Sweden: Country Economic Forecast: 16 Sep 2011

Following solid GDP growth in 2011H1, we expect the pace of expansion to slow sharply in H2. As a result, GDP growth is now forecast at 4.4% in 2011 before dipping to 1.8% in 2012. A number of indicators such as consumer confidence and PMI survey data are pointing to a slowdown. In addition, the turmoil in financial markets is ongoing and downside risks still exist from a greater deterioration of conditions in the Eurozone as well as a persistently strong SEK. On 7 September, the Riksbank left its key policy rate unchanged at 2%. Looking ahead, we expect further interest rate hikes to be postponed until mid 2012, and a lower interest rate path cannot be ruled out if global conditions continue to deteriorate. CPI inflation was unchanged in August. Core inflation is likely to remain held down somewhat by only modest wage growth and the strong SEK. In addition, upward pressure on headline inflation will ease due to interest rate hikes being put on hold. We forecast annual average inflation of 3.1% in 2011 and 2.4% in 2012. Meanwhile, the government postponed plans for another round of income tax cuts in 2012 on concerns that a slowdown would have a negative impact on tax revenues. The only positive feature in recent weeks has been the plunge in government bond yields. We expect a balanced budget this year before reaching the medium-term target (a surplus of 1% of GDP) by 2014.