Switzerland: well positioned for recovery
Switzerland has not been immune to the coronavirus outbreak. Real GDP dropped by 2.6% quarter-on-quarter (q-o-q) in Q1, the largest quarterly contraction since data began in 1980. The contraction was similar to what was seen in Germany, but less severe than in France, Italy and Spain.
The GDP report revealed that private consumption in Switzerland (-3.5% q-o-q) was hurt by the containment measures and uncertainty. Investment in construction (–0.4%) and equipment (–4.0%) contracted as well. Public-sector consumption (+0.7%) was the only domestic-demand component to post a rise in Q1.
Sector wise, services were the most affected by lockdown measures, with accommodation and food services (–23.4%) dropping at a record pace. Meanwhile, value added in manufacturing (–1.3%) posted the sharpest fall since the Frankenshock in early 2015, with noticeable declines in the exports of many sectors, particularly machinery and metals, as well as precision instruments and watchmaking. By contrast, there was a sizeable increase in chemical and pharmaceutical exports
Q1 data included only two weeks of lockdown and some supply-chain disruptions from Asia. Q2 will likely look worse as the Swiss economy was in strict (albeit partial) lockdown throughout April. Measures only started to be eased very gradually in late April.
The most recent survey data and real-time indicators for economic activity are showing some signs of a bottoming-out, in parallel with the gradual easing of the containment measures But the equilibrium remains fragile and some sectors are still not yet running at full capacity.
For now, we are keeping unchanged our below-consensus GDP growth forecast for Switzerland of -7.5% in 2020 and +5.3% in 2021. Risks to our growth forecasts remain broadly balanced and we reckon high frequency data are rising at a faster pace in Switzerland than in other countries. We continue to believe that the Swiss economy is among the best-placed in the OECD to recover in H2 2020 and 2021.
The policy response to cushion the impact of covid-19 has been forceful: the Federal government rapidly produced a stimulus package of more than CHF72bn (10.3% of GDP), while the Swiss National Bank (SNB) has become even more accommodative. Looking ahead, we continue to believe that the SNB’s two-pillar monetary policy will remain unchanged. We expect the SNB to stay on hold on rates and to remain active in the FX market.
The Swiss franc should remain relatively stable versus the euro (our 12-month projection is CHF1.09), with potential risk for appreciation in the short term because of our scenario of a slow global economic recovery. Relative to the US dollar, we expect some modest strengthening of the franc towards CHF0.94 over a 12- month horizon.
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