The Swedish Economy No.7 - October 25, 2011

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson No. 7 •27 October 2011
Economic slowdown on the way – global concerns reduce
growth forecasts
 Economic development in Sweden has been overshadowed this fall by signs
of a rapid slowdown. Economic activity is slowing mainly due to concerns
about the European sovereign debt crisis and weaker than expected
development in the US.
 The Swedish economy is relatively strong and well-balanced. Global
concerns will have an impact, however, both directly through falling export
growth and indirectly through growing uncertainty among households and
businesses. This will mean more cautious spending and investment going
forward.
 We, therefore, revised down our growth outlook in the Baltic Sea report
(October 19) for the current year to 3.9%, against 4.3% in our August
forecast. Export demand is the main reason for the Swedish economy’s
slower expansion in the short term. We then expect growing uncertainty to
impact consumption and investment. We have revised growth from 2.2% to
1.1% in 2012 and from 2.3% to 2.2% in 2013 (for details, see the tables on
the last page). Swedish economic policymakers are in a good position,
however, and can alleviate the slowdown through more expansive monetary
and fiscal policies if needed.
After a strong first half of 2011 the mood Confidence indicators for households and businesses
(Index)
has darkened 40
30
The effects of the rapid recovery in 2010 and 2011
20
are now fading as the Swedish economy enters a
slower phase. It is highly likely, however, that the 10
weak development outside the country, especially 0
in the neighbouring region, will further impact the -10
Swedish economy. Export demand is already -20
showing signs of a decline, and many companies -30
have begun announcing production cutbacks and -40
more cautious hiring plans.
Global concerns are affecting sentiments in the Households Businesses
Swedish economy. Confidence indicators for Sources: Nat’l Institute of Economic Research
households and companies have dropped quickly in
recent months. Considering the stock market’s Broad-based slowdown in the economy
decline and an uncertain housing market, greater
cautiousness can be expected in coming quarters. Swedish exports started losing steam in the second
As a result, we see investment and consumption quarter, when goods exports backed off their high
both growing slower than we had forecast in growth levels. Swedish goods exports, which are
August. dominated by input and capital goods, are strongly
Economic Research Department, Swedbank AB (publ), 105 34 Stockholm, +46 8-5859 1000
E-mail: ek.sekr@swedbank.se www.swedbank.se Responsible publisher: Cecilia Hermansson, +46 8-5859 7720.
Magnus Alvesson, +46 8-5859 3341, Jörgen Kennemar, +46 8-5859 7730

2. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 7 •27 October 2011
impacted by what is happening in the euro zone, Business investment
(Volume change in %, annualised)
which accounts for about 40% of exports. The
50
effects of the German economic slowdown during
the second quarter are clear. Service exports have 40
remained more stable during the crisis as well as 30
after. Royalties and licenses led to an increase in 20
the second quarter, while Swedish consumption 10
abroad exceeded consumption by foreigners in 0
Sweden. The strong Swedish krona was an -10
important reason why more Swedes decided to -20
vacation abroad. -30
-40
Exports, order bookings and forecast, Q4 2007 – Q3 2011 -50
(Diffusion index)
-60
80 05Q1 05Q3 06Q1 06Q3 07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1
Total Manuf acturing Construction
70
Services Retail Telecommunication
60 Source: Statistics Sweden
50
Industrial production has shown signs of a
40 significant slowdown in recent months. The auto
industry in particular has seen a decline, but so
30
have steel and electronics. This coincides with the
20 drop-off in order bookings. According to Statistics
07Q4 08Q2 08Q4 09Q2 09Q4 10Q2 10Q4 11Q2 Sweden’s latest corporate barometer (October), a
Export orders, purchasing managers (PMI)
Export f orecast, export managers (EMI)
growing number of companies feel that the
Sources: Swedish Trade Council and Swedbank economy is headed south. Optimism is also on the
wane in the service sector, in retail, finance and
With sentiment and short-term indicators slumping transportation.
in recent months, coupled with a weaker global
Industrial order bookings and production
economic outlook, we see Swedish export growth (Annualised monthly percent change, fixed prices)
continuing to slow in coming quarters. Export
managers expect sales to decline further, while 40
purchasing managers have reported shrinking
20
export orders in recent months. Additionally, we
expect the krona to appreciate during the forecast
0
period (2011-13), which will affect Swedish
competitiveness in export markets. We have ‐20
therefore revised our export forecast downward to
7% this year, 3.3% in 2012 and 4.1% in 2013 (see ‐40
table). Imports are slowing as well, and as a whole
we do not foresee a net contribution from falling ‐60
trade to GDP growth in the years ahead.
