The macroeconomic outlook
Domestic demand has picked up strongly over the past few quarters and shows no sign of abating. Consumption and housing investments are currently the main impetus to growth, whereas external demand remains suppressed.
Survey data and sector data for domestic industries point to continued strong growth and corporates are apparently optimistic about the prospects for external demand and we also remain cautiously optimistic about growth going forward.
However, one area where we have begun to change our views this spring is inflation and, hence, the Riksbank outlook. Where we, and all other forecasters, expected rising inflation in the winter, we can conclude that this has not materialised. As we write, inflation is flirting with deflation, wage inflation is subdued and inflation expectations are gradually moving down – worrying signs indeed for an inflation targeting central bank. This has meant that we, and all other forecasters, have step by step been forced to incorporate the chance of further Riksbank repo rate cuts into our forecasts. Not only this but expectations of an early 2015 hike from the Riksbank have been postponed deeper into 2015. We currently expect a July cut and a first hike towards autumn 2015 but this might very well be delayed further or even be supplemented by further cuts.
Fiscal policy is set to remain expansionary but, given our view of a lower trend GDP, we fear that some time in the not-too-distant future, the government will be forced to tighten fiscal policy as tax income growth is set to disappoint. These projections could be altered by further structural policy measures aimed at, for example, freeing up labour markets more dramatically and lowering margin tax rates to increase both the supply of, and demand for, low value-added services.
In quantitative terms, we expect GDP to grow by around 2.5% y/y in both 2014 and 2015, a full percentage point above potential. The unemployment rate is set slowly to approach 7% and given, inter alia, high cyclical unemployment, wage inflation would remain low. In our view, it is only beyond the forecast horizon that the Riksbank’s operative inflation target CPIF (CPI under the assumption of constant interest rates) will be attained. ‘Low for long’ is thus expected to hold true in Sweden too.
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