Swiss real GDP grew at an annualized pace of 2.4 percent on a sequential basis in the fourth quarter, notablyoutpacing consensus expectations. However, this data takes place prior to the de-pegging of the franc.
Calm Before the Storm
The Swiss economy remained resilient in the final quarter of 2014, growing 0.6 percent quarter-over-quarter (2.4 percent at an annualized pace, top chart). This doubled the sequential rate of growth that the consensus was anticipating, as 2014 ended on a strong note. However, the economy is facing a significant headwind in Q1-2015 as a result of the sharp franc appreciation following the Swiss National Bank (SNB) removing its currency cap against the euro. The strong finish to 2014 may be a sign that the Swiss economy is more equipped to weather this storm than previously thought.
Underlying details show that growth was broad based in the fourth quarter. Real consumer spending was up at an annualized pace of 1.4 percent, which is encouraging as monthly retail sales figures have been on the weaker side more recently. Fixed investment squeaked out a gain of 0.2 percent, but this follows a strong growth rate of 4.6 percent the previous quarter. Inventories exerted another significant headwind in Q4, but this was more than offset by strength in net exports. Exports were up an impressive 42.7 percent, outpacing the 25.1 percent increase in imports, resulting in a 12.6 percentage point contribution to GDP growth. It is not likely that we will see similarly strong export growth in Q1-2015, as the appreciation of the franc will weigh on foreign demand for Swiss goods.
CPI Inflation Back in Negative Territory
Consumer inflation had been trending upward for the past couple years and was just barely able to break into positive territory in 2014. However, this trend was unable to continue, as global inflation has been under pressure recently, and CPI inflation has now dropped back into negative territory in January (middle chart). January’s reading of a 0.5 percent decline is the lowest reading since the middle of 2013 and is likely an effect of the removal of the currency cap towards the middle of that month. The SNB had previously been attempting to avoid approaching a deflationary environment through the use of the currency cap, however, with the European Central Bank (ECB) set to embark on its own quantitative easing program, the SNB no longer saw this strategy as viable.
Franc Giving Back Some of Recent Appreciation
Immediately following the removal of the SNB’s currency cap of 1.20 franc per euro, the franc jumped about 20 percent against the euro (bottom chart). It has since given back some of its gains, but the elevated currency will likely be a negative for the economy in the near-term in the form of downward pressure on export growth. Going forward, our currency strategy team looks for the franc to continue gradually depreciating against the U.S. dollar and the euro.
Calm Before the Storm
The Swiss economy remained resilient in the final quarter of 2014, growing 0.6 percent quarter-over-quarter (2.4 percent at an annualized pace, top chart). This doubled the sequential rate of growth that the consensus was anticipating, as 2014 ended on a strong note. However, the economy is facing a significant headwind in Q1-2015 as a result of the sharp franc appreciation following the Swiss National Bank (SNB) removing its currency cap against the euro. The strong finish to 2014 may be a sign that the Swiss economy is more equipped to weather this storm than previously thought.
Underlying details show that growth was broad based in the fourth quarter. Real consumer spending was up at an annualized pace of 1.4 percent, which is encouraging as monthly retail sales figures have been on the weaker side more recently. Fixed investment squeaked out a gain of 0.2 percent, but this follows a strong growth rate of 4.6 percent the previous quarter. Inventories exerted another significant headwind in Q4, but this was more than offset by strength in net exports. Exports were up an impressive 42.7 percent, outpacing the 25.1 percent increase in imports, resulting in a 12.6 percentage point contribution to GDP growth. It is not likely that we will see similarly strong export growth in Q1-2015, as the appreciation of the franc will weigh on foreign demand for Swiss goods.
CPI Inflation Back in Negative Territory
Consumer inflation had been trending upward for the past couple years and was just barely able to break into positive territory in 2014. However, this trend was unable to continue, as global inflation has been under pressure recently, and CPI inflation has now dropped back into negative territory in January (middle chart). January’s reading of a 0.5 percent decline is the lowest reading since the middle of 2013 and is likely an effect of the removal of the currency cap towards the middle of that month. The SNB had previously been attempting to avoid approaching a deflationary environment through the use of the currency cap, however, with the European Central Bank (ECB) set to embark on its own quantitative easing program, the SNB no longer saw this strategy as viable.
Franc Giving Back Some of Recent Appreciation
Immediately following the removal of the SNB’s currency cap of 1.20 franc per euro, the franc jumped about 20 percent against the euro (bottom chart). It has since given back some of its gains, but the elevated currency will likely be a negative for the economy in the near-term in the form of downward pressure on export growth. Going forward, our currency strategy team looks for the franc to continue gradually depreciating against the U.S. dollar and the euro.
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