The Swedish Economy No.9 - December 22, 2011: The Swedish economy faces great uncertainty in 2012 – but not all is doom and gloom

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson No. 9 • 22 December 2011
The Swedish economy faces great uncertainty in 2012 –
but not all is doom and gloom
 This fall’s growing pessimism has moderated in the last month on the heels
of slightly less negative economic signals. Short-term indicators continue to
point to a slowdown, but there were also signs it could be easing. The
domestic economy, including retail sales and housing construction, is facing
an uphill battle, and household confidence has waned. At the same time
Swedish companies are in good position and remain competitive. There are
also signs that declining confidence is now bottoming out.
 The Riksbank decided to cut its repo rate from 2.0% to 1.75%, while at the
same time lowering the repo-rate path for 2012. The growth forecast was
revised downward, but only marginally. As a result, the Riksbank differs
significantly from the more negative view of the Ministry of Finance. The
government's budget is still robust, however, and is expected to produce a
surplus in 2011. With a relatively high policy benchmark rate compared with
other countries and strong public finances, Sweden has considerable room to
utilize policy measures to stabilize its economy, in contrast with most other
European nations.
Short-term indicators are pointing to a GDP-level, Q3 2007 – Q3 2011
(GDP, fixed prices, index Q3 2007=100)
rapid economic slowdown SWE
104 NOR
AUS
Swedish GDP growth has been exceptionally strong
102 GER
in 2011, but is now showing signs of a rapid HOL
slowdown. It is not clear, however, how severe the 100
USA
FRA
downturn could be. Due to industry’s dependence FIN
98
on foreign markets, it is inevitable that the problems UK
in Europe will affect Swedish exports. 96
Manufacturing and the service sector – and thus the DEN
94
labor market – will feel the pressure going forward.
Swedish households have also experienced greater 92
financial strains this year as a result of rising
mortgage rates and debt levels, as well as shrinking 90
Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11
wealth owing to a bearish stock market. Source: Ecowin
Consequently, private consumption can no longer
be counted on to give the same boost to demand Companies are already feeling the effects of the
and growth. With the turbulence in global financial weaker economy in their order books, although the
markets, confidence among businesses and signals are not altogether consistent. Since April
consumers has declined, and indicators are now purchasing managers in the service sector and
suggesting that the economy will slow significantly industry have seen demand slow and stagnate. For
in 2012. manufacturers, export orders are declining and the
domestic market is slowing as well. Demand is
most notably declining for input goods, especially
electrical and metal goods. The negative signals
were offset by stable demand for investment goods
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. 9 • 22 December 2011
1/
early in the fall, however. In addition, the slowdown Building permits granted, 2000 – 2011
(Annual change in %, quarters)
in purchasing managers’ order bookings seems to
120
have eased in recent months. The positive signals
100
from German industry and relatively strong Total, all buildings
Residential buildings
development in the US, which has grown in 80
Non-residential building
importance as a Swedish export market, also 60
counterbalance the negative signals that have 40
dominated the news this fall. 20
New orders – Manufacturing and services companies, Oct. 0
2006 – Nov. 2011 -20
(Purchasing Managers’ Index – New orders, seas. adjusted)
80 -40
-60
70 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1/
The last four quarters are adjusted for the average lag in
60 reporting.
Source: Statistics Sweden
50
Corporate profits are under pressure from falling
40 domestic prices, but the recently weaker krona and
New ordes - Services
the collective bargaining agreement signed by
30
industry will offset this somewhat. The appreciation
New orders - Manuf acturing
of the krona (trade weighted) since early 2010 now
20
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11
seems to have ended, and since mid-2011 the
Swedish currency has dropped, especially against
Source: Swedbank
the US dollar. Growing price pressures are also
Business inventories, which have returned to the being compensated by lower input prices, and wage
same high levels as before the 2008-2009 crisis, increases have slowed since mid-2010. Thanks to
represent a major uncertainty when forecasting strong productivity growth, unit labor costs have
short-term economic development. Durable goods risen more modestly. The industrial wage
inventories in particular have risen for wholesalers agreement, which calls for 3.0% hikes for 14
and retailers. The need to restore inventory levels months (corresponding to 2.6% on an annual basis)
has been a significant contributor to rising growth in is also considered consistent with a moderate cost
recent years. This is over now. With well-filled increase, given that global development won’t be
inventories, the declining demand can be quickly significantly weaker. If, on the other hand, the
met with existing inventory. This means a risk of industrial agreement doesn't set the standard for
production losses, which in late 2008 led to a major other collective bargaining agreements (wages for
drop in GDP. about 1.5 million workers in the municipal and retail
sectors still have to be negotiated), costs for
Construction, a highly cyclical industry, has also businesses and public authorities could rise to
showed signs of slowing activity. Housing unsustainable levels.
