(RTTNews) - Wednesday, Sweden’s National Institute of Economic Research, or NIER, said in a report that the economy is moving towards a “contractionary phase” due to the rapid economic slowdown in the OECD area and weak domestic demand. In addition, the economic think-tank lowered its growth forecast for 2008, 2009 and 2010.

In the latest report, the NIER said economic slowdown in the OECD area will impact the Swedish economy as the nation’s 80% of exports are received by the OECD area. However, the think-tank said the economy will pick-up the growth momentum in 2010 benefiting from international economic recovery, cuts in Swedish interest rates and an expansionary fiscal policy.

The economic think-tank now projects the Swedish economy to grow 1.7% in 2008 in actual terms. This is down from 2.4% growth reported in June. Further, the growth outlook for 2009 is reduced to 1.4% from an earlier projection of 2%. In 2010, the economy is expected to grow at a faster pace of 3.3%, slightly up from an initial estimate of 3.2%.

According to the Statistics Sweden, economic growth in the second quarter slowed to 0.7% on an annual basis from 2.2% expansion recorded in the first quarter.

On the inflation front, the research institute said the increase in prices of food and energy is expected to come to a halt by the end of this year before subsiding rapidly. Therefore, the NIER said the Riksbank will leave the repo rate unchanged at 4.5% until sometime after early 2009. Once it has become evident that inflation has begun to recede, the repo rate will be lowered in three steps to 3.75% during 2009 and further to 3.50% in 2010.

These interest-rate cuts are expected to curb the economic slowdown and contribute to an underlying inflation rate close to 2% in 2010. The underlying annual inflation based on the CPIF, which is the CPI at constant interest rates, was 3.4% in July, unchanged from June.

Meanwhile, the NIER revised the consumer price index, or CPI forecast for 2008 to 3.8% from 3.7%. At the same time, it lowered outlook for 2009 to 2.5% from 2.9%. According to the official report, the CPI inflation rose to 4.4% in July from 4.3% in June.

In July, the Swedish central bank had increased its repo rate by 25 basis points to 4.5% and had said repo rate needs to be raised on a couple of further occasions during the year to bring inflation back towards the target.

Further, the central bank had revised its 2008 growth forecast to 2.1%, down from an earlier projection of 2.6%. Meanwhile, the estimate for annual inflation was upwardly revised to 3.9% from 3.5%.

Regarding the labor market, the NIER said employment would decrease next year, particularly in manufacturing. The current growth in the service sector employment will cease. Nonetheless, the drop in employment will be countered to some extent by an expansionary fiscal policy that will contribute to higher employment, partly through more employees in the general government sector in 2009 and 2010, the NIER added. Employment in the business sector will recover in 2010, when the economy turns upward. The jobless rate is forecast to rise to 6.7% in 2010.

Separately, the think-tank said on Wednesday that Sweden’s Economic Tendency Indicator fell to 85.5 in August, marking its lowest level since July 2003. In July, the indicator stood at 88.5. Meanwhile, the consumer confidence indicator rose to minus 16.5 in August from minus 18.2 recorded in July.

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