Coronavirus Is Set to Hit Pay Talks for 2.8 Million Swedes

(Bloomberg) -- About 2.8 million Swedes look set to get a much smaller pay bump than they'd hoped for as the coronavirus flattens budgets across the country's export industry.

The fallout of the virus “puts the wage negotiations in a new light,” said Robert Bergqvist, a former Riksbank economist who now runs the macro research department at SEB in Stockholm.

For the Riksbank, the development is bad news. Policy makers ended half a decade of negative interest rates in December, only to be met with speculation that they moved too soon. Since then, inflation has slowed and the outlook for growth has deteriorated. If wage growth doesn't pick up, the prospects of inflation hitting the 2% target look remote.

“The outbreak adds to already existing arguments -- such as trade tensions -- that employers in manufacturing can use to keep a lid on wage increases,” said Bloomberg Economist Johanna Jeansson.

“For the Riksbank, lower-than-expected wage increases would spell another blow to its aim of reaching 2% inflation any time soon.”

Sweden relies on exports to generate roughly half its economic output, making it more exposed to trade disruptions than most. It's already clear that the coronavirus is hurting manufacturing in Europe, with February data for the euro zone pointing to delivery delays and sharp declines in orders.

Pay talks have been under way since the autumn and need to be wrapped up by the end of March. Last month, employers signaled they were willing to consider less than half the 3% unions want. That was before the coronavirus started to upend the outlook for global trade.

“In a situation where inflation seems be coming in quite a bit below the Riksbank's forecast, where growth has cooled considerably and where the labor market is showing significant weakness, the trade unions are in a very weak bargaining position,” said Michael Grahn, chief economist at Danske Bank in Stockholm.

Jeansson says that if the Riksbank is forced to ease policy again, it would probably expand an existing bond-purchase program rather than resort to negative rates again.

On Saturday, Riksbank Governor Stefan Ingves said there's too little clarity surrounding the fallout of the virus to draw any conclusions at this stage. “You have to study, follow, adapt and react when things get a bit clearer,” he said. “We currently don't know if this is temporary” so it's “difficult to make any forecast on what may happen.”

Sweden is already bracing for the risk of job losses. Last week, the government said it's preparing to unveil a short-term work agreement with employers in which the state would cover the cost of wages for staff that might otherwise be laid off because of temporary trade disruptions.

--With assistance from Niclas Rolander.

To contact the reporter on this story: Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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