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Swedish economy hit by eurozone troubles

Sweden's economy contracted in the last quarter of 2011, shrinking by 1.1 percent compared to the previous quarter and showing the export-dependent economy's vulnerability to the eurozone crisis.

Swedish economy hit by eurozone troubles

While Sweden’s gross domestic product (GDP) actually grew by 1.1 percent during the fourth quarter of 2011 compared to the same period in 2010, the rate was well below the 2.6 percent estimated by analysts, according to new figures from Statistics Sweden (Statistiska Centralbyrån, SCB).

The GDP figures for the fourth quarter were weaker than what had been expected by analysts, who had been predicting a rise by 2.6 percent compared to the same period in 2010 and a 0.8 percent decrease compared to the third quarter, according to news agency Reuters.

“That is a weak figure, even weaker than we had predicted and a lot worse than anticipated by the Riksbank,” said head economist at Swedish bank Nordea, Annika Winsth, to news agency TT.

“The consequence will be that the Riksbank will have to continue to cut interest rates,” said Winsth, who predicts a drop in repo rate to 0.75 percent by September.

The report showed that Swedish household consumption expenditures rose by 0.7 percent and general government consumption expenditures increased by 0.8 percent during the fourth quarter of 2011.

Export increased by 0.6 percent and the import by 1.6 percent.

According to the report, Swedish export was affected by the the unstable international conditions and the net export showed a negative development for the first time since the second quarter of 2010, pulling down the GDP by 0.4 percentage points.

Seen over the whole of 2011 the GDP increased by 3.9 percent compared to 2010. Household spending rose by 2.1 percent. Transport costs and Swedes spending money abroad contributed most to the rise.

The figures also showed a rise in public spending by 1.8 percent over the whole of 2011, with export increasing by 6.8 percent and import by 6.1 percent.

Tor Borg, an analyst with SBAB bank, said that the growth figures, just as earlier inflation figures, were well below the Riksbank’s prognosis.

“We are expecting them to cut interest rates by 0.25 percentage points at the next meeting, and these figures are endorsing that prediction a little,” Borg told TT.

The results for spending and export is what is especially worrying, according to Borg.

“Spending and export is somehow at the very centre of growth,” he told TT.

Two weeks ago, the central bank cut its key rate by 0.25 points to 1.50 percent, citing a weaker economic outlook due to dwindling growth in the neighbouring eurozone.

Europe accounts for 70 percent of Sweden’s exports.

Ben May, an economist at Capital Economics research consultancy, said the fourth-quarter figure “brought the strongest evidence yet that the problems in the eurozone are taking their toll on Europe’s healthiest economies.”

Swedish finance minister Anders Borg also commented on Sweden’s apparent economic slowdown.

“It’s very clear that the Swedish economy stood still in October, November, December. They were very weak months,” Borg told TT.

“This shows that Sweden is an open, small and dependent country. We are always affected when there is risk around us,” he said.

He added that “several measures are being taken to stabilise the situation,” but did not specify what those moves were.

Finance minister Borg said it was important to exercise caution and ensure that Sweden maintained maneuvrability in its economy, and said he saw two trends that were affecting the Swedish economy.

“On the one hand, the situation developed weakly at the end of last year, on the other hand, it looks like there has been a significant decline in uncertainty over the global economy.”

Sweden has registered consistent growth since the second quarter of 2009, when it exited a one-year recession.

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ECONOMY

Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.” 

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