How has the Riksbank misjudged the economy of Sweden so badly?

by Shaun Richards

Today is the day that central bankers gather for the annual symposium at Jackson Hole in Wyoming. This has produced quite a few changes in central banking policy in recent times such as the introduction of Forward Guidance for interest-rates. Of course that has been a complete failure as the hosting US Federal Reserve is now cutting interest-rates after “guiding” people towards rises.But the title of this year’s symposium does lead into my subject to today. So here is the Kansas City Fed.

Challenges for Monetary Policy

Actually somewhat typically they then lose the plot.

Different rates of recovery have led central banks to chart different courses for the normalization of monetary policy following a period in which most central banks used both conventional and unconventional monetary policy tools in response to the Great Recession. Whereas some central banks are approaching a neutral policy setting, others have yet to begin the process of removing policy accommodation.

Meanwhile back in the real world the one central bank (itself) which had tried to engage neutral has in fact engaged reverse. I suppose they get to some by the central banks which follow the Fed. But rather than thinking about “removing policy accommodation” other central banks such as the ECB are now looking for a gear box with more reverse gears.

Let me now move to a specific example which in a way is symbolised by a symposium starting later for which we do not have a schedule yet! The only thing we do know is that Fed Chair Jerome Powell speaks tomorrow afternoon.


This whole procedure reminds me of the Riksbank which decided it would be amongst the shock troops of the monetary accommodation era. It cut interest-rates into negative territory ( -0.5%) and engaged in some QE bond buying. Then after years of promising a change it did this last December.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby continue to support economic activity.

This was one of the challenges for monetary policy or today;s theme as I pointed out at the time. From the 20th of December.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third…….Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

Actually there was another problem as how did this work out for the Riksbank?

this can partly be explained by temporarily weak car sales.

So as you can see I was pointing out at the time that this was odd as the Riksbank had ignored the good times for the Swedish economy and then as I put it panicked fearing it would approach the next slow down with interest-rates already negative.


If we move forwards to the July policy meeting the minutes tell us this.

Similarly for Sweden, expectations of further monetary policy stimulation have increased. Pricing on the
financial markets now indicates a higher probability of a rate cut than of a rate rise while bank economists in general expect a postponement of the repo rate increases.

As you can see they were facing up to a situation where even they must have realised they had lost credibility on the subject of interest-rate rises. If we now move forwards to the end of July Sweden Statistics produced more bad news.

Sweden’s GDP decreased 0,1 percent in the second quarter of 2019, seasonally adjusted and compared to the first quarter of 2019. GDP increased by 1,4 percent, working-day adjusted and compared to the second quarter of 2018.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%. So it is quite clear that the timing of the interest-rate rise was something of a shocker or in football parlance an own goal.


Sweden Statistics has produced some concerning news.

In July 2019 there were 5 239 000 employed persons. The unemployment rate was 6.9 percent, a decrease of 0.9 percentage points compared with July 2018.

What’s concerning about that? Well they have confused the concepts of up and down as the rate increased rather than decreased.

In July 2019, there were 390 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 50 000 compared with July 2018. The number of unemployed men increased by 29 000 to 202 000. There were 188 000 unemployed women. The unemployment rate was 6.9 percent, an increase of 0.9 percentage points compared with July 2018.

This poses a real problem for the Riksbank because if we look at the accompanying chart they have raised interest-rates into a downwards turn in the unemployment situation. We know that employment can be a leading indicator so let us look at that.

In July 2019, there were 5 239 000 employed persons aged 15─74, not seasonally adjusted. The number of employed men was 2 739 000, a decrease of 39 000 compared with July 2018. The number of employed women was 2 500 000. This was the third consecutive month in which the employment rate did not increase compared with the same month a year earlier. Prior to that, the number of employed persons had increased every month since September 2016. The employment rate was 69.8 percent, a decrease of 1.0 percentage point compared with the same month a year earlier.

As you can see the picture is not pretty there either. As an aside the labour market switch is sexist as it is mostly men, I guess it must be traditional male jobs being affected.

But the picture here is not only troubling for the Riksbank as we see another statistics agency with troubles.

Last time my model said recession, as it also does now, was ahead of 2012. But the statistics agency all through 2012 posted GDP at +1.5-2% y/y – happy times! Now when all revisions are done GDP was actually below 0% y/y most of 2012. ( Mikael Sarwe of Nordea )

There is more here from Michael Grahn of Danske Bank

Adding July LFS data to our GDP tracker model a very preliminary take on Q3 GDP say growth slowed to 0.9 % yoy.


The Governor of the Riksbank will have been a relieved man as he boarded his flight from Sweden to the Mid-West. He will escape the economic bad news by being elsewhere and may even find some suggestions from his central banking colleagues about what to do. But the reality is a cruel one in that he and his colleagues are in a pickle of their own making as their timing was so bad they have endulged in some pro-cyclical monetary policy in a downturn. Even worse their previous dithering means they start it with negative interest-rates (-0.25%).

Perhaps that is something they could discuss at Jackson Hole. How the Riksbank got things so wrong?

Let me open the discussion with a talking point.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

Me on The Investing Channel