Weak Q1 GDP puts pressure on SNB

The Swiss National Bank (SNB) is likely to leave its policy stance unchanged this week. However, the weakness in real GDP and core inflation at the start of this year has increased pressure for further action by the SNB, despite the limited options at its disposal. GDP weakened more than expected in Q1, leading to revise down growth for this year to 0.9%, from 1.6% before, says Societe Generale. 

However, this is what the SNB had already forecast in March, so the data so far should not have come as much of a surprise. Consequently, more negative news will be needed to swing the SNB in favour of further action.

Acording to SocGen, the exchange rate shock at the start of the year will be counterbalanced by resilient domestic demand. This is mainly due to the positive effects of lower inflation and energy prices, boosting real purchasing power, as well as the much improved growth outlook for the euro area (and Germany in particular), factors that were largely absent at the time of the last currency shock in 2011. Q1 GDP growth largely confirmed this picture of continued domestic strength - household consumption grew by 0.5% qoq, up from 0.3% in Q4 14 while investment rose 0.4% qoq, up from 0% before. Exports, however, fell by a hefty 3.8% qoq, resulting in a strong negative net export contribution. 

However, ever since the changeover to ESA 2010 accounting, the trade data have been massively volatile. In Q4 14, exports grew by 9.6% qoq (an annualised rate of nearly 40%), while inventories were showing equally wild swings. This makes it incredibly hard to assess the true impact of the stronger currency on exports, and the impact is significantly less than the Q1 data suggest. In Q2, analysts expects the exports to have bounced back with the adverse impact only being felt gradually over time. This should result in the SNB biding its time and looking at the possible measures it could implement if the weakness in the economy spreads, argues SocGen. 

In March, the SNB forecast inflation at - 1.1% for this year, which is lower than the -0.8%, says SocGen. While inflation has been slightly weaker than expected in Q1, oil prices are also much higher now which should have a positive impact on the SNB's new forecasts.