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ECONOMY

What you need to know about the state of the Swedish economy

Sweden is headed for an economic slowdown, but is that cause for concern? The Local delved into two recent financial reports to bring you the five things you need to know about the state of the Swedish economy.

What you need to know about the state of the Swedish economy
Swedish Finance Minister Magdalena Andersson, pictured here presenting the spring budget. File photo: Lars Pehrson/SvD/TT

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A decade-low for the Swedish krona

The Swedish krona hit its lowest level against the euro in ten years over the weekend, after a 5.4 percent drop over the past year alone. Against the dollar, it has seen an even bigger decline of eight percent.


Photo: Pontus Lundahl/TT

Growth forecasts revised down

Sweden's GDP is expected to increase by 1.6 percent in 2019 and 1.7 percent in 2020, according to a report by banking giant SEB, also published on Wednesday. This was a slight downward adjustment from the previous forecast, released in January, of 1.6 percent for 2019 and 1.9 percent for 2020.

“The development [of the economy in the first quarter] has confirmed the expectation of a clear slowdown, but no collapse in the housing market and in 2020, something of an increase is expected again in the construction industry,” wrote SEB.

The bank also revised down its forecasts for global economic growth, predicting that the global economy would grow by 3.3 percent this year and not the 3.5 percent earlier forecast. And in Sweden, it predicted that low inflation would force the national bank (Riksbank) to postpone any increase in interest rates until July 2020.

Slowdown to come

The Swedish economic boom has reached its peak and the economy is approaching a slowdown, the country's Fiscal Policy Council wrote in its annual report on how the government is managing the economy on Tuesday. This shouldn't be a surprise to those who have been following developments closely, but what does it mean?

Speaking about the slow development of GDP per capita in recent years, the council's chairman Harry Flam told the TT news agency: “I don't consider it to be very serious. One cannot draw conclusions from one or two years.” 

Flam added that it was “too early to say” if growth had picked up, and said that over the long-term view, growth had been “in line with comparable countries”.

The council wrote that there was no immediate need for government action, but recommended that steps be taken for better preparedness in the future. If the slowdown turns out to be a long-term trend, it could become a “serious problem”, the report stated.

File photo: Marcus Ericsson / TT

Impact of immigration and reaction to recession

The arrival of thousands of refugees in 2015 is one possible factor behind the slow economic growth, Flam suggested. 

Another reason Sweden's growth has been slow over the past two years could actually be its strong performance in the wake of 2008's global recession, especially compared to other European countries such as Germany, Finance Minister Magdalena Andersson said.

“It is crucial for us politicians to look at this. Basically, it is about investing in education and infrastructure,” the minister said.

She put forward another explanation for the slow growth GDP: a weak development in productivity, which could be linked to Sweden's high employment rate. Although this is overall a positive thing, the minister said that above-average rates of employment could lead to a drop in productivity.

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Labour market

The Fiscal Policy Council's report highlighted that the Swedish employment rate was strong “both from a historical and an international perspective”, with employment in Sweden and Estonia the highest of all EU countries.

But despite that, it warned that the labour market suffered from major shortages of workers with in-demand skills, particularly in the public sector, and it criticized the fact that people born outside of Sweden faced a much higher likelihood of unemployment than native-born Swedes,

“The council welcomes the government's measures to reduce these problems, but believes, like previously stated, that they are insufficient,” it wrote.

Harder for Sweden's foreign-born entrepreneurs to get business loans
File photo: depositedhar/Depositphotos

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ECONOMY

What will Sweden’s interest rate hikes mean for foreigners in Sweden?

Sweden's Riksbank now expects its base interest rate to be close to two percent in three years' time. What will this mean for foreigners living in Sweden?

What will Sweden's interest rate hikes mean for foreigners in Sweden?

How high could interest rates go? 

The Riksbank on Thursday increased its key interest rate above zero for the first time since the autumn of 2014.

But it isn’t going to stop there, it expects to hike the rate in small increments over the next three years, to 1.18 in the middle of next year, to 1.57 in the middle of 2024, and to 1.81 in the middle of 2024. 

At a press conference on Thursday, the bank’s governor Stefan Ingves said that people should prepare for higher rates, but stressed that there would be “no extreme rate levels”. 

“We’re not slamming on the brakes, more taking our foot off the pedal,” he said. 

It’s worth remembering, though, that in the run-up to the Swedish banking crisis in the early 1990s, the key interest rate moved from 1 percent to 2 percent to as high as 10 percent, before the Riksbank finally upped it to 500 percent in a desperate attempt to defend the krona. 

