Real GDP in Sweden grew 1.0 percent in Q2, well above expectations of a 0.7 percent print. Net exports were the largest contributor to growth, while fixed investment contracted for the second consecutive quarter.
Growth was buttressed by net exports, which added 0.6 percentage points to the headline growth rate. Exports of goods and services were strong in Q2, growing 0.9 percent, but the 0.4 percent decline in imports further bolstered overall growth. (Imports subtract from GDP, so a decline in imports causes GDP growth to rise, everything else equal). This marks the second-consecutive quarterly decline in imports, which would suggest soft domestic demand, everything else equal. That said, the 0.6 percent gain in real household consumption is encouraging, particularly given the stagnation in this component in the prior quarter. Perhaps less encouraging was the 0.2 percent decline in fixed investment, which comes on the heels of a 0.4 percent drop in the prior quarter.
On balance, the report paints a reasonably encouraging picture of the Swedish economy. Economic activity has continued to accelerate on balance over the past few years, albeit modestly. Moreover, after hovering near 8 percent for most of the past few years, the decline in the unemployment rate seems to be showing nascent signs of accelerating (middle chart).
Despite the positive developments, however, CPI inflation has been more or less flat on a year-ago basis for much of the past two years (bottom chart). While this is partially reflective of lower energy prices, the rate of core CPI inflation has been stuck near zero as well. To be sure, the Riskbank (Sweden’s central bank) unexpectedly cut its main policy rate further into negative territory earlier in the month and ramped up its purchases of government bonds via its quantitative easing program, citing the need to ensure inflation would rise toward its 2 percent target. (The Riksbank’s policy rate, the repo rate, currently stands at -0.35 percent).
Given the persistent weakness in inflation and the country’s modest growth performance, we continue to expect monetary policy will remain accommodative in Sweden for quite some time, at least until inflation shows concrete signs of returning to the Riksbank’s target. In fact, in the minutes of its most recent policy meeting, the Riksbank noted that it “still had a high level of preparedness to make monetary policy even more expansionary if necessary,” suggesting further rate cuts are not out of the question. In contrast, we look for the Federal Reserve to begin hiking rates later this year and, as a result, our currency strategy team forecasts that the Swedish krona will trend lower against the U.S. dollar in coming quarters.
Net Exports Underpin Robust Q2 Growth
Data released this morning showed that Swedish real GDP rose 1.0 percent in Q2 (4.0 percent at an annualized rate), besting analyst expectations. The strong print brought the year-over-year rate of growth up to 2.9 percent, the highest year-ago growth rate in nearly four years.Growth was buttressed by net exports, which added 0.6 percentage points to the headline growth rate. Exports of goods and services were strong in Q2, growing 0.9 percent, but the 0.4 percent decline in imports further bolstered overall growth. (Imports subtract from GDP, so a decline in imports causes GDP growth to rise, everything else equal). This marks the second-consecutive quarterly decline in imports, which would suggest soft domestic demand, everything else equal. That said, the 0.6 percent gain in real household consumption is encouraging, particularly given the stagnation in this component in the prior quarter. Perhaps less encouraging was the 0.2 percent decline in fixed investment, which comes on the heels of a 0.4 percent drop in the prior quarter.
On balance, the report paints a reasonably encouraging picture of the Swedish economy. Economic activity has continued to accelerate on balance over the past few years, albeit modestly. Moreover, after hovering near 8 percent for most of the past few years, the decline in the unemployment rate seems to be showing nascent signs of accelerating (middle chart).
Despite the positive developments, however, CPI inflation has been more or less flat on a year-ago basis for much of the past two years (bottom chart). While this is partially reflective of lower energy prices, the rate of core CPI inflation has been stuck near zero as well. To be sure, the Riskbank (Sweden’s central bank) unexpectedly cut its main policy rate further into negative territory earlier in the month and ramped up its purchases of government bonds via its quantitative easing program, citing the need to ensure inflation would rise toward its 2 percent target. (The Riksbank’s policy rate, the repo rate, currently stands at -0.35 percent).
Given the persistent weakness in inflation and the country’s modest growth performance, we continue to expect monetary policy will remain accommodative in Sweden for quite some time, at least until inflation shows concrete signs of returning to the Riksbank’s target. In fact, in the minutes of its most recent policy meeting, the Riksbank noted that it “still had a high level of preparedness to make monetary policy even more expansionary if necessary,” suggesting further rate cuts are not out of the question. In contrast, we look for the Federal Reserve to begin hiking rates later this year and, as a result, our currency strategy team forecasts that the Swedish krona will trend lower against the U.S. dollar in coming quarters.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.