The Swedish Economy: Signs of Improvement at the End of a Gloomy Year

Sweden is in a severe economic slump, and GDP will drop by 4.4 percent in 2009. But higher exports and rising consumption will improve the situation, and growth will be 2.7 percent in 2010 and 3.3 per-cent in 2011, as is shown in the NIER’s report, The Swedish Economy, published today.

Sweden’s GDP has gradually begun to increase. The economy has passed its low point largely because of expansionary fiscal and monetary policies, including tax cuts and low interest rates. Another positive factor is that world trade is recovering, entailing increased exports. For the next few years, the Swedish economy is expected to continue strengthening. One principal driving force will be the improvement of the international economy. But since global recovery will take time and the Swedish krona is appreciating, exports will not boost growth as much as in previous eco-nomic upturns. Instead, rising consumption will play a larger part. Fuelled by low interest rates and tax cuts, household disposable income will be up by more than 3 percent in 2009 and will continue rising in 2010 and 2011. Households will also increase consumption by reducing their saving, which has been at historically high levels. The expansionary fiscal policy in the forecast, including additional appropria-tions to local government, will also contribute to a strong rise in general government consumption in 2010. After the dramatic plunge in demand and output at the onset of the crisis, it will take a long time for the economy to recover, despite a highly expansionary economic policy. The Swedish economy is not expected to be in balance again until 2014. CRISIS TO HAVE LASTING NEGATIVE EFFECTS ON THE ECONOMY The decrease in employment due to the crisis has been concentrated in manufacturing, but the services sector has been affected as well. In the general government sector, employment will increase in both 2010 and 2011, principally because of an expansionary fiscal policy. But total employment will continue to fall in 2010, though the rate of decline will lessen substantially during the year. In 2011 employment will again be rising. Unemployment will exceed 10 percent for the next couple of years. Many of those who lose their jobs in times of high unemployment will not return to the labour market. As a consequence, potential em-ployment, or the level of employment compatible with a balanced economy, decreases. The assessment is that the present crisis will reduce potential employment by about 70 000 persons. There will also be lasting negative effects on potential productivity. LOW INFLATION IN 2010 AND 2011 In view of the weak labour market, earnings in the business sector will increase by 2.3 percent in 2010 and by 2.2 percent in 2011. As cost pressure is decreasing and resource utilization is low, inflation will be slight in the period ahead. In terms of the CPI with a constant interest rate (the CPIF), inflation is expected to recede to 1 percent in both 2010 and 2011. With low inflationary pressure and low resource utilization in the economy, the Riksbank will continue to follow a highly expansionary monetary policy. In the NIER’s forecast, it is assumed that the Riks-bank will maintain the repo rate at 0.25 percent until September 2010, when a period of increases in the repo rate will begin. At the end of 2011, the repo rate will reach 1.75 percent. Read the summary at www.konj.se/English