Abstract
This 2008 Article IV Consultation highlights that Sweden’s economy has performed well, but is sensitive to global demand. The activity is now moderating. Exports have benefited from sound competitiveness, but euro area and U.S. slowing is causing them to decelerate. Private consumption growth has been relatively smooth, as employment and wages have picked up, and disposable income further benefited from tax cuts. Employment growth reached 2 percent, and the unemployment rate declined from 8 percent in 2005 to 6 percent in early 2008.
1. This statement provides information that has become available since the circulation of the staff report for the 2008 Article IV Consultation. It does not alter the thrust of the staff appraisal.
2. Inflation rose to 4.3 percent in June (higher than expected by the authorities, staff, and other analysts), and is now at its highest level since the mid-1990s.
3. Monetary policy. In response, the Riksbank raised its policy interest rate by 25 basis points to 4.5 percent, and raised its interest rate path forecast—i. e. signaling an upward bias for the near term. The minutes of the policy meeting reveal that some committee members would have preferred to retain a neutral stance, on expectations that the slowing economy will soon start to reduce inflation.
4. The labor force survey for June indicated that employment in persons and hours worked continued to increase year-on-year, but unemployment nevertheless ticked up noticeably, especially for younger workers.
5. Consumer and business confidence both declined in June based on concerns about employment prospects, the continued high energy and food prices, and the slowing external environment.
6. Banking developments. SEB and Swedbank, the dominant Swedish banks in the Baltics, surprised with profits on the upside in the second quarter of 2008. Nevertheless, their loan impairment is rising (from low levels) and funding conditions and market sentiment have weakened over time. Swedbank was downgraded by Moody’s, reflecting its large exposure to the slowing regional economies.