The world of negative interest-rates now has negative economic growth too

It was not that long ago that many of us “experts” in the interest-rate market felt that negative interest-rates could not be sustained. Back then the past Swiss example could be considered a tax – which remains a way of considering negative interest-rates – and the flicker in Japan was covered by it being Japan. Yesterday brought some fascinating news from the front line which has been in danger of being ignored in the current news flow.

Sweden’s GDP decreased by 0.2 percent in the third quarter of 2018, seasonally adjusted, compared with the second quarter of 2018. GDP increased by 1.6 percent, working-day adjusted, compared with the third quarter of 2017. ( Sweden Statistics).

Firstly let me reassure you that Sweden has no Brexit style plans. What it does have is negative interest-rates as this from the Riksbank shows.

Consequently, in line with the previous forecast, the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent.

I bet they now regret opening their latest forward guidance report like this.

Since the Monetary Policy Report in September, economic developments have been largely as expected, both in Sweden and abroad.

In fact the Riksbank was expecting this.

The most recently published National Accounts paint a picture of  slightly weaker GDP growth in recent years. Nevertheless, the Riksbank deems that economic activity in Sweden has been and continues to be strong.

In fact it has been so nonplussed that it has already reached for the central banking playbook and wondered what is Swedish for Johnny Foreigner?

Riksbank Floden: Sees Increased Uncertainty In World Economy ( @LiveSquawk )

Those who have followed my analysis that central banks will delay moving out of extraordinary monetary policy and negative interest-rates and thus are in danger of being trapped, will have a wry smile at this.

The forecast for the repo rate is unchanged since
the monetary policy meeting in September and indicates that the repo rate will be raised by 0.25
percentage points either in December or in February. As with the first raise, monetary policy will also
subsequently be adjusted according to the prospects for inflation.

That’s the spirit! You keep interest-rates negative through a strong phase of economic growth then you raise them when you have a quarterly decline. Oh hang on. I am not being clever after the event here because a month or so before the Riksbank report on the 6th of September I pointed out this.

This is also true of Sweden because if we look at the narrow measure or M1 we see that an annual rate of growth of 10.5% in July 2017 was replaced with 6.3% this July. …..A similar but less volatile pattern can be seen from the broad money measure M3. That was growing at an annual rate of 8.3% in July 2015 as opposed to the 5.1% of this July.

Since then M1 has stabilised but M3 has fallen further and was 4.5% in October. In fact if you were looking for an area it might effect then it would be domestic consumption so lets take a look.

Household consumption expenditures decreased by 1.0 percent and government consumption expenditures remained unchanged, seasonally adjusted, compared with the previous quarter ( Sweden Statistics).

Time for page 2 of the central banking play book.

Riksbank’s Floden: Recent Data Since Latest Policy Meeting Have Been Disappointing -But There Were Some Temporary Effects In 3Q GDP Data,

Something else caught my eye and it was this.

 Exports grew by 0.3 percent and imports declined by 0.6 percent.

So foreign demand flattered the numbers in a rebuttal to the central banking play book. But if we look at the overall pattern then economics 101 has yet more to think about.

J curve R.I.P. (?) – In Sweden, 2018 is heading for the worst trade year ever. The Oct deficit was SEK8.4bn. One observation: J curve effect does not work and thus the exchange rate channel (on real economy) is partially broken.   ( Stefan Mullin)

So let’s see you have negative interest-rates to boost domestic demand which is falling and you look to drive the currency lower which does not seem to be helping trade. Oh and you plan to raise interest-rates into a monetary decline. What could go wrong?

As it is the end of the week let us have some humour albeit of the gallows variety from Forex Crunch yesterday.

Analysts at TD Securities suggest that their nowcast models point to a 0.6% q/q gain to Sweden’s GDP (mkt: 0.2% q/q on a wide range of estimates), which if materialised would leave TD (and likely the Riksbank) comfortable with a December rate hike


Let us start with a response from Nikolay Markov of Pictet Asset Management.

