Borg warns of looming recession in Sweden

Sweden's finance minister Anders Borg warned on Monday that the country may be headed toward a recession, while also saying the government is considering other ways to get banks to join its state-sponsored lending programme.

• Riksbank announces loans to Sweden's financial sector (7 Nov 08)
• Crisis to turn Sweden's budget surplus into deficit (4 Nov 08)
• Swedbank signs up to crisis fund (4 Nov 08)
• Borg rips Swedish banks over bonuses (31 Oct 08)

The first of two scenarios outlined by Borg assumes that the current financial crisis will deepen and points to economic growth of 0.1 percent next year and 2.0 percent in 2010.

In the government's previous forecast, published in its autumn budget bill in September, growth was seen at 1.3 percent in 2009 and 3.1 percent in the following year.

In the second scenario, under which the crisis is expected to be deeper and more protracted, the Swedish economy was expected to contract by 1.2 percent next year and grow 1.4 percent in 2010

Borg also said the government would consider other, unspecified measures if the country's banks did not join a state-sponsored guarantee scheme for new lending.

So far, only Swedbank has joined the programme while the other big Swedish banks -- Nordea, Handelsbanken and SEB -- have remained on the sidelines.

The government introduced the plan as part of a package of measures to improve financial stability.

Borg's comments came after Swedish Financial Markets Minister Mats Odell said in a radio interview over the weekend that Sweden would consider whether to make its new debt guarantee scheme for banks compulsory.

Borg also told a news conference the government was considering measures to support the vehicles industry.

“It’s clear that there are special hardships in the industry which we need to listen to,” he said.

Borg also characterized the current wave of job loss announcements as the worst since the country’s banking crisis in the early 1990s.

He estimated that unemployment may jump as high as 7.8 percent in 2009 and 9.2 percent in 2010.

Borg also forecasts the Riksbank will further reduce the benchmark repo rate to 3.5 percent following its next monetary policy meeting on December 16th.

According to Borg, Sweden’s interest rates will drop further in 2009 to between 2.25 and 2.75 percent, before bottoming out between 2.00 and 2.25 percent.

During the press conference, Borg said that the financial crisis, combined with worsening global economic conditions, will likely deepen and lengthen the economic downturn in Sweden.

Swedish exports are expected to decline and household consumption will also slow, according to Borg, who added that he thinks inflation has peaked and that inflation expectations are now falling.

AFX/TT/The Local