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Swedish economic outlook: Carpe diem

Swedish economic outlook: Carpe diem

Households are longing to return to normal. Consequently, domestic demand, together with already strong exports, will be the key driver of growth. The scene is thus set for strong GDP growth and increasing labour shortages. Meanwhile, inflation will remain below the 2% target. Much indicates that the Riksbank will maintain its current monetary policy stance.

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Growth boom

Nordea Economic Outlook May 2021 front cover

Despite a third wave of coronavirus, the recovery of the Swedish economy in general and the labour market in particular has continued this year. This shows that households and businesses have learned to live with COVID-19 and illustrates the growth potential once infection rates decline and the restrictions are lifted.

The dual trends in the economy intensified at the beginning of the year. Already in H2 2020, the situation normalised in most parts of the manufacturing sector. But certain services sectors such as culture, entertainment, hotels, restaurants and to some extent travel are still struggling. However, these crisis-hit sectors only account for 3.5% of the economy.

Vaccination of the population is critical for the growth outlook but is assumed to progress without major setbacks. The rollout of vaccines is ongoing, and a large part of the adult population will likely be vaccinated during the summer. Moreover, it is assumed that new variants of the virus will not cause the pandemic to escalate again.

When the pandemic soon loses its grip on society, GDP growth will take off and also spread to the crisis-hit sectors.

Find out more about the Nordea Economic Outlook: Unrestricted Growth.

Seize the day

The pandemic has taught us that life is fragile. Households are now longing to return to normal as soon as possible and perhaps more than ever for a chance to enjoy life’s possibilities. And they sure have the financial means to do so. Households have seldom enjoyed such a favourable financial situation as they do now. Last year, savings reached an all-time high as households were largely prevented from using their incomes to consume services. Thus, they have savings to spend once circumstances allow them to do so. Meanwhile, the rising stock markets have lifted households’ financial wealth to new all-time highs, and credit growth is approaching record levels.

So, even if households spend only part of their available resources, the scene is set for very high consumption growth going forward. The flip side of the current situation is the growing indebtedness, but the risks posed by this trend mainly lie beyond our forecast horizon.

Sweden: Macroeconomic indicators

2018 2019 2020E 2021E 2022E
Real GDP (calendar adjusted), % y/y 2.1 1.4 -3.1 4.5 3.0
Underlying prices (CPIF), % y/y 2.1 1.7 0.5 1.6 1.2
Unemployment (SPES), % 7.0 7.0 8.5 8.0 7.0
Current account balance, % of GDP 2.5 5.1 5.4 5.5 5.1
General gov. budget balance, % of GDP 0.8 0.6 -3.1 -2.4 -0.4
General gov. gross debt, % of GDP 38.9 35.0 39.9 38.3 35.6
Monetary policy rate (end of period) -0.50 -0.25 0.00 0.00 0.00
EUR/SEK (end of period) 10.13 10.51 10.04 10.30 9.70
Charts showing: A) Strong Swedish GDP growth and B) Households’ savings record high

Red-hot housing market

Another factor suggesting a surge in consumption is the housing market. Rising housing prices tend to underpin households’ propensity to consume. And the housing market is hot. The prospect of low interest rates for a long time as well as the scrapping of interest on deferred gains of up to SEK 3m and changed preferences as a result of the pandemic have sent prices sky high. But the uptrend should start to level off after the summer. Still, housing prices on average are expected to be 14% higher in 2021 than in 2020.

Broad-based boost to domestic economy

In light of the red-hot housing market, we expect residential construction activity to remain at a relatively high level. We also foresee a pick-up in business investment in the services sector over the forecast period. And with the government’s expansionary fiscal policy, which results in a budget deficit of some 2.5% of GDP this year, government consumption and investment are increasing. Still, public sector debt (Maastricht) will peak at around 40% of GDP.

Exporters struggle to keep up

The increase in global demand during the autumn was so strong that it created shortages of certain input goods. As a result, industrial production and goods exports could lose some momentum during the spring. The problems should mainly be temporary and, to begin with, mostly affect production in the automotive industry, which accounts for 17% of the manufacturing sector.