As recently as February the Riksbank was not expecting to raise rates from zero until 2024, so if inflation proves more stubborn than expected, the key rate could possibly go higher. 

But Robert Boije, chief economist at Swedish state-owned mortgage lender SBAB, said that as inflation today is most likely the result of higher energy prices, and supply-side constraints, rather than because there’s too much money in the system, the risk of seeing higher rates than the Riksbank has outlined is relatively small.  

“There’s a higher probability of a lower repo interest rate [than expected] in 2024 than of a higher interest rate,” he said. 

How will higher interest rates affect mortgage rates? 

According to Claudia Wörmann, SBAB’s housing economist, interest rates on floating mortgages could nearly double over the next year from around 1.8 percent today to about 3 percent in January 2026.

She expects two-year fixed mortgages, which are now at around 2 percent to rise to 3.4 percent in January 2025, while five-year fixed-rate mortgages will rise from 2.5 percent today to 3 percent in 2023 and 4.1 percent in 2026. 

Many mortgage lenders had already anticipated Thursday’s rent rise, with Handelsbanken/Stadshypotek, Skandiabank, and SBAB all upping their mortgage rates by as much as 0.25 percentage points last week. 

Bigger monthly payments for those with loans

According to Wörmann, someone with a million kronor mortgage who currently has a two percent interest rate, would see their monthly payment double from about 1,160 to 2,330 if their mortgage rate rises to four percent. 

As most borrowers pay more than they need to simply to meet their interest payments, however, many have some flexibility, meaning they can slow down their repayments to make it easier to bear the increased cost, she said.  

“One aspect is the interest rate, but you need to bear in mind that a normal household amortises much more than they pay in interest rates,” she said. 

Lower buying power for those without a mortgage

For foreigners in Sweden looking to borrow to buy a house, higher mortgage rates will reduce the amount of money they can borrow to buy a house or apartment.  

Houses and flats in Sweden might get more affordable

Two years of rising house prices showed signs of coming to halt last month. 

The Swedish financial supervisory authority warned earlier this month that in its worst-case scenario, where rising interest rates are compounded by higher power costs for consumers, house prices could fall by as much as 30 percent. 

In its less dramatic scenario, the prices of apartments owned as part of a cooperative – so-called bostadsrätter – would fall only slightly, while the price of detached houses would fall 10 percent. 

“Our prognosis is that housing prices at the end of 2024 will be about ten percent lower than what they were on January 1st this year,” said Boije. 

The decline will start with a 1.3 percent drop this year, followed by a bigger 6.1 percent drop next year, and then a 3.8 percent drop in 2024. 

For most buyers the affordability of housing will not change very much, Boije points out, as higher interest rates will reduce the amount they can borrow. 

“If there’s a one-to-one correlation between the interest rate and housing prices, then the use cost of housing in economic terms will not change very much,” he said. 

Foreigners who are able to buy in Sweden without taking out a loan, will see a benefit, however.

It will also become easier for those taking out a mortgage to gather together the 15 percent of the value of the property they are required, under Swedish law, to pay in cash. 

READ ALSO: Will Swedish housing prices plummet as interest rates rise?

Wörmann said there was little doubt that the increase would start to pull down house prices, particularly when you looked at rising costs and post-pandemic effects. 

“It’s more expensive to buy food, you have to take into account that people are spending much more money on electricity and on fuel,” she said.

“We are leaving a pandemic where we were stuck in our homes, which might have meant that people didn’t mind paying a lot of money for their house as they spent so much time there. Now we are released from our home, and that might change how we look at our homes and our willingness to buy something expensive.” 

For foreigners who have yet to buy a house or flat in Sweden, a 30 percent fall in prices would of course be quite welcome, increasing the affordability of property in the country. 

Foreigners paid in local currency may benefit from a stronger krona

The hike in interest rates saw the value of the Swedish krona rise against both the dollar and the euro on Thursday.

If the Riksbank has now left behind the loose monetary policy which saw it keep the key interest rates negative between February 2015 and December 2019, the krona could strengthen against other currencies. 

“If markets now expect the Riksbank to be more hawkish relative to the Fed in the US and the ECB, this should increase the value of krona,” Boije said. 

This will mean foreigners paid in kronor will earn more once their salary is converted into another currency. Conversely, those paid in euros or dollars, but living in Sweden, could see an effective salary cut. 

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