Sweden expands monetary policy into an economic boom

Let us begin today with some good news which has emerged from the statistics office of Sweden.

Sweden’s GDP increased by 1.0 percent in the fourth quarter of 2016, seasonally adjusted and compared with the third quarter of 2016.

That is a fast rate of economic growth for a developed country in these times. Actually it would have always have been pretty good. If we move to the detail there was more good news.

Gross fixed capital formation increased by 0.9 percent. Exports increased by 1.8 percent and imports decreased by 0.2 percent.

So Investment and export-led growth which accompanied a rise in production.

Production of goods increased by 0.4 percent and service-producing industries grew by 1.4 percent.

Also it looks as though productivity increased as well as both the numbers below are lower than the 1% output growth.

Employment measured as the total number of hours worked increased by 0.3 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The annual figure is also good but it is plain that it was mostly driven by the last quarter of 2016.

The GDP increased by 2.3 percent, working-day adjusted and compared with the fourth quarter of 2015.

Inflation looks set to rise

One of the main factors in the outlook for inflation is the producer price series which tells us what is coming over the horizon but Sweden has a wider number which includes trade as well as production.

Domestic supply, that is, producer prices on the domestic and import markets together, increased 0.8 percent from December to January and 8.5 percent compared with January last year.

So a surge is on its way and the strongest part is coming from trade.

In the same period, prices on the export market and the import market increased 10.6 percent and 11.3 percent respectively. A part of the increase can be explained by the depreciation of the Swedish krona against other major currencies. On the domestic market, prices increased 5.8 percent in the same period.

So as I discussed only yesterday more generally inflation is on its way as 2017 progresses.

Inflation now

This was impacted in January by the sales season and by an adjustment to the basket of goods used which subtracted 0.1% and was therefore unusual in seeing a drop in the annual rate.

In January 2017, the inflation rate according to the Consumer Price Index (CPI) was 1.4 percent, down from 1.7 percent in December 2016. The CPI fell by 0.7 percent from December 2016 to January 2017.

However even with the drop we see that inflation seems set to move towards its target in 2017.

House Prices

Another sign of inflation can be seen from asset prices of which the clearest and most transparent is house prices so let us take a look.

Real estate prices for one- or two-dwelling buildings rose by almost 1 percent in the last three-month period, from November 2016 to January 2017, compared with the previous period, from August to October 2016. Prices rose by nearly 9 percent on an annual basis in the last three-month period, from November 2016 to January 2017,

In terms of actual prices those percentages mean this.

The average price at national level for one- or two-dwelling buildings in the period from November 2016 to January 2017 was SEK 2.85 million.

If we look for perspective I note that the index was set at 100 in 1980 and that in 2013 it was 554. We learn something from that but as we move on 2014 was 592 or 7% higher than 2015 was 656 or around 11% higher than a year before and 2016 was 711 or around 8% higher than a year before. So there has been plenty of inflation to be seen here and it must be a hard time to be either a first time buyer or someone looking for a larger property in Sweden right now.

Monetary Policy

There was a time that central bankers would respond to fast GDP growth combined with fast rises in house prices and rising inflation with an interest-rate rise so let us look at Riksbank policy.

Monetary policy therefore still needs to remain expansionary. The Executive Board of the Riksbank has decided to hold the repo rate at −0.50 per cent and there is still a greater probability that the rate will be cut than that it will be raised in the near term.

Oh and it is continuing to buy government bonds to add another stimulus to the economy.

The purchases of government bonds will continue for the first six months of 2017, as was decided in December.

That is getting to be a problem as this from The Local illustrates.

“We have had me as finance minister for two years, and we have had a surplus in public finances for two years,” Andersson said at a press conference. Overall, public finances have been strengthened by almost 40 billion kronor ($4.26 billion) compared to 2015,the authority said, with reduced sickness benefit and migration costs contributing to that.

As you can see there is not going to be a ready supply of government bonds to buy and the Riksbank must have created a false market already and is on its way to being a sort of Stockholm Whale in the Swedish government bond market.

Yet so entrenched is it in its views it feels the need to promise even more.

The Executive Board has also taken a decision to extend the mandate that facilitates a quick intervention on the foreign exchange market.

Let me use their own words as a critique of this.

In Sweden, the Riksbank’s expansionary monetary policy has contributed to high growth, falling unemployment, rising inflation and inflation expectations that are back at 2 per cent.

Now please look again at the policies they are enacting.


There is much to consider here from a central bank that was once accused of being “sado-monetarists” by Paul Krugman of the New York Times. These days they must be basking in his praise. Except there are a lot of questions to be answered here. Let me illustrate with another statistic from the monetary sector.

Households’ loans had a 6.7 percent annual rate of increase in the fourth quarter of 2016, which is 0.4 percentage points lower than in the third quarter.

So a fast rate as we note that it is slower than it was! So the monetary taps have been pretty much fully open. In terms of actual numbers here they are.

Households’ loans increased by SEK 56 billion in the fourth quarter of 2016 and amounted to SEK 3 729 billion at the end of the quarter. During the entire year of 2016, households’ loans increased by SEK 235 billion, which is SEK 6 billion more than the increase in 2015.

