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IMF Executive Board Concludes 2016 Article IV Consultation with Sweden

Author(s):
International Monetary Fund. European Dept.
Published Date:
November 2016
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On November 14, 2016 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Sweden.

Sweden is enjoying strong economic performance, with real GDP growth heading for about 3.5 percent in 2016 on the heels of an expansion of just over 4 percent in 2015. Employment has increased by 1.5 percent so far in 2016, pushing unemployment down to about 7 percent. Growth is expected to moderate to a still solid 2.5 percent in 2017. Core inflation (HICP basis) has risen significantly to an average of 1.2 percent in 2016 and inflation expectations have moved closer to Riksbank’s target. After a further easing in early 2016, the central bank has kept the repo rate at -0.5 percent and it has continued bond purchases.

House price rises slowed to about 5 percent annualized in the last ten months from around 15 percent for most of 2015. This slowing may reflect the high level that prices reached in the Fall of 2015 along with some anticipation of the introduction of an amortization requirement on new mortgages in June 2016. Nonetheless, housing prices stand at some 40 percent above their 20-year average relative to income, and expensive housing has resulted in a growing share of new borrowers taking on high debts relative to their income.

The fiscal deficit is expected to be small in 2016 even as migration-related government spending has almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015. The budget for 2017 provides for initiatives totaling 0.5 percent of GDP in education, active labor market policies, and child and elder care, yet still targets a small fiscal deficit. Despite current favorable labor market conditions, the integration of migrants into jobs is lengthy and unemployment is high among less educated foreign-born workers.

Sweden participated in the IMF’s Financial Sector Assessment Program (FSAP) in 2016, the findings of which suggest Swedish banks are largely resilient to solvency shocks, although they are very reliant on wholesale funding. The findings of the FSAP are summarized in the accompanying Financial System Stability Assessment.

Executive Board Assessment2

Executive Directors commended Sweden’s macroeconomic policies, which have supported strong economic growth, a reduction in unemployment, and a rise in inflation from low levels. Directors called for balanced policies to sustain solid growth. These policies should include returning inflation to target to rebuild space for monetary policy to cushion future downturns, containing the rise in housing market and household debt vulnerabilities, ensuring the resilience of the financial sector, and accelerating the integration of refugees.

Directors welcomed the rise in inflation expectations as a clear signal of the commitment of the Riksbank to the inflation target. They recommended that monetary policy remain stimulatory for some time given the prospect for inflation to rise only gradually. Directors considered that any unwinding of stimulus should await confirmation of a durable rise in inflation, while greater stimulus would be appropriate if inflation or inflation expectations were to weaken. At the same time, Directors strongly encouraged the authorities to continue monitoring the effects of negative interest rates on the financial sector and bank profitability, even as the financial sector is considered to be in good health.

Directors called for housing market reforms and macroprudential measures to contain household debt vulnerabilities. To moderate the uptrend in housing prices they recommended reforms to maintain an adequate land supply for construction, phasing out tax deductibility of interest payments, and phasing out rent controls while protecting the vulnerable. With household debt likely to keep rising in the medium term, Directors emphasized the need to reinforce macroprudential policies through timely adoption of a debt-to-income limit.

Directors welcomed the recent agreement on expanding the financial supervision authority’s (FI) ability to take macroprudential measures to address emerging risks in a timely manner. To further support FI’s ability to preserve the resilience of Sweden’s regionally important financial sector, Directors recommended an expansion of its resources to achieve an appropriate frequency of supervisory inspection. They supported timely adoption of a leverage ratio as a backstop and a strengthening of foreign exchange liquidity requirements on banks in view of their high reliance on wholesale funding, in line with the recommendations of the Financial System Stability Assessment.

Given Sweden’s strong fiscal position, Directors recommended that fiscal policy accommodate the temporary migration-related costs, making the modestly expansionary fiscal stance planned for 2017 appropriate. They noted that the proposed revisions to the fiscal framework would continue to protect Sweden’s fiscal health. Directors also supported utilizing the fiscal room available in coming years to further support migrant integration given the employment and long-term fiscal benefits within the new fiscal targets.

