## 1sweea2019001

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### Recent developments
- Real GDP growth averaged 2.4 percent in 2016–2018:Q3; labor productivity growth slowed to about 0.6 percent.
- Employment growth averaged nearly 2 percent since 2015; foreign born persons accounted for 60 percent of employment gains and grew 6.4 percent.
- Labor force participation (15–74 year olds) increased to above 73 percent; participation of the foreign born rose by 2 percentage points.
- Unemployment fell to 6.2 percent in 2018:Q4; job vacancy rates reached the highest level this century.
- Wage rises: 2.6 percent y/y in 2018, up from 2.4 percent y/y in 2015–17.
- Headline inflation around 2 percent in 2017–18 partly reflected rising energy prices; core CPIF inflation averaged 1.5 percent in 2018 (broadly unchanged from 2016).
- Core HICP: rose to 2.1 percent y/y in July 2017, then fell to 1.3 percent y/y by December 2018; adjusted core HICP around 1–1¼ percent y/y with estimated trend 1¼ percent y/y.
- The Riksbank deferred its first interest rate increase until late 2018, raising the repo rate by 25 basis points to -0.25 percent.
- The Swedish krona depreciated 4.3 percent in effective terms in 2018.
- Housing: a 6 percent housing price decline in late 2017 followed a surge in luxury apartment completions; housing prices stabilized and household credit growth eased to 5.3 percent y/y in 2018. Construction activity slumping partly due to reduced availability of pre-sale financing for small developers.

### Prospects, macroeconomic outlook, and risks
- Growth projection: Real GDP 2.3 percent in 2018 (estimated) slowing to 1.2 percent in 2019 due to lower global growth and weaker domestic demand.
- Drivers of slowdown: falling dwelling investment, cooling consumption growth, and weaker external demand.
- Output gap: 1.2 percent of potential in 2018; projected 0.3 percent in 2019 and 0.1 percent in 2020.
- Inflation outlook: underlying inflation expected to rise gradually; staff projects CPIF ex. energy reaching 1.7 percent by end‑2019 and rising toward 2 percent by 2021–22; Riksbank projects CPIF ex. energy 1.9 percent in 2019.
- Fiscal outlook: fiscal surplus estimated just under 1 percent of GDP in 2018; lower growth in 2019 implies fiscal surplus likely below the budget estimate of 0.9 percent of GDP.
- Fiscal buffers: public debt moderate at 38 percent of GDP; general government gross debt (official statistics) 39.0 percent of GDP in 2018, projected 37.2 percent in 2019 and 35.5 percent in 2020.
- External metrics: current account 2.0 percent of GDP in 2018, projected 2.4 percent in 2019 and 2.5 percent in 2020; net international investment position 6.9 percent of GDP in 2018, projected 7.6 percent in 2019 and 8.4 percent in 2020.
- Downside risks highlighted:
  - Fall in dwelling investment could exceed projections.
  - Weaker global growth from sharp tightening of global financial conditions or trade disruptions (including a no‑deal Brexit).
  - Prolonged low inflation and interest rates could promote housing and commercial property price rises and exacerbate debt vulnerabilities.

### Housing market and household credit (findings and vulnerabilities)
- House prices declined 6 percent (seasonally adjusted) from August 2017 peak to end‑2017; price growth slowed to 2 percent y/y in 2018.
- Housing starts dropped about 16 percent in 2018; dwelling investment fell 14 percent from 2018:Q1 to 2018:Q4.
- Household credit growth eased to 5.3 percent y/y in December 2018 from 6.8 percent a year earlier.
- Aggregate household debt: average loan-to-value ratio of 55 percent (67 percent for new loans); three-quarters of mortgages have variable rates.
- Commercial property: prices rising rapidly; valuations appear stretched though rental yields remain favorable relative to bonds.
- Staff estimate of house price overvaluation: 2 percent in 2018:H2.
- Vulnerabilities: financing difficulties among smaller property developers; households with high debt relative to income could reduce consumption and reinforce downturns.

