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Trade War Looms Large as Sweden’s Economic Engine Sputters

Trade War Looms Large as Sweden's Economic Engine Sputters

(Bloomberg) -- The growing trade war is adding to domestic troubles for the largest Nordic economy.

Gross domestic product data published on Wednesday is expected to show the economy grew a meager 0.2% in the first three months of the year, according to a survey. The annual expansion likely slowed to 1.7%.

The export-dependent nation is feeling the weakness that’s already hit the euro area, its largest trading partner. Exports are losing momentum and domestic demand is being held back by a wobbly housing market, which is curtailing construction and making households more reluctant to spend.

Trade War Looms Large as Sweden’s Economic Engine Sputters

And a simple tweet could easily make the outlook much worse. Home to Volvo, Sweden is on the front-line should U.S. President Donald Trump decide to impose import tariffs on European cars.

Such a scenario would probably make it impossible for the Riksbank to go through with its plans to lift rates above zero again. The Swedish central bank has started to backtrack on its planned tightening after the Federal Reserve and the European Central Bank signaled they were pulling back from any policies that would constrict growth.

“It’s important for inflation that domestic demand keeps up,” said Andreas Wallstrom, an economist at Swedbank. “In case of a sharper downturn we’ll probably see an even softer Riksbank and an even weaker krona.”

On Tuesday, data from the National Institute of Economic Research showed a drop in overall economic confidence to the lowest level in 4 years in May, with consumer confidence sliding to more than six-year low. Export volumes rose 4% in the first quarter from a year earlier, while imports were unchanged, a separate report showed.

The krona has plunged to near record levels, indicating a growing bet that rates will remain near record low levels and a sign of the risks facing the Swedish economy. The bleak forecasts for the first quarter should, however, be viewed against the backdrop of the previous quarter, when the economy expanded 1.2%, twice as fast as estimated. Views also vary widely, with one economist calling the economy “surprisingly resilient.”

Good news can be found in the labor market, with employment and participation rates at record high levels. Still, most forecast now predict that unemployment has now bottomed at above 6% after a record immigration over the past years.

Danske Bank’s chief economist Michael Grahn expects the economy to have contracted by 0.3% in the first quarter suggesting GDP growth has slowed to approximately 1% y/y. A decline in residential investment is weighing negatively. Also sees uncertainty related to net exports as they provided a strong 1Q boost “for the wrong reason”, i.e. plunging imports. “It is hard to interpret this positively.”
Nordea expects that the Swedish economy “almost stalled” in the first quarter with a "paltry" expansion of 0.1% on a quarterly basis, according to Torbjorn Isaksson. All in all 2019 will probably be a “bleak´´ year with the uncertainties in the housing market weighing on domestic demand and with exports losing momentum. Sees it as “unlikely” that the Riksbank will hike in a situation where unemployment is on the rise and that normalization will be a “drawn out process”.
SEB Bank economist Olle Holmgren believes GDP growth remained at a firm 0.4% in the first quarter, thanks to strong exports and consumption picking up from a weak level. The outlook going forward looks “mixed” and the second quarter growth is to land “close to 0%”. He says the risks to the 2019 forecast of 1.9% are to the downside. Doesn’t see the hiking window as completely shut and still thinks the Riksbank will lift its key rate next year.
Swedbank expects GDP to have grown at a a “decent” quarterly rate of 0.3%. The Swedish economy’s development has been “surprising,” according to Andreas Wallstrom. Exports, which might have been expected to trend lower due to seemingly weak global manufacturing, reached record levels at the end of 2018 and monthly data also indicates new highs were reached in the first quarter. Says Swedish economy is in a more “mature” phase.
Handelsbanken economist Johan Lof said GDP growth slowed to 0.1% in the first quarter. Building investments will likely hamper GDP growth as housing construction wanes. New export orders have been deteriorating rapidly lately and business sector production growth has slowed, strengthening Handelsbanken’s forecast for a gradual cooling of GDP growth in 2019.

To contact the reporter on this story: Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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