MNI INTERVIEW: Swedish Household Demand Frail - FI Econ Head

Swedish household demand has remained surprisingly weak despite swift Riksbank rate cuts in part because of economic uncertainty which does not look likely to dissipate soon despite the U.S.'s partial climbdown over tariffs, the chief economist at powerful financial regulator Finansinspektionen told MNI.

Subdued Swedish bank lending also reflects weak demand rather than supply, although steps could be taken swiftly, including cutting the countercyclical capital buffer, should capital regulations be seen as a drag on lending, Jon Thor Sturluson said in an interview.

"We still are ... a bit surprised at how slowly the private sector is picking up after the interest rate decreases, particularly households," Sturluson said, with "Economic uncertainty  ... a significant contributor to the persistence of the slump" both for firms and households.

"Swedish households are ...surprisingly forward looking about their prospects," and "businesses are also ...more wary about the potential outcomes in the future," with recent U.S. trade policy changes unlikely to resolve this.

"I don't believe that the 90-day stay in the tariffs has solved the amount of uncertainty to any significant degree, there's still a lot of things that can happen. For Sweden, definitely, there's still significant tariffs on vehicles and steel that's not been postponed, for example. So there's specific effects that should that are not going to abate at any level," Sturluson said.

Households have had to deal with "high interest rates, high inflation, higher unemployment, but it seems that ... a large proportion of households have managed this as well as possible, but at the cost of economic growth," Sturluson said.

The saving ratio has picked up and "as long as this uncertainty is a main factor in household decision-making ... we expect this to remain elevated," he said, though he added that this metric varies significantly across the economy and that many households have no significant precautionary savings.

CREDIT MARKETS

Recent uncertainty has also been reflected in volatility in the Swedish corporate and sovereign debt markets, which has seen a hike in credit spreads following a period during which liquidity had improved as the Riksbank, under former FI head Erik Thedeen, ran down its bond holdings.

"The market is more sensitive to risk than it has been, but it's still functioning quite, quite well, in our opinion, and issuance has rebounded," Sturluson said, adding "We agree with the Riksbank that this is a vulnerable market in the sense of liquidity." (See >(See MNI INTERVIEW: Riksbank Eyes Inflation Expectations - Jansson)

CAPITAL BUFFERS

FI could cut banks’ countercyclical capital buffer from its current 2% neutral level if necessary, he said.

"That could be very quickly eased if the need arises ... We have, of course, had episodes and examples in the past where we have acted very, very quickly where we have believed that there might be a risk that that our rules are a drag on lending activity to the private sector. We see no indication of that being the case right now.”

COMMERCIAL REAL ESTATE RISK

While exposure to commercial real estate is a vulnerability for Sweden’s financial system, things have improved somewhat, he said.

"Capital markets have rebounded significantly ...The average firm has improved its position considerably, but we always add the caveat that there are still a number of firms in the sector that have vulnerabilities that need to be addressed.”

Banks have higher capital requirements for CRE exposure and "we are at an appropriate level at the moment, but definitely this is an elevated risk,” he said, noting that construction activity has not responded to the lower interest rates.

"We don't see a strong supply response as of yet ... the cost of construction is still a little bit too high compared to prices, at least in the large cities ...many people are waiting for a further price increase before we can expect a strong supply response," Sturluson said.

FI is also working had with financial institutions to boost resilience against cyber attacks which "might appear in very innovative ways in the future,” he said.