GDP growth plunged to its lowest pace since the introduction of negative rates in Q1 2015. There is no reason to panic as this is a temporary drop:

There are few things more likely to cause a panic than being told there is no reason for it. I also note he was not so kind to the Swedes. Let us investigate using Swiss Statistics.

Switzerland’s GDP fell by 0.2% in the 3rd quarter of 2018, after climbing by 0.7% in the previous quarter. The strong, continuous growth phase enjoyed by the Swiss economy for one and a half years was suddenly interrupted.

The change has seen annual growth dip from 3.5% to 2.4% so different to Sweden although there has been a fall in the growth of domestic consumption. Quite what a central bank with an interest-rate of -0.75% can do about falling domestic consumption is a moot point. A driver of the decline is a familiar one.

Value added in manufacturing dipped slightly (−0.6%);  Total exports of goods (−4.2%) also contracted substantially.

The official view is that is just a blip but it does require watching as I note this area still seems to be troubled as this from earlier shows.

How cold is ‘s auto market? Passenger car sales down 28% in first 3 weeks of Nov. Whole year drop “inevitable”. Car dealers’ inventory climbing and many of them making losses. Authority said bringing back purchase tax cut will not help much. ( @YuanTalks )

Just as a reminder the Swiss National Bank holds some 778.05 billion Swiss Francs of foreign currency investments as a result of its interventions to reduce the exchange-rate of the Swissy.


These developments add to those at some other members of the negative interest-rates club or what is called NIRP.

German economic growth has stalled. As the Federal Statistical Office (Destatis) already reported in its first release of 14 November 2018, the gross domestic product (GDP) in the third quarter of 2018 was by 0.2% lower – upon price, seasonal and calendar adjustment – than in the second quarter of 2018.

And another part of discovering Japan.

Japan’s economy shrank in the third quarter as natural disasters hit spending and disrupted exports.

The economy contracted by an annualised 1.2% between July and September, preliminary figures showed. ( BBC )

As you can see we go to part three of the play book as the poor old weather takes another pounding. Quite what this has done to IMF News I am not sure as imagine how it would report such numbers for the UK?

has had an extended period of strong economic growth—GDP expected to rise by 1.1% in 2018.


Perhaps it has been discombobulated by a period when expansionary monetary policy has not only crunched to a halt but gone into reverse at least for a bit. But imagine you are a central banker right now wondering of this may go on and you will be starting it with interest-rates already negative. Or to use the old City phrase, how are you left?

Oh and hot off this morning’s press there is also this.

In the third quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.1 per cent to the previous quarter and increased by 0.7 per cent in comparison with the third quarter of 2017. ( Italy Statistics)


There as been a development in something predicted by us on here quite some time ago. So without further ado let me hand you over to The Japan Times.

Japan is considering transforming a helicopter destroyer into an aircraft carrier that can accommodate fighter jets, a government source said Tuesday,






15 thoughts on “The world of negative interest-rates now has negative economic growth too

    • Hi farnesbarnes

      For those who have not been following the state of play. From Sweden Statistcs.

      ” Declining prices were reported in Stockholm County, Dalarna County, Jönköping County and Västernorrland County at 1 percent. In the metropolitan areas of Greater Stockholm and Greater Gothenburg, prices declined by 1 percent, while prices in Greater Malmö rose by 3 percent.”

      -7% on the year for Stockholm.

