Mundus Brief – August in review

The Mundus Brief is your chance to read a summary of what happened in Sweden last month and our chance to let you know what we’ve been looking into. We try to keep the Mundus Brief brief and entertaining; a counterbalance to our more serious news and analysis. 
/The Mundus Team

In Mundus Brief in June we noted that a “cloud of pessimism lurks over the economy. Consumers feel that the good times are behind them, with the Economic Tendency Indicator falling from 102.5 in April to 99.8 in May. CFOs are also less optimistic than any time in the last 3 years. But, when the debate appeared to have hit peak gloom, the GDP growth rate for the first quarter surprised to the upside. Economists went in search for a reason, and declared that Sweden was saved by its weak exchange rate, which facilitated an impressive 3.2% growth of services exports.” But, with summer over, the story has become clearer. Exports are doing OK, yes, but they are one of the few rays of sunshine. The Economic Tendency Indicator has now fallen to 94.9. A number of banks and institutions have now updated their economic prognoses, and all agree, summer is over – it is just a question of how much rain the storm clouds will bring. This is the issue that we address in our latest Monthly Policy Review, with stories on the economy, the budget and Brexit.

The global narrative is of course well known by now. The trade war between the USA and China, with a simmering war still possible between the USA and the EU, has frightened business. Investment decisions are being postponed, and supply chains are disrupted. In addition, the potential chaos of a no deal Brexit menaces just eight weeks away. Our Brexit story focuses on the likely impacts on Sweden, an economy which is considered to be amongst the most exposed if worst comes to worst.

But Sweden’s challenge is not just an issue with trading partners. The domestic economy, which has run hot since 2013 is now slowing down, constrained by shortages in housing and labour, and with the construction sector being weakened by policies aimed at keeping the lid on house prices. Unemployment, which had been falling since 2014 is now back on an upward trend. The rate has increased from a low of 5.5% last October to 6.9% in August. Although some of this is seasonally driven, both the unemployment rate and total employment are now much weaker than they were a year ago. All of Sweden’s banks are now forecasting unemployment rising further. Nordea, which is the most pessimistic, sees the rate rising to 7.2% by 2021, as growth stagnates just over 1%. The other banks are only marginally less pessimistic.

The government and Riksbank would like to paint a more optimistic picture. The problem is that the financial community is suspicious of their forecasts and their motives. With the entire yield curve negative, even when loaning money to the Swedish government for 20 years – the country’s economic policy could be described as experimental. The Riksbank announced its latest interest rate decision this week (no change), and gave its forward prognosis for the repo rate. The banks scoffed. Danske Bank’s chief economist in Sweden, likened Stefan Ingves (the Riksbank’s Governor) to Baghdad Bob, Saddam Hussein’s (Dis)Information Minister. This colourful description underlines the tensions between opposing forecasts and theories about the future direction of Sweden’s markets. The Riksbank’s contortions are watched in microscopic detail by global economists, interested to see how Ingves resolves the underlying conflict between interest rates, exchange rates, inflation and the housing market. Our economy story in the Monthly Policy Review highlights the importance of this debate.

We also look at the budget negotiations under way between the parties to the January Agreement. The biggest issue, which has now been agreed, is how to finance bigger budgets for the armed forces. That has led to the introduction of a Bank Tax, the details of which are still to be agreed, Mundus News reported. The banks have left themselves politically exposed, due not only to their large profits, but also the inability of some banks to keep ethical behaviour off the front page. New initiatives have also been leaked to promote services in rural areas and investments in renewable energy, both favourite policies of the Centre Party.

The other big debate about the budget will be the overall level of fiscal braking applied, given the bearish sentiment. The government is constrained to run a surplus over the economic cycle by Sweden’s Fiscal Policy Framework. Now a number of economists are pushing for more expansionary policies, both to stimulate the economy and to address challenges such as climate change and education. We investigate their arguments.

The two largest business stories of the moment are Northvolt’s drive to expand – the company is on a world tour of Sweden, trying to unearth 2,500 engineers interested to move to northern Skellefteå – and the shuffling of the deckchairs at the top of Swedish industry. In recent weeks there have been announcements, or rumours, of CEO changes at no less than eight of Sweden’s largest companies – Swedbank, Saab, Ericsson, ABB, Telia, Nordea, Sandvik and Stora Enso. A curious observation of the way that Sweden works as an insider’s club is the number of companies that are appointing individuals who have already been the CEO of another Nordic blue chip.

Klarna was also in the news, after its recent fundraising, with commentators speculating on whether Europe’s largest Fintech could stay independent, or whether it was be acquired by foreigners – following in the footsteps of Skype, Minecraft and iZettle.

Crime and security continue to dominate domestic politics. This issue has been boiling away for years, but perhaps has finally crystalised after the horrendous gang executions of two women during August – one in Malmö and the second in a suburb of Stockholm. Perhaps now, enough is enough, and the politicians will move from profiling their solution to solving the problems. In early September, the politicians of all parties, except the Sweden Democrats, met to decide a response to the gangs. One hopes that by next week constructive initiatives will be announced.

There were a number of international political stories of note in Sweden over the summer.

Sweden’s bilateral relations with Iran suddenly swung into the foreground. This has been a complex situation, given that a Swedish researcher is facing a death sentence in Iran and Iran has captured a Swedish vessel in the Strait of Hormuz. Nonetheless, Sweden is hoping that Iran will stick to the nuclear agreement negotiated in 2015, a deal that President Trump rejects. As Mundus News reported, the Minister for Foreign Affairs, Margot Wallström (S), said that she had an honest conversation with her Iranian counterpart, Javad Zarif, discussing challenges that Iran and the Middle East face, human rights, and Iran’s nuclear deal.

President Trump was also involved in two other quarrels involving Sweden. The first involved an American rap artist, A$AP Rocky, who was convicted of assault. After domestic lobbying in the USA by Rocky’s friends, the President decided to intervene politically, which caused distress in Sweden, where there is a clear line drawn between politics and the law. The outrage over this incident was replaced by smiles and raised eyebrows when President Trump offered to buy Greenland. In both cases, Sweden’s former Prime Minister, Carl Bildt (M), who apparently enjoys being Trump’s bête noire, decided to tackle the President head on, via both his tweets and via an opinion piece published in the Washington Post. Bildt’s moniker of beyond absurd might be a new entry to the English language.

Our final story in this Monthly Policy Review is looking ahead at the political Autumn, where we review the odd political situation that sees neoliberal economics being implemented by a social democratic government. Can this experiment last, and if it does, what does that imply for Sweden’s future?