economy Archives • SwedeInternational

19 Dec. – great interest in 0% interest

champagne bubbles are also small zeroes
pic: 123rf.com

Whether or not you’ve been waiting for this moment for years, or dreading it, it’s happened – the Swedish Central Bank, Riksbanken, raised the repo rate to 0%, ending five years of minus interest.

The case of “Sweden and the minus interest rate” will be one for the economic books in the future – did it help? did it make things worse? The jury is still out. For one thing, the minus interest rate was a large contributing factor (although not the only factor) to the weak krona. It made Swedish goods cheaper, but imported goods more expensive. Many arguments have been made, also by the Swedish Fed chief Stefan Ingves, that the weak krona turned companies into “zombie companies” – surviving basically because of the cheap and available credit (SvD.se/krona). Even huge and stable companies like Volvo didn’t love the negative interest rate because, it was said, it gave a false picture of economic reality. Finally, the other driving reason for the negative interest rate was to try and keep inflation at, or close to, 2%. See this post for earlier info on the topic.

Sweden’s inflation has not made it up to 2% yet, despite all the efforts. The negative interest rate didn’t work. Many are starting to even question the link between inflation and interest. Furthermore, many economists don’t see a violent end to the huge growth Sweden’s economy has enjoyed over the last 5-10 years, believing instead a sort of economic “levelling off” is more likely. In the end, it seemed that most economists were for raising the rate, and for making it slightly more normal. And now it’s done.

Most Swedes will not be wildly affected by the change. 0% is still an unbelievably low interest rate. SvD’s Joel Dahlberg rated it as still being able to drink “glass after glass” of champagne without having to suffer a hangover.

Not everybody gets to drink the champagne though, just as when the interest rate was minus. Retirees and others who survive on their money in the bank or in their retirement accounts gaining a little in value due to interest are still out of luck. The other worry that won’t be lessening any time soon is the ballooning debt of the average Swedish household – it’s been cheap to get a loan, and it’s still cheap to get a loan. When the interest rate rises, which it is bound to do at some point, those loans will get expensive.

But that isn’t now, and Ingves has said that the rate will likely remain the same for a few years assuming nothing untoward happens. That will be a thin comfort if crash happens, but, now that a minus interest rate has been normal for so long, it’s become something that can be done again. As Ingves put it for DN: “Zero is not the bottom for interest. Periods of negative interest can come again. But this is all hypothetical, and we are not there today.”

Sun. 25/8 – bread and butter economy

Bread and milk is the local news today. Though the government meeting at Harpsund has come and gone, the country air clearly didn’t inspire any new ideas. Hanif Bali’s remarks are just tweets in a teacup, and that Sweden builds the most expensive biildings in the EU isn’t even remotely news. Sweden always equates money and quality, so spending more is directly translated to mean better buildings. Anyone who disputes that is reflexively of very dubious character.

Millk and bread it is. According to Omni news today, Swedish farmers increased their production of organic milk by 12% in the past year. Demand wasn’t quite at that level, so now there’s a surplus. Dagens industri (di.se) traces the impulses behind the extra milk: dairies upped the price they paid farmers for organic milk in 2016, causing milk farmers with an eye on the bottom line to increase their production of the product customers demanded. All these savvy farmers caused an overproduction. Supply, meet demand. Nothing new in other words.

In a similar vein, Swedish grain farmers are expecting one of the best seasons in years. Grain production is looking at a 10% increase over the average, which could mean cheaper bread prices at the supermarket, and even, hold on to your hats, perhaps cheaper fika bread prices! But it’s still weather dependent so don’t start making plans – if the rest of August is rainy, the quality of the grain could be lessened, making the grain better snacked on by farm animals than humans. Keep your eye on those clouds before making coffee dates.

Unfortunately for veggie lovers, none of the above news events will have any effect on the price of greens. Avocado prices have gone up by 40%, noted by avocado lovers. But being sufficient in milk and grain isn’t a bad thing for any country, and as for politics, there are worse things than the price of milk.

Thurs. 22/8 – Harpsund Day one

The Löfven government convened on Harpsund today for their annual team building session, getting together to consolidate their politics and vision for the coming year. The Swedish Green Party is attending as well, as government coalition partner, while the Center Party and Liberals will be listening carefully to see what signals the Social Democrats send out in regards to their agreed-upon 73-point plan.

What political ideas can be actualized depends on the economy, and how much the government can afford to spend. Minister for Finance Magdalena Andersson’s presentation and analysis of how much economic margin exists for any further reforms was the first day’s highlight – and/or the dark cloud hanging over all the bright ideas the government might come up with.

Andersson’s afternoon press conference didn’t hold any surprises, only an acknowledgement that the wind in Sweden’s economic sails is slackening a bit. Her deeper analysis will serve as the frame for the fall budget negotiations that need to be held with the Center Party and Liberals. Without these two parties on board, the budget risks failing in parliament – leading, if not to a new election, then at least to massive uncertainty and instability. Not good, in other words, for the Löfven government.

