Being an economy that relies primarily on industrial production and exports, Sweden’s economic structure has been hit badly by the global economic recession of 2008. The nation witnessed a more than 5% contraction in its GDP in Q4 2008, as compared to the previous quarter, as a result of plummeting exports, reduction of credit and rapid drawdown of stocks. The downturn was subsequently mitigated by Sweden making its fiscal policies more lenient and the Central Bank’s lowering the interest rates to unprecedented low levels. Discretionary fiscal measures of 1.5% of GDP were deployed in 2009 and further measures amounting to 1% of the GDP have been announced in the budget for 2010. The fiscal policies have been geared towards mitigating the effects of the downturn, providing support to domestic demand, and achieving the long term goal of increased incentives in the employment market.
After a weak start to 2009, the Swedish economy stabilized in mid 2009 posting its first quarter of positive GDP growth in over a year in Q2 2009. A number of factors have been responsible for the economic recovery, partly due to the Swedish government’s rapid deployment of fiscal policies, and mostly due to a substantial reduction in risky asset spreads and therefore greater access to the capital markets for businesses in Sweden. The Swedish stock market index was up by more than 40% in October 2009. The fiscal policy outlook is likely to be characterized by a subdued recovery in 2010, gradually gaining momentum in 2011, in the wake of resurgence in consumer consumption and high demand of Swedish exports. Though investments in Sweden are likely to be marginally lower than anticipated, the annual GDP growth should reach 1.5% in 2010 and 2% in 2011.
Sweden Economic Structure: Challenges to the Fiscal Policies
The economic crisis had led to deterioration in the Swedish labor markets, with unemployment rising from an average level of 6.2% in 2008 to 8.3% in September 2009. As the economy is expected to recover in the medium term, unemployment will continue to rise for some time yet. It should peak at about 10% in 2010 from 8.6% in 2009, before falling to expected levels.
Another challenge to the Swedish fiscal policies is to draw a comprehensive roadmap to influence seamless and non-disruptive job growth due to the huge amounts of outsourcing in labor intensive economies. This is extremely important to ensure continued and sufficient improvement in the fiscal position as GDP growth gains momentum. Ensuring that active labor market policies remain labor friendly as they expand in scope will also be important in this regard.