The Swedish Economy, No. 2, 24 February 2011


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The Swedish Economy No. 2, 24 February 2011. Mixed economic signals could complicate upcoming wage negotiations.

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The Swedish Economy, No. 2, 24 February 2011

  1. 1. The Swedish EconomyMonthly letter from Swedbank’s Economic Research Departmentby Magnus Alvesson No. 2 • 24 February 2011 Mixed economic signals could complicate upcoming wage negotiations • After the strong economic recovery last fall, we have seen a slightly slower expansion in recent months. The unusually cold weather probably had something to do with it, but at the same time there are signs that the rapid expansion the Swedish economy experienced in 2010 is tailing off. • Mixed economic signals, together with continued high unemployment, could complicate upcoming wage negotiations. Despite showing restraint during the crisis years, Sweden will probably have little leeway to increase wages in the years immediately ahead due to its relative competitive weakness. In addition, high unemployment among groups that haven’t yet gained a foothold in the job market would limit increases in the minimum wage. • To no ones surprise, the Riksbank raised its benchmark rate from 1.25% to 1.50% in February while revising the repo rate path upward. This means that the Riksbank expects that its benchmark rate, and interest rates in general, will have to be raised faster than before. At the same time Januarys inflation was significantly lower than forecast and together with low inflation pressure from wages points to a slower rate of increase than the repo rate path would suggest. Its fiscal strength gives Sweden the option of taking further measures to reduce the high unemployment.Continued strong dynamics – cool-down in Industry and service production as well as industrial capacity utilisation, Q1-07 – Q4-10sight (Annual change, %)The rapid rebound in both the industrial and service 20 100sectors showed signs of slowing in the last months 15 95of 2010. Industrial production fell by 2.1% 10 90(seasonally adjusted) between November and 5 85December, while service production was down 0.4% 0 80(not seasonally adjusted). The unusually harsh -5 75winter weather has certainly had an impact, but the -10 70recovery seems to be slightly losing steam anyway. -15 65Although industrial production has not returned to -20 60the levels from before the crisis, capacity utilisation -25 55is rising and increased investments will be needed if -30 50production is going to continue to grow at the same Q1-07 Q3-07 Q1-08 Q4-08 Q2-09 Q4-09 Q3-10rate. Industrial inventories also shrank during the Capacity utilisation - manuf act. (%, sa, rs)last quarter of the year, marking an end to an Manuf acturingupswing that began early last year. Services Source: Statistics Sweden. Signals from the labour market were mixed at the start of the year. Although unemployment in January Economic Research Department, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 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. 2 • 24 February 2011rose to 8.2% (7.9% seasonally adjusted), the The Swedish economic recovery was exceptionallyemployment rate was up by 3% compared with the strong during the first three quarters of 2010. Onsame period of 2010. The reason was a significant average, GDP grew by nearly 2% per quarter,increase in the labour supply. This could be nearly twice as much as other developedbecause an improved job market gives hope to economies. As mentioned in our January forecast,people who had given up looking for a job and we expect that quarterly growth slowed during thebrings them back into the ranks of the unemployed. last quarter, but that the rapid expansion in theAnother reason may be that many people saw their Swedish economy prevailed. On an annual basis,unemployment insurance run out and had to start we predict a growth rate of slightly over 7%. In manylooking for work again. other comparable economies, growth slowed at the end of last year. This was certainly due to some Labour market trends, Jan 2006 – Jan 2011 extent to the cold winter weather. It is likely that we (’000s, seasonally adjusted) will see a similar pattern for the Swedish economy.5100 10.05000 9.0 GDP growth 2010 8.0 (Quarterly growth, %, seasonally adjusted)4900 3.0 7.04800 6.0 2.5 1.9 ave 20104700 5.0 2.04600 4.0 3.0 1.5 1.04500 0.7 0.6 0.4 Employment 2.0 1.1 1.0 0.5 0.74400 Labor supply 1.0 1.0 0.4 Unemployment rate (%, sa, rs)4300 0.0 0.5 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0.0Source: Statistics Sweden (LFS). -0.5January inflation is hard to interpret. Consumerprices fell by 0.5% compared with December 2010at the same time that the annual rate continued torise, to 2.5%, against 2.3% in the previous month. Source: Ecowin.Underlying inflation (CPIF, i.e., adjusted for