Sweden Boosts GDP Forecast to 4.5% a Month Before Parliamentary Elections

Sweden’s government raised its economic growth forecast and cut its estimate for unemployment less than a month before parliamentary elections.

The government increased this year’s growth forecast to 4.5 percent from a July 5 prediction of 3.3 percent and said the economy will expand 4 percent next year instead of 3.8 percent, according to presentation material handed out at a press conference today in Harpsund, south of the capital Stockholm.

“Gross domestic product growth is high,” Finance Minister Anders Borg said in the statement. “But the risks are still high, especially if one looks at the world around us where many countries have very big problems with their public finances. The government therefore wants to continue to be careful. Returning to surpluses is our highest priority to defend Sweden against new threats.”

The Riksbank on July 1 doubled its main lending rate to 0.5 percent from a record-low to help pace Sweden’s economic recovery after unemployment fell more than expected, most second-quarter company results exceeded analyst expectations and exports, which make up about half of the country’s output, rose for a seventh month in June. Sweden may be poised to deliver the European Union’s biggest economic rebound this year as GDP recovers from 2009’s 5.1 percent contraction.

Sweden’s krona recouped losses against the euro and was trading up 0.2 percent at 9.4349 at 5:04 p.m. in Stockholm. Earlier, the krona lost as much as 0.3 percent against Europe’s single currency.

September Election

Swedes go to the polls on Sept. 19. Prime Minister Fredrik Reinfeldt’s four-party government, which leads in most polls, has pledged to spend 4.2 billion kronor on welfare next year. The three-party opposition coalition wants to raise taxes on income and re-launch a wealth tax to outspend the government on welfare by at least 12 billion kronor in 2011 and 2012.

Borg said the government sees room for economic reforms worth as much as 40 billion kronor ($5.4 billion) over the next four years. Risks to the economy, stemming from the debt crisis in southern Europe and low household consumption in the U.S., means there is less room for tax cuts in coming years than during the previous four-year term, he said.

“We won’t be able to manage as big tax cuts for income earners as we have done during this term -- it will be significantly smaller amounts,” Borg said. “They will have to be made at a pace and to an extent that we secure surpluses.”

‘No Hurry’

The government is “in no hurry” to sell the state assets it has pledged to divest, including all or parts of its investments in Nordea Bank AB and TeliaSonera AB, he said. Any state asset sales will depend on developments on the stock markets.

Debt as a percentage of GDP will narrow to 32.2 percent in 2011 from 34.5 percent this year. The ratio will narrow further to 29.8 percent in 2012, 25.8 percent in 2013 and 21.1 percent in 2014, Borg said.

Unemployment will peak at an average 8.5 percent this year compared with an earlier forecast of 8.9 percent, before falling to 8 percent in 2011 and 7.4 percent in 2012, Borg said today.

GDP expanded an annual 3.7 percent in the second quarter after industrial production rose an annual 12 percent in June. Seasonally-adjusted unemployment fell to 8.1 percent in June, from 8.7 percent the previous month.

Improved Finances

Manufacturing confidence rose to its second highest level in almost a decade in June after second-quarter results from companies such as Volvo AB, the world’s second-largest truckmaker, and Atlas Copco AB, the world’s largest maker of air compressors, beat analyst expectations.

Sweden’s public finances will improve more quickly than predicted earlier. The government expects to post a budget deficit of 1.1 percent of gross domestic product this year, 0.2 percent in 2011 and a surplus of 1.1 percent in 2012, Borg said today. The surplus will widen to 2 percent in 2013, he said.

That compares with an earlier forecast for a 1.5 percent deficit this year, a 0.5 percent deficit in 2011 and a 0.7 percent surplus in 2012.

“Growth prospects of the Swedish economy are no doubt favorable, short term,” said Annika Winsth, chief economist at Nordea Bank AB in Stockholm. “However, the government is too optimistic on growth for 2011 as global growth will most likely slow down going forward, which will affect the Swedish economy as well. The government is, as we see it, too pessimistic on the budget balance.”

The yield on Sweden’s benchmark seven-year bond slipped 1 basis point, or 0.01 percentage point, to 2.12 percent.

Reinfeldt, who heads the largest government party, has ruled out any income tax cuts next year. He has cut them by 70 billion kronor, or 2.3 percent of GDP, since coming to power in 2006 to increase incentives to work since unemployed Swedes can collect up to 80 percent of their former salary.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

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