Home News Swiss Economy Expands by 0.6 Percent in First Quarter 2018

Swiss Economy Expands by 0.6 Percent in First Quarter 2018

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By: Alessandra Yuan – Forex Focus

Key takeaways from the Q1 GDP numbers from Switzerland, and the future outlook

According to the State Secretariat for Economic Affairs (SECO), the Swiss economy expanded by 0.6 percent in the January-to-March quarter of 2018. The numbers more or less aligned with those in the previous three quarters, while exceeding market expectations of a 0.5-percent growth. For the year, the economy advanced by 2.2 percent, higher than the 1.9 percent reported in the last quarter but below market consensus of a 2.3-percent growth.

The Swiss economy has been setting a positive growth trajectory since the start of 2017, especially after the country slipped into contraction in the last quarter of 2016, with fourth-quarter 2016 growth numbers coming in at -0.1 percent. The economy has since rebounded, with the country’s third-quarter 2017 GDP (gross domestic product) growth rising to its highest level since the last quarter of 2014. The first-quarter growth numbers indicate a positive start to this year. The unemployment rate witnessed a steady decline, reaching one of its lowest levels in April. The external sector, too, benefitted from a weaker domestic currency against the euro in the period from January to March, while exports registered a double-digit surge. Two of the key indicators for economic growth, the manufacturing PMI (Purchasing Managers’ Index) and the KOF Economic Barometer, were seen to be edging upwards. The PMI stood at 60, one of the highest levels in the last five years.

Cyclical reasons for Q1 growth

On the domestic front, the growth in the first quarter was driven by strong consumption demand and business investment. While the latter rebounded by 3.6 percent during the January-to-March quarter, compared to a decline of 1.3 percent in fourth-quarter 2017, the progress was primarily driven by investments in research and development, vehicles and IT (information technology). Private-consumption demand, too, accelerated by 0.4 percent in the first quarter, setting the fastest pace since fourth-quarter 2016. On the contrary, government consumption contracted by 0.3 percent, and investments in construction activity slipped by 0.4 percent during the first quarter.

On the trade front, while exports jumped by 2 percent in the first three months, a more than proportional rise in imports at 2.9 percent led to a negative contribution from the sector to the broad GDP numbers. Looking at sector-wise growth, the key driver of the Swiss economy was the services sector, with only moderate contribution reported from the manufacturing sector. 

Non-cyclical reasons

Non-cyclicals contributing to growth were led by the entertainment industry, which was spurred on by major international sports events. The Winter Olympics in South Korea at the beginning of this year resulted in a surge in the revenues of the entertainment industry to the tune of 7.3 percent. Excluding the industry, non-cyclicals grew by 0.4 percent in the first quarter.

Future outlook

The Swiss economy is expected to continue on its path to dynamic recovery, with the economy projected to advance 2.0 percent in 2018, according to the Swiss National Bank. The growth forecasts are based on the buoyant global economy, supported by foreign trade and a favorable investment climate stimulating domestic demand. This is likely to be accompanied by a tightening in the labor market and gradual rise in inflation.

  • Rise in global demand on the back of a weaker franc:The sharp fall in the value of the domestic currency in 2017 and a rise in global demand will lead to robust growth in the country’s exports. With more than 40 percent of the country’s exports directed to Europe, a pick-up in European economic growth will only fuel exports further.

  • Rising investment demand:A recovery in industrial activity, mainly led by external demand, has led to an increase in capacity utilization. It is expected that this will drive a rebound in business investments in the upcoming quarters, thereby supporting GDP growth.

  • Private consumption expected to rebound: A declining unemployment rate and a rising income level are also projected to lead the country’s growth rate going forward.

Conclusion 

The OECD (Organisation for Economic Co-operation and Development) has projected that the Swiss economy will expand by 2.3 percent in 2018, higher than the central bank’s anticipation of 2 percent growth in its monetary-policy assessment in March of this year. According to the organization, economic expansion is likely to be led by a rebound in the country’s exports, which are expected to rise to 4.7 percent from -0.7 percent last year, with imports expected to surge to 3.7 percent from -2.5 percent during a similar period, pushing the net export figure to 1.1 percent for the year. Likewise, total domestic demand is also anticipated to rebound to 1.3 percent from 0.2 percent in 2018 on the back of low public debt.

In spite of the Swiss franc recovering somewhat following a slump last year, the outlook is not likely to impact economic growth—unless in the event of heightened geopolitical tensions, which could lead to a sharp appreciation in the franc. In addition, uncertainty on the outcome of the corporate-tax reform, which is due to be implemented in 2020, could also curtail business investments, affecting consumer confidence.

However, low public debt and a gradual increase in the country’s housing prices is bound to affect inflation in the medium-term, compelling the central bank to raise interest rates, which have remained in negative territory since December 2014.

 

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