Washington, DC: On March 18, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation7F [1] with Sweden and endorsed the staff appraisal without a meeting.
The economy has been hit hard by historical standards, but the fallout has been smaller than in peers. The 2020 output is estimated to have fallen by about 3 percent. While inflation hovered around 1 percent, its medium-term projection is slightly below the 2 percent target. Unemployment increased sharply, with temporary workers, the youth, and foreign-born suffering disproportionately. The external current account surplus widened on the back of compressed imports and buoyant exports. The fiscal response was strong with the small surplus of the past years shifting to a deficit of about 4 percent of GDP. Sweden’s Covid-19 infection and mortality rates have been somewhat above the EU average but much higher than in its Nordic peers.
Sweden is projected to grow at about 2 percent in 2021 but uncertainties have increased recently regarding the new strains for the virus and the rollout of vaccination. Higher growth implies that the budget deficit will decline, and public debt will remain fairly low, at around 40 percent. Monetary policy has been accommodative, with ample liquidity provision, large asset purchase program and a reduction of the Riksbank overnight lending rate. Forward guidance suggests that the policy (repo) rate will likely remain at the same level over the medium term (following its increase to zero effective January 2020). Regulatory policy has also been temporarily eased and the banking sector remains strong. Structural reforms are still lagging, especially in the dysfunctional housing market.
Executive Board Assessment [2]
In concluding the Article IV consultation with Sweden, Executive Directors endorsed the staff’s appraisal as follows:
Sweden’s economy fared the crisis better than many of its European neighbors, not least due to substantial buffers and generally strong fundamentals. The authorities’ large support package was timely and adequate. The package provided ample support to households and businesses, helped avert a financial crisis, and stabilize markets. As a result, the 2020 fall in output is projected at around 3 percent, which is less than the EU average. However, the increase in unemployment, especially of the young and foreign-born, was larger than in countries that suffered a deeper recession. While the recovery is expected to start this year, uncertainties have recently increased regarding the new strains of the virus and the rollout of vaccination. It is therefore appropriate that most of the crisis measures were extended to June 2021.
Fiscal policy should continue to support the economy and lead the recovery. It is important to not prematurely return to the surplus target. As the recovery takes hold, the eventual withdrawal of the support measures should be cautiously gradual in order to minimize scarring. Furthermore, there is room for increasing public expenditure over the medium term to enhance growth and achieve Sweden’s ambitious green and inclusion objectives. At the same time, it is desirable to review the design of the support measures, not least to facilitate structural transformation. In particular, the short-term work scheme could be redesigned to make it more flexible and more supportive for temporary workers and to incentivize retraining and hiring.
Monetary policy should stand ready to further assist the recovery if needed, but its effectiveness may be diminishing. The monetary policy stance has been appropriate and the expansion of the Riksbank’s asset purchase program contributed importantly to supporting the economy and stabilizing key markets. Inevitably such necessary operations can contribute to a buildup in vulnerabilities due to reduced risk pricing. As liquidity constraints seem to have been alleviated, the policy mix should focus on fiscal support, while the Riksbank should stand ready to complement fiscal measures as needed. Any amendments to the Riksbank law should preserve its operational independence and ability to quickly deploy a broad range of instruments in future crises. The e-krona pilot project will help design a central bank currency proposal in a way that maximizes the benefits while minimizing risks, including for financial intermediation and cybercrime. The amendments to the anti-money laundering framework and its enforcement are also welcome.
Financial vulnerabilities require continued vigilance and enhanced data collection. Banks’ exposures to the CRE sector and high household debt call for better data collection to enhance monitoring and guide possible further strengthening of prudential regulations, especially for CRE. A prolonged recession, as well as accelerated shifts to e-commerce, teleworking, and less travel could result in dwindling revenue streams of CRE companies with high exposure to sectors affected by the crisis. Close monitoring of corporate vulnerabilities and bond markets is also necessary to preserve financial stability.
It is imperative to address Sweden’s long-term structural challenges and market distortions, including to tackle the limited employment prospects for the foreign-born and youth, shortages in affordable housing, and demographic shifts. It is encouraging that the 2021 Budget Bill contained higher spending on training and education, lower social security contributions for the youth, as well as initiatives geared towards the foreign-born, especially women. A further reduction of the high labor tax wedge is also desirable. The overly regulated rental market, with its long queues, favors existing tenants. Introducing a simpler market-based system that is complemented with adequate housing allowances would be more transparent and effective in meeting both the economic and social objectives. In addition, streamlining the complex local regulations would help increase supply and competition in the construction sector, thus driving down costs. Comprehensive reforms, including gradually increasing property taxes from their extremely low level, would make the housing market more dynamic. Such reforms would help improve efficiency and equity, and facilitate labor mobility.
