Sweden has economic growth of 4% with an interest-rate of -0.5%

We can end the week with some good news as the economic growth figures produced so far today have pretty much varied between better and outright good. For example I note that the 0.5% growth for France makes its annual rate of 1.8% a smidgen higher than the UK for the first time in a while. Also Spain has continued its series of good numbers with quarterly GDP ( Gross Domestic Product) up by 0.9%. But the standout news has come from the country which I have described as undertaking the most extraordinary economic experiment of these times which is Sweden.

Sweden’s GDP increased by 1.7 percent in the second quarter of 2017, seasonally adjusted and compared with the first quarter of 2017. The GDP increased by 4.0 percent, working-day adjusted and compared with the second quarter of 2016.

Boom! In this case absolutely literally as we see quite a quarterly surge and added to that growth in the previous quarter was revised higher from 0.4% to 0.6%. This means that it grew in the latest quarter by as much as the UK did in the last year and is the highest quarterly number I can think of by such a first world country for quite some time.

If we look into the detail there is much to consider. There was something unusual for these times.

Production of goods rose by 3.0 percent, and service-producing industries grew by 1.7 percent

It also looks as though the demand was domestic as trade was not a major factor.

Both exports and imports grew by 0.7 percent

There was a sign of booming domestic consumption here.

Household consumption increased by 1.1 percent

Also investment went on a surge.

Gross fixed capital formation increased by 3.8 percent.

However there is kind of an uh-oh here as I note this from Nordea.

Residential construction continues to be a very important growth driver (scary!), but also other investments seem to have picked up and more than forecast.

We will look at that more deeply in a moment but first let us note that the numbers below suggest that productivity has picked up.

Employment measured as the total number of hours worked increased by 0.8 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The Riksbank

The latest minutes point out that the monetary policy pedal remains pressed pretty much to the metal.

At the Monetary Policy Meeting on 3 July, the Executive Board of the Riksbank decided to hold the repo rate unchanged at –0.50 per cent. The first rate increase is not expected to be made until the middle of 2018, which is the same assessment as in April. The purchases of government bonds will continue during the second half of 2017, in line with the plan decided in April.

Still they did say they were now less likely to push it even harder.

it is now somewhat less likely than before that the repo rate will be cut further in the near term

Rather amazingly they described the policy as “well-balanced” but I guess you have to think that to be able to vote for it. However today’s data will be welcome in a headline sense but is yet another forecasting failure as they expected 0.7% GDP growth. Now a 1% mistake in one-quarter makes even the Bank of England’s failures at forecasting to be of the rank amateur level.

Let us move on with the image of the Riksbank continually refilling the punch bowl as the party hits its heights as opposed to removing it.

What could go wrong?

Even the Riksbank could not avoid mentioning this.

the risks associated with high and rising household indebtedness were also discussed.

Did anybody mention indebtedness?

In June, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 7.1 percent, which means that the growth rate increased by 0.2 percentage points compared with May.

So the rough rule of thumb would be to subject economic growth and estimate inflationary pressure at 3% which of course would lead to interest-rates being in a very different place to where they are. Also if you look at the issue of the domestic consumption boom you be rather nervous after reading this.

Households’ loans for consumption had a growth rate of 9.4 percent in June, an increase compared with May, when it was 7.3 percent.

I noted earlier the fears over what is happening in the housing market and loans to it have just passed a particular threshold.

In June, households’ housing loans amounted to SEK 3 005 billion, which means that lending exceeded SEK 3 000 billion for the first time. This is an increase of SEK 27 billion compared with the previous month, and of SEK 198 billion compared with the corresponding month last year. This means that housing loans had an annual growth rate of 7.2 percent in June, an increase of 0.1 percentage point compared with May.

Another bank subsidy?

I have noted before that fears that negative interest-rates would hurt bank profits have been overplayed and as we note mortgage and savings rates we get a hint that margins are pretty good.

The average housing loan interest rate for households for new agreements was 1.57 percent in June…….In June, the average interest rate for new bank deposits by households was 0.07 percent, unchanged from May.

I also note that banks remain unwilling or perhaps more realistically afraid to pass on negative interest-rates to the ordinary depositor.

House prices

Of course this will look very good on the asset side of the balance sheets of the Swedish banks.

