Swiss economic growth slowed to its weakest pace in more than two years in the third quarter as the strong franc hit exports, piling pressure on the central bank to do more to weaken the currency and prompting forecasts of impending recession. Switzerland's gross domestic product increased just 0.2 percent in the third quarter, though that was still better than the average analysts' forecast of 0.1 percent.
The year-on-year reading of 1.3 percent missed average forecasts for growth of 1.7 percent. "This is already yesterday's story," said ING economist Julien Manceaux. "The country is likely to have entered recession (again) in Q4 as both the eurozone crisis and the franc strength heavily weigh on the country's dynamism." The franc was down less than 0.1 percent versus the euro at 1.2266 per euro by early afternoon, having moved little in the wake of the data.
Second-quarter figures were revised up to show growth of 0.5 percent instead of 0.4 percent, but the annual rate of expansion was nudged down to 2.2 percent from an earlier 2.3 percent, State Secretariat for Economics data showed on Thursday. Citing a heightened risk of deflation and recession, the Swiss National Bank (SNB) set a cap of 1.20 per euro on the franc on September 6. Speculation has grown that it might shift the cap towards 1.30 per euro as Swiss firms demand more help.
SNB chairman Philipp Hildebrand said earlier this week that the franc was still "at a high level" and the Swiss economy was entering a difficult phase of low growth or possibly even a slight contraction. Other data on Thursday showed Swiss manufacturing activity slowed further than expected in November, with the purchasing manager's index in contraction territory for the third consecutive month.
That mirrored the KOF barometer, Switzerland's leading growth indicator, which dropped to its lowest level in over two years in November, suggesting the economy might soon dip into recession. An official at Switzerland's State Secretariat for Economic Affairs also could not rule out a further slowdown in 2012. "A technical recession is possible," Aymo Brunetti, head of its economic policy unit told Swiss television.
A recession is usually defined as two consecutive quarters of negative growth. "The further deterioration in Swiss Q3 GDP will clearly provide proponents of a higher 'floor' more justification for immediate action," said Peter Rosenstreich of Swissquote. "While the number was a hair higher than expected, the SNB will be primarily focused on the severe downward trend in growth and negative effect on inflation." But other economists said the SNB, which holds its quarterly monetary policy meeting on December 15, would probably keep the cap at 1.20 per euro for now.
"We believe the SNB will stick to their minimum rate which is helping moderate the impact by giving more planning certainty," said Credit Suisse economist Claude Maurer. Investment in fixed assets fell 2.3 percent on the quarter, led by declines in the metal working and mechanical engineering sectors, the data showed. Exports of goods excluding valuables such as precious metals and works of art fell 0.9 percent in the third quarter, while service exports including tourism fell 2.7 percent.
Export prices sank by 2.7 percent although the GDP deflator rose 0.8 percent. "The GDP deflator does not suggest large-scale deflation. To me this is probably the most interesting measure," said UBS economist Reto Huenerwadel. Swiss companies including drugmakers like Roche, watchmaker Swatch Group and banks like Julius Baer have seen profits suffer due to the strong franc, leading some to cut staff. Swiss companies expect sales to drop in the fourth quarter, a survey of more than 500 companies conducted by UBS showed on Thursday, with 37 percent of respondents saying an exchange rate of 1.20 francs per euro is still too high.