Swiss Recession: Not Deep Relative to Neighbors

Swiss GDP contracted for the fourth consecutive quarter, but the recession in Switzerland is mild compared to the downturns in many other major economies. However, inventories have not fully corrected yet, which may weigh somewhat on Swiss production in the immediate future.

Weakness in Swiss Economy Driven Largely by Exports

Real GDP in Switzerland contracted for the fourth consecutive quarter, dropping at an annualized rate of 3.2 percent in the first quarter. The decline was the sharpest sequential rate of contraction in 18 years. On a year-over-year basis, the Swiss economy shrank 1.6 percent in the first quarter.

However, Switzerland's current recession should be put into perspective. Not only was the decline in real GDP in the first quarter not as steep as most investors had expected, but the overall contraction in the Swiss economy is mild compared to the nosedive in real GDP in some of Switzerland's European neighbors. Specifically, the overall decline in Swiss GDP totals 1.6 percent thus far. In contrast, real GDP in the Euro-zone has already dropped 4.6 percent in the current downturn. British real GDP is down 4.1 percent over the last four quarters.

The major source of weakness in Switzerland emanates from the rest of the world. About 60 percent of Switzerland's exports are destined for the European Union, and the deep recession in the Euro-zone is clearly weighing on the Swiss economy. Real exports in Switzerland plunged at an annualized rate of 20 percent in the first quarter, which follows the 30 percent decline that was registered in the previous quarter. However, most components of domestic demand are holding up better. Real consumer spending was essentially flat in the Q1, and fixed investment spending edged down only 1.6 percent. On a negative note, it appears that inventories rose again. Thus, real GDP could be depressed going forward as firms attempt to work off unwanted stocks. That said, the worst is probably over for the Swiss economy in terms of its rate of contraction.

In that regard, it appears that the Swiss GDP may currently be declining further, albeit at a modest pace. As shown in the middle chart, the manufacturing PMI is off the lows that it touched early this year, although it remains below the demarcation line that separates expansion from contraction. The value of exports rose in April relative to March, which suggests that the drag from the rest of the world may be starting to dissipate. As noted above, however, production may be slow to bounce back due to excess inventories.

The U.S. dollar strengthened versus most currencies last autumn, including the Swiss franc, as credit markets locked up and investors fled to the safety of U.S. Treasury securities. The franc has clawed its way back against the greenback as investors have become less risk averse. Although the franc should give up some of its recent gains, a return to last autumn's lows does not seem likely, at least not in the near term.

Wachovia Corporation
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