Swiss Business Sentiment Plunges: A Perfect Storm of Trade Wars and Structural Weakness

The Swiss economy, long a bastion of stability, has entered a period of acute vulnerability. For the third consecutive month, the KOF Economic Barometer—a leading indicator of business confidence—plunged to 97.1 in April 2025, its lowest level since October 2023. This decline underscores a deepening crisis fueled by trade wars, manufacturing collapse, and structural imbalances.

The Manufacturing Sector’s Freefall

The Swiss manufacturing sector, which accounts for nearly 20% of GDP, is in freefall. The procure.ch Manufacturing PMI dropped to 45.8 in April, marking its lowest level in nine months and the 28th consecutive month of contraction. Critical industries like vehicle manufacturing, machinery, and electrical equipment are hardest hit, with output prices falling while input costs remain stubbornly elevated.

Trade barriers are the primary culprit. Over 43% of Swiss industrial firms report being directly impacted by new tariffs—a stark rise from 18% just months ago—with two-thirds anticipating further restrictions. U.S. tariffs on Swiss pharmaceuticals and machinery have disrupted supply chains, while Chinese import costs remain elevated due to lingering geopolitical tensions.

Export Dominance Under Siege

Switzerland’s export-driven model is crumbling. Exports of goods and services fell 2.5% year-on-year in April, with sectors like luxury goods and precision instruments—traditionally Swiss strengths—struggling to maintain competitiveness. The appreciating Swiss franc (CHF), bolstered by its safe-haven status, has further weakened exporters.

The KOF Barometer’s export sub-index dropped to 94.3 in April, its lowest since early 2021. Companies are cutting production and employment: manufacturing employment levels fell to 44.0 on the PMI scale, signaling sustained workforce reductions.

Inflation’s Double-Edged Sword

While headline inflation has stabilized at 0% year-on-year, the services sector remains an outlier, with prices rising 1.4%, driven by housing costs. However, goods deflation (now at -2.0%) and falling imported prices (-2.5% YoY) are dragging down overall inflation—a trend the Swiss National Bank (SNB) views as dangerously close to deflation.

The SNB is now expected to cut rates further. Analysts predict a 25 basis point reduction before June, potentially pushing the policy rate to zero if housing inflation moderates. Yet a weaker rate environment risks exacerbating the CHF’s strength, worsening export woes.

Sectoral Divergence and Policy Risks

Not all sectors are failing. Financial and insurance services remain stable, buoyed by Switzerland’s banking sector rebound post-Credit Suisse crisis. Meanwhile, consumer staples and healthcare show resilience, with defensive stocks like Roche (ROG.SW) outperforming cyclicals.

But risks loom large. The Swiss Economy Reputation Index (SERX) stagnated at 94.5 in Q1 2025, with the pharmaceutical and machinery industries suffering reputational damage due to trade barriers. Domestic debates over executive pay and banking reforms also cloud the outlook.

The Path to Recovery?

Forecasts suggest only a gradual rebound. The SECO projects 1.4% GDP growth in 2025, while the KOF estimates a 1.9% uptick in 2026—both below historical averages. A full recovery hinges on resolving trade tensions and stabilizing global demand.

Investment Implications

• Avoid manufacturing equities: Sectors like ABB (ABBN.SW) and Swatch Group (SWNG.SW) face prolonged headwinds.
• Favor defensive plays: Roche (ROG.SW), Novartis (NOVN.SW), and utilities like Axpo Holding (AXPO.SW) offer stability.
• Monitor the CHF: Shorting the franc or investing in CHF-denominated bonds could hedge against further appreciation.

Conclusion: The Crossroads for Swiss Capitalism

Switzerland’s economic decline is not merely cyclical—it reflects systemic fragility. With trade wars eroding its export advantage, manufacturing in terminal decline, and inflation teetering toward deflation, policymakers face an existential choice.

The data is stark:
- Manufacturing PMI at 45.8, down from a 1995–2022 average of 53.6.
- Over 40% of industrial firms report tariff-related disruptions.
- Exports down 2.5% YoY, with no clear path to recovery.

Investors should proceed with caution. While defensive sectors and rate-sensitive bonds offer shelter, a sustained rebound requires geopolitical détente and structural reforms. Until then, Switzerland’s “economic miracle” remains on life support.