The sharp contraction in the Swedish economy in Q2 confirms that it has not been immune to Covid, despite the government’s well-documented light-touch lockdown. Nonetheless, the economic crunch over the first half of the year was in a different league entirely to the horror shows in southern Europe.
Swedish economy not immune, but still well placed
- The sharp contraction in the Swedish economy in Q2 confirms that it has not been immune to Covid, despite the government’s well-documented light-touch lockdown. Nonetheless, the economic crunch over the first half of the year was in a different league entirely to the horror shows in southern Europe.
- The 8.6% q/q drop in GDP in Q2 was broadly in line with the consensus estimate but way ahead of our forecast (-4.0%). Statistics Sweden did not release a breakdown, and today’s data are preliminary, but the press release noted that the decline was driven by household consumption and exports. (Note that the latter can be volatile in Sweden and were the main reason why the economy grew slightly in Q1.)
- Despite the lack of a breakdown, the agency noted a large discrepancy between the production and expenditure estimates; the fact that output did not fall as fast as spending implies a sharp pick-up in inventories, which may be unwound in Q3.
- Today’s data were worse than we had expected, and the recovery in the private sector is proving slower than suggested by high-frequency data. Separate figures also released this morning show that private sector production in June was still about 10% below its January peak.
- Nonetheless, the bigger picture is that the Swedish economy has weathered Covid comparatively well and experienced a much smaller drop in GDP in Q2 than other European economies. (See Chart 1.) While rising virus cases elsewhere in Europe pose downside risks for Swedish exporters, encouragingly, activity in the services sector appears to have gathered pace at the start of Q3; the services PMI, also released this morning, jumped to a five-month high of 54.8 in July and, on the face of it, is consistent with a rebound in the third quarter. (See Chart 2.)
- All told, while the drop in GDP in 2020 will probably exceed the current record contraction of 4.2%, seen in 2009, Sweden is still set to be amongst the best of a bad bunch this year.
Chart 1: GDP Growth (Q2 2020)
Chart 2: PMIs & GDP
Table 1: Sweden GDP
David Oxley, Senior Europe Economist, email@example.com