On behalf of the Swedish authorities would like to thank the mission teams for the reports as well as for the open and constructive policy discussions during the FSAP mission and Article IV consultation with Sweden. The authorities broadly agree with the conclusions and recommendations of the staff reports.
Recent macroeconomic development and outlook
The level of activity in the Swedish economy is high, and households as well as businesses are optimistic about the future. Positive signs include that the demand for labor remains high, inflation has picked up, and resource utilization is estimated to be higher than normal in 2017 and to rise even further in 2018. Sweden is expected to have GDP growth of around 3 percent in 2017 which will likely moderate in 2018 due to a slowing increase in housing investments.
While there is robust growth, Sweden faces challenges. Although migration inflows have dropped since 2015, the reception capacity remains stretched as the newly arrived migrants need to receive education and training and be given the opportunity to start working and contributing to society. Additionally, rapidly increasing house prices have led to high levels of household indebtedness, although the most recent data indicates that house prices have begun increasing at a slower pace. Despite positive signs, including a somewhat moderated growth in household credit, macroeconomic stability risks remain as debt levels relative to income are still increasing from an already high level.
Financial stability and macroprudential policy
Housing prices and household indebtedness in Sweden have steadily increased during a long period of time, giving rise to concerns. Recent signs suggest that the housing market is cooling off as house prices have fallen slightly during the autumn. Recently implemented amortization requirement, together with high construction activity in recent years, may have contributed to this development. Taking these recent developments into account, it is likely that there will be some further moderation in house prices in the time to come.
Still, Swedish household indebtedness has continued to rise at a faster pace than income. Increasing household debt and house prices have made households vulnerable. A sharp drop in house prices would affect households’ wealth and hence have implications for consumption and economic growth. Furthermore, about 70 percent of household mortgages have a variable interest rate. Rising mortgage interest rates will therefore quickly transmit into households’ cash flows. Nevertheless, the Finansinspektionen’s (FI) stress-tests show that the households have adequate margins to cope with negative shocks like house price declines, unemployment and higher interest rates. However, the overall picture with the high indebtedness in the system gives rise to concern for macroeconomic and financial stability.
Several measures have been taken to tackle risks emanating from rapid credit growth and increasing household indebtedness. An amortization requirement was introduced last year as a measure to mitigate risks from the increase in household indebtedness. FI has recently proposed a tightening of the amortization requirement targeting households with high debt-to-income ratios. It is expected that the proposal will be sent to the Government in mid-November for approval. The authorities place importance on the issue and continuously monitor the situation and assess whether further measures are needed. Measures could be either of the macroprudential type or of a more structural nature.
The banking system is large relative to the Swedish economy. Moreover, it is exposed to the property market to a high degree, and it is also dependent on short-term wholesale funding on international capital markets. The authorities remain aware of the need to address these vulnerabilities from both a macroeconomic and a financial stability perspective. It is important that the banks keep sufficient capital and liquidity buffers. It is also important that the Riksbank has access to sufficient foreign reserves if it needs to support banks with liquidity in foreign currency.
The authorities agree that it is important to ensure a clear legal mandate for macroprudential policy and efficient supervision of financial stability. FI has been designated as the macroprudential authority. To strengthen the institutional setup, the proposed expansion of FI’s macroprudential mandate has been put forth to the Parliament for adoption and will, according to the Government’s proposal, enter into force on the 1st of February 2018. FI will, based on this new legislation, have powers to apply a range of macroprudential tools. The new framework should ensure swifter implementation of potential macroprudential measures.
The authorities also point to the on-going work in a parliamentary commission tasked to review the Riksbank Act. The review will, inter alia, clarify the Riksbank’s role in financial stability and present measures aimed at strengthening the Riksbank’s financial independence.
The Swedish economy, and especially the banking sector, is closely interconnected with its neighbours. Cooperation amongst the authorities within the Nordic-Baltic region is essential to safeguard financial stability and ensure preparedness should a crisis arise. Efficient arrangements between authorities and sound buffers kept by the banks must be ensured and require close engagement and dialogue.
