The crisis has passed in the country, according to Nordea’s economists. Sweden’s economy is expected to grow by 4.5 percent this year and by 2.8 percent in 2012, according to a new forecast from the bank.
At the same time, unemployment is expected to fall, but inflation is seen taking off. The bank estimates that inflation will rise to 2.7 percent in 2011 and 3 percent in 2012.
“Unemployment will fall quickly, but we also see signs that structural unemployment is increasing,” cautioned Nordea economist Torbjörn Isaksson.
The GDP growth forecast for 2011 of 4.5 percent is a significant hike from the bank’s autumn forecast of 2.8 percent.
Meanwhile, the unemployment rate forecast this year of 7.3 percent is a slight lower than a previous forecast of 7.7 percent. Next year, unemployment is expected to fall further to 6.8 percent.
The Swedish economy’s unexpectedly strong recovery demonstrates an increasing need for rate increases from Sweden’s central bank, the Riksbank, according to Nordea.
“We now see higher wage growth and rising inflation ahead of us and it increases the need for rate hikes from the Riksbank,” Nordea’s chief economist Annika Winsth explained.
Inflationary pressures are increasing the need for tightening measures by the Riksbank, according to Winsth.
“Accordingly, the Riksbank needs to shift the monetary policy onto a considerably less expansionary course so that the economy will not overheat in the future,” she wrote in a statement.
She believes that Sweden’s benchmark interest rate will rise to 2.5 percent by the end of the year from the current 1.25 percent and to 3.5 percent in by the end of 2012.
Nordea’s economist have described the upturn in the Swedish economy as “broad.”
“Households are an important engine of growth, while investments are growing rapidly. Exports are rising at a healthy rate, even after the initially strong recovery from previously depressed levels,” the economists wrote.
The bank’s economists estimate that the government had already likely balanced public finances last year and that it will begin to report a surplus in the coming years.
For 2011, Nordea forecasts the surplus at 1.1 percent, then rebounding to 1.7 percent in 2012.
Separately, the European Central Bank (ECB) is expected to demand tightening at a faster pace than many expect, according to Winsth, who believes there may be a key interest rate hike from Frankfurt in September.
“It will be the starting shot of a normalisation of the monetary policies in industrial countries,” she wrote.
At the same time, she noted that the ECB is beginning to raise interest rates ahead of their colleagues at the US Federal Reserve.
The ECB’s key rate has remained at a record low of 1 percent since May 2009.
“We have not made a forecast revision since the autumn budget, but we now see that the numbers look much stronger now. Nordea’s forecast that came today is considerably higher than our previous forecast, but our figures do not differ markedly from theirs,” Finance Minister Anders Borg said at a conference of with the Swedish Centre for Business and Policy Studies’ (Studieförbundet Näringsliv och Samhälle, SNS) trade outlook council.
Borg expects GDP growth of 2011 of up to 4 percent.
“And we also expect good growth in 2012,” he added.
However, Borg is also cautious about promising new reforms.
“We will make an assessment of public finances after the summer and then we also assess the scope for reform. Reductions in employment taxes are a priority and the entire election manifesto will be accomplished,” he said.
Borg was also optimistic about the unemployment rate and expects that it will decline in the coming years.
“Our forecast for the unemployment rate is below 4 percent by 2014. With the new definition of unemployment, it will a notch below 6 percent,” he said.
Borg also discussed the large concern about long-term financial stability in Sweden. He noted in particular that the risks for the Swedish economy were considerably higher during the crisis in the Baltics than previously known.
Swedish housing prices are another concern where there is reason to worry, according to Borg.
“There is a risk here. There is no doubt. However, it is not just about housing prices, but also about total household debt,” he said.
Borg sees a need to reduce indebtedness and simultaneously be more open to more stringent requirements on banks.