Bright outlook for Swedish economy

Sweden's economy will continue to grow at a healthy pace, according to a new prognosis from the OECD, but inflation poses a threat.

The Swedish economy grew by 4.7 percent last year – the highest growth level for more than 30 years. This year it will fall slightly to 4.3 percent, dropping again to 3.5 percent in 2008. Even that figure would be high by historical standards, and OECD economists said they saw few signs of weakness.

The government was praised for cutting taxes for low earners and for its reforms to the unemployment benefit system.

“The labour market reforms implemented this year will increase potential employment. Given the strength of the economy, it is an excellent time to pursue further labour supply reforms that will prolong the current expansion,” the report said.

Consumer spending will remain strong, financed by tax cuts, wage increases and increased employment levels.

The employment level will increase by 2 percent this year and 1 percent next year. The reports authors pointed to signs that difficulties recruiting workers are starting to spread from heavy industry to other sectors. This will increase inflation, according to the report.

“The first signs of this are already being seen in the agreements in the current pay round,” the report said, prediction that inflation will rise to 2 percent in 2008, despite rising interest rates. The report warned the government not to further stimulate the economy through fiscal policy.

Average growth rates for the OECD as a whole will be 2.7 percent both this year and next year, the report’s authors say. The differences in growth rates between the world’s largest economies have narrowed and are now the smallest for more than a decade.