Real GDP growth in Switzerland came in below expectations in Q2 on top of downward revisions to Q1. With inflation still low, the Swiss National Bank is unlikely to tighten monetary policy anytime soon.
Another Disappointing GDP Print in Switzerland
Data released this morning revealed that real GDP in Switzerland grew 0.3 percent in Q2 (1.1 percent annualized), undershooting consensus expectation for 0.5 percent sequential growth (top chart). On a year-overyear basis, real GDP in Switzerland is up just 0.3 percent, the slowest pace since 2008.
The external sector accounted for much of the slowdown in growth in Q2. Imports of goods excluding valuables surged 5.5 percent in the quarter, while imports of services also increased a solid 1.7 percent. Exports of goods excluding valuables saw a much smaller 0.5 percent gain, and exports of services outright declined for the second consecutive quarter. Despite the drag from trade in this morning’s print, a weaker currency and stronger economic growth throughout the Eurozone should help provide a boost to Swiss exports in the coming quarters, all else equal.
The strong growth in imports was indicative of healthier domestic demand than the headline would suggest. All components of domestic demand gained over the quarter, with the biggest jump coming in construction investment. Private consumption expanded moderately, boosted by spending on healthcare, housing and energy, and restaurants and hotels. The manufacturing sector, which accounts for about 18 percent of value added, has faced a challenging environment amid the stronger currency and weaker growth abroad. Recently, however, the Swiss manufacturing purchasing managers index surged to a six-year high. Supply-side data from this morning showed manufacturing output growing a solid 0.9 percent in Q2, helping to corroborate the improvement in sentiment.
Central Bank Outlook: SNB Likely to Lag ECB
Against this relatively weak economic backdrop, price growth in Switzerland has managed to escape deflation territory (middle chart). Even with the recent gains, however, inflation remains remarkably modest; core CPI inflation was 0.4 percent in August, which was the highest reading since March 2011. Year-ago consumer price growth has averaged -0.3 percent over the past five years, so the Swiss National Bank (SNB) may want to wait and ensure that inflation expectations are well-anchored above zero percent before making any major changes to monetary policy.
Our currency strategy team looks for the Swiss franc to strengthen versus the U.S. dollar amid generalized greenback weakness. Against the euro, however, our currency team expects a continued slide in the value of the franc. Economic growth in the Eurozone and Switzerland has diverged, and the SNB has signaled that it still believes the franc is overvalued (bottom chart). As such, the SNB will likely lag the European Central Bank in its efforts to start removing monetary policy accommodation.