Swiss Economy Avoided Recession in Q2-2015

Solid growth in domestic spending led to an unexpected rise in real GDP in the second quarter. The central bank will maintain an accommodative stance for the foreseeable future due to the mild case of deflation.

GDP Growth Was Stronger Than Expected in Q2

Data released this morning showed that real GDP in Switzerland rose 0.2 percent (1.0 percent at an annualized rate) on a sequential basis in the second quarter (top chart). The outturn surprised many analysts, who had looked for a second consecutive quarterly contraction. The decision by the Swiss National Bank (SNB) in January to allow its currency to float freely again vis-a-vis the euro has led to a dramatic rise in the value of the Swiss franc (middle chart). With an exports-to-GDP ratio of nearly 70 percent, many observers had reasoned that the sharp appreciation of the currency would pull the entire economy into recession. It appears that the Swiss economy has avoided that fate, at least for now.

Exports did tumble in the second quarter, contracting at an annualized rate in excess of 16 percent. Real GDP growth in the Eurozone, to which Switzerland sends nearly 0ne-half of its exports, is lackluster. Moreover, global growth is generally sluggish right now which, everything else equal, would tend to weaken growth in Swiss exports. That said, the rise in the value of the Swiss franc, which is up about 10 percent in real tradeweighted terms since January, undoubtedly is also playing a role in depressing Swiss exports.

Although exports fell more than 16 percent in annualized terms in Q2, imports were down even more, dropping 27 percent. But the increase in GDP in the second quarter was due to more than simply a rise in net exports (i.e., exports less imports). Specifically, personal consumption expenditures were up 1.2 percent and fixed investment spending grew 3.8 percent during the quarter. Despite the negative news coming from abroad, Swiss consumers and businesses continue to spend at a decent clip. And there was good news and bad news regarding inventories. The plunge in inventories sliced off more than 3 percentage points from the annualized GDP growth rate. The good news, however, is that less inventory decumulation, let alone an actual increase in inventories, will tend to boost GDP, everything else equal, during the current quarter. Perhaps Switzerland actually will dodge the bullet of recession after all.

The major issue facing the Swiss economy at present is the mild case of deflation that has set in. Although the sharp drop in energy prices since last autumn is clearly contributing to the 1.3 percent drop in the overall CPI over the past 12 months (bottom chart), the core rate of inflation is also negative as well (-0.6 percent in July). Since peaking in mid-2011, the overall CPI has dropped about 3 percent. If prices continue to decline, Swiss consumers could start to delay purchases of big-ticket durable items, which would weaken the economy. Consequently, the SNB likely will keep its policy rate in negative territory for the foreseeable future.