Sweden: Selected Economic Indicators, 2018-26 | |||||||||
2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |
Projections | |||||||||
Real economy (percent change) | |||||||||
Real GDP | 2.0 | 1.4 | -2.8 | 3.3 | 2.9 | 2.4 | 2.1 | 2.0 | 2.0 |
Domestic demand | 1.7 | -0.3 | -3.0 | 3.0 | 2.9 | 2.8 | 2.3 | 2.1 | 2.1 |
Private consumption | 1.8 | 1.2 | -4.7 | 3.2 | 3.3 | 2.3 | 2.2 | 2.0 | 2.0 |
Public consumption | 0.8 | 0.3 | -0.5 | 2.7 | 1.5 | 1.3 | 1.3 | 1.0 | 1.0 |
Gross fixed investment | 1.4 | -3.1 | 0.6 | 3.0 | 3.5 | 3.2 | 3.2 | 3.1 | 3.1 |
Net exports (contribution to growth) | 0.3 | 1.7 | 0.0 | 0.4 | 0.1 | -0.3 | -0.2 | 0.0 | 0.0 |
Exports of G&S | 4.2 | 4.8 | -5.2 | 5.4 | 4.1 | 3.0 | 2.9 | 2.7 | 2.7 |
Imports of G&S | 3.8 | 1.3 | -5.8 | 4.9 | 4.2 | 3.8 | 3.4 | 2.9 | 2.9 |
HICP inflation (e.o.p) | 2.2 | 1.7 | 0.4 | 0.7 | 1.2 | 1.6 | 1.8 | 1.9 | 1.9 |
HICP core inflation (e.o.p) | 1.3 | 1.8 | 1.3 | 1.3 | 1.3 | 1.4 | 1.6 | 1.7 | 1.9 |
Unemployment rate (percent) | 6.3 | 6.8 | 8.3 | 8.7 | 8.4 | 7.7 | 7.2 | 7.2 | 7.2 |
Gross national saving (percent of GDP) | 28.6 | 29.8 | 29.8 | 29.7 | 30.0 | 30.4 | 30.5 | 30.7 | 30.8 |
Gross domestic investment (percent of GDP) | 26.0 | 24.7 | 24.5 | 25.2 | 25.7 | 26.5 | 27.1 | 27.4 | 27.8 |
Output gap (percent of potential) | 2.5 | 2.3 | -1.1 | -0.8 | -0.6 | -0.4 | -0.2 | 0.0 | 0.0 |
Public finance (percent of GDP) | |||||||||
Total revenues | 49.6 | 48.8 | 49.1 | 48.4 | 48.8 | 49.2 | 49.3 | 49.4 | 49.4 |
Total expenditures | 48.8 | 48.3 | 53.1 | 52.2 | 50.6 | 49.3 | 49.2 | 49.0 | 49.1 |
Net acquisition of nonfinancial assets | 1.6 | 1.7 | 1.8 | 2.0 | 1.9 | 1.8 | 1.5 | 1.5 | 1.4 |
Net lending | 0.8 | 0.5 | -4.0 | -3.9 | -1.8 | -0.2 | 0.1 | 0.3 | 0.3 |
Structural balance (as a percent of potential GDP) | 0.0 | -0.4 | -3.5 | -3.5 | -1.5 | 0.0 | 0.2 | 0.3 | 0.3 |
General government gross debt, official statistics | 38.9 | 35.1 | 38.5 | 40.7 | 40.7 | 39.3 | 37.8 | 36.1 | 34.4 |
Money and credit (year-on-year, percent change, eop) | |||||||||
M3 1/ | 5.9 | 7.9 | 17.8 | … | … | … | … | … | … |
Bank lending to households | 5.3 | 5.0 | 5.5 | … | … | … | … | … | … |
Interest rates (percent, end of period) | |||||||||
Repo rate | -0.5 | -0.25 | 0.0 | … | … | … | … | … | … |
Ten-year government bond yield | 0.5 | 0.1 | 0.0 | … | … | … | … | … | … |
Mortgage lending rate | 1.5 | 1.5 | 1.4 | … | … | … | … | … | … |
Balance of payments (percent of GDP) | |||||||||
Current account | 2.6 | 4.6 | 5.0 | 4.5 | 4.3 | 3.9 | 3.4 | 3.2 | 3.0 |
Foreign direct investment, net | 2.5 | 0.7 | 1.4 | 1.7 | 1.7 | 1.7 | 1.3 | 1.1 | 1.0 |
International reserves, changes (in billions of US dollars) | -0.3 | -6.6 | 3.0 | … | … | … | … | … | … |
Reserve cover (months of imports of goods and services) | 3.0 | 2.8 | 3.3 | … | … | … | … | … | … |
Net international investment position | 8.6 | 18.4 | 23.3 | 27.7 | 32.0 | 35.8 | 39.2 | 42.4 | 45.4 |
Exchange rate (period average, unless otherwise stated) | |||||||||
SEK per euro | 10.3 | 10.5 | 10.2 | … | … | … | … | … | … |
SEK per U.S. dollar | 8.7 | 9.5 | 8.4 | … | … | … | … | … | … |
Nominal effective rate (2010=100) | 92.8 | 89.2 | 90.8 | … | … | … | … | … | … |
Real effective rate (2010=100) 1/ | 93.4 | 88.7 | 93.5 | … | … | … | … | … | … |
Other Indicators | |||||||||
GDP per capita (2019, USD): 51,434; Population (2019, million): 10.3. | |||||||||
Key export markets: Germany, Norway, United Kingdom. | |||||||||
Sources: IMF WEO, Riksbank, Swedish Ministry of Finance, Statistics Sweden, and IMF Staff calculations. | |||||||||
1/ Based on relative unit labor costs in manufacturing. | |||||||||
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.