The growth pace of the Swiss economy has been the lowest since the peak of the financial crisis. Although weak GDP figures are partly due to transitional factors, they may extend the period of extremely low interest rates and further contribute to the further franc's appreciation," says Marcin Lipka, senior analyst at Conotoxia.
The publication of the Swiss GDP has probably surprised most economists in the world. The growth of this economy in the second quarter was only 0.3% YOY. It is not only below the economists' expectations who expected 1.0% gain YOY. But it was also one of the weakest readings in recent decades and equal to that observed in the Q4 of 2008, therefore, in the peak of the financial crisis. What has caused such poor results in one of the wealthiest countries in the world?
From where such disastrous results?
With the eurozone's economic growth at 2% and high probability of achieving the best results in the single currency area for the past decade, such a low GDP growth pace, which has been strongly connected with Switzerland's external economic climate, may be surprising. It is worth noting that for the bad result have contributed several factors.
Firstly, the Swiss State Secretariat for Economic Affairs (SECO) revised the data for previous years, which changed the benchmark for the last publication. Secondly, very important has been significantly strong volatility in the results of the Swiss foreign trade. In 2016, services export increased by 7.9%, including the growth of 13.3% in Q4 YOY. In turn, in March-June maturity, it was only 0.4% YOY. On the other hand, the services import increased significantly more than exports and amounted to +4.1 percent. While the demand for Swiss goods abroad decreased by 1.3% compared to the second quarter of 2016, while imports increased by 2.5%. As a result, foreign trade has had a strong and negative impact on GDP in the last reading, although this is likely to be a short-term effect.
Apart from the trade and data revision, there have been signs of a slightly worse internal economy' condition. Compared to the first quarter, household consumption growth (from 1.5% to 1.3% YOY) and public sector expenditure (1.7% to 1.6% YOY) have been declining. The investment growth pace has also been noticeably reduced. In Q4 of 2016 it was 4.4% and currently only 1.9%.
Interest rate without changes and the depreciated franc
Although the significant slowdown in GDP growth is likely to be temporary, it should affect the Swiss National Bank's (SNB) decisions. Still in June this year, the monetary authorities expected the economy to grow by 1.5% in 2017. However, in the first two quarters, the growth was around 0.5% YOY. It is extremely unlikely that the following months will pare any losses from the back of the year, especially since retail sales in July fell 0.7% YOY.
Previous results are likely to make the SNB revise downward the GDP estimates for 2017 during the meeting at 14th September. Since there is also no significant acceleration in inflation (0.5% YOY), it is possible that the monetary authorities will clearly imply that interest rates will remain negative (-0.75%) longer than it was previously expected. Taking into account the impact of the interest payment portion on the amount of their instalment, this is a positive information for those who pay off the franc loans.
More accommodative monetary policy can also be beneficial in the context of the franc's valuation. The good economic condition of the eurozone and other leading economies of the world combined with rising inflation in the single currency area and the likelihood of exiting from a mild monetary policy by the European Central Bank should reduce the attractiveness of the franc in relation to foreign currencies, including the zloty.
As a result, the confusion in the readings of the Swiss GDP may prolong the trend of extremely low interest rates and the franc's weakness. This is an ideal scenario for those who repaying loans denominated in this currency, especially as the good economic condition in Poland also supports the relatively strong zloty. Therefore, it is possible that the franc will return to approx. 3.50 PLN level, i.e. to the one before so-called "black Thursday".