Sweden’s Economy Posted Record Slump During Pandemic Peak

(Bloomberg) --

Sweden was unable to escape its worst economic contraction ever despite adopting one of Europe's softest approaches to the Covid-19 pandemic.

Gross domestic product fell 8.6% in the second quarter, more than economists had forecast. But while that's a record slump, it's less severe than the slumps seen elsewhere in Europe. Spain, France and Italy all shrank by double digits, and even Germany contracted 10%.

Sweden's GDP fell 8.2% when compared to the same quarter of last year, according to a first estimate from Statistics Sweden.

Unlike its neighbors, Sweden refrained from imposing a mandatory lockdown, relying instead on voluntary public health guidelines. The strategy has coincided with a considerably higher mortality rate than in the rest of the Nordic region, and fresh research suggests it may not have succeeded in sustaining consumer spending.

Read more: Lax Covid-19 Strategy Doesn't Save the Economy, Research Finds

“The sharp contraction in the Swedish economy in Q2 confirms that it has not been immune to Covid, despite the government's well-documented light-touch lockdown,” said David Oxley, senior Europe economist at Capital Economics. “Nonetheless, the economic crunch over the first half of the year is in a different league entirely to the horror shows elsewhere in Europe.”

The government has said its approach was never about economic benefits but about enacting sustainable policies. Prime minister Stefan Lofven has also conceded more should have been done at the outset to test people and protect the elderly.

Read more: Sweden Says Covid Strategy Was Never About Shielding the Economy

Plummeting export demand has also been blamed for a sharp rise in unemployment in the small and open Nordic economy, despite a massive spending package from the government.

“Now comes the hard part for export-oriented Sweden: How to recover without scarring the labor market too much due to weak global demand,” said Bloomberg economist Johanna Jeansson.

Nordea economist Torbjorn Isaksson said “it is too early to evaluate how different strategies to deal with COVID-19 have effected the economies” and that it's “difficult to estimate the strength of the recovery at this point.” Still the Riksbank's forecast for a full year drop of 4.5% “seems reasonable” and the second-quarter estimate “doesn't change much for the monetary policy outlook,” he said.

“Going forward, we expect the sentiment and activity indicators to keep improving as long as there are no major setbacks related to the coronavirus. However, considering the large drop in GDP, it will take a long time before economic activity returns to pre-crisis level,” Swedbank senior economist Pernilla Johansson

Statistics Sweden is scheduled to publish updated estimates on second quarter GDP on Aug. 28.

©2020 Bloomberg L.P.