The Swedish Economy

Monthly letter from Swedbank’s Economic Research Department by Magnus Alvesson No. 6 • 22 November 2012

The outside world makes itself heard – rapid slowdown in the Swedish economy
 The Swedish economy has underperformed expectations this fall and the slowdown in the euro zone is hurting Swedish growth prospects. Domestic demand is holding up better, especially household consumption.  The labor market is resilient and employment numbers have not yet begun to drop. A rapidly growing number of layoff announcements suggests, however, that unemployment will rise this winter. Forward-looking confidence indicators point to increased pessimism, mainly in construction and manufacturing.  This implies that the economic slowdown in the Swedish economy risks becoming more pronounced than we previously expected, and that unemployment will be higher.
Unexpected weak exports lower growth prospects
Recent macroeconomic data now clearly signal that the Swedish economy has cooled significantly after a strong first half-year. The Economic Surprise Index, which fell drastically for Sweden this fall, suggests that most observers did not expect such a slide. This means that actual economic development was considerably worse than anticipated, in contrast with the summer months, when the strength of the economy was a positive surprise. The unexpected slowdown in Sweden means that we will likely see significant downward revisions of our growth forecast, in particular for 2013.
Economic Surprise Index, Jan 2011 – Nov 2012 (Diffusion index) 125

The negative impulses came mainly from abroad and were evident in the decline in exports. Furthermore, Purchasing Managers’ Index shows that new exports orders in manufacturing weaken, which suggests continued anemic external demand. Swedish companies – those dependent on export markets directly or indirectly as suppliers and those that compete with imports – also have to deal with an unexpectedly strong krona. After a sharp appreciation this summer, the Swedish currency has weakened slightly, but remains at a fairly strong level, especially considering that external demand is declining.
Export of goods, new export orders (PMI, seasonally adjusted) and krona exchange rate (trade weighted SEK index, TCW), Jan 2007 – Nov 2012
70 60 50 150 145 140 135 130 125 120 115
Goods export New orders export (PMI) SEK index (rs)

75 25 -25 -75

USA Emerg. markets EMU

40 30 20 10 0 -10

110 105 100

Sweden -125 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Source: Citibank


-30 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12

Sources: Statistics Sweden, Swedbank and Riksbank

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

The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 6 • 22 November 2012

The biggest decline has been in exports to euro zone countries, although demand from other regions also weakened in the early fall. This confirms the impression of a broad-based global economic slowdown. Moreover, exports of input and capital goods are being increasingly affected, especially exports of ferrous and nonferrous metals, vehicles and wood products. The September data pointed to a rise in export orders for investment goods, however, which is possibly a sign that the export decline has eased.

Manufacturing production and service production (Index 2005 =100, seasonally and calendar adjusted)
120 115 110 Services 105 100 95 90 Manuf acturing

Household demand limits downturn
While demand from the outside is weakening, internal demand is holding up somewhat better. Household consumption, as reflected by retail sales, seems so far fairly robust. In September retail sales rose, notably sales of durable goods, although consumables also gained. Passenger car sales turned slightly higher, but still trail last year. Through August, about 10% fewer new cars were registered compared with the same period last year. At the same time demand from businesses has decreased. Domestic manufacturing orders continue to shrink, according to Swedbank/SILF’s purchasing managers index. Lower capacity utilization and growing inventories of late suggest that the slump in domestic demand will continue.
Retail sales and manufacturing domestic orders, Jan 2005 – Oct 2012
12 10 8 6 40 4 30 2 0 -2 -4 jan-05 20 70 60

85 80 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12

Source: Statistics Sweden

Continued economic downturn increases the pressure on the labor market
The weaker economy is also raising concerns in the labor market. Many companies have recently deemed it necessary to increase the number of notice of layoffs to be prepared should demand continue to fall. The number of temporary workers is also being reduced. In addition, the public employment service (Arbetsförmedlingen) reports a declining number of available jobs.
Labor market indicators, Jan 2006 – Oct 2012
10,0 8,0 16000 6,0 Employment (ann. change in %) Unemployment (% of labor f orce) Notice of layof f (persons, rs) 14000 12000 10000 8000 6000 4000 -2,0 2000 -4,0 2006 0 2007 2008 2009 2010 2011 2012 20000 18000


4,0 2,0 0,0

10 Detaljhandeln (årl. f örä. i %, 3m) Orderingång hemmamarknaden (PMI, sr, hs) dec-05 nov-06 okt-07 sep-08 aug-09 jul-10 jun-11 maj-12 0

Sources: Statistics Sweden and Public Employment Service

Sources: Statistics Sweden and B and Swedbank

As a whole, production volumes in manufacturing and the service sector have declined, most noticeably in industry. The service sector is slightly more resilient, but also diverging. Auto sales and business services are shrinking, while computer consulting services and telecom are growing. In manufacturing, auto and timber production in particular are slowing.

At the same time underlying labor market statistics remain unexpectedly strong. Hours worked in October was largely unchanged year-on-year, while employment rose compared with September in seasonally adjusted terms. The employment ratio of 65.5% was unchanged from October 2011. The labor supply rose however at the same time, which means that the unemployment rate did not change markedly during the month; 7.7% (seasonally adjusted).

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The Swedish Economy Monthly letter from Swedbank’s Economic Research Department, continued No. 6 • 22 November 2012

Although data in recent months provide a mixed picture of economic conditions, forward-looking indicators reinforce the impression that activity will remain weak for the rest of the year. Sentiment in the construction sector has been negative since before the summer. Especially order bookings are disappointing. Regulatory changes affecting housing financing have probably made it harder for some households to enter into the housing market. Confidence has also declined in manufacturing in recent months, while the service sector and households have maintained a positive, though considerably less optimistic, view of the economy.
Sentiment indicators, Jan 2007 – Oct 2012 (Diffusion index)
60 40 20 0 -20 -40 -60 Jan-07 Nov-07 Sep-08

All in all, recent data show that the economy is starting to weaken and that we will probably see a slightly more protracted slowdown in growth than late last year, when negative growth in the fourth quarter was followed by a rapid upswing in the first half of this year. Europe's structural problems with high debt levels and budget deficits are hurting Swedish exports at the same time that uncertainty is spreading to domestic households and businesses. Magnus Alvesson

Services Manuf acturing Construction Consumer


May-10 Mar-11


Source: Ecowin

Swedbank Economic Research Department
SE-105 34 Stockholm, Sweden Phone +46-8-5859 7740 Legally responsible publisher Cecilia Hermansson, +46-8-5859 7720 Magnus Alvesson, +46-8-5859 3341 Jörgen Kennemar, +46-8-5859 7730

Swedbank’s monthly The Swedish Economy newsletter is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s monthly The Swedish Economy newsletter.

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