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Macro Update: Summer optimism in Sweden reversed

Macro Update: Summer optimism in Sweden reversed

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Published by SEB Group
A slowdown but no recession continues to be the main scenario for the Swedish economy, SEB’s economists say in a research note. 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 now expected to be only marginally above zero in the second half of 2012. Forecasts for 2013 and 2014 are unchanged at 1.5 per cent and 2.5 per cent respectively.
A slowdown but no recession continues to be the main scenario for the Swedish economy, SEB’s economists say in a research note. 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 now expected to be only marginally above zero in the second half of 2012. Forecasts for 2013 and 2014 are unchanged at 1.5 per cent and 2.5 per cent respectively.

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Categories:Business/Law, Finance
Published by: SEB Group on Oct 17, 2012
Copyright:Attribution Non-commercial

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10/17/2012

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Sweden: Summer optimism has been reversed
WEDNESDAY
OCTOBER 17, 2012
 
The downward revision of second quarter GDP, combined with fading short-term growthindicators, have led us to revise our 2012 GDP forecast downward to 0.8% (from 1.3% inthe August issue of
Nordic Outlook 
). This means that our GDP forecast for 2012 is back tothe level predicted in May, reversing the upward revision in August. Our forecasts for2013 and 2014 are unchanged at 1.5% and 2.5% respectively.
 
Slowdown but not a recession
continues to be the main scenario. Slightlyexpansionary fiscal policy and low interest rates will sustain growth, while strong realincome growth and lower mortgage rates will help household consumption. Still, GDPgrowth 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 graduallyand 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 Riksbank’s forecast
throughout the forecastperiod, mainly due to lower core CPIF (ex food and energy). Lower mortgage rates areexpected to push headline CPI below zero in the first half of 2013.
 
Government finances appear to be slightly weaker
than expected but remainexceptionally strong in an international comparison. Lower than expected tax revenues in2012 indicate that the central government deficit will rise to 1% of GDP. The generalgovernment 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%,
butstay on hold in October. Low inflation and rising unemployment are driving forces.
Olle Holmgren
SEB Trading Strategy
 
olle.holmgren@seb.se +46 8 763 80 79
Key data
 
2011 2012 2013 2014
GDP* 3.9 0.8 1.5 2.5GDP working day adjusted* 3.9 1.2 1.5 2.6Unemployment
**
8.4 7.4 7.5 8.0Inflation* 3.0 1.0 0.3 1.4Government savings*** 0.1 -0.5 -0.8 0.2
* Percentage change ** Per cent of labour force *** Per cent of GDPSource: SEB
 
 
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 Researchsurvey 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 relativelystrong 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 inutilities
 
and infrastructure are providing some support, but construction sector confidence is at cyclical lows.
121110090807060504030201 12511610697887969603210-1-2-3
Swe: GDP and economic sentiment
% q/q (RHS)Economic sentiment (NIER)
 
Merchandise exports to different regions
 
Percentage of total merchandise exports, 2010
 
Germany SwedenEuropean Union 59 56GIIPS countries 11 5France 10 5Germany - 10Nordic countries 5 22Outside the EU 41 44United States 7 6China 6 4Japan 1 1
Source: Statistics Sweden, SEB
2
 
 
 
Economic Insights
HOUSEHOLD SECTOR AND LABOUR MARKET
 
The household sector has remained relatively firm
,
 
with rising retail sales and consumption. Unexpectedly lowinflation means already strong real income growth will be even higher. Mortgage rates declining fast due to bothrate cuts and lower STIBOR/mortgage bond spreads. Private consumption is expected to grow by 1.5-2.5% annuallyin 2012 and 2013.
 
The housing market continues to be more resilient than expected.
Prices have increased over last 3-4 monthsand short-term indicators remain firm.
 
Lower mortgage rates will reduce short-term downside risks to prices evenfurther. 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 ofrising
. Compared to our forecast, both job creation and unemployment have been marginally higher. Short-termindicators, such as employment plans in the NIER survey, continue to decline at a steady pace and are now at levelswhere unemployment can be expected to rise. We think
unemployment will rise to slightly above 8% in thefirst 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 2012 2013 2014
Consumption 2.0 1.5 2.0 2.3Income 3.0 2.8 2.3 2.8Savings ratio, %of disp. income 9.7 10.9 11.3 11.7
Source: Statistics Sweden, SEB
1413121110090807 4700465046004550450044509.08.58.07.57.06.56.05.5
Swe: Labour market
Employment, 1000sUnemployment, % (RHS)
 
3
 

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