‐80
With falling export demand and growing uncertainty, Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11
many companies are, furthermore, likely to hesitate Industrial production Industrial order bookings
before making major investment decisions.
Source: Statistics Sweden
Business investment grew quickly in 2010 and early
2011, especially in the housing sector, before
Expectations are also playing a big role in
shrinking in the second quarter in cyclical sectors
determining how households react going forward. In
such as construction and retail. This suggests
general, they have grown increasingly concerned
weaker development going forward, and we have
about the Swedish economy, but feel their own
revised our investment forecast downward to 3.9%
financial situation is more stable. While we see the
in 2012 and 3.6% in 2013. Public investment is
labour market slowing in early 2012, unemployment
expected to rise at a faster rate, partly due to larger
will then gradually begin declining again. This
appropriations in the government budget for 2012.
means that wages will be held in check and
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3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 7 •27 October 2011
disposable household income will weaken next economies like Spain and Italy is non negligible .
year. Compared with our August forecast, the That would affect the European capital market, and
decline will be tempered by a slower increase in in turn the Swedish capital market and trade.
interest rates and lower price increases. We expect Among internal risks, a significant price decline in
the savings ratio to rise, however, and for the housing market is the biggest threat to growth.
consumption to be weaker than in our last forecast. That would primarily impact households and
Consumption growth has been stronger among consumption, but also affect the Swedish credit
Swedish households than in comparable market.
economies for quite some time, which increases the
risk of a downward adjustment. Slower growth, but room for economic
policy
Household consumption, 2007 – 2011
(Seasonally and calendar adjusted volume, 2005=100)
Against the backdrop of an increasingly gloomy
114 Sweden global outlook and spreading uncertainty in the
Swedish economy, we cut, in the Baltic Sea report
112
(October 19) our growth forecast for the period
110 USA 2011–2013. The adjustment for 2011, from 4.3% to
108 3.9%, is partly due to revised data for the first half-
EU-15 year, but also because more indicators are pointing
106
to a rapid slowdown during the second half. In 2012
104 expected the economy to begin growing again, but
102 at a significantly slower annual rate than in 2011.
Germany
The biggest revisions compared with our August
100
Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11
forecast were in household consumption and
business investment. A continued slowdown in
Source: Ecowin global growth means that the Swedish economy
Retail sales will particularly be affected by won't receive any external growth impulses in 2013,
consumer confidence. After rising strongly in the either, when we predict growth of 2.2%, largely
first half of 2011, not least through robust auto unchanged compared with our August forecast.
sales, growth slowed during the late summer and
early fall. Durable goods such as autos and other GDP trend and forecast, 2008 – 2013
capital goods are sensitive to economic (Seasonally adjusted quarterly growth, %)
3.0
fluctuations, and we expect sales to decline during 2008 2009 2011 2012 2013
the remainder of the year. 2.0
Retail sales, Jan 2007 – Aug 2011 1.0
(Annual trend)
0.0
15.0
-1.0
10.0 2010
Total
Durables -2.0 Annual rate:
5.0 2011: 3.9 %
2012: 1.1 %
-3.0 2013: 2.2 %
0.0
-4.0
-5.0
Non-durables
-5.0
08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3
-10.0
Sources: Nat’l Institute of Economic Research and Swedbank
Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11
Source: Statistics Sweden Although the Swedish economy is now likely to
weaken, macroeconomic conditions are
Despite the reduction in the growth forecast, we fundamentally stable. The financial situation of the
believe that the downward risks weigh heavier. The households is relatively strong and consumption will
biggest uncertainty is the European sovereign debt continue to contribute to growth. Also private sector
crisis and how it is managed. Despite that euro investments are expected to increase, albeit at a
zone leaders have increased their efforts to slower rate, while net-exports will remain neutral.
overcome the crisis, the risk that it will spread from
Greece and Portugal to considerably larger
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4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 7 •27 October 2011
Contribution to GDP growth, 2009 – 2013 There are also opportunities for further monetary
(Volume, %)
policy measures. Unlike in many other countries,
8.0 the Riksbank has been able to raise its benchmark
6.0 rate and therefore has room to manoeuvre to
4.0 stimulate the economy. Given an imminent
2.0 economic slowdown, we expect the repo-rate to
0.0 remain at 2% for the rest of 2011 and all of 2012.
