UPDATE 2-Swedish industry output slide raises recession fear

Fri Nov 9, 2012 6:16am EST

* Swedish industrial output slides in September

* Down 4.1 pct in the month, 5.0 pct in the year

* Economy finally feels euro zone impact

* Some see chance of recession

* Central bank expected to cut rates (Adds analysts, details)

By Patrick Lannin and Niklas Pollard

STOCKHOLM, Nov 9 (Reuters) - Industrial output in Sweden suffered its biggest drop for more than three years in September, raising fears the previously robust Nordic state could fall into recession due to the euro zone crisis.

Export-driven Sweden, the Nordic region's biggest economy, had seemed almost immune to the problems created by the sovereign debt crisis and its economy expanded by 1.8 percent year-on-year in the first quarter and 0.8 percent in the second.

It has also been a favourite with investors due to its AAA credit rating and strong public finances.

But an export demand drop has caught up with its companies and caused a wave of redundancies that has put further pressure on the centre-right government mid-way through its second four year term. It is behind the Social Democrat-led opposition in opinion polls.

"We have a scenario where we are seeing a very sharp slowdown of the Swedish economy," Finance Minister Anders Borg said after a parliament committee meeting.

"We have large downside risks in the global economy and we have seen further signs of this lately. Especially in the labour market we are now seeing a lot of redundancies. However, we are not in the same situation we had in 2008."

Borg spoke after data showed that industrial output slid 4.1 percent in September from the previous month and 5.0 percent year-on-year.

"The drop is the biggest since January 2009, apart from a temporary reduction in production in February earlier this year," the statistics office said in a statement.

Both drops were much bigger than the small declines of 0.7 percent in the month and 0.1 percent year-on-year forecast in a Reuters poll. Industry orders fell 5.3 percent from the same month a year ago, the office added.

"This means we may see negative GDP growth in the third quarter and there is much to indicate GDP will fall in the fourth quarter as well," said Nordea chief analyst Torbjorn Isaksson.

With better public finances than elsewhere in Europe, the government has some options to spend to help the economy and in its budget in September it cut corporate income tax and said it was investing in infrastructure projects.

But Borg, one of Europe's most respected finance ministers, is proud of his reputation for fiscal rectitude and the budget deficit is already forecast to grow to 0.3 percent of GDP this year without any new expansionary measures.

"If there really is a crisis they can of course do certain things to stimulate the labour market, but I don't expect too much," said Danske Markets analyst Michael Bostrom.

"Then again I think the government is pretty keen on keeping government finances under control."

JOB CUTS VS HOUSEHOLD DEBT

A drop in output for two quarters in a row is classed by economists as a recession, which Sweden has not experienced since the last quarter of 2008 and the first quarter of 2009.

A wave of job cut announcements has rolled over Sweden in the last few weeks, including leaders in their sectors like IT giant Ericsson and truck maker Volvo and from others including garden equipment maker Husqvarna and hygiene products and paper group SCA.

The central bank is widely expected to cut its key repo rate from 1.25 percent in December, but worries about high levels of household debt have restrained four of the six central bank policy makers from cutting faster.

Borg said this meant the crown currency was being prevented from acting as a buffer to economic problems, when it should weaken and help exporters. The crown has strengthened against the euro this year, with the single currency down about 4 percent. However, the crown is weaker than its high of about 8.18 to the euro in early August and was at 8.5520 on Friday.

Borg told reporters he was not planning to revise the government economic growth forecast for this year of 1.6 percent and 2.7 percent in 2013, even though economists have said that is too optimistic.

A slight glimmer of hope in the poor data was the fact that on a monthly basis industry order books rose 1.2 percent. (Additional reporting by Johan Sennero, Editing by Alistair Scrutton)