Country Report Sweden
The Swedish central bank has recently voiced its concerns about the high level of household debt. Meanwhile, the centre-right coalition is likely to lose the September 2014 parliamentary elections.
Strengths (+) and weaknesses (-)
(+) Diversified and high technology export base and current account surpluses
In the past decade, Sweden has structurally posted large current account surpluses, whereby high technology service exports have become an increasingly important source of foreign income.
(+) Strong institutions
Sweden has a high level of government effectiveness, while corruption is very low by international standards. Politics in Sweden are rather pragmatic and consensual.
(+) Sound fiscal position
Public debt is relatively low at 40% of GDP and the fiscal deficit is modest, while the budgetary framework is relatively strong.
(-) High household debt and dependence of banking sector on wholesale funding
Partially due to a favourable tax treatment and local regulations that constrain house building, mortgage debt has reached a relatively high level. Banks partially rely on foreign funding to finance their lending.
1. Central bank voices concerns about household debt and the housing market
The Riksbank, Sweden’s central bank, has recently stated its concern about the growth of household debt in Sweden (see also figure 2). According to Riksbank Governor Stefan Ingves, household debt, which now stands at the relatively high level of 170% of disposable household income, should not go above 180% of disposable income and should instead fall gradually in the coming years. Most household debt in Sweden consists of mortgage debt. In the last 15 years housing prices in Sweden have almost tripled. The supply of housing has been constraint by strict planning laws, while relatively generous tax breaks for mortgage loans have boosted mortgage lending. To finance the strong growth of mortgage lending Swedish banks resorted to the international markets, which are now the source of more than 50% of funding of Swedish banks. Some steps have been taken to reduce the resulting risks. Mortgage borrowing has been capped at 85 percent of the purchasing price of a house. Furthermore, Sweden already has relatively tough bank capitalisation targets. However, household debt has continued to increase; it grew by 4.9% y-o-y in December 2013, and the deputy governor of the central bank has recently warned that macroprudential supervision alone is not enough to deal with the risks. In this respect, she stated that Sweden should consider to review the tax incentives. Overall, we think that the immediate risks are still limited. While the high household debt is likely to increase the volatility of the Swedish economy and could reduce the access to finance for the Swedish banking sector in case the housing market gets into a downward spiral, we note that capital levels are relatively high and that the central bank in the past extended liquidity support when needed.
2. Opposition may win September elections, while Sweden’s fiscal position remains good
In September 2014, parliamentary elections will take place in Sweden. Recent opinion polls suggest that the right-wing Alliance for Sweden coalition, which has been in power since 2006 and consists of the Moderate, Liberal, Centre and Christian Democratic parties, is less popular than the red-green opposition block. As the lead of the latter block is statistically significant and does not seem to narrow, a red-green win seems likely. If the Center and Christian Democratic parties fail to pass the 4% electoral threshold, which some polls suggest could be a likely outcome, the red-green victory will be bigger. However, a red-green majority is not assured, especially as the far-right Sweden Democrats have done well in surveys recently, with support levels of roughly 10%. A red-green government will probably end the current privatisation process but is unlikely to lead to a much looser fiscal policy, as the red-green opposition has criticized the government for not doing enough to reduce the fiscal deficit. A pre-election boost of public spending also seems unlikely though, as the Moderate Party, the main government party, is also trying to present itself as the most fiscally responsible party. In the short to medium term fiscal risks remain low anyway, given that the fiscal deficit is expected to be a low 1.9% in 2014, while public debt remains modest at about 40%.
3. Strong growth in 2013Q4 unlikely to be continued in 2014
The Swedish economy has performed reasonably well in recent years. After the economy recovered vigorously from the global financial crisis by growing 6.6% in 2010 and 3.7% in 2011, economic growth slowed down to 1.3% in 2012 and 1.5% in 2013, as Sweden felt the impact of the Eurozone crisis. In the course of 2013, the recovery gained strength, with the economy growing by a strong 1.7% q-o-q (seasonally adjusted). However, it seems unlikely that the economy will continue to grow this rapidly. First, we note that the relatively good performance in the last quarter was fuelled by government consumption and inventory growth. Second, the so-called economic tendency indicator by the National Institute of Economic Research, which is published on a monthly basis, has fallen from 107.1 in January to 101.5 in March. Although the indicator is thus still slightly above the historical average of 100, the strong decline suggest more modest growth. Nevertheless, economic growth in 2014 is likely to be somewhat higher than in 2013, also as Sweden will benefit from the economic recovery that is taking place in the EU.
With an estimated nominal GDP of almost USD 58,000 per capita in 2013, Sweden is a very wealthy country. Sweden has an open economy and its export structure is diversified and strong and the Swedish workforce is well-educated. The average current account surplus over the last 10 years was 7% of GDP. The Swedish Krona is a freely floating currency, which allows the central bank to conduct an independent monetary policy. In the early 1990s, Sweden suffered a severe banking crisis, whereby the government seized control of most of the banking sector, after real estate and consumer debt had grown rapidly in the wake of financial deregulation. The economy then contracted for three years in a row, but grew by an annual average of 3.2% between 1996 and 2007. In 2009, GDP fell strongly due to the global financial crisis, but afterwards the Swedish economy has recovered relatively rapidly by European standards. However, high household debt and the dependence on foreign funding of the banking sector are economic vulnerabilities.
Sweden has strong institutions and a pragmatic and consensual political tradition. The country has often been ruled by a minority government. While the Swedish Social Democratic Party has been the most dominant party in the 20th century, the country has been ruled by a centre-right government since 2006. The Swedish public sector is large, the level of social protection is very high and income inequality is very low by international standards. However, youth unemployment is above the EU average. Sweden has been a EU member since 1995. Sweden is not a member of the NATO, but the country has participated in several NATO missions and from time to time, there have been discussions about the country joining the military alliance.