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Growth and rising inflation suggest Riksbank will move before ECB

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Sweden joined Japan in the second quarter in recording sharply higher-than-expected growth of 4% year on year, boosted by fixed investment and domestic consumption. Somewhat surprisingly, the release of the data in late July did not lead to much appreciation of the SEK against the EUR. This could have had something to do with the time of year, with many traders on the beach. 

While it is not inevitable that such strong growth will lead the Riksbank to change monetary policy, a 4% growth rate is nonetheless very strong and, having decided to leave the repo rate at -50 basis points on 5 July, with the expectation that rates will not rise until the middle of next year, it would not be a surprise to hear some rather less dovish noises from the Riksbank’s Executive Board as we move into the autumn.

That said, everything will depend on the extent to which this very strong growth contributes to inflation. On this front, there seems to be change afoot. Having grappled with disinflation –and even outright deflation – since the financial crisis, the Riksbank is now making real progress. Indeed, the general price level appears now to be responding a little too positively to the central bank’s ultra-loose monetary policy and asset purchases. July’s year-on-year inflation rate was 2.2% - above the 2% target – and it is difficult to believe, given such very strong GDP growth, that, having risen from 0.9% as recently as last September, the inflation rate will now go on to do anything but overshoot considerably. Thus, there is potential for SEK strength once the European holiday season is over.

The ECB will have to be very cautious in normalising monetary policy, given the still precarious position of much of the South – in particular Italy. The Riksbank, on the other hand, can be expected to act more
positively when faced with above-target inflation. With yields still depressed globally, small changes to monetary policy make a big difference. It would be a surprise, therefore, if the Riksbank needed to apply
the monetary brakes more than a little, since any move towards rate normalisation will be accompanied by the traditional strengthening of the SEK, providing an additional tightening effect. Thus ‘a little and early’ looks like the best response when it comes to tightening.

How the Swedish commercial property and private equity (PE) markets will respond to somewhat higher (or at least less negative) rates after so many years of monetary accommodation is difficult to assess. For the moment, however, participants in the commercial property and PE markets are more concerned about taxation. In March a Ministry of Finance-appointed committee opined that the use of AB vehicles to
package commercial property for the purposes of tax minimisation should not be permitted. Lobbying against the decision, as might have been expected, has been intense since then and it is not clear that
the recommendation will reach the statute books but investors remain unnerved.

If anything, though, property investors should feel lucky in comparison to PE investors, who are still licking their wounds after the Swedish tax authority’s decision in May to tax carried interest as income,
rather than capital gain. Partners from at least one high-profile PE house are appealing against the decision. It remains uncertain which way the ultimate decision will go but the direction of travel is abundantly clear.

Turning the focus back on property, low yields in Stockholm continue to force yield-hungry investors outside the capital – or, indeed, outside Sweden itself, with increasing numbers of transactions in Finland and Norway. Only Swedish transactions, however, will benefit from the Swedish Land Registry’s fastprogressing project to use blockchain to facilitate and speed up transfers of property title. While this development promises to be popular with property owners, it may prove more controversial with property lawyers who will have to ensure that contracts are effectively digitalised, such that the progress of a transaction can be easily (and securely) checked and followed by the interested parties and their advisors. Given that, as recently as the nineties, some lawyers did not see the need for their own computers, on the grounds that they couldn’t type, ensuring that contracts are brought up to date in this way represents quite a change!

Another example of Sweden’s leading the charge in the field of new technology came at the beginning of July when Volvo announced that, from 2019, all its vehicles would be manufactured as either pure electric or hybrid. With the choice of a new car becoming ever more complex due to worries over the future of diesel after VW’s ‘Dieselgate’; the relatively high consumption of petrol; and the niggling d doubts as to the real-world range of all-electric, hybrid sounds like a good compromise.

Volvo Cars has, of course, been owned by Chinese multi-national, Geely, since 2010. Despite the Chinese link, US President Trump will doubtless be pleased that North Korea is unlikely to be receiving many new hybrid or electric Volvos in the near future, having failed to pay for a delivery of 1000 144s in 1974 – and now, apparently, owing just under USD 400m on the deal as a result of over 40 years’ worth of compound interest. At almost USD 400,000 per car, Albert Einstein’s description of compound interest as ‘the eighth wonder of the world’ has rarely been more appropriate.

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