The Nordic-Baltic Stability Group has recently been revamped under Swedish leadership and the authorities are planning a regional crisis-simulation exercise in the second half of 2018. The Nordic-Baltic Macroprudential Forum, created in 2011 between central banks and supervisory authorities, is continuing its work on financial stability risks and macroprudential policy. The authorities remain committed to continuing to deepen the already strong regional cooperation.
Swedish monetary policy has for some time been conducted in an environment characterised by uncertain economic developments, weak inflationary pressures, low global interest rates and great political uncertainty abroad. The monetary policy conducted by the Riksbank in recent years, with a policy rate below zero and extensive purchases of government bonds, has been exceptional from a historical perspective. The policy is largely a consequence of a global declining trend in interest rates. The aim of the expansionary monetary policy is to stabilize inflation in Sweden around the target of 2 percent and to keep inflation expectations in line with the target. Since 2014, inflation has risen and is now close to target. Inflation expectations in both the short and long term have also risen and are again close to 2 percent, measured in terms of both the CPI and CPIF. Economic activity is strong and unemployment has declined. Monetary policy has played a significant role in this development.
Inflation has however, until recently, been below target for a long time and it has taken a great deal of support from monetary policy to bring up inflation and inflation expectations. As there is a risk that inflation expectations currently are sensitive to negative surprises, inflation outcomes below the inflation target may be more problematic to manage than inflation outcomes above the target. It is therefore important that the strong Swedish economic activity continues to have an impact on price developments so that inflation expectations remain well‐anchored around the target.
Thus, while inflation is currently close to target and the Swedish economy is strong, the Riksbank shares the IMF view that it is too early to make monetary policy less expansionary, as it is important to ensure that inflation remains close to target and that inflation expectations are firmly anchored. It is also important that the krona exchange rate does not appreciate too quickly.
The strong growth in the Swedish economy has contributed to bringing back inflation close to target. The high level of growth could also create imbalances in the economy, entailing problems further ahead. However, the Riksbank’s assessment is that there are no signs, as yet, that this high growth will lead to wages and prices rising too rapidly. Factors such as high savings and strong competitiveness indicate that there are no major imbalances in the economy in general. However, if the current high level of housing construction were to slow down rapidly it could pose risks that could contribute to or strengthen a future downturn.
The Riksbank continuously analyzes the effects of the negative policy rate and the extensive government bond purchases. One possible side effect of low interest rates is that assets can become overvalued and risks become incorrectly priced, and that the indebtedness of various agents increases in an unsustainable manner. In Sweden, the increase in household indebtedness has already been a source of concern for a long time (see the financial stability section). Another possible side effect is that the functioning of financial markets could be impaired. So far, financial markets are deemed to have been able to manage the negative interest rate in a relatively frictionless manner and the Riksbank’s assessment is that the bond purchases have not significantly affected the functioning of the market. Overall, the Riksbank’s assessment is that the side‐effects of a negative policy rate and government bond purchases have so far been manageable.
The IMF External Sector Assessment
We strongly encourage staff to retain a high degree of flexibility when assessing external imbalances and to continue supplementing EBA model results with a deeper analysis of country-specific developments, avoiding mechanical model interpretations when formulating policy advice. While the authorities generally agree with the external sector assessment and appreciate staff’s attempts to further clarify how adjustments based on judgement are generally applied, the authorities are not entirely convinced by the reasons behind the changes in staff’s judgement in 2016 compared to 2015. Although no obvious changes have occurred in the data during 2016, staff now deems Sweden’s external position to be ‘stronger’ than warranted by medium-term fundamentals and desirable policies, compared with ‘moderately stronger’ in 2015. Hence, the authorities encourage further work on measurement issues and on the limitations of the EBA methodology, as well as continued efforts to clearly articulate and explain both levels and changes in judgement going forward.
Labor market policy
Overall, the Swedish labor market is performing well with the highest employment rate in the EU (81.7 percent) and falling unemployment (6.8 percent). Despite this, too many people are unemployed, and the Government’s employment policy has the objective of reducing unemployment to the lowest in the EU by 2020. This objective should be reached by increasing employment and the number of hours worked in the economy.
