The broad-based drop in Sweden’s Economic Tendency Indicator in March is consistent with the economy contracting by about 0.5-1.0% in Q1. Unfortunately, much worse is set to come in Q2.
Swedish economy set to contract in Q1, and much worse is to come
- The broad-based drop in Sweden’s Economic Tendency Indicator in March is consistent with the economy contracting by about 0.5-1.0% in Q1. Unfortunately, much worse is set to come in Q2.
- The decline in the headline ETI, from 99.1 in February to 92.4 in March, was its biggest monthly fall since the global financial crisis and took the indicator to its lowest level since May 2013.
- Given the circumstances, it was no surprise to see broad-based weakness in the subcomponents. Both the indicators for the services sector and consumer confidence slumped to their lowest levels since December 2012, and sentiment in the construction industry dropped back below its long-run average too. (See Table 1.) Meanwhile, although the manufacturing and retail sales series remained above their long-run averages, they both fell back sharply from February and are likely to drop further in the coming months.
- The ETI has not been a great indicator of GDP growth in recent years. (See Chart 1.) Nonetheless, it is currently pointing to annual GDP growth grinding to a halt in Q1, which is consistent with the economy contracting by about 0.5-1% in quarterly terms.
- While the virus-related containment measures adopted in Sweden have not been as draconian as in much of Europe (eg, the schools are still open), we still think that the economy faces as unprecedented hit to activity in the second quarter, possibly a double-digit quarterly decline in output.
- Accordingly, while the Swedish authorities have already taken broad and coordinated measures aimed at alleviating the economic impact of the coronavirus, all options remain on the table. In our view, this includes a possible rate cut, to -0.25%, to help the economy bounce back as and when the virus peaks.
Chart 1: Sweden NIER Economic Tendency Indicator & GDP
Sources: Refinitiv, Capital Economics
Table 1: Sweden NIER Economic Tendency Indicator Breakdown
David Oxley, Senior Europe Economist, email@example.com