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Is Sweden's economic future paved with gold?

Is Sweden's economic future paved with gold?

Published: 19 Jan 2011 12:37 GMT+01:00
Updated: 19 Jan 2011 12:37 GMT+01:00

With record growth, healthy public finances, booming exports and a soaring krona, Sweden has easily skirted Europe's debt woes, but with a worried eye on the aching eurozone observers say it could be rougher sailing ahead.

"You can't have a long recovery in Sweden isolated from a recovery in Europe. I don't think that's possible," Mauro Gozzo, the chief economist at the Swedish Trade Council (Exportrådet), told AFP.

"If the European economy doesn't accelerate, the Swedish growth will slow down because we're so export dependent," he added.

Seen in isolation, Sweden's economic future looks paved in gold.

"Crisis? What Crisis," was the headline used last week by a newspaper reporting that only 20 percent of Swedes say they are at all affected by the ongoing European debt crisis.

With a record 6.9 percent annual growth registered in the third quarter of 2010, which easily erased 2009's deep five-percent recession, Sweden's economy is now swelling at the pace of booming Asian nations rather than in step with "old" Western economies.

Sweden, a European Union member but not part of the eurozone, also saw its exports take flight last year, soaring 15 percent.

And the state budget ended 2010 with a deficit shrunk to a mere one billion kronor (€110 million, $146 million), down from 175 billion a year earlier.

As other European countries tighten their belts, Sweden, which is considered to have among the continent's healthiest public finances, plans to start offering new tax cuts next year, Prime Minister Fredrik Reinfeldt has promised.

The krona, which dived mercilessly at the end of 2008, has also been boosted by the slow heightening of the country's main interest rate, which dipped as low as 0.25 percent during the crisis but today stands at 1.25 percent.

Along with the Swiss franc, the Swedish currency has risen in recent months to become the star of the European exchange market.

After gaining more than 25 percent compared to the European single currency in just two years, the krona soared last week to its highest level against the euro in a decade.

And at just under 8.92 kronor to the euro, "the Swedish krona is still undervalued. I think we can handle a strong krona in Sweden," Robert Bergqvist, SEB bank's chief economist, told AFP.

Unemployment is also slowly inching down from a high of nearly 10 percent at the height of the crisis to just over seven percent in November, and Sweden's economic growth forecast for 2011 is excellent, at around 3.5 percent.

But the Scandinavian country worries the slow recovery of its neighbours could drag it back down, with the government recently cautioning against getting swept away by "euphoria."

Sweden is especially concerned about its exports, and has said it is open to contributing on a "case-by-case" basis to the European stability fund created last May.

"It is completely unrealistic to think one cannot help" by contributing to the stability fund, Swedish Finance Minister Anders Borg said at the time.

After offering bilateral loans worth hundreds of millions of euros to Latvia and Iceland, which were both nearly wiped out by the financial crisis, Sweden late last year offered debt-stricken Ireland a direct loan worth some €600 million ($808 million).

Besides the outside threat to its exports, the main shadow on the Swedish horizon is the country's still ballooning property market, which has led to fears of a real estate bubble.

"That's the risk for the Swedish economy: a correction of the housing market price. This would be negative," said Bergqvist, insisting higher interest rates are needed to keep the housing market from overheating.

But if the central bank, or Riksbank, does decide to increase rates further, this would also lead to an even stronger krona, which in turn is bad news for exporters.

Two of Sweden's six central bank directors opposed the most recent rate hike for that very reason.

"If this goes on it might become a problem for some companies," Gozzo lamented.

"Of course they will adjust and handle the problem and probably establish more activities abroad. But it's most certainly not the good solution for Sweden," he added.

AFP/The Local (news@thelocal.se)

Your comments about this article

13:19 January 19, 2011 by Nemesis
What are these people on?

Sweden's Krona is overvalued, a lot. That is not sustainable and will soon become bad for exports.

