New Slump Expected to Follow Temporary Surge in Growth

The Swedish economy has shown a strong tendency for the last few quarters. But growth is now slackening, and it will take time for the labour market to recover. A strong krona is limiting inflationary pressure. The Riksbank is expected to lower the policy interest rate to 1 percent. This is shown in the NIER’s forecast, published today.

The Swedish economy has proven resilient so far. While many countries are showing lacklustre growth, GDP growth in Sweden in the second quarter was 1.4 percent compared to the previous quarter. The underlying tendency, however, is less solid than the GDP figures would suggest. For the full year 2012, GDP is forecast to increase by a modest 1.3 percent.

In view of the lacklustre tendency in other countries, together with a strengthening krona, economic recovery in Sweden will receive little help from exports. Growth will thus be driven to a greater extent by domestic demand, as has also been the case in recent years. The Government is expected to follow an expansionary fiscal policy in 2013. In the following years fiscal policy will be tightened somewhat so that the surplus target will be met.

Growth in 2012 and 2013 will be too weak for the labour market to improve. Instead, unemployment will rise to almost 8 percent at the end of 2013 and thereafter decrease. The weak economy and an appreciating krona will hold down inflationary pressure. In order to speed up recovery and make progress toward meeting the inflation target, monetary policy will need to be expansionary for a prolonged period. In the forecast the repo rate will be lowered to 1 percent before year-end.

Risk of an even stronger krona

Over the summer the krona has rapidly appreciated to a level that the NIER previously forecast would be reached gradually and no earlier than 2016. It is always difficult to predict the development of the exchange rate. In the NIER’s forecast, the exchange rate of the krona in coming years will be largely unchanged at the average level from August. But if the krona should continue appreciating, it might be necessary to lower the repo rate further.

For further information please contact:

Jesper Hansson, Director of Forecasting, +46-8-453 59 72 (also cell phone)
Sarah Hegardt Grant, Head of Communications, +46-8-453 59 11(also cell phone)