Swiss economic outlook improves but deflation still a risk

Although Switzerland’s economy registered another disappointing quarter of growth in Q4, expanding by just 0.1% q/q, business and consumer surveys paint a more positive picture for 2017. The KOF Business Barometer rose to a 41-month high in February and is now consistent on the basis of past form with annual GDP growth accelerating from Q4’s 0.6% towards 2.5% in the first half of 2017. Moreover, the improvement in the consumer surveys and the rise in retail sales volumes in January and February, suggest that the recovery in consumer spending has continued. However, deflation remains a real risk for the Swiss economy. Granted, headline inflation was positive in February, at 0.6%. But as has been the case elsewhere, much of the recent rise has been due to food and energy prices. The core rate remained negative, at -0.1%. And if we are right that political worries in the euro-zone will cause the franc to appreciate in the coming months, then the recent upward trend in import price inflation will reverse. This suggests that the SNB will not be able to sound the all-clear on deflation just yet and will keep interest rates at rock bottom levels and continue to intervene in the currency markets.