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Sweden: NIER calling the Riksbank's hand
Wed, Aug 27 2008, 10:23 GMT
by Roger Josefsson
The National Institute for Economic Research (NIER) today published the consumer confidence index, the business confidence index and also its new forecasts for the Swedish economy up and until 2010. The short version is bullish on interest rates: confidence is down on most accounts, inflation expectations are plummeting, the labour market outlook is deteriorating, and the NIER forecasts support our view of the need for lower rates.
First, on the subject of confidence, we are not a great fan of the consumer survey, which has historically tended to co-vary with headlines in the evening press. There are however a couple of components that we focus on. Inflation expectations is one of them: last month's reading of a historically high (under the inflation targeting regime) of 3.7% y/y has plummeted to 2.9% y/y, quite a remarkable drop. The other indicator (and the only one that has any leading characteristics), is the "personal risk of unemployment": this fell somewhat. However, the even better indicator for labour market developments - employment plans in the business survey - deteriorated dramatically, both for current employment and future employment plans. The business survey was anything but a positive read. Confidence deteriorated in all sub sectors: retail services, private services, construction, manufacturing industry etc. Order intake is worsening, stocks remain too high, and although actual production is still rather high, production plans are collapsing. Also, price hikes are becoming less and less likely.
Second, on the subject of forecasts, the NIER has made a downward revision to GDP of about 0.5 p.p. for both 2008 and 2009; 2010 is left more or less unchanged. That said, the NIER seems to be doubtful about the flash GDP estimate for Q2, expecting a large recoil (+0.6% q/q) in Q3. We have made a similar assumption, but be aware that the Statistics Sweden believes a downward revision is more probable (production side estimate was considerably lower than the published demand side estimate). The NIER now forecasts: around 1.5% y/y GDP growth for both 2008 and 2009 - still some 0.5 p.p. above our own estimates; the unemployment rate to rise above 6.5%; and inflation to fall back to around 2% in Q2 09. These reasonably optimistic forecasts imply a negative output gap today and a negative labour market gap (the NIER's preferred inflation indicator) in H1 09. Coincidentally, that is also when the Riksbank is expected to start lowering rates according to the NIER.
Published on Wed, Aug 27 2008, 10:33 GMT
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