Photographer: Chris Ratcliffe/Bloomberg

Swiss Growth Unexpectedly Slows on Weak Government Demand

  • First-quarter GDP rises 0.1%, estimate was for 0.3% increase
  • Economy helped by private households, construction investment

Switzerland’s economy barely grew in the first quarter as government spending fell for the first time in a year.

The slowdown to 0.1 percent followed expansion of 0.4 percent in the last three months of 2015 and fell short of the 0.3 percent growth that economists had forecast. The report published Wednesday by the State Secretariat for Economic Affairs in Bern also showed that government expenditure dropped 0.8 percent.

The economy has been fighting to regain its footing a year after the Swiss National Bank abolished its cap of 1.20 per euro on the franc. With the strong currency undermining exports and expansion, demand has been underpinned by domestic consumption. Surveys had suggested momentum was building at the beginning of 2016.

“We see slight growth, which is positive, but Switzerland remains far away from what we’d consider its growth potential,” said Alessandro Bee, an economist at UBS Group AG in Zurich. “The recovery after the franc shock should be gradual, these numbers prove that.”

The franc has depreciated 1.5 percent against the euro this year and has traded weaker than 1.10 for almost a month. It stood at 1.10574 at 9:35 a.m. in Zurich on Wednesday.

Export Growth

Private consumption grew 0.7 percent in the first quarter compared with the fourth, the SECO data showed. Exports of goods rose by 2.1 percent. According to the SECO, the contraction in government spending was due to lower employment in the state administration and education sectors.

“On the production side, the picture was mixed: whilst financial services and the hotel and catering industry saw a decline, value added in manufacturing, construction and the health-care sector increased,” the SECO said in a statement.

A healthier euro area, where the economy expanded at its fastest pace in a year in the first quarter, is likely to help Switzerland down the road. The 19-country region is its top destination for exports. Yet a slowdown in China, with whom the Swiss have negotiated a trade agreement, could throw a spanner in the works.

Swissmem, which represents machine, electrical and metals companies, attributed a small rise in new orders in the first quarter -- snapping five periods of declines -- to better demand from abroad and called a slight increase in exports to the European Union “striking.”

‘Hardly Budged’

A closely-watched gauge of manufacturing activity also published on Wednesday showed an improvement for May. Still, April retail sales dropped by a real 1.9 percent from a year earlier.

“Strong growth in the euro area and recently improved sentiment indicators had raised the hope that the local economy had experienced a strong start to the year,” research consultancy BAK Basel said in a statement. Yet the SECO data shows that the economy “hardly budged.”

Moreover, a decision by Britain on June 23 to leave the EU could reverse any uplift stemming from better European demand. It could also cause another surge in the franc, which is popular among investors at times of market stress.

If needed the SNB, which meets for its quarterly policy assessment a week before the Brexit vote, could again cut its deposit rate, already at a record low of minus 0.75 percent, according to economists surveyed by Bloomberg. The central bank expects output to expand between 1 percent and 1.5 percent this year, an improvement to the rise of just 0.9 percent in 2015.

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