OECD Economic Surveys: Sweden 2023

Executive summary

Growth is challenged by Russia’s aggression

After emerging from the pandemic in relatively good shape, Sweden’s economy is under renewed pressure following Russia’s illegal war of aggression against Ukraine and its weaponization of energy.

Growth has slowed down, as private consumption and housing investments have fallen. Consumer and business confidence have plummeted (Figure 1). Direct trade and financial links with Russia and Ukraine are limited, but high energy prices have led to increased inflation, rising interest rates and a housing price correction. Commercial property companies have increased borrowing from the corporate bond market in recent years, but face challenges refinancing their debts.

Figure 1. Growth is losing steam

Source: Statistics Sweden; National Institute of Economic Research.

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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).

Table 1. GDP will contract in the near term

(Annual growth rates, %, unless specified)

	2021	2022	2023	2024
Gross domestic product	5.9	2.9	-0.3	1.4
Private consumption	6.2	2.0	-2.7	2.0
Government consumption	2.9	0.1	1.2	1.2
Gross fixed capital formation	6.8	6.2	-1.6	0.1
Exports	10.8	7.1	4.0	3.3
Imports	11.3	9.4	1.6	3.2
Unemployment rate (% of the labour force)	8.8	7.5	7.9	8.0
Consumer price index	2.2	8.4	7.9	2.4
Current account balance¹	6.5	4.2	5.6	5.6
General government fiscal balance¹	0.0	0.7	-0.4	-0.6

1. As a percentage of GDP.

Source: OECD Economic Outlook No. 113.

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.

Figure 2. Inflation is at a 30-year high

1.CPI with a fixed mortgage rate.

Source: Statistics Sweden.

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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.

Labour market matching could improve

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.

Figure 3. The employment gap between native- and foreign-born women is high

2019, 15-64 year-olds

Source: OECD Migration Statistics (database).

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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.

Figure 4. Swedish elderly are relatively well-off

Material deprivation by age, 2021

Note: Nordics is an average of values for Denmark, Finland and Norway. 2020 for Norway.

Source: Eurostat, Income and Living Conditions database.

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Climate policies need to tighten to reach targets

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.

Figure 5. The transport biofuel mandate was an important part of the plan to reach the 2030 target

1. ESR denotes emissions covered by Sweden’s 2030 target and the EU’s Effort Sharing Regulation. Calculations assuming the transportation target is met and maximum supplementary measures are used.

Source: Statistics Sweden; The Swedish Environmental Protection Agency.

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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. 

A nascent green industrial revolution is fuelled by clean electricity

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.

Figure 6. Electricity demand could roughly double by 2045

Source: Statistics Sweden; Gode, J. et al. (2021), Efterfrågan på fossilfri el - Analys av högnivåscenario, Energiforsk and Profu.

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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.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Stabilising inflation as a foundation for future growth
Inflation has risen, and price pressures have broadened. Five-year inflation expectations are close to the inflation target, and wage increases are expected to be modest.	Stand ready to tighten monetary policy as needed to bring down inflation and ensure that inflation expectations are anchored.
Fiscal policy is expected to be broadly neutral in 2023, with the energy crisis being met by broad-based energy price support. Energy prices have fallen back considerably since their peak.	Gradually phase out energy crisis support measures.
A number of budget decisions have been taken outside of the ordinary budget process even though not all of them have been urgent and warranted as a crisis response.	Return to the normal practice where spending decisions are taken in the ordinary budget process.
Structural reforms for a stronger and more inclusive labour market
The labour tax wedge is high. A large difference between marginal taxation of labour and capital income incentivises income-shifting.	Reduce incentives for income shifting by increasing dividend taxation and reducing the top marginal tax rate on labour income.
Foreign-born women have a very low employment rate compared to the high employment rate of natives and many of them are neither employed, nor in training or education.	Carefully review social assistance and other benefits typically taken up by inactive foreign-born women with the aim to strengthen work incentives without exacerbating inequality.
Mortgage interest deductibility and low, regressive recurrent taxes on immovable property create distortions in favour of owner-occupied housing.	Once the housing market cycle has clearly turned, consider reforming the recurrent property tax to better align tax charges with the market values of properties and phasing out mortgage interest deductibility.
Property tax revenue is low and only a minor share befalls municipalities.	Consider delegating authority to collect property taxes and set their rate to municipalities.
Swedish pensioners have decent incomes and material living standards compared internationally and compared to younger generations in Sweden. A large increase in the basic pension and a new income pension supplement in 2022 weaken pension sustainability and work incentives.	Increase the relative importance of earnings-related pensions, for example by reducing indexation of the basic pension and the new income pension supplement.
Strict rent controls discourage mobility, notably for low-income households, and contribute to weak competition in the construction sector together with complex regulations and municipalities’ local planning monopoly.	Relax rent controls and streamline building, planning and product market regulations affecting construction.
Revising climate policies and targets
Reducing the biofuel blending requirement will likely move the 2030 reduction target out of reach unless new and ambitious measures are implemented. An ambitious transport sector reduction target is redundant to the overall 2030 target, and may reduce efforts in other sectors.	Strengthen the overall policy package to ensure the 2030 target for non-ETS sectors as a whole is reached while allowing deviations from the 2030 transport sector target. Complete a country-wide charging network to speed up the take-up of electric vehicles.
Incentives to reduce agricultural emissions are weak. Quantity-based measures like the number of livestock or fertilizer use can be measured and taxed relatively straightforwardly while associated emissions can vary widely.	Improve monitoring and reporting of agricultural emissions, with the aim to introduce a pricing mechanism, while rewarding climate-friendly practices, the provision of nature-based services and green R&D.
Sweden’s climate targets and policies are focused on reducing existing domestic emissions, while there are strict limits and weaker policies to instigate negative emissions.	Treat additional negative emissions equally to reduced emissions in the target structure. Introduce a general subsidy or tax credit at the level of the carbon tax for negative emissions not currently covered by the EU ETS or the carbon tax.
Powering up the green economy
Green industry and electric vehicles are set to roughly double electricity demand by 2045, but permitting slows down investments in industry, renewable energy and transmission.	Streamline and improve coordination of the environmental permitting process.
Municipalities use their local planning veto to shelve a large share of land-based wind power projects.	Consider limiting the municipal veto while allocating a share of wind power profits to host municipalities through for example a local property tax.
New industries raise the need for re-skilling and up-skilling, and the need to draw talent from elsewhere in Sweden and abroad.	Ensure that the Public Employment Service reform contributes to a holistic approach to the supply of people and skills with cooperation between municipalities, universities and industry.
Municipalities home to new industrial development need to attract working-age people to fill jobs in public services as well as industry.	Invest in municipal infrastructure, services and housing to facilitate population increases in hotspots for the green transition.