Do Sweden's spectacular growth numbers really mean that they've turned the corner? And why on Earth might they worry about them?

Tuesday March 1st 2016

  

Do Sweden's spectacular growth numbers really mean that they've turned the corner? And why on Earth might they worry about them?

ref :- "Sweden's growth surge raises fears over negative rates policy" The Financial Times , p.6

First of all, when you say "spectacular" .....? The Swedish economy grew 1.3% in Q4 from the previous quarter, giving a year-on-year figure of 4.5%. Expectations were 0.7% and 3.6% respectively so sure, in the context of the current economic picture we think that you could call the numbers "spectacular". That's got to be an admirable thing, right? Of course it is in many ways, so why is the FT looking for gloom amidst the light?

Sweden has been one of the leading trendsetters when it comes to negative interest rates and currently boasts a deposit rate of minus 0.5%. If they're not alone in that (and they do have a lot in common with the Danes and the Swiss), the motivation behind their aggressive easing policy has differed somewhat from the Eurozone say, where kick-starting growth is key to solving other problems (e.g. deflation  --  data yesterday showed Eurozone inflation fell to -0.2% in the year to February). Sweden's problem of late has not really been about growth per se, but all about boosting their own  stubbornly low inflation  -- and crucially, lowering the value of the Swedish Krona in order to do so.

There are signs of inflation ticking higher (0.8% in Jan after a long period hovering just above or below zero) but generally the super-easy monetary policy (which includes a bond-buying programme) has had less success in this area so far than the growth numbers would suggest. There's a school of thought (whose proponents were probably among those that were against February's rate cut from minus 0.35 to minus 0.5) that is not entirely convinced that negative rates can take the credit for the jump in rates of GDP anyway. After all, other areas have adopted similar policies without the same beneficial effects on growth. Sweden has absorbed the largest wave of immigrants per capita of anywhere in Europe, and the argument goes that it is this that is fuelling public spending and growth -- some echoes of the G20's call for fiscal stimulus here.

Super-low rates provoke concerns about asset bubbles, and although Sweden's property market is mentioned in this regard the evidence is sketchy. Nevertheless, it looks as though the central bank (the Riksbank) has done enough from a monetary point of view (an overheating economy could become an issue). That will come as a relief to bankers and savers at least. On balance, such strong growth is to be applauded but Sweden is still to address the problem of a currency that they believe to be overvalued. The irony is that rate cuts intended to lower the Krona and boost inflation have largely failed to do so, and instead fostered the conditions for galloping growth that makes the currency attractive.

So if further rate cuts are off the table, what else can the Riksbank do? And the answer of course is intervention in the currency markets. Regulars will know our feelings on how effective unilateral FX intervention can be in the longer-term, but the authorities look to be preparing themselves for it. Actually, how much they feel they have to step in is probably not in their hands but in those of the European Central Bank, who on March 10th will whether to ease policy (almost guaranteed) and by how much. Very little, the Riksbank will be hoping, or else Sweden's strong performance could in fact become a burden.