Sweden: Fiscal stimulus will ease the burden on the Riksbank
COVID-19 vaccine roll-outs and powerful stimulus measures are laying the groundwork for a rapid recovery, once the pandemic releases its grip on the world economy. Despite the escalating spread of infection and expanded restrictions, late 2020 was not as weak as previously feared. The full-year 2020 decline in global GDP is expected to be only 3.7 per cent, compared to our November projection of 4.4 per cent. We have marginally downgraded our 2021 forecast to 5,0 per cent, while adjusting 2022 growth almost half a percentage point higher to 4.3 percent. Exceptional crisis relief programmes will leave behind a high public debt burden and questions about inflation, but our main scenario is that the world will avoid overheating tendencies and that central banks will continue to keep interest rates and bond yields low. Due to milder restrictions, the Swedish economic cycle will be smoother than in other countries. The recovery will pick up speed in the second half of 2021, and Swedish GDP growth will reach almost 5 per cent in 2022. Low inflation is putting pressure on the Riksbank, but we believe that its key interest rate will remain at zero − partly because new fiscal stimulus measures will ease the burden on monetary policy.
Growing differences between the United States and Europe
The effects of the pandemic dominate this February issue of Nordic Outlook. In the short term, more protracted lockdowns may increase the risk of bankruptcies and financial stress for businesses that have been under pressure for a long time. Further ahead, the stage is set for a “ketchup effect” in private consumption, once restrictions on the service sector are lifted and official stimulus measures can have their full impact. The manufacturing sector has shown resilience during the latest wave of the virus and household balance sheets − unlike after the 2008-2009 global financial crisis − are strong. This suggests a historically rapid recovery. We expect growth in the 37 advanced economies of the Organisation for Economic Cooperation and Development (OECD) to end up at 3.7 per cent, both in 2021 and 2022. Due to milder US restrictions and even larger fiscal stimulus packages expected from the Democratic majority in both houses of Congress, we have raised our US growth forecast for 2021 by almost a full percentage point to 4.5 per cent. But in Western Europe, lockdowns early this year and a less resolute fiscal policy response have led to significant downward adjustments in our near-term forecasts. This year’s growth in the euro area will be only a bit above 3 per cent and the strength of the recovery will not be apparent until next year, when growth will accelerate to nearly 5 per cent. There will also be large differences between emerging market (EM) economies. China has assumed a leading role in the recovery, but after last year's deep decline India will grow fastest in the next couple of years. Decreased uncertainty about global trade, including more predictable US policies and a post-Brexit trade agreement, will contribute to the global recovery.
Gradually higher yields amid stable inflation, USD at a low in 2021
As usual, the inflation outlook is crucial to our forecast picture. Our main conclusion is that today’s stable inflation environment will persist. This will ease central bank exit strategies and readiness to help fund higher public sector debt. Key interest rates will remain at around zero over the next few years. The trend of long-term bond yields will depend on the US Federal Reserve’s ability to steer market expectations towards a future “tapering” of its asset purchases. Ten-year government bond yields will rise by between just over a quarter of a percentage point (Germany) to just over half a point (US). We expect movements in the foreign exchange market to be smaller this year. The US dollar will remain in a weaker trend but will hit its low point this year, with the EUR/USD exchange rate reaching 1.27. In this issue of Nordic Outlook, we discuss the outlook for inflation, global trade and the foreign exchange market in separate theme articles.
