The Swedish economy has undergone impressive changes and has delivered a remarkable surge in productivity since the mid-1990s. Consequently, per capita incomes are slowly making up the ground lost in earlier decades. Labour market performance, however, has been less inspiring. Employment rates have yet to recover to their 1990 peaks and hours of work need to increase to support the welfare state.

The Swedish economy is growing dynamically, driven in particular by domestic demand. With growth projected to be 4.3 % this year and 3.6 % next (2007), the output gap will be pushed further into positive territory. Although labour shortages are visible in construction, wage growth is not yet picking up. Underlying inflation remains at very low levels but is expected to rise over the projection period.

Fiscal policy adds some stimulus to an already vibrant economy next year, but monetary policy is becoming less expansionary. To counter the risk of overheating, the central bank should increase policy rates to at least neutral levels and fiscal policy should avoid fuelling the economy.

OECD