Expansionary budget drives economic boom

The expansionary budget will drive growth and employment next year. The
bright manufacturing outlook will also boost investment significantly, and exports
will become a strong growth engine. On the other hand, the upswing will be reined
in by a growing scarcity of labour with the right skills. Despite the shortage of
labour, wage growth will not pick up notably, and inflation, which has climbed
above 2 per cent in recent months, will fall back again next year. Such are the
results of the latest forecast from the National Institute of Economic Research
(NIER), published today.

The government’s heavily underfunded budget for 2018 is not considered to be consistent with the surplus target. Contractionary fiscal policy will therefore be required in 2019 for the target to be achieved. Funding increases of around SEK 30 billion will also be necessary if the public sector commitment to welfare is to be kept at 2018 levels.

The healthy economic climate has made it easier for immigrants and other groups with a weak position in the labour market to find work. The continued fall in unemployment in the forecast is mainly due to rising employment in the immigrant population. Further action to improve matching in the labour market will be needed to support this.

The expansionary budget will drive growth in employment in 2018, but only a small part of the SEK 40 billion in new measures can be viewed as structural in the sense of contributing to a permanent increase in employment. For the relatively low unemployment of recent years to become permanent or fall further, rather than climb back towards 7 per cent in the longer term as forecasted by the NIER, the functioning of the labour market will need to be improved.

Inflation only temporarily above 2 per cent

Although the scarcity of labour with the required skills will bring slightly higher wage growth next year, pay rises will still be relatively low when compared to previous economic booms and do not seem to push up inflation appreciably. The past year’s rise in inflation is partly a result of soaring energy prices, which are now set to rise much more slowly, and a stronger krona will put a damper on import prices. Inflation will not return to the target level on a more permanent basis until 2020. Therefore, the Riksbank will not begin to raise the repo rate until next autumn.

Read the report here: www.konj.se

For further information:

Ylva Hedén Westerdahl, Director of Forecasting, +46 8 453 5972
Sarah Hegardt Grant, Head of Communications, +46 8 453 5911