As for the idea that Sweden is not exposed to Eurozone debt. Whoever came up with comment, needs there eyes, ears and head examined.

Swedish banks both owe and are owed massive amounts of money by Italy, Spain, Portugal, Ireland and Greece. Swedish banks owe a lot of money through interbank lending to PIGS banks and vice versa. That is why Sweden lent some money so as to avoid problems in its own banking system. Sweden is exposed to all of the PIGS countries. If one of those countries defaults, a couple of Swedish banks will disappear, literally.

Regarding the loans to Iceland and Latvia, Swedish banks were some of the worst offenders and financed quite a bit of the problem in the first place.

Sweden has a housing bubble. It will burst sooner or later.
23:46 January 19, 2011 by GLO
Don't pat yourself on the back ,the future is really an open question, I just wish I had made more defensive plans two years ago. The world economy is inter-connected and Sweden still has an open door policy. Free lunch to everyone....

Keep your hats on the circus ride is not over.
09:16 January 20, 2011 by Plowbridge
It is amazing that Borg and Reinfeldt are lauded for their handling of the economy despite their strong advice to Swedes to swap the krona for the Euro. If the country had listened to them in the referendum then Sweden would have suffered alongside other Eurocentric nations and be deep in the shite.

And for gods sake get rid of the pony tail and ear-ring Borg. You are a laughing stock in every country not stuck in the 70's.
09:37 January 20, 2011 by Great Scott
What crazy talk, how can borg laugh when Sweden has 25% of the under 25's unemployed. Maybe this is the 20% of people who at not happy in the current climate. Conservatives are well known for lying and twisting the facts to suit themselves, and Swedes are famous for believing anything they hear. Also with China claiming that their exports are rapidly increasing, who is doing all the buying if the world is in a so called recession.

And don't tell me its Sweden's car industry that is making great gains. What lies will the conservatives tell when most Volvos will be made in China and Saabs made in Moscow.
15:11 January 20, 2011 by Acero
"Is Swedens Economic Future Paved With Gold"........I love it!!

For anyone who isn't aware, this all looks ALOT like what happened in Ireland at the start of the 2000's. Pictures in the media of politicians and descion makers laughing and joking accompanied by slogans like that one above...and lauded in the columns of Financial newspapers over what a great job their doing in what is a world gone crazy around them.

I dont know if I agree with Nemesis that the Swedish Krona is over valued y alot. It was GREATLY undervalued from 2008 to 2009 but I believe it has found its home again once it stays between very high 8s and very low 9s. It might be a little over valued, but only to the tune of about 5% if even that much.Not enough to hold a grudge against swedes going abroad!! :p

I think its important to remember that Sweden is essentially a very sound economy, however, I believe the stabilty that underpins this is high taxation. Which the current party in Government are gonna soon change, I presume, and then when the hit comes, it'll be twice as hard.

The issue of a property bubble is a bit more than a "shadow" I believe. Its a sky full of cloud type of shadow. Swedens mortgage system was, I believe, a fix to a previous housing bubble as it made people take on high values of property over a term that they could afford (if you can call affording something when you know you'll never own it) and I think Ireland will have to put in a similar system (extend an over priced mortgage to 60+ years and dont ever own your house just so you can afford it) so I think if sweden has to take another hit on a housing bubble it will really be in trouble.

The thing that a housing bubble does is that it floods the market with cash and gives confidence to the market. 2 things that really fuel a fire! So people have more cash and with house prices going up, peopls wealth is all artificially gained. This is all good for the short to medium term and I've no doubt that Sweden as a country is going to be a hot bed of high growth and wealth for the same period stated before....................however,....Ireland...Iceland....and every other country who has seen massive growth in property prices, which includes EVERY country that has joined the EU since the late 90's, are effectively all on a ticking time bomb because as I've said before, every city cannot be London or New York for property value.

