Economic growth in Canada and Switzerland beat expectations, but currency issues are causing analysts to urge caution for the future.
In the fourth quarter of 2014, Canada saw GDP rise by 2.4% annualized, according to a statement by Statistics Canada issued on Tuesday. The growth was above expectations although slightly lower than third quarter growth, which rose by 3.2%, according to a revised estimate. Economists had expected 2% economic growth.
To urge continued economic growth, the Bank of Canada cut its interest rate target to 0.75% in January, as a stronger U.S. Dollar and falling oil prices are headwinds to Canadian growth.
The fall in oil hurt exports, which indicated a contraction from previous periods. Goods exports fell 2.5% annualized, with imports and domestic demand making up for the decline. Crude oil and bitumen products saw a 6.5% fall, with cheaper prices and slow growth in demand causing a shortfall. However, refined petroleum products where the hardest hit, falling 36.3% on an annualized basis due to lower prices.
Canadian firms are turning towards domestic demand to fill the gap in exports, as indicated by higher inventories in the fourth quarter. In total, business inventories rose 7.4 billion CAD, or $5.9 billion, in the period as businesses geared up for greater spending in the domestic economy.
In total, Canada saw 2.5% growth in 2014.
Swiss Growth Surprises
Swiss economic growth was double expectations, despite the Swiss abandoning the franc peg to the euro at the end of the year.
In total, GDP rose 0.6% in the last three months of 2014, according to the State Secretariat for Economic Affairs. The SSEA also upgraded their estimate for third quarter GDP growth, up to 0.7%.
Many economists expect Switzerland’s growth to slow as their appreciating currency hampers the export-driven economy. The abandoned peg occurred in the middle of January so it had no impact on growth in 2014. Many economists are dismissing the Swiss economic data as irrelevant in the new post-peg world.
The Swiss National Bank abandoned the peg because of the expense of maintaining in and the belief that devaluing its currency could cause a “deep recession.” Exporters have a wildly different view, arguing that peg abandonment would directly hurt earnings due to the stronger franc. Companies such as Swatch Group have warned investors—and seen their stock prices fall at the same time.
Economists at investment banks in Switzerland have released a number of reports after the announcement of the GDP figure, arguing that this performance is unlikely to maintain its momentum after the policy change. However, some economists are also predicting that there will be no recession for Switzerland, and that it will see a pick-up in both activity and performance by the end of the year. The catalyst for this change in momentum, however, remains unclear.
The Swiss National Bank is expecting 2015 growth around 2%, although some economists have warned that weaker exports will pressure that growth rate. For 2014, exports rose 4.1%.
One economist at Credit Suisse warned that Swiss industry is likely to stagnate, and domestic demand for goods and services will weaken with the stronger currency.
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