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 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.
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
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.