Sweden: Falling GDP in Q4

Incoming data confirm our assessment that GDP will decline in Q4 and we have lowered our forecast to -0.8%, 2.3% y/y. This is below the Riksbanks forecast (0.0%, 3.4% y/y) and also assumes some improvement in December data for export and production. The expected decline in Q4 GDP is larger than implied by sentiment indicators and is partly a reaction to the very strong growth in Q3. The average forecast for growth in 2012 has been revised downwards to 0.5% (0.9% working day adjusted) from 0.7%, mainly due to further deterioration of the growth outlook for the Euro-zone. Unemployment has in recent months leveled out, but is expected to rise from Q2. Indicators for the next 3-4 months suggest employment will continue to rise in the short run, but weaker growth imply it will decline later in 2012. CPIF inflation fell to 0.5% y/y in December partly due to base effects from the electricity spike last winter. CPIF inflation is expected to be at a trough but will stay well below the Riksbanks target over the next 2 years.

MONDAY 16 JANUARY 2012 Growth

Inflation

Labour-market

Key data Percentage change

2010 2011 2012 2013 GDP GDP working day adjusted* Unemployment* Inflation 5.6 5.4 8.4 1.2 4.3 4.3 7.4 3.0 0.0 0.5 0.9 7.6 1.2 -0.2 2.0 2.0 8.1 1.2 -0.1

Government fiscal balance ** 0.2

* Per cent of labour force, ** Per cent of GDP Source: SEB

Swe: The labour force survey

9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 05 06 07 08 09 10 11 12 13 4300
Unemployment, % Employment, 1000s (RHS)

4700

4600

4500

4400

Economic Insight

BUSINESS SECTOR NOW CLEARLY IN A SLOWDOWN Both production and export data confirm that the manufacturing sector now is slowing markedly. Sentiment indicators for the manufacturing sector have stabilised over the last 2-3 months in line with similar indicators for the Euro-zone. A more severe recession in the Euro-zone continues to be the main downside risk to Swedish growth. Stronger Krona vs Euro partly off set by weakening against other currencies. However, less support from exchange rate compared to earlier slowdowns. Construction confidence has declined further but is still above the historical average. Housing starts slowed significantly in Q3. Service sector production has levelled out. Sentiment indicators are slightly below the historical average.

Economic Insight

SLOWER HOUSEHOLD SPENDING, DECLINING HOUSE PRICES Consumer confidence has stabilised on a low level. Retail sector continues to be the most pessimistic sector, especially regarding durable goods trade. Rumors that Christmas sales were less weak than feared, but sector survey shows another decline in retail sector confidence in January. So far retail sales has levelled out or declined slightly. Car sales have declined slightly but are still holding up fairly well. Very high cars sales in Q4 2010 mean that car sales will decline y/y in Q4 2011. House prices have declined markedly over the last 3-4 months. A majority of households expect prices to continue to fall, but SEB:s house price indicator has stabilised over the last 2-3 months in line with consumer confidence. Our assessment that house prices will decline only gradually without declining consumption is being tested. Lower mortgage rates are expected to dampen downward pressure in the housing market somewhat, but impact from repo rate cuts on mortgage rates uncertain factor (see chart on page 4). House prices continue to be the main domestic risk for Swedish growth.
Swe: Retail sales and car registration
50
Consumer confidence Retail sales

Swe: Private consumption and confidence

15

125 120 115 110 105 100 95 90

40 30 20

3-month average Retail sales, index

32 30 28 26 24 22 20 18

10

10 0

0
Private consumption

-10 -20 07 09 11 -30

-5

Car registration, 1000s (RHS)

99

01

03

05

05

06

07

08

09

10

11

16

Swe: House Prices, index level

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 04 05 06 07 08 09 10 11 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0

Economic Insight

LABOUR MARKET WILL SLOW GOING INTO 2012, INFLATION WILL BE LOW Unemployment has leveled out over the last 2-3 months. Slower growth means that unemployment is expected to rise by approximately 1%-point starting in Q2 this year. Labour market indicators for the next 3-4 months are declining from high levels. New vacancies are high and hiring plans according to the NIER survey are still at expansionary levels. First important wage agreement for the industry sector supports our assessment that total wages will rise by 3.5% in 2012. Wages will accelerate compared to the low levels in 2010/2011. Negotiated wages for blue collar industrial worker will rise by 3.0% over the next 14 months (2.6% over 12 months). Wage negotiations for most other sectors will take place in the next 6-9 months. Core inflation (CPIF ex food and energy) was below 1% y/y in December but is expected to rise slightly in 2012 due to less downward pressure from exchange rate and higher wage inflation. CPIF was 0.5% y/y in December, partly due to temporary low electricity prices. CPIF should rise slightly compared to December but is expected to stay well below 2% over the next two years. Declining commodity prices is a downside risk.

2012 wage round (1000s of employees)

3.5

Swe: CPI, % y/y

3.5 3.0 2.5
CPIF CPIF, ex food and energy

Jan 31 Feb 28 Mar 31 Apr 30 May 31 Sep 30

350 82 454 1180 138 160

Industrial workers Auto sales and service etc Retail, IT and telecom Local govt, temp. staffing Hotel, restaurants etc Central govt etc

3.0 2.5 2.0 1.5 1.0 0.5

CPI

2.0 1.5 1.0 0.5

Source: National Mediation office

0.0

11

12

13

0.0

Swe: CPIF, % y/y

2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 11 12 13
SEB Riksbank

2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4