Sweden - OECD Economic Outlook June 2020

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Sweden The COVID-19 pandemic has triggered a severe recession. GDP is expected to fall by 7.8% in 2020 assuming another virus outbreak later in the year and by 6.7% if the virus outbreak subsides by summer.

While containment measures have been less stringent than in most other OECD countries, private consumption has fallen markedly and is set to recover only slowly. Both disruptions to supply chains and tumbling demand have led to stoppages in industry. Export weakness is expected to linger, and the investment slump even more so, as high uncertainty compounds the effect of weak demand.

The government has implemented a wide range of measures to support local authorities and households and to protect jobs and companies. The short-term work scheme is containing the rise in unemployment, which is nevertheless rapid. Tax deferrals, reduced social security contributions and credit guarantees give breathing space to companies. The monetary and financial authorities provide ample liquidity and support for lending, along with eased macro-prudential rules. Further investments in green projects and human capital will be required to shore up employment and ensure a sustainable recovery. Healthy public finances provide fiscal space to further buttress the economy, if needed.

Soft containment measures have been implemented Sweden’s first COVID-19 virus case was confirmed on 31 January and the number of people contaminated increased swiftly from March. Emergency measures to scale up acute care capacity allowed hospitals to cope with the rising inflow of patients. Nevertheless, the daily death toll rose rapidly until mid-April, before starting to decline steadily. The number of new infections stabilised, but remains relatively high, although this may partly reflect increased testing. The number of deaths is highest in the Stockholm region and among the elderly, especially in nursing homes.

Sweden GDP is collapsing and the recovery will be sluggish

Job termination notices have soared

Real GDP

2020

Index 2019Q4 = 100,s.a.

110

Thousand persons 45

Single-hit scenario

105

40

Double-hit scenario

35 30

100

25 20

95

15 10

90

5 85

2020

2021

0

0

January

February

March

April

0

Source: OECD Economic Outlook 107 database; and Arbetsförmedlingen.

StatLink 2 https://doi.org/10.1787/StatLink 2 https://doi.org/10.1787/888934139955

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

312 _

Sweden: Demand, output and prices (double-hit scenario) 2016

Sweden: double-hit scenario 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) General government financial balance (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

Current prices SEK trillion

4 406.2 2 023.7 1 161.9 1 064.8 4 250.4 22.0 4 272.4 1 876.2 1 742.4 133.8 _ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2019 prices)

2.8 2.6 0.6 5.9 2.9 0.1 3.0 4.5 5.1 -0.1

2.1 1.9 1.1 1.4 1.5 0.3 1.8 4.4 4.0 0.3

1.2 1.2 0.3 -1.2 0.4 -0.1 0.2 3.3 1.2 1.0

-7.8 -6.6 2.3 -10.9 -5.2 -1.1 -6.3 -10.7 -7.6 -1.7

0.4 0.5 0.7 -3.4 -0.4 -0.1 -0.5 3.0 1.1 0.9

2.1 1.8 2.0 6.7 1.4 40.7 3.1

2.4 2.0 2.1 6.3 0.8 38.8 1.8

2.8 1.8 1.7 6.8 0.5 35.1 3.9

1.9 0.2 0.0 10.6 -8.8 42.3 2.3

1.6 0.8 0.6 11.1 -8.5 51.9 3.0

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 107 database.

StatLink 2 https://doi.org/10.1787/888934138777

The government introduced relatively soft measures in the second half of March to contain the spread of the disease, including a ban on events gathering more than 50 people, restrictions on visits to elderly care homes and the closure of higher secondary schools and universities. However, schools for younger children, as well as shops and restaurants could remain open. Social distancing is generally recommended, as well as to work from home if possible. People over the age of 70 are advised to avoid physical contact with others. Non-essential travel to Sweden was restricted according to the rules adopted by the European Commission on 17 March.

