The Swedish Economy No. 2, 24 February 2011. Mixed economic signals could complicate upcoming wage negotiations.

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson No. 2 • 24 February 2011
Mixed economic signals could complicate upcoming
wage negotiations
• After the strong economic recovery last fall, we have seen a slightly slower
expansion in recent months. The unusually cold weather probably had
something to do with it, but at the same time there are signs that the rapid
expansion the Swedish economy experienced in 2010 is tailing off.
• Mixed economic signals, together with continued high unemployment, could
complicate upcoming wage negotiations. Despite showing restraint during the
crisis years, Sweden will probably have little leeway to increase wages in the
years immediately ahead due to its relative competitive weakness. In
addition, high unemployment among groups that haven’t yet gained a
foothold in the job market would limit increases in the minimum wage.
• To no one's surprise, the Riksbank raised its benchmark rate from 1.25% to
1.50% in February while revising the repo rate path upward. This means that
the Riksbank expects that its benchmark rate, and interest rates in general,
will have to be raised faster than before. At the same time January's inflation
was significantly lower than forecast and together with low inflation pressure
from wages points to a slower rate of increase than the repo rate path would
suggest. Its fiscal strength gives Sweden the option of taking further
measures to reduce the high unemployment.
Continued strong dynamics – cool-down in Industry and service production as well as industrial
capacity utilisation, Q1-07 – Q4-10
sight (Annual change, %)
The rapid rebound in both the industrial and service 20 100
sectors showed signs of slowing in the last months 15 95
of 2010. Industrial production fell by 2.1% 10 90
(seasonally adjusted) between November and 5 85
December, while service production was down 0.4% 0 80
(not seasonally adjusted). The unusually harsh -5 75
winter weather has certainly had an impact, but the -10 70
recovery seems to be slightly losing steam anyway. -15 65
Although industrial production has not returned to -20 60
the levels from before the crisis, capacity utilisation -25 55
is rising and increased investments will be needed if -30 50
production is going to continue to grow at the same Q1-07 Q3-07 Q1-08 Q4-08 Q2-09 Q4-09 Q3-10
rate. Industrial inventories also shrank during the Capacity utilisation - manuf act. (%, sa, rs)
last quarter of the year, marking an end to an Manuf acturing
upswing that began early last year. Services
Source: Statistics Sweden.
Signals from the labour market were mixed at the
start of the year. Although unemployment in January
Economic Research Department, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 1000
E-mail: ek.sekr@swedbank.se www.swedbank.se. Responsible publisher: Cecilia Hermansson, +46 8-5859 7720.
Magnus Alvesson, +46 8-5859 3341, Jörgen Kennemar, +46 8-5859 7730

2. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 2 • 24 February 2011
rose to 8.2% (7.9% seasonally adjusted), the The Swedish economic recovery was exceptionally
employment rate was up by 3% compared with the strong during the first three quarters of 2010. On
same period of 2010. The reason was a significant average, GDP grew by nearly 2% per quarter,
increase in the labour supply. This could be nearly twice as much as other developed
because an improved job market gives hope to economies. As mentioned in our January forecast,
people who had given up looking for a job and we expect that quarterly growth slowed during the
brings them back into the ranks of the unemployed. last quarter, but that the rapid expansion in the
Another reason may be that many people saw their Swedish economy prevailed. On an annual basis,
unemployment insurance run out and had to start we predict a growth rate of slightly over 7%. In many
looking for work again. other comparable economies, growth slowed at the
end of last year. This was certainly due to some
Labour market trends, Jan 2006 – Jan 2011 extent to the cold winter weather. It is likely that we
(’000s, seasonally adjusted)
will see a similar pattern for the Swedish economy.
5100 10.0
5000 9.0 GDP growth 2010
8.0
(Quarterly growth, %, seasonally adjusted)
4900 3.0
7.0
4800 6.0 2.5 1.9
ave 2010
4700 5.0
2.0
4600 4.0
3.0 1.5 1.0
4500 0.7 0.6 0.4
Employment 2.0 1.1 1.0 0.5 0.7
4400 Labor supply 1.0
1.0 0.4
Unemployment rate (%, sa, rs)
4300 0.0 0.5
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
0.0
Source: Statistics Sweden (LFS).
-0.5
January inflation is hard to interpret. Consumer
prices fell by 0.5% compared with December 2010
at the same time that the annual rate continued to
rise, to 2.5%, against 2.3% in the previous month. Source: Ecowin.
