Cars drive on an illuminated street of central Stockholm on November 20, 2011 as the end-of-year holiday season was officially opened.JESSICA GOW
Sweden, with its rock solid government finances, has been a rare economic success story in troubled Europe.
The country's enviably low debt and sturdy balance sheet have made it a safe haven for spooked investors, with Swedish 10 year bonds trading as much as 35 basis points below the benchmark German bund.
But as Europe's debt crisis escalates to dangerous new levels, there are signs that even Sweden's star economy is losing some of its shine. Housing markets are cooling off, industrial orders are slipping and consumer confidence has taken a hit.
In a recent note to investors, the Swedish bank SEB predicted that GDP growth, which charged ahead at 5.7 per cent in 2010, would slow to 0.7 per cent next year.
"Finance Minister Anders Borg's tiger economy will thus lose some of its stripes," the bank warned.
With 50 per cent of its GDP dependent on exports, half of which are destined for other European nations, Sweden's small, open economy is vulnerable to negative developments in Europe. Activity in the manufacturing sector has slipped, with the purchasing managers index (PMI) remaining below 50 for three consecutive months, a level indicating contraction in the sector.
What is more surprising, analysts say, is the relatively deep plunge in consumer confidence. Despite the economic turbulence in Europe, Sweden's public finances are expected to remain strong. Public debt, at 39 per cent of GDP in 2010, is on track to fall to 31.4 per cent in 2013, according to SEB. A budget surplus of 0.3 per cent is expected next year.
Still, Sweden's consumer confidence indicator has fallen below the historical average, suggesting Swedes are getting nervous. Household saving has risen to 11.4 per cent of total income, a level that is "very high by Swedish standards," said Jesper Hansson, chief economist at the National Institute of Economic Research.
"Household confidence has plummeted very sharply in Sweden," Mr. Hansson said. "I think many people think this problem in the euro zone is impossible to solve and because of that something drastic will happen."
Indeed, as the crisis continues, Europe's celebrated economy will likely have to administer a new dose of stimulus, the SEB report suggested.
"Conflicting interests and deficient problem awareness has blocked crisis management efforts and created political dithering," SEB said. "The world economy will be close to recession in 2012. Growth will be lackluster in 2013 as well."