The Swedish economy is seeing a broad recovery. The labour market situation has stabilised, and housing prices have risen to new record highs. Inflation moves in tandem with energy prices, while cost pressures remain subdued. The Riksbank will keep the repo rate at 0%, and the SEK will regain some of its former strength.
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It has been a dramatic winter and spring in Sweden with an unprecedented downturn in the economy. However, much indicates that the crisis is less severe than feared. Households are holding the fort, and at the same time global demand is rising in step with the reopening of economies after the spring lockdowns. Thus, the scene is set for a broad and healthy recovery as early as in H2 2020.
The coronavirus is still a threat, and some restrictions will remain in place in Sweden and elsewhere for some time yet. And like other countries Sweden still has to tackle certain economic problems caused by the crisis, which will also delay the recovery. Still, the rebound of the Swedish economy is expected to be strong enough for GDP to return to pre-crisis levels by mid-2021. Resource utilisation will normalise, so during the latter part of our forecast period, growth should slow to a more long-term sustainable and moderate pace.
Sweden: Macroeconomic indicators
|Real GDP (calendar adjusted), % y/y||2.1||1.3||-3.5||4.0||2.0|
|Underlying prices (CPIF), % y/y||2.1||1.7||0.5||1.1||1.0|
|Unemployment rate, %||6.3||6.8||8.5||8.5||7.4|
|Current account balance, % of GDP||2.4||4.2||4.5||3.5||3.5|
|General gov. budget balance, % of GDP||0.8||0.4||-4.3||-3.3||-1.5|
|General gov. gross debt, % of GDP||38.9||35.2||42.0||43.8||44.7|
|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||10.13||10.00||9.90|
Households stand firm
Swedish economic activity declined overall during Q2 2020. Even domestic demand fell sharply. As the Swedes were asked to maintain social distancing and stay at home as much as possible, private consumption fell at an unprecedented rate. In April and May it was a hefty 10% below the year-earlier level.
But private consumption rose slightly in June, and we expect this pick-up to accelerate in H2 2020. A key difference compared with other downturns is that the current crisis is not due to imbalances in the economy. Instead, an external shock paralysed it. Households’ financial position is thus still stable, and they do not need to consolidate their finances, which otherwise is something that often could take a long time.
There is some uncertainty related to households’ elevated indebtedness, but this is not deemed to create problems over our forecast period. Instead, in the aftermath of the crisis, households’ finances will benefit from the stronger prospect of low interest rates for long. The rise in share prices is also helping.
Housing market hot again
Thanks to households’ stable financial situation, housing prices have recovered. As early as during the summer, housing prices were back at pre-crisis levels. Much suggests that housing prices will continue to rise during the autumn. The worst is over for the labour market, and interest rates seem anchored at low levels. We expect housing prices to be around 6% higher at end-2020 than at the beginning of the year. Rising housing prices create positive dynamics, with the wealth effects boosting households’ propensity to spend. Hence, this will also underpin the recovery of domestic demand.
Expansionary fiscal policy
The fiscal stimulus measures adopted to combat the crisis are important for households’ finances, especially the scheme of temporary layoffs. The scheme implies that households keep 90% of their income while being temporarily laid off, with the government covering 70% of the cost.
The very expansionary economic policy plays a key role. The adopted measures have dampened the downturn and created the foundation for the recovery we are now seeing. The wheels are turning, and the recovery will progress at a healthy pace. Further measures are expected to be launched , not least measures to support sectors hit hard by the crisis and to help people with a weak foothold on the labour market.
This year’s budget deficit will be huge, although not as big as previously estimated. The public debt is increasing, but not to critical levels. Hence, there is no need for major tightening measures when the crisis is over, and none are expected. This is important for households’ expectations for their future income situation and makes the measures even more effective.
The decline in housing prices was very modest, but, coupled with the uncertainty caused by the coronavirus crisis, it will prompt a marked drop in residential construction. Industrial investment is plummeting this year but will subsequently stabilise. Even investment in many services sectors will decline sharply this year, while public sector investment will increase.
A key difference compared with other downturns is that the current crisis is not due to imbalances in the economy.
Torbjörn Isaksson, Nordea Chief Analyst
World trade collapsed as a result of the lockdown of countries to combat the coronavirus. And Swedish goods exports plummeted accordingly. Especially exports of vehicles and machinery nosedived. Exports of services fell too as economies were locked down, transport demand evaporated and tourism stopped.
Countries are going through different phases when it comes to the spread of the virus and economic recovery. In many places the situation is worrying, but the countries close to Sweden seem to be faring better. For example, Sweden’s Nordic neighbours, which account for 25% of Swedish exports, are witnessing relatively benign trends. Also in the Euro area, which accounts for almost 40% of Swedish exports, the situation is improving, while the UK is sliding further down the list of key trading partners.
Global indicators suggest that we are in for a recovery in world trade and especially in Swedish export markets. Up till now the signals from Swedish exporters have been mixed, but we expect exports to recover markedly as early as this year and return to more long-term sustainable growth levels during 2021
Brighter labour market outlook
Clearly, the initial shock to the labour market has passed. Over the summer the number of persons receiving layoff notices dropped to a more normal level. Moreover, the number of newly registered unemployed has remained steady at more normal levels since May, which suggests that some of the large number of layoff notices in March did not result in actual layoffs.
The number of applications under the scheme of temporary layoffs has also declined sharply. And the utilisation of this scheme also seems lower than previously estimated. According to Statistics Sweden’s Labour Force Survey, an average of some 250,000 persons were temporarily laid off in Q2 2020. This number should be compared with the number of approved applications for temporary layoffs, which totalled 550,000 persons during the same period. One explanation is that many businesses have taken precautions and applied for more temporary layoffs than were actually needed. Another is that the rules were changed along the way.
We expect the labour market situation to improve as early as in the coming months. Especially young people were laid off and temporary jobs were scrapped when the crisis hit. This means that the bar for reentering the labour market should be lower and businesses’ scope for rehiring people should be better. The number of new job vacancies remains modest, but we expect demand for labour to increase as the economic outlook improves. However, despite a relatively strong rebound, employment is not expected to be back at pre-crisis levels until mid-2022.
Delayed talks result in modest pay deals
Wage growth was already modest, and, because of the crisis, wage pressures have declined further. The big round of pay talks that was put on hold in March will be resumed in October. The talks will be affected by the crisis, but also by the brighter outlook. We expect the parties to agree on low pay rises short term, but higher pay rises longer out.
Riksbank on hold, while SEK strengthens
Inflation has been higher than anticipated over the summer. But still cost pressures are modest. Pay rises are low, and the SEK has strengthened. However, the fluctuating energy prices indicate that headline inflation could move higher in early 2021. This pick-up might be temporary, but it will ease the pressure on the Riksbank. We expect the Riksbank to keep the repo rate unchanged at 0% over the forecast period. The bank will use balance sheet measures to stimulate the economy.
Due to the crisis, the interest rate spread to other countries has narrowed, and the SEK has become more attractive to investors. We expect the SEK to stabilise over the forecast period at a stronger level than that seen in recent years.
Risks are more balanced than previously
The list of downside risks to our forecast is long, and topping the list is the renewed spread of the virus seen in many countries. However, there are also upside risks. The robust domestic demand in the Nordic countries and the positive effects of a potentially effective vaccine could well lead to higher growth than we currently envisage. At the time of writing, the risks are more balanced than previously.
Torbjörn Isaksson, Nordea Chief Analyst
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