Nordic & Swiss Economics

Riksbank to hike back to zero; Finland losing steam

Nordic & Swiss Economics Weekly
Written by David Oxley

While the Riksbank appears dead-set on raising its repo rate back to zero in December, we suspect that it will only be a matter of time before it will have to loosen policy again. Meanwhile, we expect Swiss CPI data next week to show that inflation fell back below zero in October, which will only strengthen the resolve of the SNB to resist further upward pressure on the franc.

Riksbank gunning for zero at all costs

As expected, the Norges Bank and the Riksbank both left their policy interest rates on hold on Thursday, at 1.50% and -0.25% respectively. (See here.) Nonetheless, the strong hint by the Riksbank that it will “most probably” raise its repo rate by 25bp, to zero, in December spiced up what otherwise would have been a pretty dull morning!

We are certainly not alone in finding it difficult to square the Bank’s hawkish near-term stance with the weak outlook for the economy. At best, the Riksbank is too optimistic to put its faith in the better-than-expected activity data from August given that the series have not had as good a relationship with GDP as one might expect in the past. Intentionally or not, they glossed over increasing signs of weakness in business surveys and the labour market. This body of evidence grew even bigger this morning with the release of the Economic Tendency Indicator for October, which fell for the sixth month in a row, to its lowest level since May 2013.

It turns out that the desire of the Bank to get the repo rate out of negative territory is much stronger than we or the consensus had thought. Riksbank Governor Stefan Ingves said yesterday that negative rates are an “exceptional measure” and that many Swedes think they are “strange”. We’d argue that they are an exceptional measure that is still necessary in Sweden’s case and that we live in a strange world!

Admittedly, the Bank’s updated forecast that it will then keep the repo rate unchanged well into 2022 is a lot more believable than its old habit of projecting hikes come what may. But with growth likely to slow even further next year, and fiscal policy on track to tighten, we think that it is only a matter of time before pressure builds on policymakers to loosen policy again. We have pencilled in a reversal of the probable December hike in mid-2020 and expect the Bank to scrap plans to start shrinking its balance sheet at the end of next year. The fact that the krona has given up the sharp gains it made against the euro after Thursday’s announcement shows that investors are also dubious that the Bank will last the course. (See Chart 1.)

Chart 1: Swedish Krona per Euro

Source: Refinitiv

Finnish economy lost momentum in Q3

On the face of it, the Finnish activity data released this week, including retail sales, appear to suggest that the economy held up reasonably well in Q3. However, the key point is that the retail sales data have a weak relationship with the quarterly household spending series in the national accounts. Moreover, August’s trade data suggest that net exports were a drag on growth once again.

All told, after starting 2019 on strong footing, we think that Finnish GDP growth slowed from 0.5% q/q in Q2 to about 0.2%. And with subdued domestic demand set to keep a lid on GDP growth in the coming quarters, we suspect this may be the best it will get for a while.

The week ahead

Swedish trade numbers for September kick off a busy week for data on Monday. Meanwhile, we suspect that the KOF Economic Barometer from Switzerland edged up in October but will remain consistent anaemic economic growth, and Swiss CPI data on Friday is likely to show the return of deflation. Finally, the manufacturing PMIs for October from Switzerland, Sweden, and Norway – also scheduled for release next Friday – are likely to show that industrial conditions remained weak in October.


Data Previews

Swiss KOF Economic Barometer (Oct.) Wed. 30th Oct.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Economic Barometer

08.00

93.2

93.5

93.5

KOF consistent with anaemic GDP growth

We suspect that the Swiss KOF Economic Barometer edged up in October but to have remained close to its lowest level since April 2015.

The Economic Barometer dropped from 95.5 in September to a 53-month low of 93.2 in August. The press release noted that a deterioration in sentiment among manufacturing firms drove the fall.

We suspect that the Barometer edged up to 93.5 in October. The euro-zone Composite PMI has had a pretty decent relationship with the series since 2016 (see Chart 2) and it also rose a little last month.

Nonetheless, the bigger picture is that even a small rise in the Barometer would leave it well below its long-run average of 100.5 and consistent with anaemic quarterly GDP growth in the second half of 2019 and early 2020.

Chart 2: KOF Economic Barometer & Euro-zone PMI

Sources: Refinitiv, Capital Economics

Swiss Consumer Prices (Oct.) Fri 1st Nov.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

CPI m/m(y/y)

07.30

-0.1%(+0.1%)

0.0%(0.0%)

0.0%(-0.1%)

Deflation is back

Swiss inflation probably fell back below zero in October, for the first time since November 2016.

