Swiss economy grows as companies brace for currency headwinds

[ZURICH] The Swiss economy grew twice as fast as economists forecast at the end of 2014, indicating resilience before the central bank scrapped a currency cap that was shielding exporters.

Gross domestic product increased 0.6 per cent in the three months through December, after an upwardly revised 0.7 per cent a quarter earlier, the State Secretariat for Economic Affairs in Bern said in a statement on Tuesday. That's more than the 0.3 per cent median of 18 estimates in a Bloomberg News survey.

The economy was dealt a seismic shock on Jan. 15 when the Swiss National Bank announced it would no longer enforce its ceiling on the franc of 1.20 per euro and instead was increasing its charge on sight deposits. The move sent the franc soaring against the euro, a blow to exporters who ship a big portion of their goods to the currency region, and prompted economists to predict output would shrink for at least a few months in 2015.

"The first quarter of this year surely will be hit sharply by the strong franc," said Roland Klaeger, an economist at Raiffeisen Schweiz in Zurich. Even so, "things should slowly pick up in the second half of the year, and a recession for 2015 probably will be avoided."

Private and public consumption, as well as the balance of trade in goods, contributed to the rise in GDP in the fourth quarter, according to the data. Output rose 2 per cent in 2014, it showed.

Economic Tsunami The central bank hasn't yet issued a revised GDP estimate for this year following what one corporate executive termed a currency-market "tsunami." The SNB's previous prediction, issued in December when the cap was still in place, was for 2015 growth of about 2 per cent.

"Exports of goods were relatively strong in 2014, but that'll probably get weaker in 2015 because of the franc," said Maxime Botteron, an economist at Credit Suisse Group AG in Zurich.

Exports of goods increased 4.1 per cent last year, after a decline of 1 per cent in 2013.

"Industry in Switzerland is likely to stagnate, and the big question is what effect this will have on private consumption - we expect domestic demand to weaken, including companies not investing because of the currency shock," Mr Botteron said.

Alternate SNB Governing Board Member Thomas Moser said in a speech in St Gallen last week he was "optimistic" that while Switzerland would suffer a big drop in growth in 2015, it wouldn't slip into a "deep" recession.

Economists surveyed by Bloomberg don't see a recession this year. Output is seen rising just 0.1 per cent in the first quarter and then declining 0.2 per cent in the second, according to the poll. Growth will return in the second half, bringing the annual increase to 0.9 per cent.

SNB officials are scheduled to publish new forecasts at their next monetary-policy review on March 19, and will also hold a press briefing that day in an unusual move. Economists surveyed by Bloomberg News in February said the central bank could cut its deposit rate, currently at minus 0.75 per cent, to counter weakening economic momentum.

SNB President Thomas Jordan stoked speculation about further rate cuts last month by telling Swiss radio SRF that the franc was "clearly overvalued" and there was room for an even lower rate.

The franc has increased 12 per cent against the euro so far this year. The currency was little changed at 1.0728 per euro at 8:20 am in Zurich, while against the dollar it stood at 95.73 centimes.

In what could well signal the extent of the economic slowdown, Switzerland's purchasing managers' index that gauges manufacturing output has signaled contraction for the last two months. Industrial output, much of which involves the production of technically sophisticated machines, accounts for about 19 per cent of GDP.

To support companies struggling with the strong franc, the Swiss government has modified the rules under which they may claim benefits for employees' reduced working hours, known as Kurzarbeit in German, to include fluctuations in the exchange rate. A fiscal-stimulus program isn't envisioned at this point, the government has said.

Adding to the downside risks to growth are plans to limit immigration, which has been a chief support of domestic demand. The Swiss voted a year ago to impose a quota system for newly arriving immigrants from the European Union, who currently enjoy free entry. The government has yet to announce how strictly it will implement the restrictions, which would contravene a treaty with the EU, potentially causing a deterioration in trade relations.

BLOOMBERG