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Sweden should prepare for a stagnant economy and repo rate fall to 0.5 percent by the summer: Danke Bank analysis

Monday, 09 January 2012
Sweden's economy will shrink this year, forcing both the Swedish central bank or the Riksbank and the government to change financial course. By summer, the repo rate should be down to 0.50 percent according to Danske Bank in a recent Swedish macro economic outlook.

Weak demand for Swedish exports, tight financial markets and buoyant investment makes 2012 a bad year for the Swedish economy, according to an assessment made by the Danish banking giant Danske Bank in its the first economic forecast of the Swedish economy.

"The small open Swedish economy will be severely punished in 2012 and GDP will shrink by 1 percent, "writes the bank.


This year's recession, which is not calendar-adjusted, is expected to see a decline in GDP by 1.4 percent, followed by a meagre rise in 2013 with growth of 1.5 percent, according to Danike bank forecast. The weak growth is expected to cripple the labour market.

"By the end of 2012 unemployment will go over 8.5 percent, compared to today's level of 7.5 percent. In 2013, we expect the labour market conditions to continue to deteriorate, albeit at a slower pace, and unemployment is expected to level off at 9.0 percent, "writes Danske bank.

The shrinking economy and growing unemployment makes inflationary pressures non-existent. The Riksbank will be expected to lower the policy rate substantially. By summer, the repo rate should be down to 0.5 percent, the bank forecasts. This compares with the current level of 1.75 percent.

Also the government and the Minister for Finance, Anders Borg, are expected to take vigorous action to mitigate the effects of the weak economy. Anders Borg is told to hold back on spending so as to prepare for a stagnant economy. The time has come, according to Danske.

"We expect the fiscal stimulus of about 1 percent of GDP in both 2012 and 2013, "writes Danske.
That would mean over Skr30 billion per year in unfunded reforms.
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