Basically this post accompanies the Swedish monetary policy and devaluation post I have just put up. But first some theoretical structure from Claus Vistesen.
As we can see above, the idea is that as median population age rises the current account dynamics of a country change. The last ageing phase of the diagram is purely speculative at this point. Basically we simply do not know what happens after a society starts to dis-save at an advanced median age. We have, as yet, no experience with this phenomenon.
Now, as is well known, Sweden's median population age has been rising steadily, and reached 41.3 in 2009 according to the latest estimates from the US Census Bureau. This makes it a little younger than Germany and Japan (ma circa 43) but still over the critical 41 threshold (which is itself a tentative first estimate, and still needs calibrating from case to case).
Also as can be seen below, Swedens external position underwent a structural shift in the mid 1990s, just as Claus's model predicts. First positive balance - the submarine breaks water - in 1994, median age 38.4 (quite young in international comparisons so interesting). So so far so good.
Now for the empirical side. The Riksbank said the economic outlook had worsened further since its previous meeting, in April, and gave this as its justification suggesting the repo rate will now be held at 0.25 percent until autumn 2010. The central bank now forecasts the economy will contract 5.4 percent this year and return to growth of 1.4 percent next year. As can be seen in the charts below economic performance was weak throughout 2008, and the contraction was very strong in Q4 2008, but showed some evidence of weakening in force in Q1 2009.
However, we have seen a number of signs of stabilisation in recent months. Consumer confidence is now off the lows hit in the first quarter of this year, increasing for the second consecutive month in June (to minus 9 from minus 11 in May). The confidence indicator was minus 21 in April. Sweden's business confidence indicator also improved - for the third straight month - in June, rising to minus 19 from minus 24 in May. Retail sales are also perking up, and according to Eurostat (harmonised) data sales rose 2.2 % year-on-year in May, slower than the 4.3 % rise in April, but still fairly healthy when compared with the very lacklustre performance between September 2008 and March 2009. Month on month, retail sales fell back a seasonally adjusted 1.1% in May when compared with April.
Industrial output is also performing less badly than it was. Output has stabilsed, although at around 85% of its 2005 level, and was contracting between January to May at around a 20% annual rate.
According to the Swedish Statistics Office during the three months from March to May, production decreased by 6.9 percent compared to the previous three months of December-February. Total industrial production (NACE B+C) was down by 2.7 percent in May as compared to April, while in April production decreased by 2.1 percent compared to March.
However, the recent improvements in the PMI reading have been very positive, and indeed the June manufacturing PMI was in expansion territory. Registering 50.5, following 43.7 in May.
Exports continue to be well down, even if there is still a net trade surplus (SEK 9.5 billion in May, up from SEK 8.8 billion in April, and only very slightly down from the SEK 9.6 billion reported in May 2008. Exports fell 24% year-on-year to SEK 78 billion, while imports dropped 26% to SEK 68.5 billion. On a seasonally adjusted basis, the net trade surplus amounted to SEK 8.3 billion in May, up from SEK 8.1 billion in April.
Inflation is now seen by the central bank as less of a threat to the Swedish economy than deflation. Annual consumer prices have declined for two consecutive months and fell 0.4 percent in May. Prices will fall 0.2 percent on average this year, according to the Riksbank. Year on year, headline consumer inflation is still holding in positive territory however, and was still up by 1.7% (still shy of the Riksbanks 2% target) thanks largely to the sharp knock administered by last autumns devaluation.
Curiously the inflation rate as measured by the Swedish statistical office methodology fell to -0.4% in May (-0.1 % in April), while the price index rose by 0.1% from April to May. The main difference in methodologies seems to relate to housing costs, with lower prices for repairs (-4,5 %) due to the introduction of a subsidy for home repair and maintenance and lower interest rates (-3,2 %) each contributing a negative impact of 0.1 percentage points according to the statistics office.
Also producer prices, which have been falling since August 2008 give some indication of the deflationary pressures which are now in the pipeline, and year on year they were up by only a threadbare 0.9% in May.
Rising unemployment is another indicate of the weak demand problem which is building up, and the seasonally adjusted rate hit 8.9% in May, according to Eurostat data.
Basically nothing here is easy, as we are all caught in a rather awkward place. Sweden's Economic Activity Index - which gives a rough and ready measure of activity in the Swedish economy - decreased sharply again in May 2009. The trend decreased 0.4 percent compared to April, which corresponds - according to the statistics office - with an annual contraction rate of almost 5 percent.
As in April, the decrease of the Activity Index in May can mainly be explained by the decrease in exports of goods and industrial production. Indeed, even if the net trade situation is stable, both imports and exports are still falling (see chart below).
But Sweden does seem to have the advantage over many EU countries in that it has a group of people at the central bank who take the deflation threat seriously, and it is hard to disagree with the assessment from UBS economist Sunil Kapadia, when he says that Sweden’s economy will recover faster than those in the euro area. Capital Economics's Ben May is also to the point, Sweden is the place we should look to find green shoots in the EU, if we are to find them anywhere that is.
