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By Bloomberg

Switzerland may have managed to avoid a contraction in the first quarter, temporarily defying a record surge by the franc that’s depressed the outlook for the economy.

Gross domestic product probably stagnated in the three months through March, according to the median estimate of 16 economists surveyed by Bloomberg. While that ends more than three years of quarterly expansion, it’s not the contraction feared after the Swiss National Bank scrapped its currency cap.

The gloomier outlook is the price the nation is paying for its SNB’s policy reversal in January. While consumers are now benefiting from cheaper imports, the stronger currency hurts exporters, and the shock forced the central bank to cut its growth projections.

“Probably GDP growth won’t be that bad in the first quarter -- consumption should be the driver again,” said Maxime Botteron, an economist at Credit Suisse Group AG in Zurich. However, with unemployment likely to increase as the exchange rate hinders industry, “this year should be quite weak -- the baseline scenario is for stagnation, not recession,” he said.

SNB President Thomas Jordan predicts the economy will grow “just under” 1 percent this year, half what was forecast when the cap of 1.20 per euro on the franc was still in place. The franc advanced 15 percent against the euro in the first quarter, the most since the single currency was introduced in 1999.

Recession Fears

The franc traded at 1.03591 per euro at 8:02 a.m. in Zurich in Tuesday. Against the dollar it stood at 94.75 centimes

A recession -- two consecutive quarters of contraction -- is unlikely, according to SNB policy makers, with Vice President Jean-Pierre Danthine saying last week that there will only be “probably one bad negative quarter.”

Nevertheless, in a separate survey conducted before Danthine made those remarks, economists predicted a recession, with the three months through June bearing the brunt of the franc’s appreciation and GDP not expanding again until the final quarter of this year.

“We have an exchange-rate shock, prices tumbling, companies reacting by cutting jobs,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd in Zurich. “That means that production falls, and that for me is a sign that the Swiss economy will suffer -- it’s natural that in such a context there can’t be growth.”

Growth Driver

Capturing the exchange-rate blow, revenue for the machine, electrical and metals industry was 8.1 percent lower in the first quarter than a year earlier, with orders down 17.1 percent, according to lobby group Swissmem. Thirty-one percent of companies in the sector expect an operational loss for 2015. Manufacturing accounts for about 20 percent of Swiss output, more than insurance and financial services combined.

Still, net trade is only one growth component, and domestic demand accounts for more than 85 percent of output, with household spending at 54 percent.

“Private consumption should be a driver again in 2015 even if it is a bit weaker in the first half,” said Julien Manceaux, economist at ING in Brussels. “So far, there have been few signs of strongly increasing unemployment, even if some companies are struggling with the exchange rate.”

Switzerland’s jobless rate as measured by the International Labor Organisation fell to 4.4 percent in the first quarter -- less than half the European Union’s 10.2 percent.

Struggling Companies

Surveys have pointed to a loss of momentum. A manufacturing gauge has signaled contraction for the past four months and the KOF leading indicator has fallen to the lowest in more than three years. In a sign that companies are struggling, the number of people on a reduced working hours program, in which the state pays for their shortfall in wages, has increased.

Still, the ZEW indicator, which gauges financial analysts’ expectations for the next six months, rose to the highest level in eight months in May.

“After the initial shock, I had feared there would be a deeper recession -- now we’ve upgraded our forecasts,” said Timo Klein, senior economist at IHS in Frankfurt. “It’s still likely that the first two quarters will be negative, but in sum I think the Swiss economy has, relative to the size of the shock, fared pretty well.”