Strong economy in the wake of Brexit

There is a great deal of uncertainty surrounding Swedish companies operating in the United Kingdom. The prospect of Brexit has executives on edge, with few willing to discuss the matter publicly. As Ulla Nilsson, Head of the Stockholm Chamber of Commerce in London, explains in an interview with Dagens Industri, “Swedish companies with offices in Britain are worried about whether the legislative system of the 27 remaining EU countries will mesh with that of the British. If it does not, then this may increase costs, resulting in more expensive services and products. Consequently, those services and products will be less competitive on the market.”

Swedish companies reluctance to comment on Brexit is because it is very hard to predict whom it might upset. It is impossible to know whether a customer might have voted in favour of leaving, in which case it is dangerous to take the risk. However, this problem extends not just to one’s immediate clients in the private sector, but also to the British public sector, along with various lobbying organisations active in the country. Even so, it is commonly accepted that Swedish companies wanted Britain to stay in the EU. Regardless, the Stockholm Chamber of Commerce reports that it has not yet noticed any changes in the number of Swedish companies who wish to establish themselves in the country. “It was believed that this number would decrease significantly. That has not come to pass, and so the numbers remain on a level that is good”, Ms Nilsson said to Di. Prime Minister Stefan Löfven has said that tough negotiations are sure to follow in the wake of Brexit. Not just with the British, but within the EU as well. In particular, the government will have to decide on how to approach the hole that Brexit will leave in the EU’s budget. In total, some SEK 200 billion is now missing. The government has stated that the EU should introduce cuts to the budget that correspond to the extent to which the Union’s income has now decreased. According to the Minister for Finance, Magdalena Andersson (S), “the worst case scenario has it that Sweden’s annual EU-fee gets increased by SEK 10 billion, so it is important that the EU spends less from now on.” However, as Svenska Dagbladet pointed out, the required funds will most likely come to less than 200 billion, as no more EU subsidies will be spent on the British.Monthly Policy Review

However, the government is not convinced that things will return to how they were even if the missing money is somehow acquired. Decreased EU-spending means that Sweden will receive less agricultural and regional subsidies from the Union. Furthermore, the government believes that the EU should change its policy regarding what it spends its money on. Ms Andersson says that less should be spent on supporting agriculture and various regions, whereas “genuinely common problems and challenges” ought to be prioritised. This includes, among other things, immigration, international competition strategy, as well as sustainability financing. Additionally, Löfven thinks that the EU should introduce a function that punishes those member states that fail to abide by the values and agreements maintained within the Union. This punishment should take the form of cuts to EU subsidies. He said that, “one cannot continue to receive support unless one also acts in accordance with one’s obligations.”

The latest report of the National Institute of Economic Research (NIER) names Brexit as one of the primary causes of Swedish economic uncertainty in the near future, together with the Trump administration of the United States. Brexit is liable to raise questions regarding the EU’s capacity for economic development. This is true especially because it happens to coincide with elections in Germany and France, the outcomes of which are extremely important to the Union.

The Riksbank's job is not yet done

NIER’s economic forecast notes that Swedish wage growth has not taken off despite the fact that resource utilisation on the labour market has increased over the last few years.This is partly due to the Swedish wage structure affecting the international competitiveness of Sweden’s manufacturing sector. This subdued wage growth, which has been a constant element in Sweden’s economy for a number of years, has had a negative impact on inflation. The high inflation rate of 2.0 per cent that was achieved in February was largely due to rising energy prices, and so not indicative of a fundamental change with respect to the underlying issue, which further explains why various measures of core inflation, such as CPIF minus energy prices (CPIF is consumer price index with a constant mortgage rate), remain low. In light of this NIER predicts that the Riksbank’s goal of attaining an inflation rate of 2.0 per cent on a permanent basis will not be achieved until 2020. Currently, the repo rate stands at – 0.5 per cent. The Riksbank left it untouched through winter and wishes to hold it there until early 2018. However, as a result of low inflation, NIER does not anticipate the Riksbank will raise the rate until the third quarter of this year. In other words, later than desired. Still, at this time resource utilisation will be high, and core inflation will have been climbing for over a year. Furthermore, NIER predicts that the Riksbank will raise the rate gradually. It will stand at 1.75 per cent in 2021 but nonetheless remain negative in real terms. If the rate is raised more quickly than this it will cut into economic growth, extending the period of time it will take to reach the 2 per cent inflation target.

The government has also decided to restrict the Riksbank’s influence on government debt by cutting its currency reserve (currently SEK 450 billion) in half. There are multiple reasons for this. In particular, maintaining such a massive currency reserve is expensive, since it exists partly because of borrowed foreign currency, which costs taxpayers approximately SEK 500 million per year in interest. Furthermore, there are democratic concerns regarding the idea that an unelected institution such as the Riksbank exercising so much power over government debt levels. Of course, the initial reason why the bank was allowed this kind of freedom was to guard against international financial crises, such as that of 2008. However, experts in the field believe that this is an expensive insurance policy that is not needed to manage a similar crisis, and would be largely useless in the event of an even greater one, which will probably never occur.

Exports boost growth numbers

The positive output gap in the Swedish economy will increase in 2017 and 2018, according to NIER.Significant recovery in the OECD countries will contribute positively to Swedish exports, which render them crucial to growth (GDP grew by 1.0 per cent in the fourth quarter of 2016, largely due to exports). This positive trend is also reflected in the labour market, where employment levels are rising quickly, including in the immigrant population. NIER predicts that GDP will continue to grow rapidly in the first and second quarters of 2017, although not as significantly as it did towards the end of 2016.

Employment grew very rapidly in the fourth quarter of 2016, with the data for the first two months of 2017 suggesting that that growth is continuing in the first quarter. The growth of the Swedish economy means that demand for labour will remain high in 2017 and 2018. Firms have recruitment plans that suggest that more labour is badly needed. However, this is to be seen in light of the fact that there is a continuing issue with finding labour with the right skill set, both in the business and public sectors. NIER believes that employers will probably have to decrease their standards, where this is possible. Furthermore, this matching-issue will contribute to a slower employment growth in 2018. Unemployment will continue to come down this year and reach 6.5 per cent in 2018. Among Swedes, the employment rate is unlikely to increase much further. Therefore, any increases in employment this year and over the next few years is anticipated by NIER to be driven primarily by Sweden’s immigrant population.

NIER’s Economic Tendency Indicator reported that firms remain extremely optimistic about the Swedish economy, with all sector indicators standing above or significantly above their historical averages. However, most of the indicators fell. Manufacturing industry dropped by 3.3 points in March, mostly because of less optimistic production plans in the coming months. The consumer confidence indicator also fell by 1.7 points. This was reportedly due to a loss of optimism among consumers regarding their personal finances. In contrast to these two falls, the building and civil engineering industry’s indicator gained 3.5 points following even more positive order books and a remarkable upward adjustment of recruitment plans.

The Swedish economy thus continues its positive trend despite worldwide turbulence. It remains to be seen how the Brexit negotiations and the policies of Donald Trump will come to affect its’ development. One reason for worry is that the current growth is a consequence of heavy economic stimulation, and has been for a long time. But for now, Sweden is steaming ahead.

Note: This is a shortened version of the original. Tables and footnotes are only available in the subscriber version of this article. 

We offer corporate subscriptions for 1-100+ users. Click here to find out more about our corporate offer.