Underlying inflation (CPIF, i.e., adjusted for interest
rate effects) fell to an annualised rate of 1.4%, Wage negotiations and Swedish
compared with 2.3% in December. This is partly competitiveness
because certain product groups declined in price,
e.g., clothing, air travel and, somewhat surprisingly, During collective bargaining negotiations in the crisis
food. At the same time revisions to food basket years of 2009 and 2010, wage growth slowed. This
weights also caused changes in interest rates to helped to contain unemployment and make Swedish
have a big impact on CPI in January. businesses more competitive. A weaker Swedish
krona compared with key trade partners was also a
Inflation rate, Jan 2005 – Jan 2011 factor.1 As the economy has rebounded, so have
(Percentage change) expectations that upcoming wage negotiations
5 should compensate for the previous restraint. This
4 would help household finances when interest
expenses and prices rise, ensuring a decent rate of
3
increase in private consumption. At the same time
2 steep wage increases would weaken companies’
1
competitiveness and slow job growth.
0
-1
-2 CPI (m-o-m) CPI (Ann)
CPIF (Ann)
-3
Jan-05 Feb-06 Mar-07 Apr-08 May-09 Jun-10
Source: Statistics Sweden. 1
Germany, Norway, Denmark, Netherlands and the UK
are Sweden's largest export markets.
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3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 2 • 24 February 2011
Rate of wage growth, entire economy, Jan 1992 – Nov 2010 Thanks to lower consumer prices, coupled with the
(Annual change, %)
high-priced wage agreements that still remain in
8.0 effect, real wage growth has been strong in recent
Wage drif t Wage increase Agreement years. As a result, household finances have
7.0
improved despite rising unemployment. Combined
6.0 with tax cuts during the period, real disposable
income has increased, thanks to which strong
5.0
consumer spending was able to mitigate the
4.0 economic downturn in 2008 and 2009. Higher
inflation in 2010, initially due to the weaker krona,
3.0 which led to higher import prices and later to higher
2.0
global commodity prices, has now impacted the real
value of previously agreed wage increases. As a
1.0 result, more wage earners are seeing shrinking real
wages, which could hurt consumer spending and
0.0
lead to higher wage demands in future collective
Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09
bargaining negotiations.
Source: National Mediation Office.
Rate of wage growth, entire economy, Jan 2005 – Nov 2010
(Annual change, %)
The agreements signed in 2007, which in many
6.0
cases stretch until 2010, were influenced by the Nominal wages
strong economic growth at the time, which also led 5.0 Inf lation (CPI)
to relatively high contractual wage increases during Real wages
the financial crisis. In 2008 and 2009 contractual 4.0
wages rose by an average of 3.2% and 2.8%, 3.0
respectively.2 Wage drift fell to less than a half
percentage point from nearly 2 percentage points in 2.0
the 2000’s. This is due to rising unemployment and
1.0
less competition for employees, but also because
employees have had less opportunity to change 0.0
jobs. In good times this pushes total wages higher.
With less wage drift, the actual average wage -1.0
increase was about 4.3% in 2008 and about 3.4% in
-2.0
2009.
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10
In 2010 new agreements were signed for around 3.3 Source: Statistics Sweden and National Mediation Office.
million employees. The economic crisis kept wage
increases relatively low, particularly compared with A large share of the agreements signed in 2009 and
the two previous years, but also compared with the 2010 were short in length and expire in 2011 and
entire period since the 1990’s crisis. Contractual early 2012. Facing economic uncertainty, unions
wage increases ended up at nearly 2% per year with were interested in retaining the option to revise
little variation between industrial and service wages if the economy rebounded. It is estimated
sectors. Wages for workers generally increased at a that agreements for around 400 000 workers will be
slightly higher rate in the agreements, 3.5% over 24 up for renegotiation in 2011, including salaried
months, while white-collar wages rose by 2.5% industrial employees (whose agreement expires on
during the same period. Through November 2010 September 30). Negotiations for industrial workers
the average was 2.4% at an annual rate, which will also begin in 2011 (their agreement expires on
includes wage drift and the remaining effects of 31 January 2012). These comprehensive
earlier agreements. However, the rate of increase agreements traditionally set the norm for the rest of
had fallen from 3.5% at the beginning of the year to the market, so some coordination will be expected
2.0% in November. between these groups. The negotiations for salaried
industrial employees beginning this spring will be
2
The wage figures referred to here, which are based on important to negotiations in both 2011 and 2012.
data from the National Mediation Office, increased
considerably faster than comparable figures based on In 2012 agreements await for a total of 2.4 million
national accounts. This may be largely because the latter workers, including a half-million retail workers
do not include bonuses or take into account the shorter (whose agreement expires on 31 March 2012) and
work hours agreed to in 2009.
