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Sweden's outperformance in Q1 was largely unrelated to its
COVID-19 strategy, as all domestic demand components were a drag on
headline growth, offset by a large positive contribution from net
trade.
Key downside risks include a collapse in goods exports without
a corresponding drop in imports and an elevated unemployment rate
causing negative spillovers into the banking sector and the broader
economy.
The Swedish economy is likely to outperform its peers in 2020,
but not over the medium-term. We expect Swedish GDP to return to
its end-2019 level at the end of 2022.
Impact on the economy
The Swedish economy was the only one in Western Europe that did
not contract in the first quarter, apart from Ireland where GDP was
distorted by tax-related transactions of multinationals. However,
Sweden's underlying growth drivers do not necessarily vindicate the
government's strategy. Although the country's private consumption
fell by less than the Western European average, the decline was
larger than in Finland, which imposed a strict lockdown. Despite
the strict lockdowns across Europe denting foreign demand, net
exports were the only positive contribution to Swedish growth,
driven by the largest quarterly surge in goods exports in a decade.
Without the contribution of net exports, the Swedish economy would
have contracted by 1.6% in the first quarter, which would have been
slightly less severe than in Denmark and Finland, but more severe
than in the Netherlands and Norway. Given the importance of the
first quarter for full-year growth, we currently expect Sweden to
outperform the eurozone and its Nordic peers in 2020. However,
there are some key near-term risks.
Short-term risks
According to leading indicators, goods exports, the key growth
driver in the first quarter, are heading for a major contraction.
They were down by 26% year on year (y/y) in May, equivalent to the
nadir reached during the financial crisis, while manufacturing
export orders sank in June to a lower level than in 2008-09. This
is likely to have an effect on investments and employment in the
most affected sectors.
Private consumption is likely to hold up better than elsewhere
in Europe in the second quarter, but this will hurt net exports.
Sweden's service-sector purchasing managers' index (PMI) has not
sunk to the low teens, unlike elsewhere in Europe. This is likely
to have a mixed impact on second-quarter growth as stronger private
consumption is likely to have pushed up imports, removing the key
support provided by net exports.
Despite the lack of a strict lockdown and large fiscal and
monetary policy stimulus, Sweden's unemployment rate shot up the
most among its peers and is likely to peak in double digits by
early 2021. This is a key tail risk for the banking sector and the
wider economy, given that Swedish households are among the most
indebted in Europe, with a debt-to-disposable-income ratio of above
180% at the end of 2019.
According to real-time activity trackers, Sweden is losing its
advantage over economies that imposed a strict lockdown and
successfully contained the virus. While the latter are likely to
experience a strong rebound in consumer spending owing to pent-up
demand, near-term activity in Sweden may remain relatively subdued
as a result of consumers' concerns about the still-wide circulation
of the virus.
Outlook
The Swedish economy outperformed all of its peers in the first
quarter, although the success was unrelated to its COVID-19 virus
strategy but rather driven by strong foreign demand for its goods
exports. According to leading indicators, this key support will
diminish in the second quarter, while consumption-related imports
are likely to make net trade a drag. The technical rebound from the
third quarter of 2020 also risks being subdued, owing to the
persistence of restrictions, a rise in the unemployment rate, and
fears about the high prevalence of the virus.
In our July baseline, we expect a large GDP drop of around 8%
quarter on quarter (q/q) for Sweden in the second quarter,
consistent with the leading survey data, which have a historically
strong correlation with GDP even in downturns. The rebound in the
third quarter is likely to be more subdued in Sweden than elsewhere
in Europe, as in the latter it will be related to the unwinding of
lockdown measures and extremely high growth rates in some sectors
that have seen a near-total collapse in activity. This will not be
the case in Sweden, where levels of domestic activity never
collapsed to the same extent and where a relatively high infection
rate in the summer months may weigh down on consumer spending.
For the full year 2020, IHS Markit expects the economy to
contract by just under 5%, which is roughly half the rate of
contraction forecast for the eurozone. Sweden is likely to return
to the end-2019 GDP level at the end of 2022, more than a year
earlier than the eurozone, but similar to Denmark. The crisis is
likely to leave permanent output losses, with the Swedish economy
expected to be permanently lower by around 5% compared with our
February baseline.