UPDATE 2-Swedish economy surpasses pre-pandemic size, economists say

* Swedish GDP +0.9% in Q2 - preliminary figures

* Reuters poll had forecast 0.7% growth

* Sweden imposed few restrictions during pandemic (Recasts on size of economy, add fresh economist comment)

STOCKHOLM, July 29 (Reuters) - Sweden’s economy looks to have recovered all of the losses wrought by the COVID-19 pandemic, economists said, after preliminary figures released on Thursday showed the country was at the forefront of the economic rebound.

While its economy shrank 2.8% in 2020 when the pandemic first hit, Sweden was not hit as hard as many other countries thanks in part to less onerous COVID-19 rules which allowed most businesses to stay open.

Now, with a vaccine rollout accelerating and more restrictions being lifted, gross domestic product expanded by 0.9% in the second quarter from the previous period, a preliminary estimate from the Statistics Office showed. A Reuters poll had forecast quarterly growth of 0.7%.

Against the second quarter of last year, GDP was 10% higher.

This meant the economy was now bigger than its pre-pandemic size, economists said.

“About 0.6% up (from before pandemic) which puts Sweden at the front of the pack in European terms,” David Oxley, an economist at Capital Economics, told Reuters.

In June, the government had said the economy would recover faster than previously expected, with the finance ministry revising its growth forecast upwards to 4.7% for 2021.

Despite a strong start to 2021 there have been bumps to economic recovery due to supply-side bottlenecks and shortages.

Retail sales rose 2.3% in May from April but fell 0.3% in June from May, while unemployment rose to 10.3% in June, the statistics office said.

GDP expanded 2.5% in June against the previous month, however. A sentiment indicator from the National Institute of Economic Research (NIER) showed increased confidence in the economy, particularly in manufacturing which reached an all-time high.

“Indicators point to robust growth for the coming quarters and developments are if anything stronger than our GDP forecast (4.5%),” Nordea economist Torbjorn Isaksson said in a note.

Oxley added in a separate note that interest rate hikes were still years away but that policymakers might allow, “the balance sheet to shrink before the end of next year – sooner than they have hinted at so far.”

Sweden’s Riksbank, like central bank’s elsewhere, has been buying assets in order to support the economy during the coronavirus pandemic. (Reporting by Colm Fulton, editing by Helena Soderpalm and Toby Chopra)