Country Report Sweden October 2009

Outlook for 2010-11

• Despite making a recovery in the last year, the centre-right Alliance coalition government remains just behind the opposition in the opinion polls. Yet the general election, scheduled for September 2010, remains too close to call.
• The government will continue to focus on responding to the still-weak economy, but will also carry on working towards tax and welfare reforms. The public finances will go into deficit from 2009.
• Fading inventory reductions and an upturn in domestic and external demand will see the economy improve over 2010-11. Yet growth will remain weak, after the economy experiences its most severe contraction in decades in 2009.
• The Economist Intelligence Unit expects a modest improvement to begin in the second half of 2009, with the economy to grow by 1.3% and 1.6% in 2010 and 2011, respectively, after an estimated contraction of 4.4% in 2009.
• Following an estimated EU harmonised annual inflation rate of 1.8% in 2009, a stronger krona and falling unit labour costs will cause the inflation rate to decline to an average of 1.1% in 2010 followed by an increase to 1.5% in 2011.
• Given that the Swedish krona tends to move in line with cyclical developments, it is forecast to appreciate moderately over 2010-11, although there is a risk of another fall given Swedish banks' exposure to the Baltics.

Monthly review

• On 21st September the Alliance coalition government presented its fourth, and crucially, its last full budget before the next general election, due in September 2010. The budget will set the tone for the election campaign.
• The budget contains additional fiscal stimulus measures for both 2010 and 2011. The new measures will cost Skr32bn (US$4.6bn) in 2010 (equivalent to around 1% of GDP), and a further Skr24bn in 2011.
• The opposition parties criticised the budget, saying that it will add further to the general government budget deficit and that the government's additional income tax cuts are irresponsible in the current difficult economic climate.
• The Riksbank (the central bank) left the repo rate unchanged at 0.25% in early September. Higher underlying inflation is likely to see the repo rate increased earlier than the bank is currently suggesting, before late 2010.
• Second-quarter GDP was revised upwards in September. Sweden was shown to no longer be in recession in the second quarter, after four consecutive quarters of contraction.
• Despite showing some signs of improvement, the economy remains weak and many indicators have yet to show any upturn in economic activity.

Source: Country Report