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Macro Comment Sweden

Macro Comment Sweden — The krona has weakened, but it is not particularly weak

As the krona plunged to its weakest since the financial crisis, the exchange rate debate quickly spiralled. Media stories discussed the role of the Riksbank's monetary policy, how general risk aversion is hitting small open economies and how global uncertainty is high. But the debate has not stopped there: hypothe-ses are being treated as truths and remain unchallenged. What if the krona has weakened but should not be regarded to be particularly weak? After revisiting the fundamentals behind exchange rate trends and discussing the statistical pitfalls of comparing price data in different countries, we conclude that a signifi-cant part of the trend-weakening of the krona over the past decade can be explained by inflation rising faster in Sweden. As a consequence, the krona's undervaluation is not as sizeable as many have argued and our new fair value assessments are for a weaker krona than we previously estimated.

Anders Bergvall, Senior Economist | anbe83@handelsbanken.se

Macro Comment Sweden — Spotlight on fiscal policy as the economy slows

We expect a slowdown in Sweden and note that there will be little monetary policy ammunition left to stabilise the economy. Meanwhile, low public debt levels are creating the conditions for fiscal policy to take the lead. What is more, fiscal policy stimulus measures are more effective in a low interest rate envi-ronment of the type we have now. However,  the fiscal policy framework will limit the scope for action. Also, the range of effective fiscal policy stimulus measures that can be implemented quickly and at the right time will be limited. Therefore, there is a clear risk that stabilisation policy will be less robust than normal. We believe this could open the door to more unconventional economic policy, if the downturn becomes deep or prolonged.

Anders Bergvall, Senior Economist | anbe83@handelsbanken.se

Macro Comment Sweden — As safe as houses?

We expect upward price pressure from strong employment and income conditions to counterbalance increased supply and rising borrowing costs, resulting in a stable price trend ahead. Housing starts are likely to continue falling next year, but we think it will stabilise thereafter, given the housing shortage and strong household finances. The high number of projects up for completion in 2019 could pose risks to prices and bring further pain to smaller developers, especially given limited scope to change regional focus or switch to rental accommodation. However, the relatively low importance of smaller developers to the wider economy should mean that any fallout is contained, in our view.

Helena Bornevall, Senior Economist | hebo12@handelsbanken.se

Macro Comment Sweden — Political deadlock after inconclusive election

With almost a dead heat between the two blocs after Sunday's parliamentary elections, everything indicates that the process of forming a government will be protracted and complicated. Although the political situation looks to remain uncertain in the coming weeks, it is difficult to see this having a major impact on financial markets or the near-term macroeconomic outlook. However, it is a concern that the next government will probably not command enough support in parliament to really get to grips with some of Sweden's most pressing structural challenges.

Anders Bergvall, Senior Economist | anbe83@handelsbanken.se