‘Mild recession likely’: IMF presents new report on Swedish economy

Sweden can expect a 'mild' recession this year, experts from the International Monetary Fund (IMF) have predicted, with growth projected at around -0.3 percent and inflation expected to drop to 6.5 percent in 2023.

'Mild recession likely': IMF presents new report on Swedish economy
IMF delegation leader Khaled Sakr (right) presents the fund's report on the Swedish economy alongside FSAP delegation leader Tommaso Mancini Griffoli. Photo: Claudio Bresciani/TT

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.

Finally, it stated that investment in education should focus on “science, engineering and vocational training” to address the skills gap in Sweden, as well as increasing the efficiency for “programs and regional services to better integrate the less educated and the foreign-born”.

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Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview. 

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken. 

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.” 

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.” 

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said. 

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.