Swedish Economy in Recession on Global Credit Crisis

By Johan Carlstrom

Nov. 28 (Bloomberg) -- Sweden’s economy slid into recession in the third quarter as the global financial crisis hurt demand for exports and consumers spent less, indicating that the central bank will cut rates by more than it has forecast.

Seasonally adjusted gross domestic product contracted 0.1 percent from the previous three months, when it also shrank a revised 0.1 percent, Statistics Sweden said. The median forecast of 11 economists surveyed by Bloomberg was for a decline of 0.2 percent. From a year ago, GDP was unchanged.

“We’re facing a really cold winter,” Finance Minister Anders Borg told reporters in Stockholm today. “It will be long, it will be cold, it will be bitter.”

Sweden’s economy joins the 15-nation euro region in recession as lending seizes up worldwide. Slower growth may prompt the central bank, or Riksbank, to cut to its key lending rate by more than the half-point over six months that it forecast in October. The bank based its prediction on annual growth of 0.8 percent in the third quarter.

“The decline has been very abrupt,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “There seems to be more or less a collapse of private consumption, one of the main growth drivers in past years, so it looks like the Riksbank will have to cut aggressively going forward.”

The krona fell 0.4 percent to 10.3172 against the euro by 1:24 p.m. in Stockholm. The yield on the 5.25 percent government bond due March 2011 fell 13 basis points to 2.16 percent. A basis point is 0.01 of a percentage point.

Doing More

The government is evaluating whether it can do more to cushion the economic slowdown, Borg said. “We need to look over what further measures we need to take.” The government will prioritize measures that contribute to long-term growth, he said.

Parliament has already approved plans to boost spending by one percent of GDP in 2009. Measures include cutting income taxes for a third time since gaining power in 2006. The government also plans to reduce payroll and corporate taxes and increase spending on infrastructure, education and welfare.

“The government needs to do more to prevent this downward spiral continuing,” said Leif Pagrotsky, a member of the Social Democrats opposition party and vice-chairman of the central bank’s general council, told reporters in Stockholm.

Regional Woes

Economic growth in Nordic neighbors Norway and Denmark is also faltering. Sweden will fail to expand next year after growing 0.8 percent in 2008, while Norway’s growth rate will drop by more than half to 1.2 percent from 2.9 percent, the Organization for Economic Cooperation and Development said on Nov. 25. Denmark will contract 0.5 percent next year after growing 0.2 percent in 2008, the OECD said.

Swedish retail sales fell in October from the year earlier for the second consecutive month, the first back-to-back declines in 12 years, according to figures published by Stockholm-based Statistics Sweden today.

“The retail sales figures were very, very weak and an indication of how bad the fourth quarter will be,” Gullberg said. Consumer retail purchases dropped 0.7 percent in October from a year earlier, the statistics office said.

The Riksbank will cut the benchmark rate by a 0.75 percentage points to 3 percent when its meets on Dec. 16, said Olle Holmgren, an economist at SEB AB. By the summer, the rate will be 1.5 percent or less, he said. The Swedish economy, adjusted for working days, will contracts 1.3 percent in 2009, SEB forecasts.

Several companies such as truck maker Volvo AB, construction company Skanska AB and Sandvik AB, the world’s largest maker of cutting tools, have announced that they will fire staff.

Manufacturing confidence fell to its lowest level in at least 12 years in November and consumer confidence was little changed near a 15-year low, indicating the economy may continue to slow in the fourth quarter.

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