Sweden sees faster growth but immigration costs mount

STOCKHOLM, Dec 21 (Reuters) - Sweden's economy will expand this year at its fastest pace since 2010 and growth will continue to be strong further ahead, though the cost of a record influx of refugees will weigh on finances, the government said in a forecast on Monday.

The centre-left government said strong domestic demand with high private consumption and investment was underpinning growth.

But Finance Minister Magdalena Andersson said downside risks such as an uncertain euro zone recovery, weaker growth in China and geopolitical risks in the Middle East and Ukraine dominated forecasts, while it was uncertain how many refugees would come to Sweden and its effects on finances.

In November, the government said it would spend an extra 11 billion Swedish crowns ($1.3 billion) this year due to the record number of asylum seekers that had entered Sweden in 2015. That figure currently stands at around 160,000.

Last week the Andersson said the government would cut spending by 8 billion crowns and reschedule other costs to bolster public finances as a result.

The government forecast GDP growth of 3.1 percent in 2016 following an expansion of 3.6 percent this year. In September, the government saw growth of 2.8 percent in both 2015 and 2016.

"The Swedish economy is standing very strong. Employment is rising, unemployment is falling, and we have among the highest growth rates in Europe," Andersson said.

Sweden's economy has surged this year, boosted in part by the beginnings of a recovery in exports. GDP expanded 3.9 percent in the third quarter alone.

The National Institute of Economic Research, a government think-tank, said separately it had revised upwards its 2016 growth forecast to 3.9 percent from 3.1 percent.

While higher tax revenues meant the deficit forecasts were unchanged at 0.9 percent of GDP this year and next, they were revised higher for the following three years and budget shortfalls were seen throughout the period with an expected deficit of 0.2 percent in 2019.

In the previous forecast a balanced budget was seen in 2018 and a 0.3 surplus percent was expected in 2019.

Just weeks after saying Europe should not build walls to keep out refugees, Prime Minister Stefan Lofven said Sweden needed a "breathing space".