Sweden: Slowdown evidence accumulates – Nordea Markets

Due to SEK weakness and energy price, the Riksbank will have inflation tailwinds in 2018 as GDP growth, on the other hand, looks to be turning into a clear headwind for the first time in many years, explains Mikael Sarwe, Head of Nordea Research at Sweden.

Key Quotes

“Headline CPIF inflation will be above/close to 2% the rest of 2019, but in our view the Riksbank won't consider a rate hike before underlying CPIF excl energy also is close to 2%. That won't happen until January 2019. Looking at inflation alone, thereby, there is a possible case for the Riksbank for a first rate hike in Q1 2019 even though we don't believe that such a rate hike will occur. One reason for our view is slowing GDP growth.”

“Swedish GDP looked OK in the first quarter of 2018. More interestingly, however, leading indicators have started to move down. Our broad leading GDP indicator (includes 10 components) depicts a quite marked slowdown in GDP y/y towards the end of 2018. It is so far not our main forecast, which indicates a less pronounced slowdown, but risks are definitely increasing. This would become problematic for the Riksbank and currently make us comfortable with our out of consensus forecast that the Riksbank's first hike will occur as late as Q4 2019, in close connection with ECB's first hike.”

“Also, we have several times pointed out that Sweden is a "canary in the coal mine" for growth in the Euro Area. The slowdown we are seeing in Swedish indicators could thus be followed by similar tendencies in the Euro Area. So this story might not stop in Sweden.”