Wednesday, May 30, 2007

Swedish GDP Growth Slowdown Only Apparent

Sweden's GDP growth seemingly slowed sharply during the first quarter. From a downwardly adjusted 4.2% (4.3% in calendar adjusted terms) during 2006 to 3.0% during Q1 2007. Yet if you look at the details, the slowdown is a statistical illusion.

The reason is the phenomena I discussed here: the issue of terms of trade. What fell from 4.2% to 3.0% was volume growth, which is deflated by the sales prices of producers. The more relevant measure is nominal growth deflated by the prices of the goods and services you buy, not the prices of the goods and services you sell (you don't get richer if you sell more goods and the relative price of it falls even more).

In 2006, terms of trade adjusted growth was 0.3%:points lower than volume growth (In previous years the difference was a lot higher). But during the first quarter, terms of trade adjusted growth was in fact 1.1%:points higher. Meaning that terms of trade adjusted growth, far from falling, rose from 3.9% to 4.1%.

The reason for this improvement in terms of trade can be spelled in one word: oil. This factor has also contributed to improvements in terms of trade in other oil- importing countries too, including America, Germany and Hong Kong.

That is the main bullish aspect of this report. Another bullish aspect is the fact that government consumption continued to fall as a share of GDP, thus helping to reduce the burden of government on the private sector, which in turn should continue to help growth.

There are bearish aspects too consider as well. Growth was largely driven by a surge in inventories; which could dampen growth in the short term. And a more long-term threat is the extent to which growth is driven by credit fueled over investments. Apart from inventories, the strongest factor driving growth was a surge in residential investments. Eerily similar to the situation in America a few years ago. Look for this trend to continue in the coming two or three years, given the rather dovish inclinations of the Riksbank and the housing tax reform. But after that, trouble could arise.


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