IMF Executive Board Concludes 2019 Article IV Consultation with Sweden
March 27, 2019
On March 25, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Sweden.
Solid domestic demand supported Sweden’s growth averaging 2.4 percent in 2016–18 together with a halving of the current account surplus to 2 percent of GDP in 2018. Strong job creation reduced unemployment to a post‑crisis low of 6.2 percent, but wage rises remained subdued at 2.6 percent in 2018. Headline inflation at around the 2 percent target rate in 2017-18 partly reflected rising energy prices, but core CPIF inflation remained below target at an average rate of 1.5 percent in 2018, broadly unchanged from 2016. The Riksbank deferred its first interest rate increase until late 2018, raising the repo rate by 25 basis points to -0.25 percent, and the Swedish krona depreciated 4.3 percent in effective terms in 2018.
But Sweden’s growth is projected to slow to 1.2 percent in 2019 due to lower global growth and weaker domestic demand. Housing investment is expected to fall after a 6 percent housing price decline in late 2017 that followed a surge in luxury apartment completions. Housing prices have since stabilized and household credit growth eased to 5.3 percent y/y in 2018. Lower growth in 2019 implies that the fiscal surplus will likely be below the budget estimate of 0.9 percent of GDP. Yet, Sweden’s fiscal buffers remain strong, with public debt moderate at 38 percent of GDP. The Riksbank has stated that the next repo rate increase will likely be in the second half of 2019, provided that the economic outlook and inflation prospects develop as it expects.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the sound economic performance in recent years, with strong domestic demand gains driving solid economic growth, rapid job creation, and a narrowing of the current account surplus. Directors noted, however, a softer near‑term growth outlook, with downside risks from weaker global growth and domestic demand. Against this background, they encouraged the authorities to strengthen the foundations for inclusive growth, particularly through housing and labor market reforms.
In view of the heightened economic uncertainties, Directors considered that monetary policy should remain cautious and data‑dependent to ensure that inflation remains close to target and that inflation expectations are firmly anchored. They agreed that the Riksbank’s deferral of further rate increases until the second half of 2019, dependent on the economic outlook and inflation prospects, was appropriate.
In light of Sweden’s prudent policies and strong fiscal buffers, Directors welcomed the authorities’ intention to allow the automatic fiscal stabilizers to operate fully in 2019. They also supported reducing the cyclically‑adjusted surplus to the new medium‑term target by 2020, given little risk of overheating from the resulting small stimulus at a time of slowing growth. A number of Directors considered that higher public investment needs arising from demographic shifts or other factors could be addressed by shifts in the budget, while consideration of a temporary cut in the medium‑term surplus target would need to be balanced with preserving its credibility.
Directors commended the employment gains in recent years, while noting that unemployment among the foreign‑born and low‑skilled remains high. They welcomed the social partners’ plan for “entry agreements” to enable migrants and the low‑skilled to combine work and training at reduced cost to employers. Directors encouraged the social partners to update wage formation to reflect structural changes in the economy, such as by broadening the range of sectors that set the benchmark for wage rises.
Directors encouraged comprehensive housing market reforms to improve housing affordability, thereby supporting labor market mobility and inclusive growth. In addition to liberalizing rents for newly‑built apartments, Directors saw merit in phasing out rent controls, cushioning the adjustment by expanding access to the housing allowance. To promote the efficient use of existing property, Directors favored higher recurrent property taxes, including by phasing out mortgage interest deductibility. They also supported strengthening competition in the construction sector to lower construction costs.
Directors welcomed the adoption of stricter mortgage amortization requirements, while calling for risks to remain under close watch, including by collecting household level balance sheet data. They supported continued review of the adequacy of banks’ commercial property risk management and the health of commercial property borrowers. Directors emphasized that the authorities should continue work to correct any remaining deficiencies in Sweden’s AML/CFT framework and to strengthen regional cooperation. They welcomed the authorities’ exploration of the e‑Krona and encouraged assessment of the potential economic implications of the digital currency, along with regulatory options to ensure reliable and efficient private payments.
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Table 1. Sweden: Selected Economic Indicators, 2016–24 |
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[1] 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.
[2] 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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