The Swedish economy experienced strong GDP growth in the third quarter but indicators show weakening underlying growth dynamics. Exports continue to grow but are reliant on slowing global demand while domestic demand is cautious. The labor market is cooling with rising unemployment and layoffs as collective bargaining negotiations face challenges of weak wage growth and a slowing economy. Overall the Swedish economy remains stable for now but faces risks from a weakening global economy and declining confidence.

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson No. 8 • 30 November 2011
The Swedish economy holds firm, while bracing itself for a
significant slowdown
The recent month’s economic indicators have given a surprisingly positive
picture of economic development in Sweden. This is certainly the case with
growth in the third quarter (4.6% at an annual rate), which significantly
exceeded expectations, and especially the contribution from net exports.
Domestic consumption slowed, however, and investment grew more slowly.
The labour market, furthermore, is weakening, at the same time that
collective bargaining negotiations are entering a critical stage.
Unemployment reached 7.5% in October (seasonally adjusted) and the
number of layoffs ticked up over 5 000 for the first time since 2009. With
shrinking real wages and a weakening economy there is an increased risk of
labour conflict.
Despite the worsening debt crisis in Europe and relatively slow growth in the
US, the Swedish economy has been stable. However, declining confidence
among businesses and households could by itself reduce growth going
forward. In addition, we still expect the global economy to struggle, with
negative consequences for the Swedish economy.
No obvious effects from the euro crisis just Rapid GDP growth during the third quarter means
yet that full-year growth will likely exceed our forecast
of 3.9%. The data indicate, however, that the
Despite worrying signals, the Swedish economy underlying growth dynamics are weakening.
continued to develop strongly during the fall. In the Exports are reliant on a global economy that is
last months, however, confidence indicators have clearly slowing, at the same time that cautiousness
turned lower, though this hasn’t yet been reflected among households and companies is likely to keep
in the real economy. It may be a sign that the domestic demand in check.
Swedish economy has become more resistant to GDP growth and contribution, Q1 2007 – Q3 2011
global fluctuations. On the other hand, as the (Annual % change and contribution in percentage points)
European economy weakens, however, there is a 8
growing risk that Sweden will follow suit. In addition,
6
there is a risk that declining confidence among
4
households and businesses will affect the Swedish
2
growth rate.
0
GDP growth in the third quarter was surprisingly -2
strong. The Swedish economy grew by 4.6% on an -4
annual basis, mainly driven by net exports. Exports -6
continued to grow rapidly at the same time that -8
import growth fell. That gave a boost to growth that Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11
won’t last. Domestic demand declined, however. Househ. consump. Gvt. consump. Invest.
Inventories Net exports GDP
Household consumption fell and savings rose, while
investments increased but at a slower pace. Source: Statistics Sweden
Inventory investments contributed positively,
Expansion in Swedish industry has slowed since
especially in retail, while industry inventory
the summer but is still growing at a healthy rate.
declined.
Following an annual increase of about 15% during
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. 8 • 30 November 2011
the first half-year, industrial production rose by Service production and retail sales, Jan 2006 – Oct 2011
(Index and annual % change)
about 10% during the third quarter. The rebound
after the 2008-09 financial crisis has worn off and 70.0
PMI-Services
10
Production of services
export demand and domestic orders both seem to 65.0 8
Annual change in % (cal.adj.)
be losing speed. The purchasing managers index 60.0
Index (cal.adj., s.a.)
6
(PMI) for the manufacturing sector also points to a 55.0
weaker industrial development in recent months. 4
50.0
The index, which provides a quick measure of the 2
situation for manufacturers, has fallen below 50, 45.0
0
which suggests that production is no longer 40.0
expanding. The slowdown in the PMI has eased 35.0 -2
Retail trade
slightly, but demand from important export markets 30.0 -4
such as Germany and the US will be especially Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11
important to opportunities for further growth.
Sources: Statistics Sweden and Swedbank.
Manufacturing industry: production, capacity utilisation and
purchasing managers index (PMI) Service production, which developed strongly
(Index and % change, seasonally adjusted) during the first half of 2011, also noted a slightly
120 100 slower expansion rate during the fall, though still
Industrial production
110 with growth. After having risen by nearly 6% at an
100 annual rate, growth retreated to around 4.5% in the
90 90
third quarter. This coincided with weaker retail
sales, which shrunk in September and October
Procent
80
Index
compared with last year, not least due to a rapid
70 PMI decline in auto sales and weakness in other capital
60 80
goods. This was confirmed by the purchasing
50 managers index for the service sector, which fell
Capacity utilization
40 below 50 for the first time since late 2009.
30 70
jan-05 dec-05 nov-06 okt-07 sep-08 aug-09 jul-10 jun-11 Recent export data also support the notion that the
Sources: Statistics Sweden and Swedbank. Swedish economy hasn’t yet fully felt the impact of
the global turbulence. In October the value of
Industrial investment also increased, but at a slower exports continued to rise compared with October
rate. Capacity utilisation has risen since mid-2009 2010, but at a slower rate. Detailed figures for
from levels of around 76% to nearly 90% in the third September show that wood product and
quarter of this year, which is still lower than before pharmaceutical exports were the biggest losers and
the crisis. In the face of declining economic that exports to North America in particular are
prospects, companies are not expected take on falling. Asia accounts for an increasing share of
greater commitments. In an investment survey for Swedish exports and, somewhat paradoxically,
October, they revised their investment plans exports to the EMU grew at an annual rate of 10%.
downward but still reported increases of around Manufacturing exports, especially cars and trucks,
10% in real terms for 2011. Real growth of 7% is as well as mining exports continued to grow rapidly.
expected next year. Corporate investment plans These are cyclical sectors, which means that a shift
vary greatly, however, and further revisions are not in export demand can quickly impact Swedish
unlikely. industry. In November export managers reported a
deteriorating outlook for Swedish exports, another
Investment is expected to grow the fastest in sign of a probable slowdown.
mining, minerals and textiles, while the transport
sector and wood products are reducing their
investment volumes. The construction industry,
which often reacts quickly to economic fluctuations,
is cutting its investments as early as this year and
planning for modest increases in 2012. Investments
are something companies can quickly adjust, and if
the global economy continues to worsen volumes
could be slashed even further.
2 (4)

