STOCKHOLM (AFP) — Sweden's government forecast Wednesday that the country's economy would shrink 4.2 percent this year, sinking into its deepest recession since 1939 and prompting soaring unemployment.
"The downturn in the global economy in the wake of the financial crisis means that the outlook for Sweden's economy is very gloomy," the finance ministry said in a statement.
The government, which in December forecast that GDP this year would shrink by just 0.8 percent, said Wednesday it now expected the economy to contract by 4.2 percent in 2009 before growing by a slim 0.2 percent in 2010 and by 2.4 percent a year later.
In 2008, the Scandinavian country's economy shrank 0.2 percent.
Sweden's central bank, which has hinted it is prepared to slash its key interest rate in April from its current one percent to zero, forecast in February the country's economy would shrivel by 1.6 percent in 2009.
The economic downturn was in turn expected to usher in the highest unemployment seen in Sweden since it suffered a massive national banking crisis at the beginning of the 1990s.
The jobless rate, which rose two full percentage points from August to 8.0 percent in February, was expected to swell to 8.9 percent by the end of the year and balloon to 11.7 percent by 2011, according to Wednesday's forecast.
Sweden's "economic policy is now facing huge challenges. But our approach is clear. We shall meet the crisis at the same time as we protect our public finances," Finance Minister Anders Borg said in the statement.
Sweden has seen both its exports and consumption at home hard-hit by the global crisis.
"Demand from abroad has declined and Swedish consumers and companies have become more cautious," the finance ministry said, adding that the country's public finances would likely show a deficit of more than three percent in 2010 and 2011 and would remain in the red into 2012.
"Unfortunately, I think it's a quite realistic view about what will happen during the next couple of years," SEB chief economist Robert Bergqvist told AFP.
Sweden has not suffered such a deep recession since the beginning of World War II, when its economy contracted nearly nine percent despite the Scandinavian country's neutrality throughout the war.
"The full stop of the world economy is the main reason (for the Swedish recession), since Sweden is very dependent on exports," Bergqvist said, pointing out that "roughly 50 percent of the economy has some kind of connection to the exports sector."
During the first two months of the year, Swedish exports fell 25 percent compared to a year ago.
Traditional gems of Swedish industry like Saab and Volvo in the car sector and steel group SSAB have seen demand for their products evaporate as Swedish banks, which have invested heavily in the Baltic states, have been hard-hit by the deep recessions there.
The wealthy Nordic countries, with their traditionally healthy economies and generous welfare states, long appeared to have escaped virtually unscathed by the global financial crisis, but Wednesday's forecast hinted the region will take a heavy beating.
"Sweden is now pretty much in line with the other European countries," Bergqvist said.
Neighbouring Finland also recently dramatically revised down its growth forecasts and now expects its economy to shrink by five percent this year.
Norway and Denmark, which are less dependant on heavy industry, have meanwhile so far proved less vulnerable to the global downturn, with their central banks predicting their GDPs will slip by 1.7 percent and 1.1 percent respectively this year.
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