Swedish Economy Steams Ahead Aided by Troubled Riksbank

Sweden’s economy is gathering momentum on signs that rising exports will add to growth already fueled by the central bank’s record stimulus.

Industrial production in the largest Nordic nation rose the most in more than four years in September as new orders continued a positive trend seen since the start of the year.

“The Swedish economy has been doing quite well in the last few years driven mainly by domestic factors, spearheaded by households,” said Michael Grahn, an analyst at Danske Bank A/S in Stockholm. The improving industrial production figures are a sign that also exports will start to gain ground, he said.

Sweden, which exports about half of its output, has outperformed most European countries during the financial crisis as income tax cuts and record-low interest rates have boosted domestic consumption. That’s helped offset a downturn in exports to the country’s debt-stricken neighbors, which analysts say may finally have come to an end.

Swedish unemployment fell to its lowest level in almost seven years in September as manufacturing confidence rose to its highest level in more than four years last month.

“More or less all parts of the economy are now gaining ground,” said Andreas Wallstrom, chief analyst at Nordea Bank AB in Stockholm. “When the Riksbank sees that the economy is continuing to make strides they will be strengthened in their view that this positive inflation trend that we’ve seen so far this year will continue.”

The Riksbank last month expanded a quantitative easing program, which means it’s now targeting to buy about a third of all nominal government bonds. The central bank has said it will not raise its key lending rate until the spring of 2017 as it seeks to bring inflation close to its 2 percent target by the end of next year. Both Nordea and Danske Bank expect it to cut its repo rate from minus 0.35 percent to minus 0.45 percent next month.

According to Nordea, economic growth will accelerate to more than 3 percent this year and stay at that level in 2016.

Unfortunately for the Riksbank, the pick-up won’t necessarily help boost inflation since the recent weakening in the krona is about to come to an end, Wallstrom said. Talks between unions and employers also won’t produce sufficient wage increases when concluded next year, he said.

Meanwhile, Swedish household consumption risks taking a hit from planned mortgage amortization rules designed to curb record house prices and private debt fueled in part by the central bank’s record stimulus.

In that sense, an improving manufacturing sector is good news to both the Swedish economy and the Riksbank, Danske Bank’s Grahn said.