Swedish economic growth likely to have decelerated y/y in Q1 2019, domestic demand to remain subdued

Swedish economic growth was almost zero in the first quarter. Some temporary factors are dampening growth; however, the first quarter data support the view that the Swedish economy is expected to see a weak year in 2019, noted Nordea Bank in a research report. Exports were almost the same while domestic demand was weak in the initial months of 2019.

“Against this background, GDP growth in Q1 was a paltry 0.1 percent q/q, we think. Compared with the year-earlier quarter, we expect Q1 GDP growth to have been 1.7 percent, down from the Q4 level of 2.4 percent”, stated Nordea Bank.

Firstly, housing market uncertainty is dampening the domestic demand. Residential construction in falling, and households are hesitant regarding making large purchases. The uncertainty regarding the outlook of global growth has also had an effect. Household financial wealth dropped by SEK 760 billion in the fourth quarter, corresponding to 30 percent of household income. In the first quarter, stock markets recovered lost ground; however, the large market swings create uncertainty.

Furthermore, calendar effects are dampening consumption. Easter fell in the second quarter this year, signifying that consumption looks set to rise temporarily in the second quarter, said Nordea Bank. Moreover, inventories are likely to have negatively impacted the economic growth on a quarter-on-quarter basis by around 0.4 percentage point. The fall in inventories was because of a subdued trend in production and a lower amount of input goods and work in progress in the production processes. Inventories might be a drag to growth going forward as well.

Swedish goods exports rose, while services exports dropped after haven surged towards the end of 2018. Imports were at a very low level, reflecting the subdued domestic demand. The number of hours worked dropped on a quarterly basis, and productivity rise. However, productivity dropped compared with the same period last year, partially because of calendar effects.

“Looking ahead, we expect domestic demand to remain weak, and global indicators and the signals from Swedish exporters suggest that exports will lose momentum again. In other words, the growth outlook for the Swedish economy is bleak. We look for GDP growth in 2019 (full year) of a modest 1.2 percent, which is below the Riksbank’s forecast of 1.7 percent. The low growth rate is one of several reasons why the first rate hike by the Riksbank is a long way off”, added Nordea Bank.