The Swedish Economy

Monthly letter from Swedbank’s Economic Research Department

by Magnus Alvesson No. 1 • 31 January 2011

A continued strong confidence

• Recently released data indicate that the Swedish economy continues to
expand at a brisk pace. Sentiment in many sectors strengthened in January
and exports continued to increase. Employment grew although the
unemployment rate was unchanged as the labour force expanded.

• There are, however, signs that the rate of expansion could slow. A weaker
momentum was registered in sectors such as input goods and in retail.
Household confidence in their personal finances and for the Swedish
economy as a whole was solid, but increasing prices and borrowing costs
could limit the room for consumption growth.

• Public finances are benefiting from the economy's rapid recovery, but also as
a result of reforms that have already been implemented. Government
revenue is growing as the labour market has recovered rapidly, while at the
same time the social insurance reforms are limiting spending. It is estimated
that local governments had relatively large surpluses already in 2010, but
when central government subsidies are phased out and demographic costs
grow, the balanced budget rule could be jeopardised.

Swedish economy quickly normalising Contribution to Swedish GDP growth, Q1 2006 – Q3 2010
(Percentage points and GDP growth annually in percent)
Recent data show that the economic recovery 10.0
remains strong. Confidence is increasing in many Public cons. Invest. Private cons.
8.0 6.9
sectors of the economy and exports continue to 5.4
Inventories Net-export GDP 5.0
4.5
grow. At the same time there signs that the 6.0
3.2
4.1
4.0
2.7
3.2
recovery could be weakening. While still strong, 4.0
3.4 2.2 2.7

confidence indicators are levelling off and the 2.0

0.5
0.5
effects of temporary factors, especially the
0.0
inventory build-up, are subsiding. In addition, the
recovery in important trading partners is somewhat -2.0
shaky, which means that external demand could -4.0 -1.4
decline slightly.
-6.0
-5.3
-6.1
Confidence indicators in the Swedish economy -8.0 -6.8 -7.1

turned higher in January after having shown a -10.0

weaker momentum late last year. Sentiment among
consumers was especially strong after the index
had pulled back the previous three months.
Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10
Source: Statistics Sweden.
It was in particular households’ views on the
Swedish economy that improved, but expectations
on their own personal finances also strengthened.

Ekonomiska sekretariatet, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 1000

E-mail: ek.sekr@swedbank.se www.swedbank.se Ansvarig utgivare: Cecilia Hermansson, 08-5859 7720.
Magnus Alvesson, 08-5859 3341, Jörgen Kennemar, 08-5859 7730
 The Swedish Economy

Monthly letter from Swedbank’s Economic Research Department, continued

No. 1 • 31 January 2011

Confidence indicators, Jun 2006 – Jan 2011 It was primarily durable goods took off late last year
(Netbalance)
after a big decline in 2009. This is probably
60
because many households decided to put off big
ticket purchases at a point when they felt most
40
uncertain about their personal finances. When the
effects of this pent-up demand abate, spending may
20 slow again. At the same time, rising food and
energy prices, and higher borrowing costs could
0 also limit the room to expand consumption. Growing
borrowing costs may also have contributed to falling
-20 lending rates to households – to 7.8% on an annual
basis in December from 8.4% in November.
-40
Unemployment rose to 7.4% in December,
Manufacturing Retail Consumer compared with 7.1% in November, but remained
-60 unchanged at 7.8% in seasonally adjusted terms. At
jun-06 dec-06 jun-07 dec-07 jun-08 dec-08 jun-09 dec-09 jun-10 dec-10
the same time employment numbers rose slightly,
Sources: National Institute of Economic Research and Swedish which means that the labour force is expanding.
Trade Federation. The improved job market is encouraging more
people to begin looking for work again. Together
Business confidence was mixed. In manufacturing, with a growing share of long-term unemployed,
sentiment turned higher, and the construction slightly over 35% in December, this could make it
industry in particular continued to show signs of harder to reduce unemployment at the same rate as
rapid expansion. Input manufacturers, on the other in the autumn of 2010.
hand, which are usually early in the business cycle,
began to slow during autumn of last year as order
bookings fell, but also in this segment did Unemployment and job growth, Jan 2001 – Dec 2010
sentiments grow. Retail sales dropped, however, 10.0 5.0
while the service sector reported slight growth. In
9.0 4.0
other words, the normalisation of the Swedish
economy from record-low levels in 2009 appears to 8.0 3.0
be continuing. 7.0
2.0
6.0
Retail sales volumes rose modestly at the end of 1.0
5.0
last year. Despite an increase compared to 0.0
December 2009, the trend tapered off. On a 4.0
-1.0
seasonal basis, sales fell compared to November. 3.0
This can be attributed somewhat to the unusually 2.0 -2.0
cold weather, which may have dragged down the Employment (ann. change in %, rs)
1.0 -3.0
Unemployment (% of labour force)
willingness to consume.
0.0 -4.0
Consumption and retail sales, Jan 2008 – Dec 2010 jan-01 jul-02 jan-04 jul-05 jan-07 jul-08
(Index June 2008=100)
112 0.8
Source: Statistics Sweden.

