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Election puts economy in 'fog of uncertainty'

Paul O'Mahony · 15 Sep 2014, 12:33

Published: 15 Sep 2014 12:33 GMT+02:00

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A minority government led by the Social Democrats is expected to assume the reigns after an election that left only the populist anti-immigration Sweden Democrats feeling they’d come out as winners.

“We have already seen a negative effect for the krona,” Robert Bergqvist, chief economist at SEB bank, told The Local after the currency fell slightly against the dollar and the euro.

“With the political situation so unclear we will have to wait a couple of weeks to see if the formation of a new government can reduce uncertainty. 

“Predictability is necessary for businesses to want to hire and make investments.”

In its immediate post-election analysis, SEB said the "fog of uncertainty" could carry a political risk premium for Sweden.

Social Democrat leader Stefan Löfven, with his background as head of the metalworkers union, understood the importance of industry, said Bergqvist. But his failure to get more than 31 percent of the vote meant he would face pressure from within his own party, as well as the Greens and Left Party, to implement policies unpopular with businesses.

Carola Lemne, meanwhile, head of the pro-business Confederation of Swedish Enterprise, said the election results, including the success of the nationalist Sweden Democrats, created “great uncertainty at a tricky juncture for jobs and growth.”

“There are also question marks surrounding the possibility for Sweden to remain an open and welcoming country. Sweden can’t afford four lost years,” she said in a statement.

In a similar vein, the head of the Stockholm Chamber of Commerce Maria Rankka also worried that a new government would prevent businesses from recruiting key staff outside the EU.

“Stockholm’s start-up scene depends on open borders for labour migration," she said, speaking at a panel discussion hosted by the chamber on Monday morning, 

She added that banning profits in the welfare sector would be “a catastrophe, if not impossible”. The Left Party, a possible partner in a coalition government, favours outlawing profits for businesses operating in publicly funded areas like schools and healthcare services.

Asked if the Social Democrats would ever consider forming a grand coalition with the centre-right Moderates, Rankka said it had always seemed implausible until now, “but business would like it”.

SEB bank’s post-election economic outlook

How will fiscal policy be affected?

Our forecast is that the government’s fiscal policy stance will be rather neutral or weakly expansionary.

Overall, there will be a mix that provides an extra short-term dose of stimulus, while a higher tax burden will risk worsening long-term growth potential. 

What changes in taxation are being considered?

There is a great risk that the Social Democrats will be forced to backtrack on certain taxes by maintaining that tax hikes will occur in “a different way that previously”. 

Will the mandate of the Riksbank be changed?

It is unlikely that a Social Democrat-Green government will change the central bank’s mandate.

How will monetary policy be affected?

The change of government will have only a limited impact on monetary policy.

Story continues below…

Since a red-green government will pursue policies that will lead to higher actual short-term growth at the expense of a bit lower long-term potential, this suggests slightly tighter monetary policy than before.

How will the krona be affected?

Our forecast is that the krona will weaken to around 9.40 per euro over the next few months.

Looking further ahead, we believe that stronger macroeconomic fundamentals suggest that the krona can regain lost ground against the euro and that the Riksbank will begin raising its key interest rate earlier than the ECB.

Should Sweden carry a political risk premium?

The fog of uncertainty that has swept in over the Swedish political landscape is connected to questions about Sweden’s political resolve and the probability of long-term political deadlocks as well as the shape and impact of a new economic policy.

Because of its fundamentally strong economy, Sweden’s immunity to political uncertainty is very high in historical terms. This reduces, but does not entirely eliminate, a certain political risk premium. This premium has already risen somewhat in recent weeks as a change of government has become more probable.

For more news from Sweden, join us on Facebook and Twitter.

Paul O'Mahony (paul.omahony@thelocal.com)

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