Sweden Outlook: Keepin' Our Hopes Up

Danske Bank has remained one of the most optimistic forecasters on the Swedish economy since late 2012. We have based this view on nothing less than a post-crisis first increase in global and domestic bank lending to households, implying that lenders and borrowers have started to see eye to eye on future income prospects.

Whether this is also warranted from a longer-term perspective remains to be seen (admittedly, we have some doubts), but in the short run, which this publication covers, it cannot be ignored since it implies that the deleveraging process instigated by the crisis may finally be grinding to a halt.

Of course, there are still downside risks, such as the notably more restraining financial conditions, which we believe provide a litmus test of the first real recovery since the financial crisis hit. Thus, if the world economy and the external trade dependent Swedish economy prevail in the face of higher capital costs, the period ahead looks very bright - perhaps even brighter than our forecasts suggest.

Alas, some indicators, such as US mortgage applications and pending home sales, point to higher interest rates having an adverse impact on the economy. We are wary of such developments reaching a mass that cancels the at least seemingly sustained path of recovery - a concern shared by the Federal Reserve Open Market Committee as it postponed the planned tapering of the large-scale asset purchases. So far, we nonetheless remain sanguine about the negative impact and choose to keep our hopes up.

A sustained recovery in considerable parts of the world economy, and the lion's share of Sweden's export markets, should lead Swedish exports higher - even in the face of a stronger SEK - initiating a virtuous domestic cycle as well. Due to large downward revisions to GDP by Statistics Sweden, we have revised our current year forecast down to 1% y/y (vol., cal. adj.) from 1.7% previously, but the aforementioned export developments, strong fiscal policy measures and a normalising savings ratio have resulted in an upward revision of our 2014 forecast to 2.5% y/y (vol., cal. adj.) from 2.1% y/y previously.

Higher demand will eventually drive unemployment downwards and we foresee an unemployment rate of 7.2% a year hence and thenceforth a gradual decrease towards our estimate of equilibrium unemployment rate of 6.5% past the forecast horizon. Simultaneously, inflationary pressures will rise at a measured pace from current very low levels. That said, we believe that inflation will rise faster than Riksbank forecasts - at least during the coming few quarters. Nonetheless, the inflation target will not be attained during the forecast horizon, which corroborates the current general perception of rates being low for long.

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