Country Report Euler Hermes Economic Sweden Research

Improved pricing power for firms after three tough years

General Information

GDP USD495.7bn (World Ranking 22, World Bank 2015) USD609.89bn (World ranking 21, World Bank 2013) USD268.314bn (World ranking 36, World Bank 2012) Population 9.8Million (World Ranking 89, World Bank 2015) 41mn (World ranking 32, World Bank 2013) 17.47 million (World ranking 59, World Bank 2012) Form of state Constitutional Monarchy Republic Republic Head of government Stefan LOFVEN Cristina FERNANDEZ DE KIRCHNER Michelle Bachelet (Nueva Mayoria Party) Next elections September 2018 at the latest, legislative elections October 2015, Presidential 2017, presidential and legislative

Strengths Weaknesses

 Highly educated labor force  Excessive household debt  High value-added manufactured industries  Steep rise in house prices  One of the highest R&D spending in the world  Weak governing coalition  Very diversified export structure in terms of  Ageing population products  Sound public finances  Strong and effective institutions

Country Rating to update AA1C2 Trade Structure

By destination/origin (% of total) Economic risk Exports Rank Imports Norw ay 10% 1 18% Germany Germany 10% 2 8% Netherlands Business United States 7% 3 8% Norw ay Financing environment risk United Kingdom 7% 4 8% Denmark risk Denmark 7% 5 6% United Kingdom By product (% of total)

Exports Rank Imports Road vehicles 11% 1 11% Road vehicles Political Commercial Industrial machinery (others) 7% 2 9% Petroleum (and related products) risk risk Paper and paper manufactures 6% 3 6% Telecom. and sound record. Electrical machinery, apparatus Medicinal and pharma. products 6% 4 6% and appliances Telecom. and sound record. 5% 5 5% Industrial machinery (others) Source: Euler Hermes Source: UNCTAD (2015)

Economic Overview

Moderating growth after strong years Figure 1 - Key economic forecasts

During the past decade, Sweden’s economic Sweden 2016 2017 2018 growth was among the highest in Western GDP 2.9 2.2 2.1 Europe. Over the last three years, the Swedish economy consistently ranked first among Nordic Consumer Spending 2.4 1.8 2.2 countries, thanks to strong domestic demand. Public Spending 2.5 0.5 1.9 The mass arrival of migrants played a crucial Investment 5.3 6.0 1.4 role, as it prompted government spending, and Stocks * -0.1 -0.5 0.1 further stimulated consumption and job creation. Exports 3.1 3.1 3.9 Imports 3.5 2.9 3.7 Nonetheless, the Swedish economy is set to Net exports * 0.0 0.2 0.3 normalize, as consumer and public spending growths are decelerating. EH forecasts GDP Current account ** 197 154 141 growth to slow down to +2.2% in 2017 and Current account (% of GDP) 4.5 3.4 3.0 +2.1% in 2018. This is well below the +3.2% Unemployment rate 7.0 6.6 6.5 average for 2014-16. Wages 2.9 2.5 2.2 Inflation 1.0 1.8 1.4 Still, domestic demand will remain dynamic. General government balance ** 39 37 43 Private consumption should expand by +1.8% in General government balance (% of GDP) 0.9 0.8 0.9 2017 and +2.2% in 2018. Total investment growth is expected to reach a high of +6% in Public debt (% of GDP) 41.6 38.7 35.8 2017 buoyed by a construction boom and the Nominal GDP ** 4 375 4 580 4 742 strong demand for housing. C hange over the period, unless otherwise indicated: * contribution to GD P growth Exports will be the main driver for GDP growth ** SEK bn in the next two years as global trade finally improves (+3.8% in volume after +2.0% in 2016, Sources: National statistics, IHS, Euler Hermes the lowest since 2009). Strong intra-EU trade is another source for optimism. Net exports should contribute positively to growth, while slower Figure 2 – Turnover growth, manufacturing sector (4Q/4Q) domestic demand could weigh on imports. 20%

In the medium-term, Brexit may affect growth as 15% th the UK is Sweden’s 4 largest export market. 10% Yet the negative impact should remain modest. 5% Reflation boosts pricing power 0% The end of deflationary pressures will push the -5% Swedish currency to depreciate in 2017 and -10% 2018. With inflation expected to rise by +1.8% in -15% 2017, the rise is mostly driven by increasing Denmark Eurozone commodity prices and the ongoing effects of a -20% previously weak SEK. Wage growth, Finland Germany -25% employment growth, and labor force growth – Sweden which push inflation up - remain moderate. Thus -30% the Riksbank will tend to maintain a loose 07 08 09 10 11 12 13 14 15 16 17 monetary stance. We don’t expect a start of the tightening cycle before H1 2018. Sources: National statistics, IHS, Euler Hermes

Nominal GDP growth reached +4.6% in 2016 and should keep up the pace in 2017 and 2018. Figure 3 – Cash holdings (listed companies) Swedish companies’ pricing power will thus be one the rise. Notably, turnover growth in the manufacturing sector has ticked up in Q1 2017. Annual growth stays above the Eurozone’s average and other Nordic countries (see Figure 2).

