Riksbank Predicts Temporary Weakness In 2013

The forecast update from the Riksbank released today is a fairly standard style document. In short: temporary weakness in 2013 followed by a gradual return towards trend. The Riksbank recognises that the gloomy growth outlook in Europe is having a larger negative impact on Sweden than previously assumed – at least for 2013. Growth projections for 2014 and 2015 remain optimistic (2.8% and 2.9%, respectively) but that is too far into the future to make much of a case for now.

At the same time, the Riksbank has revised down its near-term projections. Q4 12 GDP is expected to be negative (about 0.2% q/q) followed by a pretty anaemic Q1 13 (+0.2% q/q). So the Riksbank does not expect much positive news in the near term and from that point of view we doubt it will have sufficient information to cut again in February. The market is pricing in further cuts of 10bp in February and 7bp in April – we think it is more likely to be the other way around.

One thing to keep under observation is that the Riksbank – like most other forecasters – sees weakness in the export sector due to Euroland while expecting consumers to be resilient. We are becoming less convinced that is the right way to see risks going forward. We don’t question that exporters to Europe are having a tough time. But what about the consumer? Unemployment is rising, making people worried about their jobs, debt ratios are high, banks are discussing tighter requests on amortisation in addition to the LTV cap.

To us, these sound like good reasons for households to borrow less, spend less and save more. The first place to look for signs in this direction is probably retail sales going softer. If this is coupled with a steeper deceleration of lending to households and a slowdown of the real estate market, we could see a situation where banks and mortgage institutions’ need for refinancing declines further. Eventually this would also be a development that would remove much of the current restrictions for monetary easing.

To Read the Entire Report Please Click on the pdf File Below.