Switzerland: Growth falls to over three-year low in Q3 on weak external sector
November 29, 2018
Economic momentum was unexpectedly derailed in the third quarter by sluggish domestic demand and faltering exports. According to data released by the State Secretariat for Economic Affairs (SECO) on 29 November, GDP contracted 0.2% on a seasonally-adjusted quarter-on-quarter basis in Q3, swinging from the 0.7% expansion in Q2 and undershooting expectations of a 0.4% expansion. In annual terms, the economy grew 2.4% in Q3, down from the 3.5% print recorded in Q2. On a brighter note, Q3’s dismal print follows two quarters of very strong growth, indicating part of the downturn was likely caused by unfavorable comparatives, while annual growth in 2018 is still expected to mark a notable acceleration.
The downturn was in part driven by softness in the domestic economy. Private consumption growth nearly flatlined in the quarter (Q3: +0.1% quarter-on-quarter seasonally-adjusted; Q2: +0.2% qoqsa), suggesting weak wage growth and higher inflation are affecting consumer spending, despite the healthy labor market and accommodative monetary conditions. Meanwhile, government spending dropped 0.1% qoqsa, marking an over seven-year low (Q2: +0.2% qoqsa). More concerning was a sharp 1.2% fall in fixed investment growth that was the poorest print since Q1 2009 (Q2: +0.5% qoqsa). The marked downturn was partly due to a high base effect but also reflected a strong downswing in equipment and software investment, and flat growth in construction investment. Meanwhile, inventories rose at a faster rate in the quarter (Q3: +1.0% qoqsa; Q2: +0.3% qoqsa).
The external sector subtracted from growth in Q3 on the back of a decline in exports, which were particularly impacted by a slowdown in Germany, Switzerland’s largest trading partner, and a higher Swiss franc. Exports contracted 0.3%, although this was softer than the 1.0% contraction logged in Q2. Exports of goods continued to recede in Q3, albeit at a softer rate than in Q2, while exports of services had a similar result. Import growth, on the other hand, accelerated considerably in the quarter (Q3: +4.9% qoqsa; Q2: +0.7% qoqsa), driven by strong growth in the imports of goods.
Commenting on Q3’s results, Charlotte de Montpellier, an analyst at ING noted:
“The third quarter once again shows that Switzerland relies heavily on its European neighbours for its growth dynamic. A good economic situation in Europe, easy trade relations with neighbouring countries and a stabilised exchange rate at a reasonable level are therefore keys to strong growth in Switzerland.”
Available data for the final quarter of 2018, suggests that the economy could struggle to regain its footing. Economic sentiment has been on a general downward trend, while a continuous decline in the PMI throughout the third quarter to a one-year low points to softness in the manufacturing sector. Meanwhile, the all-important external sector will likely continue to be weighed down by slower growth in major EU economies and a strong franc, although October’s foreign trade data suggests Q3’s contraction could be more of a temporary effect than a cause for greater concern.
Author: Lindsey Ice, Economist