Swiss Economic Growth, Inflation Startle Economists

By Joshua Gallu

Sept. 2 (Bloomberg) -- Swiss economic growth unexpectedly accelerated and inflation eased, reinforcing the case for the central bank to keep interest rates unchanged.

Gross domestic product, the value of all goods and services, rose 0.4 percent from the first quarter, when it increased 0.3 percent, the State Secretariat for Economic Affairs in Bern said today. Economists expected growth to slow to 0.2 percent, the median in a Bloomberg survey of 19 forecasts shows. August inflation unexpectedly slowed to 2.9 percent from 3.1 percent.

Growth in emerging markets including India and China is fueling demand for exports like power networks and machinery while the lowest unemployment in six years is boosting Swiss spending. Exporters may see sales growth evaporate as the economies of the country's main trading partners cool. The 15-nation euro-area economy shrank in the second quarter and its manufacturing and service industries contracted in August.

``It's amazing we didn't see the same effects in Switzerland that we saw in Europe from high oil prices and slower global growth,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``There's no case for rate cuts in September. The Swiss National Bank doesn't need to act right now.''

Franc Rises

The franc gained as much 0.2 percent to 1.6061 against the euro from 1.6099 before today's figures were released and traded at 1.6094 at 10:09 a.m. in Zurich. Against the dollar, the Swiss currency rose to as high as 1.1008.

The SNB kept its key rate at a six-year high in June as it balanced risks to growth and inflation. At 2.75 percent, Switzerland's benchmark rate is the third lowest among major economies after Japan's 0.5 percent and the U.S.'s 2 percent. The SNB holds its next monetary policy meeting Sept. 18.

Investors expect Swiss interest rates to remain unchanged through the end of the year, futures trading shows. The implied rate on the 3-month Liffe contract expiring in December gained 0.1 percentage points from yesterday to 2.75 percent at 10:41 a.m. in Zurich. That compares with 3.42 percent on June 13.

Economic growth will slow more markedly in the second half of the year than it did in the first six months, SNB President Jean- Pierre Roth said in an newspaper interview last week.

Outlook Dims

Slower growth and the 27 percent drop in the cost of oil from a record $147.27 a barrel on July 11 may ease price pressures further in the coming months. Swiss leading economic indicators declined to the lowest in five years in August and a consumption indicator fell to the lowest since December 2006.

``What's worrying is that we have quite a significant slowdown in investments and a build-up of inventories,'' Poser said. ``Those two things will weigh on growth going forward. We're probably in for a phase of below-potential growth.''

Investment contracted by 0.7 percent in the second quarter after growing the first three months of the year, today's report showed. Equipment purchases fell by 0.9 percent from the previous quarter while construction declined 0.3 percent.

From the second quarter of last year, the economy grew at a rate of 2.3 percent, down from 3 percent in the previous three months, today's report showed. Private spending grew 2.5 percent from a year earlier and 0.6 percent from the previous quarter.

`Bucking the Trend'

``Swiss consumers are bucking the trend,'' said Reto Huenerwadel, senior economist at UBS AG in Zurich. ``Inflation hasn't impacted private consumption, but if you look at employment growth it doesn't appear to be sustainable going forward.''

Consumer prices fell 0.3 percent from July. Heating oil dropped 10.5 percent from July, carrots fell 11.1 percent and cabbage prices declines 13.3 percent.

Still, ``inflation risks are far from over,'' Eoin O'Callaghan, an economist at BNP Paribas in London, said in a research note. Core inflation, excluding food, energy and seasonal products, rose 0.2 percent from the previous month when it fell 0.7 percent.

Company spending on construction slid 0.5 percent from the first quarter, when it decreased 0.3 percent, today's report showed. Imports rose 3.8 percent from the previous quarter, when they declined 3 percent. Exports grew 3.6 percent and consumption expanded by 0.7 percent.

In the year, the economy will probably grow between 1.5 percent and 2 percent after expanding 3.3 percent last year, the central bank forecasts.

``In all, the release and breakdown confirm that the Swiss economy is slowing,'' and ``it is doing so in a relatively elegant way,'' O'Callaghan said.

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