But 2021 will overall be characterised by a strong trend in exports. Industrial companies rush to expand production capacity to meet the high demand. Already in Q4 2020, investment in the manufacturing industry approached record-high levels, and we expect the expansion of production capacity to continue this year.

Quite surprisingly, exports of services rose towards the end of 2020. The uptrend looks set to continue even though tourism in and out of Sweden could still be constrained by restrictions on travels, especially to countries outside Europe, during most of this year.

But there’s a limit to everything. The normalisation of energy prices, pick-up in longer bond yields and steps to tighten policies in some countries will likely slow down the global upturn and thus Swedish export growth next year.

Sharp increase in employment and labour supply

The increased domestic production has already boosted the labour market. Short-term unemployment is now below the pre-crisis level. Companies’ optimistic hiring plans and a growing number of vacancies at the job centres reflect high labour demand. Against this backdrop, long-term unemployment should also decline, albeit at a slower pace.

Labour market inflows have also increased markedly. The increase is positive in most respects but will dampen the decline in unemployment. We expect unemployment to drop quickly to below 8% over the summer and then to gradually decline to below 7% by end-2022. Read more about the Swedish labour market in the Sweden theme article from the Nordea Economic Outlook: Unrestricted Growth.

Households have seldom enjoyed such a favourable financial situation as they do now.

Torbjörn Isaksson, Nordea Chief Analyst

Charts showing: A) Swedish Employment set to rise and B) Both upside and downside risks to inflation

Inflation to normalise below target

Labour shortages are already rising, and the situation is likely to worsen in the autumn. The collective bargaining agreement effective until the spring of 2023 includes annual pay rises of a modest 2%. But the tighter labour market will boost wage drift (pay rises in addition to those centrally agreed). Pay rises overall thus look set to rise from 2.0% in 2020 to 2.5% in 2022.

Despite this increase, pay rises will remain below the 3.3% average of the past 25 years. At the same time, the SEK has strengthened. In April this year, the trade-weighted exchange rate of the SEK was 7.5% stronger than in the same period last year, and this will have a significant bearing on inflation. Imported goods and services account for almost a third of household consumption. Inflation, as measured by the CPIF, will consequently decline over the summer and remain in the 1-1.5% range during the remainder of the forecast period. This is in line with the trend over the past 20 years.

Risks to our inflation forecast are balanced. On the one hand, rising freight costs, shortages of certain goods and higher commodity prices could push inflation higher than currently expected. On the other hand, the stronger SEK and modest pay rises could contribute to a lower rate of inflation than forecast.

The Riksbank’s strong focus on inflation

Even if inflation should end up higher than we project, the key question for the Riksbank is whether the increase is a temporary phenomenon. The Riksbank focuses on upholding the credibility of its 2% target as a nominal anchor, and in this perspective a temporary increase in inflation is not sufficient to prompt any action. The surprisingly strong economy and the prospect of a tighter labour market provide a helping hand to the Riksbank, but history shows that this most likely will not be sufficient. Despite a significant shortage of labour, pay rises were moderate even before the coronavirus crisis. This is part of the reason why the Riksbank would rather stimulate too much than too little. The pandemic makes inflation trends a bit more difficult to interpret, though, and this will make it easier for the Riksbank to accept a decline in inflation later this year.

Against this backdrop, we expect the Riksbank to keep the repo rate unchanged at zero over the entire forecast period ending in December 2022. The Riksbank’s asset purchase programme progresses as planned, with continued purchases in H2 2021 and an unchanged balance sheet in 2022.

The SEK poses a restriction. If, for example the Riksbank decides to ease off the accelerator, it could cause the SEK to strengthen, which in turn would dampen inflation further. The policymakers at the Riksbank will no doubt try to avoid this. The fact that the Riksbank is on hold is not supporting the exchange rate, while improved market sentiment boosted by a broadly based and rapid economic recovery in Sweden and globally should benefit demand for the SEK. We see the exchange rate largely moving sideways this year. We expect EUR/SEK to continue to trade at levels  somewhat above 10 and USD/SEK to move higher during 2021.


This article first appeared in the Nordea Economic Outlook: Unrestricted Growth, published on 11 May 2021.


Torbjörn Isaksson, Nordea Chief Analyst
Torbjörn Isaksson, Nordea Chief Analyst

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