Unemployment Rising and Becoming Entrenched

Through increased uncertainty and weak exports, Sweden is being negatively affected by the government debt crisis in Europe. The year 2012 will thus be one of lacklustre growth. Absence of progress toward solutions for the crisis-ridden countries of the euro area is unnecessarily delaying recovery. There will be lasting negative effects on the Swedish economy as well, partly from many years of high unemployment. This is shown in the NIER’s forecast published today.

Swedish exports surged during autumn, largely in response to strong demand from emerging markets, and GDP has also continued to increase at a healthy pace. But the vigorous growth is only temporary. The escalation of the debt crisis early in August cast a shadow on sentiment in the economy. Since then both firms and consumers have become increasingly pessimistic. Somewhat surprisingly, domestic demand has slackened the most after the government debt crisis inEuropebecame acute. Since the weak tendency in other countries appears to be continuing, Swedish exports are also expected to recede. As a consequence, unemployment will start rising at the outset of 2012 and average about 8 percent in 2013. Until a sustainable solution to the government debt crisis has been found, the uncertainty will continue, and growth will remain weak.

Most probably, however, the government debt crisis will be resolved in an orderly manner; it is therefore assumed that the debt crisis will become less acute around the summer of 2012. Heightened uncertainty for a more substantial length of time would have a highly negative impact on the development of the macro economy, partly through lack of investment and a protracted period of higher unemployment.

Inflation will be low, and the riksbank will reduce its interest rate

With resource utilization weak both inSwedenand elsewhere, cost pressure will be modest. Not until 2016 will inflation, as measured by the CPI with a fixed home mortgage interest rate, approach 2 percent. The Riksbank is consequently expected to lower the repo rate to 0.75 percent during the spring of 2012. Interest rates faced by households, though, will be considerably higher. The abnormally wide gap between home mortgage interest rates and the Riksbank’s repo rate is a further reason for cutting the repo rate or taking other measures to reduce home mortgage interest rates. Moreover, an expansionary monetary policy is urgently needed to counter the prolonged negative effects on the labour market.

No help from fiscal policy

The budget bill for 2012 includes unfunded measures totalling SEK 15 billion. The NIER’s assessment is that during 2013–2016 fiscal policy will be adjusted so that the surplus target for general government finances will be met. The stance of fiscal policy will be slightly expansionary in 2012 and somewhat contractionary on average in 2013-2016.

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