UPDATE 2-Swedish manufacturers catch German cold as global woes hit home

Activity in Sweden's manufacturing sector dived to its lowest level since early 2013 in September as worries about global growth hit the hitherto resilient economy and boosted the chance the Riksbank will drop plans for a near-term rate hike. While growth slowed in Sweden in the first half of the year, the downturn has been mild and the central bank has stuck with its forecast of it will tighten policy late this year or early next.

But recent figures have pointed to a faster slowdown. Unemployment has spiked and inflation has slowed as the effects of a trade spat between the United States and China, worries about a no-deal Brexit and a slowdown in Europe - not least its engine Germany - have begun to take their toll. September saw the biggest monthly drop in Swedish manufacturing activity since 2008.

"Swedish manufacturers are simply going in the same direction as, for instance, in Germany," Nordea economist Torbjorn Isaksson said. "The PMI report supports our view of the Riksbank cutting rates around the turn of the year." The Swedish crown fell sharply against the euro after the data.

NO RATE HIKE? Comments by the majority of rate-setters since the Sept. 5 announcement, when the Riksbank held the repo rate unchanged at -0.25%, have underlined the view the economy is solid and that a rate rise would still leave policy very expansionary.

Deputy Governor Per Jansson has been the sole doubter. He has questioned whether a hike is necessary, although he said there was a long way to go before a rate cut would be on the cards. Economists have long been skeptical about the Riksbank's plans pointing to inflation well under the target, a slowing economy and rate cuts by the European Central Bank and the U.S. Federal Reserve.

Most believe rates will remain unchanged for the foreseeable future. "It will take a lot for them to reverse and cut interest rates, but there is probably a limit to how weak the economy can get," Olle Holmgren, an economist at banking group SEB said.

The Riksbank announces its next policy decision on Oct. 24. Swedish PMI dropped to 46.3 points in September from a downwardly revised 51.8 points the previous month, data compilers Silf and Swedbank said on Tuesday.

The sub-indices for production and orders were the biggest contributors to the decline in the overall index. Three of the five sub-indices were below 50 points, the line dividing expansion in the sector from contraction. Private sector activity in Germany shrank for the first time in 6-1/2 years in September. Activity in the manufacturing sector fell to 41.7 points.

 

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