3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 8 • 30 November 2011
Swedish trade, Jan 2000 – Oct 2011 companies consider a lack of qualified labour to be
(SEK billion)
an obstacle to expansion.
110 16
Net trade (rs) Imports Exports Labour market: Unemployment, employment and hours
14
100 worked, Jan 2006 – Oct 2011
12 (Annual % change and % of labour force)
90
10 10
80
8 8
70
6 6
60 4
4
50 2 2
40 0 0
Jan-00 Sep-01 May-03 Jan-05 Sep-06 May-08 Jan-10 Sep-11
-2
Employment (sa)
Source: Statistics Sweden -4 Unemployment rate (%, sa)
Hours worked (cal.adj., sa)
Many indicators, such as GDP and exports, show -6
that the Swedish economy has held up fairly well in Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11
the face of growing global turbulence this fall. At the Source: Statistics Sweden
same time weaker domestic demand indicates an
increased risk of a significant slowdown. In addition The weaker job market means that collective
to global developments, especially the euro crisis, bargaining negotiations, which are now entering a
domestic sentiment indicators also point to greater critical stage, will have to address increasing
uncertainty, and thus a slower growth rate going challenges. The Swedish economy has produced a
forward. rapid recovery and high growth rates, which
employees contributed to through modest collective
Confidence indicators, Jan 2006 – Nov 2011 agreements in connection with the financial crisis in
(Index) 2008-09. Together with higher inflation, this led to
60 largely negative real wage growth in 2011. This
strengthened the competitiveness of the business
40 sector, but has also meant that wages have failed
to keep pace.
20 Services
Household
Layoffs and real wage growth, Jan 2005 – Sep 2011
0 (Thousands and annual % change)
Construction
20
-20 Manufact.
Retail Notice of layof fs
15
-40 Real wages
10
-60
Jan-05 Mar-06 May-07 Jul-08 Sep-09 Nov-10
5
Source: National Institute of Economic Research
0
The labour market is cooling ahead of
-5
collective bargaining negotiations Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11
The Swedish labour market continued to lose steam Sources: Statistics Sweden, Swedish Public Employment
Service and National Mediation Office
in October. Unemployment climbed to 7.5%
(seasonally adjusted), a slight gain compared with This, coupled with a weaker job market, means that
the previous two months. Job growth fell at the the negotiating parties aren’t likely to reach an
same time that the number of hours worked was agreement before November 30, when a
unchanged. Labour demand is also showing signs commitment to industrial peace runs out. This
of weakening. In its latest economic barometer, the increases the risk of collective action and could
National Institute of Economic Research states that affect bargaining negotiations in other parts of
a growing number of manufacturers are planning to labour market. An agreement covering 2.8 million
reduce their staffing and that fewer construction employees will be renegotiated in 2011 and 2012,
3 (4)

4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 8 • 30 November 2011
and certainly isn't helped by the fact that the global
economy is deteriorating and the Swedish labour
market is weakening. At the same time household
purchasing power represents an important part of
domestic demand, and weak wage growth is
eroding disposable incomes and household
consumption.
Length of unemployment, Mar 2007 – Sep 2011
(Weeks and annual change in %)
30 40
Length of unemployment (3m MA)
25 35
20 30
Annual change in %
15
25
10 Weeks
20
5
15
0
-5 Annaul change 10
-10 5
-15 0
Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11
Source: Statistics Sweden
Moreover, long-term labour market challenges still
remain. People are unemployed longer, and during
the fall average unemployment exceeded 30
weeks. Youth unemployment remains at a high
level of around 22%, despite a slight decrease in
recent months. These problems cannot be resolved
through wage policies alone, but instead require a
combination of labour market measures and
increased efforts by the business community.
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
ek.sekr@swedbank.se the accuracy or completeness of the report and cannot be held responsible for any
www.swedbank.se error or omission in the underlying material or its use. Readers are encouraged to base
Legally responsible publisher any (investment) decisions on other material as well. Neither Swedbank nor its
Cecilia Hermansson, +46-8-5859 7720 employees may be held responsible for losses or damages, direct or indirect, owing to
Magnus Alvesson, +46-8-5859 3341 any errors or omissions in Swedbank’s monthly The Swedish Economy newsletter.
Jörgen Kennemar, +46-8-5859 7730
4 (4)