### Monetary and exchange rate policy
- Riksbank actions:
  - First repo rate hike 25 basis points in late 2018 to -0.25 percent.
  - Government bond purchases concluded December 2017 after acquiring some 40 percent of outstanding Swedish government bonds; reinvestments continue.
  - February 2019: Executive Board chose not to extend a mandate facilitating rapid FX intervention; Riksbank can still intervene with Executive Board approval.
- Policy guidance: continue a data‑dependent approach; deferring further rate increases until the second half of 2019 and conditioning them on evolving outlook and inflation prospects is appropriate.
- E‑krona / CBDC:
  - Initial assessment of demand at roughly 1–2 percent of GDP.
  - Further work should explore regulatory options to ensure reliable and efficient private payments; testing scheduled in 2020.

### Labor market, wage formation, and skills policy
- Labor market context:
  - Reforms adopted to raise employment of low‑skilled and migrants; 2018 budget boosted education and streamlined active labor market policies.
  - Unemployment rates of the foreign born and low‑skilled much exceed those of natives.
  - Nominal wage rises have become closely linked to those in Germany; wage rises have been subdued relative to labor market tightness.
- Wage formation findings:
  - Industrial sector agreement sets benchmark wage rise though the industrial sector employs only 11 percent of workers; this pattern has restrained nominal wage growth relative to domestic conditions.
- Policy recommendations:
  - Enhance employment of migrants and low‑skilled through education, training, Public Employment Service reforms, and employment protection adjustments.
  - Implement social partners’ plan for “entry agreements” in 2020 to combine work and training with state benefit supplements for up to two years.
  - Consider broadening sectors forming the national wage norm (e.g., amend National Mediation Office mandate) to better align average wage rises with productivity trends and inflation expectations.

### Housing policy reform recommendations
- Make the rental market work:
  - Fully liberalize rents of newly constructed apartments and phase out existing controls (e.g., apply market rents when tenant changes).
  - Expand access to the housing allowance to cushion adjustment; consider a temporary “windfall” tax on significant rental income gains.
  - Increase rental supply by reducing impediments to sub‑letting and households renting out their own apartments, while containing macrofinancial risks from buy‑to‑let housing.
- Tax reforms:
  - Consider broad-based increase in ceiling on property tax or targeted increases to main centers.
  - Abolish interest on deferrals of capital gains taxes; consider taxing only a portion of capital gains on primary dwellings.
  - Phase out mortgage interest deductibility (MID).
- Supply and construction:
  - Simplify planning to reduce construction cost increases (construction costs have risen by over 28 percent in real terms over the past 15 years, compared with 10 percent in the euro area).
  - Strengthen competition in construction, harmonize land sale procedures across municipalities, prevent requirements beyond national building standards.
  - Expand subsidies for affordable rental apartments and for student and elderly housing.

### Macroprudential, financial stability, and AML/CFT
- Recent measures:
  - FI’s macroprudential mandate expanded from February 2018.
  - March 2018 stricter amortization requirement: minimum amortization on new mortgages with an LTI over 450 percent increased.
  - Countercyclical capital buffer increase of ½ percentage point to 2½ percent from September 2019.
- Monitoring and data:
  - Enhance household-level data collection to evaluate effectiveness of measures.
  - Use targeted higher amortization for high LTI loans rather than an outright LTI ceiling; effectiveness needs close monitoring.
- High-LTI mortgage shares (share of new mortgage loans exceeding 450 percent of households' gross income, percent):
  - 2011: 9.9
  - 2012: 11.8
  - 2013: 11.6
  - 2014: 14.1
  - 2015: 16.2
  - 2016: 14.7
  - 2017: 15.0
  - 2018F: 7.0
- AML/CFT and regional cooperation:
  - Reports suggest Swedbank handled about US$4.3 billion in suspicious transfers in the Baltics between 2007 and 2015.
  - Authorities should continue to correct remaining deficiencies in Sweden’s AML/CFT framework and strengthen regional cooperation.
- Nonbank entrants:
  - New nonbank mortgage entrants are small but growing; they must meet macroprudential and consumer protection requirements.
  - Commercial real estate: nonbank financing is growing; FI should continue close review of banks’ risk management and commercial property borrowers’ health.

