Handelsbanken: Strong recovery, but by no means overheating

An easing of restrictions helped the recovery in Sweden gain new momentum over the summer, resulting in increased consumption. Housing prices are stable and the export industry is enjoying full order books, paving the way for a strong recovery.

“We expect GDP growth at the beginning of next year to have returned to the trajectory witnessed prior to the outbreak of the pandemic,” says Christina Nyman, Chief Economist at Handelsbanken.

However, the Swedish economy is far from overheated. Unemployment remains high and cost pressure is subdued.

“Consequently, we expect the Riksbank to maintain its current course and leave the repo rate unchanged, at least until 2023,” comments Christina Nyman.

Global economy continues to recover

Global markets have seen an easing of pandemic-related restrictions, rapid GDP growth and stronger labour markets. If the rollout of vaccination programmes continues to exceed expectations across most parts of the world, it will be possible to ease restrictions and boost confidence among both households and companies, which will in turn drive further GDP growth.

However, there is a risk that new variants of the virus may cause financial setbacks, particularly in countries with low or uneven vaccination rates, such as the US.

Strong services sector

“Despite the rapid increase in COVID-19 cases, we expect to see a continued recovery, with the services sector gradually leading the way, more so than the manufacturing sector, as well as a stronger labour market”, says Christina Nyman.

During the spring, there was a shortage in the supply of several key input goods, which led to substantial price increases and record delays in delivery times.

“Even if we are seeing early indications that bottlenecks are gradually easing, we believe there is still a long way to go before global supply chains have recovered completely, and this has hampered growth in the manufacturing industry and caused a temporary increase in cost pressure”, explains Christina Nyman.

The drivers required to maintain a sustained high rate of inflation are yet to transpire, but central banks are looking for a way out of crisis policies. Still, together with fiscal policy support, overall economic policy is set to remain stimulative for years to come.

Swedish household economies are generally robust

Savings are at a record high and household incomes are expected to rise at a healthy rate during 2021–23 as the labour market situation improves. Combined with pent-up demand for the consumption of certain goods and services, such as entertainment, travel and clothing, this suggests there will be a strong increase in consumption over the coming year. There has now been a shift in fiscal policy from “life support” measures to a focus on restarting the economy.

“We expect to see an expansionary election budget next year, which will include more funds being channelled to welfare, households and public investments,” says Christina Nyman.

Stable housing prices

Handelsbanken’s economists expect housing construction to remain historically high in the coming years.

Over the course of 2022, housing prices are forecast to rise by almost five percent. Meanwhile, within the export industry, the order books are full and the high order intake also points towards continued growth in exports.

“This is paving the way for a strong recovery. We expect GDP growth at the beginning of next year to have returned to the trajectory witnessed prior to the outbreak of the pandemic,” says Christina Nyman.

Profitable companies

The proportion of companies experiencing labour shortages has risen relatively rapidly in both the manufacturing and the services sectors.

“Our interpretation of this is that companies are not quite managing to hire at the same rate as demand is rising, rather than it being an indication of a general shortage of labour on the Swedish labour market,” says Christina Nyman.

Sweden is also affected by the global supply problems and there are expectations of price increases across the producer chain and the retail sector. However, the profitability of these companies is robust, which reduces the need to pass cost increases in the producer chain onto consumers.

“It is difficult to see how there could be a sustained period of high inflationary pressure without a substantial increase in wage pressure. All in all, we expect underlying inflation (CPIF excluding energy) to be around 1.5 percent over the coming years,” says Christina Nyman.

Repo rate to remain at zero

Handelsbanken forecasts that the Riksbank will keep the repo rate at zero percent throughout the forecast period.

“It would take a lot for the Riksbank to lower or raise the repo rate in the coming years,” says Christina Nyman.

New fiscal policy may reduce the gaps

The pandemic has had an adverse impact on existing gaps; dominant structural trends, such as digitalisation and a more global labour market, will probably continue to favour highly qualified employees in developed countries. However, inequality is climbing political agendas. “Meanwhile, new views held by governments regarding fiscal stimulus packages and the risks of high public debt could contribute to a reduction in inequality as well as higher growth in the wake of the pandemic, without resulting in higher public debt,” says Christina Nyman.

For further information, please contact:
Christina Nyman, Chief Economist: +46 8 701 51 58, +46 70 778 77 65
Joel Holm, Press Officer: +46 73 058 30 21

For the full report in Swedish, see Konjunkturprognos and in English, Global Macro ForecastFor more information about Handelsbanken, visit www.handelsbanken.com