Swiss Growth Continues to Slow As Franc Strength Takes Its Toll
Swiss GDP in the second quarter came in as expected at 0.4% q/q and2.3% y/y the Q1 numbers for both quarterly and annual readings were upwardly revised. The 0.4% quarterly growth figure marks that slowest growth for the Swiss economy, which has shifted down a gear in recent quarters, since returning to positive growth in Q3 2009. It is a similar story on the annual front which posted a very strong 3.1% showing in Q4 2010 but has since shifted down as the Swiss franc strength takes its toll on the economy resulting in the much lower 2.3% showing we saw this morning.
Concern continues to mount in the corridors of power in Switzerland regarding the strength of the Swiss franc and its effect on the economy if it doesn’t weaken from what the SNB calls “extremely overvalued” levels. The Swiss central bank have in the past attempted direct intervention in the foreign exchange markets to weaken the franc, this proved to be an ineffective and very costly policy. This time around the SNB is trying to avoid direct intervention, which can often just bate speculators to bet against them – blood in shark infested waters – and is using policy tools to help stem flow of a strengthening franc. At this juncture, only weeks after the SNB implemented these measures they do appear to be working, the franc is off its strongest levels allowing the SNB to breathe a little easier. However, it is unclear what level the SNB has in mind for the economy to function at its optimal level and it seems quite apparent that if the franc doesn’t weaken further it could cripple Swiss growth.
Reaction in the Swiss franc was muted with the largely as expected readings producing little volatility, coupled with the fact that the franc tends to move more on global macro events than domestic data due to its safe haven appeal. However, part of the safe haven appeal of the franc is Switzerland’s relative economic strength which has prevailed throughout slower global growth as the economy continues to lose momentum due to the franc appreciation and slowing global growth we could see some of the safe haven appeal evaporate.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.