The Euro-zone drags on Swedish Economy

The Swedish central bank forecasts a slowing in the Swedish Economy due to weakness in the euro area. Meanwhile the Swedish Trade Council, also forecasts poor economic development in important trading partners. Not least, the Euro zone is expected to tip into recession, with two consecutive quarters of negative growth. With exports standing for 50 percent of GNP, Sweden will be strongly affected.

The Swedish central bank lowered its interest rates against a background of less inflationary pressure and weaker economic expectations. Their press release states, “the worsened outlook is causing households and businesses to delay consumption and investment,” and points to significant uncertainty about future economic developments.

Against this background, the central bank’s Executive Board indicates that additional changes to interest rates can be necessary if the problems experienced in the Euro area deteriorate, stating, “the public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy. In this situation, the repo-rate path may need to be lowered.”

As well, forecasted growth in Swedish GNP is cut for coming years, including growth of 1.3 percent for 2012, compared to the previous forecast of 1.5 percent.

The Swedish Trade Council also issued new forecasts where they still expect a slight increase in exports for 2012, though a smaller increase than forecasted in September. “The debt crisis in the Euro zone has forced austerity policies that act as downward pressure on the economy, which can cause lower public revenues as households and businesses lose confidence in economic developments. The greatest risk looking forward is that insufficient measures are taken to resolve the debt crisis in the Euro zone,” notes the Swedish trade council Chief Economist Mauro Gozzo.

The Trade Council forecasts an economic recession in the Euro zone, which also will affect Central and Eastern Europe. Export markets in Scandinavia are expected to grow 3 percent, but in West Europe by 1.5 percent, and in Central and East Europe by 5.5 percent. Moreover, China, currently the most important locomotive in the global economy, shows initial signs of contraction.