Sweden: Risk Assessment
Country Risk Rating
Business Climate Rating
- Very favorable business environment
- Very diversified economy, specialized in high-tech products and the green economy
- Sound public finances
- Increasingly dynamic demographics
- Highly dependent on global demand
- Tensions on the real-estate market
- Substantial household debt (188% of personal disposable income, 2019)
- Highly concentrated banking sector
Nobody is on an island
In 2021, a slow economic recovery is expected, after the Swedish economy went into a recession in 2020 due to the global COVID-19 pandemic. After the virus hit Sweden in spring 2020, the government reacted unconventionally with the softest restrictions in Europe, which were mainly based on voluntary social distancing. While the aim was to reach a herd-immunity fast and keep the economy alive, the result was the tenth highest COVID-19 death rate in the world. Furthermore, the voluntary social distancing had negative economic results in Sweden in Q2 2020, like everywhere else in Europe, with a sharp decline in private consumption and investments. Moreover, as the main export partners - Germany, the U.S. or the UK - partly shut down their production, Swedish exports fell sharply too. In parallel to other European countries, the Swedish economy recovered fast in the third quarter of 2020, especially since private consumption and exports picked up again. A second wave of COVID-19 in mid-autumn turned out to be considerably stronger than the first wave. However, governmental restrictions only sharpened in single parts. Therefore, the economic growth dynamic should remain limited during the winter, but will then gain some momentum. Private consumption should pick up again, as the unemployment rate should slowly drop from its peak-level of above 9% in 2020 to a more sustainable level of around 8%, which will still be above the pre-crisis level. The financial situation of households will probably improve in 2021, with a stronger savings rate as a background and robust housing prices. The new collective wage deal, negotiated between unions and employers in the manufacturing industry in October 2020, resulted in a wage growth rate of 5.4% starting in October until March 2023. This result is less than the last 3-year deal that had a wage growth of 2.2% per year, but still builds a foundation for moderate consumption growth. Investment expenditures should remain limited in 2021 as long as the overall global economic uncertainty remains, while exports should pick up when demand from the Nordic neighbors, as well as Germany, the UK and the U.S., is revived.
Surprisingly, businesses did not deplete the government’s stimulus package in 2020, as only 3/4th of the financial support was used, e.g. the furlough scheme. The remaining amount of around SEK 105 billion (2.2% of GDP) is now planned in for 2021, including welfare measures, extended turnover support for businesses and income tax cuts for low- and middle-income earners. The Riksbank initiated a corporate loan program in 2020 (SEK 500 billion, 10% of GDP) and the asset purchase program was extended from SEK 130 billion to SEK 500 billion until mid-2021. An additional extension is possible in 2021, while the key interest rate is expected to remain at 0%. Thanks to the public support measures, the Swedish financial sector did relatively well in 2020 with stable lending to households and companies. Nevertheless, a rise in corporate debt and bankruptcies is one of the main risks for the banking sector, which will focus on rebuilding the bank’s capital buffer.
External accounts will remain positive
In 2021, the country’s external position will return to its 2019-level following the strong increase in 2020. Last year, disproportionally high returns on investments abroad led the current account balance to surge, alongside only a mild decrease in the goods-trade balance. The investment balance is likely to come back to more sustainable levels in 2021, while goods exports should increase again. Conversely, the general government budget balance will remain negative in 2021 and should not already return to its 2019-level. However, the budget deficit should remain limited, which will keep the public debt at a sustainable level.
Resilient coalition despite the pandemic
Prime Minister Stefan Löfven from the Social Democratic Party (100 seats out of 349 seats in the parliament) is leading a minority government with the Green party (16 seats), supported by the social-liberal Centre Party (31 seats), the Liberals (19 seats) and the Left Party (27 seats). At first, the unconventional strategy to fight COVID-19 increased the support share of the government in polls. However, with the advent of the economic recession, in combination with the disproportionally high death rate, public support dropped down to almost pre-crisis-levels. Nevertheless, the current coalition is expected to make it until the next general election in 2022, as the supporting parties, who would be needed for a vote of no confidence, lost support in the polls too and would not risk an election in the current difficult circumstances.