Headline inflation (on the national measure) fell to a 33-month low of 0.1% in September – well below the recent high of 1.2% in August 2018.

In October, inflation is likely to have turned negative. Our best guess is that the core rate was unchanged at just 0.4%. Meanwhile, the fact that oil prices in franc terms have fallen suggests that energy inflation is likely to have declined further into negative territory. Similarly, agricultural price indices indicate that food inflation also fell further below zero. We have pencilled in a small decline in the headline rate to -0.1%.

Looking ahead, the input prices component of the manufacturing PMI is consistent with inflation staying below zero in 2020. (See Chart 3.) This will only strengthen the resolve of the SNB to resist upward pressure on the franc.

Chart 3: Headline Inflation & PMI Input Prices

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 28th

Swe

Trade Balance (Sep, SEK)

09.30

(08.30)

-5.4bn

Ice

CPI (Oct)

10.00

(09.00)

+0.1%(+3.0%)

Wed 30th

Nor

Retail Sales ex. Motor Vehicles (Sep)

08.00

(07.00)

0.0%

Swe

NIER Economic Tendency Indicator (Oct)

09.00

(08.00)

94.6

Swi

KOF Leading Indicator (Oct)

09.00

(08.00)

93.2

93.5

93.5

Thu 31st

Den

Unemployment Rate (Sep)

08.00

(07.00)

3.1%

Fri 1st

Swe

Manufacturing PMI (Oct)

08.30

(07.30)

46.3

46.5

Swi

CPI (Oct)

08.30

(07.30)

-0.1%(+0.1%)

0.0%(0.0%)

0.0%(-0.1%)

Swi

Retail Sales (Sep)

08.30

(07.30)

(-1.4%)

Nor

Manufacturing PMI (Oct)

09.00

(08.00)

50.4

50.2

Swi

Manufacturing PMI (Oct)

09.30

(08.30)

44.6

45.2

44.6

Nor

Unemployment Rate (Oct, NAV)

10.00

(09.00)

2.2%

2.1%

Den

Manufacturing PMI (Oct)

11.00

(10.00)

50.2

Selected future data releases and events

Mon 4th

Den

Change in Currency Reserves (Oct, DKK)

17.00

(16.00)

-1.6bn

Tue 5th

Swe

Services PMI (Oct)

08.30

(07.30)

49.8

Swe

Private Sector Production (Sep)

09.30

(08.30)

+0.6%(+2.9%)

Swe

Riksbank MPC minutes

09.30

(08.30)

Wed 6th

Ice

Interest Rate Announcement

09.55

(08.55)

3.25%

3.00%

Thu 7th

Nor

Industrial Production (Sep)

08.00

(07.00)

-2.1%(-9.2%)

Fri 8th

Fin

Industrial Production (Sep)

07.00

(06.00)

+0.4%(+4.4%)

Swi

Unemployment Rate (Oct)

07.45

(06.45)

2.3%

Main Economic Forecasts

Share of

World

GDP

Consumer Prices (HICP)

2018

2019

2020

2021

2018

2019

2020

2021

Switzerland

0.42

2.5

0.5

0.5

1.5

0.9

0.5

-0.3

0.5

Sweden

0.41

2.5

1.0

0.5

1.5

2.0

1.7

1.6

1.8

Norway

0.31

2.6

2.5

1.7

2.0

3.0

2.2

1.6

2.5

Denmark

0.23

1.5

2.0

1.0

1.5

0.7

0.8

0.9

1.3

Finland

0.20

1.7

1.0

0.8

1.0

1.2

1.0

1.0

1.2

Iceland

0.01

4.6

0.0

1.5

2.5

2.3

3.2

2.5

2.7

Sources: Refinitiv, Capital Economics

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2019

End 2020

End 2021

Latest

End 2019

End 2020

End 2021

Swiss policy rate

-0.75

-0.75

-1.00

-1.00

Swiss fr/euro

1.10

1.08

1.10

1.12

Swe. repo rate

-0.25

0.00

-0.25

-0.25

Swed. Kr/euro

10.74

11.20

11.00

10.50

Nor. depo rate

1.50

1.50

1.50

1.50

Nor. Kr/euro

10.19

10.30

9.80

9.30

Den. depo rate

-0.75

-0.75

-1.05

-1.05

Dan. Kr/euro

7.47

7.47

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.80

-0.80

US$/euro

1.11

1.05

1.15

1.15

Ice. depo rate

3.25

2.75

2.75

2.75

Ice. Kr/euro

138

142

140

135

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, +44 20 7811 3906, david.oxley@capitaleconomics.com