In a recent NATIXIS research report, “The Swedish exception,” it notes that the country is an exception to the European Union on more than one level, thanks to its sound public finance and firm economic activity.
Looking at its growth structure performance over the last decade, as its domestic demand increased in strength, can explain Sweden’s performance and it should enable its GDP to rise at a modest but healthy pace in 2013-2014; this will outperform the European average.
This will come from Sweden’s advantages such as the sound financial situation of its economic stakeholders, favorable productive structure, importance of R&D and public initiatives, according to the report, which will somewhat immune it to the slow international climate in the next few years.
But for the longer term, the challenges facing the country–productivity and competitiveness–are the decisive factors for its return for greater sustained growth.
Here are some highlights from the report:
Undeniable advantages for withstanding a deteriorating international climate: In recent years, Sweden’s economy has held up relatively well, outperforming the European average. After declining 5.7% in 2008-2009, GDP increased 6.3% in 2010 and 3.9% in 2011. Performance over recent quarters confirms the country’s progress but to a lesser degree.
From its national accounts, it showed a further GDP rise in Q3 (+0.5% QoQ), after Q1’s +0.5% in Q1 and Q2’s +0.7%. Its year-on-year performance has stayed positive, unlike euro zone countries and the United Kingdom.
But this year should see a slowdown in growth (anticipated at +1%) vs. a slight EU fall 27 (-0.3%).
In the short term, Sweden’s growth, which relies on net exports, should be sustained primarily by domestic expenditure and household spending.
Swedish optimism: The positive mood of confidence over the recent months, highlights economic stakeholders’ optimism, albeit moderate. Even with the euro crisis and its multiple aftershocks over the last two years, stakeholder confidence has stayed satisfactory, but PMI performance shows deterioration in the business world over the last few months, notably in industry.
Financial situation of households remains sound: As for incomes, household GDI growth slipped in Q2 2012 to 3.2% YoY vs. 4.0% the previous quarter. This came from slowing wages, but the slowdown is not a great concern as it represents a return to the average wage increase rate.
Household savings stabilized at around 14% of GDI. Sweden’s high levels of savings over numerous years now suggests that substantial margins remain for greater consumption. In the short term, the question remains whether or not savings will rise with uncertainty over the global economic recover. Several factors call for stabilization, but households do not see their savings increasing, however, net wealth has increased in recent quarters to substantial levels.
From a balance sheet perspective, household debt is high (around 170% of GDI and 80% of GDP) mainly from real-estate lending, eventhough it has been stable in recent quarters. The relatively low interest burden has followed an early 2012 downward trend, increasing household solvency.
Some factors push away the risk of the real-estate bubble bursting (low risk of household defaults and sharp fall in real-estate prices). Performance of the real-estate market over the last few quarters supports this.
After slowing greatly in 2011, prices stabilized in 2012, but credit for real-estate is limited and well below the levels from the previous year.
The outlook for the upcoming quarters is encouraging thanks to falling mortgage rates and greater consumer intentions to buy homes anticipated over the next 12 month, according to a household survey.
In September, the government announced measures to boost construction and the rental market predominately through fiscal incentives. But any real-estate market recovery should be limited from a need to stabilize households’s debt ratio, with a downside risk if large, long-term tensions continue in the financial markets; this would affect the net financial wealth of households.
Swedish business: They appear financially sound. Non-financial companies still have large debt levels; this is from a high presence of multinationals, as noted by the share of inter-intra group loans with other countries.
Recent company revenue data shows the profit rate stabilizing at a historic average and the solid apacity for self-financing. Companies will benefit from a small 2013 tax boost with a one-point cut in company tax to 22% as previously announced in September’s 2013 Budget Bill.
A country focused on research: Sweden is unique from other European countries by its strong underlying competitiveness.
According to the World Economic Forum, the country has high-quality institutions that are efficient and transparent while instilling a high level of confidence (even with some deterioration during the last three years). Sweden’s non-cost competitiveness is still strong thanks to its private institutions and their sound business ethics; its economic stability and its business environment.
But Sweden’s underlying competitiveness is still primarily driven by research and innovation from its strong capacity in this arena and highly-qualified labor force.
A State that encourages growth: With its sound public finances, Sweden’s government is committed to building on this strength and reversing the downward trend from recent years.
Moving away from a crisis management approach to the economy, it will “invest in the future” this year, back in September it announced a series of measures costing SEK 21 billion (EUR 2.4 billion) to sustain growth and increase employment in 2013.
