March 1, 2018 / 12:56 PM / a year ago

UPDATE 1-Swiss economy gains steam in Q4 as Frankenshock left behind

(rewrites, adding government economist and manufacturers poll)

By John Revill and Michael Shields

ZURICH, March 1 (Reuters) - Switzerland's economy powered ahead at the end of last year, building up steam for 2018 and prompting the government to declare an end to the "Frankenshock" that followed the lifting of a currency cap three years ago.

Gross domestic product expanded 0.6 percent quarter on quarter in the final three months of 2017, official data showed on Thursday, equating to 1.9 percent year-on-year growth and a 1.0 percent rise for the year as a whole.

Brisk international demand fuelled the export-led economy, while a weaker Swiss franc offered respite for firms squeezed by the currency's surge after the Swiss National Bank scrapped a policy of limiting its value against the euro in January 2015.

"On a broad economic basis, Switzerland has overcome the franc shock," said Ronald Indergand, an economist at the economics ministry. "Overall the currency is no longer a drag on the economy at its current level, although there are still a few issues here and there like retailers, which are still having a difficult time."

Retail sales fell 1.4 percent in January.

The franc's rapid rise made exports to the euro zone more expensive and threatened the survival of many companies, particularly in the industrial sector.

A poll on Thursday showed Swiss manufacturers were now in their most upbeat mood for years.

The improving economy was supported by better growth in Europe, while the domestic sector was also thriving, Indergand said, particularly construction and services.

Growth this year was likely to be well above Switzerland's average rate of 1.8 percent, Indergand said.

In December the government forecast growth of 2.3 percent for 2018. It is due to give its latest assessment on March 20.

The GDP data added to a raft of upbeat economic news.

The KOF leading indicator, which points to the economy's expected performance in around six months, rose to an unexpectedly high 108 points in February.

Employment remains solid, with non-farm payrolls up 0.8 percent in the fourth quarter. The jobless rate was just 3 percent in January on a seasonally adjusted basis.

Industrial orders rose by a fifth in the fourth quarter , and the tourism industry is booming again.

Even with the economy throttling up, inflation remains subdued. Consumer prices rose 0.7 percent year on year in January, giving the SNB scope to extend its expansive monetary policy that relies on negative interest rates and currency intervention when needed to rein in the franc.

The strategy has paid off as the euro rose from below 1.06 francs a year ago to over 1.15 now.

SNB monetary policy nevertheless appears to be on hold, said VB Bank economist Thomas Gitzel.

"The SNB can be happy, the chapter of the Swiss franc's overvaluation has been closed," he added. "If the SNB pushed ahead with a more restrictive monetary policy, this would lead to a rise in the value of the franc." (Editing by Catherine Evans)

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