Sweden: Summer optimism has been reversed

The downward revision of second quarter GDP, combined with fading short-term growth indicators, have led us to revise our 2012 GDP forecast downward to 0.8% (from 1.3% in the August issue of Nordic Outlook). This means that our GDP forecast for 2012 is back to the level predicted in May, reversing the upward revision in August. Our forecasts for 2013 and 2014 are unchanged at 1.5% and 2.5% respectively. Slowdown but not a recession continues to be the main scenario. Slightly expansionary fiscal policy and low interest rates will sustain growth, while strong real income growth and lower mortgage rates will help household consumption. Still, GDP growth is expected to be only marginally above zero in the second half of 2012. The labour market continues to slow. Labour market indicators are slowing gradually and in many cases are now close to levels where unemployment can be expected to rise. We predict that unemployment will increase above 8% in the first half of next year. CPIF inflation will be well below the Riksbanks forecast throughout the forecast period, mainly due to lower core CPIF (ex food and energy). Lower mortgage rates are expected to push headline CPI below zero in the first half of 2013. Government finances appear to be slightly weaker than expected but remain exceptionally strong in an international comparison. Lower than expected tax revenues in 2012 indicate that the central government deficit will rise to 1% of GDP. The general government financial deficit will be less than 1.0% every year in 2012-2014. The Riksbank will cut its key interest rate in December and February to 0.75%, but stay on hold in October. Low inflation and rising unemployment are driving forces.

WEDNESDAY OCTOBER 17, 2012 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Key data

2011 2012 2013 2014 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

3.9 3.9 8.4 3.0 0.1

0.8 1.2 7.4 1.0 -0.5

1.5 1.5 7.5 0.3 -0.8

2.5 2.6 8.0 1.4 0.2

* Percentage change ** Per cent of labour force *** Per cent of GDP

Economic Insights

GDP SLOWING BUT NOT FALLING Manufacturing sentiment has declined after a summer fling, but the extent of the slowdown is still mixed, according to various indicators. Low PMI is a downside risk, while the National Institute of Economic Research survey remains more optimistic. Weak merchandise exports, but firm manufacturing output during the summer. The strong krona is putting downward pressure on exports, but the high percentage of exports to relatively strong Nordic countries and Germany is supportive. Manufacturing indicators are largely in line with Germany. Sentiment in the service and retail sectors has worsened, but is still at growth levels. Declining housing starts are putting downward pressure on the construction sector. Rising investments in utilities and infrastructure are providing some support, but construction sector confidence is at cyclical lows.
Swe: GDP and economic sentiment
Economic sentiment (NIER)

125 116 106 97 88 79 69 60

3 2 1 0

% q/q (RHS)

-1 -2

01 02 03 04 05 06 07 08 09 10 11 12

-3

Merchandise exports to different regions Percentage of total merchandise exports, 2010 Germany European Union GIIPS countries France Germany Nordic countries Outside the EU United States China Japan
Source: Statistics Sweden, SEB

Sweden 56 5 5 10 22 44 6 4 1

59 11 10 5 41 7 6 1

Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET The household sector has remained relatively firm, with rising retail sales and consumption. Unexpectedly low inflation means already strong real income growth will be even higher. Mortgage rates declining fast due to both rate cuts and lower STIBOR/mortgage bond spreads. Private consumption is expected to grow by 1.5-2.5% annually in 2012 and 2013. The housing market continues to be more resilient than expected. Prices have increased over last 3-4 months and short-term indicators remain firm. Lower mortgage rates will reduce short-term downside risks to prices even further. Lending to households is trending lower, and residential construction is declining. Employment continues to trend higher but at a decreasing pace. Unemployment is now showing signs of rising. Compared to our forecast, both job creation and unemployment have been marginally higher. Short-term indicators, such as employment plans in the NIER survey, continue to decline at a steady pace and are now at levels where unemployment can be expected to rise. We think unemployment will rise to slightly above 8% in the first half of 2013, with the upturn in unemployment coming slightly earlier than we assumed in August.
Household income and consumption
Year-on-year percentage change 2011 Consumption Income Savings ratio, % of disp. income 9.7 10.9 11.3 11.7
Source: Statistics Sweden, SEB

2012 1.5 2.8

2013 2.0 2.3

2014 2.3 2.8

2.0 3.0

4700 4650 4600 4550 4500 4450 07 08

Swe: Labour market

Employment, 1000s

9.0 8.5 8.0 7.5

Unemployment, % (RHS)

7.0 6.5 6.0

09

10

11

12

13

14

5.5

Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK Surprisingly low inflation in August and September was driven mainly by lower prices on imported goods. There was downward pressure on the CPIF forecast, which was already well below the Riksbanks estimates. Headline CPI is expected to decline below zero, driven by declining mortgage rate costs. Swedens already low resource utilisation is set to decline further. The Riksbank will cut its repo rate to 1% in December and 0.75% in February, but stay on hold in October. The low inflation rate and rising unemployment will continue to pressure the Riksbank to cut rates going into 2013. A possible renewed acceleration in household lending is an upside risk to our repo rate forecast. We expect the National Debt Office to raise its forecast for central government borrowing by SEK 7-8 bn per year to SEK 40bn in 2012 and SEK 22bn in 2013, equivalent to 1.1% and 0.6% of GDP, respectively. The total public sector deficit will be below 1.0% of GDP in 2012-2013, while we expect a small surplus in 2014. Swedish public sector finances remain extremely strong in an international perspective; debt levels will decline as a share of GDP.

Swe: Interest rate costs for own homes

3 2 1 0 -1 -2 -3 07 08 09 10 11 12 13 14 Contribution to CPI, %-points y/y 3 2 1 0 -1 -2 -3

2 1 0 -1 -2 -3 03

Swe: Capacity utilisation indicator

1.5 1.0 0.5 0.0 -0.5

Riksbank, RU-indicator

-1.0 11 12 -1.5

04

05

06

07

08

09

10

Swe: Central government borrowing requirement, SEK bn 200 100 0 -100 -200 -300 02 03 04 05 06 07 08 09 10 11 12
Rolling 12 months

200 100 0 -100 -200 -300