Sweden recovering, reforms needed: OECD

The Swedish economy is showing firm growth and its outlook is solid, but the government must carry out structural reforms and improve its budget margins, the Organization for Economic Cooperation and Development said last week.

The OECD also stood by earlier estimates made in April for gross domestic product growth of about 2 percent this year and 3.2 percent next year, following growth of 1.2 percent in 2001.

The recovery had been marked by both stronger domestic demand and increased exports in the first half of the year.

But the economy faced risks in the form of a slowing increase in the household saving rate and an extension of the expansionary fiscal stance to 2003. Further risks could materialize if the current weakness in demand for telecommunication products persists, the OECD said.

With unemployment at only about 4 percent, the country was facing inflationary pressure due to labor market tensions that could prompt the Riksbank, Sweden's central bank, to raise interest rates, putting the brakes on economic growth.

As a result, the OECD said it expected the Riksbank to raise interest rates gradually to 5.25 percent by mid-2003 from the current level of 4.25 percent.

"Given the current inflation rates and the potential of growth returning to above potential rates, interest rates will have to rise further," the OECD said.

The OECD said if Sweden joined the euro zone, the country would find it more difficult to counter economic shocks in the absence of an independent monetary policy.

But greater exchange rate stability as a result of joining the zone would significantly reduce one potential source of such shocks.

The Paris-based organization also noted that structural reforms had lost steam and fresh progress was needed to cope with the costs of the country's generous social protection system.

It pointed its finger in particular at some public services where efficiency could be improved, especially in health and education services.