Resilient Nordic and Baltic economies
The Nordic economies have shown resilience. Fiscal stimulus and gradually falling unemployment will set the stage for a consumption-led recovery in Norway. Last year's 3 per cent GDP downturn in the mainland economy will be followed by an upturn of nearly 4 per cent in 2021 and just over 3 per cent in 2022. Because of solid growth and rising home prices, Norges Bank will start hiking its key rate early in 2022, before many other countries. Extended pandemic-related restrictions are delaying the recovery in Denmark, but the rapid roll-out of vaccines provides hope for a surge in private consumption later this year, reinforced by one-off government payments. Last year’s GDP decline of 4 per cent will be followed by growth of 3 per cent in 2021 and 4.5 per cent in 2022. A strong Danish krone could lead to a unilateral interest rate cut in 2021. Finland has kept both its infection figures and recession in check, but weak productivity growth and a shrinking labour force will remain a problem. After a decline of more than 3 per cent last year, GDP growth will be nearly 3 per cent in 2021 and a moderate 2.5 per cent in 2022.
The Baltic economies have fared significantly better than most euro area countries − a striking difference compared to the global financial crisis. Official stimulus measures and resilient exports dampened last year’s GDP declines. Continued rapidly rising wages and salaries will improve purchasing power and lay the foundation for a rapid recovery when recently re-imposed restrictions are lifted. Lithuania will grow by just below 2 per cent in 2021 and over 4 per cent in 2022. Latvia's GDP will increase by about 4 per cent this year and 4.5 per cent in 2022, while Estonia's economy will grow by more than 3 per cent this year and close to 4 per cent in 2022.
.Sweden: Fiscal stimulus will continue to prop up the economy
We are revising our Swedish GDP forecasts higher for both 2021 and 2022. Due to milder restrictions, the economic cycle will be smoother than in other countries. Although increased lockdowns in Sweden and elsewhere will result in a weak start to the year, the recovery will pick up speed this autumn. Last year's decline of about 2.5 per cent will be followed by an increase of nearly 3 percent this year, and in 2022 GDP will grow by close to 5 percent.
The Swedish manufacturing sector is optimistic and well equipped to take advantage of the global recovery that will begin in the latter part of 2021. While merchandise exports have bounced back from their slump earlier in the COVID-19 crisis, the service sector is still very weak. In particular, the decline for business travel services risks becoming long-lasting. Capital spending is increasing at a healthy pace, driven by a recovery in machinery investments and increases in residential and public sector investments.
Private consumption fell during the first half of last year at its fastest rate ever: 10 per cent. The reason was plunging consumption of services, whereas consumption of goods was hardly affected at all. New restrictions on travel abroad during the first half of 2021 suggest that total consumption will remain weak this year. Household purchasing power will increase sharply, bolstered by the resumption of share dividends. This is expected to result in a substantial increase in consumption when restrictions ease. We have again raised our home price forecasts. Last year's upturn of more than 10 per cent will be followed by yearly increases in the 3-5 per cent range during 2021 and 2022.
Widespread furloughs and the use of government wage subsidies have limited the rise in unemployment. Fears that such furloughs will lead to permanent job cutbacks have not been realised. A weak start to the year cause a renewed uptick, but unemployment is not expected to reach last summer's peak. Once economic growth picks up, unemployment will initially fall rapidly. Our forecast for the jobless rate at end of 2022 is 7.3 percent − only slightly higher than at the beginning of 2020.
Rising electricity prices due to a colder winter, as well as base effects from record-low electricity prices last year, will temporarily push Swedish inflation above 2 per cent this spring. After that, a stronger krona will contribute to a rapid decline in inflation. At the end of our forecast period, CPIF inflation (the consumer price index minus interest rate changes) will be less than 1.5 per cent. Because of low inflation, there will be continued pressure on the Riksbank to take new action. Meanwhile the central bank is keeping open the possibility of key interest rate cuts in the future. Our main scenario is that the repo rate will remain at zero and that the Riksbank will not decide to make new net purchases of bonds after 2021. The Riksbank's recent decision to increase the foreign exchange reserve by making its own currency purchases will nevertheless contribute to continued growth in its balance sheet. In terms of fiscal policy, 2020 was a year of multiple supplementary budgets. Despite the downturn in the economy and large stimulus measures, the trend of public sector finances has been better than previously feared. This is creating room for continued government relief packages, and Sweden looks set to be one of the few countries that will avoid a tightening of fiscal policy this year. General government debt will increase from 35 per cent of GDP before the COVID-19 crisis to 36.5 per cent at the end of 2022. The National Debt Office’s gradual repayment of earlier onward lending for the Riksbank’s FX reserve is one reason for the limited increase. The krona is being squeezed between strong economic fundamentals and the risk that negative key interest rates will return. This spring the krona will trade at 10.00-10.25 per euro, followed by a slight appreciation to 9.80 by the end of 2021. The USD/SEK exchange rate will fall to a bit below 8.00. The monetary policy framework is the topic of a theme article in this issue.
