'Mild recession likely': IMF presents new report on Swedish economy

Experts from the International Monetary Fund (IMF) wrote in the fund's IV report on the Swedish economy that inflation in Sweden could drop to around 6.5 this year, if fiscal policy remains contractionary and wage negotiations were carried out responsibly to avoid a wage-price spiral.

Short-term, however, the IMF states that the inflation outlook "remains uncertain".

The report further states that strong employment in Sweden is "a positive sign", which should help to lessen the burdens on households from high debts and inflation.

It describes the Swedish housing market as "dysfunctional", arguing that the weakening of the Swedish property market highlights the market's "long-standing vulnerabilities". It lists some of these vulnerabilities as "high exposure to variable interest rates, high leverage, and excessive rent control".

It recommended that rent control measures could be "gradually eased, while providing social protection in a more efficient way", in order to address distortions in the housing market. One way of providing this protection, it said, could be through extending housing allowance.

Swedes have one of the highest levels of consumer debt in the EU, and variable-rate mortgages are common, meaning that Swedes are more vulnerable to changes in interest rates than residents of other countries. This has also affected Swedish house prices over the past year, with property prices dropping overall by 16.8 percent since the last peak in June 2022.

The IMF suggests that some measures to stimulate growth in Sweden could include increased spending on infrastructure, education and training, green investments, and by increasing "extremely low" property taxes to allow for a reduction in high labour taxes. With property taxes standing at around 0.95 percent, Sweden has one of the lowest property tax rates in the EU, as well as the third-highest labour taxes in the bloc.

It further added that a reduction in the amount of mortgage interest eligible to be deducted from taxes (ränteavdrag) would lead to a more "dynamic" housing market and reduce household borrowing.

The IMF described Sweden's energy support measures as "swift", although "small compared to other European countries". However, it stated that the energy price subsidy could have been better targeted to more vulnerable members of the population, perhaps by linking it to household income.

The report further recommended that planned fuel cuts over the next three years "impede carbon reduction efforts and increase the risk of Sweden not meeting its 2030 climate goals", and should be phased out as fuel prices decline.