Switzerland Posts Weak Economic Growth In 2Q19

Switzerland Posts Weak Economic Growth In 2Q19
September 6, 2019


The greenback declined against the Swiss franc in the European session yesterday after the GDP data indicated better-than-anticipated growth in the second quarter of fiscal 2019. However, the Swiss National Bank (SNB) is not expected to hike interest rates, which is presently at -0.75%, as the economy is expected to decelerate further in the months ahead. Furthermore, the US and China have agreed to meet face-to-face in October to discuss the ongoing trade disputes. In the past 24 hours, the USD/CHF pair, after opening at 0.9896, reached a high of 0.9928 and then plunged to 0.9798.  At the time of writing the article the currency pair has recovered to trade at 0.9870 levels.

According to the State Secretariat for Economic Affairs (SECO), Switzerland’s economic growth decelerated on a decline in domestic demand and a fall in exports. The economy expanded 0.3% q-o-q in 2Q19, after recording a 0.4% growth in the previous quarter. The March quarter figures were downwardly revised from 0.6%. Economists had anticipated the growth to decline to 0.2% in the reported quarter.

On an annualized basis, the economy grew by 0.2%, down from 1% in the first quarter of 2019. The reported figure missed economists’ forecast of 0.9% growth by a considerable margin.

Notably, the industrial sector led the Swiss economic growth in the recent quarter. While manufacturing output increased 1.3%, the construction sector posted 0.1% growth.  However, trade shrank 0.3%.

A breakdown of GDP data indicates that private consumption grew 0.3%, while government spending increased 0.1%.  SECO highlighted ‘uncertain environment’ as a major reason for a decline in investments by enterprises. While construction sector reported 0.1% q-o-q decline in investment, equipment recorded a 1% decrease.

Goods exports and imports fell 0.8% and 1.7%, respectively.  Likewise, services exports decreased 0.2%, but services imports increased 1.5%. According to David Oxley, an economist at Capital Economics, the economy would further decelerate during the rest of 2019. Half of Switzerland’s exports reach the euro area. The trade war, Brexit, and overall uncertainty in global trade are expected to further dampen exports. According to ING, the economy is expected to grow only less than 1% in 2019, down from 2.8% in 2018. However, the Swiss central bank continues to forecast an optimistic GDP growth of 1.5% in 2019, a figure considerably higher than the current momentum.

The Swiss National Bank maintains an interest rate differential of 35 basis points with the interest rates in the Eurozone. If the ECB slashes interest rates by 20 basis points in the September monetary policy meeting, then the SNB will be forced to cut rates to -1% to avoid serious negative impact on the economy.

Furthermore, the SNB is expected to intervene in the market, as usual, to keep the franc weak. ING analysts anticipate the SNB to both intervene and slash rates to prevent further appreciation of the franc.

In its statement on GDP growth, ING said: “Since August, there is evidence that the Swiss central bank intervenes regularly in the foreign exchange market. In fact, this is the first thing the SNB does when the CHF appreciates too much. If the franc strengthens further due to a more accommodative monetary policy by the ECB and a rise in global uncertainty, the SNB may need to implement other measures, including a rate cut.”

Notably, central banks across the globe have either slashed interest rates (South Korea, Thailand, Indonesia & India) or indicated their willingness (Japan) to cut rates in the coming months. For the first time in a decade, the US Fed reserve cut interest rates in July.

The interest rate cut scenario is expected to continue in the future.  24 of the 25 analysts surveyed by Reuters expect the Russian central bank to bring down the benchmark rate by 25 basis points to 7% in today’s policy meeting. While slashing interest rates in June and July, the central bank of Russia hinted further rate cuts amidst weak inflationary pressure. Societe Generale’s deputy chief echoed a similar view yesterday.

In the meantime, China’s Ministry of Commerce announced that the US and Chinese leaders have agreed for a face-to-face meeting in October. The meeting will be held in Washington, D.C., at the beginning of October. The equity market has responded positively to the meeting. The facts presented above indicate that the franc will remain weak in the near-term.

Technically, the USD/CHF chart indicates that the currency pair has formed a double bottom at 0.9715 levels. The USD/CHF pair is also moving within an ascending channel, while the momentum is increasing. As a result, we can expect the greenback to gain further ground against the Swiss franc.

CHF - technical analysis - 6th Sept 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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