The Swedish Economy No.1 - February 21, 2012


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The Swedish Economy No.1 - February 21, 2012 : Possible easing of the economic slowdown, but the EU is warning of imbalances in the Swedish economy

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The Swedish Economy No.1 - February 21, 2012

  1. 1. The Swedish EconomyMonthly letter from Swedbank’s Economic Research Departmentby Magnus Alvesson No. 1 • 21 February 2012 Possible easing of the economic slowdown, but the EU is warning of imbalances in the Swedish economy  Economic data in recent months point to continued weakness in the Swedish economy, but also that the decline may have halted. The export slowdown late last year probably means that growth was negative in the fourth quarter. At the same time domestic demand appears to have been stronger than expected and household confidence remains stable. This could help to offset weaker global conditions. Against the backdrop of the weak indicators late last year, the Riksbank cut the repo rate to 1.5% and signalled that it intends to stay at this level until the middle of next year.  Sweden missed four of ten criteria considered critical to macroeconomic stability. Within the framework of its crisis management, the EU reached agreement last year on a reform package to strengthen economic governance (the so-called Six-Pack). This includes analysing the macroeconomic imbalances in member countries.  The Swedish economy is facing imbalances both internally and externally, according to the EU Commission. Domestically, the biggest risks are high housing prices and private debt ratios. This coincides with several years of rapid credit expansion. Externally, Sweden has lost export shares in the global market, which is a sign that it has failed to keep pace competitively. The conclusions will be followed by detailed analyses and recommendations from the commission.Economic signals point sideways Institute of Economic Research’s corporate barometer confirmed the relatively weak growth inAfter a rapid and deep economic decline at the end export orders at the beginning of the year.of last year, there are now signs that the Swedish Purchasing Managers’ Index, for the manufacturing andeconomy is bottoming out. The purchasing services sectors, Jan 2006 – Jan 2012managers’ index for both industry and the service (Net balance, seasonally adjusted)sector has surpassed the 50 mark. This is 75 Manuf acturing - New orders Services - New ordersreinforced by the fact that order bookings, 70 Manuf acturing Servicesespecially from the domestic market, and order 65backlogs have stabilised in the last month, which 60suggests that manufacturing and service activity are 55no longer slowing. 50This follows continued export weakness in 45December. Since imports have not shrunk to the 40same extent, net exports are expected to have 35dragged down total GDP growth in the fourth 30quarter. With the continued global economic 25uncertainty, especially in Europe, exports are likely 2007 2008 2009 2010 2011 2012to remain sluggish for some time. Swedbank’s Sources: Swedbank and SILF.purchasing managers index and the National Economic Research Department, Swedbank AB (publ), 105 34 Stockholm, +46 8-5859 1000 E-mail: Responsible publisher: Cecilia Hermansson, +46 8-5859 7720. Magnus Alvesson, +46 8-5859 3341, Jörgen Kennemar, +46 8-5859 7730
  2. 2. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 1 • 21 February 2012 Instead it appears that growth impulses will come 2.8% from December 2010. This may be a from the domestic economy. Household confidence reflection of the hesitation on the part of employers indicators turned higher in January, and Swedes to hire given the uncertain economic outlook, which have the highest consumer confidence in Europe. is confirmed by the restrained employment plans They seem especially confident in their personal suggested by the purchasing managers’ index and finances (micro index), which suggests that the National Institute of Economic Research’s consumption could be slightly stronger going survey. Reports of higher layoffs by the national forward. Consumer confidence still remains below employment service also point to a slowdown in the the historical average, however, so we do not labour market. expect too rapid a rebound in spending. The increase in household borrowing continued to Households’ confidence indicator, Jan 2006 – Jan 2012 slow in December. Mortgages, which account for (Net balance, seasonally adjusted) the large share, grew even more slowly, probably60 Households conf idence indicator as a result of the weaker housing market. The40 Macroindex share of variable-rate mortgages was 51%, down Microindex 10 percentage points from December 2010, which20 shows that households are increasingly hedging 0 against rising interest expenses. Commercial lending by banks continued to rise.-20 Credit expansion, Jan 2005 – Dec 2011-40 (Annual change in percent) 20-60 Non-f inancial companies Households-80 15 2005 2006 2007 2008 2009 2010 2011 2012 Source: National Institute of Economic Research. 