Key figures: International & Swedish economy (figures in brackets are from the November 2020 issue of Nordic Outlook)
|International economy, GDP, year-on-year changes, %||2019||2020||2021||2022|
|United States|| 2.2 (2.2)||-3.5 (-4.0)||4.5 (3.6)||3.6 (3.8)|
|Euro area||1.3 (1.3)||-6.6 (-7.6)||3.1 (4.0)||4.9 (4.3)|
|United Kingdom||1.4 (1.5)||-10.3 (-11.5)||3.5 (4.7)||8.2 (6.6)|
|Japan||0.7 (0.7)||-5.2 (-5.8)||2.1 (2.4)|| 1.0 (0.7)|
|OECD||1.6 (1.6)||-4.9 (-5.7)||3.7 (3.9)||3.7 (3.4)|
|China||6.1 (6.1)||2.3 (2.0)||8.0 (8.0)|| 5.6 (5.6)|
|Nordic countries||1.5 (1.6)||-2.7 (-3.1)||3.0 (3.1)||3.8 (3.6)|
|Baltic countries||3.7 (3.7)||-2.7 (-2.9)||2.7 (3.4)||4.2 (3.4)|
|The world (purchasing power parities, PPP)||2.8 (2.8)||-3.7 (-4.4)||5.0 (5.1) ||4.3 (3.9)|
|Nordic and Baltic countries, GDP, year-on-year changes, %|
|Norway||0.9 (1.2)||-1.3 (-1.9)||3.4 (3.0)||2.8 (3.5)|
|Denmark||2.9(2.8)||-4.0 (-4.2)||3.0 (4.3)||4.5 (3.5)|
|Finland||1.1 (1.1)||-3.3 (-4.0)||2.8 (2.8)||2.5 (2.5)|
|Estonia||5.0 (5.0)||-2.8 (-3.8)||3.3 (3.3)||3.8 (3.5)|
|Latvia||2.2 (2.2)||-4.7 (-4.6)||3.9 (4.3)||4.6 (3.5)|
|Lithuania||4.3 (4.3)||-1.5 (-1.5)||1.8 (3.0)||4.2 (3.3)|
|Swedish economy, year-on-year changes, %|
|GDP, actual||1.3 (1.3)||-2.6 (-3.1)||2.8 (2.7)||4.8 (4.4)|
|GDP, working day corrected||1.3 (1.3)||-2.9 (-3.4)||2.7 (2.6)||4.8 (4.4)|
|Unemployment, % (EU definition)||6.8 (6.8)||8.3 (8.5)||8.7 (9.1)||7.7 (8.0)|
|CPI (consumer price index)||1,8 (1,8)||0,5 (0,5)||1,3 (1,1)||1,0 (1,4)|
|CPIF (CPI minus interest rate changes)||1,7 (1,7)||0,5 (0,4)||1,4 (1,1)||1,0 (1,4)|
|Government net lending (% of GDP)||0,6 (0,4)||-3,3 (-3,5)||-3,2 (-3,3)||-1,9 (-2,0)|
|Repo rate (December)||0,0||0,0 (0,0)|| 0,0 (0,0)||0,0 (0,0)|
|Exchange rate, EUR/SEK (December)||10.46||10.05 (10.20)|| 9.80 (9.85)||9.70 (9.70)|