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
We now expect the Riksbank's quantitative easing programme to come to an end in December 2016, versus previous expectations of June 2016. However, we still believe that interest rates have bottomed and will begin rising in 2017.
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. A UK vote to leave the EU in June, while not our base-case scenario, poses an additional risk.
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