The recovery in the Swedish economy is losing steam near term, but the foundation is in place for a strong upturn later in 2021. Unemployment will decline, while inflationary pressures remain subdued. But the outlook is blurry due to muddled statistics and incoherent signals from the Riksbank.
Vaccination is crucial
The Swedish economy has recovered rapidly from the dramatic fall in the spring. Large parts of the economy normalised in H2 2020, while a few sectors remain hard hit, including travel, hotels and restaurants.
Vaccination is crucial for the growth outlook. The vaccination programme is assumed to proceed according to plan without any major setbacks, which means that all Swedish adults will be vaccinated in H1 2020. When the coronavirus gradually loses its grip on society during this period, also the sectors hit hard by the crisis will start to recover.
We expect GDP to grow by some 4% in 2021 and by some 3% in 2022. Unemployment looks set to fall from a high of 9.2% during the summer of 2020 to 7.3% by end-2022.
Flooring the accelerator
Economic policy in Sweden and abroad is more accommodative than ever. The aid packages and stimulus measures implemented across the world in 2020 were of a magnitude similar to the size of the US economy, that is, almost 20% of global GDP. The stimulus measures will spill over to 2021 and support growth this year as well.
In addition, more stimulus measures will likely be implemented in the Euro area, the US and Sweden. The Swedish fiscal policy measures will amount to 3% of GDP in 2021. The central banks’ expansionary monetary policies will remain unchanged in most countries and regions during most of the forecast period.
Monetary conditions trigger dynamics, including cheap financing and surging asset prices, which boost demand and pave the way for a strong recovery. Moreover, the likely pent-up demand will help to boost growth. The flip side of the expansionary conditions is the growing indebtedness in Sweden and elsewhere, but these risks probably lie beyond our forecast period.
Near term, the recovery will slow due to the rising infection rates and the tighter restrictions in Sweden and abroad. But the slowdown in Sweden is expected to be mild. It will not lead to any persisting economic problems and thus not impede the future recovery. The situation is uncertain, and further restrictions affecting growth cannot be ruled out near term. If the slowdown proves to be more pronounced than we expect, the upturn could be even stronger longer out.
Sweden: Macroeconomic Indicators
|Real GDP (calendar adjusted), % y/y||2.1||1.4||-2.9||4.0||3.0|
|Underlying prices (CPIF), % y/y||2.1||1.7||0.5||1.6||1.0|
|Unemployment rate, %||6.3||6.8||8.4||8.2||7.4|
|Current account balance, % of GDP||2.5||4.6||6.0||4.4||5.0|
|General gov. budget balance, % of GDP||0.8||0.6||-3.2||-2.2||-0.8|
|General gov. gross debt, % of GDP||38.9||35.1||39.3||38.9||37.6|
|Monetary policy rate (end of period)||-0.50||0.00||0.00||0.00||0.00|
|EUR/SEK (end of period)||10.13||10.51||10.04||9.75||9.70|
Strong goods exports, weaker services exports
The Swedish export industry recovered quickly and goods exports returned to the same levels as before the crisis already during the autumn. The coronavirus crisis mainly affects the service industries currently, while demand for goods is high and looks set to remain so. In recent months, the order intake from export markets in some sectors has approached record-high levels, which underpins expectations of sustained high demand.
Exports of services have been hit harder and will recover more slowly than exports of goods. But with increased global demand and eased travel restrictions, we should see a marked upswing in services demand later on in 2021. For example tourism to and from Sweden should pick up again.
The economic effects of the coronavirus crisis are clearly reflected in household consumption. Already in Q3 2020, household spending on goods was back at pre-crisis levels, while the consumption of services was much lower. Due to social distancing households simply couldn’t buy certain services.
Households seem to have emerged relatively unscathed from the crisis thanks to the system of short-term layoffs and higher unemployment benefits. The low inflation level supported households’ real disposable incomes in 2020. Their savings increased, probably mainly as a result of deferred consumption. Also the increase in housing prices has lifted households’ propensity to consume. Housing prices are expected to rise further going forward, albeit at a slower pace than in 2020. See the theme article from the Nordea Economic Outlook.
