Sweden will remain a growth outperformer among developed states, with domestic demand remaining strong in 2016-17.
The surge in migrant inflows in 2015-16 will lead to higher economic growth over the medium term, but will present challenges to the fiscal accounts, the labour market, and domestic political stability.
Interest rates will remain low through 2017 as the central bank (Riksbank) will maintain a negative policy rate and disinflationary conditions will persist. However, there is an increasing chance of a policy reversal in 2016, as extraordinarily easy monetary measures are inappropriate given strong economic growth, incipient inflation, and rising private sector debt.
Major Forecast Changes
With higher-than-expected real GDP growth in 2015 of 4.1%, and leading indicators looking strong, we have raised our 2016 forecast to 3.6% from 2.9%.
Due to strong economic growth and accelerated tax payments by businesses seeking to avoid negative deposit rates, we have seen fit to revise our overall budget deficit forecast for 2016 to -0.9% of GDP from -1.3% previously, following an estimated balance of -1.1% for 2015.
Sudden Reversal Of Easy Monetary Policy: A sudden, unexpected increase in interest rates could cause a painful adjustment for private sector borrowers and generate instability in the financial sector.
Downside Growth Risks From Europe: A relapse in the European economic recovery would leave Sweden's open economy vulnerable to external demand shocks.
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