interestrate effects) fell to an annualised rate of 1.4%, Wage negotiations and Swedishcompared with 2.3% in December. This is partly competitivenessbecause certain product groups declined in price,e.g., clothing, air travel and, somewhat surprisingly, During collective bargaining negotiations in the crisisfood. At the same time revisions to food basket years of 2009 and 2010, wage growth slowed. Thisweights also caused changes in interest rates to helped to contain unemployment and make Swedishhave a big impact on CPI in January. businesses more competitive. A weaker Swedish krona compared with key trade partners was also a Inflation rate, Jan 2005 – Jan 2011 factor.1 As the economy has rebounded, so have (Percentage change) expectations that upcoming wage negotiations5 should compensate for the previous restraint. This4 would help household finances when interest expenses and prices rise, ensuring a decent rate of3 increase in private consumption. At the same time2 steep wage increases would weaken companies’1 competitiveness and slow job growth.0-1-2 CPI (m-o-m) CPI (Ann) CPIF (Ann)-3 Jan-05 Feb-06 Mar-07 Apr-08 May-09 Jun-10Source: Statistics Sweden. 1 Germany, Norway, Denmark, Netherlands and the UK are Swedens largest export markets. 2 (6)
  3. 3. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 2 • 24 February 2011 Rate of wage growth, entire economy, Jan 1992 – Nov 2010 Thanks to lower consumer prices, coupled with the (Annual change, %) high-priced wage agreements that still remain in8.0 effect, real wage growth has been strong in recent Wage drif t Wage increase Agreement years. As a result, household finances have7.0 improved despite rising unemployment. Combined6.0 with tax cuts during the period, real disposable income has increased, thanks to which strong5.0 consumer spending was able to mitigate the4.0 economic downturn in 2008 and 2009. Higher inflation in 2010, initially due to the weaker krona,3.0 which led to higher import prices and later to higher2.0 global commodity prices, has now impacted the real value of previously agreed wage increases. As a1.0 result, more wage earners are seeing shrinking real wages, which could hurt consumer spending and0.0 lead to higher wage demands in future collective Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 bargaining negotiations.Source: National Mediation Office. Rate of wage growth, entire economy, Jan 2005 – Nov 2010 (Annual change, %)The agreements signed in 2007, which in many 6.0cases stretch until 2010, were influenced by the Nominal wagesstrong economic growth at the time, which also led 5.0 Inf lation (CPI)to relatively high contractual wage increases during Real wagesthe financial crisis. In 2008 and 2009 contractual 4.0wages rose by an average of 3.2% and 2.8%, 3.0respectively.2 Wage drift fell to less than a halfpercentage point from nearly 2 percentage points in 2.0the 2000’s. This is due to rising unemployment and 1.0less competition for employees, but also becauseemployees have had less opportunity to change 0.0jobs. In good times this pushes total wages higher.With less wage drift, the actual average wage -1.0increase was about 4.3% in 2008 and about 3.4% in -2.02009. Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10In 2010 new agreements were signed for around 3.3 Source: Statistics Sweden and National Mediation Office.million employees. The economic crisis kept wageincreases relatively low, particularly compared with A large share of the agreements signed in 2009 andthe two previous years, but also compared with the 2010 were short in length and expire in 2011 andentire period since the 1990’s crisis. Contractual early 2012. Facing economic uncertainty, unionswage increases ended up at nearly 2% per year with were interested in retaining the option to reviselittle variation between industrial and service wages if the economy rebounded. It is estimatedsectors. Wages for workers generally increased at a that agreements for around 400 000 workers will beslightly higher rate in the agreements, 3.5% over 24 up for renegotiation in 2011, including salariedmonths, while white-collar wages rose by 2.5% industrial employees (whose agreement expires onduring the same period. Through November 2010 September 30). Negotiations for industrial workersthe average was 2.4% at an annual rate, which will also begin in 2011 (their agreement expires onincludes wage drift and the remaining effects of 31 January 2012). These comprehensiveearlier agreements. However, the rate of increase agreements traditionally set the norm for the rest ofhad fallen from 3.5% at the beginning of the year to the market, so some coordination will be expected2.0% in November. between these groups. The negotiations for salaried industrial employees beginning this spring will be2 The wage figures referred to here, which are based on important to negotiations in both 2011 and from the National Mediation Office, increasedconsiderably faster than comparable figures based on In 2012 agreements await for a total of 2.4 millionnational accounts. This may be largely because the latter workers, including a half-million retail workersdo not include bonuses or take into account the shorter (whose agreement expires on 31 March 2012) andwork hours agreed to in 2009. 3 (6)
