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Consumer pessimism stifles Swedish growth

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17:59 CEST+02:00
Swedish first-quarter GDP growth of just 0.3% from the preceding quarter was well below market expectations of 0.6% and sharply reinforces the probability that the Riksbank will cut the repo rate by 25 bp in two weeks' time to 1.75%, said Capital Research analysts at Calyon in London.

Calyon said the details of the report were all largely negative, with household consumption and imports in particular showing a contraction of 0.2% and 3.2% respectively from the previous quarter.

"This was the first time in two years that households held back spending, conflicting with the Riksbank's view in the March inflation report that household consumption would be the second engine of growth in Sweden besides investment," said Calyon.

Even more worryingly, early indications for consumption growth in the current quarter are even weaker, with household surveys suggesting that consumers have become notably more pessimistic about the outlook for the economy and jobs.

"This suggests that household spending in Sweden could have entered recession in H1 2005, clearly a shock to the Riksbank, which expected 2.7% consumption growth this year in the March inflation report," said Calyon.

Calyon said it expects the Riksbank will now deliver "significant downward revisions" to its growth forecasts, which currently stand at 3.2% for both this year and next.

It said it has been looking for the Riksbank to cut its GDP growth forecast to 2.6% this year and to 2.7% for next year, but the weak details of the first-quarter GDP report may even "pose downside risks to these numbers".

Historically the weak figures would have been sufficient for the Riksbank to slash the repo rate by 50 bp, but Calyon said it believes hawks on the bank's board are likely to baulk at this prospect, preferring instead a staged rate cut.

"Although markets are now likely to move towards speculating on 50 bp easing in Sweden, we think that the monetary hawks within the executive board will argue too strongly against this to make it happen in June," Calyon said.

(AFP)

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