OECD: Sweden must raise interest rates

The Organization for Economic Co-operation and Development, OECD, has reported that unemployment rates in Sweden are falling and GDP is rising. Interest rate rises will be needed to ensure continued growth, the organisation warns.

Swedish Gross Domestic Product will be 4.3 percent this year, only to fall to 3.6 percent next year and 2.9 percent in 2008.

Open unemployment in Sweden is expected to fall from 5.5 percent this year and 5.3 percent next year. It will continue to fall during 2007 and settle at 4.3 percent, according to the report. The OECD used Statistics Sweden’s measure for unemployment. This measure is not fully accepted by other international bodies such as Eurostat, as it does not include some groups such as students who are looking for work.

Other figures presented by OECD showed that economic growth in the western world has reached its peak this year. The overall GDP of OECD countries will increase by 3.2 percent this year and will then decrease by 2.5 percent and stay at 2.7 percent in 2008.

The Paris-based organisation praised the European Central Bank’s policy of interest rate rises to control inflation, and encouraged Sweden’s Riksbank to raise interest rates considerably, at least to a neutral level, to ensure continuous economic growth. A neutral level, according to Riksbanken, should be somewhere between 3.5 and 5.0 percent.

“This is how Riksbanken defines it. A more classical rule of thumb is to say that the neutral level should equal the inflation plus the average economic growth of the country in question,” says Peter Kaplan, interest analyst at Handelsbanken.

This would mean for Sweden, a raise in interest rates to about 4 or 5 percent.


Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s.