2014-12-18

Swedish Economy December 2014

Weak euro area hampers Swedish growth

Swedish exports are growing more slowly than normal and will not be the same engine they have been in previous recoveries. It is primarily in the euro countries that demand for Swedish goods and services is weak. As a result, Swedish growth is not taking off.

Should the situation deteriorate, greater responsibility for stabilisation will fall on fiscal policy, as monetary policy has limited scope to provide further support. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.

GDP in the euro area has virtually stagnated in the past two quarters. This drag from the euro area is more than can be offset by the US and the UK, which are well ahead in the business cycle.

Swedish export growth will gradually recover from 2.4 per cent this year to around 5 per cent in 2016 and 2017. This, however, is not especially strong by historical standards.

With this two-speed global economy, domestic demand has become increasingly important. Private and public consumption have been propped up by expansionary fiscal policy and low interest rates.

We are now entering a situation where monetary policy has less leeway with the repo rate down at zero. Monetary policy therefore has limited scope to provide further support should economic developments turn out worse than expected. Responsibility for stabilisation will therefore rest more with fiscal policy.

Fiscal policy will be contractionary in 2015 due to the “krona for krona" principle (all new spending must be fully funded with tax revenue). However, meeting the surplus target for net lending of 1 per cent of GDP over a business cycle would require significantly greater fiscal tightening in the coming years and would significantly delay economic recovery.

The NIER does not believe sharp fiscal tightening to be a likely or appropriate stabilisation policy in the current situation.

Despite significant deficits in net lending, public finances are fundamentally in good shape, and the government debt is low. Should the economic situation deteriorate, temporary fiscal stimuli could therefore be considered.

Selected Indicators

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

2019

 

GDP, market price

1.3

1.7

2.3

3.1

2.7

2.3

1.7

GDP, calendar-adjusted

1.3

1.9

2.0

2.8

2.9

2.4

1.7

GDP, world-wide

3.2

3.4

3.8

3.9

3.9

3.9

3.9

Current account (1)

6.8

5.7

5.6

5.5

4.9

4.4

3.9

Hours worked (2)

0.3

1.9

1.0

1.3

1.5

1.2

0.5

Employment

1.0

1.5

1.2

1.2

1.2

1.1

0.5

Unemployment (3)

8.0

7.9

7.7

7.4

7.0

6.6

6.6

Labour market gap (4)

–1.9

–1.1

–1.1

–0.8

–0.3

0.1

0.0

Output gap (5)

–2.2

–1.8

–1.5

–0.8

0.0

0.2

0.0

Hourly earnings (6)

2.5

3.0

2.9

3.0

2.9

3.0

3.2

Labour cost per hour, business sector (2)

1.8

1.8

2.5

3.0

2.9

3.0

3.2

Productivity, business sector (2)

1.7

0.3

1.3

2.0

1.9

1.5

1.7

CPI

0.0

–0.2

0.1

1.0

2.3

2.7

2.8

CPIF

0.9

0.5

0.8

1.3

1.7

1.9

2.1

Repo rate (7,8)

0.75

0.00

0.00

0.25

0.75

1.25

1.75

Interest rate, 10-year government bond (7)

2.1

1.7

1.4

2.1

2.7

3.3

3.9

Index for the Swedish krona (KIX) (9)

103.0

106.7

107.0

103.3

99.8

99.3

99.3

General government net lending (1)

–1.4

–2.2

–1.8

–1.0

–0.5

0.0

0.2

Cyclically adjusted net lending (10)

–0.7

–1.6

–1.2

–0.5

–0.4

–0.1

0.2

General government consolidated gross debt (Maastricht debt) (1)

38.6

41.0

41.6

40.8

39.8

38.7

37.6

Percentage changes unless otherwise stated

Sources: Statistics Sweden, National Mediation Office and NIER.
Footnotes:

  1. Percent of GDP
  2. Calendar-adjusted
  3. Percent of labour force
  4. Difference between actual and potential hours worked as percent of potential hours worked
  5. Difference between actual and potential GDP as percentage of potential GDP
  6. According to Short-term Wage Statistics
  7. Percent
  8. At year-end
  9. Index 1992-11-18=100
  10. Percent of potential GDP

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