Sweden: Weak GDP going into 2013

GDP expected to grow by 1.3% in 2013 and 2.5% in 2014, unchanged compared to the forecast in the November Nordic Outlook. GDP is expected to decline by 0.5% q/q in Q4, partly as a reaction to stronger growth earlier in 2012. Current low levels for sentiment among both corporations and households is a downside risk for growth, but improvements for growth indicators in the US and emerging markets are expected to be reflected in Swedish indicators over the next 3-4 months. The labour market is starting to slow more markedly and unemployment is now trending higher. So far the upturn is driven by labour supply, but employment is expected to decline in the first half of this year. CPIF inflation will remain subdued and be below the Riksbanks target through-out the forecasting period. Lower mortgage rates are expected to push headline CPI below zero in the first half of 2013. Government finances have been weaker than expected but still look strong in an international comparison. We predict general government savings to be -1.0 - -1.5% of GDP in 2013 and 2014 with risks skewed towards larger deficits. The government is expected to present fiscal policy measures amounting to another SEK 2-3bn in 2013 and SEK 25bn in 2014. Together with measures presented in the budget bill the total fiscal expansion in 2013 will be ~25bn or 0.7% of GDP. The Riksbank will cut its key interest rate in February to 0.75%, but could possibly also wait until April. Low inflation and rising unemployment are driving forces.

THURSDAY JANUARY 10, 2013 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Key data

2011 2012 2013 2014 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

3.9 3.9 7.5 3.0 0.2

0.7 1.0 7.6 0.9 -0.4

1.3 1.3 8.3 0.1 -1.5

2.5 2.6 8.3 1.3 -1.2

* Percentage change ** Per cent of labour force *** Per cent of GDP

Economic Insights

BUSINESS SENTIMENT AND PRODUCTION Manufacturing sentiment indicates downside risks for manufacturing sector. However, better sentiment in the US and emerging markets are expected to lift sentiment over the next 3-4 months. Industrial production and export of goods will be weak over the next 3-4 months. The strong krona is putting downward pressure on exports, but the high percentage of exports to relatively strong Nordic countries and Germany is supportive. Manufacturing indicators are largely in line with Germany, but hard data has been slightly weaker. Sentiment in the service and retail sector has declined, but is still at growth levels. Declining housing starts are putting downward pressure on the construction sector. Rising investments in utilities and infrastructure are providing some support, but construction sector confidence is at cyclical lows.

Swe: GDP and economic sentiment

3 2 1 0 -1 -2 -3 01 02 03 04 05 06 07 08 09 10 11 12
% q/q (RHS) Economic sentiment (NIER)

3 2 1 0 -1 -2 -3

Merchandise exports to different regions Percentage of total merchandise exports, 2010 Germany European Union GIIPS countries France Germany Nordic countries Outside the EU United States China Japan
Source: Statistics Sweden, SEB

Sweden 56 5 5 10 22 44 6 4 1

59 11 10 5 41 7 6 1

Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET The household sector has become more concerned over the economic outlook and consumer confidence has declined to levels slightly below the lows from late 2011 driven by labour market concerns. Consumer confidence is expected to recover slightly over next 3-4 months in line with higher international risk appetite. House prices are trending sideways. Prices have increased over the last 3-4 months, but short-term indicators have declined slightly indicating stable prices going forward. Lending to households is trending lower, and residential construction is declining. Employment is still moving higher but at a decreasing pace while unemployment is clearly rising. There is a marked upturn in notices of lay-offs, but other short-term indicators, such as employment plans in the NIER survey and new vacancies are weakening more gradually. We think unemployment will rise to almost 8.5% in the first half of 2013, while employment will decline slightly. Household income and consumption
Year-on-year percentage growth 2011 Consumption Income Savings ratio, % of disp. income 10.2 10.4 10.3 10.5 2.1 3.5 2012 1.5 2.6 2013 2.0 2.1 2014 2.3 2.4

Source: Statistics Sweden, SEB

Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK Inflation has been surprisingly low in the last 3 months driven mainly by lower prices on imported goods. CPIF inflation expected to trend sideways in 2013 around 1% y/y. The Riksbanks estimate is below our own in 2013 after a downward revision in December, due to a lower forecast for energy prices. Headline CPI is expected to decline to -0.5% y/y driven by declining mortgage rate costs. Swedens already low resource utilisation is likely to have declined further in Q4. The Riksbank will cut to 0.75% in February, but it is possible that they will wait until April. The probability for an early move has increased after the latest minutes showing that a 50bps rate cut in December was considered by several board members. The repo rate is expected to stay at 0.75% until the end of 2014. The National Debt Office raised its forecast for central government borrowing for 2013 by SEK ~30bn in 2013 to SEK 55bn (1.5% of GDP) and expect borrowing at this level also in 2014. Our forecast is in line with the NDOs, but risks are skewed to the upside. Also, the Riksbank wants to (temporarily) borrow another SEK 100bn in foreign currency to increase the currency reserve, which will increase borrowing by a further 3% of GDP.