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4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 2 • 24 February 2011
over one million municipal workers (whose about 23% of Sweden's goods exports (Germany
agreement expires on April 30). Economic accounts for about 10%).
development in coming months, and how it is 1/
interpreted, will therefore have a major impact on Hourly labour costs in industry, 2005 – 2010
(Annual change, %)
wages in Sweden and as a result, on the country's
9
competitiveness and unemployment levels.
Germany Netherlands Finland
8
Denmark UK Norway
Wage level according to agreements and renegotiations,
2010 - 2012 7 Sweden
(Index March 2010=100) 6
106
5
1000 4
104
3
2
102
1
500
0
100
-1
2005 2006 2007 2008 2009 2010
98 0 Source: National Mediation Office.
mar-10 sep-10 mar-11 sep-11 mar-12 1/ First three quarters of 2010.
Agreement ends ('000 empl., rs) Industry - salaried
Industry - workers Construction
Transport Retail A rapid increase in hourly wages could be offset if
Local government
productivity rises faster than in competing countries.
Sources: National Institute of Economic Research and National
Mediation Office. Swedish productivity climbed quickly after the
financial crisis in the early 1990s, gaining over 7%
When wage negotiations now begin, one of the main annually in 1994-1998, nearly twice the EU and
topics will be the competitiveness of the Swedish OECD averages. The rate was slightly lower, at
economy relative to key export markets. 6.8%, until 2003, before falling to about 2.5% in
Competitiveness is partly determined by wages, but 2004-2009, again affected by an economic crisis.
also by productivity compared with other countries. After the major economic fluctuations caused by the
Exchange rates also have a big impact on the prices current crisis, Swedish productivity can’t be
of Swedish goods and services abroad, and on expected to grow by more than 2-3% per year under
import competition in Swedish markets. Wages more normal conditions. This leaves even less room
affect other aspects of the economy as well. In for wage increases than in the early 2000’s.
addition to household budgets, which are the
Productivity in manufacturing industry, 2005 – 2009
determining factor for consumer spending, wages (Annual change, %)
are critical to unemployment. For many people
15.0 Germany Netherlands Finland
currently outside the job market, minimum wages
Denmark UK Norway
are especially important. Sweden
10.0
There are a number of measures of industrial
wages, but many aren’t totally comparable between
countries. Any such comparisons therefore have to 5.0
be viewed cautiously. One of the most common
indicators is the hourly labour cost. In Sweden, it fell 0.0
during the first three quarters of 2010 and rose by
only 1.9% on an annual basis, compared with an
-5.0
average of nearly 3% in 2005-2009 and slightly over
4% in 2000-2004. In Germany, hourly wages have
increased even slower, especially during the first -10.0
half of the 2000’s (2.5%). Compared with other 2005 2006 2007 2008 2009
competing countries, Sweden has seen lower wage Source: National Mediation Office.
increases, particularly relative to neighbours such as
Norway, Denmark and Finland, which account for Unit labour costs – a combination of productivity and
labour costs – indicate that Sweden was slightly less
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5. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 2 • 24 February 2011
competitive, based on domestic factors, than most Real effective exchange rates, Jan 1994 – Jun 2010
(Nominal exchange rates deflated by the unit labour cost)
of its main trading partners. Rapid growth was led
by rising labour costs, but this trend was broken in
Norway Finland
2009 when Swedish costs fell as wages dropped 135 Germany Netherlands
more than in key export markets at the same time Sweden UK
that productivity stopped declining. The exception is 125
Germany, where unit labour costs have increased
even more slowly since the mid-2000’s, putting it in 115
a strong position as the global economy recovers.
