Business and consumer optimism fuels economic growth
Business and consumer confidence improved during the autumn both in Sweden and in the US and the euro area. This will help the Swedish economy to strengthen further and unemployment to fall in 2017 and 2018. Persistently weak economic conditions in Europe will, however, contribute to relatively slow wage growth and to inflation in Sweden not hitting 2 per cent until 2020. The Riksbank will not therefore begin to raise the repo rate until the third quarter of 2018. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.
Economic growth was comparatively strong during the autumn in Europe and the US. Many confidence indicators have moved above their historical averages, as in Sweden. This suggests that the global economy will continue to strengthen in the near term. Economic recovery in Europe nevertheless remains sluggish, which will contribute to inflation remaining below target over the next couple of years and to a continuation of the ECB’s low interest rate policy. In the US, on the other hand, the Federal Reserve has commenced a series of rate hikes.
In Sweden, investment has risen very rapidly in recent years, due partly to strong growth in homebuilding. Government consumption has also soared as a result of the refugee crisis. Both residential construction and government consumption are now expected to grow more slowly, however, contributing to slower economic growth in 2017 and 2018. Exports and household consumption will take over as the main growth drivers.
The continued strengthening of the economy means that demand for labour will be high. The business sector currently has substantial recruitment needs, and shortages of labour with the right skills have risen to the levels seen before the financial crisis. Two out of three employers in the government sector are reporting problems sourcing staff. The growing scarcity of labour with the right skills will contribute to slightly slower employment growth in 2017 and 2018.
Weak krona not enough to return inflation to target
Despite falling unemployment, the central pay settlements for 2017 are not expected to be higher than the previous two rounds. All in all, hourly earnings are expected to climb around 3 per cent annually in 2017 and 2018. This low wage growth in relation to the strong economy will play a role in the Riksbank failing to hit its inflation target over the next three years. This is despite signals during the autumn that the repo rate will remain negative for a long period and then rise only slowly. The Riksbank’s expansionary monetary policy has had an impact through a weaker krona and so higher imported inflation, but this will not be enough to return inflation to the 2 per cent target level. General government net lending will be positive for the next couple of years, but fiscal policy will need to be tight if the new surplus target is to be met in 2019.
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