Swiss Economy Stalls Unexpectedly in Q2

Real GDP in Switzerland edged a bit lower in the second quarter as business fixed investment was flat and government spending and net exports were drags on the quarter. 

When Europe Sneezes, Switzerland Catches a Cold

Economic growth in Switzerland hit a snag in the second quarter, edging down at an annualized rate of 0.2 percent (top chart). This was much weaker than expected, as the consensus forecast was for continued modest growth. This is the first contraction since Q1-2012 as the recent stagnation in economic activity in the Eurozone appears to be taking its toll on the Swiss economy. Net exports were a drag on the quarter as exports decelerated markedly to 2.6 percent in Q2 from the 9.4 percent annualized growth rate registered in Q1, as the German economy also contracted in the second quarter, growth in France stalled and Italy fell into its third recession since the Global Financial Crisis. With nearly 60 percent of Switzerland’s exports destined for the European Union, continued slow growth in that region should remain a headwind to economic growth going forward. 

Net exports was not the only culprit of the disappointing result in the second quarter. Business fixed investment remained flat, while government spending fell at a 1.0 percent annualized rate. The only small bright spot in the underlying details was the 1.0 percent annualized gain in personal consumption expenditures, while this was not enough to register a positive number for overall growth. 

The disappointing result for Q2 GDP comes as survey data is also pointing to a slowing in economic activity as shown by the manufacturing PMI. Reaching 52.9 in August, the manufacturing PMI has seen a downward overall trend in recent months, while remaining in positive territory. The slowing in the PMI in August was mainly a result of the backlog of orders component dropping into contractionary territory, falling more than six points to 49.9, as this component has the largest weight at 30 percent of the total diffusion index. This is concerning because it likely reflects weak activity going forward, perhaps pointing to further downward pressure on economic growth in the third quarter. 

Weak Growth Should Keep Inflation Muted

As the economy stalled in the second quarter, prospects for any pickup from the currently flat reading of inflation in July seem minimal (bottom chart). The threat of deflation in 2011 is what caused the Swiss National Bank (SNB) to cut its target for 3-month Swiss LIBOR to zero in July of that year and target an exchange rate no stronger than 1.20 Swiss francs per euro. Inflation has remained essentially flat over the past year as low interest rates and the target exchange rate appear set to stay for the foreseeable future. While the currency is capped against the euro, it has experienced weakness against the U.S. dollar more recently. We look for continued modest appreciation of the dollar versus the euro, and by extension, against the Swiss currency.