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Activity was hit hard by the global economic slowdown in late 2011 and unemployment rose. Growth is expected to be modest this year but stronger in 2013 as world trade regains strength and confidence improves. With ample spare capacity, core inflation should stay subdued.

The stance of monetary policy ought to remain accommodative. Thanks to steadfast fiscal discipline in the past, Sweden now has room for discretionary stimulus, which might be warranted if growth turns out to be significantly weaker than expected. To avoid high unemployment becoming entrenched and to combat social exclusion, reforms are needed that lower hurdles to labour market entry, notably for youth.