The Alliance government released its budget proposal for 2013 on Thursday, in which the measures total to SEK 22.7 billion, dedicated to "investing in the future". Corporate taxes will be cut by 4.3 percentage points to 22 percent in order to facilitate increased investment and increased employment. Other measures include investments in infrastructure and research, and initiatives aimed at reducing youth unemployment.
The government expects a slight deficit this year and the next year, followed by an improvement in net lending in the years thereafter. Note that the finance ministry is far more optimistic than consensus (as well as us). It projects a growth rate of 2.7 percent next year, while consensus expects 1.8 percent. The Government's assessment is that the measures in the budget for 2013 will result in approximately 0.4 per cent higher GDP growth and approximately 17 000 more people employed in 2014 than if these measures had not been taken.
Riksbank minutes do not signal further cuts: In the monetary policy meeting on 5 September the Riksbank decided to cut the repo rate by 25 basis points to 1.5 percent. The new interest rate path signals a flat repo rate until the summer of 2013. The minutes reflect that the decision to ease policy was unanimous, due to low inflationary pressure, high unemployment and a weakened outlook for the real economy. A stronger krona and lower unit labour costs were listed as key factors behind low inflationary pressure. Several members mentioned the recent developments of the krona and noted that the appreciation that was forecast earlier had come sooner than expected. Furthermore, there seemed to be widespread suspicion that the first Q2 GDP estimate published in late July was too high. Indeed GDP growth was significantly revised downwards, to 0.7 percent q/q later on.
The Ekholm/Svensson minority continued to advocate an even more expansionary policy. Svensson wanted a 50 bp cut instead of the actual 25 bp cut right away, while Ekholm preferred to signal another 25 bp cut during the autumn through the interest rate path. Svensson repeated his mantra that forecasts for foreign policy rates and growth abroad were too high, and that a lower repo-rate path would lead to a higher rate of CPIF inflation closer to the target and a lower rate of unemployment closer to a long-run sustainable rate and thus provide a better-balanced monetary policy.
The majority, consisting of Ingves, Wickman-Parak, Jansson and to some extent af Jochnick, continues to worry about households' high debt ratios and the vulnerability created by this factor. Wickman-Parak argued that household borrowing does not present any immediate danger, given the slowdown of credit growth during the last year. She did, however, express worries that a substantial cut in the repo rate could trigger another round of acceleration in the build-up of debt. This is not primarily a question of risks to financial stability, but of risks to growth, employment and inflation in the longer run – variables that are central to monetary policy. Governor Ingves argues that the less one does in other areas to counteract financial imbalances, the more responsibility falls to monetary policy. Introduction of new regulations regarding capital adequacy, liquidity and risk weights are important measures. The discussion of amortisation requirements, reduced tax deductions for mortgages and an increased supply of housing is also important. Ensuring that indebtedness does not rise too far has long-term significance. He stated that the less one does in other areas, the more responsibility falls to monetary policy.
Ekholm states that monetary policy should be last line of defence. One should be careful using the interest rate to control housing and credit market risks, she argues. Such risks are less imminent now than in 2010, since developments in these markets have calmed down significantly. As the inflation target has recently been questioned by some, Ekholm considers it important to focus on the inflation target, to avoid losing the anchor for inflation expectations.
Coming up this week: We believe that consumer confidence will be weighed down by gloomy economic developments in Europe and an uptick in unemployment at home. Our estimate is a decline from 5.4 in August to 4.5 in September (consensus is 5.2). We expect manufacturing confidence to have waned as well, from -9 to -11 (consensus is -11.1). Our estimate of retail sales in August is below consensus (0.0 percent vs 0.2 percent).
Assessment: The Riksbank plans to keep the repo rate at 1.25 percent until the middle of next year, while market prices indicate expectations of another cut in 2012. We expect the Riksbank to leave its policy rate unchanged until the spring of 2014, and the Governments’ spending plans serves to strengthen our view.
