First Swiss Recession in Six Years

The Swiss National Bank may see the fallout from its dramatic policy u-turn delivered in one word this week: recession.

Seven months after the central bank scrapped its currency cap, Switzerland is dealing with declining exports, stagnant manufacturing and plunging prices. Economists forecast gross domestic product shrank 0.1 percent in last quarter, a second consecutive contraction that would mark the first recession in six years. The data are due on Friday.

Much of the pressure on the economy is coming from the franc, which has appreciated 11 percent versus the euro since the central bank’s unexpected Jan. 15 decision to opt for a free float. For SNB President Thomas Jordan, who has defended the policy move, the weaker near-term backdrop will feed into his assessment when officials gather in three weeks for their quarterly policy meeting.

Switzerland’s slump may be short lived, with a separate survey predicting growth of 0.1 percent this quarter and 0.2 percent in the last three months of the year.

Currency Weakens

The economy could get a boost from a weaker currency and a drop in the price of oil. With Greek risks having abated and the euro area no longer at risk of imminently splintering, the franc has depreciated more than 3 percent since the end of June.

The franc fell as much as 0.4 percent against the euro on Wednesday and was trading at 1.08396 in Zurich.

In tandem with giving up the minimum exchange rate in January, the SNB cut its deposit rate to a record low of minus 0.75 percent and pledged currency interventions as needed. Its next rate decision is on Sept. 17, and Jordan said that a policy change isn’t imminent.

While expansion is projected to resume, surveys indicate a subdued recovery. A manufacturing index has signaled contracted almost every month this year and consumer confidence declined to its lowest in more than three years in July.

In the first half, Swiss exports sank by a nominal 2.6 percent. Shipments to the euro area, which account for 44 percent of sales abroad, dropped 8 percent.

Exports of watches to eight leading Asian markets declined in July, with China tumbling almost 40 percent. Overall exports to China fell 1.7 percent last month.