Saturday, February 28, 2009

Scandinavian Recession

Sweden is in the middle of a much more serious recession than previously thought, according to official figures for the fourth quarter of last year that revealed the economy contracted by nearly 10 per cent on an annualised basis.

Figures from the Swedish statistics office published on Friday showed gross domestic product contracted 2.4 per cent quarter-on-quarter in the final three months of last year, equivalent to an annualised decline of 9.3 per cent. Consensus expectations were for a fall of 6.5 per cent.

“Today’s national accounts confirmed the Swedish economy is falling off a cliff,” said Nicola Mai, economist at JP Morgan, in a research note. “The report confirms Sweden is in the midst of a very deep recession.”

There were no positive signs in the latest GDP figures, with consumer spending falling sharply, fixed investment contracting, productivity worsening and trade on the decline.

The dismal growth number increases the chance that the Riksbank, Sweden’s central bank, may join other central banks around the world by introducing a zero interest rate policy and implementing a policy of quantitative easing.

The central bank has been preparing the intellectual ground for zero rates in speeches by its board members in recent months, and economists argued the accelerating pace of the economic downturn now makes such a move more likely.

“The figures point to an economy that is contracting far more rapidly than the Riksbank had been estimating. On balance, the report supports our forecast that the Riksbank will go to zero in April and engage in quantitative easing soon afterwards,” said Mr Mai.

The central bank has been cutting rates aggressively in a bid to offset the effects of the global recession, but to little avail. It has reduced rates by 400 basis points to their current 1 per cent, giving it little further flexibility for the use of conventional monetary policy.

The growing sense of crisis in Sweden has been compounded by a slew of sackings at some of the country’s major manufacturers and the uncertainty over the future of Saab, the car maker that has been put up for sale by General Motors, the stricken US manufacturer.

Other Nordic countries are also starting to feel the full effects of the global slowdown, ending a honeymoon period in which they appeared to have escaped the worst of the crisis.

Denmark’s economy contracted 3.9 per cent year-on-year in the fourth quarter, while Finland, which is a member of the EU and Eurozone, entered a recession in the fourth quarter.

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