Directors commended the Swedish authorities’ efforts to improve migrant reception and settlement. They called for further initiatives to provide affordable housing, ensure sufficient educational capacity at the municipalities, and improved coordination across agencies. To alleviate high and rising unemployment among less educated workers born outside Sweden, most Directors recommended that social partners allow temporary and targeted exceptions to high entry-level wages to enable on-the-job skill building. They also recommended that employment subsidy programs be streamlined and employer-employee matching be improved to maximize employment gains.

Sweden: Selected Economic Indicators, 2013–19
Projections
2013201420152016201720182019
Real economy (in percent change)
Real GDP1.22.64.13.42.42.22.1
Domestic demand1.62.94.04.32.72.42.2
Private consumption1.92.12.72.62.42.32.2
Public consumption1.31.52.53.61.91.21.0
Gross fixed investment0.65.57.26.93.93.83.6
Net exports (contribution to growth)−0.3−0.10.3−0.6−0.1−0.10.0
HICP inflation (e.o.p)0.40.30.71.21.62.02.2
Unemployment rate (in percent)8.07.97.46.96.76.76.7
Gross national saving (percent of GDP)27.828.029.530.431.131.331.3
Gross domestic investment (percent of GDP)22.523.324.225.526.026.326.5
Output gap (as a percent of potential)−2.8−2.2−0.70.91.00.70.4
Public finance (in percent of GDP)
Total revenues50.950.149.148.948.948.948.7
Total expenditures52.251.748.949.149.149.148.7
Net lending−1.3−1.60.2−0.2−0.3−0.20.0
Structural balance (as a percent of potential GDP)−0.5−0.60.0−0.5−0.9−0.5−0.1
General government gross debt, official statistics39.844.642.941.640.539.438.8
Money and credit (year-on-year, percent change, eop) 1/
M33.14.17.68.5
Bank lending to households4.96.07.47.4
Interest rates (end of period)
Repo rate 2/0.80.0−0.4−0.5
Ten-year government bond yield 2/2.11.70.70.2
Mortgage lending rate 3/2.51.91.61.6
Balance of payments (in percent of GDP)
Current account5.34.65.24.95.15.04.7
Foreign direct investment, net4.41.02.72.62.82.62.6
International reserves, changes (in billions of US dollars) 4/14.60.21.30.5
Reserve cover (months of imports of goods and services)3.43.33.5
Net international investment position−12.6−0.34.16.08.110.112.0
Exchange rate (period average, unless otherwise stated)
SEK per euro 2/8.79.19.49.4
SEK per U.S. dollar 2/6.56.98.48.4
Nominal effective rate (2010=100) 5/108.5103.797.596.7
Real effective rate (2010=100) 5/6/103.498.894.795.7
Fund Position (August 31, 2016)
Quota (in millions of SDRs)4430.0
Reserve tranche position (in percent of quota)1.8
Holdings of SDRs (in percent of allocation)87.4
Other Indicators
GDP per capita (2015, USD): 50,591; Population (2016, million): 9.9; Main products and exports: Machinery, motor vehicles, paper products, pulp and wood; Key export markets: Germany, Norway, United Kingdom
Sources: IMF Institute, Sveriges Riksbank, Sweden Ministry of Finance, Statistics Sweden, and IMF staff calculations.

Data for 2016 is as of August 2016.

Data for 2016 is as of September 2016.

Mortgage rates for new contracts, data for 2016 is as of June 2016.

Data for 2016 is as of Q2 2016.

Data for 2016 is as of August 2016

Based on relative unit labor costs in manufacturing.

Sources: IMF Institute, Sveriges Riksbank, Sweden Ministry of Finance, Statistics Sweden, and IMF staff calculations.

Data for 2016 is as of August 2016.

Data for 2016 is as of September 2016.

Mortgage rates for new contracts, data for 2016 is as of June 2016.

Data for 2016 is as of Q2 2016.

Data for 2016 is as of August 2016

Based on relative unit labor costs in manufacturing.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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