Swedish Finance Minister Anders Borg warned market turmoil could deepen over the second half of the year and pledged an expansive fiscal policy to hold back climbing unemployment in the largest Nordic economy.
“There’s a significant risk that things get messy in the financial markets this autumn, that money simply rushes out of weaker countries in Europe back home to the U.S.,” he said today to reporters in Visby, Sweden. “Then we’ll see renewed pressure on primarily Greece and Portugal and Spain. If those countries at the same time contribute toward political worry, well then things could be relatively messy during the autumn.”
The Swedish finance minister also today predicted higher unemployment this year while keeping estimates for economic growth little changed as the euro-area crisis weighs on a recovery. The economy will expand 1.3 percent this year and 2.1 percent in 2014, compared with April forecasts of 1.2 percent and 2.2 percent, the government said. Unemployment will rise to 8.4 percent this year, versus an 8.3 percent April forecast.
Sweden’s exports, which account for about half of its $540 billion economy, have fallen as the euro-area struggles with a recession. Ericsson AB, the world’s largest maker of mobile networks, and other companies have been forced to cut jobs to cope with falling demand.
Sweden is in a strong position to support the economic recovery, Borg said today even as downside risk dominates, citing concerns over the crisis in the euro area, Japan and the Chinese banking system.
Prime Minister Fredrik Reinfeldt yesterday outlined further measures for job creation to help companies hire and train unemployed youth. He also said the government, which is trailing in the polls ahead of next year’s election, will cut fees on unemployment insurance programs. It today revised its forecast for employment to grow 0.3 percent next year, after earlier predicting a decline.
The four-party coalition government is spending 25 billion kronor ($3.7 billion), or 0.7 percent of gross domestic product, this year on infrastructure, education, research and a lower corporate tax to boost growth and cut unemployment.
The government today predicted budget deficits of 1.3 percent this year and 0.8 percent next year. That’s narrower than the 1.6 percent and 1 percent shortfalls predicted in April. Consumer prices will rise 0.2 percent this year and 0.9 percent in 2014, the government also said.
Exporters have also been reeling from a strengthening currency, which rose 31 percent against the euro from the end of 2008 through the middle of March this year as investors poured funds into Sweden’s AAA rated bonds backed by one of Europe’s lowest public debt. The krona tumbled last month after the U.S. Federal Reserve signaled it was prepared to ease stimulus for the world’s largest economy.
Borg said today that the sell-off may not be over.
“Markets with thinner liquidity like for example the Scandinavian currencies tend to take a slightly bigger hit in messy environments,” he said. “If things get messier on the financial markets that could potentially hit the krona.”
Sweden’s central bank Governor Stefan Ingves said in an interview yesterday that the economic recovery now stands on a firmer footing than previously assessed. The Riksbank kept its repo rate unchanged at 1 percent for a third consecutive meeting after cutting it four times in a year through December 2011.