The Swedish Economy No.1 - February 21, 2012 : Possible easing of the economic slowdown, but the EU is warning of imbalances in the Swedish economy

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson No. 1 • 21 February 2012
Possible easing of the economic slowdown, but the EU is
warning of imbalances in the Swedish economy
 Economic data in recent months point to continued weakness in the Swedish
economy, but also that the decline may have halted. The export slowdown late
last year probably means that growth was negative in the fourth quarter. At the
same time domestic demand appears to have been stronger than expected and
household confidence remains stable. This could help to offset weaker global
conditions. Against the backdrop of the weak indicators late last year, the
Riksbank cut the repo rate to 1.5% and signalled that it intends to stay at this
level until the middle of next year.
 Sweden missed four of ten criteria considered critical to macroeconomic
stability. Within the framework of its crisis management, the EU reached
agreement last year on a reform package to strengthen economic governance
(the so-called Six-Pack). This includes analysing the macroeconomic
imbalances in member countries.
 The Swedish economy is facing imbalances both internally and externally,
according to the EU Commission. Domestically, the biggest risks are high
housing prices and private debt ratios. This coincides with several years of rapid
credit expansion. Externally, Sweden has lost export shares in the global
market, which is a sign that it has failed to keep pace competitively. The
conclusions will be followed by detailed analyses and recommendations from
the commission.
Economic signals point sideways Institute of Economic Research’s corporate
barometer confirmed the relatively weak growth in
After a rapid and deep economic decline at the end export orders at the beginning of the year.
of last year, there are now signs that the Swedish
Purchasing Managers’ Index, for the manufacturing and
economy is bottoming out. The purchasing
services sectors, Jan 2006 – Jan 2012
managers’ index for both industry and the service (Net balance, seasonally adjusted)
sector has surpassed the 50 mark. This is 75 Manuf acturing - New orders Services - New orders
reinforced by the fact that order bookings, 70 Manuf acturing Services
especially from the domestic market, and order 65
backlogs have stabilised in the last month, which
60
suggests that manufacturing and service activity are
55
no longer slowing.
50
This follows continued export weakness in 45
December. Since imports have not shrunk to the 40
same extent, net exports are expected to have 35
dragged down total GDP growth in the fourth 30
quarter. With the continued global economic
25
uncertainty, especially in Europe, exports are likely 2007 2008 2009 2010 2011 2012
to remain sluggish for some time. Swedbank’s Sources: Swedbank and SILF.
purchasing managers index and the National
Economic Research Department, Swedbank AB (publ), 105 34 Stockholm, +46 8-5859 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. 1 • 21 February 2012
Instead it appears that growth impulses will come 2.8% from December 2010. This may be a
from the domestic economy. Household confidence reflection of the hesitation on the part of employers
indicators turned higher in January, and Swedes to hire given the uncertain economic outlook, which
have the highest consumer confidence in Europe. is confirmed by the restrained employment plans
They seem especially confident in their personal suggested by the purchasing managers’ index and
finances (micro index), which suggests that the National Institute of Economic Research’s
consumption could be slightly stronger going survey. Reports of higher layoffs by the national
forward. Consumer confidence still remains below employment service also point to a slowdown in the
the historical average, however, so we do not labour market.
expect too rapid a rebound in spending.
The increase in household borrowing continued to
Households’ confidence indicator, Jan 2006 – Jan 2012 slow in December. Mortgages, which account for
(Net balance, seasonally adjusted)
the large share, grew even more slowly, probably
60
Households' conf idence indicator as a result of the weaker housing market. The
40
Macroindex share of variable-rate mortgages was 51%, down
Microindex
10 percentage points from December 2010, which
20 shows that households are increasingly hedging
0 against rising interest expenses. Commercial
lending by banks continued to rise.
-20
Credit expansion, Jan 2005 – Dec 2011
-40 (Annual change in percent)
20
-60 Non-f inancial companies
Households
-80 15
2005 2006 2007 2008 2009 2010 2011 2012
Source: National Institute of Economic Research. 10
Retail sales recovered slightly at the end of last 5
year after a weak autumn. Sales of consumables
grew, while durables such as cars remained 0
sluggish. Industrial production also surprised
-5
strongly in December after declining growth
throughout 2011. A slightly lower than expected -10
production level in December is providing positive 2005 2006 2007 2008 2009 2010 2011
momentum in the first months of 2012. Source: SCB.
Production and retail sales, Jan 2008 – Dec 2011 Against the backdrop of weaker economic
(Annual change in percent, volume) development late last year, the Riksbank cut the
25 repo rate from 1.75% to 1.5% at its February
Retail sales
20 meeting. At the same time its growth forecast was
Industrial production
15 revised downward for 2012 from 1.3% to 0.7%, i.e.,
Services production
10 a considerably gloomier picture than presented in
5 December. Exports in particular were weaker than
0 expected. The repo rate path was also revised
-5 downward and the Riksbank is now saying that its
-10 benchmark rate will remain unchanged until the
-15 second quarter of 2013.
