The Swedish Economy No.9 - December 22, 2011


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

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The Swedish Economy No.9 - December 22, 2011

  1. 1. The Swedish EconomyMonthly letter from Swedbank’s Economic Research Departmentby Magnus Alvesson No. 9 • 22 December 2011The 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 governments 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 AUSSwedish GDP growth has been exceptionally strong 102 GERin 2011, but is now showing signs of a rapid HOLslowdown. It is not clear, however, how severe the 100 USA FRAdownturn could be. Due to industry’s dependence FIN 98on foreign markets, it is inevitable that the problems UKin Europe will affect Swedish exports. 96Manufacturing and the service sector – and thus the DEN 94labor market – will feel the pressure going forward.Swedish households have also experienced greater 92financial strains this year as a result of risingmortgage 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 Q3-11wealth owing to a bearish stock market. Source: EcowinConsequently, private consumption can no longerbe counted on to give the same boost to demand Companies are already feeling the effects of theand growth. With the turbulence in global financial weaker economy in their order books, although themarkets, confidence among businesses and signals are not altogether consistent. Since Aprilconsumers has declined, and indicators are now purchasing managers in the service sector andsuggesting that the economy will slow significantly industry have seen demand slow and stagnate. Forin 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: 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. 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 120have eased in recent months. The positive signals 100from German industry and relatively strong Total, all buildings Residential buildingsdevelopment in the US, which has grown in 80 Non-residential buildingimportance as a Swedish export market, also 60counterbalance the negative signals that have 40dominated the news this fall. 20New orders – Manufacturing and services companies, Oct. 02006 – Nov. 2011 -20(Purchasing Managers’ Index – New orders, seas. adjusted)80 -40 -6070 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1/ The last four quarters are adjusted for the average lag in60 reporting. Source: Statistics Sweden50 Corporate profits are under pressure from falling40 domestic prices, but the recently weaker krona and New ordes - Services the collective bargaining agreement signed by30 industry will offset this somewhat. The appreciation New orders - Manuf acturing of the krona (trade weighted) since early 2010 now20 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 alsoBusiness inventories, which have returned to the being compensated by lower input prices, and wagesame high levels as before the 2008-2009 crisis, increases have slowed since mid-2010. Thanks torepresent a major uncertainty when forecasting strong productivity growth, unit labor costs haveshort-term economic development. Durable goods risen more modestly. The industrial wageinventories in particular have risen for wholesalers agreement, which calls for 3.0% hikes for 14and 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 costrecent years. This is over now. With well-filled increase, given that global development won’t beinventories, the declining demand can be quickly significantly weaker. If, on the other hand, themet with existing inventory. This means a risk of industrial agreement doesnt set the standard forproduction losses, which in late 2008 led to a major other collective bargaining agreements (wages fordrop in GDP. about 1.5 million workers in the municipal and retail sectors still have to be negotiated), costs forConstruction, a highly cyclical industry, has also businesses and public authorities could rise toshowed signs of slowing activity. Housing unsustainable, which trailed during the 1990s and Costs and prices facing companiesearly 2000, have been the biggest driver of (Annual change in %)business investment in the last four quarters. Since 15the middle of the year building permits are 6declining, however, an indication that housing 10 4construction could drop going forward. After several 5 2years of government subsidies for home repairsand renovations, many households have less need 0 0for these services, because of which unemployment -5 -2among 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 2 (4)
  3. 3. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 9 • 22 December 2011In another cyclical sector, retail, sales are trending Confidence indicators have also continuedlower, driven mainly by lower spending on durable downward, though there has been some leveling offgoods. Car sales are leveling off after a strong in recent months. In its December forecast, therecovery, and purchases of furniture, for example, National Institute of Economic Research stated thatare shrinking. The increase in auto sales explains a economic confidence is fading and that conditionslarge part of the substantial rise in consumer in the Swedish economy are weak, though not asspending that drove growth in 2010 and 2011. It will bad as during the 2008-09 crisis. Lower confidencetake time before households again need to replace is especially evident in sectors strongly tied totheir cars, especially with todays growing domestic demand, like retail. This coincides withuncertainty. Although the repo rate cuts, especially lower consumer confidence and shrinking sales ofif they continue, could potentially slow borrowing capital goods. Households sense that the risk ofcosts, households are likely to spend less unemployment has risen and that mortgage costscompared with the strong trend in 2010. will remain high. This will keep pressure on consumer spending, though there are also signsRetail 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 201110 (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 -60Employment numbers remained strong this fall, but Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11the rate of increase is now slowing. The number of Source: National Institute of Economic Researchhours worked is on the decline and the labor marketis under pressure from a growing number of layoffsand slower increase in available jobs (and thus in Dry powder in Swedens policy arsenaldisposable income). Unemployment leveled off at At its most recent monetary meeting, the Riksbank7.5% (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 pathand their willingness to spend. A weaker labor downward. The reasons for the decision were notmarket will certainly impact domestic demand. obvious. 2011 was a strong year for SwedishLabor 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. Deputy10 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 doesnt 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 3 (4)
  4. 4. The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 9 • 22 December 2011corporate profit, although declining stock prices and Monetarily and fiscally, Sweden is in good positiona more cautious housing market have reduced to address the expected economic slowdown. Withcapital gains for households. For 2011 the Swedish a relatively high benchmark rate compared with theNational Financial Management is already is rest of the world and strong public finances, it haspredicting a surplus in public savings equivalent to considerable room to utilize policy measures to0.4% of GDP and a decline in public debt to about stabilize the economy, in contrast with the majority35% of GDP. of European nations. u Magnus AlvessonSwedbank Economic ResearchDepartment Swedbank’s monthly The Swedish Economy newsletter is published as a service toSE-105 34 Stockholm, Sweden our customers. We believe that we have used reliable sources and methods in thePhone +46-8-5859 7740 preparation of the analyses reported in this publication. However, we cannot the accuracy or completeness of the report and cannot be held responsible for error or omission in the underlying material or its use. Readers are encouraged to baseLegally responsible publisher any (investment) decisions on other material as well. Neither Swedbank nor itsCecilia Hermansson, +46-8-5859 7720 employees may be held responsible for losses or damages, direct or indirect, owing toMagnus Alvesson, +46-8-5859 3341 any errors or omissions in Swedbank’s monthly The Swedish Economy newsletter.Jörgen Kennemar, +46-8-5859 7730 4 (4)