Despite the buoyant economy the Institute said it expects Swedish inflation to remain low over the next two years.
The Institute had forecast last year that GDP would grow by 2.9 percent in 2006, but said both exports and the domestic economy have picked up strongly since then.
“Strong growth in other countries has continued to drive Swedish exports. At the same time, domestic demand has been increasing rapidly and on a broad front,” it said and predicted higher disposable income ahead.
“Rising employment, moderate but accelerating wage increases, low inflation and tax cuts will boost household disposable income to almost 5 percent in 2007”, it said.
It sees unemployment dropping to 5.4 pcercent in 2006 from 5.9 percent last year. In 2007 it sees unemployment at 5.0 percent, and in 2008 at 4.5 percent.
It also forecasts employment at 77.8 percent in 2006, 79.3 percent in 2007, and 80.3 percent in 2008.
“The government’s economic reforms will help increase both labour supply and demand for labour,” it said.
The strong employment will lead to solid public finances. The Institute forecasts net lending at 3.0 percent of GDP in 2006 and that it will remain virtually unchanged in 2007 and 2008 even though the budget is underfinanced by 11 billion kronor in 2007 and 6 billion kronor in 2008.
“The main reason why Sweden’s public finances will remain strong in 2008 is the favourable tendency of the labour market,” the Institute said.
Specifically, it said the new centre right government’s reforms will boost employment by 142,000 between 2006 and 2008.
Despite the strong economy, the Institute sees inflation remaining low over the next two years.
It said there has been little build up of underlying cost pressure in the economy and this, combined with the appreciation of the Swedish krona during 2006 and the continuing drop in the price of oil, will limit inflation increases in 2007 and 2008.
“Thus although wages will be rising faster and consumption will pick up, inflation will reach only 1.5 percent in Dec 2008.”
It sees the Consumer Price Index at 1.8 percent in 2006, 1.9 percent in 2007, and 2.2 percent in 2008.