-20
-25
Although the Riksbank’s macroeconomic forecast is
jan-08 jul-08 jan-09 jul-09 jan-10 jul-10 jan-11 jul-11 now closer to our own (Swedbank Economic
Source: SCB. Outlook, 24 January), there are strong indications
that the benchmark rate will be cut further. A
After improving last autumn, the labour market, protracted economic decline in Europe will put
which often trails the rest of the economy, has pressure on Swedish exports at the same time that
flattened out. Unemployment was 7.4% (seasonally unemployment continues to rise and resource
adjusted) in December, unchanged from November. utilisation in the economy remains low. In addition,
The increase in the workforce also levelled off. inflation pressures are limited, and the inflation
However, the number of hours worked rose by target is not at risk during the current and next year.
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3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 1 • 21 February 2012
This indicates that the benchmark rate will continue Household debt is high in Sweden and has
to fall during the year. especially increased since the early 2000’s.
EU Commission warns of imbalances Private sector debt ratios, 2001-2010
(Percent of GDP)
As part of the extended fiscal cooperation within the 300 Companies
EU, the EU Commission published its first annual Companies (excl. intra-company loans)
analysis of macroeconomic imbalances in member 250 Households
countries. Sweden exceeded the limits on four out
of a total of ten criteria. As a result, the commission 200
160%
will follow up with more detailed analyses of the
150
Swedish economy in these areas.
EU-commission’s macroeconomic balance conditions for 100
Sweden
Condition 50
fulfilled
0
2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Internal imbalances
Sources: EU-commission and SCB.
Housing prices No
Private sector credit flow Yes High private sector debt ratios are a result of strong
Private sector credit No credit growth during the 2000’s. During two years,
Public sector credit Yes 2007 and 2008, it exceeded the 15% threshold
Unemployment rate Yes recommended by the commission. Lending also
External imbalances includes flows between companies, which may
have contributed to the high growth rate. The credit
Current account No
expansion tailed off in 2009 and 2010, but data for
Net International Investment Position Yes
2011 indicate that business and household debt
Real Effective Exchange Rate Yes had again risen. There was a notable increase in
Export market shares No bank loans to businesses, by nearly 6% in nominal
Unit labour cost Yes terms, after having shrunk the two previous years.
Households increased their borrowing by slightly
Source: EU-commission over 7% at an annual rate, only marginally higher
than in 2010.
It is primarily in the domestic economy that
Sweden is considered to have imbalances that Housing prices are also included in the
could lead to macroeconomic risks. Private sector commission's analysis, since economic and
debt in Sweden has exceeded the commission’s financial crises often coincide with major
limit of 160% of GDP every year between 2001 and fluctuations in housing. Falling housing prices can
2010. The commission argues that high debt in the affect household consumption through the wealth
private sector increases the risk that the impact of a effect, and also investments in the construction
recession will be more severe when businesses sector. In addition, there are close ties between the
and households are forced to adjust their balance real estate market and the financial sector, where
sheets at the same time that demand declines. change is often mutually reinforcing. High housing
prices fuel a rapid credit expansion, which in turn
In Sweden, the debate has mainly focused on the
reinforces the price increases – a dynamic that
vulnerability of households because of their debt,
played a prominent role in the early 2000’s. The
but the EU Commission’s data show that Swedish
opposite was true during the latter part of the same
companies are also highly indebted compared with
decade in much of the West.
other EU countries. The data also include intra-
company loans, however, which probably means
that some debts are being double counted, giving
Swedish companies, which are often multinational,
unreasonably high debt levels. On the other hand,
financial companies are not included, which in
Sweden's case would probably increase the private
debt compared with many other countries.
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4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 1 • 21 February 2012
House prices and credit expansion, 2001 - 2010 In Sweden's case, the EU Commission has noted
(Annual percentage change in real house prices; credit as a
that the construction sector has been under-
share of GDP)
investing for a number of years. This may be due to
25.0
an overly regulated housing market and impacts the
House prices
20.0 Credit expansion
labour market as well as growth in the medium
15% term. At the same time the commission recognizes
15.0
that developed economies with an aging population
10.0 should maintain a foreign trade surplus, while
6% economies in a faster growth phase should attract
5.0 capital for investments and, thus, can “live” with
0.0 current account deficits.
