Swiss GDP growth accelerates in the first quarter
Despite the tense situation on the international stage, the latest batch of economic data from Switzerland surprised to the upside. However, the Swiss franc failed to catch any bid as it traded sideways against the greenback around 1.0040. Even the victory of nationalist at the European elections did allow the Swissy to gain ground against the single currency as EUR/CHF remained above the 1.12 threshold.
The Swiss GDP rose by 0.6% in the March quarter, beating widely economists’ estimates of 0.3%q/q. Over the last 12 month, the economy grew 1.7%, also topping median forecast of 1% and upwardly revised figures of 1.5% previously. The acceleration of household consumption together with a pick-up in investments explain mostly this good reading. Household consumption increased by 0.4%q/q, compared to 0.3% in the previous one, while investment in capital goods surged by 1.5%q/q versus a contraction of 0.1% in the December quarter.
Despite mediocre trade data for the month of April – exports contracted by 0.6%m/m while imports rose by 1.5% – figures remained good for the first quarter as exports of goods rose 2.2%q/q (+5.8% previously), while service exports hit 1.7%q/q (+0.6% in 4Q 2018). Overall, the report showed that the Swiss did quite well, especially against the backdrop of escalating trade tensions between the US and China. Nevertheless, we believe that 2019 will be a challenging year for the Swiss economy. The latest European elections showed that the cohesion between countries continues to fall apart, which does not bode well for business. Being an outward-looking nation – i.e. highly dependent on international flow, especially with the Union – Switzerland could only suffer from this situation. Consequently, we wouldn’t be surprise to see renewed interest for safe-haven currencies such as the Swiss franc and the Japanese yen as the geopolitical uncertainty continues to rise.
EUR relief over, focus on Italian debt
The recent release of European elections results, although mostly feared by most investors, finally came in better than expected. Despite a loss of majority in the center-left and center-right coalition, it appears that anti-establishment parties’ gains came lower than anticipated while the greens and liberals also progressed, a rather good news for the single currency. Yet now that headlines are digested, it seems that investors are turning towards longer-term issues, including risk on Italian government debt, growth concerns, Brexit or potential US – EU trade war.
The EU budget monitoring process occurring along 5 June 2019 should see the Commission implementing the excessive deficit procedure against Italy as the assessment is likely to conclude that current structural deficit spending is approaching the 2.40% range instead of targeted 2% for this year and reach 3.60% by 2020 with current policy actions. Italy, the second largest debt-to-gdp bearing country within the EU after Greece could face fines that could reach as much as 0.20% of GDP, pushing interest-bearing costs higher amid rising bankruptcy risk. However, the timing of such an announcement might cause turmoil within EU parliament, as populist, eurosceptic parties could possibly hinder the period of distribution of executive powers, in a time where EU unity is essential.
Under current circumstances, we see little upside potential for the EUR, as ECB meeting is taking place on 6 June 2019. Currently trading at 1.1193, EUR/USD is heading along 1.1180 short-term
