Sweden; brighter economic picture and U.S. sales outlook result from declines in oil prices and the dollar - Business Outlook Abroad

Business America, July 7, 1986

SWEDEN

Sweden's economy is now doing better than it was projected to do at the start of the year. As the economy heads into the second half of 1986, business confidence in Sweden is high. The talk is of a return to the 1960s-style low-inflationary growth.

While forecasted GNP growth of 2 percent is below the OECD average, it is better than the estimate of only a few months ago. External factors, particularly a fall in the price of oil and the dollar exchange rate, deserve the credit for the improved situation. They should make the present downturn in the Swedish business cycle both milder and shorter.

The Swedish government forecasts a trade surplus of $4.3 billion in 1986, which will contribute to an overall current account surplus of about $500 million. Some private sector forecasts are even more optimistic.

Private consumption is experiencing strong growth, which should lead to an increase in imports. In 1986 imports are expected to rise 3 percent. This should benefit U.S. sales in the Swedish market.

The fall in oil prices has produced a favorable impact on inflation. The consumer price index is running at 4.3 percent. While still higher than the OECD average or the rate in Sweden's major competitor economies, the rate continues to fall. The Swedish government anticipates inflation will be brought down to between 3 and 4 percent by yearend.

There has been an effective devaluation of the Swedish krona against the yen and deutsche mark. The currency basket that determines the krona's exchange rate gives double weight to the dollar. The dollar's fall has brought the krona down with it, improving export competitiveness against Japanese and West European engineering and capital equipment.

Swedish industry entered 1986 in a much more favorable position than many thought likely only six months earlier. The combination of reduced raw material costs brought on by a declining dollar and a more favorable krona-deutsche mark exchange rate has softened an anticipated recession in the economy and buoyed Swedish competitiveness and exports on the European market. The combination has worked to conceal the effects of costly wage settlements in 1985 and counterbalance a fall in domestic demand, the result of declining public sector consumption as well as falling investment and inventory stocking.

Business profitability at yearend 1985 remained at record-high levels, though profit margins--the ratio of profits to turnover--were falling slightly in comparison to 1984. The benefits of this situation were spread unevenly throughout the economy. The export sector, particularly metalworking, automobiles, electronics, and engineering, showed high levels of production and capacity utilization. Domestic industries, including textile, foodstuff, and construction industries, as well as such raw material producers as the pulp and paper industry, showed declining orders and production.

Sweden's trade balance is forecast to improve this year and could approach krona 20 billion, or be slightly above the current government estimate. That projection is based on a continued strong demand for Swedish goods on the European market and a declining price for oil and other raw materials. The government estimates that Swedish manufactures still retain a competitive margin from the 1982 devaluation.

The level of export orders registered within the capital goods sector in the first quarter confirms the prospect of strong sales this year. Comparatively high domestic wage costs and a lack of spare capacity will prevent industry from translating increased sales into expanded market shares. In fact, it is estimated that the Swedish market shares in the trade of manufactured and capital goods will actually decline next year. The trend will be moderated somewhat by a 15 percent depreciation of the krona against the deutsche mark and yen since March 1985. This has enabled Swedish industry to maintain its position against its principal Japanese and West German competitors on the European market. The Swedish government assumes exports will rise by 4.5 percent this year, manufactures at a slightly weaker rate.

The growth in Swedish exports to the United States slowed markedly in 1985, but it was still at a respectable 14 percent level measured in current prices. Sales of vehicles, chiefly automobiles but increasingly trucks as well, accounted for more than 40 percent of the total. The United States remains Sweden's largest export market for automobiles, a fact reflected in Sweden's planned adoption of U.S.-style emission controls later in the decade.

Although the high dollar over the last several years has affected the market in Sweden for U.S. goods, especially those which are price sensitive, in 1985 there was a significant increase in imports of U.S. products. This was undoubtedly tied to Swedish export performance, since many of the largest Swedish exporters are important users of American equipment and components. The declining dollar can only help U.S. exporters to improve their market shares in Sweden; nevertheless, Swedish demand for many U.S. products will also depend on a continued buoyant export market for the Swedish companies which incorporate U.S. products into their own. Since the prospects for Swedish exports continue to be favorable for this year, this offers good opportunities for U.S. exporters of products which would increase the performance and competitiveness of Swedish exports.