  4. 4. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 2 • 24 February 2011over one million municipal workers (whose about 23% of Swedens goods exports (Germanyagreement expires on April 30). Economic accounts for about 10%).development in coming months, and how it is 1/interpreted, will therefore have a major impact on Hourly labour costs in industry, 2005 – 2010 (Annual change, %)wages in Sweden and as a result, on the countrys 9competitiveness and unemployment levels. Germany Netherlands Finland 8 Denmark UK Norway Wage level according to agreements and renegotiations, 2010 - 2012 7 Sweden (Index March 2010=100) 6106 5 1000 4104 3 2102 1 500 0100 -1 2005 2006 2007 2008 2009 2010 98 0 Source: National Mediation Office. mar-10 sep-10 mar-11 sep-11 mar-12 1/ First three quarters of 2010. Agreement ends (000 empl., rs) Industry - salaried Industry - workers Construction Transport Retail A rapid increase in hourly wages could be offset if Local government productivity rises faster than in competing countries.Sources: National Institute of Economic Research and NationalMediation Office. Swedish productivity climbed quickly after the financial crisis in the early 1990s, gaining over 7%When wage negotiations now begin, one of the main annually in 1994-1998, nearly twice the EU andtopics will be the competitiveness of the Swedish OECD averages. The rate was slightly lower, ateconomy relative to key export markets. 6.8%, until 2003, before falling to about 2.5% inCompetitiveness is partly determined by wages, but 2004-2009, again affected by an economic crisis.also by productivity compared with other countries. After the major economic fluctuations caused by theExchange rates also have a big impact on the prices current crisis, Swedish productivity can’t beof Swedish goods and services abroad, and on expected to grow by more than 2-3% per year underimport competition in Swedish markets. Wages more normal conditions. This leaves even less roomaffect other aspects of the economy as well. In for wage increases than in the early 2000’s.addition to household budgets, which are the Productivity in manufacturing industry, 2005 – 2009determining factor for consumer spending, wages (Annual change, %)are critical to unemployment. For many people 15.0 Germany Netherlands Finlandcurrently outside the job market, minimum wages Denmark UK Norwayare especially important. Sweden 10.0There are a number of measures of industrialwages, but many aren’t totally comparable betweencountries. Any such comparisons therefore have to 5.0be viewed cautiously. One of the most commonindicators is the hourly labour cost. In Sweden, it fell 0.0during the first three quarters of 2010 and rose byonly 1.9% on an annual basis, compared with an -5.0average of nearly 3% in 2005-2009 and slightly over4% in 2000-2004. In Germany, hourly wages haveincreased even slower, especially during the first -10.0half of the 2000’s (2.5%). Compared with other 2005 2006 2007 2008 2009competing countries, Sweden has seen lower wage Source: National Mediation Office.increases, particularly relative to neighbours such asNorway, Denmark and Finland, which account for Unit labour costs – a combination of productivity and labour costs – indicate that Sweden was slightly less 4 (6)
  5. 5. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 2 • 24 February 2011competitive, based on domestic factors, than most Real effective exchange rates, Jan 1994 – Jun 2010 (Nominal exchange rates deflated by the unit labour cost)of its main trading partners. Rapid growth was ledby rising labour costs, but this trend was broken in Norway Finland2009 when Swedish costs fell as wages dropped 135 Germany Netherlandsmore than in key export markets at the same time Sweden UKthat productivity stopped declining. The exception is 125Germany, where unit labour costs have increasedeven more slowly since the mid-2000’s, putting it in 115a strong position as the global economy recovers. 