Sweden: Risk Assessment
Country Risk Rating
Business Climate Rating
- Open, diversified and competitive economy
- Specialization in high-tech products and green economy
- Sound public finances
- Increasingly dynamic demographics
- Highly concentrated banking sector
- Tensions on the real estate market
- Significant household debt
Growth will be Weaker in 2018, But Still Dynamic
The Swedish economy is expected to continue its dynamic growth path in 2018, albeit at a slower rate. Headline growth is set to be more in line with the economy’s potential rate, which is estimated at around 2%, according to the OECD. As in 2017, the largest growth contributions will be delivered by private consumption and investment. Consumers’ propensity to buy is boosted by growing employment, increased social transfers, low interest rates, and marginal tax cuts. Real disposable incomes will likely expand at a moderate pace, albeit slightly higher than in the previous years. Driven by a build-up in domestic demand, inflation is expected to stabilize close to the 2% target of the central bank (Riksbank).
Buoyant investment growth in 2017, driven by the upswing in residential investment since 2013, is expected to cool down, because of labor shortage and a lack of constructible land. Nevertheless, the construction sector will continue to fuel growth, while the risks of overheating in real estate activity are reducing. In 2018, government consumption will likely receive a slight boost from a more expansionary fiscal policy. In addition to higher transfers and some tax relief, there will likely be higher expenditures for public employees and for supporting improvements in the social and health sectors. Net exports should marginally support growth.
As a very competitive small and open economy, Sweden will be favored by a better global macroeconomic environment. Given that global demand for investment goods picked up strongly in 2017, it should remain high in 2018 as well. Hence, Swedish exports are expected to grow by more than 4% again, although this will likely be offset by dynamic import growth. Growth contribution of net exports will, therefore, be positive, but low. In spite of robust growth, filed bankruptcies are expected to keep increasing, especially in the construction and retail sectors.
Sound Public Finances, Large Current Account Surplus, But High Private Debt
Despite a more expansionary fiscal stance in 2018, with an expected fiscal package of about SEK 40 billion (Swedish krona), the budget balance will remain in positive territory. Nevertheless, the surplus in structural budget will shrink slightly due to these discretionary measures. With the economy growing rapidly, and the general government sectors being a net lender for years, public gross debt is expected to continue shrinking. In 2017, the debt-to-GDP-ratio, which fell below 40% for the first time since 2012, will probably approach the 30% threshold.
The sustaining of the current account surplus is one clear indicator of the favorable competitiveness of the economy. To some extent, Swedish specialized exports are less dependent on fluctuations in the exchange rates: high-quality goods such as machinery (roughly 14% of exports), cars and parts (13%) and electronics (7%) dominate the export basket. Risks from the upcoming Brexit are contained since UK’s share amounts to just 6 %. The primary income, mostly thanks to investment income, contributes positively to the current account balance. The latter’s surplus is expected to decrease slightly because of a somewhat weaker trade surplus.
One key risk for the Swedish economy is the high level of debt of private households. According to Riksbank’s data, private debt-to-disposable income-ratio has risen fast: in mid-2017, it stood at almost 183%, with indebtedness growing faster than disposable incomes. A severe setback in property markets could, therefore, hamper the highly indebted private household sector, as well as the banking system. The Swedish banking sector is well capitalized but highly concentrated: the country’s four major banks hold about 85% of deposits and loans. Approximately 85% of lending to households consists of mortgages, and almost half of lending to corporates goes to real estate-related operations.
General Elections in September 2018
Sweden will probably be ruled by a left-green minority government until the next general elections (September 2018). Although the populist Swedish Democrats party is expected to perform better than in the last elections in 2014, they lost some support, as the refugee crisis has not been as acute as in 2015 and 2016. Therefore, the two biggest parties could win voters’ support back, according to polls conducted in autumn 2017. Furthermore, the Swedish Democrats are quite isolated in the Swedish parliament, meaning that the upcoming Swedish government will likely proceed with an EU-friendly and consensus-based policy stance.
Sweden has one of the most friendly business environments in the world. It notably ranks tenth in the 2018 Doing Business ranking.