Sweden: Country Economic Forecast: 16 Jan 2012

GDP is expected to have fallen sharply in 2011Q4, by 1.9%, largely due to a decline in export volumes; this is in contrast to Q3 when net exports made a substantial contribution to growth. Even so, GDP is likely to have grown 4.1% in 2011, well above the 1.6% expansion seen in the Eurozone. Industrial production remains on a downward trend and recent domestic and external new orders data provide no encouragement for the coming months. And though survey data may have bottomed out, they suggest weakness, while merchandise exports have continued to decline. As a result, we have lowered our forecast for 2012 GDP growth to just 0.5%, with the risks still on the downside unless the Eurozone crisis abates. At its next policy meeting on 16 February, we expect the Riksbank to lower its key rate by 25bp to 1.5%, prompted by much weaker domestic and global growth expectations as well as hopes of lower core inflation. CPI inflation eased to 2.3% in December. Core inflation is forecast to remain low, held down by subdued growth, modest increases in wages and the strong SEK. In addition, a lower interest rate path could dampen pressures on headline inflation. We expect inflation to average 1.6% in 2012 after 3% in 2011.