IMF Executive Board Concludes 2011 Article IV Consultation with Sweden

On July 8, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sweden.¹

Background

Sweden’s recovery from the global recession has been very strong relative to other advanced countries. In 2010, output rose by 5½ percent, with exports, investment, and consumption all rising rapidly. Unemployment has come down to 7¾ percent, from its mid-crisis peak of over 9 percent, and core inflation has remained close to target throughout. Financial sector strains have been contained, bank capital and liquidity have strengthened, and most emergency stabilization measures have been withdrawn.

The fiscal deficit narrowed to 0.3 percent of GDP in 2010 and while public debt remains at about 40 percent of GDP, it is expected to fall. Alongside, a cautious monetary tightening cycle has been underway since July 2010, with the Riksbank raising the policy rate by 1¾ percentage points, together with prudential mortgage regulations to cool housing. Since its trough in mid-2009, the krona has appreciated by 20 percent against the euro, but remains competitive. Growth momentum has been maintained into 2011 with first quarter GDP rising by 6½ percent year-on-year. This success reflects the strength of domestic and global stabilization policies.

However, long-term and youth unemployment have lagged in the recovery, and fixed investment, although rising again, is still below 2006–08 levels relative to output. Furthermore, there is risk of a decline in house prices in coming years which could have an adverse impact on growth.

Executive Board Assessment

Executive Directors commended Sweden’s impressive recovery from the global recession, noting that its economic growth in 2010 was uniquely strong among advanced countries. This performance reflects decisive domestic policies, underpinned by sound policy frameworks.

Directors welcomed the measured exit from policy stimulus. The increases in the Riksbank policy rate confirm the commitment to low inflation. The withdrawal of many financial sector support measures alongside enhanced capital ratios has strengthened the resilience of the sector. The return to fiscal surpluses has reinforced strong sovereign credentials.

Directors noted that notwithstanding the positive outlook, challenges remain. Youth and long-term unemployment has lagged the recovery, fixed investment has remained below its pre-crisis level relative to GDP, and despite the recent dip in house prices, they still appear richly valued in the context of elevated household indebtedness. While the global economic outlook has improved, risks remain, especially from ongoing stresses in the euro area.

Directors commended the balance that the authorities had secured in their 2011 budget between supporting activity by maintaining a neutral stance given the remaining output gap, and continuing to build fiscal buffers against external uncertainties. In this regard, they welcomed the increased margins relative to spending ceilings and the postponement of planned tax reductions. Directors agreed that if scope remains for reductions in 2012, the focus should be on the earned income tax credit to strengthen labor market performance. Directors welcomed the role that the Fiscal Policy Council is playing as an effective watchdog. Going forward, it will be important to ensure that the Council remains adequately resourced.

Directors noted that continued moderation in wage settlements would provide a platform to secure a sustained reduction in unemployment. Along with further structural efforts, they encouraged adoption of permanent concessionary arrangements for labor market entrants.

Directors considered the anticipated further increases in the Riksbank policy rate to be appropriate. The authorities should stand ready to respond flexibly to circumstances, raising rates more rapidly if wage settlements accelerate and delaying somewhat if strong krona appreciation continues.

Directors welcomed the findings of the recent Financial Sector Assessment Program (FSAP) update, indicating the initial reassurance on credit risks. In light of the potential vulnerabilities stemming from house prices, they called for continued supervisory vigilance. The authorities should be prepared to take further macro prudential measures if significant new financial stability or consumer risks develop.

Directors welcomed recent measures to strengthen the monitoring of liquidity, as well as plans for early introduction of strong liquidity regulations taking specific account of risks in foreign currencies. Given the unique characteristics and risks of the Swedish financial system, Directors supported the authorities’ intention to go faster and further than Basel III capital regulations.

Directors also endorsed the FSAP recommendations on institutional issues. These include merging the stability and deposit insurance funds, establishing a special bank resolution regime, increasing further the Financial Supervisory Agency’s capacity, and improving coordination among institutions responsible for macro prudential policies.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.