OECD Economic Outlook May 2019, Country Notes: Sweden

212 

Sweden The economy remains robust, but growth is set to slow to 1.6% as the construction boom is over. Modest wage growth and lower house prices will continue to hold back private consumption, and global uncertainties will weigh on business investment. The unemployment rate is set to stop falling, as skill mismatches hamper hiring. Inflation is close to the 2% target.

The Riksbank has started raising its policy rate, which is appropriate, but further moves should depend on inflation and output developments. Fiscal policy is appropriately prudent, but space for easing is available, should the economy deteriorate further than projected. The government is planning housing and labour market reforms, which are welcome steps to strengthen growth and inclusiveness.

Economic growth is slowing Private consumption slowed sharply in 2018 with consumer confidence falling. Modest wage increases, sagging house prices and global uncertainties are encouraging households to save. The construction boom is now over and following house price declines, residential investment is falling steeply. Declining business confidence and global uncertainties hold back corporate investment. Exports have remained relatively strong so far, with support from a weak krona, while sluggish domestic demand is damping imports. Skill mismatches hamper further reductions in unemployment. Inflation is close to target, albeit partly due to rising energy prices.

Sweden Growth is slowing and unemployment bottoming out % change 5

Residential investment is falling steeply as house prices drop

% of labour force 10

% change 20

← Real GDP Residential investment

Unemployment rate →

4

Real house prices

9

15 10

3

8

2

7

1

6

5 0 -5

0

2012 2013 2014 2015 2016 2017 2018 2019 2020

5

-10 0

2012 2013 2014 2015 2016 2017 2018 2019 2020

-15

Source: OECD Economic Outlook 105 database; and OECD Analytical House Prices database.

StatLink 2 https://doi.org/10.1787/888933934945

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

 213

Sweden: Demand, output and prices 2015

Sweden GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index2 Core inflation index3 Unemployment rate4 (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2016

Current prices SEK trillion

4 200.7 1 889.3 1 085.7 990.3 3 965.4 31.3 3 996.7 1 912.5 1 708.6 204.0 _ _ _ _ _ _ _ _

2017

2018

2019

2020

Percentage changes, volume (2017 prices)

2.5 2.8 3.2 3.9 3.2 -0.1 3.0 2.6 3.9 -0.4

2.4 2.3 0.4 6.5 2.8 0.1 2.9 3.7 5.2 -0.4

2.4 1.2 1.1 3.5 1.8 0.4 2.1 3.7 3.1 0.4

1.6 1.8 1.0 -0.5 1.0 0.1 1.0 3.2 2.2 0.5

1.6 2.1 0.4 1.5 1.5 0.0 1.5 3.2 3.1 0.2

1.7 1.0 1.4 6.9 16.0 1.0 42.4 3.8

2.2 1.8 2.0 6.7 15.1 1.4 40.8 2.8

2.2 2.0 2.1 6.3 17.1 0.9 38.8 2.0

2.1 1.7 1.6 6.2 17.3 0.8 36.5 3.4

2.1 2.0 1.9 6.2 17.0 1.0 34.7 3.5

1.

2.

3.

4.

Contributions to changes in real GDP, actual amount in the first column.

The consumer price index includes mortgage interest costs.

Consumer price index with fixed interest rates.

Historical data and projections are based on the definition of unemployment which covers 15 to 74 year olds and classifies job-seeking full-time students as unemployed.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935838

Labour and housing market reforms could strengthen growth and inclusiveness The Riksbank raised its policy rate to -0.25% in December 2018, with actual and expected inflation close to the 2% target. Monetary policy remains very supportive and a gradual normalisation of interest rates is welcome given high capacity utilisation and the potential impact of a long period of very low interest rates on indebtedness, asset prices and resource allocation. Still, delaying further policy moves until inflation and growth prospects become clearer is appropriate.

Fiscal policy is expected to remain prudent over the projection period, with surpluses in excess of the target of ⅓ per cent of GDP over the business cycle. This stance is appropriate, given cyclical conditions, the need for budget buffers in an economy highly exposed to external shocks and where low policy rates limit room for monetary policy manoeuvre.

The economy is suffering from some structural weaknesses. The government is considering easing labour market regulations to increase flexibility and facilitate the hiring of low-skilled workers. The introduction of entry agreements, negotiated with the social partners and combining subsidised employment and education, should help better integrate immigrants and long-term unemployed in the labour market.

Housing market inefficiencies affect affordability, macroeconomic and financial stability, and labour mobility. The government has taken measures to release land for development and speed up planning processes. It also plans to remove rent controls for new dwellings and to amend property taxation, but restoring affordability may require further and deeper reforms in the housing market.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

214 ď ź

The economy will remain solid but global uncertainty shrouds the outlook Growth will moderate, as bottlenecks appear after years of strong growth and global uncertainties weigh on confidence. Private consumption is expected to remain fairly weak despite tax cuts, as real wages will grow only modestly and households remain cautious in uncertain times. The contribution from foreign trade to growth will gradually shrink as export growth weakens and imports recover as domestic demand picks up. The large proportion of the low-skilled and recent immigrants among the unemployed limits the scope for further reductions in unemployment. Inflation is projected to remain close to the 2% target, as capacity utilisation remains high. Further decreases in house prices constitute a key risk to the outlook, as they could depress residential investment and private consumption. However, a reduction in global uncertainty would be conducive to stronger growth.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019