Sweden: Scope to cut interest rates
The Swedish economy stalled in the first half of 2008 and is expected to weaken in the near term, as the effects of the international financial crisis take their toll. Consumption is projected to pick up late next year as the turmoil subsides and thanks to further income tax cuts and lower interest rates. Export growth should gradually recover as Sweden’s export markets expand again. Residential investment is expected to contract, with weaker house prices and confidence compounding unfavourable demographic patterns. Employment and labour force participation are both expected to decline, and labour productivity growth is expected to remain weak in the coming quarters.
With widening slack and lower commodity prices, the Riksbank, Sweden’s central bank, has scope to continue to cut interest rates. The announced fiscal easing in 2009 will support demand and is structured to contribute, over time, to improving supply.