Summer in Sweden A review of economic events Torbjörn Isaksson Andreas Wallström 16 August 2016 1
Global drop in yields World trade has stagnated. Indicators do not suggest an improvement any time soon. BREXIT has brought down growth outlook in the UK. In August, the Bank of England cut the interest rate, extended QE and signalled that it is prepared to act again, which was stronger than expected stimulus measures. Contagion to other countries appears limited thus far. For example, the euro area continues to grow. In the US, 2Q GDP was disappointing, with growth at only 1.2%. The labour market is improving at a decent rate, however. The market is pricing in a 40% probability of a rate hike from the Fed this year. In China, GDP increased as expected by 6.7% in 2Q. The PMIs have been mixed. BREXIT and uncertain growth outlook have pushed interest rates down to new record-low levels. The oil price has at times been traded below USD 40/bbl. 2
Riksbank on vacation In July, the Riksbank left the repo rate and QE programmes unchanged. However, the rate path was cut. The inflation forecast was revised downwards for 2017. However, it is still above our forecast. The minutes show confidence in rising inflation ahead. At the same time, the Riksbank says that maximum contingency to act is maintained. The SEK weakened during the summer and is weaker than the Riksbank s forecast. We consider the weakening to be temporary. In our view, the Riksbank has completed it stimulus measures. However, further measures cannot be ruled out. A rate hike is very remote. 3
Good inflation news for the Riksbank Inflation remains volatile. Following the surprisingly low outcome in June, inflation turned out higher than expected in July. In July, the 12-month figure for CPIF was 1.4%, i.e. 0.1 ppts higher than the Riksbank s forecast and 0.3 ppts higher than our assessment. Prices of food, clothes and shoes, and foreign travel, explain the deviation from our forecast. CPIF ex. energy was 1.4% in July, which was also 0.1 ppts higher than the Riksbank s assessment. CPIF ex. energy was varied around 1.5% in the past year. The oil price has dropped in the summer, while the electricity price has been relatively high. Our inflation path is in line with the Riksbank s forecast for the remainder of the year, but lower for most of 2017. 4
GDP: The slowdown is already here In 2Q GDP rose only 0.3% q/q and 3.1% y/y. The outcome was lower than expected, and 0.4 and 0.6 ppts, respectively, below the Riksbank s forecast. Exports have lost momentum this year, and surprised on the downside in 2Q. Indicators do not suggest a turnaround in exports any time soon. Investments were also lower than expected and unchanged q/q. We consider the stagnation to be temporary. Public consumption is rising rapidly. Household consumption continues to increase, even though growth has been somewhat subdued. Unit labour costs increased slowly, +1.1% y/y, despite weak productivity. GDP growth for FY 2016 looks set to amount to around 3% (Riksbank 3.3%). Outcome Forecasts Nordea, Riksbank, Change, % y/y, if not otherwise stated. 2016 Q2 2016 Q2E 2016 Q2E Household consumption 3.0 3.1 General gov. consumption 4.5 3.7 Fixed investments 6.4 8.6 Inventories, contribution to GDP growth y/y 0.6 0.5 Exports 3.2 5.0 Imports 5.4 7.3 GDP 4.1 4.4 GDP, calendar adj. 3.1 3.5 3.7 GDP, seasonal adj. q/q 0.3 0.5 0.7 Contribution to GDP growth y/y, %-points Domestic total demand 4.8 5.1 Domestic final demand 4.1 4.5 Foreign trade -0.7-0.6 Hours worked, cal. adj. 2.4 2.4 5
Industry losing momentum Industrial production for April and May was revised down sharply, while at the same time the outcome for June was weak. Order intake to industry is subdued, indicating that the industrial sector is still struggling. The service sector performed well, however. Production for May was revised upwards, and the June outcome was decent. The revisions for April and May, and the outcome for June, are mainly included in the published GDP figures for 2Q. 6
BREXIT making its mark Swedish exports to the UK have declined in the past year.* Uncertainty about the BREXIT referendum is probably a reason. The UK has diminished in significance and is now the fifth largest export market. For example, Denmark is a more important market. Outlook for exports to the UK is bleak in the near future. Read more about the impact of BREXIT on the Swedish economy here. *In the graphs, exports of goods are expressed in current prices. This increases sensitivity to FX changes. 7
Waning sentiment Sentiment among companies and consumers has gradually deteriorated during the year. According to the National Institute of Economic Research, the confidence indicator (ESI) dropped somewhat in July. The indicator implies GDP growth of approx. 3% y/y. The confidence indicator for the total business sector and it s employment plans have gradually declined this year, even though the summer months were decent. The Riksbank s resource utilisation indicator (the RU indicator), rose further in 2Q, now indicating that resource utilisation is above normal. Note: The indicator sums up information from around 40 series in the CI barometer. 8
Retail trade should slow down Retail trade sales remained on a relatively strong trend, albeit somewhat subdued in June. In June sales increased 3.2% y/y but dropped 0.3% m/m. Trend still decent... Indicators support the prospect of more subdued growth ahead. Companies are less satisfied with the state of sales than at the beginning of the year. Consumer confidence has also declined....but lower consumer confidence......and less satisfied companies 9
Housing market cooling off According to our figures stripped of seasonal effects, apartment and house prices were largely unchanged between March and July. In Stockholm the price of apartments has largely stagnated since September 2015. The slowdown on the housing market is in line with our forecast from February in which we predicted stagnating prices ahead. The main reason is that mortgage rates have ceased to drop. Sales also slowed down in the summer, even adjusting for normal seasonal fluctuations. The number of sales dropped 15% m/m in June, and remained at that low level in July. This suggests that the amortisation requirement has taken effect, although it is too yearly yet to observe because the time series is volatile. 10
...but household leverage continues to increase sharply Household credit growth was 7.7% y/y in June, which was a reduction of 0.1 ppts from May. Mortgages increased 8.6% in the same period; that too was a decline of 0.1 ppts from May. Credit growth therefore remains elevated. As a consequence of the slowdown on the housing market, we expect credit growth to be somewhat subdued ahead. 11
Tight labour market Unemployment dropped, surprisingly, to 6.6% in June from 7.1% in May. This is the lowest level since the financial crisis struck eight years ago. Employment increased and remains on a steady and rising trend. The labour force contracted in June, which is an important reason for the major drop in unemployment in June. Indicators suggest sustained high demand for labour. Companies in industry are finding it increasingly difficult to find labour. The shortage figures rose sharply in the second quarter and are approaching the high levels of 2007. 12
Summary Global trade exhibits a weak trend. The major economies are largely growing as expected, however. The real economic effects of BREXIT are visible, but appear to be limited outside of the UK. However, interest rates remain suppressed after BREXIT. Growth in the Swedish economy slowed down in the first half of the year. Inflation outcomes are bumpy, but underlying inflation ex. energy is varying as expected around 1.5%. The SEK is weak and it does not look likely that the Riksbank will see any reason to change the focus of its monetary policy in the near future. Due to the weak SEK and record-low interest rates, monetary financial conditions are still highly expansionary. 13
Autumn goodies Unemployment (Labour Force Survey), July 25 August NIER Tendency Survey 25 August Yellen to speak at Jackson Hole 26 August Retail trade, July 29 August G20 3 September Riksbank, rate announcement 7 September ECB, rate announcement 8 September CPI, August 13 September Swedish 2Q GDP (revised) 14 September Bank of England, rate announcement 15 September Government s autumn budget 19 September Bank of Japan, rate announcement 21 September Fed, rate announcement 21 September and a little later US presidential election 8 November 14
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