Switzerland: Slight rebound in GDP after two disappointing quarters - ING

Geoffrey Minne, Economist at ING, notes that in the first quarter, Switzerland’s GDP increased by 0.3% QoQ, following two consecutive disappointing quarters as recovering domestic demand and a more stable CHF are among the key drivers of this result.

Key Quotes

“In 1Q17, GDP growth stood at 0.3% QoQ and 1.1% YoY. Last year results were slightly revised: +0.1ppt for 4Q16 and -0.1ppt for 3Q16. In 1Q17, domestic demand was the key contributor while the contribution of external demand was also positive. In 4Q16, net exports (excluding non-monetary gold and valuables) fell importantly, mainly on the weakest quarterly result in three years for goods exports. In 1Q17, exports rebounded both for goods (+3.9% QoQ) and services (3.2% QoQ), which is positive news for an economy characterised by a relatively strong contribution of external trade. The performance of both the chemical and pharmaceutical sector and the precision tools, watches and jewellery sector is noticeable.”

“This rebound is essentially driven by the upsurge in investment in equipment (+1.7% QoQ). Companies' survey data have been pointing towards a solid improvement since the beginning of the year. Between January and April 2017, the KOF index pertaining to expected business tendency within the next 6 months has seen the highest increase in 6 years for the first 4 months. In our view, the stability of the Swiss Franc against the key currencies (thanks to FX interventions and negative interest rates) tends to limit investor worries.”

“That being said, corporate investments have been volatile in recent quarters (investment growth has been negative in four quarters and positive in five in the last two years) and capacity utilisation was still declining in the beginning of the year, this rebound could therefore prove momentary. Moreover, households’ investments (in new buildings) continue to be slowed by real estate market overvaluation and the Swiss National Bank’s prudential policies. One key to unlock business investments lies in a cheaper CHF. An easing of the pressure on the CHF could increase foreign demand, improve capacity utilisation and therefore narrow the output gap.”

“To be clear, as in most developed countries, private consumption remains central for the recovery in Switzerland. After a strong rebound in 4Q16 (0.9% QoQ), private consumption seems to mark a pause in 1Q17, slowing to 0.1% QoQ. It has not experienced two consecutive strong quarters since the beginning of 2013.”

How to explain this “pause”? In 1Q17, labour market developments remained insufficient to support private consumption. Job creation indeed remained subdued, and failed to drive wages up significantly. The report published yesterday by the Swiss Statistical Office confirmed this: nominal wage growth reached only 0.1% YoY in 1Q17 (its lowest growth rate since the data was created in 1995) compared to 0.7% in 4Q16. However, there is light at the end of the tunnel: looking at the employment sub-index of the Markit PMI (which reached in February its highest level since mid-2011), employment growth could be bottoming out. But even then it is still a long way from creating inflationary pressures in the SNB’s eyes.”

“All in all, the recovery is ongoing in Switzerland even if it could be considered as subdued on an historical basis. The overvaluation of the Swiss Franc still hampers business investment while subdued job creation keeps wages in check. Looking ahead, we expect GDP growth to remain steady this year but not outstanding: 1.3% in 2017 and 1.6% in 2018.”