Sweden: Risk Assessment
Country Risk Rating
Business Climate Rating
- Very favorable business climate (#10 in the Doing Business 2020 ranking)
- 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)
- Highly concentrated banking sector
Several weakness factors lead to slow growth
Swedish growth is cooling down. Coming from very high growth rates, the economic dynamic is and will be less agile in 2019 and 2020. However, the growth level remains quite high in comparison to other European countries. One reason for the decrease in growth is the weakness of global demand, especially from the main trade partner, Germany. With a very high degree of openness, this weakness has not only a dampening effect on trade per se, but also on the total manufacturing sector. The sentiment indicators dropped sharply and business investments decreased in 2019. This general weakness should hold on in 2020, as global and German growth are expected to remain comparatively low. The pessimistic sentiment had contagious effects on the labor market with freezes in hiring and first dismissals, which lead to an increase in the unemployment rate (the trend of the unemployment rate went up from 6.5% in late 2018 to 6.9% in September 2019, a three-year-high).
Consumer confidence dropped sharply as personal households are more and more insecure about their personal economic future, all the more since the level of private household debt remains very high. It is expected, however, that private consumption expenditures will show some improvement in 2020. The main reason for this is the new national wage negotiation round for the Swedish industry in March, where wages are set for a three year agreement. The new deal should include a wage increase compared to the last deal in 2017 with annual pay hikes of 2.5-2.6% in 2020/2022. This could be a compromise out of higher inflation expectations in 2019 compared to 2017, on the one hand, and lower productivity numbers on the other.
The interest rate environment for the Swedish consumer should remain accommodative in 2020. As the inflation rate has dropped markedly and other central banks have turned around in their exit strategy, it is expected that the Riksbank will stay on hold in its interest rates increases for 2020, after the small hike in December 2019. Additionally, the current Quantitative Easing-purchases of government bonds (SEK 15 billion over six months) should be extended after the planned end in December 2020. Another factor helping private consumption is planned tax cuts for high-income earners and pensioners as well as deductions for job starters in 2020. Residential investments should benefit from this better consumption environment and continue the cautious recovery from the major drop down after the peak in 2018. The strong increase in the population due to higher immigration will help to foster the demand.
Sound public and external accounts
Public finances will continue to be robust in 2020, with a small budget surplus expected to be slightly under its medium-term objective of 0.3% of GDP. The new debt anchor of 35% of GDP for public sector debt, however, will be met. The budget for 2020 is a compromise between the government and its supporting parties. Except for the tax decreases/deductions, it also contains capital injections for municipalities and county councils, a higher defense budget but also investments in the renewable energy sector, financed i.a. via higher taxes on plastic carrier bags.
The country’s external position will also remain comfortable. Although cars and car parts are a major part of all exports with 19.2%, exports surprisingly increased in 2019 due to a further depreciation of the Swedish Krona. In 2020, the value of exports should come back to normal levels. However, the higher services surplus and the investment income, even with lower holdings of long-term debt securities, should add positively to the current account surplus.
A surprising stable alliance
After the election in September 2018, none of the traditional party alliances secured a majority. In the end, Prime Minister Stefan Löfven from the Social Democratic Party (100 seats) could continue his governmental work with the Green party (16 seats), after he stroke a “confidence and supply agreement” with the social-liberal Centre Party (31 seats) and the Liberals (20 seats). They offered their support for the weakest minority government in Swedish history, in exchange for concessions on the labor market reforms as well as tax cuts. This new alliance seems quite stable, as the voters of the Liberals and the Centre Party did not punish their parties for supporting the center-left government in the European election and in the polls during 2019. Therefore, there are realistic chances that the alliance will hold until the next parliamentary election in 2022.