OECD Economic Outlook, Volume 2018 Issue 1

Sweden

Growth will remain strong as global demand and a weaker krona continue to boost exports. Exporting sectors will invest further to meet rising demand, but housing investment will contract against the backdrop of house price declines. The labour force will expand more slowly and unemployment will level off, as difficult‑to‑hire low‑skilled workers make up a rising share of jobseekers. Households will remain cautious, with the saving rate staying high.

Both fiscal and monetary policies are expansionary during a strong upturn, and risk amplifying the business cycle. Expansionary monetary policy has succeeded in bringing inflation close to 2% and expectations are well‑anchored. The Riksbank is projected to begin withdrawing monetary stimulus towards the end of 2018, which is needed to balance inflation risks against those of resource misallocation and financial imbalances, notably connected to property prices. Reforms aimed at improving the functioning of the housing market are also needed.

Exports maintain their strong growth as domestic demand softens

The economy continues to grow strongly, but the composition of growth is changing. Exports are being boosted by international demand and a weaker krona, but consumption growth is slowing due to still modest wage growth, high saving and falling housing prices. Shortages of qualified labour persist, but unemployment is declining only gradually, as the unemployed increasingly consist of harder‑to‑employ individuals, including recently arrived immigrants. Business investment is buoyed by growing export demand. In contrast, housing investment is contracting. Households have not cut consumption, but are expected to remain somewhat cautious in the near term. Employment continues to expand, but at a slower pace.

Monetary and fiscal policies are expansionary

Inflation is projected to stay close to target going forward, but monetary policy is set to remain highly expansionary, notwithstanding signs of high capacity utilisation. The bond purchasing programme has been put on hold, and the first hikes in the repo rate, which has remained at ‑0.5% since February 2016, are expected in the second half of 2018. A gradual tightening of monetary policy is welcome to balance the risks of inflation undershooting against those of overshooting, financial imbalances and resource misallocation.

Sweden

Source: OECD Economic Outlook 103 database; Statistics Sweden; and Valueguard.

Statlink

Together with easy access to credit, and rapid income and population growth, low interest rates have fuelled strong house price growth until recently. Household debt has grown to exceed 180% of disposable income, but macro‑prudential measures seem to have started to have some effect. Favourable tax treatment of housing and mortgages, rental regulations and a lack of competition in construction have contributed to imbalances in the housing market, where an overall shortage of dwellings coincides with excess supply in some market segments. House prices are undergoing a welcome correction. They fell by 3.7% in the year to February 2018, and by 6.5% from their peak in August 2017, but now show signs of stabilising.

Sweden. Demand, output and prices

Statlink

Fiscal policy is expansionary, with new discretionary spending measures exceeding structural increases in government revenue. Even though investments are needed in the areas of education, immigrant integration, health, defence and environment protection, fiscal initiatives fuel already solid growth, and are financed by temporarily high tax revenues. However, fiscal sustainability is not threatened, with gross public debt below 40% of GDP and the headline fiscal surplus around 1% of GDP.

Growth will soften somewhat and housing market risks remain

GDP growth is set to slow down somewhat, as capacity constraints bind. Exports and business investment will continue to drive growth, as external demand, notably from the European Union, holds‑up. Household consumption will still expand at a measured pace, as labour market tightness only gradually feeds through to wages and the housing price correction instils cautiousness. Residential investment will contract further. Key risks to the outlook include further house price falls, which could weigh on consumption. A downturn could be exacerbated by imbalances resulting from excessively loose macroeconomic policies during the upturn.