Swiss economy grows below expectations in Q2, SNB likely to lag ECB – Wells Fargo

Swiss real GDP growth came in below projections in the second quarter. Moreover, the first quarter’s print was revised down. The Swiss economy expanded 0.3 percent in the second quarter, as compared with consensus expectation of 0.5 percent sequential growth. On a year-on-year basis, the real GDP grew just 0.3 percent, the slowest rate since 2008.

The external sector mainly drove the slowdown in the economic growth in the second quarter. Imports of goods excluding valuables rose sharply by 5.5 percent in the quarter, while imports of services also rose a strong 1.7 percent. Goods exports, excluding valuables saw a much smaller 0.5 percent gain, and exports of services dropped for the second straight quarter. In spite of the drag from trade in the second quarter growth report, a weaker currency and stronger economic growth throughout the euro area should help provide a boost to Swiss exports in the quarters ahead.

The solid gain in imports was indicative of healthier domestic demand than the headline would suggest. All components of domestic demand rose in the quarter, with the biggest jump coming in construction investment. Private consumption grew moderately, stimulated by spending on healthcare, housing and energy, and restaurants and hotels. The manufacturing sector, which accounts for around 18 percent of value added, has faced a challenging environment amidst the stronger currency and weaker growth abroad.

However, recently, the Swiss manufacturing purchasing managers index rose sharply to a six-year high. Supply-side data released today showed that manufacturing output rose strongly by 0.9 percent in the second quarter, aiding in corroborating the improvement in confidence.

Given this relatively subdued economic backdrop, Swiss price growth has managed to escape deflation territory, noted Wells Fargo in a research report. However, even with the recent gains, inflation continues to be remarkably modest, with core inflation rising 0.4 percent in August, which was the highest reading since March 2011. Year-on-year consumer price growth has averaged -0.3 percent in the past five years, so the Swiss National Bank might want to wait and guarantee that inflation expectations are well-anchored above zero percent before making any major alterations to monetary policy.

According to Wells Fargo, the Swiss franc is expected to appreciate against the U.S. dollar amidst generalized greenback softness. However, against the euro, the franc is expected to continue to slide. Economic growth has diverged in the euro area and Switzerland, while the Swiss National Bank has hinted that it continues to believe that the franc is overvalued.

“The SNB will likely lag the European Central Bank in its efforts to start removing monetary policy accommodation”, added Wells Fargo.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Swiss Franc was neutral at -15.4284, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -58.485. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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