© Robert Bergqvist
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With a falling industrial production and increasing household debt, how would you evaluate the current economic situation in Sweden?
Just a half year ago the Swedish economy was quite strong, and it was a surprise that there was not any negative impact from the weakening global environment. However, now we are observing signs of an economic slowdown in Sweden. I think the reasons for the slowdown are not coming from domestic sources, but rather due to negative developments in the international economy, and especially the uncertainty about what is happening currently in Europe.
Sweden is an export-dependent country. Around 50% of the economy has some connection to the export sector and 70-75% of all Sweden's export is going to Europe. Thus, if there is a slowdown in the global economy and especially in Europe, Sweden should be affected and that is also what we are seeing in fact right now. In addition to that, during the summer period there was a strengthening of the Krona, consequently affecting many exporters, who also suffered from the slowdown in the global demand.
As to the household indebtedness, I know that lots of people are focusing on household debt in Sweden. If you look at the levels of household debt today, it is 175% of disposable income. However, I think we have to put the household debt in Sweden in a bigger context, because one of the key questions here is - could you justify current price levels in the housing market? Today I would say house prices have decreased by around 3% and that is not very much. Currently we see some sort of stabilization in the housing market, house prices are moving sideways with a kind of tendency that they are moving a bit downward, but without dramatic developments. I think we are going to see some slowdown in house prices development, with the prices declining around 10% from the peak, but I do not forecast any major corrections in the housing markets and the reason is that we have a low interest rate environment.
We believe that the unemployment rate should grow, and that would also increase the pressure on the government to spend more money, hence we expect more fiscal stimulus in Sweden and that should provide some support to the labour market in Sweden. The government is able to spend more money because we have quite strong government finances. If we look at the general government debt in Sweden, it is today close to 37% of GDP, and that is not very much.
If we are able to justify price level in the housing market, I think we could also justify the levels of household indebtedness that we have right now. Of course we could be concerned about household indebtedness, but then it means that we have a pessimistic view on the labour market, we have to expect that the unemployment rate should increase quite substantially and also believe that it would be difficult for the government to spend more money. I think that people should not be very concerned about the house price level in Sweden and household indebtedness.
Do you anticipate any measures from Sweden's central bank any time soon?
Today the policy rate in Sweden is 1.25% and we expect Riksbank to cut rates by 25 basis points in December. Thus, by year end we should have policy rate at 1%, and then we forecast that the central bank will cut interest rates one more time during the first quarter next year. Afterwards, we believe Riksbank will stop at the level of 0.75%, because it is quite obvious that for many central banks monetary policy has become not very effective in providing support to the economic growth. I think today it is a task for the government. Since we believe the government in Sweden will spend more money that should also provide some support to the economic growth. All in all, there is room for Riksbank to cut rates by in total by 50 basis points within the next 6 months.
What is your outlook for Sweden's economy for the next year?
I think the economy will face a slow recovery. We forecast external demand to continue to be quite subdued, because we have a pessimistic view on the Euro area. We believe we are going to see zero economic growth within the Eurozone, and also slightly slowing growth in the U.S. and Asia. Thus, the recovery in Swedish economic growth will mainly come from domestic demand, because we think that households have fairly strong balance sheet. Moreover, if we look at households' income for the next 2 years, we believe that they will receive wage increases of around 3% in nominal terms, while the inflation rate is expected to be on average around 1% for 2013-2014, which means that real wage increase of around 2%. Thus, the households should have room for strong consumption.
Of course it is very important for economic growth in Sweden that the uncertainty, coming from abroad: from the developments in Europe and also to some extent from Asia and the US, is reduced. However, we think that the main driver for the economic recovery within the next year or so should come from domestic demand, but not from external demand.