Swiss Seen Immune From Euro Recession as SNB Holds Firm

Switzerland’s economy probably kept growing in the first quarter as domestic demand and the central bank’s currency cap kept at bay the recession afflicting many of its neighbors.

First-quarter gross domestic product probably rose 0.2 percent from the previous three months, according to the median of 17 forecasts in a Bloomberg News survey. That contrasts with the surrounding euro area, which has suffered six quarters of recession. Germany, the region’s largest economy, eked out expansion of only 0.1 percent in the first quarter.

The Swiss National Bank has shielded the economy from the effects of the slump in the euro region with its currency ceiling of 1.20 francs per euro. Such a policy has helped ensure Switzerland suffered only one quarter of contraction since the cap was imposed in September 2011, and an unemployment rate about a quarter of that in the 17-nation bloc.

“The last quarter was better than anticipated and the question is whether Switzerland was able to outgrow the rest of Europe at a comparable pace,” said Reto Huenerwadel, a senior economist at UBS AG in Zurich. “Private consumption here is growing above trend, and the question is whether this can last in light of a softening labor market.”

Domestic demand accounted for about 57 percent of growth last year, while net exports made up 10 percent.

Economic Strength

GDP figures are scheduled for publication on May 30, a day after forecasts from the Organization for Economic Cooperation and Development. Also due this week are trade data for April and the KOF barometer, which aims to predict the state of the economy in six months’ time.

Switzerland has “very high economic strength, as reflected in the country’s open, highly developed and diversified economy that is both a major financial center and an important producer of chemicals and pharmaceuticals,” Moody’s Investors Service said on May 23, affirming the country’s Aaa credit rating. It also has top ratings at Standard & Poor’s and Fitch Ratings.

With tensions in the euro area easing, the franc weakened through 1.26 per euro for the first time since May 2011 last week, driven down by SNB President Thomas Jordan’s warning that further measures such as a shift in the cap’s level or negative interest rates hadn’t been ruled out. The Zurich-based central bank holds its next monetary policy assessment on June 20.

Stocks Gain

The franc was little changed against the euro today, trading at 1.2431 at 9:22 a.m. in Zurich. Against the dollar it stood at 96.08 centimes. The Stoxx Europe 600 Index rose 0.3 percent, while Asian stocks fell for a fifth day after Bank of Japan Governor Haruhiko Kuroda said in Tokyo yesterday his country could cope with higher rates.

The SNB, which forecasts economic growth of as much as 1.5 percent this year and consumer prices declining 0.2 percent, has said its cap will remain in place until deflation risks recede, a pledge reiterated by Jordan last week. Swiss consumer prices have fallen 19 consecutive months and are likely to stagnate this year, according to the median economist estimate in Bloomberg’s monthly survey.

With about 46 percent of Swiss exports going to the euro area, the euro’s 0.9 percent gain against the franc in the first three months of this year was a boon to exporters.

“The depreciation of the franc of late should be a spot of good news for companies -- it all goes in the right direction,” said Maxime Botteron, a research analyst at Credit Suisse in Zurich.

‘Risk Normalization’

While Switzerland’s exports have yet to return to their pre-crisis level from 2008, they have climbed in the past three years, defying the franc’s strength against both the dollar and the euro, albeit with companies making concessions on prices.

Data due tomorrow will show whether exports continued to increase in April, after climbing 5.1 percent in March. Exports rose 1.8 percent in the first quarter, supported by the chemicals and pharmaceuticals segment, which include drugs made by Roche Holding AG and Novartis AG, and shipments of precision instruments.

According to analysts including Richard Adcock at UBS and Vasileios Gkionakis at UniCredit Spa, a further weakening of the franc may lie in store, which could prove a further support to the economy.

“We still see the great risk normalization to remain the dominant theme of the markets for the remainder of the year,” said Gkionakis, global head of foreign exchange strategy at UniCredit, which sees the franc plummeting to 1.33 per euro by year’s end.

Asia Exports

In a sign of shoppers remaining wary, consumer confidence rose less than expected in April. On May 30, the UBS Consumption Indicator, which signals developments three months ahead, will show whether data again improved after snapping five months of declines in March.

Switzerland’s joblessness, which is at a two-year high, has hurt consumer confidence. At 3.1 percent in March, the unemployment rate is still a fraction of the euro area’s record of 12.1 percent for that month.

Exporters including watchmakers Cie. Financiere Richemont SA and Swatch Group AG have increased their business with Asia, helping them offset weak demand in Europe.

The 30 companies, whose stocks are listed in the SLI Swiss Leader Index, generated about two thirds of their 2012 revenue outside Europe, according to data compiled by Bloomberg. Exports to China, which accounted for 3.5 percent of Swiss foreign trade in goods in the first quarter, is likely to be boosted by a trade agreement due to be signed in July. The details of the deal were finalized on May 24 during the visit of Chinese Prime Minister Li Keqiang to Switzerland -- his initial stop on his first trip to Europe as premier.

“This agreement marks a new and very important step in bilateral economic relations between Switzerland and China and will permit, on a lasting basis, greater cooperation and economic exchange between our countries,” Economy Minister Johann Schneider-Ammann said.

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