Sweden has economic growth of 2.7% but -0.1% interest-rates! And will Portugal have a negative bond yield?

Today something really rather extraordinary has happened in the world of economic policy and I wish to combine analysing it with a continuing issue which is also rather extraordinary which I touched on in Wednesdays blog. Let us take a trip to Scandanavia and in particular to Sweden which is in the grip of a rather extreme monetary experiment.

Sweden’s GDP increased 1.1 percent in the fourth quarter of 2014, seasonally adjusted and compared to the third quarter of 2014. GDP increased 2.7 percent, working-day adjusted and compared to the fourth quarter of 2013.

To a cursory reader this may seem that things are going well. A solid annual rate of growth caused by an acceleration at the end of the year looks rather satisfactory. But wait because there is more.

The retail trade sales volume increased by 5.1 percent in January compared to the same month last year. Retail sales for consumables increased by 2.1 percent while retail sales for durables increased by 7.7 percent. The information is working day adjusted.

So an acceleration in economic growth has been followed by booming retail sales figures as Swedes relax into their armchairs and review a strong economic performance. Some of you may be wondering at what point under monetary theory the Riksbank will “take away the punchbowl” should the party continue? Oh hang on…

Sweden’s Riksbank

From the 11th of this month.

At the monetary policy meeting on 11 February, the Executive Board of the Riksbank decided to cut the repo rate to –0.10 per cent and to adjust the repo-rate path downwards somewhat.

This was not all as in another groundbreaking moment for Sweden the Riksbank decided to do something else as well as this.

A majority of the Board members also decided that the Riksbank shall buy nominal government bonds for SEK 10 billion.

Here we have a problem which is that these measures have taken place after a surge in the Swedish economy which in the past might indicate a tightening and not a loosening of policy! Of course the Riksbank should be planning some 18 months or so ahead so let us see if it sees barriers or some form of roadblock to future Swedish economic growth.

The Riksbank’s overall assessment is that growth is normal at present and that GDP will grow by 2.7 per cent this year, 3.3 per cent in 2016 and 2.2 per cent in 2017.

This is the moment at which Snoopy in the Peanuts cartoon series would say “Ahem!”. So growth is pre credit crunch normal and indeed may well have been boosted by past interest-rate cuts since this phase began back in December 2011 when the repo rate was cut from 2% to 1.75%. In fact if you believe that interest-rate cuts boost an economy when they are made near to zero or in a ZIRP world then the cuts from 0.75% to 0.25% made last July and the cut to 0% made last October have yet to fully work their way through the system. So they are applying a supercharger to the turbocharger or at least they think that they are! Others may be singing along with the Smiths.

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?

If only they had added Stockholm to the list in the way that they did Dublin?!

What is the claimed rationale for all this then?

It is all about inflation and in particular fears of disinflation and what many call deflation.

Inflation is very low and lower energy prices are expected to lead to low inflation over the next 12 months

However some care is needed here as of course central banks have overlooked above target inflation because economic growth is low. It would appear that the asymetry I have argued all along is being proved by the Riksbank as it ignores strong current growth and solid future growth due to in effect some negative inflation prints. But there is a nuance because it does not expect the inflation to continue in such a low/negative vein.

Underlying inflation, for example the CPIF excluding energy, appears to have bottomed out and to be increasing. Wages and prices are expected to rise at a faster pace as resource utilisation increases. Import prices are also expected to rise as a result of the international recovery
and to contribute to higher inflation.

So they are cutting on the grounds of what they argue is a temporary fall in consumer inflation?  Somewhere along this path we are not being told the full truth and may not be being told much truth at all. For those who worry that something is wrong in the world’s financial system such moves only exacerbate the fear and worry. The state of play here was summed up by the nutty boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha

Propaganda ministers
Propaganda ministers
I’ve a-got a heavy due
I’m gonna walk all over you

Madness, madness, they call it madness

Negative interest-rates for savers and bank depositors

This subject is one which no doubt would wake up even the gentleman who slept though Paul Johnson’s presentation at Wednesday’s Inflation Report Public Meeting! Here is the Riksbank discussion.

Is there not now a risk that banks will in turn introduce negative interest rates, or some kind of fee, for the customers’ savings or wage accounts?

