Swedish economy will peak this year but remain buoyed by external demand next year
The Swedish economy will peak this year, and GDP growth will slow next
year. Capacity utilisation in manufacturing is at historically high levels, and
housing investment is high as a share of GDP. A strong labour market is also
good for the households, who can expect wage growth to pick up somewhat. Next
year, the economy will slow slightly as growth in both manufacturing and housing
investment falls sharply, but external demand will limit the slowdown. Such are
the results of the latest forecast from the National Institute of Economic
Research (NIER), published today.
Although Swedish exports performed poorly in the first half of this year, firms’ responses to the Economic Tendency Survey suggest optimism in the export industry. Along with monthly data, this leads us to expect exports to grow more quickly in the second half of the year. As in Sweden, confidence indicators in the euro area as a whole are much higher than normal. Factors contributing to this optimism include the ECB’s continued low interest rate policy and slightly expansionary fiscal policy. Also good news for Sweden’s export industry is the strong investment climate in both the US and the euro area.
Employment growth fell slightly in the second quarter this year, and continued lower employment growth means that unemployment will bottom out just above 6 per cent next year. This indicates considerable matching problems in the labour market. Despite the strong economy, unemployment is still very high in the foreign-born population. High resource utilisation in the labour market and continued major shortages of labour with the desired skills mean that wage growth will continue to accelerate, leading to a slight increase in cost pressures on firms. To prevent CPIF inflation from rising too far, the Riksbank is expected to commence a series of policy rate hikes in February next year. The repo rate will then continue to be raised very gradually, and the inflation-adjusted repo rate will remain negative right through to the latter part of 2022. Our forecast is based on an assumption that fiscal policy next year will be largely neutral. Fiscal space for the coming four-year parliamentary term is estimated at around SEK 120 billion.
There are also risks to our forecast, including an escalating spiral of new barriers and retaliation in global trade policy, which would have adverse effects on the Swedish economy. In Europe, there is concern about Italy’s public finances. Another risk is a Brexit where the UK – one of Sweden’s key trading partners – leaves the customs union and internal market completely without a new deal. This would have significant effects on the Swedish economy, potentially exacerbated by knock-on effects from turbulence in financial markets.
Read the report here: www.konj.se
FOR FURTHER INFORMATION, PLEASE CONTACT:
Ylva Hedén Westerdahl, Director of Forecasting, +46 8 453 5972
Sarah Hegardt Grant, Head of Communications, +46 8 453 5911
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