Economic activity is collapsing The pandemic affects most economic activities, albeit with large differences. Worst hit are transport, tourism, accommodation, restaurants and cultural activities, where businesses are shut down or running at a fraction of pre-crisis activity. Bankruptcies are soaring, especially for hotels and restaurants. Sales of necessities, notably food, have remained solid, but those of other goods have collapsed, including online sales. Export orders tumbled in April. Weak global demand, together with value chain disruptions and health safety issues, have entailed plant closures, especially in the automotive industry. The number of short-term layoffs and job termination notices has risen sharply.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

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Sweden: Demand, output and prices (single-hit scenario) 2016

Sweden: single-hit scenario 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) General government financial balance (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

Current prices SEK trillion

4 406.2 2 023.7 1 161.9 1 064.8 4 250.4 22.0 4 272.4 1 876.2 1 742.4 133.8 _ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2019 prices)

2.8 2.6 0.6 5.9 2.9 0.1 3.0 4.5 5.1 -0.1

2.1 1.9 1.1 1.4 1.5 0.3 1.8 4.4 4.0 0.3

1.2 1.2 0.3 -1.2 0.4 -0.1 0.2 3.3 1.2 1.0

-6.7 -5.0 2.3 -10.5 -4.4 -1.1 -5.5 -8.6 -5.9 -1.4

1.7 3.9 0.5 -2.8 1.3 -0.1 1.2 7.8 7.1 0.5

2.1 1.8 2.0 6.7 1.4 40.7 3.1

2.4 2.0 2.1 6.3 0.8 38.8 1.8

2.8 1.8 1.7 6.8 0.5 35.1 3.9

1.9 0.3 0.0 10.0 -8.0 41.2 2.5

1.6 1.1 0.8 10.0 -7.0 49.2 2.8

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 107 database.

StatLink 2 https://doi.org/10.1787/888934138796

Government support to the economy is massive The government has introduced a wide range of measures to shore up the economy. Discretionary fiscal easing amounts to 4.8% of GDP. Adding liquidity measures, notably tax deferrals and state guarantees, total policy support could reach 16% of GDP. These policies are limiting the damage inflicted by the crisis on jobs and companies, protecting the most vulnerable and preserving economic and human capital to speed up the recovery once the crisis is over. The more generous short-term work scheme put in place is most important for the well-being of workers and for preserving skills for the recovery. For those who nevertheless lose their jobs, the unemployment insurance has temporarily been reinforced and education opportunities have been expanded. In addition, temporary reductions in employer social contributions, the temporary shouldering of the cost for sick pay by the government and a reorientation of support to cover part of the fixed costs of companies experiencing large losses in turnover give breathing space to businesses and targeted measures support some of the worse hit sectors. The government also increased grants to municipalities and regions, including for green jobs, which is essential to cover increased welfare costs and compensate for lower tax income. The Riksbank announced a programme of corporate lending via banks (up to about 10% of GDP), new asset purchases (up to around 6% of GDP) and other steps to increase liquidity. The financial supervisory authority lowered the counter-cyclical capital buffer to zero and suspended the mortgage amortisation requirement.

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314 _

The recovery will be slow and a pandemic resurgence would delay it further Economic activity is expected to pick up starting by the start of the summer, but slowly, as households exercise caution and purchasing power suffers from lower income, due to the fall in activity and high unemployment, and lower wealth, due to lower equity and housing prices. While government support partly shields households from the crisis, it will be slow to translate into higher spending, even though targeting lower-income households will help. Reorganising industrial production also takes time and the weakness of global demand and high uncertainty will hold back investment. Lacking demand is bound to exceed the reduction in supply capacity, pulling inflation down. Reflecting the sluggish recovery, unemployment will ebb very slowly. The double-hit scenario entails both another short-term blow to the economy and more severe long-term consequences, as bankruptcies increase further, longer unemployment spells erode human capital and heightened uncertainty delays investments even more.

Additional policy action may be needed to support the economy The government has taken appropriate temporary measures to buttress the economy and alleviate hardship. Depending on the speed of the recovery, such measures may need to be prolonged. Part of the tax deferrals may need to be converted into tax cuts. Even though some steps to reinforce active labour market policies have already been taken, additional training and support for job search may be necessary.

Further fiscal and monetary stimulus may be required to boost demand in the recovery phase. Low government debt provides fiscal space, despite the already huge increase in public spending. Further support could be targeted at sectors durably affected by the crisis or transitioning towards greener production.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020