KI argued in its report on the Swedish economy that the situation is as bad as the banking crisis in the beginning of the 1990s.
Unemployment is forecast to climb to 10.7 percent in 2010 with 250,000 jobs lost.
With the manufacturing industry set to be hardest hit and exports forecast to decline by 15 percent, KI called for an expansionary fiscal policy to meet the situation.
“To dampen the effects of the severe economic contraction, it will be necessary to provide further stimulus to demand with both monetary and fiscal policy,” KI argued.
The institute expects the Riksbank to lower the base (repo) rate to 0.25 percent and provide new fiscal measures worth 8 billion kronor ($965 million) in 2009 and 50 billion kronor in 2010.
“We are not saying what the money should be used for but if it is made available to local councils then it will contribute to sustaining employment levels,” KI Director-General Mats Dillén said to the news agency TT.
Dillén underlined that the Swedish state finances were in a stronger position now than in the beginning of the 1990s and therefore provided scope for fiscal measures.
Swedish households remain pessimistic with KI’s confidence indicator falling by two points to -16.5.
Household inflation expectations have increased to two percent year-on-year, from 1.4 percent in February.
The Swedish kronor fell against both the dollar and euro on publication of the KI report on Tuesday reversing a recent trend.
Market rates climbed somewhat with two-year government bonds up to 1.06 percent and 3.10 percent for the ten-year bond.