% annual growth rate:
Sources: M3 from Statistics Sweden, new definition from 1998, data for 1961-1997 created using growth rate of old definition of M3; GDP from Statistics Sweden..
The medium-term relationship between money and nominal GDP growth in Sweden, 1961-2020
Five-year moving averages of annual % changes, with 1963 being the start of the first five-year period
Comment on monetary trends in Sweden
(with thanks to Gabriel Stein)
As with most advanced economies, Sweden’s Riksbank has an inflation target, in this case 2%. Unlike many other economies, it has from time to time reached this target in recent years, but only to see inflation drop back towards 1% again. This is important for the current outlook. The relationship between nominal broad money growth and nominal GDP developments is as reasonable in Sweden as it is in any economy. Broad money growth undershot GDP growth significantly in the first half of the 1980s, not least as part of a strategy to bring down inflation, but also heralding the eventual crash of the early 1990s (Sweden’s worst depression since the 1920s). An unsustainable surge in credit, notably for housing purposes, preceded the Great Recession, with M3 eventually growing by less than 3% in the five years to both 2012 and 2013. Recent data is considerably more buoyant, and the lack of inflation means that nominal GDP growth is all but equivalent to real.
Swedish broad money growth accelerated sharply during 2020. In the three months from December 2019 to February 2020, M3 growth averaged a 12-month rate of slightly less than 7%. However, from March onwards, the growth of M3 shifted into double digits, eventually peaking at 18.7% in the year to January 2021, before easing very slightly to 17.7% in February. This masks seasonal variations; during the summer of 2020, broad money growth weakened, before accelerating again in the second half of the year. Sweden remains on course for its longest period of double-digit broad money growth since the run-up to the Great Recession in 2007/08. At the same time, inflation, which eased during the pandemic, is showing signs of returning. Underlying inflation (CPIF) rose by 1.7% in the year to January 2021 and by 1.5% in February. This is of course still below the 2% (a tolerance of 1-3%) target, a target not reached since late 2018. Base effects will push both headline and underlying inflation well above target later in 2020, but the key question is whether that higher rate will be sustained. Sweden’s alternative approach to the COVID pandemic, including no lock-down, but also a badly mishandled vaccination program, implies that the recovery will be less strong in 2021 than in, e.g., the UK. Nevertheless, a reviving housing market hints that demand is still strong and inflation could be on course for a sustained overshoot of the target.
You can access Gabriel Stein's latest comment on monetary developments in Sweden here.