Unpicking Sweden’s labour data; DNB to cut again - Capital Economics
Nordic & Swiss Economics

Unpicking Sweden’s labour data; DNB to cut again

Nordic & Swiss Economics Weekly
Written by David Oxley
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The larger-than-expected increase in Swedish unemployment in July was not as bad as it first appeared given that it mainly reflected fewer summer jobs this year. While Sweden has not been immune from Covid, despite its light-touch lockdown, we expect it to be the best of a very bad bunch in Europe this year. Next week, we expect July surveys from Sweden and Switzerland to show that economic conditions continued to improve at the start of Q3.

Nordic economies comparatively well placed

In case you missed it, we published our Nordic & Swiss Economics Outlook this week. (See here.) The key message is that we forecast the Nordic economies to experience the shallowest recessions in Europe, and our GDP forecasts this year are now above the consensus. That said, inflation will remain frustratingly low across most of the region, and policy tightening is years away.

Sweden’s labour market proving tricky to interpret

The main data news of the week was the larger-than-expected increase in Swedish unemployment in July. The seasonally adjusted unemployment rate rose to 9.2% in June – well above the consensus (8.6%).

The Swedish labour market has clearly weakened during the crisis. That said, as elsewhere, the blow has been cushioned by the short-time work scheme, and June’s figures were not as bad as they may appear. Indeed, the increase in unemployment from May was driven entirely by a jump in the 15-24 age group due to fewer summer jobs this year. (Youth unemployment typically picks up in the summer as students temporarily re-join the labour force and not all of them find work.) Of course, this is bad news for them, but the development is perhaps not as economically damaging as a broader surge in layoffs among full-time workers.

Admittedly, the 10% y/y drop in hours worked in Q2 is more troubling and, on the face of it, suggests that the risks to our forecast for the size of the contraction in GDP are on the downside. That said, many of the lost hours may have been amongst those least engaged with the labour market given that employers have had to lay off non-permanent staff to be eligible to receive the government’s short-time work allowance. Perhaps more importantly, it is not clear how accurately the labour force survey is capturing changes to working habits, including those working from home. Notably, relatively few Swedes have reported reductions in working hours due to Covid as in other European countries. (See Chart 1.)

More generally, the labour force survey has been beset with troubles from a low response rate in recent years, and it should be taken with a heavy dose of salt. All told, while Sweden has not been immune from Covid, despite its light-touch lockdown, we expect it to be the best of a very bad bunch this year.

Chart 1: Changes In Working Time Due to Covid-19
(% Share of Survey Respondents)

Source: Eurofound

DNB likely to reverse course before long

The interest rate hike by Denmark’s Nationalbank (DNB) at the height of the Covid crisis is surely a shoo-in for this year’s ‘contrarian policymaking’ award. A combination of this and a wider pick-up in investor risk appetite has driven the Danish krone to its highest level against the euro since mid-2018, above the centre-point of its peg. If investor sentiment continues to improve, as we expect, we would not be surprised to see the DNB cut rates before long. We have pencilled in a 15bp rate cut to -0.75%, possibly in Q4, which would reverse the hike earlier this year and reinstate the 25bp rate differential with the ECB.

The week ahead

Following a few quiet weeks on the data front, things will pick up a bit next week. We suspect that retail sales in Sweden rose in monthly terms again in June and that the Economic Tendency Indicator continued to improve in July. Similarly, having underwhelmed in June, and lagged behind the euro-zone Composite PMI, we expect the Swiss KOF to have rebounded in July (data released on Thursday).


Data Previews

Swiss KOF Economic Barometer (Jul.) Thu. 30th July

Forecasts

Time (BST)

Previous

Median

Capital Economics

Economic Barometer

08.00

59.4

75.0

85.0

Rebounding, but still far from normal

The Swiss KOF Economic Barometer is likely to have rebounded in July, but to have remained below its long-run average.

The small increase in the Barometer in June was a tad underwhelming given the larger bounce-back seen in the euro-zone Composite PMI. (See Chart 2.) For what it’s worth, the press release noted that the rise was driven by an improvement in sentiment among firms in manufacturing, led by those in the metals sector.

