Swedish Economy Posted Strong Growth in Q4

Real GDP growth in Sweden greatly outpaced consensus expectations in Q4-2014, growing at an annualized rate of 4.6 percent on a sequential basis. However, low inflation and a weak currency remain concerning. 

Sweden’s Economy Finishes 2014 on a Strong Note

Data released this morning showed that real GDP in Sweden grew at an annualized rate of 4.6 percent in Q4-2014 relative to the previous quarter (top chart). The outturn was much more robust than most analysts had expected, and it marked the strongest rate of sequential GDP growth in nearly two years.

Moreover, there was broad-based strength in the spending components. Gross fixed capital formation made one of the strongest contributions to growth, up 11.4 percent on a sequential basis. Household consumption also posted a solid growth rate of 3.8 percent quarter-over-quarter, consistent with the continued upward trend we have seen in monthly retail sales figures. Government consumption contributed 0.6 percentage points to headline GDP growth, while inventories were the only detractor, taking off an equal 0.6 percentage points.

Deflationary Pressures a Primary Concern

The stronger-than-expected GDP outturn in Q4 is certainly welcome news, but it may not be enough yet to alleviate fears that a mild deflationary environment may be taking hold due to sluggish economic growth over the past few years. As shown in the middle chart, consumer prices in Sweden are essentially flat on a year-over-year basis at present. Because CPI inflation is so far below target—the Swedish Riksbank (the country’s central bank) targets a CPI inflation rate of 2 percent—the Riksbank has joined some other central banks in cutting rates into negative territory. Specifically, the Riksbank earlier this month cut its main policy rate to -0.10 percent and it announced its own program of government bond purchases. Moreover, the central bank said it stands ready to ease policy further should events warrant it.

With economic conditions in the Eurozone, to which Sweden sends about 40 percent of its exports, slowly improving we would expect to see economic growth in Sweden slowly strengthen over the next couple years. Indeed, the Bloomberg consensus forecast calls for real GDP growth to gradually pick up steam throughout 2015 and 2016 with full year growth of 2.7 percent expected for 2016, compared to 2.3 percent this past year. With the strong reading in Q4, overall growth for 2014 outpaced prior expectations for just 1.9 percent growth.

The accommodative policy stance of the Riksbank has contributed to the weakness of the Swedish krona, which has nosedived about 25 percent versus the U.S. dollar over the past year (bottom chart). Looking forward, our currency strategy team looks for the recent weakness to continue as the divergence in monetary policy continues to be the driving theme of Swedish krona weakness.