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Swiss Outlook at Risk After Surprise GDP Drop: Economy

Swiss Economy Contracted in Second Quarter on Export Drop
Switzerland’s economy is faltering as the euro area’s deepening slump and waning global growth erode export demand, forcing companies to lower costs. Photographer: Chris Ratcliffe/Bloomberg

Swiss government officials and economic forecasters may cut their predictions for growth this year after gross domestic product unexpectedly fell in the second quarter.

The BAK Basel Institute, Bank Sarasin, Zuercher Kantonalbank, UBS AG and the State Secretariat for Economic Affairs might lower their 2012 forecasts after a government report today showed that GDP fell 0.1 percent from the first quarter, when it rose 0.5 percent, less than the 0.7 percent previously reported. That’s the first drop since the third quarter of 2011, when the Swiss National Bank imposed a franc ceiling to help protect the economy.

SNB President Thomas Jordan yesterday reiterated his commitment to defend the franc ceiling with the “utmost determination” amid signs the economy is faltering as the euro area’s deepening slump and waning global growth erode export demand. Bruno Parnisari, head of the state secretariat’s economic policy, said in an interview the government may need to cut its 2012 outlook in new projections on Sept. 18.

“The risk for the full-year forecast has increased,” Parnisari said by telephone from Bern. The June forecast of 1.4 percent growth “seems a little bit optimistic at this stage. Up to August, we don’t have any clear signs of economic improvement.”

SNB Ceiling

The franc traded at 1.2010 against the euro at 11:52 a.m. in Zurich, little changed on the day. It was at 95.31 centimes versus the dollar. The benchmark Swiss Market Index dropped for the first time in three days, declining 0.7 percent.

Economists had forecast growth of 0.2 percent in the second quarter, the median of 16 estimates in a Bloomberg News survey showed. From a year earlier, GDP rose 0.5 percent, less than the 1.6 percent economists had expected. First-quarter annual GDP growth was revised to 1.2 percent from 2 percent.

The third quarter of 2011 was also revised lower to show a contraction, followed by an expansion of 0.4 percent in the subsequent three months, suggesting the franc ceiling of 1.20 versus the euro introduced in September to stem a surge in the currency to a record helped stabilize the economy.

“Switzerland has weathered the crisis relatively well, but not as well as previously thought,” said Alexis Koerber, a senior economist at the BAK Basel Institute, which will lower its 2012 growth forecast from 1.5 percent. “It could be difficult” to reach growth of more than 1 percent, he said.

European Confidence

Swiss gross fixed capital formation including construction spending stalled in the second quarter after rising 0.2 percent in the previous three months, the GDP data showed. Exports of goods excluding precious metals, jewelry and antiques dropped 0.7 percent after falling 0.5 percent in the first quarter.

In the 17-member euro area, the destination for about two thirds of Swiss exports, the economic slump is deepening with at least five nations in recession and Germany showing increasing signs of slowdown. Euro-area manufacturing output shrank more than initially estimated in August, economic confidence slumped and German unemployment increased.

The European Central Bank forecast in June that the euro-area economy will shrink 0.1 percent this year. The central bank will publish new forecasts after a meeting of policy makers on Sept. 6.

U.S., Japan

Elsewhere in the world, economies are also cooling, clouding Swiss export prospects. U.S. manufacturing probably teetered between growth and contraction in August, with the Institute for Supply Management’s factory index seen at 50 after 49.8 in July, according to a Bloomberg survey. The ISM will release the report at 10 a.m. New York time.

In Japan, a government report yesterday showed capital spending rose 6.6 percent in the second quarter from a year ago, below the 7.8 percent estimate in a Bloomberg survey. That prompted economists to cut forecasts for Japan’s second-quarter GDP, initially reported at an annualized 1.4 percent gain.

U.K. construction unexpectedly contracted in August as new orders dropped at the fastest pace since April 2009, Markit Economics said today. The report is adding to evidence that Britain’s recession extended into the third quarter.

“The second half of the year will be weaker than the first,” said Alessandro Bee, an economist at Bank Sarasin in Zurich, who may cut his 2012 GDP forecast of 1.3 percent. “Europe is in recession and Asia isn’t doing too well either. Domestic demand continues to support the economy.”

Swiss consumer spending rose 0.3 percent from the first quarter, when it advanced 0.9 percent, today’s report showed. Government spending increased 1 percent, while imports of goods and services advanced 0.2 percent.

‘No Shift’

So far, Swiss indicators for the second half of the year are showing mixed signs. While the KOF economic indicator climbed to a one-year high in August, manufacturing output contracted for a fifth straight month. Exports dropped for a second month in July and the UBS consumption indicator weakened.

The SNB forecast in June that the economy would expand about 1.5 percent this year. The central bank, which kept borrowing costs at zero that month, will hold its next monetary assessment on Sept. 13. Jordan said yesterday the franc ceiling remains the “best policy” at the moment.

“The critical take away from this data is that there will be no shift in the SNB currency policy any time soon,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “Obviously the SNB recognizes that in these difficult times, a strong currency will make growth challenging for the export-driven economy.”

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