Sweden, is it an economic Mecca?
First of all the financial side:
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Sweden has four banks which are as big as Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) –and even more “international” as Danske Bank. Finnish banking is mainly Swedish.
The banks had a severe crisis in the 1990’s with significant government intervention – even ownership. That crisis has never really been resolved – which can be seen on the housing market as well. Undoubtedly, the health of the housing market is regarded as an indicator of the health in the financial sector.
As you can see from the post-deluvial graph, Denmark (in a pitiful financial condition) and Ireland (a recognised disaster) are taken as references. The Swedish housing market in the 1990’s declined around o20% and then started growing again. During 2008 the prices briefly decreased and then rose again. This is more an indication of the health of the banks than any real ability to generate service on loans. Meanwhile Denmark has “stabilised” housing prices with a very low volume of sales and little losses taken – Ireland has taken some severe losses of 30-40% as opposed to Denmarks with around 20%.
The situation of the Swedish financial sector on that background could be considered more than precarious – even by European standards. Another indicator is that the financing industry is formed by a large intragroup of multinational companies – Swedish businesses are largely conglomerates of big companies which generally avoid to deal with troubled banks, more occupied in these days to finance the bad loans of their own.
Denmark possesses more small and medium businesses. Small and medium businesses are more likely to suffer from the consequences of a credit crunch than large corporations with independent access to funding through bonds directly obtained from investors.
The main consequence to the real economy is that any rise in wages and productivity is poured into the bottomless vessel of dead banks where it will either be consumed in housing rents or service on defaulted loans. Any real increases in consumption will hardly be forthcoming.
Turning to the real economy the exports of Sweden are mainly industrial and manufactured goods compared to Denmark’s oil, agriculture, shipping and pharmaceuticals. Thus price expectations on Swedish exports are worse, simply because they are on competition with German industry -what do you prefer? A Volvo or Mercedes?- Whereas Denmark very much supplements the economy of both Sweden and Germany. The integration is much more important than immediately apparent because both Denmark and Sweden publish figures on export to BRIC countries that are highly irrelevant. The truth is that much of the exports to Germany are delivered to German industry that then export to China.
The often parroted conviction of a great market in China is missing the point: To increase direct exports would mean competing with yourself through hurting your best costumer – that is not going to happen! In Denmark’s case, there might be an increase of exports of bacon and insulin (both spare parts from pigs) that can be done without hampering exports to Germany. Sweden is not so lucky. Not only are they in direct competition with Germany on the BRIC’s market; but the export to Germany is in competition with French, Polish and other nationalities that have lower labour cost and a very competent industry. Therefore is not a surprise that German industry has moved the manufacturing of goods such as the last year model of Volkswagen AG (PINK:VLKAY) (PINK:VLKPY) to countries such as Spain and the Czech Republic . In the meantime, Sweden keeps producing slightly outdated technology hoping that volume will outstrip investment productivity gains – which never happens – not with Germany investing.
The real hope for increasing productivity in both Denmark and Sweden lies in the public sector where productivity gains are notoriously slow. On the other hand the potential is high. If you don’t think productivity increases in health care just look at the increasing life expectancy that erodes your pension fund, which is based on calculations that you will die at the young and spruce age of 70-75, where the truth is that it is more likely you will live until your 80’s. The benefits will come with decreasing taxes (and Denmark and Sweden are some of the highest taxed countries in the world), so hourly wage stagnation – even wage reduction – is balanced with lower taxes and prices.
This is where the financial losses come in. As losses have not been taken into account they will haunt wages and salaries for the next generation. Labour cannot reduce cost, as about half is stuck in insolvency, illiquidity and increasing debt in real terms with deflation.
Here the importance of the frozen banking system is seen and with Sweden’s four big floundering -dead– whales, this debt cannot be repaid and losses cannot be taken. Japan has not progressed in 25 years.
Business and investment will not suffer too much, as alternative channels for capital will be found bypassing the banking system. Germany thrived splendidly without a functioning banking system the 10-20 years after WW2. Apparently they are about to repeat the trick. Are the same high hopes for Sweden? Doubtful – other nations might stagger on with leaden shoes but not the Sweden boots.