Swedish economy in recession (Financial Times)

Sweden’s economy is in recession, having contracted for two consecutive quarters, according to statistics released Friday – the latest sign that the impact of the global credit crisis on this small, flexible and resilient economy is deepening.

Gross domestic product shrank 0.1 per cent in the third quarter of the year compared with the previous quarter, having already contracted by 0.1 per cent in the second quarter, said Statistics Sweden.

The announcement compounds a sense of growing crisis in Sweden that has been fuelled by a slew of sackings at some of its leading companies, the collapse of Carnegie, a major investment bank, and worries over the banking sector’s exposure to the rapidly-slowing Baltic nations.

“The impact of the international financial crisis on the Swedish economy is becoming increasingly evident,” said SEB, the bank, in its latest Nordic Outlook released this week. “Production and employment plans are now undergoing rapid cutbacks. Economic sentiment is the weakest since the early 1990s economic crisis.”

SEB expects GDP to contract 1.3 per cent next year and for the downturn to continue during 2010, when growth will be just 0.6 per cent. At the same time, by late 2010, unemployment will climb to nearly 10 per cent.

The Swedish economy is highly dependent on trade with exports generating over 50 per cent of gross domestic product.

While there have been few signs to date of a marked downturn in exports, except to the US, SEB points out that the influx of new orders has rapidly fallen to historically low levels and company interim reports reveal an abrupt downturn in order bookings and cancellations.

“The synchronised downturn in the world economy will mean that the growth of exports to Sweden’s 10 most important markets will be record-low,” it said. “Overall, we expect total export volume next year to fall for the first time since 1991.”

With the bad news intensifying, attention is now shifting to the planned monetary and fiscal policy response to the crisis. The Riksbank, the central bank, is expected to start cutting interest rates aggressively and the government to devise additional spending plans.

Sweden has plenty of room to act. Rates in Sweden are 3.75 per cent and the Riksbank has been making increasingly dovish noises in recent weeks, indicating there could be sizeable rate cuts in coming months.

Some private sector analysts are forecasting rates coming down to 2 per cent or lower by mid to late 2009.

In terms of fiscal policy, Sweden is currently running a budget surplus and has already announced a planned expansionary budget, but the government is widely expected to announce additional another stimulus package during the winter.

As the economy softens, there could also be political implications for Sweden’s centre-right alliance government, which was elected in the economic boom times of 2006 and faces its next election in 2010.

“The rapid downturn in the economy raises a question: to what extent is the Alliance government prepared to use more traditional Swedish ‘labour market policy programmes’ – employment training and temporary government-financed jobs – to slow the increase in registered unemployment?” asked SEB.

“The Alliance government will thus have to deal with an economic policy environment in which the conflict between ideology and pragmatism will come to a head in many respects,” it added.

By David Ibison in Stockholm

 The Financial Times