Swiss Leading Indicators Decline More Than Expected

By Joshua Gallu

Aug. 29 (Bloomberg) -- Switzerland's leading economic indicators fell more than expected to the lowest level in five years this month, evidence that growth may grind to a halt.

The monthly aggregate of indicators that aims to predict the economy's direction about six months ahead slid to 0.68 from a revised 0.85 in July, the KOF research institute in Zurich said today in an e-mailed release. That's the lowest since August 2003. Economists expected a drop to 0.83 from a previously reported 0.90, the median of 13 estimates in a Bloomberg survey showed.

Switzerland's expansion is losing momentum as stalling growth elsewhere in Europe threatens exports of machines and chemicals, and finance market turmoil sparked by the U.S. housing crisis erodes profit at banks including UBS AG and Credit Suisse Group. With inflation at the fastest pace in 15 years, the central bank has limited room to ease lending rates.

``This is quite a sharp slowdown,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``The risk of a recession is there, but it's still unlikely. Growth may even have been negative in the second quarter, and we see it averaging only 0.1 percent through the end of the year.''

The Swiss National Bank left its benchmark rate on hold at a six-year high on June 19 as central banks from Asia to North America shifted their focus from the global credit squeeze to stamping out inflation. The SNB holds its next monetary policy meeting on Sept. 18.

Franc Drops

The Swiss franc fell to as low as 1.6165 against the euro after the release from 1.6129 earlier. Against the dollar, the franc fell to $1.0978 from $1.0924.

SNB President Jean-Pierre Roth said on Aug. 19 the economy is slowing even more than policy makers had expected and added this week that growth will slow more markedly in the second half of the year than it did in the first.

The economy of Germany, Switzerland's biggest trading partner, contracted 0.5 percent in the second quarter and the economy of the euro area shrank for the first time since monetary union a decade ago.

Like other European countries, Switzerland is struggling to stave off the impact of waning growth. German business confidence plunged to a three-year low this month and European services and manufacturing contracted for a third straight month, increasing the risk of a recession.

Export Question

``Net trade continues to be surprisingly resilient, but given that two thirds of exports go to Europe, it's questionable whether they can continue to surprise to the upside,'' said Eoin O'Callaghan, an economist at BNP Paribas in London.

Export growth will probably slow to 3 percent this year after reaching 10 percent in the past two years, according to the government.

With sales weakening and the market turmoil hurting banks' profits, two engines of Swiss growth are stalling. At the same time, inflation is outpacing wage gains and may hurt household spending. Swiss consumer confidence fell to the lowest in four years this month.

Inflation may have reached its peak this summer, Roth said in an interview with the newspaper Finanz und Wirtschaft on Aug. 26. The risk of second-round effects from inflation are limited and it would be ``absurd'' to use monetary policy to counter rising prices for oil and food, he said.

Full-year growth will probably slow to between 1.5 percent and 2 percent in 2008 after reaching 3.3 percent in 2007, the central bank estimates.

The price of oil has dropped 18 percent after climbing to a record $147.27 a barrel on July 11.

To contact the reporter on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net