Stock Exchange at the end of June. Fearing catastrophic consequences for the Swiss Stock Exchange, safeguard measures have been put in place by the Swiss authorities. Therefore, since 1 July, the shares of companies listed on the Swiss stock exchange are no longer traded on EU stock exchanges and EU investors have to buy and sell these shares via suppliers of the Swiss stock exchange or other trading venues outside the EU. As a result, the effects of the loss of equivalence on both trading volume and stock prices were very limited. The implementation of this threat, therefore, did not lead to a speeding up of the negotiation process as the EU had hoped but rather tended to strain relations. Uncertainty is therefore complete as to the outcome of the negotiations, which may affect the business climate and trade flows between Switzerland and the EU. Knowing that the EU is Switzerland's main trading partner (53% of Swiss exports go to the EU and 71% of Swiss imports come from the EU), the prolongation of uncertainties is not great for economic growth in Swiss. See our piece on the end of stock market equivalence here Growth slows And the Swiss economy does not really need an additional source of uncertainty. Indeed, GDP growth is already negatively impacted by slowing global growth, trade disputes, very weak growth in Germany and global uncertainties. After two quarters of negative growth at the end of 2018, growth returned to positive territory in the first half of 2019 (0.4% QoQ in the first quarter and 0.3% QoQ in the second). But a lot of clouds are hanging above the Swiss economy. Investments are falling sharply. Leading indicators are tanking. The composite PMI fell to 43.4 in September, its lowest level since 2009. The KOF leading indicator is also down, to 93.2 in September, well below the long-term average. The economic risks are clearly tilted to the downside We believe that GDP growth should reach 0.9% in 2019, considerably down on thee growth observed in 2018 (2.8%), which was boosted superficially by major sporting events (because of television broadcasts rights being collected by companies based in Switzerland). For 2020, we expect GDP to grow at 1.2%. Both in 2019 and 2020, household consumption is expected to support growth. Indeed, the situation on the labour market is still favourable (2.3% unemployment rate) and the decline in inflation tends to boost households' purchasing power. The economic risks are clearly tilted to the downside. An intensification of trade tensions between the United States and China or a trade battle between the EU and the United States could weigh heavily on the Swiss economy. It is the same with a no-deal Brexit agreement or a very strong deterioration of relations between the EU and Switzerland. Turbulence in the financial markets could also push the Swiss franc higher and lead to a decline in Swiss exports. Leading indicators are showing a downward trend Source: Thomsons Reuters, ING Economic Research The SNB remains ultra-accommodative Inflation in Switzerland is very low and has tended to slow down in recent months. As a result, overall consumer price inflation should be 0.5% in 2019 and 0.6% in 2020, after 0.9% in 2018. In this context, the SNB can only be accommodative. In addition, global uncertainties have pushed the Swiss franc to appreciate in recent months, forcing the SNB to intervene in the foreign exchange market to limit a too strong appreciation of the domestic currency. At its September monetary policy meeting, the SNB kept its policy rate unchanged at -0.75%. It stated that the CHF was still "highly valued" and that it was ready to intervene in the foreign exchange market when it deemed it necessary. In addition, it decided to modify the tiering system by increasing the amount of liquidity exempted from negative rates, in order to limit the impact of negative rates on the profitability of banks. For the future, we expect the SNB's key rate to remain in negative territory for a very long time, and in any case well beyond the forecast horizon. If none of the risks to the global economy materialise, we believe that the SNB will keep its rate at the current level of -0.75% for as long as possible, while intervening on the foreign exchange market when necessary. If one of the risks should materialise (a no-deal Brexit, a trade war between the EU and the United States, for instance) and this was accompanied by an excessive appreciation of the Swiss franc, it is likely that the SNB would have to further reduce its key interest rate. In this case, the SNB could reduce its rate by 25bp, to -1% Inflation is low Source: Thomsons Reuters, ING Economic Research Charlotte de Montpellier Economist, France and Switzerland +32 2 5473386 [email protected] Disclaimer This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. ("ING") solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. 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