10 Retail sales recovered slightly at the end of last 5 year after a weak autumn. Sales of consumables grew, while durables such as cars remained 0 sluggish. Industrial production also surprised -5 strongly in December after declining growth throughout 2011. A slightly lower than expected -10 production level in December is providing positive 2005 2006 2007 2008 2009 2010 2011 momentum in the first months of 2012. Source: SCB. Production and retail sales, Jan 2008 – Dec 2011 Against the backdrop of weaker economic (Annual change in percent, volume) development late last year, the Riksbank cut the 25 repo rate from 1.75% to 1.5% at its February Retail sales 20 meeting. At the same time its growth forecast was Industrial production 15 revised downward for 2012 from 1.3% to 0.7%, i.e., Services production 10 a considerably gloomier picture than presented in 5 December. Exports in particular were weaker than 0 expected. The repo rate path was also revised -5 downward and the Riksbank is now saying that its -10 benchmark rate will remain unchanged until the -15 second quarter of 2013. -20 -25 Although the Riksbank’s macroeconomic forecast is jan-08 jul-08 jan-09 jul-09 jan-10 jul-10 jan-11 jul-11 now closer to our own (Swedbank Economic Source: SCB. Outlook, 24 January), there are strong indications that the benchmark rate will be cut further. A After improving last autumn, the labour market, protracted economic decline in Europe will put which often trails the rest of the economy, has pressure on Swedish exports at the same time that flattened out. Unemployment was 7.4% (seasonally unemployment continues to rise and resource adjusted) in December, unchanged from November. utilisation in the economy remains low. In addition, The increase in the workforce also levelled off. inflation pressures are limited, and the inflation However, the number of hours worked rose by target is not at risk during the current and next year. 2 (5)
  3. 3. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 1 • 21 February 2012This indicates that the benchmark rate will continue Household debt is high in Sweden and hasto fall during the year. especially increased since the early 2000’s.EU Commission warns of imbalances Private sector debt ratios, 2001-2010 (Percent of GDP)As part of the extended fiscal cooperation within the 300 CompaniesEU, the EU Commission published its first annual Companies (excl. intra-company loans)analysis of macroeconomic imbalances in member 250 Householdscountries. Sweden exceeded the limits on four outof a total of ten criteria. As a result, the commission 200 160%will follow up with more detailed analyses of the 150Swedish economy in these areas.EU-commission’s macroeconomic balance conditions for 100Sweden Condition 50 fulfilled 0 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Internal imbalances Sources: EU-commission and SCB. Housing prices No Private sector credit flow Yes High private sector debt ratios are a result of strong Private sector credit No credit growth during the 2000’s. During two years, Public sector credit Yes 2007 and 2008, it exceeded the 15% threshold Unemployment rate Yes recommended by the commission. Lending alsoExternal imbalances includes flows between companies, which may have contributed to the high growth rate. The credit Current account No expansion tailed off in 2009 and 2010, but data for Net International Investment Position Yes 2011 indicate that business and household debt Real Effective Exchange Rate Yes had again risen. There was a notable increase in Export market shares No bank loans to businesses, by nearly 6% in nominal Unit labour cost Yes terms, after having shrunk the two previous years. Households increased their borrowing by slightly Source: EU-commission over 7% at an annual rate, only marginally higher than in 2010.It is primarily in the domestic economy thatSweden is considered to have imbalances that Housing prices are also included in thecould lead to macroeconomic risks. Private sector commissions analysis, since economic anddebt in Sweden has exceeded the commission’s financial crises often coincide with majorlimit of 160% of GDP every year between 2001 and fluctuations in housing. Falling housing prices can2010. The commission argues that high debt in the affect household consumption through the wealthprivate sector increases the risk that the impact of a effect, and also investments in the constructionrecession will be more severe when businesses sector. In addition, there are close ties between theand households are forced to adjust their balance real estate market and the financial sector, wheresheets at the same time that demand declines. change is often mutually reinforcing. High housing prices fuel a rapid credit expansion, which in turnIn Sweden, the debate has mainly focused on the reinforces the price increases – a dynamic thatvulnerability of households because of their debt, played a prominent role in the early 2000’s. Thebut the EU Commission’s data show that Swedish opposite was true during the latter part of the samecompanies are also highly indebted compared with decade in much of the West.other EU countries. The data also include intra-company loans, however, which probably meansthat some debts are being double counted, givingSwedish companies, which are often multinational,unreasonably high debt levels. On the other hand,financial companies are not included, which inSwedens case would probably increase the privatedebt compared with many other countries. 3 (5)
  4. 4. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 1 • 21 February 2012 House prices and credit expansion, 2001 - 2010 In Swedens case, the EU Commission has noted (Annual percentage change in real house prices; credit as a that the construction sector has been under- share of GDP) investing for a number of years. This may be due to25.0 an overly regulated housing market and impacts the House prices20.0 Credit expansion labour market as well as growth in the medium 15% term. At the same time the commission recognizes15.0 that developed economies with an aging population10.0 should maintain a foreign trade surplus, while 6% economies in a faster growth phase should attract 5.0 capital for investments and, thus, can “live” with 0.0 current account deficits. -5.0 The competitiveness development in Sweden has-10.0 been mixed. The real effective exchange rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (weighted by export shares and deflated by the Source: EU-commission. consumer price index) has fallen every year except 2003-2005. This is an effect of the depreciation of The Swedish housing market has managed fairly the krona and that inflation has been lower than in well in recent years despite that annual price competitor countries. Goods and services produced increases (real, deflated by consumer price in Sweden have become less expensive, which increases) have exceeded the EU Commissions benefits exports, but also helps them compete critical value in five of the last ten years. Real price better against imports. increases in 2010 were also “unbalanced”, Competitiveness in Sweden, 2001-2010 according to the commission. As a result, it will (Change in percent, weighted real exchange rate, and three year analyse the Swedish housing market in more detail, average of unit labour cost) adding further to the hotly debated topic of housing 15.0 12% prices in Sweden (see not least the Riksbank’s study of the market). Preliminary data indicate, 10.0 11% however, that the trend turned lower in 2011. 