The rise in stock markets also has an impact. Our calculations show that it had boosted household financial wealth by SEK 1,000bn by end-2020 relative to the year-earlier level. This increase corresponds to some 40% of household consumption. In other words, households will be ready to spend more as soon as infection rates decline and restrictions are lifted.
The situation for the crisis-hit industries will improve significantly this year.
Torbjörn Isaksson, Nordea Chief Analyst
Improved labour market, poorer statistics
Also the labour market is moving in the right direction. After rising sharply during the spring, unemployment declined in H2 2020. In December it did edge up again, and this slightly higher level will likely persist into 2021. Still, the uptrend should be modest and temporary as the number of people with layoff notices was below normal at end-2020 and the number of job vacancies increased. Employers’ hiring plans are also optimistic, reflecting the underlying strength of the economy and businesses looking beyond the current headwinds. Some sectors are even reporting difficulties in recruiting staff.
When the crisis hit, especially young people were laid off and temporary jobs were scrapped mainly at hotels, restaurants and in the travel industry. This means that the bar for reentering the labour market should be relatively low and the scope for rehiring people in these areas should be better. It also suggests that the pandemic will not have any major lasting effects on the labour market. Employment is expected to pick up again from Q2 2021 and return to pre-crisis levels in H1 2022. Unemployment, on the other hand, is now running higher than before the pandemic, but is close to the long-term levels.
In 2021, Statistics Sweden will implement changes to its labour force survey (LFS). Unfortunately, the transition process from the old to the new survey seems to be deficient, which means that the LFS data for 2021 will not be directly comparable with previous years.
Our forecasts are based on the LFS data. We have taken the changes to the LFS survey into account, and consequently our forecast shows a weaker labour market trend than it would have in the absence of these changes. In 2021 we will have to rely more on the unemployment data from the Swedish Public Employment Service and Statistics Sweden’s quarterly employment data to assess the performance of the labour market.
Volatile inflation and vague Riksbank
The basis for consumer price statistics will also change. EU national statistics agencies have decided that the unusual consumption pattern in 2020 should affect the basket of goods and services as early as in 2021. Normal practice would have been to use spending patterns from 2019. This decision will probably lead to more volatile year-on-year data, and especially the inflation data in the beginning of the year will be more difficult to decipher.
Energy prices have risen. And this year, prices of several goods and services are much higher than the very low levels recorded in the spring of 2020. The result will be higher year-on-year inflation numbers for some months in 2021. However, it will not change the current picture of modest inflationary pressures. The SEK has strengthened and the autumn pay talks resulted in modest pay rises in the coming three years. Inflation will therefore remain a challenge for the Riksbank in the long term.
The signals from the bank are also hard to interpret. In its latest reports the Riksbank has been surprisingly pessimistic. The Executive Board seems divided over the bond purchase programme, the scope for rate cuts, the significance of the SEK rate for monetary policy and the role of fiscal policy in stabilising economic fluctuations and inflation. The bank may choose to focus less on inflation, citing the pandemic and muddled inflation numbers in 2021 as the main reasons.
We expect the Riksbank to keep the repo rate unchanged at zero over the entire forecast period ending in December 2022. Also its asset purchase programme will remain intact. A rate cut later on in 2021 cannot be ruled out, though.
This risk will arise if the SEK continues to appreciate sharply, which could further dampen the already low inflation. In 2020, USD weakness was a key driver of currency market movements and this will likely also be the case in early 2021. An unchanged monetary policy line coupled with improved market sentiment boosted by a broadly based and rapid recovery of the Swedish economy should benefit demand for Swedish kronor. We expect EUR/SEK to trade at levels below 10 and USD/SEK at levels below 8 by mid-2021; these are levels that should be acceptable to the Riksbank.
This article first appeared in the Nordea Economic Outlook: The Growth Booster, published on 27 January 2021.
Torbjörn Isaksson, Nordea Chief Analyst
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