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
- Tensions on the real estate market
- Substantial household debt
- Highly concentrated banking sector
Growth slowing but still strong
Swedish growth will be driven by exports and private consumption in 2019. Vigorous activity in recent years has led the economy to operate at full capacity, as evidenced in an increase in the job vacancy rate, for example. Amid high demand in goods and services, investment was boosted – particularly in the manufacturing sector, which has been running above capacity. These high levels of investment in 2018, the shortage of skilled workers, and less buoyant demand suggest that a slowdown in business investment is likely in 2019. The decline in property prices since mid-2017(after a sharp increase), should also limit investment in private construction. Unemployment, which is back to pre-crisis levels, is expected to stabilize at around 6% of the labor force, due to the fact that a significant proportion of those still unemployed are harder to employ. Despite being at a low level, wages are set to grow at a moderate pace, as social partners (unions and employers’ associations) prioritize competitiveness in the face of muted productivity growth. However, household consumption should be boosted by low inflation, which is close to the central bank’s 2% target, as well as by monetary policy, which remains very accommodative despite the prospect of a hike in the key interest rate in early 2019 (it was held at -0.5% in November 2018). A larger decline in housing prices could also constrain household consumption through a wealth effect, weakening domestic demand. However, household disposable income is expected to increase as a result of the tax cuts included in the 2019 budget. Uncertainties associated with Brexit and the rise in global trade tensions could weigh downward on this outlook, potentially limiting net exports contribution to growth.
Sound public and external accounts but private debt is vulnerable
Public finances will continue to be robust in 2019, with the budget surplus expected to converge towards its medium-term objective of 0.33% of GDP. The Sweden Democrats’ support for the center-right opposition’s budget proposal led to the adoption of USD 2.2 billion of tax cuts (lower pension taxes, higher income tax threshold), leading to a reduction in the budget surplus. Once a government has been formed, it may review the spending plan, but cannot change taxes as these cannot be modified outside the autumn budget process. As a net lender for several years, the Swedish government has slashed its public debt-to-GDP ratio, which fell below 40% in 2018, and this decline should continue thanks to the vigorous level of activity.
The country’s external position will also remain very comfortable, with an increase in the current account surplus. More sluggish domestic demand is expected to bring slower import growth, while exports will be stronger. The downward trend in the krona should stabilize over the course of the year if monetary policy is tightened as expected. The Swedish economy is highly competitive, and exports mainly capital goods (15% of exports in 2017), cars and car parts (13.5% of exports), as well as commercial services, particularly telecommunications and tourism. Primary income, chiefly from investments, contributes to the current account surplus.
Conversely, the situation is more precarious regarding private debt, with household debt equivalent to 180% of disposable income at the end of 2018. In a context of low interest rates and a tax regime favorable to homeowners, real estate loans increased sharply, driven by price growth in large cities, especially between 2014 and 2016. A readjustment has taken place since mid-2017, with prices softening by 5% in the year to August 2018, but a more significant price fall could have an adverse impact on the banking sector, which is highly concentrated (four banks account for 85% of the market) and heavily exposed to the real estate market. Credit interconnections between banks also raise the risk of contagion.
A more uncertain political situation in the absence of a parliamentary majority
None of the traditional parties (left-wing and center-right blocs) secured a majority during the parliamentary elections of September 2018. Although the far-right Sweden Democrats won 62 seats out of 349, no other party was willing to join forces with it. At the time of writing, the two attempts to form a new government were both unsuccessful. As the constitution allows only four rejections before new elections are organized, a new vote could be held. However, the costs associated with holding such elections could lead parties to compromise in order to form a government. Because of this fragile coalition, any government will have less room for maneuver than in the past, but its policy should remain pro-EU.
Sweden’s business climate is still among the most favorable in the world, coming 12th in the Doing Business 2019 ranking.