105
Unit labour cost 2000 – 2010
(Index 2005=100, trend) 95
120
85
Index 1999=100
115
75
110 Jan-94 Oct-96 Jul-99 Apr-02 Jan-05 Oct-07
105 Source: EU Commission.
100 Wage negotiations will also have a direct effect on
95
job creation and unemployment. The low wage
increases and layoffs during the crisis years helped
90 Denmark Finland to keep unemployment in check. Sweden’s relatively
Germany Netherlands high minimum wages limit job opportunities for those
85 Sweden UK
United States
most in need, however. The people finding it hardest
80 to gain a foothold in the job market are often young
Q1-00 Q3-01 Q1-03 Q3-04 Q1-06 Q3-07 Q1-09 Q3-10 or long-term unemployed. It would be easier for
Source: OECD.
them to get work if starting salaries were relatively
low.
The weakening of the krona made Sweden more
In summary, there is a risk that collective bargaining
competitive during the economic crisis, but this has
negotiations could be difficult and protracted.
changed since the currency again increased in
Economic conditions are uncertain at the same time
value last fall. Currency fluctuations clearly have an
that wage earners have had to make large
impact on the economy's cost structure and, as a
concessions to keep Swedish businesses
result, its competitive strength. Since the mid-1990s
competitive and limit the impact of the global
real exchange rates have trended lower, giving
financial crisis. Jobs have increased for several
Sweden a competitive boost relative to its key
months, which is evident by the labour shortage in
export markets. This has reinforced the effects of its
certain sectors. This could mean higher wages,
lower unit labour costs. Given the stability of the
increasing the pressure on the negotiating parties.
economy, especially in fiscal terms thanks to budget
On the other hand, overall unemployment remains
surpluses and shrinking government debt, there is a
high, which would favour restraint with regard to
chance that the krona will continue to rise in value.
minimum wages. Productivity growth is likely to level
This puts an additional limit on how much wages
off after the rapid rebound at the same time that the
can increase without hurting Swedish businesses.
krona will continue to rise slightly. Given the strong
job recovery, however, the risks in the wage
forecast in our economic report in January may
have been on the upside.
The economic turnaround is a challenge for
economic policy
As expected, the Riksbank raised the repo rate at its
most recent monetary meeting from 1.25% to 1.50%
at the same time that the repo rate path was
increased. The assumption is that monetary policy
will continue to normalise, though at a slightly higher
rate than before. Two members are still in favour of
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6. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 2 • 24 February 2011
leaving rates where they were with a lower repo rate Sweden's public finances continue to surprise on
path, arguing that unemployment remains high and the positive side. The budget surplus in January was
underlying inflation pressures are low. Mixed nearly SEK 30 billion, exceeding our forecasts. Tax
economic signals create uncertainty about the need revenues in particular are rising, but transfers to
for further increases in the repo rate. The global municipalities were also lower than expected. With
economy has begun to rebound, but considerable stronger finances but persistent problems in the
risks still remain, especially among more developed labour market, the government has to decide how to
economies. Underlying inflation (CPIF) surprisingly best address these problems. Underinvestment in
declined in January (which was not announced until physical and human capital is a medium-term
after the monetary decision), and it is likely that the challenge for Swedish economic policy.
stronger krona will limit imported inflation. At the
same time unemployment remains high, but with Even though structural reforms haven’t gotten much
incipient signs of a labour shortage in certain attention since last year’s election, the government
sectors, which could put pressure on wages. sold off part of Nordea in January, generating SEK
19 billion. This is another step in reducing the state's
Inflation, exchange rate and benchmark rate, Jan 2005 – Feb role in the economy, and further sales of state-
2011
owned assets can be expected in the years ahead.
(Percentage change)
As a direct consequence, government debt has
6.0 160 continued to shrink and now is among the lowest in
CPIF (ann)
5.0
Repo rate Europe.
TCW (rs) 150
4.0 Magnus Alvesson
140
3.0
2.0 130
1.0
120
0.0
110
-1.0
-2.0 100
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: Ecowin
Swedbank Economic Research Department Swedbank’s monthly The Swedish Economy newsletter is published as a service
SE-105 34 Stockholm, Sweden to our customers. We believe that we have used reliable sources and methods in
Phone +46-8-5859 7740 the preparation of the analyses reported in this publication. However, we cannot
ek.sekr@swedbank.se guarantee the accuracy or completeness of the report and cannot be held
www.swedbank.se responsible for any error or omission in the underlying material or its use. Readers
Legally responsible publisher are encouraged to base any (investment) decisions on other material as well.
Cecilia Hermansson, +46-8-5859 7720 Neither Swedbank nor its employees may be held responsible for losses or
Magnus Alvesson, +46-8-5859 3341 damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Jörgen Kennemar, +46-8-5859 7730 monthly The Swedish Economy newsletter.
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