Unexpectedly strong GDP increase in Q2
According to the preliminary ("flash") reading, Swedish GDP in Q2 increased by 1.4/2.3 percent q-o-q/y-o-y. This was much stronger than expected. Our estimate was 0.3/0.8 percent (q-o-q/y-o-y), while the consensus forecast was 0.2/0.6 percent (q-o-q/y-o-y). As is normal with the Q2 flash estimate, previous quarters are not revised. However, with updated seasonal adjustments (SA), SA data is revised (as normal).
Strong exports behind GDP surprise
Looking at the demand components, net exports and inventories were the biggest surprise to us. Focusing on the GDP growth y-o-y, these two practically explain our forecast error (outcome of 2.3 percent vs. our forecast GDP growth of 0.8 percent). In foreign trade, imports landed pretty close to our estimate while exports came in clearly above forecast - a surprise considering the state of Europe and indicators for the manufacturing sector (a large chunk of Swedish exports). On the domestic side, our forecast for private consumption was pretty much spot on. Yet, domestic demand on the whole proved to be a tad weaker than forecast. This was due to distinctly lower-than-forecast fixed capital formation. Public consumption was clearly stronger than we anticipated but was not enough to offset the forecast error for capital formation. All in all, domestic demand contributed only little to the GDP increase q-o-q, in line with our forecast. This is a bit ironic as the Euro crisis keeps plaguing manufacturing and global trade; it was mainly exports that gave the significant positive impact to the GDP increase since Q1.
Stronger growth trend likely to delay rate cut from the Riksbank
In the big picture, today's data add to the image of a strong Swedish economy. The rapid growth slowdown in 2011 was accentuated by a significant GDP decline in Q4, raising questions about the performance further on (even taking some forecasters to recessionary scenarios). After significant surprises for two quarters in a row now, base effects push annual GDP forecasts upward. However, economic fragility in Europe and fiscal/political uncertainties are still a major risk to Sweden, so H2 still is pretty much an open question. With doubt about both the US and China as the major drivers globally, recent soft data have hinted at a weaker remainder of the year than we have previously projected. The view of a weak and flattish H1 followed by a better recovery in H2 will likely be revised. Recent weakness in indicators, especially those for the services sectors, still point to a weaker labour market than the Riksbank expects in the shorter term, we believe. Most likely, today's strong GDP reading will lift the Riksbank's macro projections, shifting the repo rate path a bit upward (through new paths for GDP and the unemployment rate). We still expect a rate cut to 1.25 percent in the autumn, but with revised macro projections, the decision to cut rates will likely be put on hold in September, making October perhaps a more likely time.