Real estate prices for one- or two-dwelling buildings rose by almost 4 percent in the second quarter of 2017 compared with the first quarter. Prices rose by nearly 10 percent on an annual basis in the second quarter, compared with the same period last year.

In terms of amounts or price it means this.

The average price at the national level for one- or two-dwelling buildings in the second quarter 2017 was just over SEK 2.9 million.

If we look back we see the index which was based at 100in 1981 ended 2016 at 711 and we learn a little more by comparing it to the 491 of 2008. There was a small dip in 2012 but in essence the message is up, up and away. For owners of Swedish houses it is time for some Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
All the things I could do
If I had a little money
It’s a rich man’s world


If we go for the upbeat scenario then it is indeed time for a party at the Riksbank as we see Sweden’s economic performance in the credit crunch era.

The problem with being top of the economic pop charts is that it so often ends in tears. The clear and present danger is the expansion of lending to the housing market and the consequent impact on house prices. Also the individual experience is not as good as the headline as the population grew by 1.5% in the year to May to 10.04 million which of course is presumably another factor in higher house prices.




15 thoughts on “Sweden has economic growth of 4% with an interest-rate of -0.5%

  1. Hi Shaun, apologies for posting but I have been astounded at the IMF report on Italy being hailed as the country being on the road to recovery and endlessly retweeted as great news from people who I thought knew better. Here is the summary:
    “The economy continues to recover, unemployment and nonperforming loans have declined somewhat from their crisis peaks, and public debt appears to be stabilizing. Growth remains moderate, however, despite exceptional monetary accommodation and fiscal easing, and Italy continues to underperform its euro area peers, owing to persistent structural weaknesses, imbalances, and financial fragilities. Thin policy buffers leave the economy exposed, including to the start of withdrawal of monetary accommodation. Meanwhile, real disposable incomes per capita have fallen below pre-euro accession levels and the distribution of the burden of adjustment has been uneven, potentially contributing to public discontent”.

    Is it just me that finds this summary to be one of unremitting gloom rather than some sort of orwellian triumph?

      • Hi bill

        No problem but the real problem for Italy is this ” Growth remains moderate, however” because that is what has happened in Italy in the better periods for quite a while hence the Girlfriend in a Coma theme.

    • Bill, I return to Italy next month to drive my red italian sports car around the beaches. I can go there because my sterling still buys something. As you say there is NO obvious recovery on the street, the place and people are still in the economic equivalent of 1983 but of course very stylish.

    • I thought the IMF were crystal clear in their view – Italy: Reforms Needed For Stronger Growth and Stability. Here’s the link – http://www.imf.org/en/News/Articles/2017/07/24/na072717-italy-reforms-needed-for-stronger-growth-and-stability?cid=em-COM-123-35686

      Nowhere do I see them saying it’s on the road to recovery except for a hint in the first line which is immediately retracted as they talk about weak recovery, subpar growth and come up with a mountain of suggested reform measures to help put Italy right..

        • You may be interested to know I am a “remainer/Bremainer/Bremoaner” or any other derogatory term you wish to apply. The EU is actually doing OK but not booming whilst Italy specifically is a basket case and always has been even when it was out of the EU and later the EZ so EU membership seems to have had little effect on it.

          That said the UK is doing OK too but most of this was hard baked in 2 – 2.5 years ago by monetary policy at that time. The weakening of the GBP against the US dollar is related to the dollar being in a strengthening phase which should start waning next year. The GBP got itself and gave itself a further push down by voting Brexit and then Carney pushed it further down with his rate cut.

          The UK was always heading for inflation this year and next regardless of Brexit due to monetary policy 2 years ago but the collapse in the GBP has worsened the effect while the collapse in oil price has lessened the effect. The GBP collapsed following Brexit vote because investors looked into the future and didn’t like what they saw so sold and ran abroad.

          Brexit problems are structural and will take time to play out . The first order effect has been the loss of investor confidence via sell outs of UK companies and money moved abroad resulting in a falling GBP (although it has staged a partial recovery in recent weeks) and thence providing an extra push up on prices of imported goods and commodities.

          The second order effect will be continuing increasing prices if the UK insists on hard Brexit (i.e. no movement of labour/closed borders to immigration) as of course the EU will retaliate via tariffs on UK exports to the EU, whereby the UK will retaliate via tariffs on EU exports to the UK.

