Swiss Economy Unexpectedly Shrinks After Strong Franc Stifles Exports

SNB President Thomas Jordan
Thomas Jordan, president of the Swiss National Bank. Photographer: Alessandro Della Bella/Bloomberg

Switzerland’s economy contracted the most in six years as the strong franc took its toll on exports.

Gross domestic product fell 0.2 percent in the first quarter, after a revised growth of 0.5 percent in the previous three months, the State Secretariat for Economic Affairs in Bern said in a statement on Friday. The contraction is the biggest since early 2009 and missed the median economist forecast for stagnation.

With the franc overvalued, according to the Swiss National Bank, the risk is that the weakness persists. The data also hands ammunition the central bank’s critics, who say its January decision to give up the cap versus the euro is jeopardizing the economy. The ceiling exit caused the franc to surge by a record against the euro in the quarter, a particular hardship for industrial companies that export a large portion of their wares.

“We’ve got the first sign of a recession, the second quarter surely won’t be better,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd. in Zurich, adding that the SNB won’t necessarily have to revise its growth outlook for this year. “I think the SNB will be able to shrug this off.”

Slower Growth

In the first three months of the year, exports of goods fell 2.3 percent, and a “significant negative contribution came from the category of chemicals, pharmaceuticals,” the SECO said. Machinery, electronics as well as precision tools and watches also declined. At the same time, private consumption increased 0.5 percent, thanks to growth from housing, energy and health.

SNB President Thomas Jordan predicts the economy will grow “just under” 1 percent in 2015, half what was forecast when the cap of 1.20 per euro on the franc was still in place. In the first quarter, the franc rallied 15 percent against the euro, the biggest such increase since the single currency was introduced in 1999. The franc traded at 1.03351 against the euro at 12:20 p.m. in Zurich on Friday, little changed from a day earlier.

So far, SNB policy makers have not predicted a recession -- two consecutive quarters of contraction. In fact, SNB Vice President Jean-Pierre Danthine said as recently as last week that there would only be “probably one bad negative quarter.”

Public Criticism

While Swiss reactions to the SNB’s abandonment of its cap have generally been benign, the prospect of slowing growth and rising joblessness has prompted criticism from members of the Social Democratic party, the second-biggest in parliament, who have called for the establishment of a new minimum exchange rate. Trade union Unia even called on the central bank’s board to resign.

“The fresh decline in Swiss GDP in the first quarter should bear no immediate implication for the monetary policy of the SNB,” said Johannes Gareis, an economist at Natixis in Frankfurt. “Private consumption will remain the key driver of growth this year, driven by a further decline in inflation.”

The central bank will publish updated growth and inflation forecasts at its next policy review on June 18.

Recent surveys have pointed to a slowdown in momentum. A manufacturing sector gauge has signaled contraction and exporters have experienced revenue and prices declines in the first quarter. The May reading of the KOF economic barometer indicated that “the Swiss economy can be expected to exhibit growth rates clearly below average,” according to a statement Friday.

According to the International Monetary Fund, Swiss growth is set to slow this year to 0.75 percent, due to the unfavorable exchange rate, with unemployment set to increase moderately.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE