Sweden’s reliance on exports to Europe has turned Scandinavia’s erstwhile strongest economy into the region’s laggard as job losses undermine demand.
“It will get worse before it gets better,” said Andreas Jonsson, an economist at Nordea Bank AB in Stockholm. “We will see rising unemployment during most of 2012.” Jonsson said there is a risk the largest Nordic economy will contract this year, versus the central bank’s forecast for 0.7 percent growth.
A recession would follow 3.9 percent expansion in 2011, when Sweden outgrew neighboring Norway and Denmark. Now, Swedish reliance on trade with Europe, where it sends 70 percent of exports, has left the nation more vulnerable to the euro region’s debt crisis. Gross domestic product shrank 1.1 percent in the fourth quarter, the statistics office said yesterday. The central bank estimates unemployment will rise to 7.7 percent this year and stay there until 2014.
Central bank Governor Stefan Ingves said Feb. 15 Sweden is entering a period of “much lower growth,” prompting him to cut rates for a second time in as many meetings. Those cuts probably won’t be enough to prevent a recession, Jonsson said.
“We’re seeing a big need for downward revisions to the Riksbank’s macro forecasts,” he said. “It also opens up for yet another rate cut in April.”
Sweden Vs Norway
Swedish output contracted last quarter as the economies of Denmark and Norway grew. All three nations carry AAA grades at the three main ratings companies. Sweden’s krona lost 0.2 percent against the Norwegian krone, declining for a fourth day, to trade at 0.8427 as of 3:14 p.m. in Stockholm. That’s the lowest rate since October last year.
Sweden is more vulnerable to a slowdown in exports because the country “is heavily dependent on cyclically sensitive investment and intermediate goods,” said Tina Mortensen, an economist at Citigroup Global Markets Ltd. in London, in a note. “But private consumption is also set to decelerate markedly.”
Sweden’s central bank, the Riksbank, has lowered its benchmark interest rate twice since December, reducing it to 1.5 percent last month. Policy makers indicated then they will keep rates unchanged over the next year.
“The GDP-level is now almost 2 percentage points lower than what the Riksbank had in mind when they put forward their latest forecasts,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, in an e-mail reply to questions.
“This creates a huge gap in estimates of resource utilization and implies that the Riksbank is in for another downward revision to their inflation forecast,” he said. Danske Bank sees a quarter point cut at the Riksbank’s April meeting.
Finance Minister Anders Borg signaled yesterday the government may be willing to add stimulus should the economy continue to decline.
“The development at the end of last year was much weaker than we predicted,” Borg said. “We’re monitoring the development carefully and are ready to act if things turn out much weaker than we thought.”
Borg signaled last month that the government will probably cut its economic growth forecast to about 0.5 percent this year, from a 1.3 percent estimate in August. At the Riksbank, the board is split on how much easing is needed to save the economy from a recession. Two of the bank’s six board members support deeper cuts.
Swedish manufacturing expanded at a slower pace last month than in January as sub-indexes for orders and production fell, according to Swedbank AB’s purchasing managers’ index published today.
“The forecasts for the euro area and thus demand for Swedish exports are too optimistic,” Riksbank Deputy Governor Lars E. O. Svensson said at the central bank’s February meeting, according to minutes published yesterday. “The forecast for Sweden is also too optimistic.”
Svensson argued for a 0.5 percentage point cut to 1.25 percent and for further easing to 0.75 percent by the end of the third quarter.
“The probability of further rate cuts has risen,” said Anders Brunstedt, an analyst at Svenska Handelsbanken AB in Stockholm. Handelsbanken may have to cut its forecast of unchanged rates to as low as 1 percent, he said.
Still, concerns about Europe’s fate have eased this year, as leaders agreed on a second bailout package for Greece and the European Central Bank offered unlimited three-year loans to ease credit concerns.
Swedish retail sales unexpectedly rose following the central bank’s rate cuts and after stock market gains boosted incomes. The trade surplus was more than four times bigger than estimated in January, improving from 16-month low in December.
“What happens further down the road is very uncertain,” Jonsson said. “We’re seeing some bright spots. But we do see a weak development during the first half and, most significantly, we’ll see a weak development in the labor market.”
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