A very strange feeling to see a GDP print in Europe coming in notably above expectations, as was the case for Switzerland this morning. Not only did the Q1 number print 0.7% (vs. expectations for flat), the previous quarter was revised up from 0.1% to 0.5% QoQ. It was household consumption that was the main driver of growth in Q1, rising 0.6%. In Switzerland, this accounts for around 58% of GDP. Working in the opposite direction was construction (down 5.0% QoQ), whilst exports of goods fell by 0.5%.
The fact that household consumption is growing at a two year high (in annual terms) underlines the problem for the Swiss authorities in dealing with the current situation of relatively low unemployment, ample domestic liquidity and zero rates combined with a currency that is seen as still overvalued by the central bank. Meanwhile, inflation is at a near 3 year low at -1.0% YoY. Anecdotal evidence suggests that flows into the Swiss franc are increasing as investors position themselves defensively, as evidenced by the ever lower lows in core bond yields (UK, US, Germany). There is now speculation that the SNB may struggle to keep the 1.20 peg on EUR/CHF in place if faced with further downside pressure on the euro and increased inflow into the franc, with the SNB president (in weekend comments) also not ruling out some form of capital controls. So, even though stronger GDP growth may seem like something worth celebrating, all it does is merely complicated the conflicting policy dilemmas the authorities currently face.