Sweden recovered quickly from the Great Recession, leading much of the rest of Europe in 2010–11, but the economy has slowed more recently.
While the economy appears to have stabilised, the overall growth trend has been one of moderation, partly reflecting cooling activity abroad and Sweden’s tight trade and financial links with the rest of the Nordic region and the euro area. Meanwhile, the unemployment rate remains elevated, reflecting cyclical and structural weaknesses. Consumer price inflation has eased markedly below the 2 per cent target, primarily due to the strong krona amidst safe-haven flows, and the external balance remains strongly in surplus.
Downside risks stem from financial fragilities and regional spillovers. Domestically, household debt is high and rising, reflecting tax incentives, easy access to low-amortisation mortgages, and very low interest rates. As a consequence, a sudden and sizeable fall in Swedish property prices could have a knock-on effect on consumption and unemployment, with negative repercussions on banks through non-performing loans and funding costs.
Executive Board Assessment
Directors recognised Sweden’s consistently high level of competitiveness but encouraged additional reforms to bolster potential growth further. This should include continued strengthening of the labour market by stimulating demand for young and foreign-born workers, and relieving housing bottlenecks by increasing land supply and raising incentives to invest in residential construction.
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© International Monetary Fund
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