Who will be the locomotive of the world economy?

“I’ve been around a long time since I started at the National Institute of Economic Research in 1979, and I’ve seen many dramatic events,” says Sven-Arne Svensson.

Right now there is plenty of data on the world economy that has looked positive recently. The question is how stable this trend could be.

“It seems we are heading for slightly better growth compared to last year, when we ended up at just over 3 percent overall. We’ve received quite conflicting statistics from the United States, with economic indicators like the purchasing manager index fairly strong, but we have also seen other data from retailing that seems to have begun to decline. Car sales are down and the employment numbers for March were not exactly great,” says the economist, who notes at the same time that unexpected help has come from the East, in the form of increased activity in China, the country that created so much uncertainty in the financial markets last year.

“China, which many people though would slow, with growth down to 6 percent, has actually accelerated a little in the first quarter. And if China is doing well, it also takes with it a lot of other Asian countries,” says Sven-Arne Svensson.

Other regions that have made a positive contribution are Europe as a whole and Sweden in particular, where mainly industries that have been very weak for a number of years seem to have recovered. The fact that Europe is doing well is, in itself, naturally positive for Swedish industry.

“The economic barometer from the National Institute of Economic Research showed the highest order backlogs since 1996. What could dampen growth in Sweden is that the labour shortfall has risen to similarly high levels as in the fourth quarter of 2007,” says Sven-Arne Svensson.

Chinese growth now appears to have landed at just over 7 percent. This is unlikely to be sustainable, believes Sven-Arne Svensson.

“I think it will decrease from current levels. We will not get back to the levels seen between 1980 and 2010, with growth of 10 percent. China is still providing a very big contribution with 6-6.5 percent growth.”

How about the rest of Asia?

“Not much data is available but, what we have, is pointing up: Singapore is suddenly at a 10 percent growth rate in industrial output, and things look even slightly better in Korea. If China moves up a gear, it also gives a shot to other countries. Then, of course, it will be interesting what the United States does, and whether it tears up any trade agreements. If that happens, China will naturally see an opportunity to tie in other countries even more closely, countries that have otherwise been quite connected to the United States.”

Could the flow of goods change?

“Yes, from what I have seen things will certainly be tougher for US exports. The dollar is really too strong given the constant deficits in US foreign trade, even though this is now actually slightly lower. Before the financial crisis, the deficit was 6-7 percent of GDP,” says Sven-Arne Svensson.

Donald Trump’s United States has very high debt as a nation. Realistically, new tax cuts for businesses would have to increase the country’s debt even more, unless enormous growth is achieved, believes Sven-Arne Svensson.

“I’m a little uncertain how big the numbers are; he is supposed to have proposed a cut in corporate tax from 35 percent to 15 percent. Some big companies pay no tax at all, so those that would benefit would be smaller enterprises that don’t have this possibility. The danger, of course, is runaway government debt, but there is no certainty it will be passed,” says Sven-Arne Svensson.

He notes that there has been an unexpected pattern in which Republican presidents in particular have caused public consumption to grow very sharply. The pattern was clear under both Reagan and Bush, and has caused the country’s government debt to rise substantially.

“When Reagan became president in 1981, government debt was 31 percent of GDP. Now it’s somewhere between 105 and 110 percent, so these are entirely different levels,” says Sven-Arne Svensson, reminding us of the economic environment when Ronald Reagan took over. The interest rate was 17.5 percent and inflation was over 11 percent, which made it possible to make cuts when oil prices fell.

Donald Trump has planned to stimulate the economy, and also said that some low-wage labour should be deported if illegal. Is there a risk of inflationary pressures?

“The textbooks say that, without a doubt, inflation and wages should accelerate. But many commentators have predicted that inflation should be higher in Sweden as well. Wage rises in the United States are currently at an annual rate of 2.7 percent, which is very low in relation to an unemployment rate of 4.5 percent,” believes Sven-Arne Svensson.

There have so far been three interest rate rises from the US Federal Reserve. The market consensus is that there will be two more hikes before the end of the year.

“Our own forecast is that it will only be one, on June 14. I think there is a fear that if the United States is the only country that raises interest rates, the dollar could get too strong,” says Sven-Arne Svensson.

Automotive sales were at peak levels before weakening a little in March.

“December was an all-time high, and they have since decreased, but are still at relatively high levels. But this does not offer much in itself. Household incomes are not rising at the same pace as before.”

Could there be a shift in the world economy, with Europe gradually coming to the fore?

“Europe was actually turning upward slightly last year. European industrial numbers so far this year have been a positive surprise, and this has certainly helped Sweden. Outside the EMU, the UK has performed very well following the Brexit referendum. UK unemployment is now 4.7 percent, and that’s the lowest in 40 years,” says the economist.

Sweden has lived well since the financial crisis. Is this greatly driven by increased population?

“It is clear that in some areas we have 1-1.2 percent population growth, so if GDP increases by 4 percent like in 2015 the gain per capita is 2.8 percent. Housing demand is rising, as is public consumption, but this takes resources from other areas that would have increased more if this demand had not existed,” says Sven-Arne Svensson, highlighting a large contributor to the Swedish economy, unexpected by many: service exports.

“The biggest contribution to the Swedish economy in recent years has come from exports of services, which many commentators have missed. These now make up one-third of total exports, and at the start of 2000 they were still below 20 percent. There is a lot of gambling business, which has seen considerable volume increases,” he continues.

The construction sector has been strong for many years and is crying out for labour.

“Yes, we have had construction investment of over 10 percent for a number of years, and something around 60-65,000 new apartments are being built, as well as other major projects: the West Link in Gothenburg and tunnels in Stockholm. But even though there is high demand, the pace of increase will slow,” says Sven-Arne Svensson.

In Sweden we have managed to keep down government debt excellently, but we have transferred it to private individuals instead. According to The Atlantic, government debt has not been the real problem in past crashes, but rather private debt and its strong growth.

“Debt has risen sharply. Most of the economic upswings in the United States have actually been driven by private consumption and household debt. However, at the beginning of the upturn after the financial crisis it was not private consumption providing the traction, but rather, to some extent, exports and investment in housing construction, which gained momentum from very low levels.”

But a country like Japan has had extremely high government debt for a long time, but just rolls it forward. Could you imagine the West getting into a Japan scenario?

“I would not rule it out. There are tendencies, at least with monetary policy, to try to mimic Japan, which has operated with zero interest rates for 20-25 years without upping inflation and growth. Japan has seen very high growth turn into very low growth, and has a stock market that is still some 50 percent below the level of 1989.”

Looking forward 12 months – do you see a positive picture?

“I expect decent growth, at least for a couple of quarters to come. However, we believe that 2018 will be a little weaker than 2017,” concludes the Erik Penser economist.

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