Swiss Economy Contracted in Q1-2015

Real GDP in Switzerland fell for the first time in more than three years as exports nosedived. Further economic weakness in the next few quarters seems likely.

Sharp Decline in Exports Lead to Negative GDP Growth

Data released today showed that real GDP in Switzerland fell 0.2 percent (0.8 percent at an annualized rate) in Q1-2015 relative to the previous quarter (top chart). Not only was the outturn weaker than expected, but it marked the first quarterly contraction in the Swiss economy in more than three years. There actually was modest growth in domestic demand in the first quarter. Real personal consumption expenditures rose at an annualized rate of 2.1 percent, fixed investment spending was up 1.6 percent and real government spending edged up 0.4 percent.

The weakness was concentrated in exports, which nosedived at an annualized rate of 14.2 percent. Some of this weakness may simply represent statistical payback for the surge in exports that was recorded during the previous quarter and some of the weakness may be associated with sluggish economic growth in some of Switzerland’s major trading partners. That said, we suspect that the sharp appreciation of Swiss franc in recent months—it has risen more than 15 percent against the euro and nearly 10 percent vis-à-vis the U.S. dollar since January—may also be playing a role in restraining Swiss exports. (The Swiss National Bank had been fighting the appreciation of the franc against the euro since September 2011. The central bank gave up the fight in January and, as shown in the middle chart, the franc surged against the euro and has remained at an elevated level.).

There have not been many data releases so far in the second quarter, but the incomplete picture we have at this point suggests that momentum remains weak. The manufacturing PMI in April remained below the demarcation line separating expansion from contraction, and the unemployment rate edged up to 3.3 percent from 3.2 percent in March. Most analysts look for the year-over-year rate of real GDP growth, which fell from 1.9 percent in Q4-2014 to 1.1 percent in Q1, to weaken further over the next few quarters.

Moreover, the economy has slipped into a mild deflationary environment. Although the sharp decline in oil prices since autumn has contributed to the downward path in the overall CPI inflation rate (bottom chart), the core rate of inflation, which excludes energy prices, is also in negative territory at present. In an attempt to combat deflationary forces, the Swiss National Bank (SNB) has taken its main policy rates deep into negative territory. With economic growth in Switzerland expected to remain weak for the foreseeable future and with CPI inflation expected to remain negative through the remainder of this year, it seems likely that the SNB will continue to maintain an accommodative monetary stance for quite some time.