One reform already agreed upon by the four parties is getting rid of the emergency austerity tax (värnskatt) – an extra tax on high incomes. The tax was supposed to be temporary, but has been in place since 1995. Other reforms are almost a given as well: the ”free year,” a repris of ”year off for personal development” Green Party demand (that was roundly derided as a monetary black hole the first time around), and a reduced employer tax (arbetsgivaravgift) if the employee is a young person or a new immigrant. These reforms are already expected to cost 19 billion kronor, which doesn’t leave much over for new demands from cooperating parties or any unexpected expenses. Any worsening on the trade horizon, a harder than expected Brexit, or the complete collapse of the Italian government are a few of the worst case scenarios that the government (and the rest of us) are hoping don’t happen.

But, Andersson concluded with, Sweden has the muscles to meet the future. So far, then, no economic stimulus measures are in the works.

Tues. 30/7 – it’s the economy

Statistics Sweden (the SCB, Statistiska centralbyrån) released the numbers on the economy this morning. Sweden’s second quarter GDP (BNP, bruttonationalprodukt in Swedish), compared to this time last year was lower than expected, and came in at 1.4%. The Swedish central bank (Riksbanken), whose measures the governnment uses for its work, thought it’d be 1.8%. So that’s not so great but perhaps not a signal to freak completely out.

Sweden’s 2nd quarter GDP wasn’t better than 1st quarter numbers either, unfortunately – it was lower by 0.1%. Again, the Swedish Fed thought (hoped?) differently, namely that it would increase by 0.1% compared to 1st quarter. It seems their algorithms might need to be recalibrated.

No great cause for economic alarm here, just more evidence that the economy isn’t going gangbusters anymore, or likely anytime soon. It seems instead like we’ll be muddling through for a bit – barring a no-deal Brexit, in which case things will become much more unsettled.

Tues. 23/7 – an SOS for the SEK

Although the Swedish Central Bank (Riksbanken) had a darn cheery economic prognosis for Sweden earlier this month, a report from Capital Economics (a pretty huge, international, economic research company) predicts that the krona may sink to a new low by the end of the year – 11 kronor to the Euro. DN.se reports (bit.ly/DNekonomi) that Capital Economics has Swedish household consumption down 1% in May compared to last year – the largest drop in a decade. This bodes ill for the economy as a whole.

So why is the krona so weak? Why doesn’t it buy so much anymore? Why does so much seem so much more expensive? It’s good for people bringing over money, or if you’re a tourist, but it’s not generally good when you have to pay a lot more for things than normal.

Some people think that the krona has simply been overvalued before and this is the new normal (see Handelsbank’s economists on Affärs Världen ). Or, that it’s not really that bad – if you compare it to even smaller currencies. But if you don’t think that way, then there are a bunch of different factors to consider. DN.se’s Carl Johan von Seth had a few ideas a while back ():

Low interest rates. You’ve probably noticed how nobody is getting any interest on the money in their bank account. It’s the same on a country scale. Other countries are simply not buying the krona because they won’t make any money on it, and if no one’s buying, it further weakens the krona. Snow, meet ball.
Trump. Let’s just go ahead and blame him for this too, right? But we can! The dollar is super strong, and every time the Fed even thinks about raising the interest rate to keep things on an even keel, Trump is right there tweeting some really dark shade. The tax reform he implemented is also keeping the dollar strong (and possibly the economy good but that’s another, complicated, blog post). Plus, the trade war he’s engaged in with China makes people (read: economies) nervous, and nervous economies don’t buy weak currencies, like the krona. Especially when it’s known how dependent Sweden is on international trade.
The European Central Bank. The Euro is pretty strong these days, (which also makes the krona look weak), but has an even lower inflation than Sweden. In that comparison, Sweden’s higher inflation is unfavorable.
Sweden’s Minister for Finance, Magdalena Andersson. Some argue that Andersson’s relatively restrictive budgeting and the resulting budget surplus is part of the reason. If she had spent a bit more, maybe the krona would be stronger. (Then again, the budget surplus is a good thing to have if/when the economy weakens. Always an argument.)
The Swedish Financial Supervisory Authority (“Finansinspektion”). The housing market is an acknowledged hot mess, and the Finance inspection’s new demand for paying off one’s mortgage and a higher down payment requirement has had both the desired effect (dampening the housing market) and an unwanted side effect (dampening the housing market). Less building can be good in some ways but also affects Swedish economic growth negatively. Exactly, contributing to a weak krona again.

Congratulations on making it all the way through this blog post. Now go out and spend some money to bring up our economy. Or save the money in your mattress for the worse days to come. No advice here, this is just a blog post.