European lockdowns cast cloud over Swiss economy

European lockdowns cast cloud over Swiss economy

Data released earlier this week showed that Swiss industrial growth slowed in October. Switzerland’s manufacturing PMI (Purchasing Manager’s Index), a reliable indicator of economic activity, fell from 53.1 in September to 52.3 last month. Anything above 50 indicates growth, on a monthly basis.

A similar dip in Switzerland’s KOF economic barometer (which predicts near-term business cycle performance) was observed in October, which fell to 106.6 from 110.1 the previous month. While national output picked up over the summer, the disruption caused by a resurgence in Covid-19 cases appears to be tipping GDP growth back towards negative territory.

Recent retail data published by the Federal Statistical Office confirmed that Switzerland’s summer recovery is now firmly behind us, with sales falling by 3.6% month-on-month in September. What’s more, household consumption is sure to suffer in November as spending on food and entertainment will be curtailed by nation-wide curfews and cantonal confinements.

In addition, recent lockdowns in neighbouring countries will weigh on economic growth, particularly in Germany where supply chains are intimately linked with Switzerland’s manufacturing sector. Admittedly, German factories saw record growth in new orders in October. However, its recent lockdown will limit manufacturing activity and should place a lid on Swiss industrial output over the coming weeks.

One consolation is that Switzerland’s industrial sector is relatively well placed to withstand Europe’s second wave of infections, mainly owing to the out-sized importance of its pharmaceutical sector, whose stock market performance has been solid so far this year. What’s more, eurozone GDP growth in Q3 was stronger than many economists anticipated (at 12.7% quarter-on-quarter), which should cushion Switzerland’s annual growth rate.

That said, the employment component of October’s PMI dipped to a four-month low, meaning that Switzerland’s state-sponsored short-time working scheme will probably remain a life-line for companies (and employees) well into next year. The upshot is that, even with the temporary reprieve over the summer, Switzerland’s economy is on course to contract by roughly 5% this year. All eyes will now be on 2021.