The reply really does give us an insight in the rarified world in which central bankers now inhabit.

Mr Jansson’s assessment was that this risk is limited for at least two reasons. First, this would of course not be a very popular measure among the banks’ customers……..
Second, the costs that the banks will incur as a result of the negative interest rates are not particularly substantial.

So banks only do what is popular with customers then Mr Jansson? In the UK we have FOREX and LIBOR manipulation and of course Payment Protection Insurance miss-selling and a vast range of savings interest-rate cuts. Perhaps the £11 million annual remuneration of the head of Lloyds Banking Group announced this morning also goes on the list. I am sure that readers have their own list! In a way the latter statement is as unworldly as those who are used to dealing with banks will be very aware.

Portugal and its amazing world of bonds

By the time that you read this then the latest GDP (Gross Domestic Product) numbers for Portugal will probably be published. However it has done better up to the third quarter of 2014 but you see in a link with the past the annual growth rate is 1.1% which if you look back over Portugal’s history is about its long-term growth rate in the good years. For now let us draw a discreet veil over the bad ones. But such a performance cannot support a national debt to GDP of 131% and rising. Yet even the new record numbers I discussed on Wednesday have been replaced by this. From Bloomberg yesterday.

Portugal’s 10-year yield dropped two basis points, or 0.02 percentage point, to 2 percent as of 9:27 a.m. London time and touched 1.998 percent, the least since Bloomberg started tracking the data in 1997.

Actually it is now 1.88% which does not leave much of a margin for default risk does it?

There are dangers in international comparisons such as different currencies but the UK ten-year Gilt is at 1.78% as I type this.


It is hard to get over how wrong the two issues discussed today are. We have the inversion of economic policy and something of a perversion and inversion of bond yields. Could  a country which is likely to default (Portugal or Italy) have a negative bond yield? in that world economic may well be joining the late great Richard Feynman.

“I think I can safely say that nobody understands quantum mechanics.”

As to the Riksbank well its policy based on defeating some mythical deflationary beast will have had some food for thought from the news from Italy earlier.

In February 2015, according to preliminary estimates, the Italian consumer price index for the whole nation (NIC) rose by 0.3% compared with the previous month and declined by 0.2% with respect to February 2014 (the annual rate was -0.6% in January 2015).

Oh and in line with one of the comments yesterday it was introduced as shown below on twitter.

Italian prices unexpectedly rose in February.

Like the oil price rise of 16% (Brent Crude) that has unexpectedly happened in the past days and weeks of February?


27 thoughts on “Sweden has economic growth of 2.7% but -0.1% interest-rates! And will Portugal have a negative bond yield?

  1. Since all bonds are implicitely guaranteed by ECB, there should be no price difference between Portugal and Germany, and that is what we are seeing in yields.

  2. Hi Shaun

    The conclusion I have come to is that the CBs will only raise rates when they are forced to do so; they will never raise them as a voluntary act in response to “indicators”. All this is just talk and it will remain so; we will be hit by the next recession before we get a rate rise!

    Let’s face it any interest rate rise will take away discretionary spending and further exacerbate the fairly universal condition of demand deficiency here and elsewhere;. interest payments are a transfer from debtors to creditors and I would guess that the MPC of creditors is greater than that of debtors. This (private) effect is quite apart from the effect on government deficits which would also ratchet higher.

    I also believe ( and indeed hope) that CBs are not as dumb as they appear to be; they are forced to view the situation through a certain type of prism (eg by taking official statistics as being “correct”) and make judgments accordingly. I suspect many know that the “real” situation varies from fragile to outright perilous and that the statistics either do not tell the full story or actively mislead.

    I think we are going to have to have a “bust” and a reset.

    • Hi Bob J

      It would have been much better in my opinion if we had taken the “bust and reset” option at the beginning of the credit crunch so that we could then move forwards. However no-one in authority was willing to countenance a 10%+ fall in recorded GDP before we then regained ground. Too many awkward questions!

      As to the being late of the interest-rate rise party then I argued this from the early days of this blog. Again I visited it in 2010 when I suggested a nudge higher in UK Base Rates to ameliorate the inflation I could see coming (RPI and CPI both exceeded 5% in 2011). The conventional view was that it would hurt the economy but if you think now of how the inflation the “expansionists” overlooked impacted on real wages my case from then is reinforced.

