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2018-05-10Macro `n Cheese

What if the SEK isn’t weak?

In this week’s blog Roger is answering a question that we all are asking, albeit from different perspectives; how about that SEK? Our perspective being the upcoming ‘vacances’, while others are more interested in making a buck. Or at least avoiding a loss. In typical fashion, our two-handed Chief Economist starts off with a question…

A few years back, I wrote a piece on wage formation in Sweden, arguing that a (structurally) weak SEK was instrumental in carting the economy from the depths of the financial crisis and even — heresy! — suggested that FX-interventions were perhaps a smarter path for Sweden than the asset purchase program the Riksbank had embarked on. I will draw much of the reasoning from that piece if you happen to recognize some of the arguments.

The one-legged Swedish economy

This much is generally agreed upon (at least in Sweden): The Swedish economy has long been super-strong and export-companies are doing just fine. Inflation expectations have stabilized, and actual inflation is just a tad below the inflation target. Hence, there is no need to blindly chase the last tenths of a percentage point to reach an arbitrary 2% inflation target.

Consequently, it is an unsound weakness of the Swedish Krona (SEK), and the presumed guilty party is the Riksbank. In particular it has been the Riksbank’s perceived focus on the beneficial effects of a weak SEK on inflation, the eagerness of the Riksbank to “walk the talk”, backing up verbal interventions with further repo rate cuts (despite already being below 0%), and constant additions of QE, that stir up emotions.

Macrobond Document Note: KIX is a geometric effective exchange rate index, where currencies are weighted by the total flows of processed goods and commodities for the constituting 32 countries.
Chart 1: A Riksbank fortune considered a national mis- fortune

The graph shows that in the prelude to the Riksbank Asset Purchase Program (QE) in February 2015, the Krona weakened considerably and since then continued addition of monetary stimuli has kept the SEK on the weak side of historical experiences. Recent weakness (mainly against the EUR) however, has largely been driven by a string of lower-than-expected inflation outcomes1, but also by talk of trade restrictions, which would hit the export-dependent Swedish economy particularly hard.

Against the backdrop of unprecedented monetary and fiscal stimuli and a weak SEK, you would be excused for believing that the Swedish economy is firing on all cylinders.

1Admittedly, the Riksbank’s somewhat less than clear-cut discussions on the currency are probably also to blame. My own view is that the Riksbank is at least a recession away from any active managing of the SEK. Macrobond Document Note: Though not completely kosher, but immensely time-saving, I have calculated (final) domestic demand as the sum of government and private consumption and gross fixed capital formation.
Chart 2: The one-legged economy

The domestic economy is indeed performing very well, with demand levels now at or even above the pre-crisis trend. Alas, this simply is not the case for exports, which are severely lagging behind previous trends. Consequently, to the extent that Swedish export companies are doing well, it does not emanate from domestic production facilities but probably from overseas operations. Yes, and admittedly, some sort of catch up has taken place over the past few years, but it is feeble, to say the least.

Before going into possible explanations, let me underline that I too consider the SEK weak from a historic perspective. However, I also see reasons to why it needs to be so and may very well continue to be “on the weak side” for some time, especially if the global economy would again decelerate. The currency, you see (me being ironic), is not the only thing that decides competitiveness.

The SEK is not as weak as you think

Sweden is the archetypical small open economy. Its exporters are indeed “price takers”2 and obey exogenously set world market prices (and quantities). Low international demand but high domestic growth in the wake of the GFC has meant that Swedish domestic costs – wages – have increased considerably more than for competitors3. Thus, the exporters have been unable to preserve their margins and the profit share – the share of incomes (GDP) that accrue to companies – has decreased on trend and the wage share has – of course – increased (yet, oddly, Piketty has a wide fan-base in Sweden).

2Even though well-known for high-tech companies, a large share of Swedish exports is related to the vast forests and deposits of high-grade iron ore.
3While productivity has been in line with or worse than for the main competitors. Macrobond Document
Chart 3: (Non-fin corp) Profit share heading down

Again, it is important to remember that this data pertains to domestic production, not export companies per se, and paint a much more troublesome picture than what public discourse admits to. In my opinion, a more fruitful way forward to judge developments in the SEK is therefore to incorporate both relative wages and relative productivity; i.e., to deflate nominal exchange rates with unit labor costs4.

4This is often approximated by using CPI or PPI, but I believe ULC should be preferred, especially when considering a small open economy. Macrobond Document
Chart 4: It’s weak, but not that weak

When taking ULC into account it should stand clear that while both nominal and real (ULC-deflated) measures have developed in a similar fashion, with Sweden’s (previously) high productivity improving competitiveness during the 1990’s and early 2000’s. However, as the GFC struck and lingered, the relatively high wage growth5 in Sweden eroded competitiveness. It is only over the past few weeks that the SEK has reached levels where the exports sector has previously been able to pull ahead. Considering, also, how the housing market woes could be expected to affect investments and GDP-growth over the coming year(s) a resurrected exports sector would constitute a welcome (re-) balancing of the Swedish economy.

5Despite wage growth being low from a historical perspective.

To conclude, the weak Swedish krona has drawn a lot of attention lately. And while it is indeed weak in nominal terms and compared to, e.g. the EUR, in aggregated terms and considering relative wage and productivity developments, it is close to normal. Or, to put it another way, we have the currency we need. We have the currency we deserve.

If we want a stronger currency, strengthen incentives for education and entrepreneurs, strengthen infrastructure and integration. Not everything is the Riksbank’s work.



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We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.