A rising tide raises all boats........but when the tide goes out and you bought a boat to big for the bay, ya find yourself in a go-nowhere position.
18:49 January 20, 2011 by Nemesis
@ Acero,

The curency is about 10% overvalued and rising. It has been overvalued by about 5% to 10% for most of the last ten years, apart from the economic crisis over the last two years. It is actually at its highest level compared to the Euro (Deutschmark) for the last ten years and still rising. To me that is an indication of a long term problem in the economy. There is real problems and it really is starting to look like we are about six months to one year from a repeat of Ireland-Greece, unless there is some changes of policy.

In my opinion, the Swedish Krona was at a more realistic value in 2009, than at any other time in the last ten years. I may well be wrong, but that is how I see it.

I have also commented on a connected article here on the local. See:

'No housing bubble in Sweden': central bank

http://www.thelocal.se/31550/20110120/

A statement and correction of ideology to the imbeciles who came up with the statement, that there is no housing bubble in Sweden.

YOU ARE 100% WRONG.

Sweden is skewing its economy to growth based on rising property prices and the financial sector, just as Ireland and Greece did before falling into an economic abyss.

That is increasing the risk of an economic crash due to a problematic systemic economic model, from a medium level, steadily towards highly likely.

It is obvious nothing was learned in the 90's in Sweden and that Sweden is determined to make the economic crashes that occured in Iceland, Greece and Ireland, look like a walk in the park.

Short sightedness, greed, arrogance, stupidity and delusions of grandeour can only explain so much, expecially in a country that has so often engaged in long term planning of its economy, until now. The warning signs are now very obvious, yet are being deliberately ignored. I am beginning to wonder if this is deliberate to create a massive crash in Sweden, after the worst is over in the rest of Europe.

PS: As a matter of interest it might be worth taking a look at who has shorts that benefit if there is a crash in Sweden, as well as who there families and social circle are.
13:09 January 21, 2011 by Luke35711
Why wouldn't there be a bubble??!

Cyclicality is the normal state of affairs in capitalism. Interest rates are being kept artificially low, for too long. All the psychological incentives for the elites are there: bankers get their bonuses, politicians get their taxes, businessman get their profits. Common folk in Sweden is exceptionally naive and easily controlled by the elites. Additionally, there is a very strong political incentive to lower unemployment (esp. among the young) and provide good news in the midst of depressing winters: the rise of Sweden Democrats. Short-term thinking is unavoidable in current democratic systems. We get the usual denials, which would never come from such high places if there were not a problem. Why would the PM deny a bubble, unless there was one? It simply wouldn't be a priority for the PM to speak on the subject, unless somebody decent and well-informed had sleepless nights fearing the problem.

So there most likely is, or will be a bubble.

The question is how bad is it going to be? Here I would inclined to be a cautious optimist. Probably not as dramatic as some here suggest. It's still a solid, well-organised, well-connected country where people basically like to work. Get some perspective: the country may be run by people who are a bit arrogant and controlling, but at least they are not mad, alcoholics, or totally corrupt, like most other places.
17:25 January 21, 2011 by zircon
Once upon a time there was this... very rich Sweden?
02:00 January 22, 2011 by 2394040
The world's politicians have a very serious problem. They have lied so often and so long that the world's electorate no longer believes them.
03:42 January 22, 2011 by oOjimOo
Sweden is solvent, but only because the the Social Democrats learned from the dip in the '90. The ability of Sweden as a nation to remain solvent depends upon the actions of the present government. Borg recently said that Sweden was the new tiger economy, if the present Swedish government wastes the gains as the Irish government have done in the past Sweden could easily go the same way - let hope it dosen't!
11:36 January 22, 2011 by wakak
With 55% personal tax rate, it would be a shame if this country was in deficit.

