Underlying Resilience in Swedish GDP in Q1-2016
|Growth in Domestic Spending Remained Strong in First Quarter
Recently released data showed that real GDP in Sweden grew at an annualized rate of 2.0 percent in Q1-2016 relative to the previous quarter (Figure 1). The consensus forecast had anticipated a slightly stronger number, and the outturn represented the slowest rate of sequential GDP growth in six quarters. That said, there is more to this seemingly disappointing number than initially meets the eye. First, the Swedish economy has grown very strongly over the past year. Indeed, the year-over-year rate of real GDP growth remained above 4 percent in the first quarter. When viewed in this context, the sequential rate of growth in the second quarter does not appear to be so disappointing after all.
Second, domestic demand, which has driven the acceleration in the Swedish economy over the past year or so, remained robust in the first quarter (Figure 2). Specifically, real personal consumption expenditures grew at an annualized rate of 4.4 percent in Q1, and investment spending was up nearly 9 percent. The drag on the overall rate of GDP growth in the first quarter came from real exports of goods and services, which contracted 1.3 percent. Negative export growth in conjunction with the 0.8 percent rise in imports caused real net exports to slice 3.7 percentage points off of the overall rate of GDP growth in Q1. In short, the expansion that is currently under way in Sweden appears to be sustainable because it is based on strong growth in domestic spending.
Swedish Riksbank on Hold for Foreseeable Future
Despite strong GDP growth in Sweden over the past two years, there still appears to be some spare capacity in the economy as measured by the country’s unemployment rate. The jobless rate has trended lower during Sweden’s recent growth spurt, but it still remains elevated, at least relative to the end of the previous cycle (Figure 3). Another indication of spare capacity in the labor market is the behavior of wages. Although wages have accelerated a bit in recent months, the current pace of wage growth—average hourly earnings in the first quarter were up about 2.3 percent on a year-ago basis—is hardly “robust” (Figure 4).
This lackluster pace of wage growth has contributed to benign inflationary pressures with the overall rate of CPI inflation in Sweden less than 1 percent at present (Figure 5). As in many other countries, the collapse in energy prices has helped to push down the overall rate of CPI inflation. That said, there are few inflationary pressures in the country today as shown by “underlying” inflation measures that are all below 2 percent at present.
The Swedish Riksbank, the country’s central bank, conducts monetary policy to hit a CPI inflation target of 2 percent. With the overall rate of inflation well below target for the past four years, the Riksbank has adopted a very accommodative policy stance. Not only did the Riksbank commence its own quantitative easing (QE) program in February 2015, but it also took its repo rate, which is its main policy rate, into negative territory that month. The Riksbank has subsequently increased the size of its QE program—purchases of government bonds should total SEK 245 billion (roughly $30 billion) by the end of 2016—and it has cut its repo rate three more times. The repo rate currently stands at -0.50 percent, and policymakers have indicated that they are prepared to ease policy further if “needed to safeguard the inflation target.”
In the statement that was released following its last policy meeting on April 21, the Riksbank mentioned the Swedish krona a number of times. The trade-weighted value of the Swedish krona depreciated nearly 15 percent between early 2013 and early 2015, but it has subsequently retraced some of its losses (Figure 6). With nominal imports equivalent to roughly 40 percent of nominal GDP, appreciation of the Swedish krona, if sustained, could make it more difficult for the Riksbank to achieve its 2 percent inflation target. Consequently, the central bank appears to be preoccupied with the value of the Swedish krona. Not only did the Executive Board of the Riksbank explicitly state that it is ready to ease policy further, but it also said that it is “prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.”
Against the U.S. dollar, the krona depreciated 25 percent between early 2014 and the end of 2015, but it is up nearly 5 percent against the greenback so far this year. Looking forward, our currency strategy team forecasts that the krona will depreciate modestly versus the U.S. dollar in coming quarters. We look for the Fed to hike rates, albeit at a slow pace, later this year and into 2017. On the other hand, the Riksbank seems poised to remain on hold, if not ease policy further, for the foreseeable future. This divergence in the respective policy stances of the Federal Reserve and the Riksbank should support the value of the dollar vis-à-vis the Swedish krona in coming quarters.
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