  3. Good morning Shaun,

    The world certainly is a strange place these days! Funnily enough I have just finished reading ‘In search of Scrodingers cat’ by John Gribbin which attempts to explain quantum mechanics. I thoroughly recommend it but it should come with a health warning – attempting to read more than one chapter a day may make your head explode! From the world of the weird we come to the very weird – today’s financial markets and economic policy. I have to confess I am often confused as to what is going on and appreciate your explanations or at least confirmation that things are indeed strange as I often think I am just being thick!

    Various central banks are obsessed with deflation or very low inflation and yet seem to ignore the reasons why inflation is low at the moment and therefore appear to me to overreact. The classic theory of a deflationary spiral may just be that – a theory. I have yet to hear of anyone deferring a purchase on the basis it may be cheaper tomorrow and I include my Greek friends in that statement. Certainly more than 95% of my expenditure falls into the classification of necessary and not something I could or would postpone on the basis it will be cheaper in future.I have yet to hear anyone say ‘I don’t think I will eat today, or drive my car, or heat my house because I might save a couple of quid if I do it tomorrow’! I would be interested to know if, outside of truly exceptional circumstances such as a stock market crash, there is any evidence of people differing purchase in a mildly deflationary scenario?

    As for Portuguese bonds, and indeed many Eurozone bonds, I can only assume that the markets bank on big daddy Germany keeping everyone afloat – but I am not sure that it is a safe bet at all! Either that or the bond markets exist in a parallel universe (see quantum mechanics – multi universe theory!)

    • Hi

      I’d recommend a book entitled: “Who’s Afraid of Schrodinger’s Cat?” by Marshall and Zohar. It’s a glossary book that not only covers Schrodinger but also such things as Godels Theorem and Heisenbergs Uncertainty principle.

      • Heisenbergs Uncertainty principle

        yes really odd

        If you know who he is – you can’t tell where he is

        and if you know where he is – you don’t know who he is …..

        bit like British Secret Service on Jihaddis 😉


        • Not really odd when you consider that ‘matter’ doesn’t exist, everything is energy fluctuating between different states within a probability spectrum.
          Apply the same logic to the apparent randomness of billions of ‘economic’ transactions across the de-regulated financial markets by algo-driven trading and perhaps it might point to why no-one ‘controls’ what happens. We have created a ‘multi-verse’ in ‘fiat’ space.

  4. Shaun A very varied piece today Sweden, Portugal, Italy and negative bonds do you thing
    that things are heading towards a conclusion?

    My grandaughter is reading maths at Uni so if you think quantum theory is difficult then
    try theoretical maths. If I might offer an analogy shrodingers cat is sealed in a box
    with a flask of poison and a radioactive source, can we think of anything toxic that
    should also be in there? “Ahem!”

    Confused,you will be but for how long?

    • Hi jrh

      Firstly good luck to your grandaughter. I hope that theoretical mathematics does not make the mistakes that theoretical economics has made of preferring theory over reality.

      As towards a conclusion yes we are but the can-kickers never seem to run out of energy as China has shown with this morning’s interest-rate cut however even they run out of road eventually.

  5. Is Sweden similar to Switzerland and Denmark? Is it using negative rates for the short term problem of keeping its exchange rate in touch with the Euro and is saying about future inflation “I’ll worry about that tomorrow” (as Scarlet Ohara said in Gone With The Wind)? Perhaps its CB thinks it can’t be honest about this position so is clutching at inaccurate straws to justify cutting rates into a boom. Please let me know if I’ve misunderstood anything or you disagree.

    • Hi Doubting Dick and welcome to my corner of the blogosphere

      Actually the Krone has been falling overall against the Euro since early 2013 when it was at 8.32 to the Euro and is now 9.36. So Sweden has received a boost from that over the period. As the ECB has tried to push the Euro lower in 2015 maybe this has stabilised or reversed a little. So actually overall the Krone has reinforced Riksbank policy.

      So lower interest-rates and a weaker currency the pedal is being pushed to the metal is it not?

