2016-08-31

Swedish Economy Report August 2016

Fiscal policy needs to be tightened

The Swedish economy is booming. Investment levels are high, and employment has risen rapidly, resulting in reduced unemployment. The buoyant economy has also boosted central government finances. However, all the indications are that the structural deficit will widen both this year and next, taking fiscal policy further away from the surplus target.

Sweden’s GDP growth slowed in the first half of the year after a very strong 2015, but there is much to suggest that the decrease was only temporary and that the boom will continue.

GDP will increase by more than 3 per cent this year, driven mainly by higher consumption and investment. Next year, investment will slow and so GDP will grow less quickly, with household consumption and exports taking over as the main growth drivers.

One concern for economic growth is that many firms are facing shortages of labour, and unemployment in some groups remains high. Matching inefficiency in the labour market will therefore contribute to slower job growth next year.

A high proportion of workers will be needed in future to meet the increased pressure on publicly funded services from a growing share of elderly and young in the population.

This year and next, the structural deficit will widen while the economy is booming, and so fiscal policy will be somewhat procyclical. Structural net lending will also be well below even the proposed new surplus target of one-third of a percent of GDP. Given the strength of the economy and the need to move back towards the surplus target, it would have been more expedient to pursue a tighter policy.

In this light, it would, at the very least, have been appropriate for new measures in the 2017 budget to be fully funded, reducing the need for tightening policy in 2018 and beyond when the economic climate is more uncertain.

Brexit to have limited effects on Swedish economy

The outcome of the Brexit vote will impact negatively on growth in the UK but have limited effects on Sweden. There is, however, a risk that the British decision to leave will erode confidence in the EU as an institution, which could have far more serious consequences.

Selected indicators

Percentage change, unless otherwise indicated. 

 

2014

2015

2016

2017

2018

2019

2020

GDP, market prices

2.3

4.2

3.3

2.0

1.9

1.5

2.1

GDP per capita

1.3

3.1

2.0

0.5

0.6

0.4

0.9

GDP, calendar-adjusted

2.4

3.9

3.0

2.3

2.0

1.5

1.9

GDP, world

3.4

3.1

3.1

3.4

3.7

3.8

3.8

Current account balance (1)

4.2

4.8

4.4

4.7

4.6

4.4

4.2

Hours worked (2)

1.8

1.0

2.2

1.4

0.9

0.2

0.3

Employment

1.4

1.4

1.8

1.3

0.8

0.4

0.4

Unemployment rate (3)

7.9

7.4

6.7

6.3

6.2

6.4

6.7

Labour market gap (4)

–1.1

–1.1

0.2

0.6

0.8

0.4

0.1

Output gap (5)

–2.1

–0.5

0.5

0.7

0.6

0.2

0.0

Hourly earnings (6)

2.8

2.5

2.8

3.2

3.4

3.3

3.3

Hourly labour costs (2)

1.8

4.2

3.7

3.3

3.4

3.3

3.3

Productivity (2)

0.5

2.6

0.7

1.0

1.1

1.3

1.6

CPI

–0.2

0.0

1.0

1.4

2.7

3.4

3.1

CPIF

0.5

0.9

1.4

1.7

2.0

2.4

2.2

Repo rate (7,8)

0.00

–0.35

–0.50

–0.25

0.50

1.50

2.50

Ten-year government bond rate (7)

1.7

0.7

0.5

0.8

1.6

2.3

2.9

Effective krona exchange rate index (KIX), (9)

106.8

112.6

110.2

109.2

107.3

105.8

104.3

Government net lending (1)

–1.6

–0.1

–0.6

–0.3

0.2

0.6

0.5

Structural net lending (10)

–0.8

–0.2

–0.5

–0.8

–0.3

0.3

0.5

Maastricht debt (1)

44.8

43.4

41.7

40.2

39.1

37.7

36.4

1. Per cent of GDP.

2. Calendar-adjusted.

3. Per cent of labour force.

4. Difference between actual and potential hours worked in per cent of potential hours worked.

5. Difference between actual and potential GDP in per cent of potential GDP.

6. According to the short-term earnings statistics.

7. Per cent.

8. At year-end.

9. Index 18 November 1992=100.

10. Per cent of potential GDP.

Sources: IMF, Statistics Sweden, National Mediation Office, Sveriges Riksbank, Macrobond and NIER.

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