  1. I am beginning to think that all of these extreme measures (QE, negative interest rates) have unexpectedly lost their power because:
    1. People get used to the idea
    2. People adjust their behaviour to what they see as the new normal (they expect to be able to borrow extremely cheaply and to get no return on savings)
    3. Once you have spent your £425 billion or x trillion euros, the effect on asset classes has gone as you are no longer affecting the market
    This then means that:
    1. People are wholly unprepared for any shock, such as a rise in interest rates. Even to return to, say, a rate of 3% in the Uk, for example, seems completely out of the question as it will crater mortgage holders, the property market and then of course the banks
    2. You have to do more and more QE or have lower and lower (larger and larger negative) interest rates to have an effect. You can see the extreme versions of these in Japan, where QE is being directly used to keep the stock market up and after a decade or more, issues have not been solved.
    So, now, we have what looks like the beginning of a downturn with the ECB/BoE already maxed out on the QE credit card and already in very low interest rate territory.
    Perhaps it is time for helicopter money to increase demand…

  2. What I find depressing in all this is that, despite policy actions failing or, at the very least, showing poorer results than expected there is never any reflection on this as to why. It’s almost as if these institutions cannot admit to being wrong even when it’s patently obvious they are.

    Any reductions in interest rates are usually about increasing consumption by making saving less attractive and operate by bringing spending forward. But what happens when you’ve done that? You can’t keep doing that forever and the whole thing begins to take on the air of a Ponzi scheme. Is this really what economic policy has come to?

    • “…You can’t keep doing that forever and the whole thing begins to take on the air of a Ponzi scheme. Is this really what economic policy has come to?…”

      apparently so – and just to keep the TBTF Banks alive as our leaders bread n butter are provided by them .

      frankly we’re stuffed


      • Forbin,

        “frankly we’re stuffed ”

        Yes and that’s before we have eaten the roast on the 25th December.

        We are all lambs to the slaughter, one thing is entirely predictable is that we will all die one day.

    • I think that yes is the short answer to your question.
      What is even odder is that chancellors agonise over fractions of a percent on borrowing/gdp etc when these elephants are in the room

  3. I’m late to the discussion again but I just want to point out this, since 2008 the levers central banks pull haven’t been attached to anything since at least 2008 and possibley since 1971 . This is not policy it’s experimentation no wonder we don’t know what they’re doing if they don’t. Which one of them was Pink anyway?

    Can’t stop!
    Lose job!
    Mind gone!
    What bomb?
    Get away!
    Pay day!
    Make hay!
    Break down!
    Need fix.
    Big six.
    Clickity click.
    Hold on!
    Oh no,
    Bring bingo!

  4. Pingback: The world of negative interest-rates now has negative economic growth too - Free World Economic Report

  5. Shaun, off topic, but interesting I think. OECD numbers on average household disposable income after tax and social charges for France, US and UK ( being the 3 countries I spend time in)
    France $31k, US $44k, UK $28k.
    Health costs reduce these on average by France $3k ( 30% costs financed by top-up insurance). US $10k average family insurance plus £6k average co-pay, UK $0k if health provided by NHS.
    Yes remarkably ( or perhaps not) they all come to $28k after tax, social charges and health costs.
    However UK pays 5% more of average disposal income than US/France on housing costs; and US pays one third of the costs of UK/France on petrol and energy.
    Lucky US for having all that indigenous gas and oil; silly UK for over-paying for houses.
    The rest of the ‘economic numbers’, trade figures, productivity etc seem a wash.

    • Hi JimW

      The UK having high housing costs, but the inflation numbers seem to miss that out 🙂 Anyway it is interesting to see that we end up with the same answer for those 3 countries. As to their petrol prices I pointed out to a US site on twitter that the price of a US gallon of gas over here is just shy of US $6. I think I may have blown their minds.

  6. “Any reductions in interest rates are usually about increasing consumption by making saving less attractive and operate by bringing spending forward. But what happens when you’ve done that? You can’t keep doing that forever and the whole thing begins to take on the air of a Ponzi scheme. Is this really what economic policy has come to?”

    I said, when interest rates were coming down towards this level, that people saving for financial security (rather than individual purchases) would save more, rather than less, becoming more frugal as it became more difficult to achieve that security, which, when added to the facts that, people living on savings returns would also watch the pennies, and even the most spendthrift, financially incontinent borrower eventually reaches their credit limit, that this would eventually cause a drop in consumption.

    I’m no expert, but I’ve yet to see contradictory evidence.

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