Pause in Economic Recovery

The recovery of the world economy has slowed to a halt, and so has economic recovery in Sweden. In the latter months of 2012, recovery will resume, but no decrease in unemployment is expected until 2013. That assessment is based on the assumption of an unchanged repo rate for the next year. There is also a margin for an expansionary fiscal policy. These developments are shown in the NIER’s latest forecast, published today.

Sweden has been in a recession since 2008–2009, when GDP fell sharply. The recovery accelerated in 2010, but during the past summer it began rapidly losing momentum. Financial turbulence swept in from abroad, sending stock prices plummeting and adding to uncertainty. Concerned households and businesses are postponing consumption and investment decisions. Growth is consequently slowing, and unemployment will level out at around 7.5 percent in 2012.

Given the lacklustre development of the international economy, recovery in Sweden will need boosting from expansionary monetary and fiscal policies. It is assumed in the forecast that monetary policy will be expansionary, with the repo rate remaining at 2.0 percent until next summer before being raised gradually to about 3.5 percent in 2015. The NIER’s assessment is that there will be a total margin of some SEK 65 billion for unfunded fiscal policy reforms in 2012-2015. In view of the weaker tendency of the economy in the near future, it would be appropriate to use SEK 30 billion of the reform margin as early as 2012. Among other things, this step would improve the situation on the labour market. But in the forecast for 2012, only SEK 10 billion will be devoted to unfunded measures.

The financial turbulence is expected to subside during the autumn, and confidence in the future will gradually return in 2012. When consumer and business confidence in the economic future has been restored, growth will pick up again. Domestically, conditions favour strong growth. For example, household saving is high by historical standards, providing considerable scope for increases in consumption once uncertainty has subsided. Growth inSweden, however, will be curtailed by the sluggish pace of recovery in countries that are important markets for Swedish exports.

Developments may prove substantially more adverse

There is a significant risk that the debt crisis in the euro zone will deepen and prove more severe than in the forecast. In an alternative scenario, there is heightened uncertainty throughout 2012, and the problems spread to the banking sector of the euro area. In this scenario, Swedish GDP growth is much lower in 2012-2013, and unemployment rises above 9 percent.

For further information:

Jesper Hansson, Head of Forecasting +46-8-453 59 72

Sarah Hegardt Grant, Head of Communications +46-8-453 59 11, +46-70-267 80 41