In a previous life, this Alphaville writer occasionally had to cover SKF ’s earnings, and was duty-bound to always describe it a “bellwether for the global economy” given how its ballbearings are pretty much everywhere.
This was a cool theory beloved by journalists and analysts that unfortunately wasn’t actually true.
Yes, SKF shares started to fall before the broader stock market in 2007, but they would still have been a very bad way to navigate the subsequent years. At best the company is a (very) rough indicator of narrow industrial demand. This is why international coverage of SKF earnings has atrophied in recent years.
Still, everyone loves a good “bellwether”, so analysts at BCA have now offered up the entire country of Sweden as an early warning system for the global economy. And to be fair, there are some decent reasons why Scandinavia’s least-cool country might work:
Sweden’s unique vantage point on global growth comes from the fact that total trade is above 100% of GDP, with exports representing about 50% of GDP. This is much higher than most major economies. What has been remarkable is that this share has been increasing over the last three decades, while for economic behemoths such as China and the US, it has been flat-to-falling. For example, total trade in China has dropped from a peak of close to 60% in the early 2000s to almost 35% today. For the US, it has basically been flat at around 25%. Given that global trade as a share of GDP has been moving sideways for well over a decade, Swedish data will have much more of a pulse on the direction of the trade-sensitive economies — which constitute most economies outside the US — in the near term.
Focusing on Sweden has an additional advantage: exports are highly geared to global trade. Intermediate and capital goods comprise close to 60% of the country’s foreign shipments. These are goods that are highly cyclical in nature and used as inputs into the overall production process. This makes Swedish data a natural leading indicator on the state of worldwide manufacturing and exports, the most cyclical component of most economies’ GDP.
FT Alphaville should also grudgingly point out that Sweden’s exports are also pretty diverse (unlike far cooler but more oil-dominated Norway). For example, Ikea wardrobes, payment tech, nuclear power, boring cars, pop music, lung cancer drugs, etc etc.
So what is Sweden telling us? Are things going jättebra or is everything et helvetes skit ?
Well, the OMX Stockholm 30 Index hit a new record this month, and Swedish krona is up 7.5 per cent versus the dollar since its September nadir, which “has usually coincided with an improvement in global growth variables,” BCA notes.
Moreover, the expected production plans component of the Swedish manufacturing PMI clocked in at 56.8 in February. Other better than expected data has lifted Sweden’s economic surprise index back above zero, which “represents a beacon of optimism”, according to BCA.
Having gotten us excited, BCA then brings the gloom, noting that it’s mostly exports to the US that have been strong, corporate bankruptcies and unemployment are ticking up, and consumer spending is slowing:
— Swedish exports have been mainly headed to the US, a relatively closed economy. Shipping to more open economies such as Germany and China has been weak. This is not a good signal for global growth and suggests that any rebound will be tentative if the US economy eventually succumbs to a recession.
— Bankruptcies are on the rise in Sweden, indicating that the domestic corporate sector is not benefiting from any budding pickup in global growth. As of February, bankruptcies had surged to the highest level in three decades on the back of increasing borrowing costs. Retail and construction, two sectors very sensitive to interest rates and consumer demand, are leading the ascent in bankruptcies. Given businesses in Sweden ultimately depend on global demand, it is telling that the default rate in the US (one of Sweden’s biggest export destinations) is also picking up.
— Similarly, the labor market in Sweden is softening. The employment PMI, sitting at 46, is near the weakest levels since the pandemic lows. The unemployment rate has also ticked up significantly, rising from a low of 6.9% to the current level of 8%. Swedish employment trends tend to lead those of its trading partners.
– On the consumer side of the equation, while consumer confidence has bounced back sharply, household consumption and retail sales growth are continuing to contract, though the momentum has bottomed. House prices have been decelerating relative to incomes and rents, which will further limit the pickup in consumer sentiment.
BCA’s overall conclusion is (understandably) a bit of classic fence-sitting:
Putting it all together, Sweden confirms that the improvement in global manufacturing will continue but is at risk of a relapse given the powerful deflationary headwinds globally.
Alphaville looks forward to adding the Swedish economic surprise index to our daily chart consumption.