IMF warns Swedish economy 'vulnerable'

Sweden's economy is structurally sound but vulnerable because of its exposure to strained European economies which could impact its growth, the International Monetary Fund warned on Tuesday.

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Sweden has long secured strong growth thanks to its "robust policy frameworks and sustained reform initiatives," the IMF said in its country report, but "after many years of success, the outlook for growth is clouded."

Sweden's economic health "is closely tied to that of Europe given that the economy is very open and that two-thirds of exports go to Europe, as does much of the financial sector's external lending."

The IMF noted that as elsewhere in Europe, stresses in Sweden's banking system have risen since the autumn of 2011 and growth momentum has weakened, led down by exports.

"And though the krona is competitive now, it remains on an appreciating trend which, if continued, would compound the drag on growth," the report said.

Weak demand for exports was likely to continue, it predicted, forecasting growth of zero to one percent in 2012, "with activity regaining steam from mid-year."

"But near- and medium-term downside risks to these projections are significant, reflecting European fragilities."

Sweden's finance ministry in April slashed its growth forecast for 2012 from 1.3 percent to just 0.4 percent due to consequences from the Eurozone debt crisis.

The IMF also noted that while Sweden's direct exposures to strained eurozone economies were negligible, its financial system was large (5.5 times GDP) and the banking system was directly exposed to many other European economies.

Meanwhile, the Fund urged the country to make its tax structure more "growth friendly", mainly by better targeting tax and expenditure measures to support employment of vulnerable groups in society.

It suggested that deregulation of the housing rental market could reduce shortages and improve employment prospects, notably in big cities.