While Swiss Q1 GDP undershot the consensus forecast, the underlying details are not as weak as the headline figure suggests. Continued muted growth will not likely spur inflationary pressures in the foreseeable future.
Setting up for Potential Rebound in Q2
Data released this morning revealed that real GDP in Switzerland grew 0.3 percent in Q1 (1.1 percent annualized), undershooting the consensus expectation which called for 0.5 percent growth. Despite the miss, Q1 growth was the strongest since Q2-2016. A breakdown of Swiss output into its underlying demand components shows mixed results in the first quarter.
Household consumption was notably weak, growing just 0.1 percent in Q1. However, a slowdown in personal consumption growth could have been expected given its 0.9 percent increase the previous quarter. Government spending increased 0.4 percent to mark its twelfth consecutive quarter of expansion. Business investment in equipment and software increased a strong 1.7 percent on the quarter while construction investment edged up 0.4 percent.
Moreover, exports (excluding valuables) jumped 3.9 percent on the quarter, following a 3.5 percent pullback in Q4-2016. Likewise, exports of services grew 3.2 percent. Prior to this quarter, Swiss export growth had been lackluster, reflecting slow economic growth in many of Switzerland’s trading partners as well as the appreciation of the Swiss franc. As economies in the Eurozone begin to gain momentum, as we expect, Swiss export growth should remain positive. On the other hand, real appreciation of the Swiss franc in recent years has eroded the price competitiveness of goods and services produced in Switzerland relative to goods and services produced in other countries, which could serve as a headwind for export growth moving forward. Moreover, nominal inventories declined 1.7 percent, and it appears that real inventories are weighing on overall growth. However, the current drag of inventories on topline growth provides the potential for a bounce back in coming quarters.
Inflationary Pressures Relatively Absent
Consumer price inflation in Switzerland emerged from negative territory in January for the first time in over two years. The core CPI followed suit in March, however both price measures remain dangerously close to slipping back into negative territory. The aforementioned appreciation of the franc has put downward pressure on inflation via lower import prices. The Swiss National Bank (SNB) has adopted extraordinary policies in recent years in an effort to bring about higher prices on a sustained basis. Between mid- 2011 and late 2014 the SNB held its target rate for 3-month Swiss franc LIBOR at 0 percent. In January of 2015, the SNB cut rates deeper into negative territory by reducing its target for 3-month Swiss franc LIBOR to -0.75 percent. Although inflation has recently been positive, the SNB likely will maintain negative rates for the foreseeable future.