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OECD warns of Sweden house price fall but a slightly positive outlook

Tuesday, 27 November 2012
The Swedish economy has lost growth momentum in the year, reflecting the uncertain external environment. Higher unemployment and lower household confidence has been evident.

The Swedish economy has lost growth momentum in the year, reflecting the uncertain external environment. Higher unemployment and lower household confidence has been evident, the Organisation of Economic Co operation and Development (OECD) warns in its latest report on the impact of the economic situation to the Swedish housing market.

The government should let the automatic stabilizers to operate fully and the Riksbank should cut rates further, according to the OECD in its autumn, Economic Outlook, so as to assist the Swedish housing sector from falling further.

OECD expects that Sweden's GDP will grow 1.2 percent in 2012, 1.9 percent in 2013, and 3.0 percent in the 2014. In the spring forecast, OECD looked at the GDP to grow by 0.6 percent in 2012 and by 2.8 percent in 2013.
From mid- 2013, growth is expected to accelerate over its potential level. The unemployment rate is expected to decline, even the remaining spare capacity should keep inflation low.

The OECD estimates that unemployment will reach 7.7 percent in 2012, 7.9 percent in 2013 and 7.6 percent 2014

The OECD notes that activity in the Swedish economy slowed slightly in 2012, and GDP growth has become gradually less broad-based.

Exports and domestic consumption has slowed while overstocking increased significantly. House prices and residential investment has continued to fall, indicating that the continued decline in home prices and investment may continue to be visible.

With increased labour supply and weak employment growth in the private sector, the unemployment rate rose, although employment growth in the private sector edge forward slightly. Wage growth, which was strong in the first half of 2012, is expected to slow down, which should support employment to some extent.

Action by the government to combat unemployment and to develop short-term work should also limit the rise in unemployment and the risk that the elevated unemployment becomes prolonged.

The budget for 2013 provides for measures, including a reduction in the corporate tax rate, would expect to boost growth, but judging by the changes in the cyclically adjusted budget balance, the fiscal stance wold be broadly neutral.

"The government should let the automatic stabilizers operate freely. Slower activity and the krona has kept inflation below target, which allowed the Riksbank to cut its key interest rate to 1.25 percent in September. With subdued inflationary pressures, the Riksbank should cut its policy rate further, "the OECD.

The OECD notes that growth is expected to slow in the short term as weaker demand from the euro area and the krona is holding back exports, while rising unemployment and falling house prices weighing on consumer confidence.

"The activity is expected to regain strength in the second half of 2013, when conditions in the labour and housing markets improve, increasing private consumption. With world trade and business confidence rebounds, so will exports and private investment to increase," the OECD.

The OECD adds that the Swedish macroeconomic policy stance is appropriate, but the scope for more stimulative monetary and fiscal policies should be used if growth proves to be weaker than expected. To avoid unemployment becoming entrenched, the government should continue its efforts to lower the relative labour cost for groups at risk.
by Scancomark.com Team

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