Too many people still have trouble finding work, particularly those who have not completed upper secondary school or those who are born outside Europe. At the same time, employers have difficulties finding people with the right skills. Labor shortages are considerable in several parts of the Swedish labor market. The Government agrees with the IMF that it is important to invest in education and training in order to equip unemployed women and men who lack the relevant education, training, and experience to fill the vacant jobs. In order to achieve this, the Government has expanded adult education and increased resources for basic education. To make it easier for employers to hire those who, for instance, lack experience or have been unemployed for a long time, the Government has streamlined the system of subsidized employment. Five different forms of employment subsidies will be replaced with one uniform supportive measure. All these arrangements can help alleviate the labor shortage.
The next few years will be shaped by efforts to help a large number of newly arrived people become established in working and community life. Since 2010, there is a two-year introduction program in place for refugees coordinated by the Swedish Public Employment Service. In 2016, the Government, together with the social partners, put in place fast tracks to shorten the time from arrival to work in professions with a shortage.
To make the integration of newly arrived immigrants more effective, a new regulation will enter into force on January 1, 2018. The regulatory changes will harmonize the regulation of new arrivals’ integration in working life and Swedish society to a greater extent with the regulations that apply to other jobseekers. The Government will also introduce targeted measures for foreign-born women, and also an education and training obligation for newly arrived immigrants who are considered in need of education and training to find work. The government also welcomes ongoing negotiations between social partners on new ways to facilitate labor market entry for people with a weak attachment to the labor market.
Regarding the IMF’s discussion on wages and the need for relative wage changes, wage formation in Sweden is the responsibility of the social partners. This arrangement has contributed to stability and real wage development in line with productivity growth for the last two decades.
Housing and tax issues
The Government concurs with the IMF that there are challenges in the housing market. High construction costs and inefficient use of existing property need to be addressed and this could be done in different ways. The Government agrees that the support for construction of more affordable rental housing is vital and that is why an investment grant for rental dwellings and student housing was implemented in 2016. Further, the Government also agrees that efficient public transportation is a vital component. The Swedish housing policy has for a number of years been heavily focused on reforms that make the planning and building process smoother, faster, and more predictable. This work will continue in line with the 22-item list that was presented by the Government in 2016.
The rent-setting system is designed to create a balance between tenants’ right of security and reasonable rents for both the individual tenant and the property owners. The model for rent setting on new production, which takes production costs and the need for a reasonable return on investment into account (presumption rents), has been reviewed by an inquiry. One of the proposals in the inquiry report aims at making the model less rigid and more adaptable to new, altered or unforeseen circumstances.
The Government has also implemented reforms to improve the functioning of the housing market. The threshold for deferring capital gains tax has been temporarily removed and will give greater incentives for those with high capital gains to move in the near future. The Government is continuously looking at different possibilities to improve the functioning of the housing market.
The design of the tax system is one of many factors that influence the level of household debt. Any potential measures in this area must be seen in a long-term perspective and therefore need to be based on a broad political consensus. Changes must be handled with great care due to the potential negative effects on growth. General changes to the rules on mortgage interest deductibility will affect those who have already made the decision to buy a house or part of a tenant-owned property. There must be predictable conditions forhouseholds’ investment in property as this is among the largest financial decisions a household can make.
The Government agrees with staff’s fiscal assessment that the current fiscal stance is broadly neutral and that the fiscal stance for 2018 is assessed to be mildly expansionary with a marginal decline in the structural balance. Yet, as the IMF notes, concerns around overheating the economy are limited by persistently low core inflation and modest wage growth, which is in line with the Government’s assessment.
Furthermore, the Government agrees with staff that Sweden has a healthy fiscal position with substantial fiscal space were it to be needed. The Government also notes the IMF’s view that if debt in practice falls below the 35 percent of GDP benchmark, a further reduction in the surplus target may be appropriate at the time when the fiscal framework is due for its 8- yearly review.