Booming economy and falling unemployment call for fiscal tightening

The Swedish economy will continue to strengthen in 2016 and 2017. Domestic demand is being stimulated by expansionary fiscal and monetary policy, and unemployment will fall to 6.3 per cent in 2017. The booming economy and the considerable deviation from the surplus target for government net lending indicate that fiscal policy should be tightened already in 2017. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.

After seven years operating below capacity, Sweden will this year return to a positive output gap. Firms’ recruitment plans are positive, and vacancies are high. Employment is expected to continue to grow rapidly, especially in the government sector. One driver behind the strong economy is Sweden’s expansionary economic policy. The low interest rate policy has stimulated domestic demand while also keeping down the value of the krona. Together with continued global economic recovery, the relatively weak krona will contribute to further strong growth in exports this year and next.  

Despite the booming economy, the government is expected to pursue expansionary fiscal policy both this year and next, with the result that the deviation from the surplus target will widen further. In this situation, there is reason to tighten fiscal policy, arming the economy for harder times and preserving the credibility of the fiscal policy framework.  

Negative repo rate due mainly to global conditions

The Riksbank will continue to focus on inflation over the next couple of years. Despite the strong economy, the repo rate will remain negative in 2017, due largely to low rates abroad. The low level of interest rates does have its risks, but is justified in a situation where the credibility of the inflation target is being questioned after a sustained period of weak inflation.

Read the Swedish Economy at www.konj.se/english

For further information:

Jesper Hansson, Director of Forecasting, +46 8 453 5972
Sarah Hegardt Grant, Head of Communications, +46 8 453 5911

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