105 Unit labour cost 2000 – 2010 (Index 2005=100, trend) 95120 85 Index 1999=100115 75110 Jan-94 Oct-96 Jul-99 Apr-02 Jan-05 Oct-07105 Source: EU Commission.100 Wage negotiations will also have a direct effect on 95 job creation and unemployment. The low wage increases and layoffs during the crisis years helped 90 Denmark Finland to keep unemployment in check. Sweden’s relatively Germany Netherlands high minimum wages limit job opportunities for those 85 Sweden UK United States most in need, however. The people finding it hardest 80 to gain a foothold in the job market are often young Q1-00 Q3-01 Q1-03 Q3-04 Q1-06 Q3-07 Q1-09 Q3-10 or long-term unemployed. It would be easier forSource: OECD. them to get work if starting salaries were relatively low.The weakening of the krona made Sweden more In summary, there is a risk that collective bargainingcompetitive during the economic crisis, but this has negotiations could be difficult and protracted.changed since the currency again increased in Economic conditions are uncertain at the same timevalue last fall. Currency fluctuations clearly have an that wage earners have had to make largeimpact on the economys cost structure and, as a concessions to keep Swedish businessesresult, its competitive strength. Since the mid-1990s competitive and limit the impact of the globalreal exchange rates have trended lower, giving financial crisis. Jobs have increased for severalSweden a competitive boost relative to its key months, which is evident by the labour shortage inexport markets. This has reinforced the effects of its certain sectors. This could mean higher wages,lower unit labour costs. Given the stability of the increasing the pressure on the negotiating parties.economy, especially in fiscal terms thanks to budget On the other hand, overall unemployment remainssurpluses and shrinking government debt, there is a high, which would favour restraint with regard tochance that the krona will continue to rise in value. minimum wages. Productivity growth is likely to levelThis puts an additional limit on how much wages off after the rapid rebound at the same time that thecan increase without hurting Swedish businesses. krona will continue to rise slightly. Given the strong job recovery, however, the risks in the wage forecast in our economic report in January may have been on the upside. The economic turnaround is a challenge for economic policy As expected, the Riksbank raised the repo rate at its most recent monetary meeting from 1.25% to 1.50% at the same time that the repo rate path was increased. The assumption is that monetary policy will continue to normalise, though at a slightly higher rate than before. Two members are still in favour of 5 (6)
  6. 6. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 2 • 24 February 2011leaving rates where they were with a lower repo rate Swedens public finances continue to surprise onpath, arguing that unemployment remains high and the positive side. The budget surplus in January wasunderlying inflation pressures are low. Mixed nearly SEK 30 billion, exceeding our forecasts. Taxeconomic signals create uncertainty about the need revenues in particular are rising, but transfers tofor further increases in the repo rate. The global municipalities were also lower than expected. Witheconomy has begun to rebound, but considerable stronger finances but persistent problems in therisks still remain, especially among more developed labour market, the government has to decide how toeconomies. Underlying inflation (CPIF) surprisingly best address these problems. Underinvestment indeclined in January (which was not announced until physical and human capital is a medium-termafter the monetary decision), and it is likely that the challenge for Swedish economic policy.stronger krona will limit imported inflation. At thesame time unemployment remains high, but with Even though structural reforms haven’t gotten muchincipient signs of a labour shortage in certain attention since last year’s election, the governmentsectors, which could put pressure on wages. sold off part of Nordea in January, generating SEK 19 billion. This is another step in reducing the statesInflation, exchange rate and benchmark rate, Jan 2005 – Feb role in the economy, and further sales of state- 2011 owned assets can be expected in the years ahead. (Percentage change) As a direct consequence, government debt has6.0 160 continued to shrink and now is among the lowest in CPIF (ann)5.0 Repo rate Europe. TCW (rs) 1504.0 Magnus Alvesson 1403.02.0 1301.0 1200.0 110-1.0-2.0 100 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: EcowinSwedbank Economic Research Department Swedbank’s monthly The Swedish Economy newsletter is published as a serviceSE-105 34 Stockholm, Sweden to our customers. We believe that we have used reliable sources and methods inPhone +46-8-5859 7740 the preparation of the analyses reported in this publication. However, we guarantee the accuracy or completeness of the report and cannot be responsible for any error or omission in the underlying material or its use. ReadersLegally responsible publisher are encouraged to base any (investment) decisions on other material as well.Cecilia Hermansson, +46-8-5859 7720 Neither Swedbank nor its employees may be held responsible for losses orMagnus Alvesson, +46-8-5859 3341 damages, direct or indirect, owing to any errors or omissions in Swedbank’sJörgen Kennemar, +46-8-5859 7730 monthly The Swedish Economy newsletter. 6 (6)