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Sweden: Shaky recovery on track

We expect GDP to grow by 1.2% in 2013 and 2.5% in 2014, unchanged compared to the forecast in the February Nordic Outlook. GDP is set to increase in Q1 2013 after being unchanged the previous quarter. Labour market indicators have improved, although unemployment is rising. There are signals that employment will continue to grow slightly going forward. We expect unemployment to keep increasing due to rising labour supply. An upward revision to the jobless rate in 2010-2012 means the labour market gap is larger than earlier perceived. CPIF inflation will remain subdued and below the Riksbanks target throughout our forecast period. Three-year wage deals that have been reached for the manufacturing, trade and construction sectors including wage hikes of 2.2-2.3% per year support this assessment. Slightly more fiscal expansion in the spring budget bill. Largely in line with our expectations, the government has signalled that another SEK 3 bn in fiscal stimulus measures will be presented in the spring bill (on April 15). The total fiscal stimulus will be SEK ~25 bn (0.7% of GDP) in 2013 and we expect equally large measures for 2014. Public finances are weakening in line with our forecast, with a general government deficit slightly below 1.5% in 2013 and 2014. General government debt will increase somewhat but is still at low levels, just over 40% of GDP in 2013. The Riksbank will keep its key interest rate on hold until the end of 2014. Low inflation, rising unemployment, a stronger krona and more expansion from other central banks are downside risks, but concern over household lending will prevent another cut.

FRIDAY APRIL 12, 2013 Olle Holmgren SEB Trading Strategy +46 8 763 80 79

Key data

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

3.7 3.7 7.8 3.0 0.2

0.8 1.2 8.0 0.9 -0.5

1.2 1.2 8.3 0.2 -1.3

2.5 2.7 8.2 1.0 -1.3

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

Economic Insights

BUSINESS SENTIMENT AND PRODUCTION Manufacturing sentiment has improved, signalling low but positive growth for exports and output in early 2013. A declining purchasing managers index (PMI) in Germany indicates a risk of temporary setbacks going into Q2. The strong krona is exerting 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. The recovery is supported by hard data. Declining housing starts are putting downward pressure on the construction sector. However, there are signals of some improvement going forward according to to the National Institute of Economic Research (NIER) economic sentiment survey, and slightly rising home prices support this assessment.

Swe: GDP and economic sentiment

3 2 1 0 -1 -2 -3 01 02 03 04 05 06 07 08 09 10 11 12
% q/q (RHS) Economic sentiment (NIER)

3 2 1 0 -1 -2 -3

Merchandise exports to different regions Percentage of total merchandise exports, 2012 Germany European Union GIIPS countries France Germany Nordic countries Outside the EU United States China Japan
Source: Statistics Sweden, SEB

Sweden 57 5 5 10 23 43 6 3 1

57 9 10 6 43 8 6 1

Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET Solid household income growth and a high savings ratio are supportive of consumption. Both savings and income will be somewhat stronger compared to our February forecast. Household sentiment has recovered markedly in early 2013 and SEBs housing price indicator implies improvement also going forward. Retail trade is in a steady upward trend but car registration was weak in Q1. A low number of trading days and revised rules for subsidies to environmental cars are at least partial explanations. House prices have increased slightly in the past 3-4 months. SEBs home price indicator implies rising prices in the near term. Labour market indicators have stabilised and in some instances improved. Employment growth continues to trend gradually higher and seems to be more resilient than expected. Still, unemployment is also increasing gradually due to an increased labour supply. The unemployment rate for 2010-2012 has been revised 0.3 percentage points higher and employment almost equally lower, indicating a larger labour market gap than earlier perceived. Household income and consumption
Year-on-year percentage growth 2011 Consumption Income Savings ratio, % of disp. income 10.2 11.4 118 11.8
Source: Statistics Sweden, SEB

2012 1.5 2.5

2013 2.0 3.0

2014 2.3 2.4

2.1 3.5

Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK Inflation continues to be very subdued, with CPIF (the Consumer Price Index without interest rate changes) expected to stay around 1% y/y this year, well below the Riksbanks forecast in 2014. A stronger krona is a downside risk to this assessment. Headline CPI is expected to stay below zero in the first half of 2013 due to declining mortgage rates, but thereafter gradually rise. Negotiated wages will increase by 6.8% over the next 3 years. On average, negotiated wages will increase by 2.2% per year, rising slightly faster towards the end of the 3-year period. The wage agreements are on the low side compared to the historical average and indicate a slight downside risk to our wage forecast for 2014 (3.1%). The Riksbanks key interest rate will remain on hold throughout 2014. Inflation and capacity utilisation indicate room for more rate cuts, but concern over household lending means that the Riksbank will stand firm. Expansionary central banks in other countries, combined with a stronger krona, imply that the chances of a rate cut are larger for a rate hike in 2013. The Riksbank is expected to keep the repo rate unchanged in April but continue to signal a 20% (5 basis point) chance of a rate cut in July.