Swedish government warns of slowdown as war in Ukraine and inflation hit economy

People walk past Christmas windows at a department store in downtown Stockholm November 28, 2008. REUTERS/Bob Strong

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  • Growth will slow to 0.4% in 2023 due to war and inflation
  • Government warns it cannot offset all price hikes
  • Swedes vote in 9/11 parliamentary elections

STOCKHOLM, Aug 18 (Reuters) – The Swedish government on Thursday downgraded its growth outlook for next year as it warned that the impact of Russia’s war in Ukraine and soaring inflation would hit growing economy.

The minority Social Democrat government, which faces a tight general election in September, raised its outlook for economic growth this year to 2.3% from 1.9% in June, but it cut its forecast for 2023 to only 0.4% against 1.1%.

“The economy is on a war footing and uncertainty is high,” Finance Minister Mikael Damberg told reporters.

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“Sweden is heading into a recession. We will need to set priorities and pursue responsible fiscal policies to deal with the challenges Sweden faces.”

Damberg said the government had the option to increase spending next year by around 30 billion crowns ($2.87 billion), but warned it could not compensate households and businesses for all recent price increases. However, the government on Wednesday announced subsidies for energy bills. Read more

Slowing global growth is likely to hurt Swedish exports while rising inflation, compounded by the impact of the war in Ukraine on global gas and food prices, will hurt Swedish consumers.

The Social Democrats are hoping to woo voters by promising to use extra leeway for the social sector and boost employment.

The government and its supporters are neck and neck with the right-wing bloc ahead of the 9/11 vote and Damberg has brushed aside opposition plans for tax cuts which he says would increase inflation. Read more

“If you’re irresponsible, it will translate into higher prices, higher mortgages,” he said.

Inflation in Sweden is hovering around 8%, levels not seen since the early 1990s, and there are few signs of easing price pressures.

The central bank has already raised the benchmark interest rate twice this year to 0.75% and is expected to raise borrowing costs further in September and November. Read more

Damberg called on employers and unions to negotiate responsible wage increases and warned companies not to take advantage of the current situation to raise prices more than necessary.

The government has entrusted the National Institute of Economic Studies with the mission of monitoring the rise in prices.

The government had a limited ability to prevent companies from using higher prices to increase profit margins at a time when consumers are under pressure, Damberg said, adding that consumers could change their buying habits or change their bank if necessary.

The government forecasts average inflation of 7.3% this year and 3.9% in 2023, down from previous forecasts of 6.1% and 2.9%, respectively.

($1 = 10.4710 Swedish crowns)

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Reporting by Anna Ringstrom, Stine Jacobsen, Simon Johnson, Johan Ahlander and Niklas Pollard, editing by Terje Solsvik and Susan Fenton

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