Europe debt crisis casts shadow over Swedish jobs market

STOCKHOLM: Swedish unemployment rose unexpectedly in May, hitting its highest level in almost a year as the debt crisis in the euro zone, the main market for its exports, cast a deepening shadow over the Nordic nation's economy.

The jobless rate rose to 8.1 percent in May, Sweden's statistics office said, above the forecast in a Reuters poll of analysts for an unchanged rate of 7.8 percent.

It was the highest level since June last year. "This was clearly weaker than we had expected. We did forecast a softer labour market but not until maybe the second half of the year," SEB analyst Sanna Eckardt said.

Sweden has largely been sheltered from the effects of the euro zone's sovereign debt crisis, now in its third year. The country's public finances are sound and consumers relatively upbeat, underpinning unexpectedly strong economic growth in the first quarter of the year.

But signs have emerged that deepening turmoil to the south has started to take a toll on the Nordic manufacturing powerhouse, with a steady drop in industrial production and orders and a falling purchasing managers index (PMI).

"This (unemployment) was higher than expected, although it wasn't a total surprise because of the signals of a weaker labor market we have seen in the PMI figures for instance," Danske Markets analyst Michael Grahn said.

"These figures were also a little higher than the Riksbank's forecast and should we have one or two more months with unexpectedly high unemployment, then it might influence monetary policy."

The repo rate is currently at 1.50 percent with the Riksbank forecasting no further cuts. It is widely expected to remain on hold at its next meeting, in early July, but many analysts expect the slowdown to prompt more easing later in the year.

WORSE TO COME Sweden's budget watchdog, The National Financial Management Authority (ESV), said separately it expected rising unemployment next year as the effects of the debt crisis and the increasing numbers of people flowing into the labour market weighed.

"Employment has so far proved relatively robust to the downturn in the economic climate," it said.

"The slowdown in the economy this year and limited growth next year will, however, put a damper on demand for labour."

The Confederation of Swedish Enterprise also took a glum view, saying in a new forecast that after two years of falling unemployment, joblessness would rise this year. It did not see a recovery in 2013.

The Nordic country's public finances are nevertheless expected to remain robust through the coming lean years, though the situation in Europe will leave no room for the government to bolster the economy and labour market with fresh spending.

The ESV forecast central government budget deficits of 8 billion Swedish crowns ($1.14 billion) in 2012 and 17 billion crowns in 2013, a far cry from the 176 billion crown shortfall seen in the wake of 2008/2009 financial crisis.

"Public finances are healthy but will not meet the budget surplus target of 1 percent of GDP. In other words, there is no scope for unfunded reforms, at least not in the near future," the budget watchdog said.

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