Swiss Panorama July 2015: astride recession and expansion

Economic outlook - 7/8/2015

The Swiss economy shrank 0.2% in the first quarter, leaving it with one foot in recession. GDP growth is now running at a meagre 1.1% year on year, down from 1.9% previously.

The Swiss economy

The Swiss economy shrank 0.2% in the first quarter, leaving it with one foot in recession. GDP growth is now running at a meagre 1.1% year on year, down from 1.9% previously. Switzerland is no longer the envy of the Euro Zone countries. Yet there is no cause for deep concern. Although the news in itself is not good, a number of factors cast it in a better light.

To begin with, a decline was expected after the SNB’s decision to do away with its cap on the franc. Secondly the present situation is not likely to last. As proof, leading indicators (compiled by the KOF and Markit) show that confi dence among Swiss manufacturers is already recovering. Growth will not descend into negative territory for a protracted period.

Imbalance between imports and exports

A closer look at the QI data reveals reasuringly that it was mainly an imbalance between imports and exports that dented growth. Inescapably the franc’s 15% appreciation against the euro came as a severe blow to exporters’ competitiveness. We shouldn’t forget that Europe alone accounts for 58% of the goods and services sold by Swiss fi rms abroad. Conversely the high franc boosted imports. In view of the historical correlation between the Swiss trade balance and the EUR/CHF exchange rate, we would not be surprised to see net exports chip more off  the rate of expansion in the coming quarters, as they did in 2008 and again in 2011.

Fortunately the other components of GDP all helped to absorb the shock of franc appreciation. Capital investment and consumer spending were both very encou-raging. Companies’ expenditure on plant and equipment rose 0.4% compared with the fourth-quarter 2014 level. That said, we should not overly emphasise this point as a recent drop in Switzerland’s capacity utilisation rate portends and imminent phase of divestment. (...)