Swiss Economic Growth Supported by Exports at Start of Year

(Bloomberg) -- Swiss economic growth accelerated less than forecast at the start of the year as household spending barely rose, though sectors long-blighted by the strong franc bounced back.

A 3.9 percent jump in exports in the three months through March helped push economic growth to 0.3 percent. While that fell short of the 0.5 percent forecast in a Bloomberg survey, it's still the strongest performance in three quarters. Consumer spending rose just 0.1 percent, a sharp slowdown from the 0.9 percent rate seen at the end of 2016.

Switzerland has long been battling fallout from the strong franc, which has pressured exports and crimped corporate profit margins. The domestic economy has helped underpin growth, though an improving euro area could give Swiss momentum a fillip by boosting foreign demand.

“The manufacturing sector contributed very well,” said Sibille Duss, a senior economist at UBS in Zurich. “We expect not only the pharma industry but also other sectors to have adjusted to the exchange rate situation” helping to make growth more broad based.

The euro area is Switzerland's top trading partner, and the recovery of the 19-country bloc has progressed to the point that some policy makers there now say they consider risks to its economic outlook to be broadly balanced. Still, it is contingent on an “extraordinary” amount of monetary stimulus, European Central Bank President Mario Draghi said earlier this week in Brussels.

Along with retailers and hoteliers, Switzerland's manufacturers have been among those particularly hard hit by the strong franc. Yet even here, according to industry group Swissmem, the sector is demonstrating “tentative signs of recovery.” Its May survey found that 51 percent of companies anticipate a rise in new orders from abroad in the next 12 months.

“The industry sector was the key driver of growth,” the State Secretariat of Economic Affairs said. Investment in equipment increased “significantly,” with support coming from the research and development, as well as IT and machinery. “Value added rose in healthcare and social work activities, but dropped in retail services, in financial services and in certain other service sectors.”

The Swiss National Bank, which has a deposit rate of minus 0.75 percent to take pressure off the haven franc, forecasts an inflation rate of 0.3 percent for this year, ending a multi-year spate of falling consumer prices.

UBS's Duss said that because of the pickup in inflation, private consumption probably won't support growth as much this year.

Speaking at the Institut fuer Finanzdienstleistungen Zug on Wednesday, SNB President Thomas Jordan said the negative deposit rate -- the lowest of any major central bank -- as well as the willingness to wage interventions is “absolutely crucial” to curb the currency's strength.

“The franc remains significantly overvalued,” he said.

The SNB's next policy decision is on June 15.

--With assistance from Joshua Robinson and Joel Rinneby

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss