Sweden Cuts 2014 GDP Forecast as Krona Adds to Crisis Pain

Sweden cut its economic growth forecast for 2014 after a strong krona added to the effect of Europe’s debt crisis to undermine demand for exports.

The largest Nordic economy will expand 2.2 percent next year, compared with a December estimate of 3 percent, Finance Minister Anders Borg said in Stockholm today. Gross domestic product will grow 1.2 percent this year, he said. The economy grew 0.8 percent in 2012, according to the latest official figures.

“We still have a serious situation with the crisis in Europe,” Borg told reporters at the Finance Ministry today. “For Sweden, this means a slow and protracted recovery, both during 2013 and 2014.”

AAA rated Sweden emerged as a haven from Europe’s debt crisis last year, only to watch its currency appreciate more than its developed-world peers over the past 12 months, hurting exporters and killing jobs. The unemployment rate will rise to an average of 8.4 percent in 2014, Borg estimates -- that’s the highest rate in Scandinavia.

The krona has gained 7.9 percent on a correlation-weighted basis against a basket of nine other developed-world currencies tracked by Bloomberg over the past 12 months. It’s up about 6 percent against the euro over the same period.

Krona Slides

The krona lost as much as 0.4 percent before trading at 8.3512 per euro as of 10:36 a.m. local time. Versus the dollar, it sank 0.6 percent to 6.3938.

The yield on Sweden’s benchmark two-year note was little changed at 0.971 percent. Its 10-year yield eased half a basis point to 1.68 percent.

Sluggish economic growth means the government of Prime Minister Fredrik Reinfeldt will post a budget deficit in both 2013 and 2014, Borg said. The shortfall will reach 1.6 percent of GDP this year and narrow to 1 percent in 2014. Sweden’s budget will be in balance in 2015, he said.

“There is continued big uncertainty and the risks are more on the downside than on the upside,” Borg said. “There are significant uncertainties in Europe and there is a risk that the situation will worsen.”

Sweden, which generates half its economic output from exports, of which 70 percent are destined for Europe, will lose more jobs next year as a result of weak demand in the euro area, Borg said. He said the crisis in the euro area represents a bigger risk to Sweden than the strong krona.

Debt Outlook

The government isn’t planning additional measures to reduce debt as it focuses on creating jobs, Borg also said. While debt should come down “at some point,” the government can’t cut its borrowing when unemployment is still high, he said.

Sweden’s total debt burden, including borrowing by municipalities, will reach 42 percent of GDP this year, the Finance Ministry said today. Debt will ease to 41.8 percent of GDP next year and 39.5 percent in 2015, it said. Debt by that measure was 38.2 percent in 2012.

Hans Lindblad, the head of Sweden’s debt office, said in an interview last week that even a debt load of 30 percent to GDP is no guarantee against risks. Especially nations with large financial industries should target lower debt levels, he said.

Crisis Buffers

Borg said today governments need to ensure the they have large enough buffers to stay within the EU’s 60 percent debt limit even after suffering a potential banking crisis.

The ruling four-party coalition said last week said it will add about 3 billion kronor to education and infrastructure spending this year and next to cut the jobless rate. It also proposed changes to the country’s taxation system to make it more profitable for smaller companies to hire and expand.

The government has cut income taxes by 70 billion kronor ($11 billion), or about 2 percent of the economy, lowered unemployment and sickness benefits, and abolished a levy on wealth to encourage entrepreneurship and to get more people to join the workforce. In January, the government cut the corporate tax rate to 22 percent, following a cut to 26.3 percent from 28 percent in 2009.

Sweden’s central bank has lowered its main lending rate four times since December 2011 to boost growth. The rate is 1 percent, a quarter of a percentage point higher than the benchmark set by the European Central Bank for the euro area.

The government said today it predicts Sweden’s repo rate will be 1 percent through the end of 2014, before rising to 1.75 percent by the end of 2015.

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