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Sweden: Economic optimism at an historic high

Thu, Apr 26 2007, 14:15 GMT
by Stefan Mellin

Danske Bank A/S

All three sets of data from Sweden this morning (business- and consumer-confidence and PPI) came in on the strong side of expectations. The numbers confirm a continued strong growth momentum. The data weigh on Swedish bonds and are supportive for the SEK. We assess that the probability that the Riksbank will move as soon as May has moved closer to 50/50. However, we maintain that a June hike is the main scenario. In our opinion, the likelihood of hikes in both May and June is low,

Business and consumer confidence confirmed and even reinforced the underlying strength in the Swedish economy. The sentiment indicator rose to 116.4 in April, the highest reading since 2000.

The overall business sentiment remains strong and was even rising during Q1. A marked increase was noted for the manufacturing sector. The inflow of orders has increased more than expected, labour shortages have become more appreciable and firms remain optimistic for the second quarter. The construction sector has become stronger and labour shortages are described as considerable. The retail trade sector has also become more optimistic, whereas a slight decline, albeit from a high level, can be observed in the private service sector.

Contrary to our expectations, consumer confidence jumped to 23.0 from 15.0, its highest level in the current cycle since November 2000, reflecting both rising optimism among consumers on their own financial situation and higher optimism regard-ing the Swedish economy. The micro index rose to 18.2, which is just below the all-time high. One-year inflation expectations fell to 1.9% (2.1% in March), which may seem a bit counter-intuitive but on the other hand, it is closer to general (professional) forecasts on where inflation will be in one year’s time, ie, clearly below 2%, and we would not make much of this decline as long as expectations remain close to the target.

In addition, Statistics Sweden released PPI data for March which rose 1% m/m and 5.2% y/y, higher than the market’s forecast of 0.6/4.7% (we had 0.7/4.8%). The increase is as much a reflection of higher prices on petroleum prices and a weaker SEK. In the details we note that the price index for domestic supply consumer goods rose from 0.7% to 1.0% y/y. Also, this is a reflection of the SEK. Regarding the currency, we expect the recent appreciation of the SEK (versus a US dollar, EUR, NOK, GBP basket) will have the opposite effect in April.

These data underpin the impression of a really strong economy. Obviously, the numbers are bad news for Swedish bonds and supportive for the SEK, especially seen in light of upside risks in the persisting wage rounds. The data support expectations of faster/earlier rate hikes than the Riksbank projected in February and, in particular, we consider that the probability for a May hike has in-creased. However, we maintain our view of a June hike as the most likely. That would allow the RB to base the decision on a fresh analysis of growth and inflation risks.

Published on  Thu, Apr 26 2007, 14:14 GMT