Fiscal policy needs to be tightened

The Swedish economy is booming. Investment levels are high, and employment has risen rapidly, resulting in reduced unemployment. The buoyant economy has also boosted central government finances. However, all the indications are that the structural deficit will widen both this year and next, taking fiscal policy further away from the surplus target. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.

Sweden’s GDP growth slowed in the first half of the year after a very strong 2015, but there is much to suggest that the decrease was only temporary and that the boom will continue. GDP will increase by more than 3 per cent this year, driven mainly by higher consumption and investment. Next year, investment will slow and so GDP will grow less quickly, with household consumption and exports taking over as the main growth drivers.

One concern for economic growth is that many firms are facing shortages of labour, and unemployment in some groups remains high. Matching inefficiency in the labour market will therefore contribute to slower job growth next year. A high proportion of workers will be needed in future to meet the increased pressure on publicly funded services from a growing share of elderly and young in the population.

This year and next, the structural deficit will widen while the economy is booming, and so fiscal policy will be somewhat procyclical. Structural net lending will also be well below even the proposed new surplus target of one-third of a percent of GDP. Given the strength of the economy and the need to move back towards the surplus target, it would have been more expedient to pursue a tighter policy. In this light, it would, at the very least, have been appropriate for new measures in the 2017 budget to be fully funded, reducing the need for tightening policy in 2018 and beyond when the economic climate is more uncertain.

Brexit to have limited effects on Swedish economy

The outcome of the Brexit vote will impact negatively on growth in the UK but have limited effects on Sweden. There is, however, a risk that the British decision to leave will erode confidence in the EU as an institution, which could have far more serious consequences.

For further information please contact:

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