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IMF Executive Board Concludes 2017 Article IV Consultation with Sweden

Author(s):
International Monetary Fund. European Dept.
Published Date:
November 2017
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On November 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Sweden.

Sweden’s strong economic growth continues, with real GDP expected to rise by 3.1 percent in 2017, driven by domestic demand and exports each growing at a similar pace. Robust job creation of over 2 percent has lowered unemployment to 6.8 percent, or just 4.5 percent excluding full-time students. Yet, inflation remains subdued, with core HICP inflation at only 1.3 percent y/y excluding some volatile items. Wage rises are also low, at an estimated 2.2 percent y/y in 2017, and the three-year wage agreement reached earlier in the year could imply that wage rises remain low, posing a downside risk to the inflation outlook. The central bank has kept the policy rate unchanged at −0.5 percent since early 2016 and has slowed its purchases of government bonds during 2017.

House price increases have moderated somewhat in 2017, to 7 percent y/y in September. Aided by large increases in new dwelling construction, signs of further market cooling have emerged in recent months. Household credit growth has also eased somewhat this year, and the minimum mortgage amortization requirement that came in effect in mid-2016 led to a modest decline in the share of mortgages with a high debt-to-income ratio. Unexpectedly strong government revenues in 2016 have carried forward into 2017, with the general government fiscal surplus projected at 1 percent of GDP. The 2018 budget proposal includes 0.9 percent of GDP in new initiatives to address priorities in public services, defense and security, welfare and the environment.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They commended the Swedish authorities on maintaining policies that have supported robust economic growth and declining unemployment. At the same time, Directors noted that elevated housing prices and household debt levels, subdued wage growth, and persistently low core inflation pose challenges. They encouraged the authorities to take advantage of the economy’s strong position to undertake deep reform of the housing market in order to durably address macrofinancial vulnerabilities and support inclusive growth.

Directors noted that the current accommodative stance of monetary policy remains appropriate given low underlying inflation and uncertainties around the inflation outlook. They agreed that an unwinding of monetary accommodation should await clearer signs of a sustained uptrend in inflation. Directors encouraged using the parliamentary review of the Riksbank Act as an opportunity to further enhance the specification of the inflation target and to put the financial stability role of the Riksbank on a firmer legal footing while preserving its financial autonomy.

Directors welcomed the significant measures in the budget for 2018 to promote employment including migrant integration, reduce inequality, and address climate and the environment. Given signs of high resource utilization and solid growth prospects, Directors considered that a phased reduction in the fiscal surplus to the new medium-term target of 0.33 percent of GDP over a period of a few years would strike an appropriate balance while maintaining a prudent fiscal policy.

Directors noted that moderate wage rises in recent years may have been a needed correction, but if low wage increases persist, inflation would likely remain below target, prolonging interest rate normalization. In this context, they considered that linking wages to domestic conditions, such as trends in Swedish labor productivity and medium-term inflation expectations, while maintaining adequate business sector profitability, would provide a more appropriate anchor. Directors welcomed new initiatives to raise employment among the low- skilled and migrants through a combination of targeted wage flexibility and suitable education.

Directors agreed that improving housing affordability would not only ease household debt burdens and saving needs, but would also bolster growth and reduce inequality. In addition to reforms to reduce high construction costs, they urged promoting better utilization of the housing stock by overcoming political hurdles to phasing out rent control and shifting the composition of property taxes. Reductions in mortgage interest deductibility, expanded support for affordable housing construction, and enhanced public transportation within regions would also be important to improve housing affordability over time.

Directors commended the further progress made in following up on the 2016 FSAP, including the augmentation of the 2018 budget for Finansinspektionen (FI) and the planned expansion of FI’s macroprudential authority in early 2018. Noting that the recently adopted floors on mortgage amortization have shown positive initial results, Directors endorsed the proposed tightening targeted on high debt-to-income mortgages. Given the heavy reliance of Swedish banks on wholesale funding, Directors supported retaining liquidity requirements on their euro and U.S. dollar exposures and the Riksbank continuing to hold sufficient foreign reserves. Directors encouraged the Swedish and regional authorities to collaborate closely on sound supervisory and resolution arrangements regarding Nordea’s proposed relocation.

Sweden: Selected Economic Indicators, 2014–20
Projections
2014201520162017201820192020
Real economy (percent change)
Real GDP2.64.53.33.12.42.22.0
Domestic demand2.94.33.33.12.62.42.1
Private consumption2.13.12.22.52.52.32.1
Public consumption1.52.43.40.81.21.11.0
Gross fixed investment5.56.95.67.04.14.03.3
Net exports (contribution to growth)−0.10.40.10.0−0.1−0.1−0.1
Exports of G&S5.35.73.33.84.03.93.8
Imports of G&S6.35.23.44.24.64.54.4
HICP inflation (e.o.p)0.30.71.71.81.51.82.0
Unemployment rate (percent)7.97.47.06.66.36.36.3
Gross national saving (percent of GDP)28.029.029.229.930.030.130.2
Gross domestic investment (percent of GDP)23.324.324.725.926.226.627.0
Output gap (percent of potential)−2.1−0.30.30.90.80.70.5
Public finance (percent of GDP)
Total revenues48.949.349.749.248.348.248.2
Total expenditures50.549.148.648.247.547.647.7
Net lending−1.60.21.11.00.90.60.5
Structural balance (as a percent of potential GDP)−0.60.00.80.70.50.30.3
General government gross debt, official statistics45.243.741.338.436.534.332.1
Money and credit (year-on-year, percent change, eop) 1/
M34.17.68.49.5
Bank lending to households6.07.47.46.7
Interest rates (percent, end of period)
Repo rate 2/0.0−0.4−0.5−0.5
Ten-year government bond yield 2/1.70.70.50.6
Mortgage lending rate 3/1.91.61.61.6
Balance of payments (percent of GDP)
Current account4.64.74.53.93.73.53.2
Foreign direct investment, net0.91.60.30.80.50.30.2
International reserves, changes (in billions of US dollars) 4/0.21.30.50.5
Reserve cover (months of imports of goods and services)3.33.53.53.8
Net international investment position1.24.611.212.814.315.716.9
Exchange rate (period average, unless otherwise stated)
SEK per euro 2/9.19.49.59.6
SEK per U.S. dollar 2/6.98.48.68.5
Nominal effective rate (2010=100) 2/103.797.597.196.7
Real effective rate (2010=100) 2/5/100.692.892.691.7
Fund position (September 30, 2017)
Quota (in millions of SDRs)4,430
Reserve tranche position (in percent of quota)3.2
Holdings of SDRs (in percent of allocation)91.5
Other Indicators
GDP per capita (2016, USD): 51,473; Population (2016, million): 10.0; Main products and exports: Services, including computer and information; motor vehicles, forest products; Key export markets: Germany, Norway, United Kingdom.
Sources: IMF WEO, Riksbank, Swedish Ministry of Finance, Statistics Sweden, and Fund staff calculations.

Data for 2017 are as of August 2017.

Data for 2017 are as of September 2017.

Mortgage rates for new contracts. Data for 2017 are as of August 2017.

Data for 2017 are as of Q2:2017.

Based on relative unit labor costs in manufacturing.

Sources: IMF WEO, Riksbank, Swedish Ministry of Finance, Statistics Sweden, and Fund staff calculations.

Data for 2017 are as of August 2017.

Data for 2017 are as of September 2017.

Mortgage rates for new contracts. Data for 2017 are as of August 2017.

Data for 2017 are as of Q2:2017.

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 Chair 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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