SEB report: Slow start in Sweden, but recovery on track

7/27/2019 SEB report: Slow start in Sweden, but recovery on track

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Sweden: Slow start, but recovery on trackWEDNESDAY

OCTOBER 16, 2013

Lower GDP in 2013. We have lowered our growth forecast for this year to 0.8 per cent(from 1.2 per cent in Nordic Outlook) after the downward revision to second quarter flashGDP. Forward-looking indicators are mixed but suggest that the recovery is largely ontrack, though monthly growth metrics remain weak, indicating downside risks for Q3 GDP.

Manufacturing sector indicators are mixed, while households have clearly becomemore optimistic, supported by fiscal policy and house prices.

Steady increase in employment. The labour market continues to be stronger thanimplied by GDP, with growing employment and stable unemployment. Some indicatorseven suggest that employment growth could be accelerating.

Inflation will remain subdued. Tendencies towards higher inflation during the summerreversed in September and our forecast that CPIF will remain below the Riksbanks targetthroughout the forecasting period is unchanged. Lower energy prices mean that CPIF willalso be below the Riksbanks forecast in the short run.

Lower government borrowing. Privatisation of Nordea will lower the centralgovernment borrowing requirement by SEK 40bn. Tax revenue has also been stronger

than expected. The National Debt Office will thus reduce nominal bond issuance in 2014.

The Riksbank will remain on hold for most of next year due to low inflation andcapacity utilisation, combined with continued expansionary policy from internationalcentral banks. We expect a first key interest rate hike in December next year and a reporate of 1.75 per cent at the end of 2015. Market pricing is approaching our forecast.

Olle Holmgren

SEB Trading Strategy

[email protected]

+46 8 763 80 79

Key data

2012 2013 2014 2015

GDP* 1.0 0.8 2.6 3.2

GDP working day adjusted* 1.3 0.8 2.7 3.0

Unemployment** 8.0 8.1 8.0 7.5

CPI* 0.9 0.0 1.0 2.0

CPIF* 1.0 0.9 1.3 1.6

Government savings*** -0.2 -1.5 -1.8 -1.3

* Percentage change ** Per cent of labour force *** Per cent of GDP

Source: SEB


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Economic Insights

BUSINESS SENTIMENT AND PRODUCTION

Manufacturing sentiment is mixed, with a rising purchasing Managers index (PMI) but a more moderate upturnaccording to the National Institute of Economic Research (NIER) survey. Hard data are lagging, with continuedsluggish industrial production and merchandise exports being weak up to August. We expect exports andproduction to recover going into Q4, in line with the upturn in PMI, but see downside risks for Q3 GDP.

Sentiment in the service sector improved in September, despite a decline for the manufacturing sector. Theeconomic sentiment indicator (a weighted average between business and consumer sentiment) clearly suggeststhat GDP will grow again in the second half of this year.

A marked recovery for housing starts indicates that residential investment will rise again going forward. Capitalspending in the manufacturing sector is, however, expected to remain weak throughout 2013.

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Swe: GDP and economic sentiment

GDP, % q/q (RHS)

Economic sentiment (NIER)


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Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET

Household sector confidence is recovering, climbing to its highest levels since 2011 during the summer. Theupturn should continue going forward, supported by international recovery and a gradually improving labourmarket. Strong real income growth fuelled by low inflation and tax cuts, together with strong household savings andbalance sheets, will open the way for a consumption boom as confidence returns. Retail sales and car registrations

have accelerated during the summer.

Home prices are rising again. Prices have increased over the last 4-5 months, and short-term indicators suggest acontinued upward trend over the next 6-12 months. Lending to households is also accelerating, but only marginally.This could be an effect of macroprudential policies, with a loan-to-value ceiling of 85 per cent and increaseddemands for principal payments on mortgage loans.

Employment continues to trend higher, while unemployment is stable. Job creation plans in the NIER surveyeven suggest a possible acceleration, although this is at odds with the weak GDP growth. Unemployment isexpected to decline from the middle of next year. Recent developments suggest downside risks to this forecast.

Household income and consumption

Year-on-year percentage growth

2012 2013 2014 2015

Consumption 1.6 2.0 2.7 3.0

Income 3.3 2.9 2.8 1.7

Savings ratio, %

of disp. income 11.5 11.8 12.2 10.8

Source: Statistics Sweden, SEB


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Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK

Inflation remains subdued. Faint signs of rising inflation pressures were reversed in September with core CPIF (exfood and energy) declining below 1 per cent y/y again after a temporary increase in August. Low internationalinflation and moderate wage increases over the next 3 years indicate that CPIF inflation will stay below the Riksbanktarget through-out the forecasting period. CPI inflation is predicted to gradually increase to 2.5 per cent y/y driven

by higher mortgage interest rate costs due to expected rate hikes from the Riksbank in 2015.

The Riksbank expected to stay on hold, until December next year. Inflation below target, low capacity utilisationand continued expansionary policy from international central banks will exert downward pressure. Financial stabilityconsiderations is an upside risk, although the new macro prudential framework means that it has become less likelythat this will trigger a rate hike. We expect a first hike in December and two more hikes in 2015.

Stronger tax revenues and Nordea privatisation lowers government borrowing requirement. National debtoffice is expected to lower 2013 borrowing requirement forecast by SEK 50-60bn, where SEK 40bn is explained byprivatization. Borrowing ex privatisation and re-lending (mainly for the Riksbank currency reserve) is trendinggradually higher (see chart), but is expected to turn-over as growth accelerates.

Documents

SEB report: Slow start in Sweden, but recovery on track