  6. Hello Shaun ,,

    For one thing the Banks here have been mooting for sometime to drop “free” banking and go to a USA / European model where they can nickle and dime you at every corner ….

    But they#ll have to move as a herd because if one doesn’t then see the others panic…..

    Also if we really do see negative rates on savings then they too will evaporate as people will buy gold or just store notes under the mattress !

    Perhaps that’s the plan , push everyone into cash then inflate away to infinity and beyond !

    Frankly I don’t think they dare , see the money pulled out , a bank run will happen , and they’ll never endanger the banks that way ……


    • Hi Forbin

      The UK banking sector has been pressing for an end to “free banking” for as long as I can remember! I put it in quote as though who even nudge being overdrawn will have quite a different view.

      As to the cash argument I note that a few places are beginning to argue that larger denomination notes are not required. Of course exactly when in fact many may be thinking that they are required as a way of avoiding negative interest-rates. Ironically will this lead to actual money printing via higher demand for notes and coins. We have seen stranger developments in the credit crunch era…

  7. With regard to Swedish inflation, the Swedish Riksbank, like the Bank of Canada and the Icelandic central bank, targets a CPI that includes interest rates, so interest rate drops to boost the target rate of inflation will also serve to lower it. The Swedish CPI has a dysfunctional owner-occupied housing component: an ugly hybrid of a rental equivalence index for condominium apartments and an opportunity-cost index for other types of OOH.
    The annual real estate price index for Sweden showed an increase of 6.9% for 2014, up from 3.5% in 2013, while Greater Stockholm showed an increase of 10.3%, up from 4.1% in 2013. Since, by any measure, consumer price change was low over the last two years, these nominal price increases also imply very substantial real price increases. The Riksbank may be inflating a housing bubble that could lead to a housing bust of the kind that hit Sweden in the early 1990s.

    • Hi Andrew

      Very like the UK RPI in that respect isn’t it and the reason why the RPI went negative as the Base Rate cuts of 6 years plus affected it. Food for thought for the media and their record low headlines for UK inflation!

      As to the Riksbank there are genuine dangers as you highlight. Even the European Commission has highlighted the potential dangers here.

      What is the response? Negative interest-rates, QE and until recently a falling currency against the Euro. What could go wrong?

  8. Hi Shaun,

    Re your comment on Jansson being out of touch with the reality of banker’s attitudes.

    Would that be British bankers or Swedish? The reason I ask is that Sweden, being a socialist country, albeit practising Revisionist Marxism, (and aren’t they doing well when compared to capitalist models – relatively low public debt and good economic growth, food for thought for the “capitalism is the one way the true way and the only way” charlies, oh, and Germany springs to mind too) they may have a social contract between the people, employers(banks etc) and the Government in the same way Germany has.

    If so, Swedish Banks may believe in looking after their customers to a limited extent. Out of all the banking nightmares, I haven’t heard anything about Swedish malpractice but maybe you can enlighten me on that?

    I see disinflation is increasing in Sweden and wonder what they plan to do when the cycle turns and they are faced with negative GDP growth? Cut rates further????

    Presumably, given that the new Central Bank mantra seems to be morphing into pro-cyclical policy they will increase rates in the face of a recession!!??##@@

    • Hi Noo2

      I suspect that central banks will display yet another form of asymetry in such a situation. The cut cut cut strategy has found another fan as the PBOC in China has cut already today. They do enjoy making their moves when the think that the evil capitalist imperialists will have their eyes of the ball.

      As to the Swedish banks I am afraid that their record if far from trouble free. The were involved in the problems in Latvia and I believe in the Swiss Franc loans in Eastern Europe. Also whilst I am sure that the Swedes are very nice people there is the rationale behind the bilateral loan to Ireland..

    • It was Brits in the street that practiced carpetbagging – the practice of demutualising building societies for a quick buck. So Britain’s problems go well beyond a Bankster elite.

      And I’d suggest Sweden’s low debt and relatively good management is directly related to LACK of CORRUPTION. There are many examples of bankrupt Marxist states, and it often equates to the communist elite living extremely well while the 99% queue for basics like bread.

      • Completely agree everything you said. Personally, I have no problem with either Capitalism or revisionist Marxism but I have serious problems with the (corrupt) implementation of both ideologies in various countries

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