Sweden Economy Unexpectedly Contracts in Q2

Sweden Economy Unexpectedly Contracts in Q2
July 31, 2019

 

The Swedish krona fell sharply against the greenback yesterday after Statistics Sweden reported that the economy contracted in the second quarter, for the first time in three quarters. Analysts were expecting slight growth for the reported period. Following the release of GDP data, the USD/SEK pair rose from a low of 9.4690 to a high of 9.5726 in the past 24 hours.

During the June quarter, unexpectedly, the Swedish economy contracted by a seasonally adjusted 0.1%, compared with 0.5% expansion recorded in the previous quarter. Economists had anticipated Sweden’s GDP to record 0.3% growth on a q-o-q basis. The previous economic contraction was recorded in the third quarter of 2018 when the economy shrank at 0.1%. The contraction in the recent quarter has raised doubts about Riksbank’s intention to boost interest rates in 2019.

The economic contraction was primarily driven by a 1.1% fall in gross fixed capital formation, a 0.3% decline in exports and a 0.5% fall in imports. Household consumption increased 0.6%, while state spending dropped 0.1%. Changes in inventories had a 0.1% impact on GDP.

On a y-o-y basis, GDP grew 1.4% in the second quarter following a 2.1% growth in the earlier quarter. Economists had predicted 1.9% economic expansion, the weakest since the third quarter of 2018 when the economy recorded GDP growth of 1.4%.

While leaving the repo rate unchanged in early July, the Riksbank reaffirmed that it intends to hike benchmark rates by the end of 2019 or early 2020. The repo rate, which currently stands at -0.25%, was increased last December, the first such initiative since mid-2011.

Notably, at that time, the central bank boosted the growth outlook for 2019 to 1.8%, from 1.7% issued earlier. However, it slashed the GDP growth outlook for 2020 to 1.6%, from 1.9% issued previously.

Last month, the National Institute of Economic Research opined that there are hints that the Swedish economy is slowing down and the weak consumer confidence is expected to have a negative impact on household consumption in the months ahead, despite robust labor market and stable housing prices. The institution also cautioned a likely negative effect on the economy, in case the UK crashes out of the EU without an agreement in place.

Skandinaviska Enskilda Banken AB (SEB) stated that the GDP data was not impressive and missed its forecast of 0.4%. Furthermore, the financial institution stated that the investment decline was also higher than anticipated. Swedbank pointed out that the largest negative impact was from “fixed investment and exports, import growth and public consumption” and was below expectation.

Swedbank said, “Today’s data suggests that the strength in the Swedish economy is dampening which is negative news for the Riksbank. This adds some downside risk to our forecast of a rate hike in December.”

The poor GDP data is anticipated to keep the currency pair weak in the short-term.

Technically, the USD/SEK pair has rebounded after testing the 9.4230 level, which acts as support. The next resistance is anticipated only at 9.646. The currency pair is also trading above its 50-day moving average, while the momentum indicator is making new highs. As a result, we can expect the currency pair to move up in the short-term.

sek - technical analysis - 31st July 2019

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Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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