The growth and outlook of the Swedish economy is good but vulnerable. Increasing household debt and a large banking sector make the economy susceptible to Eurozone shocks, such as the economic instability of Greece. Speaking in Almedalen this week, the Finance Minister underlined the impact of the crisis in Greece on the Swedish economy and trends in Swedish exports and industrial production. The negative inflation trend is anticipated to have bottomed out, but nonetheless, on 2 July, the Riksbank lowered the repo rate again.
Strong growth coupled with pessimism about the global economy
The growth of the Swedish economy is expected to remain strong in the foreseeable future. SEB’s Nordic Outlook report for May anticipates a 3.0 per cent GDP growth forecast for 2015. The reason for this is mainly the robust economic finish of last year, driven primarily by factors such as rising residential construction and consumption. This prediction finds support in a recent Economic Tendency Survey published by the National Institute of Economic Research (NIER). NIER’s Economic Tendency Indicator climbed from 99.2 in April to 101.4 in May, indicating that economic growth is stronger than normal. Confidence indicators show particularly high numbers in the retail trade and building/civil engineering sectors. The current retail indicator stands at 110.4, which is significantly higher than normal for this period. The net balances for all the questions asked were above their historical averages, and sales have continued to grow fairly rapidly over the past three months. Firms are less negative than usual about their stocks of goods, and expectations are higher than normal for the oncoming three months. Whilst the building/civil engineering indicator slipped from 110.3 in April to 102.9 in May, the present numbers are still suggesting a more optimistic situation than usual. The decrease was mainly the result of firms being dissatisfied with their order books. Despite this, they remain upbeat, and especially expect employment growth to improve the business prospects of the three-month period ahead. Even so, the Nordic Outlook report identifies an underlying uncertainty about the world economy and domestic economic conditions, which hampers growth numbers. NIER’s consumer indicator reinforces this claim. Whereas it rose by 1.9 points to 98.8 in May, this is mostly attributable to consumers being increasingly positive about their own personal finances, both now and in a year’s time. The indicator result is still weaker than normal, which is because consumers remain pessimistic about the Swedish and global economic climate. This sentiment was echoed by the Minister for Finance, Magdalena Andersson (S), as she presented the government’s economic outlook in Almedalen this week: “Looking around the world, we have seen increasing growth since 2013. Many factors indicate a further strengthening of growth next year. The US economy is expected to continue to grow strongly this year, despite a weak first quarter. In the euro area, we saw clear growth in all the four largest economies in the first quarter, for the first time in a long time, and conditions are in place for continued recovery. Having said that, somewhat weaker growth in China and other fast growing economies means that the global economy is gaining strength rather more slowly than we thought earlier this year.”
According to a report published by Statistics Sweden (Statistiska Centralbyrån), export and import numbers were good during the first quarter of 2015. Throughout January and March, Sweden exported and imported SEK 290 and 280 billion worth of goods respectively. Compared to the first quarter of 2014, exports and imports rose by 5 per cent each during this period. There was a net trade surplus of SEK 10 billion, up from SEK 9 billion last year. In particular, imports from China went up by 32 per cent, whereas exports and imports from Russia decreased by 29 and 26 per cent. Exports of pharmaceutical products increased by 22 per cent, with imports of electronics and telecommunication products rising by 10 per cent. The Nordic Outlook report notes that in May, manufacturing sector indicators remain weak. They are divergent, with some signs of improvement. Specifically, stronger economic conditions in Western Europe combined with a weaker krona suggests that a positive trend may develop from here. For now, however, industrial production and merchandise exports are disappointing. The Minister for Finance has particularly underlined the trends in Swedish exports and industrial production. Commentators have long been expecting a clear strengthening of industrial production, but this upswing has still not materialised. The risk of weaker international demand continues to delay the upswing, Ms Andersson said on 30 June. Furthermore, as in many other countries at this time, the link between manufacturing profits and investment volumes has weakened. The primary reason for this is believed to be that many exporters do not think that the currently weak krona exchange rate is going to last very long, but rather consider currency-driven profit levels as temporary. Still, because service exports increased by more than 7 per cent in 2014, total exports for 2015 and 2016 are expected to climb 4 per cent each year.
More repo rate cuts and good job growth
On 2 July, the Riksbank announced its decision to cut the repo rate once more. The Executive Board of the Riksbank decided to cut the repo rate by 0.10 percentage points to -0.35 per cent and to extend the purchases of government bonds by a further SEK 45 billion with effect from September and until the end of the year. Since the repo-rate decision in April, the krona has strengthened more than the Riksbank had forecast and the development of the exchange rate remained a risk to the upturn in inflation. In this uncertain environment, monetary policy needed to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent, according to the Riksbank.
