Swedish economy expands below Riksbank’s view in Q3, likely to rebound in Q4

Swedish economic growth for the third quarter came in below the Riksbank’s view. The economic growth dropped 0.2 percent sequentially and rose 1.6 percent on a year-on-year basis. The first quarter and second quarter growth was upwardly revised to 3.3 percent year-on-year and 2.7 percent, respectively.

The big picture is that the domestic demand is softening because of the set-back on the housing market while foreign demand is sluggish. Household consumption dropped 1.1 percent quarterly, while it remained the same over the year at 0.3 percent.

Indeed, there are some temporary factors at play. Most significant is the changed taxes on cars 1 July, stimulating sales in the second quarter and resulting in a sharp fall in the third quarter. This negatively contributed 1.3 percentage point of household consumption in the third quarter. Furthermore, the warm weather reduced energy consumption and could have been a drag on retail sales However, even considering these effects, consumption was subdued in the third quarter.

The labor market remains strong and unit labor cost is slightly above the Riksbank’s forecast, which might seem “hawkish”. However, as the economic growth has decelerated, there is a risk that demand for labor market might wane soon. And higher unit labor costs is typical for a slowdown phase, as GDP growth slows first and the labor market is lagging.

More bad news is the soft beginning for the fourth quarter, with continued softness in exports and for retail sales and new car registrations. Domestic sentiment indicators have begun to weaken as well.

“We nevertheless expect the quarterly growth rate will recover in Q4. GDP growth for 2018 will probably be somewhat below the Riksbank’s forecast at 2.4 percent”, noted Nordea Bank.

The Swedish central bank appears eager to raise interest rates and might possibly take the opportunity while inflation is high. However, energy prices have begun to decline and the SEK gives just temporary boost to inflation, which signifies the window is gradually closing for rate hikes. And considering the softness in domestic demand and the fragile housing market, it is very late in the cycle to hike rates now, stated Nordea Bank.

“We stick to our view that the Riksbank will hike rates in December, but we reiterate that it is far from a done deal. And if there is no hike in December, then there is a risk that there will be no rate hike at all in the near term”, added Nordea Bank.