Swedish Economy Beats Survey, Giving Central Bank Hope

(Bloomberg) -- The Swedish economy grew more than expected in the fourth quarter of 2016, boosting the chances that the central bank may finally meet its inflation target after more more than five years of misses.

Gross domestic product grew at a quarterly 1.0 percent and expanded at an annual 2.3 percent, Statistics Sweden said Tuesday. The median estimate from 12 analysts pointed to growth rates of 0.8 and 2.3 percent respectively, while the Riksbank had expected growth of 2.2 percent from a year earlier. The krona strengthened 0.4 percent to 9.56 against the euro as of 11:24 a.m. in Stockholm.

Sweden's economy has been running on all cylinders, thanks in part to investments designed to address a housing shortage and care for a record number of immigrants from war-torn countries like Syria and Iraq. The central bank, for its part, has helped fuel private consumption by cutting interest rates deep below zero and buying bonds. So far those efforts have failed to return inflation to the bank's 2 percent target.

“Exports are picking up” thanks to a weak currency and an improved outlook for the global economy, Robert Bergqvist, chief economist at SEB AB in Stockholm, said in a telephone interview. That raises the likelihood that the central bank will start raising rates already in December. That's sooner than the Riksbank's forecast of early next year.

According to Statistics Sweden, exports were the main drivers of growth in the fourth quarter, rising 1.8 percent from the previous three months. Investments increased 0.9 percent, while public and household consumption only rose 0.3 percent each.

However, there are signs that the economy is now cooling after economic growth slowed to 3.3 percent last year from 4.1 percent in 2015. The Social Democrats-led government predicts growth will slow further, to 2.4 percent this year and 1.8 percent in 2018. Since coming to power in late 2014, the government has raised taxes and adopted a more cautious approach to public spending in an effort to return to a budget surplus.

Despite the economy slowing from its 2015 peak, the Riksbank predicts inflation will pick up and stabilize around the target already next year. Since its Feb. 15 meeting, a number of Riksbank board members have stressed that they're not in a hurry to tighten policy until inflation is back on firm ground. The Riksbank will publish minutes from that meeting on Wednesday.

Not all economists are as confident on consumer prices.

“Despite a strong real economy, nominal variables such as wages and inflation are low and refuse to take off,” Andreas Wallstrom, chief analyst at Nordea Bank AB, said in a note. “As a result the Riksbank over the foreseeable future will struggle to meet its target. Our baseline scenario is no further easing measures and a first rate hike in April 2017.”

--With assistance from Josh Robinson

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo, Niklas Magnusson