          The UK exports 15% of it’s GDP to the EU while the EU exports 3% of it’s GDP to the UK. Although individual EU countries will be hit harder than others it is clear who will suffer the most.

          The argument is that the EU politicians will be leaned on by EU businesses not to go down the tariff route and the politicians will comply. The reality is that in such an event EU politicians will tell the EU businesses to concentrate on increasing market share in the remaining 26 EU free trade countries to replace lost UK sales as the EU/EZ is the pet project of EU politicians and in politics hard headed commerce rarely plays a role when projects and political dreams are in play.

          The further assumption in the UK is that once the foreigners are gone there will be jobs for all. In fact the UK already has full employment notwithstanding arguments about underemployment which has always been there since records began.

          Another assumption is that rising prices don’t matter because employers will simply pay higher pay rises to pace inflation. The track record on that in the UK over the last 10 years does not back up the fantasy.

          Personally I believe many UK people think certain work is benneath them and there is a real probability of labour shortages in certain industries where the British won’t work like food production which will lead to shortages and price rises.

          The things I have outlined will take place over about 3 – 5 years after a hard Brexit has been implemented and not overnight or even over a few months.

          Having said all this I am heartened and simultaneously alarmed by what I am hearing from UK politicians re a transitional period where the UK will still have a CAP (vehemently argued against by people who want Brexit) and open borders (another major plank of Brexit) which will likely lead to no tariffs on either side during the transitional period but I begin to suspect they are softening the electorate up for a change of direction to rejoining the EU The reason I am alarmed at such a turn is that any rejoining of the EU would require a commitment ti adopt the Euro which would be a disaster for the UK, I just can’t work out if it would be as disastrous as Brexit.

          The UK was in the sweet spot prior to Brexit with EU membership but still retaining the GBP, that has now gone, all paths from here are hard.

          • Hi Jive,
            That was such a good comment I’ve cross posted it on the reply thread under my Brexit California post, thanks.

  2. Shaun, regarding Sweden. They need to be put on a pedestal. They are the dream example of Govt administered excess. Flood the nation with immigrantion, ramp up the credit availability and watch real estate and consumption borrowing go through the roof.
    I can see what Mark Carney was aiming for here in Britain, but not quite 4% “growth” in blighty though. Of course we all know that these trend may not be sustainable…for long.

    • Hi Paul

      It is indeed quite an economic surge in Sweden but the should the party leave them with a hangover there are few places to go in terms of monetary policy. After all the official interest-rate is -0.5% in a boom…

      • But theyll have to go somewhere so what are likely next steps? Or is it just case or they place they go is bust?

        • Second option but not according to Gordon Brown because he abolished boom/bust some years ago around the time he “saved the world”.

  3. Great blog as usual, Shaun.
    According to Reuters:
    the Riksbank was pondering switching from using the CPI as its target indicator to CPIF. It is similar to the RPIX, only instead of excluding mortgage interest payments, it only excludes the impact in changes in interest rates. The CPIF is currently tracking higher than the CPI. It showed 1.9% inflation in May and June, as opposed to 1.7% for the CPI.
    This would, by the way, make the Bank of Canada the only central bank of any importance that still allows changes in mortgage rates to impact its target inflation indicator. (The only other one is the Icleandic central bank.)
    While a step in the right direction, the Swedish regime needs not so much a tweak, as a major overhaul. To mention just one thing, it is absurd that the target inflation rate is still 2.0%; it should be 1.5%, if not lower.

    • Hi Andrew and thank you.

      Yes they made an announcement back in May.

      “The Riksbank is considering changing the target variable for the inflation target to the CPIF. As inflation will always vary around 2 per cent, a variation band of +/- 1 percentage point is being also considered to illustrate this uncertainty. The changes are expected to be able to be implemented at the monetary policy meeting in September 2017. ”

      Although they then point out that it doesn’t really make any practical difference!

      ” For some time, the CPIF (the consumer price index with a fixed interest rate) has been used as the Riksbank’s operational target variable. The Riksbank will continue to strive towards 2 per cent inflation, regardless of whether outcome is within or beyond the variation band. The variation band under consideration is therefore not a so-called target range.”

      But I agree that excluding direct consequences of policy moves is sensible….

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