⌛ Did you miss ProPicks’ 13% gains in May? Subscribe now & catch June’s top AI-picked stocks early.Unlock Stocks

The Business Cycle: Dead Or Dormant?

Published 12/19/2016, 08:22 AM
Updated 05/14/2017, 06:45 AM

In Sweden, demand growth has remained on a solid footing. In the first three quarters of 2016, GDP growth was 3.5% y/y on average. Despite this, due to a very strong comparative Q4 15, we expect the full-year average to be closer to 3% y/y.

In 2017 and 2018, we expect GDP to grow around 2% y/y, which is a tad above our estimate of potential GDP growth post crisis (1.5% y/y). Given apparent domestic and international perils, this reflects our view of an economy in a state of Riksbank-induced real interest rate unconsciousness.

Swedish labour markets continue to show steady improvement, despite some deceleration in employment growth being visible throughout 2016. Concurrently, the improvement in the unemployment rate seems to have ground to a halt. Our forecasts indicate the unemployment rate will continue to hover just above 7% over the forecast years.

At face value, there is an apparent inconsistency between strong demand and employment growth but a rather high and stable unemployment rate. Looking into details, we can nevertheless explain most of these differences with a very strong inflow of immigrants over the past few years. These flows are expected to build over the coming two years as newcomers exit basic language and vocational training programmes and enter the labour force.

Despite the 'core labour market' (domestically-born persons between 25 and 54 years of age) demonstrating among the lowest unemployment rates since the early 1990s, wage inflation is still very weak. Even accounting for historical upward revisions to data and wage drift, we estimate that wage inflation is currently below 2.5% y/y.

Looking ahead, we do not forecast a material change to the wage outlook. First, the profit share is rather subdued from a historical perspective, second, companies refer to stark competition and troublesome developments in demand, third, real wage growth has been very strong in Sweden, finally, employers and employees are posting subdued expectations on future wage growth. In our view, this implies only a gradual ascent from the current 2.5% y/y hourly wage growth towards 3% y/y in 2018.

Historically, CPI inflation has been half of wage inflation. Hence, our forecast of peak 3% wage inflation is not sufficient to push inflation sustainably much closer to the inflation target than its current point.

That said, the renewed push in oil and other commodity prices seen recently as well as a weak SEK can, at least temporarily, cause higher inflation. In our forecast, we expect commodity prices to rise slightly from here and a modest strengthening of the SEK. This last one is, however, not enough to balance fully the inflationary impulse, implying a small rise in inflation from summer 2017 onwards.

Thus, we expect the Riksbank to increase stimuli with another prolongationof at least SEK30bn over the next six months, to lower rates by 0.1pp and then to hold still.

To read the entire report Please click on the pdf File Below

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.