Sweden: Growth forecast largely on track

Growth forecast largely on track. The sharp decline in Q4 GDP shows that Swedish growth is slowing, but exaggerates the underlying weakness. The growth forecast has been revised upward slightly to 0.7 per cent in 2012 and 1.9 per cent in 2013 (previous forecast 0.5 per cent and 1.7 per cent for 2012/13). Signs of stabilisation in the Euro zone are supportive, although many problems remain that will affect Sweden. Growth is likely to be well below trend over the next two years. The sharp decline in Q4 GDP constitutes a downside risk. However, the outcome doesnt seem to reflect the underlying trend as sentiment indicators signal a slowdown rather than a recession. Downside risks for the household sector have decreased with rising sentiment and signs of a relief in the housing market. The labour market is slowing down but indicators point to a mixed picture. Employment has been weak in the beginning of 2012 but unemployment has so far leveled out in line with our forecast. Furthermore, short-term indictors have only declined moderately. All in all, our forecast of gradually rising unemployment from mid-2012 is largely on track. CPIF inflation is expected to rise slightly in 2012 from the present low level, partly due to rising petrol prices. Headline CPI is heading lower due to declining mortgage rates. The Riksbank is expected to continue to cut rates to 1 per cent in 2012 due to rising unemployment and low inflation. The April rate decision is likely to be a close call but we continue to expect the Riksbank to remain on hold and wait for more indications on the extent of the slowdown and where the housing market is heading. The forecast for government savings has been lowered slightly but Swedish public finances are still extremely strong in an international comparison.
Swe: GDP
10 8 6 4 2 0 -2 -4 -6 10 11 12 13
% y/y % q/q (RHS)

MONDAY 26 MARCH 2012

Olle Holmgren, SEB Trading Strategy

olle.holmgren@seb.se

+46 8 763 80 79

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5

Key data Percentage change

2010 2011 2012 2013 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

6.1 5.9 8.4 1.2 0.0

3.9 4.0 7.4 3.0 0.3

0.7 1.1 7.6 1.3 -0.5

1.9 1.9 8.1 1.0 -0.4

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

Economic Insight

GDP SLOWING BUT NOT DECREASING Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector have stabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment. Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak in January. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs also for other service sectors. Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and in the public sector. Confidence in construction has declined considerably and housing investments are predicted to decline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012 according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.

Economic Insight

HOUSEHOLD SECTOR AND THE LABOUR MARKET Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in the stock market. Car registration and retail sales are holding up well, while consumer confidence has recovered. Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was one explanation. There has been a downward revision to the household savings ratio implying that household savings almost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective. The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3 months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 per cent over the next two years but downside risks have decreased. Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast. Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment is likely to start rising from mid-2012.

Swe: House Prices, index 2005 = 100

160 150 140 130 120 110 100 90 05 06 07 08 09 10 11 160 150 140 130 120 110 100 90

Swe: Household savings ratio, % of income

15
Total

15 10 5 0 -5
Ex manatory pension savings Own financial savings

10 5 0 -5 -10

93

96

99

02

05

08

11

-10

SCB, houses Valueguard, Flats

Valueguard houses

Swe: The labour market

3-month average

9.0 8.5
Net balance

Unemployment, %

4700 4650 4600 4550 4500

Employment, 1000s (RHS)

8.0 7.5 7.0 6.5 6.0 5.5 07 08 09

10

11

12

13

4450

Economic Insight

INFLATION AND THE RIKSBANK Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiations remain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some signs of negotiation strains but we expect wage agreements to be reached with out any major strikes. The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIF inflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF ex food and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicates that the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1 per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbank will take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a stabilisation in the housing market will be more important than the lower than expected Q4 GDP.
Swe: CPI, % y/y
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10
CPIF, ex food and energy CPI CPIF

Swe: CPIF, % y/y

3.5 3.0 2.5 2.0 1.5 1.0 0.5 13 0.0

2.5 2.0 1.5 1.0 0.5 0.0

SEB Riksbank

2.5 2.0 1.5 1.0 0.5 0.0

11

12

10

11

12

13

Swe: Hourly wages, % y/y

5.0
Total economy

Swe: Capacity utilisation indicators

5.0 4.5 4.0 3.5 3.0

2 1 0 -1 -2
Riksbank, RU-indicator SEB's, indicator

2 1 0 -1 -2 -3

4.5 4.0 3.5 3.0 2.5 2.0

Corrected for historical bias (Riksbank's estimate) Business sector

2.5 2.0

1.5

01 02 03 04 05 06 07 08 09 10 11

1.5

-3

03

04

05

06

07

08

09

10

11