Swiss GDP expands in Q4 but deflation remains significant threat to economy

Switzerland's GDP grew in Q4, giving a relief amidst uncertain global scenario and the appreciation of the frac. However, with continuous deflation as a significant risk to the economy, the SNB is expected to increase its policy support in March. The Swiss economy grew 0.4%, slightly better than the consensus expectations of a growth of 0.2% and the stagnation feared by Capital Economics.

On a year-on-year basis, the economic growth slowed to 0.4% from 0.8% in Q4. Q3's growth rate was revised down to -0.1% from 0.0%. The annual growth rate of Switzerland for the entire 2015 is likely to be 0.9%, lower than the euro area equivalent of 1.5%.

Delving into details, net trade was the only component that considerably contributed positively to the GDP. However, this was because of the sharp increase in exports of valuables that resulted in the total exports to grow 3.1%. Exports, excluding this volatile component, grew 1.6%, whereas imports grew 2.6%.

There was hardly any growth in consumer spending, which had increased 0.3% in Q3, while the pace of drop in investment accelerated from -0.3% to -0.5%. Actually, the rise in GDP growth in Q4 compared to Q3 was totally down to a less negative statistical discrepancy".

Indeed, business surveys indicate towards a noticeable acceleration in annual GDP growth at the beginning of 2016. However, other evidence is not much encouraging. The Swiss franc continues to be at a high level with little hope of depreciation, while surveys of export orders indicate towards nearly no growth in export.

Meanwhile, the labor market remains in good health, which is good for household spending. However, the threat of a negative impact from deflation is higher than anywhere else. In January, CPI inflation was -1.3% and has been below zero for nearly every month for the past four years.  The Swiss National Bank, against this backdrop, will take little comfort from the modest growth in Q4.

"With ECB policy loosening set to exacerbate upward pressure on the franc, we see the SNB renewing its FX interventions before long. We also expect it to cut its deposit rate, which applies only to the largest banks, to a new low of -1.0% at its meeting on 17th March", says Capital Economics.