IMF praises Sweden for handling of crisis

The International Monetary Fund (IMF) has praised both Sweden's central bank, the Riksbank, and the Swedish government for their handling of the economic crisis.

IMF praises Sweden for handling of crisis

However, the IMF has cautioned that its outlook for Swedish growth is uncertain, saying that the Riksbank should enact a “gradual and cautious” tightening cycle with regards to raising the repo rate.

The uncertainty regarding Swedish growth has increased in step with the debt crisis in Europe that gained momentum in the spring, according to the IMF.

Peter Doyle, who led the annual review of Sweden’s economy, sprinkled praise on the Riksbank and the government for their handling of the crisis.

He could not think of anything that could have been done better.

“I believe that the answer is no, despite there having been a huge economic shock,” Doyle said in a statement. “The government has allowed the budget surplus to turn into a deficit in order to keep demand up and the Riksbank has kept interest rates down.”

The IMF also welcomed the Financial Supervisory Authority’s (Finansinspektionen) proposal to place a cap on mortgages at 85 percent of the market value of the dwelling to be purchased. According to the IMF, this ceiling can act as insurance against undesirable consequences from excessive lending to home buyers.

The IMF noted that Sweden’s GDP fell by 5 percent last year while unemployment rose to over 9 percent and the financial strength of the export industry deteriorated.

At the same time, Doyle thinks that the current turmoil in Europe is hard to judge. He feels that the Riksbank should take into account these concerns at the next interest rate meeting.

“It’s hard for anyone to assess what the worries involve, but it is definitely something one should consider,” he said. “However, it is possible that the situation will be clearer in July. We think the Riksbank’s interest rate path is otherwise a reasonable path on the basis of developments in Sweden.”

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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.