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Confidence in Sweden’s economy plummets

Swedish consumer confidence is at its lowest for over 15 years, a new report from the National Institute of Economic Research (KI) shows.

Published: 31 July 2008 11:14 CEST

Confidence in Sweden's economy plummets

The institute has cut its GDP forecast for 2009 to “a good bit under 2 percent.”

The Consumer Confidence Indicator (CCI) fell to -18.2 in July, from -10.2 in June. Households are pessimistic about both their personal finances and the development of the Swedish economy as a whole.

The Micro Index, which measures consumer confidence in personal finances, fell substantially between June and July and consequently it at levels well below the historic average. 21 percent of households held that their personal finances have deteriorated in the past year, compared with 16 percent three months ago.

“We had expected households to be more concerned over the situation, but confidence has declined more than we thought,” said Torbjörn Isaksson at Nordea to news agency TT.

The Macro Index, which measures consumer confidence in the Swedish economy, continued its decline in July and is at its lowest level for 15 years. 57 percent of households held the opinion that the Swedish economy has deteriorated over the last 12 months, up from 43 percent in June.

The figures indicate a clear cooling off of the Swedish economy.

“The question is just how deep this dip in growth will be,” Isaksson said.

KI has cut its growth forecast for 2009 as a result of the new survey.

“Our June forecast indicated 2 percent growth for 2009, we will now have to cut the growth forecast to a good bit under 2 percent,” said Urban Brusewitz at KI.

Sentiment in the Swedish economy became gloomier in nearly all sectors of the economy in July. KI’s Economic Tendency Indicator, which measures business and consumer confidence, declined from 93.3 in June to 89 in July.

“We can now see clear indications that the economy has weakened further,” said Roger Knutsen at KI to TT.

GDP figures for the second quarter are expected on Friday.

“We forecast a year-on-year GDP growth of 1.7 percent for the second quarter and this is relatively low compared to other analysts. This indicator strengthens the overall picture that business activity has eased off,” said Torbjörn Isaksson at Nordea.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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