* GDP q/q fall worst since 1992, y/y drop worst since 1976
* Export slump continues; construction, investment weak
* Economists see central bank sticking to ultra-loose policy
* Downturn may slow as PMI posts strongest rise since 2005
(adds PMI details, analyst comments)
By Sven Egenter
ZURICH, June 2 (Reuters) - The Swiss economy shrank at its fastest pace in decades in the first quarter, but survey data showing a slowing downturn in manufacturing in May raised hopes that the deep recession may be easing.
The Swiss National Bank is still likely to stick to its unconventional monetary policy measures, economists said, because of deflation risks and a lack of clear signs of recovery from the worst recession since 1975.
Swiss gross domestic product declined by 0.8 percent in the first three months of the year from the previous quarter, the State Secretariat for Economic Affairs said on Tuesday. It was the worst quarterly drop since the end of 1992.
The year-on-year drop was 2.4 percent, the sharpest contraction since the first quarter of 1976.
However, the Swiss Purchasing Managers' Index (PMI) jumped 5.1 points to 39.8, posting the largest monthly rise since September 2005, said Credit Suisse, which publishes the monthly survey of manufacturers.
"The economic decline thus continues, but at a slower pace than previously," Credit Suisse said.
The Swiss survey was in line with the euro zone PMI, which hit a seven-month high in May.
"Clearly, the decline in the Swiss manufacturing industry has started to ease from the disastrous contractions seen in the fourth and first quarters," 4Cast analyst Saara Tuuli said.
"What remains to be seen however, is whether these improvements prove sustainable and lead to an eventual recovery in Swiss manufacturing," she added.
ULTRA-LOOSE
Swiss manufacturers have been hit hard by the slump in global demand. The country slipped into recession last summer and the SNB forecasts an economic contraction of up to 3 percent in 2009, which would be the worst decline in over 30 years.
"The 2.4 percent drop in GDP is not very upbeat, confirming the Swiss economy is feeling the heat of global economic slowdown," said UBS analyst Reto Huenerwadel. "But it is still comparably solid compared to other European economies."
Economists surveyed by Reuters had expected GDP to drop by 1.5 percent on the quarter. However, the government office revised the data for the fourth quarter down, saying the economy contracted by 0.6 percent on the quarter.
But recession has hit key Swiss trading partners like Germany much harder so far, with German GDP slumping 3.8 percent on the quarter in the first three months of 2009.
The Swiss first quarter release showed that exports dropped by 5.4 percent on the quarter, coming on top of an 8.7 percent fall in the final quarter of last year.
Government spending rose by 1.4 percent on the quarter and private consumption also ticked up slightly, underscoring the resilience of Swiss consumers.
Consumer spending is expected to weaken in the coming months as more and more firms axe jobs in response to the recession. The PMI survey showed that manufacturers continued to cut staff at a high rate despite slower contraction in orders and output.
"With the Swiss and global economic outlook unusually uncertain and with continued risks of deflation in Switzerland, the SNB is likely to remain dovish and in turn maintain their ultra-loose policy stance," 4Cast analyst Tuuli said.
The SNB has taken drastic steps to fight deflation. The central bank has slashed its target for 3-month Swiss franc LIBOR to a record low of 0.25 percent, intervened to stem a rise in the franc and bought corporate bonds to keep spreads down.
(Editing by Ruth Pitchford)