Sweden delivers ‘neutral’ fiscal policy as recession fears grow

Stockholm. Sweden’s government cut its economic growth forecasts for a second time this year, and promised a “neutral” fiscal policy for next year to cope with the slowdown.

At a press conference in Harpsund, south of Stockholm, Finance Minister Magdalena Andersson said next year’s budget, which still pencils in a surplus, will be “well-calibrated” and that the country is “well-equipped” to handle the economic slowdown.

Swedish growth contracted in the second quarter, held back by slowing momentum in global growth amid a trade dispute between the US and China and a growing threat for a hard Brexit. A report ahead of Thursday’s press conference also showed that unemployment rose to a three-year high in July, raising concerns the country is headed into a recession.

Andersson said that one should be careful in reading too much into one employment report, especially over the summer months.

“What we are seeing now is a slowdown, not a crisis,” she said. “If the development turns considerably worse than we expect now, we have the muscle to take measures.’

After building buffers and cutting debt since taking over in 2014, Andersson now predicts smaller surpluses ahead. She has also promised to cut the highest marginal taxes at the start of next year as part of an agreement forged in January to allow her Social Democratic minority government to remain in power after contentious elections last year.

There will be limited room for stimulus, with only about 25 billion kronor available for “reforms” next year, according to Andersson.

The message from the finance minister will come as a disappointment to economists from both the left and right. They have called on Andersson to capitalise on Sweden’s financial strength to boost fiscal spending and tackle needs in infrastructure and welfare, as well as help the central bank exit more than four years of negative rates.

The government on Thursday revised its outlook for the central bank, and now predicts that it will leave its benchmark rate unchanged below zero into 2021.