CHIEF ECONOMIST: THE LATEST EXPORT NUMBERS ARE ENCOURAGING – BUT EXPECT A BUMPY ROAD AHEAD
Trade Partners has taken the pace on the export market with Chief Economist Lena Sellgren from Business Sweden. She helps Swedish companies when they are looking abroad and foreign companies when they invest and want to expand in Sweden. During Trade Partner Summit 2023, she presented the latest edition of the Export Managers Index (EMI).
Lena says this about the Export Manager Index:
– It’s presented every quarter since 2007 and is the temperature of how the Swedish exporting companies perceive the export market and if they are optimistic or pessimistic. The survey covers 225 Swedish exporting companies within goods or services. Statistics Sweden helps us to collect the answers and we have a high response rate of 80%. It’s an index that you statistically can rely on to see how the export will perform.
Fortsättningsvis råder hon att följa det globala läget mer noggrant än någonsin förr, och vara beredd på att saker kan förändras snabbt.
And the second quarter presented is quite encouraging.
– Yes, a large part of the Swedish exporters are optimistic. If we look just a quarter back, they were pessimistic. We of course need to be a bit careful when interpreting the results but it’s encouraging to see that there are signs of a more positive view when they look both at the current situation and a quarter ahead – especially in a time where we see that global demand is slowing down. What we expected was still a downward trend in this index – or at least sideways – so this upturn was a surprise for us. Hopefully, this will be the case going forward in the next coming quarters as well.
What are the key factors here?
– Of course, many of the exporters have an advantage of the weak Swedish Krona but if you also have a large part that is import in your export, then it’s maybe not the same situation. That’s one issue. If we compare it with the first quarter of this year, the global economy has developed a bit better than we expected. We can also see that the inflation is coming down, though still too high. So the central banks, including the Swedish Riksbank, will probably have to continue to increase rates but not so much more. So they are very close to the finishing line when it comes to their rate hike cycles. And that could be a positive situation, that the exporting companies see that it’s probably soon more of a stable situation where they can plan in a better way. And then we will see that both consumption and investment will come back. But, we are not there yet.
According to Sellgren, the situation also differs between different industries.
– Right now, the manufacturing industry is performing quite well. But if you go to the retail sector and transport as well – and from the Swedish perspective, in the real estate sector – it’s far weaker. And our Swedish households – and this goes for the whole of Europe as well as the US – are quite depressed at the moment. We have the high-interest rates and high energy and food prices, which means that real incomes are now decreasing. In the Swedish case, our households have one of the highest debt situations, as a percentage of disposable income, in the world. Swedish households are also very rate-sensitive since we often don’t have fixed rates in Sweden, which means that the interest rate hikes from zero to 3.5% has an immediate impact. So, we take the purchasing power away from the households and that’s of course something that hurts, not least the retail sector, service sector, restaurants, and the real estate market.
When we look at the purchasing power, what do you forecast?
– This year, and maybe, another year, we will see these decreasing real incomes, so they’ll become quite weak. But on the other hand, it seems quite robust when it comes to the labour market. In Sweden, we have quite a high structural unemployment rate, but it’s not increasing, so the labour market seems to be strong and resilient, which is a good sign. We see this weakness in the economy, in particular this year, when we will have a global slowdown. And then we will see that demand is coming back when the central banks stop hiking their interest rates and they will feel more secure with the fact that inflation will come down, Sellgren shares. She continues:
– If you look out globally, we see that it differs. The Western world is the part of the world that has had a weakness with a high inflation rate and policy rates. It’s not the case in, for example, the Asian Pacific region. So we will see the global economy being driven more by demand that we have in that part of the world. And now, the opening of the Chinese market, will mean that from a Swedish export perspective, there will be a demand here, while most of our export, 74%, is directed towards Europe, where we have the weakness. Looking ahead, it’s an opportunity for companies that are well-capitalized to gain market shares if they do it in a smart, good way and work very close to the markets where they have their customers. If your company is digitalized and prepared for the digital transformation, you will probably have good development during the coming years. And when we look ahead, demand will come back.
Already in the EMI previous to this latest one, we saw strong development in expected demand from Asia, as well as from the US. You mentioned it but is this development in the Far East the good side here? Or what are the most positive key takeaways from the index?
– I think that the underlying strength in the global economy seems to be better than expected. And what is also important to focus on is that when you look at some parts of the world, like the Asian Pacific region, except for China, it’s a young population and a growing middle-income class, and they will demand much more. So when the countries develop, there will be a lot of purchasing power from that part of the world – where most people live. For demographic reasons, this is a good opportunity from a Swedish perspective to focus more on this region. If you are not already there, I should recommend you to, and also see where you have the business opportunities in the Asia Pacific region. And globally, there are other regions as well, when it comes to Africa, the Middle East, and South America, but they are at a far lower level when it comes to GDP per capita. So, the Asian Pacific region is of huge interest, I think. There are still opportunities in Europe and North America as well but the higher GDP growth will be in other parts of the world.
In general, for Swedish export companies, do they still have the perception that the main export markets are in the so-called Western world and they tend to forget these fast-growing regions?
– Yes, since we have 74% of the export directed towards Europe and another 10% to North America. We then have about 12% to the Asian Pacific regions and quite small numbers to other parts of the world. So, the Asian Pacific region in total has bypassed North America in export – and it’s growing faster. So, Swedish companies are for sure exporting to this part of the world and it’s increasing, but at the moment, a challenge is that we have more tensions, such as the geopolitical trade war and tech war between the US and China. This means that the risk premia for doing global business has increased and Russia’s invasion of Ukraine is another example. It’s harder to navigate the global market today and the risks are higher, so it’s more costly to be in more, so to say, risky markets. I’d suggest using Business Sweden or any organisation or other part of the trade promotion system that can support you in the business that you do in more complex markets because there are ways to handle the risks.
What is the one thing that export companies need to concern the most about in the short-run perspective?
– You need to be prepared for a bumpy road ahead because of the situation that we have with inflation that is not coming down as fast as we want it to. And this means that central banks are balancing on a thin line to actually bring inflation back to the targets at 2% and not taking away too much of the demand in the market, so there will probably be high volatility in the financial market. That’s something you need to be prepared for as well as a situation where we will see higher cost levels and interest rates for quite a long time. Probably, the central banks will over-tight a little bit and increase more than the neutral rate but the long-run sustainable policy rate will probably not be as high as it is at the moment. Prepare for higher costs and higher interest rates, Sellgren explains. She adds:
– I think that we should all look ahead and also understand that there’s another situation globally today. You need to understand how the global economy evolves and that there could also be geo-economic measures in place like the sanctions that we have towards Russia and other export restrictions. You need to follow the global market more closely than ever and just be prepared that the situation can change fast. However, I believe we should take these signs from the exporting community in Sweden as something positive – that there is light at the end of the tunnel. Or at least hope for it!
Pictured above is Vanessa Leporati – Chairman, Trade Partners Sweden , Lena Sellgren – Cheif Economist, Business Sweden, & Helena Waker – CEO Trade Partners Sweden