Sweden Q3 GDP Growth Weaker Than Expected

The Swedish economy grew at an annualized rate of just 1.3 percent in the third quarter as net exports imposed another drag on the headline and personal consumption growth was weak on the quarter.

Net Exports Impose a Drag Yet Again

As shown in the top chart, Swedish real GDP grew 1.3 percent at an annualized rate in the third quarter while the reading from the previous quarter was revised lower. A breakdown of the real GDP data into its underlying demand components shows that growth was driven primarily by a nice pickup in gross fixed capital formation, which was up 4.3 percent on an annualized basis. Export growth remains resilient, growing at an annualized rate of 2.7 percent, even as growth has slowed considerably in the Eurozone, to which Sweden sends 40 percent of its exports. That being said, imports were up 5.3 percent and net exports experienced its fourth-consecutive decline on a sequential basis. Personal consumption was  relatively weak in Q3, just barely eking out a gain of 0.1 percent. 

There is not yet much “hard” data on economic activity in the fourth  quarter, but “soft” data suggest that growth remains positive. The manufacturing PMI edged down in October, but it remained comfortably above the demarcation line separating expansion from contraction. The comparable index for the service sector also stood at a very high level (57.7) in October. Also released today in a separate report were retail sales for October, which came in significantly stronger-than-expected. Retail sales were up 4.5 percent year-over-year in October, as we may be looking at a pickup in consumer spending in the fourth quarter, which would be a welcome change from the sluggish growth experienced in Q3.

Sweden Continues To Be Plagued by Low Inflation 

The rate of real economic growth in Sweden has generally been positive over the past year or so, but it has not been strong enough to arrest the downward trend in the inflation rate (middle). Indeed, both the overall and “core” rates of CPI inflation are essentially zero at present, which is well below the Riksbank’s (the country’s central bank) target of 2 percent. Unacceptably low inflation is the main reason that the Riksbank cited when it decided to cut its main policy rate to 0.00 percent from 0.25 percent on October 28. Moreover, the Riksbank said that it expected the main policy rate to remain at 0.00 percent until “the middle of 2016.” This “forward guidance” has helped to pull longer-term interest rates in Sweden lower over the past month. 

Ultra-low interest rates in Sweden and the expectation that they will remain depressed for the foreseeable future are important reasons behind the deprecation of the Swedish krona in recent months. Not only has the krona weakened nearly 15 percent on balance versus the U.S. dollar since the beginning of the year, but it has fallen about 5 percent vis-à-vis the euro over that period. Our currency strategy team looks for further krona weakness, especially against the greenback, in coming months.