Sweden: Consumer-driven demand keeps economy afloat in Q3
November 30, 2015
Sweden’s economy surprised analysts in the third quarter, as consumer-driven domestic demand remained supportive to growth against a backdrop of extraordinarily unorthodox monetary policy measures. Although the economy moderated to a 0.8% seasonally- and working-day adjusted expansion in Q3 (Q2: +1.0% quarter-on-quarter), the reading was double what analysts had expected. The stronger-than-expected growth will likely reduce the chances of the Central Bank lowering rates further at its next monetary policy meeting 6 December, despite external pressures from an anticipated ECB rate cut in December.
Private consumption in Sweden continued its gradual acceleration in Q3, expanding 0.7% over the previous quarter. This follows expansions of 0.3% and 0.5% in Q1 and Q2, respectively. These numbers suggest that the effects of historically-low interest rates are rippling through the economy, as spending increased on cars, holidays and housing throughout the quarter. Housing construction has been particularly strong and will likely continue to be robust as the recent influx of migrants will put further pressure on Sweden’s already strong housing market. Government consumption eased in Q3, falling from a 0.5% expansion in Q2 to 0.1%. This deceleration will likely be reversed for the remainder of the year, as the government scrambles to cover costs associated with housing and providing other services to the thousands of recently-arrived migrants. Similar to consumption, investment growth was largely in line with the previous quarter, increasing 0.1 percentage points from Q2’s reading to 1.2%.
On the external side of the economy, both imports and exports accelerated, each growing 2.1% over the previous quarter (Q2: +0.2 qoq, Q2: +0.2% qoq respectively). The weaker than average krona has given exporters a competitive edge on international markets, and slow but steady recovery in the EU has also helped. Despite the strong export reading, the acceleration in imports caused the external sector’s contribution to fall from plus 0.2 percentage points in Q2 to plus 0.1 percentage points in Q3. On an annual basis, GDP rose 3.9%, which marked the largest expansion since Q1 2011 (Q2: +3.4% year-on-year). The robust growth recorded in Q3, as well as the expected gradual pickup in inflation in the coming months as the base effect from last year’s fall in energy prices dissipates, will likely deter the Central Bank from loosening monetary policy further, and may begin to gradually unwind its ultra-loose policy sooner than expected.
Author: Robert Hill, Economist