Swedbank Economic Outlook: Autumn darkness surrounds the recovery – but there is scope for growth

The outlook for economic recovery has worsened during the autumn. The increasing spread of the coronavirus is causing a slowdown in the economy. The recovery has been uneven, and many sectors continue to struggle. However, Sweden’s public finances remain strong, which means that continued expansionary fiscal policy and structural reforms are possible, according to the latest Swedbank Economic Outlook.

The COVID-19 pandemic continues to determine the course of economic development. Despite a strong recovery during the summer, global GDP is expected to decline by 4 per cent this year. Against the background of a rise in infections, there are increasing signs of an economic slowdown in many countries as renewed restrictions are introduced.

“The pace of the global recovery is now expected to be slower and more uneven next year, compared to what we forecasted in August,” says Mattias Persson, Chief Economist at Swedbank.

We are now seeing the emergence of a two-tier development in the economy, with major differences between sectors. Generally, the export- and manufacturing industry has recovered strongly, whereas the service sector remains under pressure. Overall, Swedbank has lowered our economic growth forecast for the global economy in 2021. All countries in Europe will be affected.

Worsening outlook – but the Swedish economic recovery is continuing
Following a sharp decline during the spring, the Swedish economy recovered more forcefully than expected during the third quarter. Now that the spread of coronavirus has picked up again, there are signs that the recovery is faltering. The near-term forecast for Swedish economic growth has been lowered, but the worst is behind us. We expect the recovery to pick up speed during the latter part of 2021 and 2022, as support from fiscal and monetary policy will continue and the pandemic is expected to ease.

“Sweden may need to further increase its support for its vulnerable service sector, and it is time to consider structural economic reforms similar to those imposed after the crisis in the 1990s and the financial crisis in 2008,” Mattias Persson says.

Continued support from economic policy is essential
The Swedish government presented fiscal measures during the spring to ease the effects of the crisis and followed up with an expansionary budget for 2021. Despite this, we expect further support measures of SEK 25 billion for 2021 and SEK 60 billion for 2022. Public debt is expected to increase from 35 per cent of GDP in 2019 to just over 42 per cent in 2021. This is a low level of indebtedness compared to international public debt levels.

“Our assessment is that the scope for fiscal policy remains extensive and that further measures are needed. Apart from supporting sectors in crisis, fiscal policy could also focus on structural reform in the labour market – including the participation of foreign-born residents – and on demographic challenges or the green transition,” says Mattias Persson.

The Riksbank is expected to leave the repo rate unchanged during the entire forecasting period, despite continued challenges in reaching the inflation target. Bond purchases are expected to continue according to plan.

“The Riksbank needs to continue with its expansionary monetary policy, and it’s likely that it will extend its asset purchases until the second half of 2021,” Mattias Persson says.

Link to the report: www.swedbank.com/seo  

For appendix with tables, please see attached pdf.  

Contact:

Mattias Persson, Chief Economist, Swedbank, +46 73 094 29 56
Amanda Billner, Press Manager, Swedbank, +46 73 045 11 68

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