Sweden’s Economy Unexpectedly Contracts in Blow to Central Bank

(Bloomberg) -- Sweden’s economy unexpectedly shrank in the second quarter, casting further doubts on the Riksbank’s plans to continue to raise rates.

Gross domestic product contracted 0.1% in the second quarter from the first, according to preliminary numbers from Statistics Sweden Tuesday. Economists had predicted an expansion of 0.3%. Annual growth was 1.4% while economists and the Riksbank had predicted an expansion of 1.9% and 1.8%, respectively.

Key Insights

• According to Statistics Sweden, the quarterly contraction was mainly caused by gross fixed capital formation, which decreased by 1.1%. Exports and imports decreased by 0.3% and 0.5%, respectively, while household consumption grew by 0.6%.
• The data, which was released early as a result of a mistake at the statistics agency, comes after first-quarter numbers showed that the economy expanded three times faster than estimated at the beginning of the year.
• The Riksbank earlier this month said it still expects to hike rates toward the end of this year or early next year, though many economists doubt it will be able to do so given a slowing economy. Minutes from the meeting also showed that policy makers are growing increasingly uncertain about the planned hike as the world’s major central banks prepare to add more stimulus and growth cools.
• The preliminary second-quarter GDP data is published by Statistics Sweden to provide the government with figures for its autumn budget work. The so-called flash estimate has historically been subject to large revisions when final data is published in September.

What Analysts Say

• SEB says the GDP data was "a disappointment" with the quarterly number missing its estimate of 0.4% growth and the Riksbank’s forecast of 0.1% growth. The decline in investments was larger than SEB had expected, it said.
• Swedbank said the largest negative contribution came from fixed investment and that exports, import growth and public consumption were also weaker than it had expected.
• "Today’s data suggests that the strength in the Swedish economy is dampening which is negative news for the Riksbank," Swedbank said. "This adds some downside risk to our forecast of a rate hike in December."
• Both SEB and Swedbank noted that the data is preliminary and could be subject to considerable revisions.

Market Reaction

• The krona weakened 0.23% against the euro after the data was published, to trade at 10.5976 as of 8:10 a.m. in Stockholm.

Get More

• Krona Bears Tuck in to Early Breakfast Thanks to Sweden GDP Miss

--With assistance from Rafaela Lindeberg.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Niclas Rolander

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