The Swiss economy has recovered from the Frankenschock

Market analysis - 9/19/2016

The Swiss economy posted Q2 GDP growth of +0.6% quarter on quarter, its fastest pace in 18 months. This figure, underpinned by public spending (+1.7% q-o-q) and exports (+4.6% q-o-q), came in ahead of expectations.

The Swiss economy posted Q2 GDP growth of +0.6% quarter on quarter, its fastest pace in 18 months. This figure, underpinned by public spending (+1.7% q-o-q) and exports (+4.6% q-o-q), came inahead of expectations (see charts below).

 

The expansion in public spending is the result of the Swiss government's procyclical strategy, which lifted an economy that slowed in 2015 (+0.8% versus +2% in 2014). This debt-brake strategy consists of generating a budgetary surplus during boom periods and spending more during economic lulls. Under this strategy, public debt fell from 49% of GDP in 2004 to 33.5% in 2015, and the government is now able to stimulate growth without putting pressure on public finances. Exports benefitted from two factors: the effect of the Swiss franc’s rise after the Swiss National Bank (SNB) scrapped its currency peg with the euro in January 2015 has dissipated and exporters have implemented efficiency and cost-cutting measures in response to the SNB’s move. These measures gave a boost to productivity, which showed positive yearon-year growth for the first time since early 2014 (+0.1% in Q2).

On the down side, private domestic demand disappointed: consumer spending was stable versus the previous quarter, and investments shrank (-0.7%). However, and to put this number into perspective, while investments in Q2 may have declined versus the previous quarter, the Q1 figure underwent a sharp upward revision. This means that in the first six months of the year investments grew at their fastest pace since a year and a half (+1.5%).

In the next few quarters, the Swiss economy will be supported by an export sector that is on a firm uptrend and by a pick-up in domestic demand. While public spending cannot continue expanding at such a high rate, investments are likely to gain momentum in view of improving economic prospects. Consumer spending appears set to improve slightly, as suggested by the latest retail sales figures, which accelerated for the first time since the start of the year. The Swiss economy should meet or even beat our 2016 growth forecast (+1.1%), even if the next two quarters will probably not be as strong as Q2.

Prices in Switzerland were stable in August (-0.1% quarter on quarter, and -0.1% year on year). After 24 months of deflation, we now expect inflation to turn positive in Q4 and continue on that path in 2017 (+0.3%). The end of deflation can be attributed to several factors. First, the impact of the removal of the currency peg has worn off (see left-hand chart), and, with the franc stabilising since then, import prices have stopped falling. In addition, rising oil prices since the start of the year will help push up prices, while at the same time the SNB maintains its expansionary monetary policy (see right-hand chart).

 

 

 

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