Saturday, August 02, 2008

Swedish Economic Growth Decelerates Dramatically

Preliminary numbers indicate that Swedish economic growth fell to just 0.7% in the second quarter. Using my terms of trade adjusted approach, growth was even slower at just 0.2%.

Unlike the American numbers, which were stronger than other indicators indicate, the Swedish numbers were weaker than one would expect given other indirect indicators. That Sweden will head into a recession is likely, but it seems implausible that so much of the slowdown had happened already by the second quarter. Most likely, this is the result of a too big calendar adjustment. I therefore find it likely that there will be future upward revisions, though probably not so much already by the next release of these same numbers in September.

At any rate though, regardless of how much of the slowdown had occurred duing the second quarter, it seems clear that Sweden will fall into a recession. The political blame game is all too predictable with the Social Democrats continuing with their confused attacks on a supposedly too expansive fiscal policy, only to propose more fiscal expansion themselves, in the form of increased government investments. Logical consistency ,or learning from Japan's failure to boost its economy with government investments in the 1990s, appear to be overrated virtues according to the Social Democrats. Most right-wing pundits on their hand either completely ignore the numbers or simply urge people not to "panic" while not explaining why the downturn has started.

Had they read and spread the conclusions of my Timbro report they would have had a good explanation for the problems. But now that they don't, the nonsensical Social Democratic theory risks becoming the explanation accepted by most Swedes. A bad theory always beats no theory.


Anonymous Anonymous said...

Although technically correct, I don't think GDP tells the whole story of recession. In the US, we are looking at 7 straight months of job losses. The only way they can report positive GDP is by understating inflation, which they do in fine style. How are the job numbers looking in Sweden?

7:19 PM  
Blogger stefankarlsson said...

Anonymous: employment continues to grow and grows at a nearly 2% rate. And that is one of the indicators I referred to when I wrote that other indicators indicate higher growth than the GDP numbers.

However, it should be noted that the Swedish government has implemented a policy which stimulate employment, but has a negative effect on productivity such as cutting marginal tax rates, but only on low and moderate incomes as well as cutting payroll taxes for labor intensive sectors. This means at least statistically lower productivity, which is why productivity growth in Sweden is likely close to zero. Which in turn is why I think the actual growth rate is something like 1.5-2%. That is a significant slowdown from the roughly 4% we saw in 2006 and 2007, but not yet a recession. However, I expect a Swedish recession too come very soon.

9:12 PM  
Anonymous Anonymous said...

You are talking about the real GDP right? Also, employment and real income figures are other (presumably secondary) indicators of recession.

10:03 PM  
Blogger HS said...

I read part of the report to which you refer. In our time we observe some significant changes. In the United States, pundits refer to the present real estate downturn as the result of a credit crisis. The credit crisis is, however, only a symptom of two underlying problems. One underlying problem is the deregulation of financial markets, coupled with regulatory changes encouraging home ownership. During the last 10 years, the federal government encouraged home ownership by allowing governmental agencies to purchase and/or insure those mortgages where the mortgagor made no/little downpayment. People were able to purchase a home in which they have no initial investment. As real estate price decrease, those with no equity will walk away from their properties. The more important underlying problem is, however, that real estate prices increased much faster than real incomes. Eventually, people were just not able to make mortage payments. Real estate prices must keep pace with real income. When prices exceed real inncome, the inevitable result can only be delayed. Real estate prices will, at least, correct downn to the early 2003 level. That correction will lead to numerous foreclosures and bank failures.
The American economy can not begin to recover until the real estate market stablizes, and that will not occurr until late 2009, at the earliest. There are just too many houses that are on the market or about the enter the market. There are even more homes that are not on the market because sellers have an unrealistic expectation that prices will increase.
The economic downturn in Sweden appears not to be triggered by an implosion of the real estate market. However, real estate prices have increased at a rate far higher than real incomes. Real estate prices will therefore fall. A recession will, of course, just aggravate such a price correction.
In the United States, the government can not tax-cut us out of our current economic problem. The budget deficit is high, although as a percentage of gross domestic product. An increase in the budget deficit will only increase the upward pressure on interest rates and further aggravate the real estate problem. If the government should increase spending, such spending should be directed towards infrastructure issues and education. In Sweden, the budget is balanced, and the government may have more flexibility in dealing with the problems that are just beyond the horizon.
We are living in a very interesting time.

10:23 PM  
Blogger flute said...

This means that inflation-adjusted GDP growth is already negative, right? Which means a contracting economy in real terms.

10:25 PM  
Blogger stefankarlsson said...

Anonymous2: Real GDP is the number that I focused on primarily in this post, but I did mention other indicators as well.

HS: The main cause (the downturn in other countries contribute as well) of the problems of the Swedish economy now is the massive monetary expansion iniated during the summer of 2005, as I described in my report.

Flute: no, it does not mean a contracting economy, it means slower growth. Why do you think it implies contraction?

11:53 PM  
Blogger flute said...

If GDP growth is 0.7% and we have CPI increasing more than that, I can't see anything but "negative real growth". Or have I misunderstood what SCB actually mean by GDP growth?

10:02 PM  
Blogger stefankarlsson said...

Yes, Flute, you have misunderstood it. The 0.7% growth number refers to real growth, not nominal. Which means that the 0.7% number os the figure derived by dividing nominal growth once with the price increase. Dividing it again would mean double-counting the price increase.

10:13 PM  

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