Switzerland: GDP growth’s last rebound - ING

Julien Manceaux, Senior Economist at ING, notes that the Swiss economy rebounded as expected in Q2, after a rather weak first quarter.

Key Quotes 

“However, domestic demand failed to contribute positively to growth. It is rather what made import growth so weak which allowed for a net export lead rebound. With the risks from the Brexit vote only starting to emerge and consumer confidence still at very low levels, this was likely the last strong quarter of 2016

Figures published this morning showed that after having slowed to 0.1% in the first quarter, the Swiss economy rebounded by 0.6% in the second. However, the main domestic components continued to show signs of weaknesses with private consumption stagnating in Q2 and investments contracting. It was expected that private consumption would not have grown strongly because of its strong rebound in Q1, while unemployment was still increasing. Public consumption by contrast posted a strong 1.7% QoQ growth.

All in all, this morning figures confirm the rather strong rebound that was expected for the second quarter, but given the weak start of the year, GDP growth should be limited to 1.1% in 2016. Moreover, the domestic demand weakness is set to continue as consumer confidence is still declining (retail sales were down by 4.4% on the year in 2016H1) and that investments will probably be hit by the Brexit vote in the second half of the year.

These data show that the Swiss economy is hardly immune to the neighbouring Eurozone slowdown. Brexit has added uncertainty to the current outlook. Indeed, back in 2014, after almost 12 years of open borders for EU expatriates, the Swiss voted for tighter immigration rules at a referendum, by way of introducing quotas. The vote was passed with a very slim majority and there were also no specifics on how high quotas should be. Nevertheless, the government now has until early 2017 to impose new rules. These will by themselves be detrimental to Swiss potential growth, but they could also be much harder to negotiate with the European Commission after Brexit and before February 2017.

A Swiss delegation is expected in Brussels on 19th of September, but the Brexit vote will make it very difficult for Switzerland to reach a deal with the EU. The EU will not have any interest in providing the UK any precedent on how a new balance between tighter immigration and access to the single market could look like. The Swiss economy outlook could therefore darken further in coming months.

This implies that the current monetary policy, which aims at maintaining large spreads between CHF and EUR interest rates in order to avoid too strong an appreciation of the CHF against the EUR, will remain a key determinant of growth in 2016. With a very low domestic demand growth to be expected, supporting exports growth will be key to limit the damages in terms of GDP and employment growth. This is why we expect the SNB to continue to intervene to support the CHF above parity against the euro in 2016 and to ensure that interest rate spreads between the euro and CHF remain substantial.

As we expect the ECB to at least hint at a possible lengthening of its quantitative easing program and as the interest rates spread between EUR and CHF have continued to decrease since the Brexit shock, we still believe that it is possible that the SNB will decide to go further into negative territory before year end, to enlarge EUR-CHF spreads and decrease real CHF interest rates. This means that the EUR/CHF exchange rate should show some volatility again, that the CHF 3m Libor will be pushed lower in the coming months (closer to -1.0%) and that any monetary policy normalization is likely to be postponed until 2018.”