SNB Franc Shield Reaps Reward of Growth Defying Euro Area
Switzerland’s economy defied the recession that afflicted its neighbors to notch up a year of uninterrupted growth, underlining the importance of the country’s currency ceiling as it marks its second anniversary.
Swiss gross domestic product rose 0.5 percent in the second quarter from three months through March, when it expanded by 0.6 percent, the Secretariat for Economic Affairs in Bern said in a statement today. That is more than a median estimate of 0.3 percent in a Bloomberg survey of 18 economists.
Since the Swiss National Bank set a cap on the franc of 1.20 per euro on Sept. 6, 2011, the economy has seen just a single quarter of contraction, while the debt-plagued euro area only emerged from 18 months of recession last quarter. Given the need to keep prices stable and the chance of the euro-area crisis flaring up again, the ceiling remains the right policy tool, SNB President Thomas Jordan said in a Berner Zeitung interview published yesterday.
“It’s a clear success -- they achieved what they wanted,” minimizing deflation risks, said Daniel Hartmann, an economist at Bantleon Bank in Zug. “At the beginning the step was met with much skepticism. There were worries the cap wouldn’t be manageable, that it would fail or the SNB would have to buy lots of euros and was exposing itself to huge losses.”
In a sign of how well the measure has worked, 21 months of falling consumer prices ended in June, and the Swiss economy is expected to outperform that of the euro area again this year. The European Central Bank forecasts the 17-nation currency bloc will contract 0.6 percent, while the SNB sees growth of 1 percent to 1.5 percent in Switzerland. It will issue a new forecast at its policy review on Sept. 19.
To be sure, a calming of financial markets, fiscal reforms from Spain to Italy and a pick up of momentum in the U.S. have played into the SNB’s hands by lessening investors’ interest in the franc, which they tend to buy in times of turmoil.
Spanish unemployment unexpectedly was little changed last month, data today showed. That is the first time Spain’s joblessness hasn’t increased in August since 2000.
With Europe’s revival taking hold, the Organization for Economic Cooperation and Development today lifted its growth forecasts for Germany, France and the U.K. while urging the region’s most-indebted nations to step up changes to improve competitiveness.
Separately, last month’s construction output in the U.K., which isn’t part of the euro area, rose at the fastest pace since September 2007, Markit Economics and the Chartered Institute of Purchasing and Supply said in a statement today.
Even so, uncertainty over the euro area’s health persists. The cap on the franc will remains “as long as it corresponds to monetary conditions,” SNB Vice President Jean Pierre Danthine said yesterday during a speech in Lausanne.
Compared with a year ago, the Swiss economy grew 2.5 percent in the second quarter, up from a revised 1.2 year-on-year growth rate in the first, today’s data showed.
“The euro zone is not yet out of the mess for good -- one swallow doesn’t make a summer,” said Christian Lips, an economist at NordLB in Hanover. “Even with the end of the recession things are still on shaky ground there and could flare up again. The SNB could again find itself up against the wall on the exchange rate again.”
The easing of the debt crisis has led the franc to depreciate 2.1 percent against the euro this year, allowing the SNB to hold off on major interventions. In 2012, it spent 188 billion francs ($201 billion) defending the cap, and as a result now holds foreign currency equal to three-quarters of the economy’s annual output.
The SNB’s cap defense, undertaken over the past 18 months under Jordan, stands in contrast to the strategy pursued in 2010, when his predecessor Philipp Hildebrand was at the helm. For that year, the SNB suffered a record loss of 26 billion francs on its foreign currency positions, after having injected more than 100 billion francs into spot markets.
“The franc is still overvalued, albeit less strongly than in 2011,” said Maxime Botteron, an economist with Credit Suisse Group AG in Zurich. “We don’t think the SNB will change its stance before the end of 2014.”
The franc was little changed at 1.2325 per euro at 2:16 p.m.in Zurich, while it fell 0.1 percent against the dollar to 93.55 centimes.
Less volatility in the exchange rate due to the cap has also helped the export sector, which grew 0.9 percent in the second quarter. Domestic demand, which constitutes a large share of the economy, grew 0.5 percent in the three months through June.
The SNB’s loose monetary policy has kept mortgages cheap, boosting demand for homes and apartments. The central bank has sounded the alarm about borrowers overextending themselves.
To prevent the mortgage writedowns from hobbling economic growth, the SNB, whose hands are tied on the interest rate front by the cap, pushed for a bank capital buffer. The measure, set at 1 percent of mortgage-related assets, comes into force at the end of this month and can be increased to as much as 2.5 percent.
“With the very expansionary monetary policy, the risk for new excesses and new risks to financial stability can arise,” NordLB’s Lips said. “Limiting the financing may help, but it may not be enough.”
To contact the reporter on this story: Catherine Bosley in Zurich at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com