Switzerland Joins European Neighbors in Recession

Real GDP in Switzerland contracted at a modest pace in the fourth quarter, but a large build-up in inventories sets the stage for further weakness in the quarters ahead. The Swiss franc has weakened versus the dollar since the beginning of the year, and we believe this trend will remain in place for the foreseeable future.

Swiss Economy Weaker Than it First Appears

Data released this morning showed that real GDP in Switzerland contracted at an annualized rate of only 1.2 percent in the fourth quarter of 2008, which was not as weak as most investors had expected. However, the underlying data reveal that the Swiss economy is weaker than it first appears. First, downward revisions to prior quarters show that the economy had less momentum than previously thought coming into the fourth quarter. In addition, growth in the fourth quarter was propped up by a large build-up of inventories, which sets the stage for weak GDP in the quarters ahead as the unwanted stocks are worked off.

The downturn in the Swiss economy was driven in part by a collapse in exports, which plunged at an annualized rate of 29 percent in the fourth quarter. More than 60 percent of Swiss exports are destined to the country’s western European neighbors, and the deep recession in the Euro-zone has imparted a nasty shock to the Swiss economy. In addition, fixed investment spending was off 12 percent, which should come as little surprise in the current environment of extreme uncertainty and frozen credit markets. In contrast, real personal consumption expenditures managed to post a modest increase of 0.4 percent. However the unemployment rate has risen from 2.3 percent last summer to 3.3 percent at present. This deterioration in the labor market suggests that consumer spending probably will weaken.

Indeed, it seems likely that the Swiss economy has contracted further in the current quarter. As noted above, the large increase in inventories in the fourth quarter gives producers incentive to curtail production until stocks return to more appropriate levels. In addition, it appears that the Euro-zone remains in a deep recession in the current quarter, which should weigh further on Swiss exports. As shown in the middle chart, the Swiss manufacturing PMI in February remains well below the demarcation line that separates expansion from contraction.

Dollar Probably Will Grind Higher Versus Swiss Franc

As shown in the bottom chart, the U.S. dollar has risen about 10 percent or so against the Swiss franc since the beginning of the year as interest rate differentials between the United States and Switzerland have moved in the dollar’s favor. Looking forward, we project that the greenback will appreciate further against most major currencies in the next few quarters, and we expect that generalized dollar strength will carry over to the Swiss franc as well. Arguably, U.S. authorities are doing more to jumpstart the economy than their counterparts in Europe are. Expectations of eventual recovery on the western side of the Atlantic should be dollar positive.

Wachovia Corporation
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