The country should keep its fiscal policy on a sustainable track and continue tax reforms to promote growth, the OECD said in a report.
“The ample fiscal surplus and relatively low public debt allow for some policy easing, but the fiscal framework should be strengthened by linking targets more clearly to long-term considerations,” it said. “The challenge now is to continue with tax cuts.”
Last week the OECD, in its twice-yearly economic outlook, forecast Swedish GDP growth of 0.8 percent this year, no growth in 2009 and 2.2 percent in 2010. That was better than the outlook for the entire OECD during the next two years.
Robert Ford, deputy director of the OECD Economics Department, said Sweden had better underlying growth than most other countries but risks were on the downside — the main risk being the financial sector overseas.
Another worry was Sweden’s exposure to the troubled motor industry. Struggling US auto makers Ford and General Motors both want to sell their Swedish subsidiaries. Ford owns Volvo Cars and GM is the parent of Saab Automobile.
“It’s a big downside risk for the Swedish economy,” Ford said in an interview, referring to uncertainty over Volvo and Saab. Sweden should avoid buying all or parts of the car makers, even at the risk of letting them fail, he added.
“They shouldn’t really support them,” OECD’s Ford said, adding that lending money would also be risky business. “A more efficient use of its money, than to try to keep specific companies going, is to reflate the economy generally. If people start buying Saabs again, all the better,” he said.
The OECD also urged Sweden to take its biggest-ever privatization scheme further, once the effects of the global financial crisis were out of the way.
“Obviously the timing is not good right now. I don’t think they’ll be able to sell things now,” Ford said.
Ford expected Sweden’s key repo rate to fall to around 2 percent by the year-end. “And there is scope for more after that.”
The Riksbank is widely expected to announce a cut on Thursday of 1 percentage point, or possibly more. Rates are now at 3.75 percent.
Ford said the government should be ready to stimulate private consumption further in 2009 while waiting for monetary policy easing to trickle down and have an effect on consumption.
“It is crucial at this point to stimulate demand rather than supply,” he said. “To increase demand is what you want for 2009.”
Ford said Sweden could follow the US example with stimulus measures of its own or by temporarily cutting value-added taxes. “That’s what’s going to sustain GDP.”