New global risks are building up and Sweden’s economic growth may be slow-moving, Swedbank warned in new report.

Although the outlook for Swedish and global economy has improved new risks are building up, Swedish bank Swedbank warned in its Economic Outlook published Thursday.

“Despite the improved prospects, risks are building up. The dependence on public stimulus packages is significant, and their rollback could create new strains on the real economy and financial markets”, Swedbank’s Chief economist Cecilia Hermansson wrote in the report, adding that economic growth is expected to be low-moving and “sluggish”.

Sweden’s calendar-adjusted GDP growth is expected to rise to 2 percent this year, compared with the 1.2 percent forecasted in September, mainly on the back of better conditions on the labor market and stronger household consumption.

Still, that's slower than global GDP growth as Swedbank raise forecast to 3.3 percent for 2010 and to 3.5 percent for 2011.

Sweden’s economy is polarized between the negative developments in the industrial sector, which is heavily dependent on global investments, and the more robust services sector. Large structural changes are happening in the industrial sector due to the downturn and the outcome and effect of those changes are still uncertain.

The strengthening of the krona may also hurt exporters, although stronger global growth gives relief.

The bank also expects the country’s central bank to raise the key repo rate from today’s record low of 0.25 percent to 3 percent towards the end of next year, resulting in the fact that “many indebted households will be less able to spend on consumption goods and services”.

However, the largest risks are to be found in the uncertainties of stability in global financial markets and systems.

“The main risks to our forecast are a sharp reversal of international growth and a reemergence of the turmoil in the international financial markets”, Cecilia Hermansson wrote”. “Parts of the public stimulus packages will be withdrawn, and there is uncertainty to what extent the private sector will be in a position to take over as the main engine of growth”.

Summary of Swedbank’s outlook

Sweden
• Sweden’s GDP growth has been revised upwards mainly due to the labour market performing better, resulting in a higher growth in household consumption. The already high debt ratio represents a risk as the. Riksbank is expected to increase the repo rate to 3% by the end of 2011.
• Positive aspects of the Swedish economy are the good fiscal position, and the robust services sector. Negative aspects include the weak productivity growth and high cost increases, as well as the risk of more fundamental structural changes in Sweden’s industrial sector. The strengthening of the krona may hurt exporters, although stronger global growth gives relief.

Estonia
• Joining the EMU is becoming increasingly more likely for Estonia. We anticipate that the budget criterion will be met for 2009, and that a decision to join the euro area will be made in June this year.
• Euro adoption is expected to spur investments in the Estonian economy. Already, improved global conditions are stimulating Estonian exports. The main risk is a postponement of the euro adoption.

Latvia
• Exports have started to recover, but challenges remain. Labour cost adjustment has improved competitiveness, but with deflation deepening, an increasingly important challenge becomes deleveraging.
• The main risk to the outlook is that domestic structural reforms stall. Insufficient progress in both the public and private sectors risks a post-recession stagnation. To make further competitiveness improvement
less painful and ensure sustainable growth, lasting structural productivity gains are necessary.

Lithuania
• The rate of decline of economic activity in Lithuania appears to have slowed in late 2009. In particular, the export-driven manufacturing sector is doing better than expected.
• The Lithuanian economy faces significant challenges. A weak labour market undermines domestic demand and the decommissioning of Ignalina exerts further pressure on households and companies. Considerable uncertainties remain regarding public finance developments.