Investment growth in Sweden likely to slow down significantly in future

There has been a steady rise in investments in Sweden in the past couple of years. But growth in investment is expected to slow down considerably in the future. Gross fixed capital formation or investments grew nearly 8 percent in Q1 2016. Sweden has recorded investment growth of more than 7 percent year-on-year in 2014 and 2015. But housing investments and other construction investments has mainly driven the higher investment growth rate. Only in the second half of 2015, a more broad-based growth was seen in machinery investments, R&D etc.

In spite of the robust growth seen in investments in the past few years, it is vital to notice the huge gap between the present investment level and the pre-crisis trend. The gap implies that the ‘pent-up’ investment demand is solid. However, it might also show an investments over-hang from pre-crisis that is required to be worked off before growth in investments can resume, said Danske Bank in a research report.

Business sector investment in machinery equipment and similar does not appear to keep up with depreciation. This suggests negative net investments and a reduction of the capital stock.

Since general demand is anticipated to grow slowly in the coming years, there is likely to be very little boos to an investment boom in the near term, according to Danske Bank. This is confirmed by the recent Statistics Sweden’s investment survey that forecasts growth in investment to be negative this year. Furthermore, interest rates are at the nominal zero lower bound and are therefore not able to boost investment demand.

Moreover, public investments are also expected to fall, while a weaker housing market is likely to restrict the amount of housing investments. Overall, growth in investment is likely to fall considerably in the forecast horizon. Investment in Sweden is likely to grow 5.6 percent this year, mainly driven by a brief stimulus to quarterly growth in the fourth quarter of 2015 and first quarter of 2016.

“In 2017, we expect investments to grow a measly 2.0% y/y, despite consecutive growth rates picking up in comparison to 2016”, added Danske Bank.