By Niklas Pollard and Sven Nordenstam
STOCKHOLM, Nov 27 (Reuters) - Sweden's gross domestic product (GDP) expanded only modestly in the third quarter and lagged economists' forecasts, but more up-to-date figures for retail sales showed consumers growing markedly more confident.
GDP grew 0.2 percent quarter-on-quarter for an annual contraction of 5.0 percent as firms scaled back inventories more than expected in the period, the statistics office said.
Analysts in a Reuters poll had forecast growth of 0.6 percent and 5.0 percent respectively. Retail sales, however, jumped 1.5 percent in October against a forecast for a 0.4 percent gain.
"GDP was a bit of a disappointment and the explanation for that is inventories," Nordea analyst Torbjorn Isaksson said. "A bright spot is that with inventories this low, the outlook for production going forward looks better."
"It is, of course, the case that the Riksbank will feel less pressure to raise interest rates if economic growth is lower than they are forecasting."
The Riksbank's key repo rate is currently at 0.25 percent, the lowest level since records began in 1907, and the bank has forecast it will keep rates there until autumn 2010, though many analysts believe an improving economy will see it hike sooner.
Sweden's economy went into a nose-dive last year as the global financial crisis pulled the plug on years of strong demand for the exports of blue-chips companies such as the world's number two truck maker Volvo and SKF , the globe's biggest bearings maker.
But the Nordic country limped out of recession in the second quarter and since then signs that a recovery is gaining traction have multiplied as state support revived credit markets.
IMPROVING MOOD
Consumer confidence has risen for seven consecutive months as Swedish households reap the benefits of record-low interest rates and tax cuts. Credit growth has recovered to the extent that some analysts worry of it inflating a housing bubble.
In the year, retail sales were up 5.5 percent in October versus a 4.0 percent forecast.
"Retail sales ... came in very strong, so we think this points to very strong growth during the fourth quarter. Companies have slashed inventories very much and demand appears to be pretty strong," said Handelsbanken analyst Stefan Hornell.
Still, many firms remain cautious about the strength of the recovery in global demand, painting a picture of stabilisation that is a far cry from years of booming sales before the crisis.
The auto industry is hurting, with General Motors-owned Saab Automobile facing the risk of closure while the likes of truck makers Volvo and Scania continue to grapple with pitiful demand.
Some of Sweden's top banks also face mounting loan losses in the Baltics where they extended billions of euros of loans over years of booming growth that has now turned to bust.
The central bank said this week that risks facing Sweden's major banks had eased since June, but still forecast a hefty 155 billion crowns ($22 billion) of loan losses in the coming years with the largest losses seen in the Baltics.
Second-quarter GDP was revised up marginally to a 0.3 percent expansion quarter-on-quarter and to a contraction of 5.8 percent on an annual basis. The previous reading was 0.2 percent growth on the quarter and an annual fall of 6.0 percent.
(Additional reporting by Simon Johnson, Nicolas Vinocur and Bjorn Rundstrom; Editing by Patrick Graham) Keywords: SWEDEN GDP/
(Stockholm Newsroom, tel: +46-8-700 1017, e-mail: stockholm.newsroom@thomsonreuters.com)
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