Real GDP growth in Swit erland was stronger than expected in Q4. Although the CPI is declining modestly at present, rapid growth in the money supply bears watching in the years ahead.

Swiss Economy Stronger Than Most of Its Neighbors in Q4 Data released this morning showed that real GDP in Swit erland rose on a sequential basis of 0.2 percent (1.0 percent at an annuali ed rate) in the fourth quarter, which was stronger than the consensus forecast had anticipated (top chart). Over the past four quarters the Swiss economy has expanded by 1.2 percent, not strong but better than the contractions registered in many other European economies over that period. In that regard, the 6.7 percent annuali ed increase in Swiss exports of goods and services in the fourth quarter, the strongest rate of increase in nearly two years, appears to be somewhat surprising as Swit erland sends one-half of its exports to the Euro one. However, Asian countries have been gaining share over the past few years. A decade ago, developing Asian economies accounted for only 3 percent of Swiss exports, but that percentage has grown to more than 7 percent at present. Therefore, the Swiss economy may have benefitted from stronger economic activity across Asia in the fourth quarter.


The GDP data also show that Swiss domestic demand was firm in the fourth quarter. Real personal consumption expenditures grew 4.4 percent and fixed investment spending rose 1.8 percent, but an apparent decline in inventories appears to have weighed on real growth GDP. Moreover, the few data points that we have from the first quarter indicate that the expansion has continued. The manufacturing PMI shot up to a reading of 52.5 in January, the first time the index has risen above the demarcation line separating expansion from contraction since August 2o11, and the volume of exports rocketed up by 3.7 percent in January.



CPI Inflation in Negative Territory at Present, But…


If Swit erland has a “problem” at present it is the slight rate of deflation that exists in the economy. Indeed, the consumer price index fell 0.3 percent on a year-over-year basis in January, the sixteenth consecutive month in which CPI inflation has been in negative territory (middle chart). Due to the openness of the Swiss economy, currency appreciation can reduce CPI inflation quickly, and the trend appreciation of the Swiss franc from late 2007 through mid-2011 certainly contributed to the mild case of deflation in Swit erland (bottom chart). In response, the Swiss National Bank (SNB) announced in September 2011 that it would no longer tolerate an exchange rate that was stronger than 1.2 francs per euro. Thus far, the SNB has been successful in defending this line. However, the potential cost of the policy is the rapid rise in the Swiss money supply that has occurred (the M3 money supply was up more than 9 percent on a year-ago basis). With house prices in Swit erland continuing to trend upward, low interest rates and rapid money supply growth certainly bear watching in the years ahead.