OECD Economic Outlook, Volume 2020 Issue 2

Sweden

The Swedish economy is gradually recovering from the COVID-19 crisis. Overall, GDP is projected to expand by 3.3% in both 2021 and 2022. Nevertheless, high unemployment and ongoing distancing will limit the pick-up in household consumption. Low capacity utilisation and uncertainties hold back business investment. Exports will gradually pick up as the global economy recovers. Unemployment will decrease slowly despite the economic recovery, as increases in working time from low levels will precede new recruitments.

Monetary policy will remain accommodative to facilitate credit and provide sufficient liquidity to firms. The government is implementing a sizeable fiscal package to support the economy and employment as well as to tackle structural issues like green transition and regional inequality. However, additional measures may be needed to support young, low-skilled and foreign-born unemployed, as well as remote regions.

Additional containment measures can now be locally implemented

Since September, the number of COVID‑19 cases has climbed up again. The number of patients in intensive care units and deaths has also increased. To contain the spread of the virus, the Swedish Public Health Agency has tightened the rules to isolate people who live in a household with an infected person: previously, they were urged to stay at home; now, they must stay at home if ordered to do so by a doctor. Furthermore, selling and serving alcohol after 10 pm was forbidden. The threshold for public events was lowered from 50 to eight people, and almost 90% of the counties have introduced additional guidelines specific to their area.

Sweden: Labour market and card spending

Source: Swedish Public Employment Service (Arbetsförmedlingen); Swedbank Pay; and Swedbank Research.

Statlink

Sweden: Demand, output and prices

Statlink

Economic activity is recovering

Despite the absence of a lockdown in Sweden, sectors like hotels, restaurants and transport have been severely hit and unemployment has risen markedly, notwithstanding a generous short‑time work scheme. Still, termination notices and newly registered at the public employment service have sharply decreased since the beginning of the summer, suggesting a gradual slowdown in the rise in unemployment. Domestic tourism during the summer months supported private consumption. Card transactions have increased since the end of June, including for non-grocery goods. Firms in manufacturing, retail and services are becoming less pessimistic.

Government support to the economy remains generous

The government has introduced new measures in the 2021 budget bill, amounting to SEK 105 billion (2% of GDP) in 2021 and SEK 85 billion (1.7% of GDP) in 2022. Reductions in employer social security contributions and income taxes will support employment and household purchasing power. Higher unemployment compensation, retraining and support to people weakly attached to the labour market will help reduce unemployment. Municipalities and regions will receive additional grants to cover COVID‑19‑related expenses and rising welfare costs. Structural measures include investments in infrastructure and the green economy. Monetary policy will remain highly accommodative: the Riksbank intends to keep the repo rate at zero at least until 2023 and has included corporate bonds in its securities purchasing programme for a total amount of SEK 10 billion (0.2% of GDP).

The economic recovery will be gradual

The household saving rate has risen and will remain very high in the near term because of increased unemployment and restrictions on social life. Nonetheless, consumption is projected to gradually regain traction, provided the number of infections remains low in most of the country and an effective vaccine is deployed. Exports are set to pick up as demand in neighbouring countries gathers momentum. However, the recovery in business investment will be slow. Firms’ low capacity utilisation and the high level of uncertainty will hold back their investment, despite higher liquidity provided by government measures. Improvement in the labour market will also be slow. The increase in unemployment was damped thanks to the short-time work scheme, but it will continue for some time, as employers will first raise working hours of existing employees before hiring. A more severe spread of COVID-19, higher global trade tensions and the lack of a trade agreement between the United Kingdom and the European Union would hold back exports and investment, further delaying the economic recovery.

Additional policy action may be needed to address inequalities

The COVID-19 crisis has exacerbated inequalities among people. Unemployment has more severely hit youth, low-skilled and foreign-born persons, many of whom were working in the hospitality sector. Even though current policies will support these groups, additional measures may be needed to improve their training and help them transit to new jobs. Remote regions were already facing mounting demographic challenges, with an ageing population and the departure of young and skilled workers. Additional grants may be needed to provide adequate welfare services, especially in healthcare, elderly care and education.