CHF strength and Swiss export performance – evidence and outlook from a disaggregate analysis

Abstract

Why has Swiss export performance been so strong during the past quarters despite the marked appreciation of the Swiss Franc (CHF)? What is the outlook for Swiss exports given the still elevated CHF? In this article, we shed light on these questions by analysing a panel of Swiss exports disaggregated along both the regional and the industry dimension. To explain the export performance of the recent past, we estimate how the exchange rate and demand growth in each export market affect trade flows and also, how this varies across different industries. The appreciation of the CHF has considerably dampened Swiss export performance. As a counterfactual, we ask how Swiss exports would have developed had the CHF stayed flat against other currencies during the 5 years leading up to October 2010. Compared to this scenario, the Swiss export industry has already lost a cumulative of CHF 35 billion in revenues due to the CHF appreciation. At the current juncture, monthly exports are reduced by CHF 2.7 billion (around 17%). We show that the key reason for the strong export performance despite the CHF strength was the rebound in global demand in the aftermath of the financial crisis. Moreover, we also document that the timing of global demand growth has completely masked the effect of the CHF strength: during the last quarters, periods of pronounced CHF appreciation always coincided with strong recovery of global demand. Failure to account for this coincidence could lead to the wrong assumption that the exchange rate matters very little for Swiss export performance. Last, to gauge the likely evolution of Swiss exports and their regional composition in the years to come, we combine our estimation results with the regional Gross Domestic Product (GDP) and exchange rate forecasts provided by the Swiss National Bank (SNB). Following this approach, we predict that over the next 3 years, Swiss exports will rise a combined 16%, with little less than half of this increase going to Emerging Asia and 30% to the euro zone. We also document the key industries that will drive Swiss export growth in the near future.

Keywords:

• international trade; exchange rates; Switzerland; demand elasticities

JEL Classification:

• F10; F14

Acknowledgement

We thank Andreas Fischer, Andreas Kropf and Caroline Schmidt for comments and Andreas Kropf for providing excellent research assistance.

Notes

¹ Our sample includes the time quarters from 2005Q1 to 2010Q2. We balance the sample by excluding good-country pairs with zero trade for some of the periods.

² The cumulated negative effect of the bilateral exchange rate on Swiss export growth is rather low in magnitude compared with estimates of other studies. In a companion note (Auer and Sauré, 2011), we document that the globally unique composition of the Swiss export basket drives this fact: the Swiss export basket is heavily concentrated in price-insensitive goods, which makes aggregate Swiss exports less responsive to exchange rate changes than exports of other OECD nations.

³ Tressel (2011) estimated a vector error correction model using aggregate trade data. For models with a lag structure comparable (2 and 4 lags) to the ones presented in Table 1, he found a long-run exchange rate elasticity of 0.92–0.93.

⁴ Broda and Weinstein (2006) documented that there is a wide degree of heterogeneity in demand patterns across different sectors, thus also implying that the effect of the exchange rate and of foreign GDP growth on exports might vary substantially across different sectors. Indeed, the findings presented by Schmidt (2009) and Hildebrand (2010) suggest that the effect of foreign GDP on Swiss Exports varies substantially across different sectors.

⁵ The Precise definition of mechanical watches is ‘Uhrmacherware, mit mech. Aufzug’ and the one of pharmaceutics is ‘Arzneiwaren, andere’.

⁶ Further, estimations of the coefficients on the aggregate level induce potentially serious aggregation bias as pointed out in Imbs and Méjean (2008).

⁷ Economic analysis does not provide a forward estimate for the exchange rate of Emerging Asia. We assume that the exchange rate will appreciate by 3% against the USD in the course of the next 12 months, as is currently predicted by 12-month nondeliverable forwards for the Chinese Renminbi. Thereafter, we assume that the exchange rate will stay flat compared with the USD.