5.0 According to the commission, real housing prices fell by 0.8% on an annual basis during the third 0.0 quarter. Unit labour cost (nominal) -5.0 Real Ef f ective Exchange Rate For the other two indicators of domestic -10.0 (REER) -11% macroeconomic balance, public debt and unemployment, the Swedish economy falls well -15.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 within the thresholds defined by the commission. Source: EU-commission. The critical value for public debt aligns with the 60% of GDP stipulated in the Maastricht Treaty. The On the other hand, unit labour cost developments labour market is considered balanced if average have been less than favourable. Labour costs have unemployment over a three-year period does not outpaced productivity and eventually could erode exceed 10%. This is politically controversial, since Swedish competitiveness. The increase in Sweden many feel that an unemployment level of 7-8% is an exceeded the EU Commission’s threshold value for unacceptable mismanagement of resources that in non-EMU members only in 2009, however. The itself could lead to imbalances. threshold value for non-EMU members is higher (12% vs. 9%), since many of them have undergone The Swedish economy has managed better with trade liberalisation, which has led to faster respect to external imbalances. The current adjustment in wage levels. This does not apply to account surplus has remained stable throughout the Sweden, because of which Swedish wage growth period and during the last six years has exceeded should also be judged against the lower level. 6% of GDP, the EU Commission’s upper limit. Although the Swedish economy would have also Although it may seem paradoxical that there is an managed well against the lower limit, the trend in upper limit to how high exports should be compared recent years shows that its competitive advantage with imports, a large current account surplus could could fall back unless productivity keeps pace with be a sign that the investment climate in the wage growth. economy isnt favourable, since “surplus savings” are going to other countries. 4 (5)
  5. 5. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 1 • 21 February 2012 At the same time Sweden has lost export market As a whole, the EU Commissions analysis shows shares. Between 2001 and 2010 its market share that despite a relatively fast recovery after the shrunk on a global basis for much of the period, financial crisis and strong public finances, the exceeding the EU Commissions threshold value of Swedish economy still faces imbalances that could -6% for eight of the ten years. The export market cause a macroeconomic crisis going forward. In share complements the competitiveness analysis. many respects these imbalances are interrelated. In Despite that the real exchange rate and unit labour the domestic economy, rising housing prices have cost have largely remained within a satisfactory facilitated a major credit expansion, which in turn range, the loss of export market share could be a has led to a further rise in housing prices and sign that exports are not growing in new, rapidly household debt. Corporate debt has also increased, emerging product areas or in new markets. Another but is likely to be revised downward when intra- reason could be that the high level of production company loans are consolidated. outsourcing to other countries is leading to lower export market share, but that revenue from service The analysis of external imbalances points in exports instead are increasing. different directions. The current account surplus indicates strong exports, but also that the Export Market Shares and export volume, 2001-2010 investment climate and growth dynamics in the (Average five year change in percent) Swedish economy are weak. Competitively,10.0 Sweden has benefitted from a weaker krona, but been hurt by labour costs and slow productivity 5.0 growth. Despite growing export volumes, this may have been why Sweden has had a harder time 0.0 -6% competing in emerging markets and thereby lost its -5.0 global trade position.-10.0 The fact that Sweden exceeds the threshold values Export Market Shares in four of ten areas means that the EU Commission Export Volume-15.0 will conduct a detailed analysis, which is likely to 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 tone down the risks (e.g., corporate debt), but could Sources: EU-commission and SCB. also provide valuable insight on macroeconomic threats and the choice of reform priorities. Magnus Alvesson Swedbank Economic Research Department Swedbank’s monthly The Swedish Economy newsletter is published as a service to SE-105 34 Stockholm, Sweden our customers. We believe that we have used reliable sources and methods in the Phone +46-8-5859 7740 preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base Legally responsible publisher any (investment) decisions on other material as well. Neither Swedbank nor its Cecilia Hermansson, +46-8-5859 7720 employees may be held responsible for losses or damages, direct or indirect, owing to Magnus Alvesson, +46-8-5859 3341 any errors or omissions in Swedbank’s monthly The Swedish Economy newsletter. Jörgen Kennemar, +46-8-5859 7730 5 (5)