The Swedish Economy No.3 - May 29, 2012: The Swedish economy is back to growth – and the service sector plays a key role

1. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department
by Magnus Alvesson Nr 3 • 31 May 2012
The Swedish economy is back to growth – and the service
sector plays a key role
 The Swedish economy grew significantly beyond expectations during the first
quarter, with business investment in particular surprising on the positive side.
This indicates improved confidence. Considerable imbalances still remain,
however, mainly household debt and high unemployment, which have to be
handled with economic policy.
 The private service sector is becoming increasingly more important for the
Swedish economy and has served as a shock absorber against recent
economic fluctuations. Output, employment and exports have grown faster in
the service sector than in manufacturing, but at the same time the overlap
between the two sectors is growing. So it isn't a question of either/or, but rather
both.
 Economic policy has the delicate role of balancing the improvement in the
Swedish economy with the remaining imbalances. The likelihood that the
Riksbank will keep monetary policy unchanged has grown despite the relatively
high unemployment rate. In the longer term conditions for service businesses
have to be improved, mainly through a modified tax system, investments in
education and research, and liberalization of the service trade within the EU.
Growth was surprisingly strong during the growth, which confirms the signs of more robust
first quarter household sentiment earlier in the year. The only
negative contribution to growth was inventory
The Swedish economy expanded by 1.5% annually
investment, which declined compared with the first
(calendar adjusted) during the first quarter 2012.
quarter 2011.
This is significantly above what we had expected
(0.7%). On a seasonally adjusted basis the Contribution to growth, Q2 2009 - Q1 2012
economy grew by 0.8% from the previous quarter. (Quarter by quarter, percentage points)
As a result, our growth forecast for the full-year 4,0 Private consumption Public consumption
2012 of 0.5% (calendar adjusted) is probably on the Investments Inventories
3,0 Net export GDP
low end, although we can't rule out that high growth
during the first quarter was partly due to temporary 2,0
factors and a rebound after the considerable
decline in the fourth quarter of last year. 1,0
0,0
Most components surprised on the upside. The
biggest contributor to annual growth was -1,0
investment, contrary to indications in surveys. The
main investment drivers were the mining and -2,0
2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4
energy sectors. Net exports were also significantly
Source: Statistics Sweden
better than expected. While imports were
stagnating, Swedish exports grew, especially in The high growth numbers mean that Sweden is
services (see the next section). Goods exports were withstanding the growing turbulence in the global
largely unchanged and foreign auto sales were flat. economy. With the exception of Norway, Sweden
Private consumption also contributed to the positive has had the fastest recovery among comparable
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46-8-5859 7740
E-mail: ek.sekr@swedbank.se Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson, +46-8-
5859 7720, Magnus Alvesson, +46-8-5859 3341, Jörgen Kennemar, +46-8-5859 7730, ISSN 1103-4897

2. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 3 • 31 May 2012
economies since the financial crisis in 2008 and the savings ratio declined in the wake of the rising
2009. One probable reason is that Norway and consumption. Household debt is leveling off, but
Germany, which have also managed the crisis remains a significant risk to the Swedish economy
relatively well, are among Sweden's most important going forward.
export markets. To the extent the global market
continues to weaken, especially if Europe's debt Household disposable income and borrowing, 2006 - 2012
(Annual change, %)
crisis worsens, it will also affect the Swedish
14
economy. Furthermore, the strong first quarter Disp. Inc. (real)
partly reflects a recovery from the major slowdown 12
Borrowing (nom.)
in the last quarter of 2011. 10
8
GDP level: Sweden and comparable countries, 2007 - 2012
6
(Real index 2007=100)
105 NOR 4
103 SWE
2
GER
USA 0
101
-2
FRA
99 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1
NETH
FIN
97 Source: Statistics Sweden
UK
95
DEN
In summary, there was a surprisingly sharp rebound
93 of the Swedish economy surprisingly in early 2012,
91 which was a sign of strength given the growing
concerns plaguing the European economy. There
89
Q4-07 Q2-08 Q4-08 Q2-09 Q4-09 Q2-10 Q4-10 Q2-11 Q4-11 are still significant weaknesses in Sweden,
Source: Ecowin however, especially the stubbornly high
unemployment and high level of household debt,
The expansive GDP during the first quarter which should be taken into consideration in future
coincides with a slightly more positive labor market. assessments of the economy and dealt with
Here as well we had expected a weakening, yet through economic policy.
employment and unemployment levels have both
been a positive surprise. Unemployment has risen, The service sector is an important
but only marginally, and employment has continued economic shock absorber
to grow. The number of hours worked increased by
1% in total and by 1.3% in the private sector during Although the service sector has been growing for
the first quarter. Given a growing GDP, labor some time as a share of Swedish GDP, as it has in
productivity was unchanged compared with the first other developed economies, its importance as an
quarter 2011. economic shock absorber became more apparent
during the fiscal crisis in 2008-2009 and late last
Labor market development, 2006 - 2012 year, when the economy again slowed. Since the
(Annual change, %, unless otherwise indicated) beginning of the 1990s the private service sector
9 has expanded in real terms by about 2/3, while
7 manufacturing is about 1/3 bigger. Its contribution to
5
productivity has also been strong – 50% higher in
fact than for industry since the mid-1990’s.1 At the
3
same time, however, the service content in
1 industrial production has increased as well in recent
-1 Employment
years, which means that the service sector’s
Unemployment rate (sa, % of
development is dependent in many respects on a
-3 labour f orce)
Hours worked healthy manufacturing industry, and vice versa.2
-5
Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12
The economic slowdown late last year was partly
Source: Statistics Sweden
offset by continued growth in service production.