We expect the Barometer to have rebounded sharply in July as restrictions continued to be eased throughout Switzerland’s key trade partners. We have pencilled in a reading of 85.0, which is above the consensus but would still leave the indicator lagging behind the euro-zone Composite PMI, which jumped back above the 50-mark in July.

In any case, Switzerland appears set for a comparatively modest contraction in GDP this year by European standards, more akin to that in Germany than the worst-affected countries.

Chart 2: KOF Economic Barometer & Euro-zone Composite PMI

Sources: Refinitiv, Markit, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (BST)

Previous*

Median*

CE Forecasts*

Mon 27th

Den

Retail Sales (Jun)

08.00

(07.00)

+9.4%(+5.3%)

Tue 28th

Nor

Household Consumption of Goods (Jun)

08.00

(07.00)

+4.5%

Nor

Retail Sales Ex. Motor Vehicles (Jun)

08.00

(07.00)

+2.8%

Swe

Trade Balance (Jun, SEK)

09.30

(08.30)

+2.4bn

Swe

Retail Sales (Jun)

09.30

(08.30)

+0.5%(+2.4%)

Wed 29th

Swe

NIER Economic Tendency Indicator (Jul)

09.00

(08.00)

75.2

Thu 30th

Den

Unemployment Rate (Jun)

08.00

(07.00)

5.4%

Swi

KOF Leading Indicator (Jul)

09.00

(08.00)

59.4

75.0

85.0

Fri 31st

Swi

Retail Sales (Jun)

08.30

(07.30)

(+6.6%)

Nor

Unemployment Rate (Jul, NAV)

10.00

(09.00)

4.8%

Selected future data releases and events

Mon 3rd

Swe

Manufacturing PMI (Jul)

08.30

(07.30)

47.3

Swi

CPI (Jul, EU Harm)

08.30

(07.30)

-0.1%(-1.3%)

Swi

Manufacturing PMI (Jul)

08.30

(07.30)

41.9

Nor

Manufacturing PMI (Jul)

10.00

(09.00)

48.9

Den

Manufacturing PMI (Jul)

11.00

(10.00)

52.2

Tue 4th

Den

Change in Currency Reserves (Jul, DKK)

17.00

(16.00)

0.0bn

Wed 5th

Swe

Services PMI (Jul)

08.30

(07.30)

49.2

Swe

Private Sector Production (Jun)

08.30

(07.30)

-0.4%(-10.0%)

Swe

GDP Indicator (Q2, q/q(y/y)

09.30

(08.30)

+0.1%

Fri 7th

Nor

Industrial Production (Jun)

08.00

(07.00)

-1.0%(+3.0%)

Den

Industrial Production (Jun)

08.00

(07.00)

-3.0%

*m/m(y/y) unless otherwise stated. p=provisional.

Sources: Bloomberg, Capital Economics

Main Economic Forecasts

Share of

World GDP

GDP

Consumer Prices (HICP)

2019

2020

2021

2022

2019

2020

2021

2022

Switzerland

0.42

0.9

-5.0

3.0

2.0

0.4

-0.9

0.4

0.6

Sweden

0.41

1.3

-1.5

2.0

1.7

1.7

0.5

1.5

1.5

Norway

0.31

2.4

-3.0

2.5

1.8

2.3

1.0

2.0

2.0

Denmark

0.23

2.3

-3.0

3.0

2.0

0.7

0.2

1.0

1.5

Sources: Refinitiv, Capital Economics

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2020

End 2021

End 2022

Latest

End 2020

End 2021

End 2022

Swiss policy rate

-0.75

-0.75

-0.75

-0.75

Swiss fr/euro

1.07

1.10

1.10

1.12

Swe. repo rate

0.00

-0.25

-0.25

-0.25

Swed. Kr/euro

10.27

10.25

10.00

10.00

Nor. depo rate

0.00

0.00

0.00

0.00

Nor. Kr/euro

10.69

10.25

10.00

9.75

Den. depo rate

-0.60

-0.75

-0.75

-0.75

Dan. Kr/euro

7.45

7.45

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.50

-0.50

US$/euro

1.14

1.20

1.20

1.20

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, david.oxley@capitaleconomics.com