UPDATE 2-Healthy domestic demand buoys Swiss economy despite euro zone drag

Thu Feb 28, 2013 7:20am EST

* GDP rises more than expected

* SNB still seen retaining lid on franc at 1.20 per euro

By Emma Thomasson

ZURICH, Feb 28 (Reuters) - Swiss economic growth slowed in the fourth quarter but robust domestic consumption kept it healthier than most analysts had predicted given the weakness of the neighbouring euro zone.

Demand is being helped along by low unemployment and a high rate of immigration.

The economy grew 0.2 percent on the quarter and 1.4 percent on the year in the last three months of the year, data showed, beating average analyst forecasts for a flat reading quarter-on-quarter and a rise of 0.9 percent on the year.

"The figures are really good, especially when you compare them with the rest of Europe," said Sarasin economist Alessandro Bee.

"What is driving them is robust consumption in Switzerland which is the main difference to the euro zone. Exports are weaker but even they are not too bad."

The provisional growth rate for 2012 as a whole was 1 percent after 1.9 percent in 2011. The euro zone is seen having contracted by 0.6 percent in 2012 and shrinking again by 0.3 percent in 2013, according to the European Commission.

Switzerland's relative economic health was underlined on Thursday by forecasts from the government for a small budget surplus for 2013 and 2014, allowing the state to gradually reduce its already low level of indebtedness.

Swiss private consumption rose by a quarterly 1.1 percent, driven by an increase in spending on health and financial services and insurances, while government consumption also rose 1.1 percent, the State Secretariat for Economics said.

Resilient domestic demand has helped the Swiss economy weather the global crisis better than most even though the strength of the safe-haven franc has hurt its exporters.

Swiss exports grew robustly in January, led by strong sales of pharmaceuticals and food products as companies benefited from a weaker franc and tentative signs of improving demand in the euro zone.

"The Swiss economy has digested the negative impact of the strong Swiss franc. We expect to see a gradual improvement in the export sector. The export component of GDP is likely to improve most," said Credit Suisse economist Maxime Botteron.

Investor sentiment also jumped to its highest level in 32 months in February, while manufacturing in January grew for the first time in 17 months.

FRANC CAP REMAINS

But economists said it was still too early for the central bank to consider lifting the cap it imposed on the franc at 1.20 per euro to shield the economy from recession and deflation.

"The Swiss National Bank is unlikely to change the course of its monetary policy," said ING economist Julien Manceaux.

"The economy still needs its full support at a time when confidence is decreasing again and when the recent Italian election results are bringing volatility back around the future of the eurozone."

SNB Chairman Thomas Jordan was quoted on Wednesday as saying the central bank was far from exiting its policy of capping the strong franc, pointing to new risks from the indecisive outcome of the Italian election.

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