Swiss economic growth disappoints in Q1; SNB unlikely to tighten policy for sometime

Swiss economy grew 0.1% q/q in the first quarter of 2016. The economic growth came in weaker than expected. However, in certain sense, the result was not as weak as the headline indicates. Private spending growth was solid as personal consumption expenditures grew at a decent annualized pace of 2.7%, while investment spending expanded almost 7%.

The overall economic growth faced headwinds in the first quarter from the 3.3% decline in government expenditures and a huge inventory correction that subtracted around two percentage points from the economic growth rate. The overall real GDP growth of Switzerland might rebound if inventories stabilize in the quarters to come and if government expenditures come back to their underlying trend, said Wells Fargo in a research report.

However, the first quarter sequential growth rate of Switzerland shows the underlying economy state at present. In the past year, Swiss quarter-on-quarter growth has followed a saw-tooth pattern. On a year-on-year basis, the Swiss real GDP grew 0.7%, as compared with Q4 2015’s 0.3% y/y. However, it was not a strong growth. Overall, the Swiss economy is not much robust currently, noted Wells Fargo.

Furthermore, there are other indicators in line with a weaker rate of economic growth. For instance, the jobless rate has been on a higher trend in the past few years. Although the rate is at just 3.5%, it would have been lower if the economic growth rate was more robust. Moreover, the Swiss economy is not facing any inflationary pressures currently. Also, the CHF’s appreciation, which rose almost 10% on a trade-weighted basis since late 2014, has exerted downward pressure on inflation rate. However, if the Swiss economy grew at a stronger rate, inflation would have been higher, added Wells Fargo.

The Swiss National Bank has lowered its policy rate to negative in light of a mild case of deflation. Even if the economic growth is likely to strengthen slightly in 2016 and inflation expected to enter positive territory, the central bank appears to be a long way from tightening its monetary policy, according to Wells Fargo. The US dollar is expected to strengthen modestly against the CHF in the quarters to come as the US Fed gradually hikes its target range for the fed funds rate, added Wells Fargo.