Sweden: Remarkable activity data in 2017 - HSBC

James Pomeroy, Economist at HSBC notes that Sweden’s activity data in 2017 so far have been remarkable with Q2 GDP growth as the highlight, at 1.3% q-o-q, and survey data and all short-term indicators suggest this wasn’t an aberration.

Key Quotes

“We’ve been bullish on Sweden’s economic prospects for some time, and its good data look set to persist. We recently raised our 2017 whole-year GDP growth forecast to 3.2%, and that may appear conservative given the growth already delivered in the first half of the year, but we assume a slowdown from the very high Q2 base.” 

“The truly encouraging thing about Sweden’s recent boom is the breadth of it. The labour market is tight and consumption is robust despite higher inflation. Investment is taking off. Exports are doing well, especially considering the krona strength in recent months. Productivity growth has returned and is now running at around 2% y-o-y while employment continues to grow too.” 

“The housing market of course remains a risk – and although it has cooled somewhat in recent quarters, house prices remain extremely elevated, debt levels are high and rising and credit growth remains comfortably above 6% y-o-y. We see few triggers for this level of financial instability to be the catalyst for a downturn within our forecast horizon, but we are wary of how vulnerable this excellent economic story could be to a shock either at home or abroad.” 

“It is for these reasons that we are slightly more cautious when forecasting growth in 2019, and we pencil in a trend of just above 2%.” 

“On the inflation front there has been a noticeable improvement over the summer. This was in part due to a change in the methodology around package holiday prices, an electricity tariff hike and some remnants of the base effects from the oil price. Those should all dissipate over the coming months and inflation, after stripping out package holidays and energy, is closer to 1.5% than the above-2% headline readings. We expect headline inflation to return to these levels over the coming year or so.” 

“However, for the Riksbank, that’s all okay. The new inflation target (CPIF inflation of 1-3%) means the central bank will be less concerned by this level of inflation than before. And in an economy where nominal growth is running at 7.0% y-o-y, negative policy rates are hard to justify. We look for two rate rises in 2018 and one in 2019.”