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Photographer: Alfons Rath/picture-alliance/dpa/AP Images Photographer: Alfons Rath/picture-alliance/dpa/AP Images

In the Swiss lakeside town of Kreuzlingen, the strength of the franc is leaving its mark.

The currency’s advance this year means locals in the border town are crossing into Germany to shop in greater numbers, hurting domestic retailers. That’s compounding the impact of the exchange rate on the economy, which probably suffered a recession in the first half.

“It’s a problem -- hotels, restaurants and stores are having a tough time,” said Nicole Esslinger, head of the tourism board in the town on the shore of Lake Constance. “People in Kreuzlingen have always gone to the closest store, even if it is across the border. But now it’s on a different scale.”

Towns dotted along the northern edge of the country are paying the price of the Swiss National Bank’s January decision to let the franc float freely against the euro. With exports undermined by the currency, Switzerland’s economy is heading for its weakest performance in six years, with growth forecast to lag even the euro area.

Consumer prices are forecast to fall the most in six decades this year, and data on Wednesday will probably show the inflation rate remained at minus 1 percent in July. Manufacturing activity unexpectedly declined last month, data on Monday showed. Economists predict the unemployment rate, scheduled to be published on Friday, held at 3.3 percent in July.

Shopping Spree

While Lake Constance separates a good part of Switzerland and Germany, there’s no natural boundary between Kreuzlingen and the German town of Constance, with just small border posts along the roads demarcating the line between countries. Schengen rules allow passport-free travel between the two, though customs laws apply.

Swiss shoppers have a history of buying everyday goods abroad. According to a study by market research firm GfK, they spent about 10 billion francs ($10.3 billion) outside Switzerland in 2013 on everything from detergent to sunglasses.

Switzerland’s residents are allowed to import 300 francs of goods per person a day without paying duty and are also entitled to recoup value-added tax from Germany.

“I usually go on weekends,” Judit Pretli, a 43-year-old local who works in a hospital, said of her shopping trips to Germany. “Some things like hairspray and other personal care products are cheaper there.”

Shopping Tourists

Judging by price-comparison website www.preisbarometer.ch, a basket of 54 typical personal care products such as L’Oreal hair gel and Beiersdorf’s Nivea sunscreen cost 70 percent more in Switzerland than in Germany. Clothing is 43 percent more expensive in Switzerland, it showed.

In response to so-called shopping tourism, drugstore chain Mueller has temporarily cut prices at its Kreuzlingen branch to make them cheaper than those in Germany. Even so, reclaiming VAT on articles purchased at Mueller’s Constance branches makes shopping in Germany a better deal, according to company spokeswoman Tatjana Meier.

“I’ve seen the prices here and it’s mad. It’s definitely cheaper in Germany”

At Modehaus Rudolf, a clothing store founded in 1873 in Kreuzlingen, the situation is similar: revenue has slumped 40 percent since the SNB gave up its cap of 1.20 per euro, according to owner Maria Jonasch.

The franc rose 0.2 percent on Monday, trading at 1.05993 per euro at 2 p.m. in Zurich. Against the dollar it stood at 96.83 centimes.

“I’ve seen the prices here and it’s mad,” said Alex, 53, a mechanical engineer from Waldenbuch, near Stuttgart, standing in front of a shopping center. “It’s definitely cheaper in Germany.”

Short Recession

Still, economists estimate that Switzerland’s recession -- its first in six years -- will be short lived. Analysts surveyed by Bloomberg expect output to expand in the third quarter -- albeit by a meager 0.1 percent.

This is supported by the UBS consumption indicator, which rose for a third month in June and is back to its December level. An increase in new car registrations offset the retail sector’s “slightly more pessimistic mood,” its authors said.

The KOF economic barometer jumped by 10 points in July back to its long-term average. While the strong franc continues to weigh on the economy, the first “shock wave” that followed the cap exit “is clearly losing its power,” according to the Zurich-based institute.

And in Kreuzlingen, not all businesses are suffering.

“For us the situation isn’t that bad,” said Markus Stotz, owner of a Kreuzlingen shop that sells mattresses and beds. “With the strong franc it means people are going to Germany to shop. But we sell Swiss-made mattresses billed in francs, so the weak euro doesn’t play a role.”

SNB Reports 1H Loss of CHF50B on Franc Appreciation

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(Updates with franc in 13th paragraph.)