Swedish Economy Grows at Slowest Pace Since 2001

By Johan Carlstrom

Aug. 1 (Bloomberg) -- Sweden's economy grew at its slowest pace in almost seven years in the second quarter as unemployment reached a two-year high, inflation accelerated and interest rates rose.

Gross domestic product expanded an annual 0.7 percent, compared with a revised 2.1 percent in the previous three months, Statistics Sweden said today. The median forecast of 13 economists surveyed by Bloomberg was for 2 percent growth. GDP was unchanged from the first quarter.

Today's report may deter the central bank, or Riksbank, from going through with its forecast that interest rates will rise twice more this year to stem an inflation rate that reached a 15- year high in June. The bank had forecast economic growth of 2.1 percent for the second quarter.

``There's no room for the Riksbank to raise the interest rate,'' said Robert Bergqvist, chief economist at SEB AB, Sweden's second-largest bank by assets.

The yield on the 5.25 percent government note fell 10 basis points to 4.39 percent by 11:50 a.m. in Stockholm. The krona strengthened to 9.4377 per euro from 9.4413.

``The extremely weak Q2 GDP report, together with other very weak, more forward looking, economic indicators that we have received the past few days have reduced the probability of rate hikes during the autumn substantially,'' said Anna Raaman, economist at Handelbanken AB in a client note.

Slowing Down

The consumer confidence index fell to a 13-year low of minus 18.2 in July from minus 10.2 the month before, the National Institute of Economic Research said yesterday. Manufacturing industry contracted for the first time in five years in the same month, a Swedbank survey of purchasing managers showed today.

The Riksbank lifted its benchmark lending rate to 4.5 percent last month to limit inflation which accelerated to an annual 4.3 percent in June on the back of rising food and oil prices.

Net trade cut 0.4 percentage point from annual growth in the second quarter, Statistics Sweden said. Household consumption added 1 point, fiscal spending contributed 0.1 point and investment added 1.9 percentage points. The spending figures were not adjusted for calendar effects, unlike the overall GDP number.

Productivity declined an annual 1.3 percent in the second quarter, the largest fall since Statistics Sweden started to publish the figure in 1993, said Olle Holmgren, an economist at SEB. That will add to pressure on companies to raise prices.

``This highlights that inflation still is a Riksbank headache,'' Holmgren said in a client note. ``Still the risk for another rate hike in September has been reduced significantly.''

The central bank, which has an inflation target of 2 percent, predicts growth will slow to 2.1 percent this year and 1.2 percent in 2009 from 2.8 percent last year. Inflation will probably ease to 2.3 percent in 2010, it forecasts.

Several companies, including Ericsson AB, the world largest maker of wireless networks, and Sandvik AB, the world's biggest maker of metal-cutting tools, have said they will cut staff in Sweden as the economy slows. Unemployment rose to 8.1 percent in June from 5.9 percent in May.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.