Sweden

Fighting the housing bubble


Download the full report
including graphs and images


 

 

General Information

GDP USD492.6bn (World Ranking 22, World Bank 2015)
Population 9.8Million (World Ranking 89, World Bank 2015)
Form of state Constitutional Monarchy 
Head of governmentStefan LOFVEN 
Next elections September 2018 at the latest, legislative elections 

 

 

Country Rating AA1euler hermes

Strengths

  • Highly educated labor force
  • High value-added manufactured industries
  • One of the highest R&D spending in the world
  • Very diversified export structure in terms of products
  • Sound public finances
  • Strong and effective institutions

Weaknesses

  • Excessive household debt
  • Steep rise in house prices
  • Weak governing coalition
  • Ageing population 

 

 

Economic Overview

Growth prospects remain solid 

The Swedish economy has enjoyed a robust growth since 2014, especially compared to Eurozone countries. Growth was mainly driven by domestic demand. Additionally, in 2015 and early 2016, the mass arrival of migrants prompted government spending. This further stimulated consumption and job creation and unemployment stood at 6.9% in October 2016 down from 7.4% on average in 2015. EH expects growth above +3% in 2016. It may slow down to +2.4% and +2.6% in 2017 and 2018 (see Figure 1.) Long-term growth potential hinges on the integration of migrant workers despite labor market rigidities. Another key is continued success in converting high R&D spending (3.2% of GDP) into job opportunities and productivity growth. 
Yet the careful macroeconomic management of vulnerabilities such as deflation and household debt might prove to be the most important challenge for the Swedish economy. 

Monetary policy would remain accommodative despite a rise in inflation

Other than the Sterling, the Swedish Krona has been the weakest performer among G-10 currencies. It has depreciated by 6% against the euro in 2016. This was not due to uncertainty or volatility - as was the case for the GBP - but to renewed cuts in key interest rate to    -0.5% in July 2016. Deflationary pressures seem to be over as inflation is on a rising trend. This is good news when looking at the high stock of household debt (1.8 times of the net disposable income). Yet the precautionary behavior of households - the saving rate reached a record high of 17.8% - remains a drag.

Reforms to address housing and debt were implemented, but more needs to be done

In order to deal with rising household debt, the government has had to moderate the rise in housing prices. The introduction of regulatory constraints for banks (extra capital buffers) and for loan takers (minimum amortization requirements) managed to curb the steep rise in house prices (see Figure 2).

However, high demand for housing and insufficient supply, especially as rental real estate is penalized by tightly supervised rents, still needs to be tackled. It remains to be seen whether a simplification to the Planning and Building Act will be enough to stimulate construction, especially in urban areas. 

The government has also increased and strengthened the mandate of Sweden’s financial supervisor. This will allow macro prudential policy to act in a timely and targeted fashion to counteract financial imbalances in the credit market. It could also help prevent a further rise in the share of highly indebted households by reducing the size of allowed credits. 

Last review: 2016-12-12