• Sweden is among the strongest economies in the developed world. The current account has posted large surpluses ever since Sweden’s own financial crisis in the beginning of the 1990s. Fiscal balances are well kept with primary balances close to zero and structural balances demonstrating large surpluses. In addition, public debt is low and falling.
  • Nonetheless, the lion’s share of Sweden’s prosperity stems from a significant investment goods industry able to export its products to feed the insatiable investments needs of a rapidly expanding world.
  • The short story: Sweden is heavily dependent on continued strong global growth and in the light of recent downward revisions to global projections we are thus forced to revise our forecasts in accordance. In Sweden we expect growth to reach circa 4% y/y this year and to fall back to 1.25% y/y next year and rise to 1.5% y/y in 2013.
  • Low demand will serve to push resource utilisation and thus inflationary pressure downward for the remainder of the forecast horizon. The operational inflation target, CPIF – where mortgage interest costs are expected to be static – is expected to gradually fall back towards, perhaps even below, 1% y/y at the end of the forecast horizon. CPI-inflation, currently close to 3.5% y/y, is expected to decline towards 1.5% y/y in 2013.
  • In the absence of any inflationary pressure the recently announced pause in the Riksbank’s hiking cycle risks becoming an extended leave. Danske Bank even believes that the deteriorating outlook for the Swedish economy will eventually provoke cuts in the Riksbank’s repo rate. We expect the Riksbank to start cutting the repo rate come winter and within a year the repo rate should have reached levels closer to 1% (or 1¼% to be exact).