Robust GDP supports Swedish krona

Summary:

• Second quarter GDP smashes expectations underpinning odds for a rate hike by the year end
• Private consumption expenditure accelerates, investment spending eases a bit compared to the first quarter
• EURSEK tumbles in response to the data, the pair eyes a crucial support

The Swedish economy expanded at a much quicker pace than anticipated in three months through June. Robust growth underpins the likelihood of a monetary tightening by the year end. Having said that, domestic inflationary pressures remain fairly contained looking at GDP deflator. Anyway, the SEK jumped immediately after the release reaching the highest level against the shared currency since 9 July.

Second quarter GDP growth easily exceeded expectations. Source: Macrobond, XTB Research

The Swedish economy expanded 1% in a quarterly and 3.3% in yearly basis in the second quarter smashing expectations pointing to 0.5% and 2.4% respectively. The details of the release shows that consumption expenditure was the main driver for the decent pace of growth reaching 4.8% yoy while investment spending eased somewhat to 7.5% from 8.8% seen in the first three months. The data unveils that Sweden, similarly to other developed economies, has its growth pushed up predominantly due to consumption which could be quite encouraging especially when we take into account relatively dormant real wage growth. It needs to be said that the Scandinavian economy has seen 20 consecutive quarters of growth as of yet, which has driven employment to the highest level on record and public debt to the lowest since 1977.

GDP deflator points to subdued domestic inflationary pressures. Source: Macrobond, XTB Research

Furthermore, the current growth rate is clearly above its sustained level being estimated by the Riksbank at 2.2% in this and the following year. Given that productivity growth remains rather weakish one may suppose that potential GDP is unlikely to speed up notably over the upcoming few years implying the economy will be running above its sustained level for some time, the signal for increased domestic inflationary pressures. Nevertheless, internal price growth measured via GDP deflator has been relatively muted thus far. In the second quarter it totalled 1.9% qoq and 1.5% yoy. In both cases base effects played a role as the quarterly number was biased to the upside while the yearly number to the downside. Bear in mind that the Sweden’s central bank has signalled lately that a rate hike could take place toward the end of the year, and having GDP growth above its sustained level acts undoubtedly in favour of such a move. The probability for a 25 basis points increase hovers around 34% this morning.

The EURSEK moved significantly down following the GDP release. However, bulls have been so far unable to break the support localized at 10.22 (the two retracements underpin this level as well). An ultimate breakdown of this area could entail further falls and push the pair to subsequent supports at 10.10 and 10.00. Source: xStation5