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Sweden’s historic crisis plan exposes central bank’s limits

Bloomberg | Updated on August 28, 2020

Sweden’s government is embarking on an historic spending spree as it acknowledges that there’s now less scope to look to the central bank to provide crisis support.

“It’s a big responsibility that we have, now that the Riksbank’s possibilities are smaller than they have been,” Finance Minister Magdalena Andersson said in an interview in Stockholm on Thursday. “We are in a deep crisis, at the same time as monetary policy doesn’t have the muscle it normally has.”

The Riksbank has made clear it wants to avoid a return to negative interest rates, after ending half a decade of the policy last year. But its also sought to reassure the market that it has an adequate toolbox with the room to do whatever it takes to support the economy.

With Andersson’s new spending pledge, talk of more monetary support might now become moot. Sweden’s government is dedicating over 100 billion krona ($11.5 billion) next year to dragging the largest Nordic economy out of the Covid crisis. She says there will still be a need for forceful stimulus in 2022, perhaps also in 2023.

Dodging the worst

Sweden now faces a much milder recession than the euro zone, and Andersson on Thursday raised the economic forecast. Gross domestic product is expected to shrink 4.6 per cent this year, compared to the 6 per cent contraction seen in June. For next year, the government expects a stronger rebound than previously, with GDP set to grow 4.1 per cent.

On Friday, Sweden’s statistics office said the second-quarter GDP data contraction wasn’t as deep as first estimated, with the economy declining 8.3 per cent from the first three months of the year, instead of the 8.6 per cent initially reported. The krona strengthened slightly and was trading about 0.2 per cent higher against the euro as of 9:36 am in Stockholm.

Spending will target public investments across welfare and climate initiatives, Andersson said. Sweden has an historic opportunity to take measures to create jobs, accelerate adjustments to climate change and improve social services, she said.

Sweden’s spending plans will leave debt well within limits set by the European Union. Next year, debt will reach 42 per cent of GDP, compared with 35.2 per cent in 2019. Thats less than half the EU average.

Covid fight

The Nordic nation of 10 million people continues to find itself in the international spotlight for sticking with a light-touch lockdown strategy while others adopted more stringent measures to fight the pandemic.

That decision initially saw a spike in the number of Covid-related deaths and infections in Sweden, and the government of Prime Minister Stefan Lofven has admitted that more should have been done to protect the elderly in care homes.

But on Thursday, the country’s health agency proposed raising the limit on certain public gatherings to 500 from 50, amid a stabilisation in Covid-19 infection rates.

Sweden’s death rate, however, remains among the highest in the world at about 57 per 1,00,000.

Published on August 28, 2020

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