As a result of a weak krona and increased petrol prices, inflation is expected to continue to rise throughout the remaining half-year of 2015. Additionally, the CPIF will near 1.5 per cent towards the end of the year. The upward trend produced by these two elements will reach its peak early in 2016 and slowly disappear after that. However, January 2016 will see the effects of increased indirect taxes, such as reduced home renovation deductions and a higher petrol tax. This is thought to lift inflation by 0.3-0.4 percentage points during 2016. Still, inflation currently remains below the Riksbank’s 2 per cent target, which will most likely not change, because mediocre pay increases and low world market prices will continue to push prices downward. As a result of the European Central Bank’s large scale QE-program, the Swedish krona has a tendency to climb as soon as the market stops expecting more monetary stimulus to be pumped into the Eurozone economy. The Nordic Outlook report believes the krona will trade around 9.30 per Euro by mid-2015. In the long run however, the Riksbank will not be able to match the QE-policy of the European Central Bank, and stronger global economic conditions will once again push the value of the krona upwards. The Nordic Outlook report predicts that the EUR/SEK exchange rate will fall to 8.95 in December and further to 8.80 towards the end of 2016. The krona will weaken against the dollar until mid-2016, reaching 9.40, before recovering as a result of the Euro gaining strength against the dollar.
According to Statistics Sweden’s May 2015 population forecast, the amount of people of working age (15 – 74 years) is expected to grow by approximately 500,000 between 2014 and 2024. This is primarily because immigration is believed to remain high, due to social unrest elsewhere in the world. The number of people born abroad within the working age population will increase by just over 600,000, whereas the number of people born in Sweden will decrease by 100,000. In other words, the amount of immigrants in the population will increase from 19 to 26 per cent during this period. Because it takes time for immigrants to establish themselves on the labour market, the labour market status of immigrants vary with respect to how long they have lived in Sweden. Their labour force participation and employment rate increases with regard to this variable, so those immigrants who have only lived in the country for a short time are more likely to be unemployed than those who have stayed for longer. Both the employment rate and the labour force participation have improved among immigrants in recent years, but there is an especially big gap between the employment rate of immigrants and their native cohort. This in part explains why, in spite of good job growth, unemployment in Sweden is high and is expected to remain on this level. This rapid population growth is pushing the labour supply upward. Therefore, the Nordic Outlook report expects unemployment to decrease slowly.
Increased spending in an uncertain world
Swedish economic activity is developing in a positive direction. Low interest rates have stimulated household consumption. As the economy continues to strengthen, long-term business investment will also increase. This is indicated by the fact that in the past 12 months, the Riksbank reports that corporate borrowing has increased. Additionally, corporate funding conditions in relation to banks have improved. The low interest rates are also an integral factor in explaining why household debt has continued to rise, as well as why housing prices are being driven upward at such a fast rate. Even though the Riksbank thinks that households have the margins they need in order to keep their loans afloat, the increased amount of debt means that risks pertaining to the housing sector have increased and that resilience is currently low. Growing indebtedness and a very large banking sector are the two biggest risk-elements of the Swedish economy. This makes the economy sensitive to shocks in these areas. Continued high risk-taking could generate such shocks. The Riksbank has therefore recommended the government and the Riksdag clarify the strategy with regard to macroprudential-policy instruments, such as an amortisation requirement, as soon as possible. Immediate measures of this kind are necessary in order to push down debt and risk. In light of this, the Nordic Outlook report points out that room for fiscal policy manoeuvres is limited, since the Social Democratic government’s public finances are showing deficits due to increased spending. Furthermore, the December Agreement imposes constraints on what changes are permissible within the current fiscal framework. Fiscal policy is thus expected to worsen the deficit through the funding of expensive reforms to sick pay and the integration of immigrants. The Minister for Finance said on 30 June, that it would take one year longer than expected for government finances to balance, after tax revenues weakened and spending at municipal level increased. The government expects that the budget deficit in 2018 would be 0.3 per cent of economic output compared with zero expected earlier this year. A budget surplus of 0.1 per cent is now expected in 2019 compared with 0.4 per cent previously.
There is a particular scenario to which Swedish public finances, along with the rest of Eurozone finances, are vulnerable. While economic activity in the euro area is strengthening, events in Greece over the past few days have substantially increased the uncertainty. A Greek sovereign debt default could lead to banks and other sovereigns in the euro area finding it harder to acquire funding on the financial markets, which could adversely influence credit granting to households and companies. This could impact the development of the real economy of the euro area, which is already suffering from structural economic issues. Public finances are weak on the whole, and would be weakened further by a Greek financial collapse in no small part because European sovereigns hold a significant amount of Greek government bonds. Additionally, since monetary policy in the Eurozone is currently expansionary, the available further measures to stimulate the economy are limited. The economic recovery of the euro area will be stunted if Greece’s situation develops negatively, but at this stage, the impact on the Swedish economy is difficult to assess.