investments, which trailed during the 1990s and
Costs and prices facing companies
early 2000, have been the biggest driver of (Annual change in %)
business investment in the last four quarters. Since
15
the middle of the year building permits are 6
declining, however, an indication that housing 10
4
construction could drop going forward. After several 5
2
years of government subsidies for home repairs
and renovations, many households have less need 0 0
for these services, because of which unemployment -5
-2
among construction workers could rise. -4
-10
Exchange rate index (trade-weighted) -6
-15 Prices- intermediate goods
Wages (rs) -8
Prices - home market
-20 -10
Jan-01 May-02 Sep-03 Jan-05 May-06 Sep-07 Jan-09 May-10 Sep-11
Source: Statistics Sweden
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3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 9 • 22 December 2011
In another cyclical sector, retail, sales are trending Confidence indicators have also continued
lower, driven mainly by lower spending on durable downward, though there has been some leveling off
goods. Car sales are leveling off after a strong in recent months. In its December forecast, the
recovery, and purchases of furniture, for example, National Institute of Economic Research stated that
are shrinking. The increase in auto sales explains a economic confidence is fading and that conditions
large part of the substantial rise in consumer in the Swedish economy are weak, though not as
spending that drove growth in 2010 and 2011. It will bad as during the 2008-09 crisis. Lower confidence
take time before households again need to replace is especially evident in sectors strongly tied to
their cars, especially with today's growing domestic demand, like retail. This coincides with
uncertainty. Although the repo rate cuts, especially lower consumer confidence and shrinking sales of
if they continue, could potentially slow borrowing capital goods. Households sense that the risk of
costs, households are likely to spend less unemployment has risen and that mortgage costs
compared with the strong trend in 2010. will remain high. This will keep pressure on
consumer spending, though there are also signs
Retail trade, Jan 2007 – Oct 2011 that the rapid slowdown in future confidence may
(Sales volume, annualized change in trend, %)
be easing.
15
Economic tendency indicators, Jan 2005 – Dec 2011
10 (Index, sa)
60
5
40
0
20
-5 Total retail 0
Non-durables
Durables -20
-10
Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Services Construction
-40
Manuf act. Retail
Source: Statistics Sweden Household
-60
Employment numbers remained strong this fall, but Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11
the rate of increase is now slowing. The number of Source: National Institute of Economic Research
hours worked is on the decline and the labor market
is under pressure from a growing number of layoffs
and slower increase in available jobs (and thus in Dry powder in Sweden's policy arsenal
disposable income). Unemployment leveled off at
At its most recent monetary meeting, the Riksbank
7.5% (seasonally adjusted) in November. The risk
decided to cut the repo rate from 2.0% to 1.75%
of unemployment weighs heavily on households
and at the same time revise the repo-rate path
and their willingness to spend. A weaker labor
downward. The reasons for the decision were not
market will certainly impact domestic demand.
obvious. 2011 was a strong year for Swedish
Labor market developments, Jan 2001 – Nov 2011 growth, at the same time that economic indicators
(Annual change in % unless otherwise noted) clearly pointed to weaker future growth. Deputy
10 80 Riksbank Governors Karolina Ekholm and Lars EO
Unemployment
(% lab. f orce, sa) Svensson voted against the resolution and wanted
8 60
a larger rate cut and a lower repo-rate path. In
6 40 connection with the decision, the Riksbank also
Employment (sa) lowered its growth forecast for the Swedish
4 20
economy for 2012 to 1.3% from 1.5%, showing that
2 0 it doesn't share the same fears of a major financial
meltdown in Europe with substantially negative
0 -20
growth in the euro zone and Sweden next year.
-2 -40
New vacancies (rs) The Swedish government has maintained its fiscal
-4 -60
jan-01 jun-02 nov-03 apr-05 sep-06 f eb-08 jul-09 jan-11
strength in 2011. Because of the rapid improvement
in the labor market, increasing work-related taxes
Sources: Statistics Sweden and the Swedish Public have compensated for declining consumption taxes.
Employment Service
Capital taxes have risen as well, due to higher
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4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 9 • 22 December 2011
corporate profit, although declining stock prices and Monetarily and fiscally, Sweden is in good position
a more cautious housing market have reduced to address the expected economic slowdown. With
capital gains for households. For 2011 the Swedish a relatively high benchmark rate compared with the
National Financial Management is already is rest of the world and strong public finances, it has
predicting a surplus in public savings equivalent to considerable room to utilize policy measures to
0.4% of GDP and a decline in public debt to about stabilize the economy, in contrast with the majority
35% of GDP. of European nations.
u 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
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Jörgen Kennemar, +46-8-5859 7730
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