Business confidence has been on the rise since mid-2016. It reached an all-time high in April 2017 with capacity utilization rates standing above the long-term average. Coupled with a strong economic growth in 2016 (+2.9%) and extremely low-interest rates, companies have invested, although in % of balance sheets cash holdings remain high (USD29bn equal to 17% of the balance sheets, see Figure 3).

Sources: Bloomberg, IHS, Euler Hermes

View all Euler Hermes Economic Contact Euler Hermes Last review: 2017-06-14 2 Research online Economic Research Team Country Risk Analyst: Ana Boata, Julien Ayme-Dolla http://www.eulerhermes.com [email protected] [email protected] 40% Latin America plus Mexico Mexico Colombia 35% Venezuela

30%

25%

20%

15%

10%

5%

0% 00 01 02 03 04 05 06 07 08 09 10 11 12 GDP growth (y/y, 4 qtrs cumulated %)

Venezuela 25% World

20% Latin America

15% General gov. gross debt (right 90% 6% scale) 80%10% General gov. net lending (left 4% scale) 70% 2% 5% 60% 0%

50%0% -2%

40%-5% -4% 30% -6%

20%-10% -8%

10%-15% -10% 0% -12% -20% 00 01 02 03 04 05 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11

Sources: IHS Global Insight, Euler Hermes

60% Foreign debt (% GDP, left scale) 20% Current account (% GDP, right scale)

50% 15%

10% 40% 5% 30% 0% 20% -5%

10% -10%

0% -15% 00 01 02 03 04 05 06 07 08 09 10 11

Housing and debt reforms were Figure 4 - Housing market indicators implemented, more needs to be done Residential building starts (4Q/4Q, lhs)

To deal with rising household debt, the Real estate prices (y/y, rhs) government has had to moderate the rise in 60% 16% housing prices. Some progress was made, as 14% shown by the continuous slowdown in real 40% 12% estate prices in 2016 (see Figure 4). 10% 20% Nonetheless, house prices have climbed again 8% in the Q1 2017, signaling a continuous 6% 0% overheating. Reasons include a lack of housing 4% supply coupled with a high demand, low levels 2% of new buildings and extremely low-interest -20% rates. 0% -40% -2% The introduction of the forced amortization rule -4% is no longer effective. More and governmental -60% -6% measures are to be expected, as structural 05 06 07 08 09 10 11 12 13 14 15 16 17 bottlenecks keep the housing bubble inflated. Growing fears of a disorderly market correction Sources: National statistics, IHS, Euler Hermes could cause collapse in house prices and hit consumer spending. Figure 5 – Distribution of Days Sales Outstanding The government has also increased and (listed companies) strengthened the mandate of Sweden’s financial watchdog. This will allow prudential, timely and Sweden Western Europe targeted policy decision-making to counteract 40% financial imbalances in the credit market. 35% It could also help prevent a further rise in the 30% share of highly indebted households by reducing 25% the size of allowed credits. 20%

Payment terms are slightly better 15% than the Western European average 10%

Days Sales Outstanding (DSO) increased by +4 5% to 56 days in 2016. This compared with an 0% increase of 1 day to 61 in Western Europe and Below 10 days Between 10 Between 30 & Between 60 & Between 90 & Above 120 64 days at the global level, stable compared to and 30 days 60 days 90 days 120 days days 2015. Sources: Bloomberg, Euler Hermes When looking at DSO distribution (see Figure 5), 40% of Swedish companies are paid after 60 days with 5% having to wait for more than 120 Figure 6 – Business insolvencies, number days against 10% in Western Europe.

Business insolvencies are expected to stabilize in 2017 at 6,020 cases (see Figure 6) after three consecutive years of decreases. Overall, business insolvencies remain +4% above the 2007 level. A slight acceleration is foreseen in 2018: +1%.

Sources: National sources, Euler Hermes

DISCLAIMER These assessments are, as always, subject to the disclaimer provided below. This material is published by Euler Hermes SA, a Company of Allianz, for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the Euler Hermes Economics Department, as of this date and are subject to change without notice. Euler Hermes SA is authorised and regulated by the Financial Markets Authority of France. © Copyright 2017 Euler Hermes. All rights reserved.

View all Euler Hermes Economic Contact Euler Hermes Last review: 2017-06-14 3 Research online Economic Research Team Country Risk Analyst: Ana Boata, Julien Ayme-Dolla http://www.eulerhermes.com [email protected] [email protected]