25 Nov 2008 10:00

New Nordic Outlook: Deeper recession - despite aggressive stimulus policies

The downturn in the Swedish economy is continuing at a rapid pace. Next year GDP will fall by 1.3 per cent, and economic weakness will persist in 2010. The recession will have a growing impact on the labour market. The job market will shrink by nearly 150,000 people altogether, and unemployment will climb to nearly 10 per cent by the end of 2010. The Riksbank will cut its repo rate at least to 1.50 per cent next summer. The government will implement additional fiscal stimulus packages, and by 2010 Sweden's annual surpluses in public sector finances will have turned into a deficit equivalent to 3.5 per cent of GDP.   
The consolidation of the global credit market will dominate economic developments in the next couple of years. The global economy will suffer on a broad front from tighter lending practices, falling asset prices, increased saving and reduced risk-taking. The United States will undergo one of its deepest recession in modern times. Unemployment will climb to 9 per cent. Lower resource utilisation will squeeze wages and prices. We expect a sharply declining Consumer Price Index for a while, and the battle against unemployment and falling prices will be the most important economic policy tasks. The Federal Reserve will cut its key interest rate one more time to 0.50 per cent before the end of 2008 and maintain this rate during both 2009 and 2010. The new Barack Obama administration will launch a large stimulus package, which will help soften the downward economic spiral, but this policy will meanwhile lead to major strains in public sector finances.
Economic developments in Western Europe are closely following American trends. Higher household savings and balanced foreign trade points towards somewhat greater resilience than in the US, but on the other hand, home prices in many European countries are at least as excessive as in the US. Economic stimulus measures will also be less aggressive in Europe. The European Central Bank will continue cutting its refi rate, which will reach 1 per cent next autumn.  
Having rebounded, the US dollar will maintain its strength for the next six months in an environment of weak risk appetite and de-leveraging. After that, underlying forces will gain the upper hand and the euro will rebound to USD 1.40 by the end of 2010. Bond yields will fall further, in the wake of sluggish growth and lower key interest rates. German ten-year government bond yields will bottom out at 2.7 per cent next summer and American ones will dip even lower. After that, long-term yields will turn slightly upward, among other things because of very large central government borrowing requirements in many countries.   
The Swedish economy will follow the downward path of the synchronised international recession. Next year GDP will fall by 1.3 per cent, adjusted for work days, and 2010 will be another weak year. Average annual growth will be 0.2 per cent in 2008-2010, or significantly weaker than during the slowdown just after the millennium shift, but substantially better than during the crisis of the early 1990s. The labour market downturn has accelerated in recent months, and unemployment is clearly on the way up. Calculated as annual averages, the jobless rate will climb from 6.2 per cent this year to 9.4 per cent in 2010.
Inflation has peaked and will fall sharply in the near future. As early as this coming spring, inflation will be below the Riksbank's target. A combination of recession and financial stress will help persuade the Riksbank to continue cutting its key interest rate at a rapid pace. By next summer the repo rate will be 1.50 per cent. The Swedish krona will continue to weaken for another while, but then it will recover as the financial situation gradually normalises.
The role of fiscal stimulus in stabilisation policy will become increasingly important in a situation characterised by a deep economic downturn and tighter credit. We expect further stimulus packages in Sweden equivalent to SEK 50 billion. This, combined with weak economic conditions, will lead to a rapid deterioration of public sector finances. The government will now face a difficult balancing act when it comes to interpreting the official budget target. We will probably see an adjustment to less ambitious budget targets in a slightly longer perspective.
Key figures, Swedish economy 
Year-on-year percentage change        
GDP, adjusted for work days
GDP, actual
Unemployment (%, ILO definition)
CPI inflation
Public financial saving (% of GDP)
Repo rate (December)
Exchange rate, EUR/SEK (December)
SEB is a North European financial group serving some 400,000 corporate customers and institutions and five million private individuals. SEB offers universal banking services in Sweden, Germany and the Baltic countries - Estonia, Latvia and Lithuania. It also has local presence in the other Nordic countries, Poland, Ukraine and Russia and a global presence through its international network in another ten countries. On 30 September 2008, the Group's total assets amounted to SEK 2,416bn (~EUR 237bn) while its assets under management totalled SEK 1,244bn (~EUR 122bn).The Group has about 22,000 employees. Read more about SEB at www.sebgroup.com.
For further information, please contact:
Robert Bergqvist, telephone +46 8 506 230 16
Håkan Frisén, +46 8 763 80 67
Mattias Bruer, +46 8 763 85 07
Bo Enegren, +46 8 763 85 94
Mikael Johansson, +46 8 763 80 93
Tomas Lindström, +46 8 763 82 97
Press contact: Elisabeth Lennhede, +46 70 763 99 16, elisabeth.lennhede@seb.se