In a new forecast for the Swedish economy, GDP will grow by 2.6% this year, and by 2.7% in 2016. However export-led growth has stagnated and productivity is something of a disappointment. Additionally, tax revenue is less than previously forecast. As a result, the government is revising down its forecast over public savings.
To date Finance Minister Magdalena Andersson has said that the government’s reforms will be financed “krona for krona”. However, uncertainty in the euro area could force Sweden to increase its borrowing. “But we are not there yet, since reactions have been muted despite the Greek drama,” said Andersson on Tuesday
We do not yet know how the Greek drama will end. One possible scenario is that the EU/ECB/IMF troika will extend Greece’s bailout programme at the last moment. Such a move is feasible, since Greece is in quite a strong negotiating position, writes Professor Mats Persson at Stockholm University’s Institute for International Economic Studies.
In a debate piece in Dagens Industri, the professor makes the point that 75% of Greece’s debt is owned by the troika, and thereby indirectly by taxpayers. If the programme is not extended, and Greece goes bankrupt, the troika will be forced to report massive capital losses. The losses would be so great that the ECB’s equity would be wiped out.
Visiting Stockholm on Monday, Citigroup CEO Michael Corbat told business daily Dagens Industri he believes Greece will stay in the euro zone; a Greek exit would undermine confidence in the single currency.
And, commenting Britain’s planned EU referendum, Mr Corbat says he does not believe in an exit, pointing out that Britain is an important trading partner for the rest of Europe.
In practice, inflation is dead in Sweden, which means that the central bank, the Riksbank, should act more forcefully, Anders Borg, the former finance minister, has said in an interview with business weekly Affärsvärlden.
He warned that Europe faces a long period of stagnation; price pressure will remain low as a result of a weak banking system, rapid digitalisation and globalisation.
Borg also said that irrational currency movements were to be expected as a result of zero interest rates, and that this was “extremely dangerous for export-dependent countries such as Sweden”.
Sweden’s CPI inflation reading for April was a negative 0.2% – down from +0.2% in March – while underlying inflation fell from 0.9% to 0.7%. Cheaper holidays, lower interest rates and falling electricity prices contributed to the downturn.
The Riksbank has low tolerance of negative surprises and it is feasible the central bank will cut its benchmark rate further in the coming weeks, particularly if the Swedish krona strengthens against the euro.
The National Audit Office has started a preliminary study into the Riksbank and monetary policy, with the aim of launching an inquiry, which will be concluded by the end of the year.
“We want to examine how the Riksbank has fulfilled its price stability target, and whether the target is compatible with today’s situation. We also want to see whether the Riksbank has the right tools,” says Claes Norgren, who was deputy governor of the Riksbank in the early 1990s.
It is the first time the Audit Office has wanted to examine Sweden’s monetary policy, and means more pressure on the Riksbank.
Equity analyst Peter Malmqvist has described the Riksbank’s policy as “alarming”. He does not believe in negative interest rates as a means of bringing up inflation to target; all it does is to build bubbles in the economy.
“I am against the policy that has been pursued in the past few years. Property prices are rising, there are no homes, and the stock market is going up. All curves in Sweden are pointing upwards right now, apart from the interest rate,” he says, and suggests that the consequences could be grave when inflation starts picking up and the bubbles burst.
Talking to public service broadcaster SVT this morning, Anders Borg, the former finance minister, gave his views on the economic situation in Sweden and in Europe.
When asked about Greece, he made clear that the country needed to be saved so that it remained in the eurozone.
“My advice is that Europe should bail out Greece, even if the country has made a lot of mistakes,” he said.
He predicted that a new drachma would lose 40 per cent of its value relative to the euro if Greece were to withdraw from the monetary union (ed.), that banks would be forced to close for several weeks, restrictions would be imposed on withdrawals and anger would drive people out onto the streets to protest.
“It’s a small, fragile democracy. You cannot drive them into a tumultuous economic situation,” he said.
During the interview, Anders Borg said he expected European inflation and interest rates would remain low for a long time, and that this was a consequence of the ECB’s actions in combination with globalisation and an economic shift that affected consumer prices.
He also admitted that the Swedish government should have done more to stimulate the economy in 2012, when the Greek crisis struck. “We should have introduced some form of tax relief or invested more in the infrastructure,” he said.
The Swedish Riksbank has gone from being the best among its peers in 2008 and 2009 at forecasting inflation to lagging behind its peers in two-thirds of the predictions, writes Bloomberg after comparing forecasts by six central banks between 2008 and 2013. The Riksbank’s errors can be traced back to 2010 when Governor Stefan Ingves raised rates despite Europe being in the midst of the worst economic crisis since WWII, states Bloomberg.
Appearing before the Committee on Finance yesterday, Riksbank Governor Stefan Ingves tried to pour oil on troubled waters when he said a strong krona was unwelcome news in the current situation. Afterwards, he told the media that it would be helpful if the krona remained at current levels, in terms of bringing up inflation to the 2 per cent target.
Ingves also said the central bank was prepared to take further measures, although currency intervention was not his first choice.