-5.0 The competitiveness development in Sweden has
-10.0
been mixed. The real effective exchange rate
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (weighted by export shares and deflated by the
Source: EU-commission. consumer price index) has fallen every year except
2003-2005. This is an effect of the depreciation of
The Swedish housing market has managed fairly the krona and that inflation has been lower than in
well in recent years despite that annual price competitor countries. Goods and services produced
increases (real, deflated by consumer price in Sweden have become less expensive, which
increases) have exceeded the EU Commission's benefits exports, but also helps them compete
critical value in five of the last ten years. Real price better against imports.
increases in 2010 were also “unbalanced”,
Competitiveness in Sweden, 2001-2010
according to the commission. As a result, it will (Change in percent, weighted real exchange rate, and three year
analyse the Swedish housing market in more detail, average of unit labour cost)
adding further to the hotly debated topic of housing 15.0
12%
prices in Sweden (see not least the Riksbank’s
study of the market). Preliminary data indicate, 10.0
11%
however, that the trend turned lower in 2011. 5.0
According to the commission, real housing prices
fell by 0.8% on an annual basis during the third 0.0
quarter. Unit labour cost (nominal)
-5.0
Real Ef f ective Exchange Rate
For the other two indicators of domestic -10.0 (REER) -11%
macroeconomic balance, public debt and
unemployment, the Swedish economy falls well -15.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
within the thresholds defined by the commission.
Source: EU-commission.
The critical value for public debt aligns with the 60%
of GDP stipulated in the Maastricht Treaty. The On the other hand, unit labour cost developments
labour market is considered balanced if average have been less than favourable. Labour costs have
unemployment over a three-year period does not outpaced productivity and eventually could erode
exceed 10%. This is politically controversial, since Swedish competitiveness. The increase in Sweden
many feel that an unemployment level of 7-8% is an exceeded the EU Commission’s threshold value for
unacceptable mismanagement of resources that in non-EMU members only in 2009, however. The
itself could lead to imbalances. threshold value for non-EMU members is higher
(12% vs. 9%), since many of them have undergone
The Swedish economy has managed better with
trade liberalisation, which has led to faster
respect to external imbalances. The current
adjustment in wage levels. This does not apply to
account surplus has remained stable throughout the
Sweden, because of which Swedish wage growth
period and during the last six years has exceeded
should also be judged against the lower level.
6% of GDP, the EU Commission’s upper limit.
Although the Swedish economy would have also
Although it may seem paradoxical that there is an
managed well against the lower limit, the trend in
upper limit to how high exports should be compared
recent years shows that its competitive advantage
with imports, a large current account surplus could
could fall back unless productivity keeps pace with
be a sign that the investment climate in the
wage growth.
economy isn't favourable, since “surplus savings”
are going to other countries.
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5. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 1 • 21 February 2012
At the same time Sweden has lost export market As a whole, the EU Commission's analysis shows
shares. Between 2001 and 2010 its market share that despite a relatively fast recovery after the
shrunk on a global basis for much of the period, financial crisis and strong public finances, the
exceeding the EU Commission's threshold value of Swedish economy still faces imbalances that could
-6% for eight of the ten years. The export market cause a macroeconomic crisis going forward. In
share complements the competitiveness analysis. many respects these imbalances are interrelated. In
Despite that the real exchange rate and unit labour the domestic economy, rising housing prices have
cost have largely remained within a satisfactory facilitated a major credit expansion, which in turn
range, the loss of export market share could be a has led to a further rise in housing prices and
sign that exports are not growing in new, rapidly household debt. Corporate debt has also increased,
emerging product areas or in new markets. Another but is likely to be revised downward when intra-
reason could be that the high level of production company loans are consolidated.
outsourcing to other countries is leading to lower
export market share, but that revenue from service The analysis of external imbalances points in
exports instead are increasing. different directions. The current account surplus
indicates strong exports, but also that the
Export Market Shares and export volume, 2001-2010 investment climate and growth dynamics in the
(Average five year change in percent)
Swedish economy are weak. Competitively,
10.0
Sweden has benefitted from a weaker krona, but
been hurt by labour costs and slow productivity
5.0
growth. Despite growing export volumes, this may
have been why Sweden has had a harder time
0.0
-6% competing in emerging markets and thereby lost its
-5.0
global trade position.
-10.0
The fact that Sweden exceeds the threshold values
Export Market Shares
in four of ten areas means that the EU Commission
Export Volume
-15.0
will conduct a detailed analysis, which is likely to
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 tone down the risks (e.g., corporate debt), but could
Sources: EU-commission and SCB. also provide valuable insight on macroeconomic
threats and the choice of reform priorities.
Magnus Alvesson
Swedbank Economic Research
Department Swedbank’s monthly The Swedish Economy newsletter is published as a service to
SE-105 34 Stockholm, Sweden our customers. We believe that we have used reliable sources and methods in the
Phone +46-8-5859 7740 preparation of the analyses reported in this publication. However, we cannot guarantee
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