Sweden Without Crisis Plan Tests Economic Reality: Nordic Credit
Reality is about to catch up with Sweden’s government.
Finance Minister Anders Borg signaled yesterday he probably needs to cut growth estimates for the $500 billion economy for a fourth time this year even as he rejected speculation Sweden may need a crisis package to soften the blow.
“The government’s forecasts have been very optimistic this autumn, which has drawn some attention as they have a rather different view than the market,” Andreas Halldahl, who helps manage about $15 billion in fixed-income assets at Storebrand Kapitalforvaltning AS in Stockholm, said in an e-mailed reply to questions. “But reality is catching up and they will have to revise both the gross domestic product forecast and budget numbers.”
The largest Nordic economy is stalling as a recession in the euro area wreaks havoc on exports, prompting mass job cuts from some of Sweden’s biggest companies, including Ericsson AB, Volvo AB (VOLVB) and TeliaSonera AB. (TLSN) The central bank has said it’s reluctant to ease policy further for fear of spurring household debt growth, while Borg has told exporters they can’t rely on a weaker krona to provide the same relief as in previous crises.
Swedish bonds have returned 2.1 percent this year, the third-worst performance after Japan and Spain among the 26 major Bloomberg/EFFA sovereign indexes. The yield on Sweden’s 10-year note fell one basis point to 1.50 percent today. The spread to similar-maturity German bunds was little changed at nine basis points.
About half of Sweden’s output comes from exports, roughly 70 percent of which go to European markets. Manufacturing confidence has remained negative since August last year and sank to a three-year low in October, according to Sweden’s National Institute of Economic Research. Consumer confidence fell for a third month in October as announcements of job cuts grow more frequent.
Yet as recently as September, the government estimated Sweden’s economy will expand 2.7 percent next year, and forecast a budget deficit of 0.6 percent of GDP. At the start of 2012, the government predicted a 3.5 percent expansion for next year. Borg’s latest forecast for this year is for 1.6 percent growth.
SEB AB (SEBA), the Stockholm-based bank, said yesterday Sweden’s government “faces an uphill battle in terms of credibility” as its growth forecasts over the next two years are in “great need of downward revisions.” The lender predicts a deficit of almost 1.3 percent of GDP in 2014, compared with a government forecast for a 0.3 percent surplus. SEB sees GDP expanding 0.7 percent this year and 1.3 percent in 2013.
The government in its 2013 budget, unveiled in September, said it plans to spend 0.7 percent of GDP on roads, railways, research and corporate tax cuts. Borg’s ministry estimates the measures will boost growth by 0.4 percentage point and raise employment by 17,000 jobs in 2014.
“We have, so to speak, sufficiently strong public finances that if we see a slowdown, then we have the strength to perhaps consider what has to be done in 2013 and in 2014,” Borg said in a speech in Stockholm yesterday. “But we’re not in a situation where there are any plans of an extensive crisis package.”
As the government withholds any significant stimulus, the central bank is struggling with internal divisions in its six- member board. Governor Stefan Ingves has warned debt growth makes continued rate cuts dangerous, while Deputy Governor Lars E.O. Svensson has argued the bank’s failure to cut rates further is killing jobs.
Borg has sided with Ingves, reiterating concerns yesterday that the bank is restricted in its ability to ease policy because of high household indebtedness. Swedish consumers have debt equivalent to about 170 percent of disposable incomes, the central bank estimates. Borg said that level should be kept unchanged over the next 10 years.
While there’s an economic case to be made for rate cuts “I think they are mindful of the impact it has on household debt,” said Daragh Maher, a currency strategist at HSBC Holdings Plc (HSBA) in London. “There’s a chance of a rate cut but I don’t think it is as certain as some people suggest.”
Household debt as a share of disposable income mustn’t exceed 200 percent, Ingves said this month. The bank predicts the level will remain largely unchanged at about 170 percent through 2015, after having risen from 90 percent in 1996, provided it doesn’t cut rates further.
Still, overnight index swap levels today showed a 41 percent probability of a rate cut next month and a 59 percent probability for no change. Futures on the Riksbank rate are trading at 1 percent in March, indicating a rate cut by then.
“The Riksbank will have to cut more than they are communicating at the moment,” said Halldahl. “They will absolutely have to cut rates going forward, but the market is already pricing in more than the Riksbank is forecasting too.”
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