Sweden: Risk Assessment

Country Rating¹

Rating: A1

Business Climate Rating¹

Rating: A1

Risk Assessment²

Very strong recovery in 2010
After a deep recession in 2009, the Swedish economy resumed strong growth in 2010. Households began to spend again in phase with the growth of their disposable income and by drawing on their savings. The increase in foreign demand caused an upturn in corporate production and investment, which have replenished their stocks. With the rebound of domestic demand, imports have also begun to grow again at a strong pace.

GDP growth will be more modest in 2011
Although outstripping the economic expansions achieved in the euro zone and the United Kingdom, Sweden's growth will remain below its long term trend. Households will keep spending but at a slower pace. The wage agreements in force call for wage moderation in 2011 that the automatic cushioning mechanisms associated with the welfare system will be unable to offset. Tighter monetary policy will also limit purchasing power: The rate hikes, albeit conservative, decided by the Sveriges Risksbank are expected to result in an increase in the debt service burden of households with variable-rate property loans representing 60% of their total outstanding commitments. Despite a high rate of debt (167% of disposable income) and an unemployment rate that is significant for Scandinavia (about 8%), Swedish households will not adopt a circumspect approach to spending as has been the case elsewhere. They are thus expected to tap savings (about 10% of their income) to sustain their rate of consumption (48% of GDP). Meanwhile, the rise of housing prices and the boom in property loans to households that marked the 2010 third quarter will bear watching.
The restocking process initiated by Swedish companies will slow significantly, which will cause investment to decelerate. Exports will feel the effects not only of the austerity policies of varying intensity adopted by Sweden's main client countries (euro zone, United Kingdom, Norway, Denmark) but also of the Swedish krona appreciation against their currencies (up between 7% and 18% from the low-point in March 2009 low to the levels reached in November 2010).
The fiscal deficit will narrow as a result of the restrictions on public spending, the reduced size of welfare transfer payments in the wake of the slight decline expected in unemployment, and the income growth associated with the expansion of economic activity. Thanks to its moderate debt (about 40%) the government has been able to avoid adoption of austerity policy, especially with the privatisation programme, put on hold during the crisis, apt to be revived at this juncture.

The decline in bankruptcies bears out the consolidation of the economic fabric
The increase in household demand in 2010 benefited sectors operating in the domestic market, particularly wholesalers, retailers, and personal service providers, but also the automotive sector. Construction and manufacturing, traditionally vulnerable in times of crisis, benefited from an upturn in business activity. Demand and production will likely remain strong in services and construction. Export sectors - including mechanicals, electronic equipment, transport equipment, capital goods, chemicals, consumer durables, and wood - benefited from the restocking process that developed in most client countries. But they will likely suffer this year from the slowdown expected in the rest of Europe. Although bankruptcies declined over 5% in the twelve month period ending in October 2010, the pace accelerated again in the last three months of that period (up 3.8%).

Strengths

• Structurally sound public finances
• High participation rate for men and women
• Strong social cohesion
• External accounts in surplus
• Open, diversified, and competitive economy
• Strategic geographic position for regional trade
• Specialization in high technology products
• Excellence in research and development
• Relatively low public-sector deficit and debt
• Political consensus on the economic and social model
• High household net worth

Weaknesses

• Economy very open to Scandinavian and Anglo-Saxon countries
• Export specialised in capital goods and motor vehicles
• Strong exposure of some banks to Baltic countries
• Very high levels of household debt
• High youth unemployment in a relatively protected labor market
• Aging population
• High taxes for private individuals