Sweden’s government and its central bank have room to do more to stimulate the slowing Nordic economy, the National Institute of Economic Research said.
“There is plenty of space if they want to conduct a more active fiscal policy” since Sweden’s “financial standing is so strong that it wouldn’t lead to any big problems,” Jesper Hansson, director of forecasting at NIER, said today at a press conference in Stockholm. “The Riksbank could lower the interest rate more since inflation is low.”
Economic growth in Sweden will slow to 0.7 percent this year from 3.9 percent in 2011 and consumer prices will rise 1.2 percent this year and 1.4 percent in 2013, which is below the central bank’s 2 percent target, NIER forecast today.
Sweden, which exports about half of its output, is suffering from weakening demand as the euro area economy shrinks amid austerity measures. Europe buys about 70 percent of Swedish exports.
The government should say that it’s “prepared to mainly give more state aid to local governments so that municipalities don’t already now start to plan for spending cuts” in case “things get much worse in Europe,” Hansson said.
Swedish unemployment unexpectedly rose to 8.1 percent last month, while a survey published today by NIER showed consumer confidence fell more than estimated this month. Unemployment will hold at an average 7.5 percent this year and rise to 7.6 percent in 2013, NIER predicted today.
“Companies will keep their staff and there will be a limited upturn in unemployment,” Hansson said. “Sweden is well-equipped to meet this weak development.”
A Riksbank survey found Swedish manufacturing companies are preparing to cut jobs amid waning export demand. Swedish manufacturing contracted in May for the first time this year, a survey by Swedbank AB indicated, and industrial production slumped for a third month in April.
“Weak resource utilization both in Sweden and abroad will keep a lid on salary increases and the development of raw material prices,” Hansson said.