After two years of strong expansion, demand and growth are now slowing down sharply. Swedish GDP is stagnating and is forecast to rise by just 0.1 percent in 2012.
The growth outlook is weak for both the euro area and the US in the coming years, and low global demand affects Sweden through weaker exports. Household consumption will also be low, as expectations about both personal finances and the whole economy have deteriorated drastically. Moreover, household wealth has fallen with share prices. The political and financial uncertainty in Europe is expected to persist, and it will take time for the economy to pick up again. Growth is therefore expected to remain weak in 2013.
After deficits in 2009 and 2010, public finances are expected to produce a surplus of 0.4 percent of GDP this year. This surplus is being generated by central government and the old-age pension system, as net lending in the local government sector has been negative. The sharp slowdown in the economy in 2012 means that general government net lending will deteriorate again next year to give a deficit of 0.3 percent of GDP. Central government tax revenue is particularly cyclical, as is central government expenditure relating to the labour market. Fluctuations in economic activity therefore cause fluctuations in central and general government finances. Public finances are expected to recover after 2012 and be back in balance in 2013.
Despite the weak growth ahead, the central government budget is expected to remain in surplus throughout the forecast period. A surplus of SEK 76 billion is forecast for 2011, which is a substantial increase on 2010, but next year the budget balance is expected to deteriorate sharply, albeit still leaving a small surplus.
Consolidated general government gross debt, or Maastricht debt, fell from 72 percent of GDP on Sweden’s accession to the EU in 1995 to 40 percent at the end of 2010 and is expected to be 36 percent of GDP at the end of this year. It is then forecast to hold at the same level in 2012 before falling ever faster to 28 percent in 2015.
Central government net lending is forecast to be SEK 9 billion this year, which is substantially less than the budget surplus. The difference is due partly to this year's sell-off proceeds and extraordinary dividends of SEK 29 billion boosting the budget balance but not net lending. There are sometimes considerable differences between the central government budget balance and net lending, which corresponds to the balance on the national accounts. These differences arise mainly as result of how the two measures are defined.
The deterioration in the economy and the labour market hampers growth in local government tax revenue. Municipalities are therefore expected to rein in consumption expenditure in order to meet the statutory balanced-budget requirement. As a result, consumption will stagger more in 2012 than in 2011, and a relatively weak increase in consumption is expected throughout the forecast period.
Net lending in the old-age pension system is forecast to be SEK 21 billion this year and close to zero from 2012.
A considerable uncertainty remains
There is considerable uncertainty about how the debt crisis in Europe is to be resolved. As the consequences of the problems in Europe for the real economy are hard to gauge, there is a risk that growth rate in Sweden is weaker than forecast. On the other hand, the economic circumstances in Sweden are relatively favourable, which could lead to higher growth than forecast.
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