But here is the “rub” as Shakespeare would put it. How does it work that you have the monetary taps fully open when aggregate economic growth has not only been quite good but is also expected to be? If we go deeper how would they respond to any slow down or recession? The economy has got used to a type of junkie culture on an aggregate scale.

Mind you there is another perspective on this which we get if we look at the population numbers.

In 2016, the number of people listed in Sweden’s population register increased by 144 136, and at the end of the year the population figure was 9 995 153.

So up by 1.5% which means that in terms of per capita the GDP growth fades considerably and we see the fear of the Riksbank and why the ordinary Swede may wonder why things do not seem to be getting much better.

Measuring inflation

I note that the Swedes are abandoning a system the UK ONS is pressing for! I mentioned yesterday the way it wants to use rents for properties which are not rented well look at Sweden.

Cost development for owners of tenant-owned dwellings is currently represented by rental development in multi-dwelling buildings. The new measurement will consist of three main sub-indices – interest costs, the monthly fee for the tenant-owned apartment, and apartment repairs.

Charlotte Hogg

For those of you who are unaware Charlotte is the new Deputy Governor at the Bank of England for markets which includes QE. I will give my view of her woeful performance this morning in front of the Treasury Select Committee another time but for now here are some other views.

For the new DG Markets, Charlotte Hogg has a pretty shaky grasp of QE, transmission mechanism and market impact. ( h/t @moyeenislam )


Charlotte Hogg grew up in a moated country house, where evenings were spent debating Thatcherite privatisations  ( h/t @Ian_Fraser )


Charlotte Hogg says “didn’t know” what her banker brother did at Barclays before she asked him for a TSC questionnaire. Odd ( h’t @BenChu_ )





9 thoughts on “Sweden expands monetary policy into an economic boom

  1. Hi Shaun
    I had some dealings with Charlotte’s mum when she was at BG and afterwards. Well named family,’noses in troughs’ etc. Her mum was as thick as s*it, and full of it.
    Good to know us serfs know who our masters continue to be.
    Swedish GDP/capita follows a familiar pattern. Its no coincidence that Sweden and Germany have been at the forefront of stocking up on their ‘deltas and epsilons’ from MENA. Got to keep peasantry well stocked don’t you know!

    • Hi JW

      It was an incredible performance from Charlotte Hogg and I do not mean that as a compliment. The bit I focused in on was when she was demonstrating that she knows little or nothing about how to unwind QE which is especially awkward when as Deputy Governor for markets it is supposed to be her speciality! It could not have been clearer that it was not what you know but who you know that was at play when she was appointed.

      As to Sweden the real problem comes when the next recession hits which is why the Riksbank is so desperate to avoid that which of course means that the crunch will be harder when it comes.

      • Nepotism and incompetence at the BoE I’m shocked……sadly it’s everywhere it’s not just the news that’s ‘fake’.

    • Hi Dutch

      As no establishment ever wants to go cold turkey these days perhaps take a hint from France?

      “French official says a police sharpshooter has accidentally opened fire at a President Hollande speech, injuring two people” ( Sky News )

  2. “If we go deeper how would they respond to any slow down or recession?”

    no no , sorry , this is not about the Swedish economy – its about the BANKS

    who is going to go tits up Shaun?

    or is this protection against knock on effects of other Banks on Swedish Banks and Government


  3. I’m not going to criticise Sweden but prefer to observe it. It will be interesting to see what happens next, their economy is doing well, maybe it will continue doing well or simply stop growing when the next recession arrives – this could be another Black Swan event but of the positive kind requiring what’s left of the old economics text books to be thrown away.

  4. Great blog as always, Shaun.
    Thank you for the news about the reform in the Swedish CPI’s treatment of owner-occupied housing. I always got a headache when I thought about their methodology, and one of the reasons was their quite different approaches to houses and to flats. I am not sure I understand exactly what they are doing now for flats (the detailed Swedish methodology on the subject at the Statistics Sweden website was Greek to me) but it looks to be closer to the opportunity cost approach they use for houses. I agree that it is a bit of a blow to the ONS effort to make the CPIH the headline rate of inflation.
    I notice that the Riksbank Monetary Policy Report for February states (and this would seem to be standard to every issue): “The CPI is the target variable for monetary policy, but the aim of the measure is also to calculate the impact of price fluctuations on households’ living costs and it is used, among other things, to calculate the price base amount. The CPI includes households’ mortgage costs, which are directly affected by the Riksbank’s repo rate. Instead, it is therefore sometimes appropriate to use the CPIF, in which mortgage rates are held constant.” This is a core inflation measure, and the Riksbank also looks at CPIF ex energy as a core measure. Sweden is the only country of any size (with more than a million people) whose central bank includes mortgage rate changes in its target inflation indicator besides Canada. So it is distressing to see that while the Riksbank quite sensibly filters out changes in mortgage rates in its core inflation measures, the Bank of Canada has since the fall of 2016, moved to including changes in mortgage rates in ALL three of its new core inflation measures that constitute its operational guide (at least they are not explicitly excluded).
    The CPIF inflation rate for January was 1.9%, up from 1.6% in December, so it is showing more inflation than the overall CPI.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s