-2.0 Underlying inflation pressures should ease slightly
-4.0 compared with our August forecast, and a slight
-6.0 appreciation in the Swedish krona will reduce
-8.0 external inflationary impulses.
2009 2010 2011f 2012f 2013f
Household consumption Public consumption
Fixed investments Inventories
Net-exports GDP
Sources: Nat’l Institute of Economic Research and Swedbank
Public sector savings are expected to produce a
surplus in 2011. Together with a relatively low Magnus Alvesson
public debt, this leaves room for stimulus measures
beyond those announced in next year’s budget bill.
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5. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 7 •27 October 2011
Key economic indicators – October 2011 1/
2009 2010 2011f 2012f 2013f
Real GDP (calendar adjusted) -5.1 5.4 3.9 1.5 2.2
Industrial production -17.9 14.6 8.9 1.8 2.5
CPI index, average -0.3 1.2 2.7 1.8 2.1
CPI, end of period 0.9 2.3 2.2 1.9 2.2
CPIF, average 2/ 1.7 2.0 1.4 1.4 1.8
CPIF, end of period 2.4 2.3 0.7 1.7 1.8
Labour force (15-74) 0.2 1.1 1.1 0.5 0.5
Unemployment rate (15-74), % of labor force 8.3 8.4 7.5 7.4 7.3
Employment (15-74) -2.1 1.0 2.1 0.6 0.6
Nominal hourly wage whole economy, average 3.4 2.5 2.5 3.0 3.1
Nominal hourly wage industry, average 3.0 2.8 2.6 3.2 3.1
Savings ratio (households), % 12.8 10.5 10.3 10.4 10.1
Real disposable income (households) 1.7 1.4 1.9 1.3 1.8
Current account balance, % of GDP 6.9 6.2 6.6 6.3 5.8
General government budget balance, % of GDP 3/ -0.9 -0.2 0.2 0.3 0.4
General government debt, % of GDP 4/ 42.7 39.7 35.3 34.4 32.0
Sources: Statistics Sweden and Swedbank.
1/ Annual percentage growth, unless otherwise indicated.
2/ CPI with fixed interest rates.
3/ As measured by general government net lending.
4/ According to the Maastricht critera.
Swedbanks GDP forecast – October 2011
Changes in volume, % 2009 2010 2011f1/ 2012f 2013f
Households' consumption expenditure -0.3 3.7 2.2 (2.5) 1.3 (1.8) 2.2 (2.2)
Government consumption expenditure 1.2 2.2 1.2 (1.3) 0.3 (0.7) 0.7 (0 8)
Gross fixed capital formation -16.0 6.6 8.0 (8.1) 3.9 (6.7) 3.6 (4.8)
private, excl. housing -18.5 4.9 5.1 (7.3) 4.1 (8.7) 4.7 (5.8)
public 3.8 4.9 7.8 (4.7) 1.6 (1.1) 1.4 (2.9)
housing -22.9 15.5 18.9 (14.3) 5.4 (5.3) 2.2 (3.2)
Change in inventories 2/ -1.6 2.1 0.4 (0.4) -0.2 (-0.5) 0.2 (0.0)
Exports, goods and services -13.2 11.0 7.0 (8.7) 3.3 (4.9) 4.1 (4.6)
Imports, goods and services -13.8 12.7 6.6 (8.0) 3.9 (5.5) 4.6 (5.2)
GDP -5.2 5.8 3.9 (4.3) 1.1 (1.8) 2.2 (2.3)
GDP, calendar adjusted -5.1 5.4 3.9 (4.3) 1.5 (2.2) 2.2 (2.3)
Domestic demand 2/ -3.0 3.6 2.8 (3.2) 1.4 (2.5) 1.9 (2.4)
Net exports 2/ -0.6 0.0 0.6 (0.8) 0.0 (0.0) 0.0 (0.0)
Sources: Statistics Sweden and Swedbank.
1/ The figures from our forecast in August 2011 are given in parentheses.
2/ Contribution to GDP growth.
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SE-105 34 Stockholm, Sweden used reliable sources and methods in the preparation of the
Phone +46-8-5859 7740 analyses reported in this publication. However, we cannot
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