Growing output gap
The positive output gap in the Swedish economy will widen this year and peak in 2018, driven by stronger exports on the back of improved global demand. The increase in activity will lead to more people finding work and the unemployment rate will fall slightly further. Despite continued shortages of staff in many professions, inflation will move only slowly towards the target level, with the result that the Riksbank will not rush to raise the repo rate. Fiscal policy will be neutral next year, as there will be a limited scope for unfunded measures. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.
GDP growth in Sweden will not be quite as high this year as in the past two years, but the output gap will continue to widen. Growth is being driven largely by exports and investment, while government consumption is rising more slowly. Demand for labour is strong in both the business sector and the public sector. Substantial matching problems in the labour market mean that unemployment rate will nevertheless level off at 6.4 per cent next year.
The strong labour market has not brought higher wage growth, with low pay increases in the euro area being believed to have had a restraining effect on Swedish wage formation. Due partly to this low wage growth, inflation will not reach 2 per cent until 2020. This presents a challenge for the Riksbank, which will not begin to raise the repo rate until autumn 2018.
Public finances have improved with the economy in recent years. The NIER’s forecast is based on fiscal policy being designed such that the new surplus target is met in 2019. It is therefore assumed that structural net lending will rise to 0.5 per cent of potential GDP next year. In this case, there will be scope for unfunded measures of around SEK 9 billion in the 2018 budget.
Read the report here: www.konj.se
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