Sweden unemployment rate likely to hover slightly above 7 pct, says Danske Bank

The rate of unemployment in Sweden is expected to hover slightly above 7 percent in the upcoming year, while the country’s gross domestic product is likely to come in around 2 percent during the next year and 2018.

Swedish labor markets continue to show steady improvement, despite some deceleration in employment growth being visible throughout 2016. Concurrently, the improvement in the unemployment rate seems to have ground to a halt, Danske Bank reported.

Despite the 'core labor market' (domestically-born persons between 25 and 54 years of age) demonstrating among the lowest unemployment rates since the early 1990s, wage inflation is still very weak.

"Even accounting for historical upward revisions to data and wage drift, we estimate that wage inflation is currently below 2.5 percent y/y. Looking ahead, we do not forecast a material change to the wage outlook," the report said.

First, the profit share is rather subdued from a historical perspective, second, companies refer to stark competition and troublesome developments in demand, third, real wage growth has been very strong in Sweden, finally, employers and employees are posting subdued expectations on future wage growth. This implies only a gradual ascent from the current 2.5 percent y/y hourly wage growth towards 3 percent y/y in 2018.

In 2017 and 2018, GDP is expected to grow around 2 percent y/y, which is a tad above the estimate of potential GDP growth post-crisis (1.5 percent y/y). Given apparent domestic and international perils, this reflects the view of an economy in a state of Riksbank-induced real interest rate unconsciousness, the report added.

Meanwhile, the renewed push in oil and other commodity prices seen recently as well as a weak SEK can, at least temporarily, cause higher inflation.