The service sector further expanded in the first
Improving household finances have also supported
the Swedish economy. Real disposable incomes 1
continue to rise, mainly due to rising wages. At the ”The Size of Service Sector”, Swedish Agency for
same time household borrowing decreased. Growth Policy Analysis, WP 2010:14
2
“Servicification of Swedish manufacturing,” 2010 03,
Savings fell during the first quarter, however, and
National Board of Trade.
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3. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 3 • 31 May 2012
quarter of this year, by slightly over 2% at an annual Employment per sector, 2006 - 2012
(Q1 2006 = 100)
rate, while the industrial production index fell by
more than 4%. It should be noted, however, that 120
industrial production as measured in the national Manuf acturing
115
accounts has reported significantly higher growth, Services (excl. public sector)
110
especially in 2010. According to Statistics Sweden,
this is partly because some services are included in 105
these figures. 100
Production indices for the service sector and manufacturing 95
industry, January 2007 – March 2012
90
(Annual change, %)
20 85
Service production
15 80
Industrial production
2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1
10
Source: Statistics Sweden
5
0 Despite the growing spinoff of service companies
-5 from the manufacturing industry, the service content
-10 in manufacturers’ exports has grown in magnitude.
-15
From early 2005 till the first quarter 2012 service
exports expanded by slightly over 50%, compared
-20
with nearly 30% for goods exports. This is partly
-25 because manufacturers are exporting more
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
services, which are an important part of their
Source: Statistics Sweden
integrated product range, and partly because
The latest data indicate, however, that the service service businesses are increasing their exports.
sector is also slowing. The purchasing managers
Exports of goods and services, Q1 2005 – Q1 2012
index for services was 48.6 in April, compared with (Q4 2004 = 100 and SEK billion)
an average of 53.7 during the first three months of 200 400
the year. In other words, the service sector is no 180 Goods (SEK billion) Services (SEK billion)
Goods (index) Service (index) 350
longer expanding. Order bookings for the service 160
sector, with an index measure of 47.3, also point to 300
140
slowing demand for services. 250
120
The service sector is also playing an increasingly 100 200
important role for the labor market. Since the mid- 80 150
2000’s employment in the private service 60
100
businesses has grown by nearly 10% at the same 40
time that it has declined correspondingly in 20 50
manufacturing. This is partly because many 0 0
manufacturers are hiring independent service 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1
contractors for tasks they previously did in-house. Source: Statistics Sweden
Deregulation of the public sector has also
contributed to a growing private service sector. Policy agenda in the short and long term
Better than expected economic growth during the
first quarter reduces the need for economic policy
stimulus, and monetary policy is likely to remain
unchanged in the short term. There are still
significant risks, however, mainly related to the
global economy, though also domestically in the
form of relatively high unemployment and high
household debt. A rapid worsening of the debt crisis
in Europe would again raise the issue of whether
the Swedish economy needs more stimulus, at the
same time that risks have to be balanced in the
housing and credit markets.
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4. The Swedish Economy
Monthly letter from Swedbank’s Economic Research Department, continued
No. 3 • 31 May 2012
Service production’s importance to the Swedish research to increase value-added in the service
economy will grow. Economic reform policies sector and pave the way for wage growth. As
should therefore focus on fully taking advantage of foreign trade data have indicated, the export trend
this trend. An important area of reform is tax policy, is also positive for services, and Sweden would
where labor-intensive production is currently at a thus greatly benefit from further liberalization of the
disadvantage from relatively high taxes. Moreover, service trade within the EU.
additional investment is needed in education and
Magnus Alvesson
Swedbank Economic Research
Department Swedbank’s monthly The Swedish Economy newsletter is published as a service to
SE-105 34 Stockholm, Sweden our customers. We believe that we have used reliable sources and methods in the
Phone +46-8-5859 7740 preparation of the analyses reported in this publication. However, we cannot guarantee
ek.sekr@swedbank.se the accuracy or completeness of the report and cannot be held responsible for any
www.swedbank.se error or omission in the underlying material or its use. Readers are encouraged to base
Legally responsible publisher any (investment) decisions on other material as well. Neither Swedbank nor its
Cecilia Hermansson, +46-8-5859 7720 employees may be held responsible for losses or damages, direct or indirect, owing to
Magnus Alvesson, +46-8-5859 3341 any errors or omissions in Swedbank’s monthly The Swedish Economy newsletter.
Jörgen Kennemar, +46-8-5859 7730
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