THE recession fears They came back into the city in force. Poor US employment data in July was enough to trigger hysteria. The forecast of a recession in the US after the aggressive interest rate hikes that affected the entire global economy – if the US cools down, the rest sneezes – caused a disaster in the markets that gradually subsided in August and some doubts that have not been dispelled. Looking for clues and a canary in the mine that warns when firedamp begins to choke the economy European analysts have set their sights on one of the most cyclical economies in the world, Sweden.
Given Sweden’s intense integration into the global economy and its export-oriented nature, the behaviour of its key markets and sectors can be an early indicator of how international trade will react, both cyclically and to future crises or structural changes. For example, if global demand declines, the Swedish economy will be one of the first to feel the effects due to its heavy reliance on exports, giving analysts a glimpse of what could happen in other trade-oriented economies.
“To determine whether our baseline scenario of a recession in late 2024 or early 2025 becomes reality, we look to Sweden as a reference country. barometer of the world economy“This Nordic country, for example, tends to outpace the eurozone at turning points in global growth due to its cyclical nature and its sensitivity to global trade,” argues Mathieu Savary, chief strategist at BCA Research in a report this week.
A great expert on the Swedish economy like the former Nordea Andreas Steno Larsen has not hesitated to point out on other occasions the vitola of the canary in the mine of the Swedish economy for the world economy: if it stops singing, it means that the world will suffer . For example, in 2019, Larsen warned that “if you thought that the chaos in the eurozone was over, think again: Sweden is the canary in the coal mine … We are sure that Sweden is currently in a slight recession. the most open economy in Europe and acts as a barometer for the world. Even if Larsen did not have the crisis ball to anticipate what was coming, the truth is that at the beginning of 2020 came the covid pandemic and a historic recession in the eurozone.
The data confirm this description because one of the most open economies in the world. Exports represent more than 53% of gross domestic product (GDP), compared to 49% of imports (they have a good current account surplus). Sweden has managed to position itself as a key player in the global economy, not only thanks to its export capacity, but also thanks to the high competitiveness of its productive fabric. If the Scandinavian country offers clues about the trends that could dominate the global panorama in the future, it is largely thanks to its high exposure to international markets (exports and imports total more than 100% of GDP), its sectoral diversification and the way its economy responds to global dynamics. A bad glass in Sweden can directly indicate that the world is about to choke.
It is true that, Sweden has so far managed to avoid a recession; however, its economy remains weak. This does not send the best signals. The country published its GDP figures on Thursday morning, which confirmed expectations of a quarterly contraction in the second quarter. The figure is -0.3% quarter-on-quarter, although much better than the -0.8% expected by the consensus, it nevertheless constitutes a serious warning for sailors.
“The slowdown in the economy was widespread, but it was offset by international trade due to the sharp decline in imports and the improved performance of exports,” Jessica Engdahl, director of national accounts at Statistics Sweden, said in a statement collected by the agency. Bloomberg. “Sweden’s weak second-quarter GDP figure may be the last negative growth figure this year, but overall performance will remain weak. We maintain our forecast for a 0.8% expansion for the year as a whole, a moderate rate given past trends.”
Nordea experts provide the key and reveal the “hidden” data that show the weakness of the Swedish economy: “The most important thing is that domestic demand remains weakwith a drop in household consumption (-0.2% quarter-on-quarter) and fixed investment (-1.7%). While public consumption only increased by 0.1% quarter-on-quarter. Weak demand means that companies are finding it increasingly difficult to pass on cost increases, which explains the increase in bankruptcies,” warns the Swedish bank. business sector The sector is feeling the pressure, with bankruptcies up 222% from their 2020 low and their highest level in 30 years.
One of the big culpritsOne of Sweden’s internal problems, if not the most serious, is its real estate market. Swedish households are highly indebted, accounting for 155% of their disposable income. In addition, Swedish house prices are high. Until they began to fall in March 2022, real house prices in Sweden had increased by 205% since 2000. Similarly, Sweden’s price-to-income and price-to-rent ratios are among the highest in the G-10.
As a result, the Riksbank’s increase in the deposit rate from 0% in May 2022 to 4% in September 2023 has led to a 25% drop in Swedish house prices and a 62% drop in building permits between February 2022 and March 2024, to their current lowest levels since 2013.
The poor previous data on consumption and imports also find their explanation in the labor market (they are two sides of the same coin). Employment is also in crisis. Employment growth has fallen from 3.1% per year in November 2022 to 0.2%. “This is a worrying development, as the poor health of the Swedish labor market generally anticipates weaker employment trends in the rest of Europe,” says Savary of BCA Research.
The gloomy growth situation in Sweden was one of the main factors behind the Riks Bank adopt a accommodating attitude. “When combined with an increasingly weak labor market and disinflation, there is no doubt that further easing is underway,” analysts at ING Research said in a note published Thursday. The question now is whether the central bank will cut two or three more times this year.
THE manufacturing activitylogically strongly influenced by global industrial fluctuations, is deteriorating. The Swedish manufacturing PMI index fell to 49.2 points (below 50, this is a contraction level). Even more worrying, new orders are weak, driven by domestic and foreign orders. “Historically, a weakening of the new orders index in Sweden announces a slowdown in manufacturing activity in the eurozone,” they point out from BCA Research.
If we look at the markets, the recent evolution of the Swedish sovereign yields This is also alarming for the European economy. “The 10-year yield spread between Sweden and Germany has narrowed, which historically indicates a deterioration in our forecast for global industrial activity. Given that the European economy is very sensitive to global growth conditions, this is unlikely to be observed. The spread between Sweden and Germany also indicates downside risks for European equities and the euro,” says the BCA strategist.
Regarding the apparently contradictory signal sent by the Swedish stocks -stocks have rebounded-, Savary explains his thesis: “This outperformance reflects the rebound in global activity that occurred at the start of the year. However, the devil is always in the details. industrial sectors The Swedes are sending a different signal than the broader market. Since January 2024, they have underperformed global industrial sectors. “This is a particularly worrying sign for global growth.”
The behaviour of the Swedish industrial sectors indicates, the expert continues, that the superior performance of the Swedish market in general in recent times is temporary and that Swedish shares are under threat. capital goods orders in the United States, the Eurozone and Japan are particularly worrying for Savary. Historically, when their combined orders are weak, Swedish stocks underperform the eurozone. Today, capital goods orders in all three economies are falling at a faster pace than in the past four years.
“The Swedish economy is hypercyclical and its development is a barometer of global growth. For the time being, the weakness of Swedish growth and yields remains consistent with our negative outlook for the European economy. Accordingly, we see the three risks to our negative view – the strength of household finances, the recovery of the credit impulse in Europe and more favourable global financial conditions – as just that: risks related to the recent deterioration in the relative results of Swedish industry and the collapse in capital goods orders from the US, the euro area and Japan – indicating that Swedish equities are likely to underperform European equities in the coming quarter,” concludes the BCA analyst.
