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UPDATE 1-Swiss growth barometer at 5-yr low, hints at recession

Published 10/31/2008, 08:34 AM
Updated 10/31/2008, 08:36 AM
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(Adds analysts' comments, UBS on wages, market, background)

By Sven Egenter

ZURICH, Oct 31 (Reuters) - Switzerland's leading growth barometer, the KOF, dropped to its lowest level in over 5 years this month as the global downturn hits exports and consumers spend less, fuelling fears of a recession.

The Swiss franc dipped while interest rate futures rose, as the fall bolstered expectations that the Swiss National Bank will join other global central banks in cutting interest rates aggressively. The indicator, which points to the economy's likely performance in six months' time, fell to 0.35 in October from a downwardly revised 0.52 in the previous month, the KOF Swiss Economic Institute said on Friday.

That was the lowest since July 2003 and below the median forecast of 0.49 in a Reuters poll of economists.

"With inflation seemingly less of a concern, the SNB has some further leeway to act aggressively on rates given deterioration in global growth prospects," Rajel Khambhaita, analyst at Informa Global Markets, said.

A big fall in Swiss manufacturing PMI next week could increase chances of an inter-meeting 25-basis-point SNB cut, possibly as a coordinated move with the BoE and ECB in early November, Khambhaita said.

Japan followed the U.S. Federal Reserve in cutting interest rates for the first time in seven years on Friday, and the European Central Bank and Bank of England are expected to follow suit at meetings next week.

So far, Switzerland has held up better than its European peers in the credit crisis despite its large banking sector.

Low unemployment has supported consumer spending and exports have remained healthy due to the Swiss focus on high-quality products and a strong foothold in emerging markets.

But recession fears are mounting as key Swiss markets slow sharply and the soaring Swiss franc puts an extra drag on exports.

Markets are pricing in a 0.5 percentage point cut by the SNB's next regular quarterly meeting on Dec 11.<0#FES:>

Analysts see a chance of an earlier move as the SNB has stepped up efforts to bring the 3-month Swiss franc LIBOR -- its target rate set by the market -- to its target of 2.50 percent.

The LIBOR was fixed at 2.72 percent on Friday, down from Thursday's 2.77 percent and below a recent high of 3.13 percent.

The SNB last lowered the target by a quarter of a percentage point on Oct. 8 as part of a joint cut by major central banks.

RECESSION

SNB Vice-Chairman Philipp Hildebrand said recently the central bank had leeway to lower rates as price pressures eased.

Inflation stood at 2.9 percent in September, still close to the 15-year high of 3.1 percent hit in July, and way above the central bank's stability threshold of 2 percent.

But the cooling of the economy will dampen inflation.

"The poorest economic performance in quite a while paired with what we expect to be a material increase in the unemployment rate makes no case for higher prices near-term," UBS analyst Reto Huenerwadel said in a note.

The economist slashed his 2009 growth forecast to 0.1 percent, which would be the lowest since the economy last contracted in 2003.

The KOF sees the economy slipping into a recession around the turn of the year and growing by a mere 0.3 percent in 2009, ending a five-year-long boom.

The institute said its sub-indicators for exports and manufacturing continued their slide in October. "The decline in the Swiss consumption sub-module is even more pronounced."

Swiss consumer morale has taken a hefty knock in recent months due to soaring food and energy prices.

A UBS survey showed on Friday that wages actually fell when adjusted for inflation this year. The UBS economists forecast a rise of real wages by 1.0 percent in 2009 as inflation retreats.

(Editing by Patrick Graham)

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