110
0.6 Against the background of a persistently high
108
unemployment rate, rising prices are making
106 0.4 economic policy more tricky. Consumer prices
104 began to rise in December, reaching 2.3%. KPIF,
0.2 the measure of underlying inflation excluding
102

100 interest expenses, also reached 2.3%. Because the

0.0
98
increase was mainly in energy and food prices, it
-0.2
can be argued that it is temporary. On the other
96
hand, price increases could spread. Higher energy
94
-0.4 and transportation prices in particular could,
92 Retail sales (vol., m-o-m, %, trend, rs) Durables however, easily spread to other sectors. Thus, there
Non-durables Retail
90 -0.6 are reasons for a continued normalization of the
Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 monetary policy, in line with our forecast from
Source: Statistics Sweden. January. However, to reduce unemployment there

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 The Swedish Economy

Monthly letter from Swedbank’s Economic Research Department, continued

No. 1 • 31 January 2011

is also a need for targeted policy initiatives and State revenue and expenditure, and budget balance, Jan
2007 – Nov 2010
growth enhancing reforms.
(SEK billion, 12-month moving average)

Swedish exports are growing quickly, exceeding 80

export market growth. Demand has especially risen
from the US, where exports jumped 30% from
January to November 2010 year-on-year. This was 60

at a time when US growth reached 3.2% at an

annualized rate. In the last month of 2010 export 40 Budget balance Expenditures Revenues
growth exceeded import growth. As a result, the
trade surplus continues to rise. Swedish exports 20
benefited from the inventory build-up on a global
level after the retrenchment in 2009 and from
growing demand for input and investment goods. 0

International trade, Jan 2000 – Dec 2010

-20
(SEK billion, trend)
jan-07 aug-07 mar-08 okt-08 maj-09 dec-09 jul-10
110 16
Trade balance (rs) Exports Imports Sources: Swedish National Financial Management Authority and
14
National Debt Office.
100

90
12 Government spending has also continued to fall.
10
The improved labour market has helped to limit
80 unemployment costs. Spending on social insurance
8 also continues to trend lower. This is due to the
70 substantial decrease in the number of people
6
receiving sick leave and activity compensation. This
60
4 is expected to continue. The social insurance
50
authority (Försäkringskassan), is predicting that the
2
number of people receiving compensation will fall
40 0 from around 440 000 in 2010 to 300 000 in 2015.
jan-00 jun-01 nov-02 apr-04 sep-05 feb-07 jul-08 jan-10 Although many will leave the labour force due to
Source: Statistics Sweden. demographic reasons, it will remain a challenge for
the labour market to absorb the remainder.
Fiscal policy towards surpluses Otherwise the costs will be shifted to other parts of
The strong increase in economic growth and the social insurance system.
improvement in the labour market mean that
Sick leave and rehabilitation compensation and benefits,
government revenue is trending upward again, Jan 2000 – Nov 2010
despite tax cuts in recent years. In particular, (SEK billion excluding old-age pension fees)
indirect taxes, mainly in the form of VAT, have 8.0
remained steady, mainly due to the stable
household consumption. 7.0

6.0

5.0

4.0

3.0

2.0
Totalt
1.0 Sick leave and rehabilitation compensation 1/
Sick leave and rehabilitation benefits
0.0
jan-00 jul-01 jan-03 jul-04 jan-06 jul-07 jan-09 jul-10

1/ Prior to 2003, early retirement

Source: Försäkringskassan.

Sweden’s municipal and county budgets were

generally strong in 2010, with an estimated surplus

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 The Swedish Economy

Monthly letter from Swedbank’s Economic Research Department, continued

No. 1 • 31 January 2011

of about SEK 19 billion. This was due in no small

part to temporary central government transfers, but
also to spending restraint and better than expected
tax revenue. Going forward, these surpluses will
shrink, and the municipal sector could find it hard to
meet its balanced budget requirement. This is partly
because the transfers will be phased out, but also
because costs stemming from demographic
changes will rise. In addition, uneven progress in
the labour market will affect municipalities
differently. A large presence of service industries
will likely lead to a more stable development, while
those parts of the country where manufacturing
dominates will see more volatility.
All in all, the budget deficit is now shrinking and we
expect the public sector to reach a surplus as early
as this year. From an international perspective,
Sweden compares well. This means that large
buffers to meet future crisis are being built up, but it
also provides room for reforms to reduce
unemployment and for investments in future
economic growth.
Budget deficits and public debt 2011
(Forecast, per cent of BNP)
250
Economy still strong, but risks remain
In summary, recent indicators show that the
Swedish economy is continuing its rapid recovery.
After a quick rebound last autumn, we anticipate a
stable but slightly slower economic expansion in
2011 and 2012.
The risk situation hasn’t changed significantly.
Worries about indebted economies in southern
Europe still remain. However, the forecast risks
stemming from economic policy has increased. The
balancing act for both monetary and fiscal policy
has become more difficult. Consumer prices are
increasing at the same time as unemployment
remains high. Thus, economic policy will have to
apply the brake and accelerate at the same time.
Magnus Alvesson

JAP

200

150 GRE
ITA
BEL US IRL
100
POR FRA UK

60 % GER
SWE LAT SPA
50
FIN DEN LIT
EST
0
2 0 -2 -3% -4 -6 -8 -10 -12
Budget balance

Sources: IMF (WEO) and Swedbank’s forecast.

Swedbanks Ekonomiska sekretariat

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Magnus Alvesson, 085859 3341 eventuella fel eller brister som redovisas i Swedbanks Månadsbrev.
Jörgen Kennemar, 085859 7730

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