Switzerland’s economy is a double-edged sword
Switzerland’s robust current account surplus and export-oriented economy all support a strong Swiss franc. However, this strength also imports deflationary pressures, creating challenges for the Swiss National Bank (SNB), and the risk of reintroduction of negative interest rates.
 | Samy Chaar, PhD Global Chief Economist and CIO for Switzerland, Banque Lombard Odier & Co Ltd. |
 | In collaboration with Laurent Pellet Limited Partner, Global Head of EAM, Banque Lombard Odier & Co Ltd. |
The Swiss economy is extremely agile, and in recent years, successfully diversified exports from Chinese and German consumers towards the US. America became Switzerland’s biggest export market by value, making it the most dependent European economy on US exports. The country is also the US’s seventh-largest foreign investor, supporting half a million US jobs, according to the Swiss Federal Department of Foreign Affairs in August 2024. But volatile US trade policy has now turned that strength into a sensitivity, including for Swiss pharmaceutical exports. Many Swiss companies have already increased their US based manufacturing and hope, in this way, to avoid the worst effects of US tariffs.
This year we lowered our expectation for Swiss economic growth from 1% to 0.7%. This reflects not only Swiss export dependence, but the wider slowing global economy, and Switzerland’s negative inflation, which has fallen faster than markets anticipated, thanks to falling energy prices and the strength of the Swiss franc.
A return to negative rates?
Could this environment push the SNB into negative interest rates again? The central bank responded on 19 June with what we think is a final 25 basis point cut for this monetary cycle, taking its key rate to 0%. Given the uncertainties, we can’t rule out a cut into negative territory to prevent deflation in the second half of 2025, but that looks like a last resort if the franc strengthens significantly, or the economy weakens.
Switzerland’s robust external balances and high productivity suggest that the Swiss franc is likely to continue its gradual, long-term appreciation. Indeed the franc looks like the main factor behind monetary policy and demands special attention. That complicates monetary policy in a small open economy like Switzerland’s, and supports the SNB’s bias towards cutting interest rates. In contrast to the long term, short-term swings in the Swiss franc’s real exchange rate have been driven by the US dollar/Swiss franc, itself a function of broad US dollar sentiment in recent months.
We expect haven currencies broadly to retreat, assuming global risk sentiment improves in the weeks ahead. That should stabilise the US dollar, as the market’s current extreme pessimism over the US currency moderates, before the dollar resumes its decline over the second half of 2025.
We believe that the US currency will stabilise and that this could happen even if the geopolitical situation escalates. That may be counterintuitive, but the dollar’s positive correlation with energy prices - thanks to US energy independence - should see USDCHF rise alongside the broader dollar, as extreme short positions are underwound. That supports our base case expectation that the SNB can avoid negative interest rates for now.
Swiss solutions
For Swiss franc denominated investors, this presents its own challenges. Along the Swiss sovereign bond yield curve, only maturities over six years now provide positive returns. With the 10-year bond yielding just 0.28% and negative Swiss money market rates, investors need to deploy their capital into income-producing assets.
Our multi-asset wealth management strategies for Swiss franc-denominated portfolios build on dedicated strategic asset allocations, to extract optimal performance and competitive payouts in the current low-rate environment. We currently overweight government and investment grade bonds – including in the Swiss currency. We expect Swiss government bond yields, in particular 10-year rates, to settle at 0.15% in 12 months. And while this is a low yield, the prices of Swiss bonds will increase as a result.
Rising equity markets will lend further support, and our franc-based portfolios are overweight stocks. Swiss investors can also consider exposure to Swiss real estate funds, while dividend-yielding stocks provide stable payouts. Dividends on the Swiss Market Index have averaged 2.8% this year, with some yielding more than 4%, and in 2024 half of the SMI’s companies carried out share buybacks - a vote of confidence in their own outlooks. In addition, yield-enhancing structured strategies can offer alternative payout profiles for eligible investors through different underlying assets, increasing diversification.
Naturally, geopolitical uncertainties mean that investors everywhere have to be especially vigilant. In Switzerland, investors’ vigilance also has to be combined with some creativity.
Article - Status as June 22, 2025
Biographies
Samy Chaar is Global Chef Economist and CIO for Switzerland at Lombard Odier and a voting member of the Lombard Odier Investment Committee. In this role, he is leading a team that formulates the bank’s macroeconomic insights and analyses economic forecasts (growth, economic trends and cycles, inflation, balance of payments, central banks action, financial conditions, major geopolitical events & their impact on the markets).
Samy joined Lombard & Odier in 2006. He holds a PhD in economics and a degree from the Paris II Pantheon-Assas & Paris IX Dauphine Universities. He was a researcher in the economics department of the IRGEI Institute, whilst teaching at the Paris IX Dauphine and Paris II Pantheon–Assas Universities. From 1999 to 2002 Samy worked in Asia with the Crédit Agricole Group, first with W.I. Securities in Tokyo and then in asset management in Hong Kong, after which he returned to Paris to prepare for his doctorate.
Laurent Pellet joined the Bank in 2017 and took over responsibility for the External Asset Managers department for the Group in 2018. After starting out at Ferrier Lullin & Cie SA, he held various positions at Bank Julius Baer for more than 20 years. He holds a Diploma in Quantitative Wealth Management from HEC Geneva, a Diploma in Digital Finance Law from the University of Geneva and the CWMA.