The labour market has performed strongly after the pandemic. Unemployment has fallen. Employment surpassed pre-crisis levels in 2021 and grew robustly throughout 2022 and early 2023. Signs of a slowdown are emerging, with layoff notices increasing and companies preparing to downsize their workforce.

The economy is set to contract in the near term. After a 2.9% expansion in 2022, output is projected to shrink by 0.3% in 2023 before growing by 1.4% in 2024. Investment is expected to decline against the backdrop of rising input and financing costs. Unemployment is set to increase. Inflation will ease only gradually and remain high in 2023 (Table 1).

Monetary policy has been normalising on the back of rising inflation pressures. Consumer price inflation with a fixed mortgage rate (CPIF) stood at 7.6% in April 2023, after peaking at 10.2% in December 2022. CPIF inflation excluding energy moderated to 8.4% suggesting inflationary pressures remain broad (Figure 2). Wage increases are expected to be modest, even as real wages are falling. The Riksbank raised its policy rate from 0% in May 2022 to 3.5% in April 2023 and has embarked on quantitative tightening to bring inflation back towards its 2% target.

The fiscal stance in 2023 is set to be broadly neutral. Fiscal policy remained supportive in 2022, after the pandemic years of spiralling public expenditure. Considerable support was provided to households hit by soaring energy bills in 2022, and more is planned for 2023. The support includes transport fuel tax relief, price support and ex-post compensatory payments based on electricity consumption. Such untargeted support adds to fiscal cost, may fuel inflation and distort incentives to save energy. Defence spending is also rising in response to increased security threats and in anticipation of NATO membership.

Sweden’s labour force participation and employment rates are very high. Women’s and the elderlies’ employment rates are also high in OECD comparison. Even so, a compressed wage structure raises demands for workers’ productivity and makes it hard for low-skilled people to find jobs, while a high labour tax wedge and recent changes to the pension system reduce work incentives.

Elevated long-term unemployment following the pandemic has coincided with a high level of job vacancies. Most of the long-term unemployed are low-skilled, foreign-born or have disabilities, and an increasing share are older Swedish-born men. Rent controls hold back labour mobility.

Foreign-born women make up one third of the long-term unemployed, and lag considerably behind the high employment rate of Swedish-born women (Figure 3). They are often low-educated and may face strong gender- and family norms. Weak work incentives for second earners receiving social assistance can contribute to keeping this group out of work. A recent public employment service reform, contracting out activation policies in outcome-based payment schemes, may help if well-implemented.

Sweden’s labour tax wedge is high. The top personal income tax rate is among the highest in the OECD and applies at a low threshold, while a large difference in tax rates for labour and capital income incentivises income-shifting. At the same time, Sweden’s property tax revenues are among the lowest in the OECD.

Sweden’s pensioners are well-off, with already low relative poverty further on the decline, and good material standards (Figure 4). This is much thanks to Sweden’s pension system, which has combined decent pensions, fiscal sustainability and incentives to lengthen working lives. The recent increase of the tax-funded basic pension and the introduction of a new tax-funded income pension supplement tend to weaken incentives to lengthen working lives and fiscal sustainability.

Sweden has more than halved greenhouse gas emissions since the 1970s and has implemented a comprehensive and relatively efficient policy package comprising carbon pricing, subsidies, regulations and tools for cooperation and dialogue. Nonetheless, recent policy changes have likely put the 2030 target out of reach unless new ambitious policies are put in place.

Mandatory biofuel blending was an important part of Sweden’s plan to reach its 2030 target for non-ETS emissions (Figure 5). This policy has a very high price tag, while other emission sources, notably agriculture, face no effective climate policies at all. The new government has proposed to reduce the blending requirement to a low level and scrap other climate policies. By consequence, the country is likely set to miss its 2030 reduction target.

Negative emissions face weaker incentives than reductions from existing sources, and their use to meet climate targets is restricted. Planned reverse auctions for capture, transport and storage of biogenic CO2 is a step in the right direction, but natural sinks remain undervalued. 

High-emitting industries, notably steel, cement and chemicals, invest heavily to decarbonise, while Swedish mines expand to provide materials for the green transition. Sweden’s Northern regions are at the forefront of this nascent revolution, fuelled by an abundance of clean energy. To maintain momentum Sweden will need to roughly double its electricity generation (Figure 6) with renewables and nuclear power and invest in plannable electricity generation capacity, storage and transmission.

Projects within industry, mining, electricity generation and transmission are challenged by long lead times. Planning and permitting procedures rooted in the Environmental Code are complex and long, while informal coordination of stakeholders in Norrbotten and ongoing pilot projects in transmission demonstrate scope for improvements. A large percentage of wind power projects are struck down by municipalities, who hold a veto in local planning decisions.

The green industrial revolution depends on skills, for industry and for complementary public services. This is a challenge for northern regions and municipalities, which are already suffering labour shortages after decades of demographic decline. Investments are also needed in infrastructure and housing.