Country wrap-up Sweden - weak momentum ahead

Economic growth : Sweden grew by 2.4% in 2018, the same pace as in 2017, supported by stronger public consumption, still buoyant investment and private consumption, resilient exports but also a buildup in inventories. During 2018, the economy shifted away from domestic towards external demand as the main drivers of growth. D omestic demand eased to 1.8% in 2018 from 2.8% in 2017, while net external trade added 1pp to growth in H2 2018 after being a drag on growth over two and half years. Q4 saw a rebound in GDP by 1.2% QoQ after a disappointing Q3 (-0.1%) thanks to revival in private consumption (+0.7% QoQ after -0.8% QoQ in Q3) and strong exports. Looking ahead, domestic demand is likely to advance less dynamic ally , on the back of weaker growth in Sweden’s main trading partners. On the upside, activity will be further supported by low unemployment, moderate inflation and rising household incomes. Furthermore, the new coalition’s centrist and liberal parties have proposed to lower taxes on income and enterprise, which if implemented would reinforce domestic demand. Monetary policy : A lthough inflation notably strengthened to hover around the central bank target of 2% (Feb.: 1.9%) from touching zero at the beginning of 2014, inflation excl. energy has still been below target at 1.4%. While wage growth, the main determinant of core inflation, has continued to be relatively sluggish, the SEK weakness spurred inflation. The Riksbank is determined to increase its repo rate by 25bp to 0% in autumn this year after having increased the rate by 25bp from -0.5% in December. Yet, we do not see more hikes at this stage given that domestic demand is slowing, core inflation remains muted and the major central banks, ECB and Fed, ha ve become dovish again. House prices : After a period of extreme growth, house prices fell in late 2017 to recover only in late 2018 (Feb.: 0.7% after -2.9% in 2018) due to high construction activity and macroprudential measures (stricter amortization requirements, 85% limit on LTV ratio etc.). Over the forecast horizon, house price increases will be dampe ned by somewhat tighter lending conditions and still rising supply of newly produced flats. On the upside, construction activity is easing, while household disposable incomes are likely to rise further owing to low unemployment and inflation as well as planned income tax cuts. Political situation : After four months of attempts to build a coalition government, the three main political parties (the Social Democratic Party ( centre -left), the Moderate ( centre -right) and the Sweden Democrats (far right)) reached a consensus to reappoint Stefan Löfven , the previous Prime Minister, as the leader of a new minority coalition government between the centre -left and the Green Party, yet at the expense of many concessions to the liberal right (relaxation of labour law, lower taxes for high incomes and libera lisation of rents for new housing).