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Political Economy

Sweden to face more difficult economic years before the economy starts improving

Wednesday, 19 December 2012
It was the Swedish Finance minister, Anders Borg (M) who had accused the rest of the European troubled economies as being irresponsible. Now the Swedish economy is facing intense economic stagnation for the forth coming years though the Swedish public finances seem to remain buoyant than the rest of the troubled Euro-economies.

Sweden's National Institute of Economic Research (NIER) today said that it expects Sweden's central bank to cut its main interest rate further next year to help the economy overcome slowing growth stemming from falling demand for its exports.

This is despite the Riksbank surprisingly cutting its main repo rate on Tuesday to 1percent from 1.25 percent. The driver for that cut was the negative effects of weak developments in the euro area on the Swedish economy. This is because the Euro area usually vacuums at least one third of goods shipped from Sweden making the country fully exposed to the Euro zone crisis.

"It's not really a deep recession, but still a marked decline in how companies are hiring, "says NIER's Director, Mats Dillén.

NIER does not expect the government to stimulate the economy further in 2013, as the Social Democrats would want but Mats Dillén believes that the Riksbank should cut interest rates further in more sequences.
"We think we can go a couple of steps with the cuts and the sooner the better, "says Mats Dillén, adding that NIER expect low inflation for years to come.

Dillén point out that households' concern for their own unemployment is now rising according to the institute's survey. "It dampens consumption, resulting in negative effects on demand and employment."

Unemployment will rise to at most 8.5 percent in 2014, according to Mats Dillén. NIER recent forecast indicates that the annual average unemployment rate will rise to 8.3 percent in 2013 and 8.4 percent 2014.

This comes after the government was accused this morning on Swedish television of not helping people into the job market. The opposition, Social Democrats, accused the government of having an "irresponsible policy that is likely to trigger unemployment," the Social Democrat economic policy spokesperson, Magdalena Andersson said in a debate with the Minister for Finance, Anders Borg.
"The government is doing too little to address unemployment, which is now likely to go up over 8 percent. Of course it is a failure of government," said Magdalena Andersson, who said that the Social Democrats had instead wanted to focus on stimulating economic demand, for example through increased child benefit and tax cuts for pensioners.

Anders Borg counter argued that tax increases of between Skr30 and Skr50 million proposed by the Social Democrats and their Greens counterpart implies a squeeze on employers or job creators. It will strike primarily to jobs in the export sector and the domestic service industry and it's not a very bright proposal.
"The situation in Europe is extremely serious, and it hit the Swedish export industry. Child benefit is not an effective method to get the Germans, Greeks or Spaniards to consume more," said Anders Borg.
NIER said that during the first three quarters of 2012, Sweden's growth was better than the eurozone. GDP growth has averaged just over 0.6 percent per quarter, while GDP has fallen in the euro area over the past four quarters.

The comparatively strong growth in Sweden during the third quarter, however, was temporary and was partly due to increased government consumption and companies building up their inventories. Companies will start to reduce their stock for the fourth quarter. During the autumn, several forward-looking indicators, such as PMI indicator will drop to low levels, which portends a poorer growth in the Swedish economy.

NIER said gross domestic product growth would slow to 0.9 percent this year from 3.7 percent last year. Growth will remain at a low 0.8 percent next year, the NIER adds, before rising to 2.2 percent in 2014.
by Scancomark.com Team

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