OECD Economic Outlook, Volume 2022 Issue 1

Sweden

Growth is set to slow to 2.2% this year and 1% in 2023. Heightened global uncertainty will weigh on business investment and exports. Household consumption is backed by a strong labour market, high savings and fiscal support, but will slow as higher inflation and interest rates start to bite. The unemployment rate will continue to fall this year but will level off in 2023, as skills in high demand become increasingly scarce.

Inflation has taken off, fuelled by lingering supply chain disruptions and soaring commodity prices. Monetary policy should aim to keep expectations anchored. Fiscal policy remains expansionary this year, and additional spending may be needed in the future to accommodate Ukrainian refugees and boost defence. Investment in energy infrastructure will be needed to support ongoing electrification and enhance energy security.

Growth is slowing amid increasing uncertainties

The level of GDP was 4% above its pre-pandemic peak by the fourth quarter of 2021, but declined in the first quarter of 2022. Household consumption edged down in March and consumer confidence has plummeted, reaching the lowest level since 2008. In contrast, business sentiment remains relatively upbeat. Unemployment is almost back at pre-pandemic levels and will continue to decrease, albeit at a slower pace, as an increasing share of jobseekers lack the skills demanded by employers. Inflation rose to 6.4% in April, the highest rate in three decades, and is broadening beyond energy prices, with food and services prices shooting up.

Sweden: Wages indicators and refugees situation

1. Scenarios published by the Migration Agency on 27 April. The original scenarios run to the end of 2022. The truncated scenarios shown here assume that half of the number for the whole year is reached by the end of June.

Source: Statistics Sweden; and the Swedish National Mediation Office; Migration Agency.

Statlink

Sweden: Demand, output and prices

Statlink

The direct economic consequences of the war in Ukraine have so far been small, as trade with Ukraine and Russia is limited and financial exposure to Russia low. Sweden has been hit by higher prices of energy and other commodities and is set to suffer from lower growth in important trading partners, notably Germany. As of late May, close to 39 000 Ukrainian refugees (0.37% of the population) had arrived in Sweden but the number could grow considerably, depending on the course of the war. The government is compensating car owners for mounting fuel prices, and has set aside an extra SEK 10 billion (0.2% of GDP) to accommodate Ukrainian refugees.

Fiscal policy remains supportive but monetary policy has begun to normalise

In response to surging energy prices and the deteriorating security situation, the government has proposed to add discretionary spending amounting to 1.2% of GDP to an already expansionary budget. Public spending is set to remain high by pre-pandemic comparison, as Ukrainian refugees need accommodation, and the government has vowed to expand defence spending from today’s 1.3% of GDP to 2% over the coming years, against the backdrop of Sweden’s application to NATO. Moreover, energy infrastructure is being strengthened to support decarbonisation and enhance energy security. Tax revenues have surprised on the upside and are expected to remain strong with an improved labour market and the phasing out of pandemic-related support measures. Fiscal policy will remain supportive despite tightening somewhat in 2023. The Riksbank has started to normalise monetary policy, raising the repo rate from 0 to 0.25% and tapering asset purchases, in an attempt to curb soaring inflation expectations before the upcoming central wage negotiations. The Riksbank is expected to raise the repo rate three times in 2022, by a cumulative 100 basis points, and by a further 0.5 percentage point in 2023.

Growth will edge down as inflation lingers

Growth will abate, albeit from a high pace, to 2.2% this year and 1% in 2023. Households will react to declining purchasing power and rising interest rates by reducing spending growth. Public consumption and investment will continue to support the economy, but strong tax revenues are bolstering the public finances and the public debt-to-GDP ratio is likely to fall below its pre-pandemic level in 2022. Inflation will remain high throughout the projection period, as increasing commodity and energy prices are gradually passed on to customers. Elevated energy prices could de-anchor inflation expectations, resulting in greater wage pressures and more entrenched inflation. Rising interest rates will quickly increase households’ debt servicing costs on floating-rate mortgages. There is a risk that this could trigger a house price correction, with consumption easing further. Firms indicate that lack of material and equipment, not demand, continues to be the main factor constraining industrial production. A quick easing of supply bottlenecks would improve growth prospects.

Labour market and energy infrastructure challenges remain

The labour market suffers from structural problems, as manifested in a still relatively high unemployment rate. Improving activation policies and raising the skills of the long-term unemployed and inactive individuals should remain top policy priorities. The government has taken welcome first steps to prevent tax avoidance, the exploitation of low-skilled foreign labour, and welfare fraud in low-skill segments of the labour market. The government should follow through to ensure that resident low-skilled workers compete on a level playing field. Investments in existing energy infrastructure as well as in new, plannable energy sources will be needed to facilitate the green transition and reduce reliance on energy imports.