Sweden’s economy expanded by twice the rate expected by economists as it grew by 0.8% q/q in the third quarter of the year. Estimates were for the economy to expand by 0.4% q/q. The year-on-year rate accelerated to 3.9% following three successive quarters of growth around 1%.
The better-than-expected figures make it more difficult for the Riksbank, Sweden’s central bank, to justify looser monetary policy. Like the Eurozone, Sweden has problems of deflation of its own where prices have been mostly in negative territory since 2013, even before the slump in commodity prices began. The Riksbank is engaged in a massive quantitative easing program, which it expanded by 65 billion krona to 200 billion krona as recently as October. It has also been cutting its repo rate deeper into negative territory since the start of the year and have stood at -0.35% since July.
The Riksbank has been fighting to keep the value of the Swedish krona at competitive levels against the euro. The single currency has depreciated by 4.6% against the Swedish currency from a peak of 9.6731 krona on August 26. The krona’s rebound against the dollar was much more limited and is now back near the 6-year lows it first touched back in March. However, the krona has now reversed most of its losses against the single currency from the summer, as the euro has turned increasingly bearish.
After underperforming in 2012-2013, Sweden’s economy has been growing strongly since late 2013. Today’s data showed no signs of the robust growth abating anytime soon. Household consumption rose by 0.7% q/q and gross fixed capital formation was up 1.2% q/q. Exports and imports both expanded by 2.1%. Unemployment has also come down from 8.5% in June to 6.7% where it currently stands.
The biggest threat to further krona appreciation is the European Central Bank’s policy meeting this Thursday. If, as expected, the ECB announces fresh new measures to loosen monetary policy, the krona is likely to appreciate further against the euro, making it more difficult for the Riksbank to meet its inflation target of 2%. At the same time, any additional quantitative easing by the central bank risks fuelling household debt and property prices further higher.
While inflation has been in positive territory since September, it remains at just 0.1% (although core inflation is much higher at 1.1%). The Riksbank could still justify looser monetary policy until inflation rises closer to its 2% target. Apart from the development of the krona’s exchange rate, the direction of commodity prices are also likely to influence how quickly prices rebound. More recently, the Riksbank cited the migrant influx as another potential risk to the economy due to higher government spending.
The krona jumped sharply immediately after the data as it lessened the prospects of further action by the Riksbank. The euro hit a low of 9.2120 krona before rebounding slightly to 9.2180 by mid-European trading. The dollar was also lower, setting a low of 8.7003 krona before recovering to 8.7138.
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