Wednesday, June 07, 2006

Strong First Quarter Swedish GDP Growth-But It Won't Last

Today's report (As usual more details in the Swedish language version ) on first quarter GDP in Sweden came in roughly as strong as I expected it, at 4.1%. Given the surprise increase in the trade surplus and the strong retail sales numbers, a growth rate of roughly this magnitude was to be expected. The details are actually mostly good with the trade surplus rising and business investments increasing at a double digit rate, while government purchases rose a lot more slowly than private sector production. As we shall see however, future prospects are not as good.

As one could have expected, Swedish Finance Minister Pär Nuder gloated about the number, repeating his old lie about how this mean Sweden have the highest growth rate. While this claim was now actually somewhat closer to the truth than in the past, both because he modified it to being the highest in EU15 (i.e. excluding the Baltics and other rapidly growing Eastern European countries) and because Sweden with this number surpassed Spain and (by a mere 0.1%:point) Greece, it is still lower than in Denmark, Ireland and Luxembourg.

More importantly, though, this growth number is very much unsustainable as it was based on some moderate tax cuts, a highly inflationary monetary policy and strong global growth.

As increasing inflationary pressures will soon force the Riksbank to follow the Fed and the ECB and hike interest rates substantially. And because Sweden have lower interest rates and higher money supply growth than the Euro-zone, the Riksbank will have to tighten more, meaning that we can expect the Swedish economy to cool more than in the rest of Europe.

Moreover, there are signs that growth have already decelerated. April employment growth was , as preiously reported very weak. And while investment growth was reported at 12% for the first quarter, a business survey indicates that manufacturing investment growth for the year will be a far more moderate 5%. Even counting in the higher expected growth rate in residential investments, the survey clearly indicate that investment growth will slow substantially during the rest of the year.

So it is nearly certain that growth will slow, both in absolute and relative (compared to rest of Europe) terms during the rest of the year. Whether it will slow fast enough to deprive the Social Democrats of re-election in this September's election is however less clear.

UPDATE July 13th: Now I see that Greek growth have been upwardly revised to 4.1%, meaning that just 10 out 14 of the old EU countries have lower growth than Sweden.


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