Handelsbanken: Sweden can afford to invest more
There is a risk of long-term economic consequences from the corona crisis in the form of high unemployment and social exclusion in Sweden, despite the huge measures that have already been taken.
In its new macroeconomic report, Handelsbanken expects the Swedish government to increase emergency and stimulus measures to 4 percent of GDP, although public debt remains relatively low in international terms.
“Both fiscal policy and monetary policy should be as expansionary as possible,” says the Bank’s Chief Economist, Christina Nyman.
Many service sectors are in freefall and Sweden’s export-dependent manufacturing industries have been hard hit by large parts of the global economy being put into quarantine. There will be a huge decline in GDP in Q2 and the Swedish economy will enter a deep recession, with unemployment rising sharply and house prices falling.
We believe that unemployment will rise to over 10 percent during the autumn before gradually falling again. The younger generation and foreign-born citizens will feel the brunt of the impact and there is a clear risk that weak groups will be permanently locked out of the labour market.
Given the assumption that restrictions around the world will begin to be eased early in the summer, we expect growth in Sweden to pick up again in the third quarter of this year, although it will take several years before it returns to pre-crisis levels. The most exposed service sectors will receive a direct growth boost in the third quarter and will gradually start to re-employ staff as households return to more normal consumption patterns. There will also be a Q3 improvement for industrial companies as external demand increases from a low base. However, investments will remain subdued. For the construction sector, where lead times are longer and the direct effect of the shutdown is small, we expect production to be held back during the second half of the year; however, there will be an upturn in sales of residential properties and expectations about the future.
Nevertheless, the risk of a setback linked to the spread of the virus is creating uncertainty that will affect households’ and companies’ financial plans. All told, it means that the recovery will occur gradually and result in a higher unemployment rate than previously.
The in-depth analysis in our macroeconomic report lays out two alternative scenarios for Sweden: one assumes a quicker recovery, the other a more protracted recovery. The latter scenario sees the risk of serious effects on long-term economic trends.
We believe the government will introduce further emergency and stimulus measures that could take the total amount to 4 percent of GDP, compared to 2.7 percent during the financial crisis. Public debt would thereby rise from 35 percent of GDP before the corona-crisis to 45 percent of GDP, which is still relatively low in international terms. The Riksbank has implemented a number of measures to reduce the risk of disruptions to the financial system. Although an interest rate cut is not formally excluded, the Riksbank interprets that zero is the new lower limit for the repo rate. We therefore expect the repo rate to remain at zero throughout the forecast period.
For further information, please contact:
Christina Nyman, Chief Economist, +46 8 701 51 58, +46 70 778 77 65
Joel Holm, press officer, +46 73 058 30 21
Read more about alternative scenarios and policy measures in our in-depth articles.
For more information about Handelsbanken, see: www.handelsbanken.com
For the full report in Swedish, see Konjunkturprognos and in English, Global Macro Forecast
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