Swiss economy slumps on lower exports

City A.M. Reporter
The Swiss economy unexpectedly shrank in the second quarter as the impact of the Eurozone crisis weighed on the country's exports, providing further justification for the central bank's cap on the strong franc.

The Swiss National Bank (SNB) imposed a 1.20 per euro limit on the franc a year ago to ward off a recession and deflation as investors exiting the Eurozone sought a sanctuary in the currency.

But the economy contracted for the first time in nine months, falling 0.1 per cent compared with the first quarter. The figure was below analyst forecasts for a growth rate of 0.2 per cent and compared with a first quarter expansion that was revised down to 0.5 per cent.

Exports of services contracted 0.9 per cent in the second quarter even as private and public consumption stayed relatively healthy.

"An unexpected shrinking," said Julius Baer Chief Economist Janwillem Acket. "The SNB has no other option but to continue with its policy, no matter how costly it is. It would have been even more costly not to do anything at all."

Until now, the Swiss economy's relatively solid performance had prompted questions about the continued need for the SNB's cap on the franc, which it has had to defend by selling hundreds of billions of francs, pushing its foreign exchange reserves to nearly 70 per cent of annual output in July.