Country Report Sweden April 2009

Summary

Despite a stronger showing in opinion polls for the four centre-right governing parties in recent months, the road towards a full recovery by the next general election, scheduled for September 2010, will still be difficult.
The government will focus on responding to the economic downturn, but will also continue to work towards tax and welfare reforms. The public finances will go into deficit from 2009.
Following recession in 2008, Sweden is heading for its most severe contraction in 2009 for decades. Contracting domestic and external demand will last until at least the end of 2009, although this could be delayed.
The Economist Intelligence Unit has lowered its real GDP forecast for 2009 to -5.3%, after a fall of 0.5% in 2008. We expect only a modest recovery to begin during the latter part of 2010, but the economy will still contract by 0.8%.
As a result of easing economic activity, the EU harmonised measure of inflation is expected to fall from an average of 3.3% in 2008 to 0.3% in 2009, followed by a slight rise to 1% in 2010.
The Swedish krona will continue to weaken against the US dollar for most of 2009, before gradually making a moderate recovery.

Talks between the main employers' and employees' associations on a major revision to the voluntary labour market agreement that has governed Sweden's labour relations for seven decades collapsed in mid-March.
As expected, a government defence bill presented in mid-March does not urge a reassessment of the downsizing of military capacity, but does set out plans to improve Sweden's capacity to respond quickly to external threats.
In late March the government announced that it would ban bonuses and variable compensation for executives at state-owned companies. It has also urged private company boards to do the same.
As part of the energy and climate bills that will be presented to parliament shortly (to be debated in mid-June), the government is planning a significant change in vehicle taxation that is aimed at reducing carbon dioxide emissions.
The wide discrepancy between the headline and underlying inflation rate may give the Riksbank (the central bank) some cause for concern, but the rapidly contracting economy will continue to outweigh this for the time being.
February statistics show that the labour market experienced a significant fall in employment and an unexpectedly large increase in the unemployment rate (from 6% in February 2008 to 7.9% in the same month of this year).

Source: Country Report