Still, let's see in a few months / years after the bubble has burst. Then, Sweden might have to go to Ireland for counsel and support.
15:59 January 22, 2011 by Mib
Wow,there are a few people on here who think it was going to crash tomorrow. Let's get one thing straight...the housing market is not in a bubble about to burst and when I mean burst...drop by 20% or more. The Irish market collapsed by 50% in lots of cases and that is due to landlord investors borrowing too much from banks with blinkers. Add to the fact only 3 million or so live in Ireland and you have wastelands of new housing estates lying empty, which will not improve for a long while as the young people emigrate to get work! Sweden does not have this landlord scenario of investingin several properties due to the regulations of housing associations, which do not allow apartments to be bought as investments to be rented out. The rent regulations also stop people from charging market rates legally. When I arrived in the summer of 2006, I was surprised at how low the prices were after living in the UK and they are still very cheap compared to prices in the UK even after their drop in house prices. Add to the fact that everyone must have at least 15% to invest as capital before they can borrwo money for a property, then this will help remove any potential bubbles in the future. When I came over to Sweden, it was around 9,47....to the Euro and nowit is slighty below 9. That is mainly due to the doubts in the Eurozone debt levels and that interest rates are higher in Sweden. A strong currency is a doubled edged sword as it is an indication of the confidence investors have in the country, yet it makes exports more expensive, but Sweden is projected to continue in growth albeit at a lower sustainable level. In terms of tax rates, they should only be lowered IF they increase tax revenue and encourage growth and investment in Sweden, otherwise, keep it at 57%. Anyway, I find politicians can sometimes only think in terms of interest rates and income tax as blunt instruments, when there are many more ways to achieve the same effect. Someone mentioned that the Left Government were responsible for the regulations in place that help protect Sweden fro the worst of the credit crunch and that was a good job. However, the Left were also responsible for causing the problems that led t that crisi in the early nineties and the Right Government came in when the proverbial hit the fan and were blown away by the situation. From my experience of Sweden in terms of business, they are usually the first adopters of technology and have the creativity to grow. Their English is fantastic, which gives it a great advantage over its competitors. It is well respected outside Sweden and many of my friends and family who visit are impressed by the lifestyle, especially in the summer. Sweden is not a utopia...it has many problems, but at least it is not masively burdened with debt like Ireland, Spain, Portugal, Italy, Greece, UK etc where austerity measures will last a long time to reduce their debts as demanded by the loan requirments.
04:01 January 23, 2011 by LordSqueak
Once the housing bubble pops, the deck of cards that is swedish economy at the moment, is going to crash,, Hard!

Once that happends, all the political parties will blame the other side for the mess.
06:24 January 23, 2011 by theTRUTH4u
Comment: here's a recent unbiased update for you guys.

The problem is really that this is all CREATED! they don't want to stop the disasters that are obvious and coming. It is part of the big plan! watch the other videos on that page and hold on to your shorts.
16:49 January 27, 2011 by 2394040
For what it's worth, the "Great Depression" in the USA was preceded a few years before the stock market crash by a major real estate crash in many parts of the USA. That fact is not well-known (at least today) here in the USA, but it did happen. Whether one likes to think about it or not, that is something to be worried about. History has an annoying habit of repeating itself.
07:47 January 28, 2011 by Mad Mac
Sorry, but this looks very much like the fatuaous claims of the Cameron government in Britain. The Swedish economy is export-led, and an overvalued Krona is very, very bad news at a time when the main overseas buyers of Swedish products are experiencing major economic problems.

Also, have you noticed that what economists and politicians claim to be good for 'the economy' is generally not good for the people as a whole? It might be good for the owners of that economy, but not for their footsoldiers and vassals. Most neoliberal economists believe there is some kind of 'natural' level of unemployment. Well, there ain't. Unemployment is a weapon of terror, regulated by the owners of the economy, and used against the people.

The owners of the Swedish economy are still deploying the weapon of unemployment vigorously against the people, and the only way to change this is to elect a non-neoliberal government, which puts the wellbeing of the people before the discredited quack theories of Hayekian economists.
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