Sweden: Continued growth, but no strong recovery

We deem slower international growth momentum more important than rising domestic sentiment indicators and stronger than expected Q1 GDP growth. Still, our view that Sweden can avoid a recession and grow in line with the relatively stronger northern European countries has strengthened. We are making a minor (0.2 percentage point) downward revision to our growth forecast for both 2012 and 2013 to 0.5% and 1.7% respectively. Sentiment indicators remained at high levels up to May and are generally at levels higher than assumed in our growth forecast. We expect both consumer and business confidence to decline over the next 3-4 months. The labour market is slowing very gradually. Employment still trending upward, while unemployment has levelled out. Furthermore, short-term indicators have only declined moderately. Slow growth suggests that unemployment will rise from mid-2012. CPIF inflation is expected to rise slightly in 2012 from the present low level, mainly due to higher core inflation. Headline CPI is heading lower due to declining mortgage rates. Petrol prices are now a downside risk. Government finances continue to look strong. The budget is expected to be close to balance although slower growth and lending to the IMF suggests risks of larger deficits. The government continues to resist calls for more expansionary fiscal policy, but recent comments from Finance Minister Anders Borg may indicate that the Budget Bill this autumn will be more expansionary than the government has earlier indicated. The Riksbanks key interest rate is expected to stay on hold in July, but euro zone turbulence has strengthened the case for a rate cut later in 2012. We expect a cut to 1.25% in September and believe that the repo rate will stay at this level throughout 2013.

TUESDAY 12 JUNE 2012 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Swe: GDP
10 8 6 4 2 0 -2 -4 -6 10 11 12 13
% y/y % q/q (RHS)

Key data
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5

2010 2011 2012 2013 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

6.1 5.9 8.4 1.2 0.0

3.9 4.0 7.4 3.0 0.3

0.5 0.8 7.5 1.1

1.7 1.7 8.0 1.1

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

Economic Insights

GDP SLOWING BUT NOT DECREASING We are seeing a mixed picture regarding to what extent the manufacturing sector is slowing. Industrial production and exports are declining, but companies are still optimistic about future growth. The weakness in exports and industrial production continued up to April. Production problems in the pharmaceutical industry lowered industrial production by 2-6 % in February-April 2012 and also contributed to lower exports. Production problems are said to have persisted in Q2 and could continue to lower production throughout 2012. Strong fixed investment was one reason for Swedens surprisingly strong first quarter 2012 GDP. There was a sharp upturn for capital spending in utilities and non-residential construction, while manufacturing investments levelled out. Residential construction is heading lower after two strong years. Sentiment in the service sector was higher during the spring but seems to be turning lower again after renewed financial market turbulence. Still, our forecast that domestic sectors will support growth is on track.

Swe: GDP and economic sentiment

120 110 100 0 90 80 70
% q/q (RHS) Economic sentiment (NIER)

3 2 1

-1 -2 -3

01 02 03 04 05 06 07 08 09 10 11 12

Economic Insights

HOUSEHOLD SECTOR AND THE LABOUR MARKET The household sector has remained firm, with rising sentiment and retail sales. Car registrations were weak in April/May and are trending lower. Confidence is expected to decline again over the next 3-4 months but should remain at expansionary levels. Private consumption is expected to grow by 1.5-2.5% in 2012 and 2013. The housing market has recovered since the Riksbanks latest rate cuts and prices are now close to the peaks from 2011. We are maintaining our forecast that home prices are set to decline by 10-15 per cent over the next two years, but downside risks have decreased. Employment continued to trend higher early in 2012, while unemployment stabilised, largely in line with our forecast. Short-term indicators, such as employment plans in the NIER survey, are easing very gradually and still at levels that suggest that employment will continue to rise in the short run. Due to weak economic growth, the jobless rate should start increasing from mid-2012. We think unemployment will rise to slightly above 8% in early 2013.

Swe: Household savings ratio, % of income

15
Total

15 10 5 0 -5
Ex manatory pension savings Own financial savings

10 5 0 -5 -10

93

96

99

02

05

08

11

-10

Swe: Labour market

4700 4650 4600 4550
Employment, 1000s

9.0 8.5 8.0 7.5 7.0 6.5 6.0

Unemployment, % (RHS)

4500 4450

07

08

09

10

11

12

13

5.5