### Fiscal policy stance, targets, and options
- Allow automatic stabilizers to operate fully in 2019.
- Medium-term target:
  - New medium-term fiscal surplus target 0.33 percent of GDP (from 2019); debt benchmark 35 percent of GDP.
  - Meeting target implies net financial worth broadly stable; net financial worth 27 percent of GDP in 2017.
- Near-term options:
  - Transitioning to the new medium-term target by 2020 would release modest resources (about 0.2 percent of GDP); staff assumes surplus reduced to about 0.5 percent of GDP in 2019.
  - Temporary cut in surplus target could address higher public investment needs from demographic shifts.
- Investment and demographic needs:
  - Needs for at least 1,400 additional schools, 700 housing facilities for the elderly, and 93 healthcare facilities through 2026 noted.

### Key quantitative indicators (selected)
- Real GDP (percent change): 2016: 2.7; 2017: 2.1; 2018: 2.3; 2019 (proj): 1.2; 2020 (proj): 1.8; 2021: 1.9; 2022–2024: 2.0/2.0/2.0.
- Domestic demand (percent change): 2016: 3.2; 2017: 2.7; 2018: 2.0; 2019 (proj): 1.1; 2020: 1.9; 2021: 2.1.
- Private consumption (percent change): 2016: 2.9; 2017: 2.2; 2018: 1.2; 2019 (proj): 1.7.
- Gross fixed investment (percent change): 2016: 4.2; 2017: 6.0; 2018: 3.3; 2019 (proj): 0.0; 2020: 2.2; 2021: 3.2.
- HICP inflation (e.o.p): 2016: 1.4; 2017: 1.8; 2018: 2.2; 2019 (proj): 1.8; 2020 (proj): 1.7.
- HICP core inflation (e.o.p): 2016: 0.9; 2017: 1.6; 2018: 1.3; 2019 (proj): 1.5.
- Unemployment rate (percent): 2016: 6.9; 2017: 6.7; 2018: 6.3; 2019 (proj): 6.3.
- Gross national saving (percent of GDP): 2016: 28.3; 2017: 28.4; 2018: 28.3; 2019 (proj): 28.5.
- Gross domestic investment (percent of GDP): 2016: 24.5; 2017: 25.6; 2018: 26.3; 2019 (proj): 26.1.
- Output gap (percent of potential): 2016: 0.5; 2017: 0.9; 2018: 1.2; 2019 (proj): 0.3.
- Total revenues (percent of GDP): 2016: 49.9; 2017: 49.9; 2018: 49.5; 2019 (proj): 49.4.
- Total expenditures (percent of GDP): 2016: 48.8; 2017: 48.4; 2018: 48.7; 2019 (proj): 48.8.
- Net lending (percent of GDP): 2016: 1.1; 2017: 1.5; 2018: 0.8; 2019 (proj): 0.5.
- Structural balance (percent of potential GDP): 2016: 0.7; 2017: 1.2; 2018: 0.5; 2019 (proj): 0.4.
- General government gross debt, official statistics (percent of GDP): 2016: 42.4; 2017: 40.8; 2018: 39.0; 2019 (proj): 37.2.
- Bank lending to households (y/y percent change, eop): 2016: 7.1; 2017: 6.8; 2018: 5.3; 2019 (data as of January): 5.3.
- Repo rate (percent, end of period): 2016: -0.5; 2017: -0.5; 2018: -0.5; 2019 (eop): -0.25.
- Current account (percent of GDP): 2016: 3.8; 2017: 2.8; 2018: 2.0; 2019 (proj): 2.4.
- Net international investment position (percent of GDP): 2016: 0.1; 2017: 4.4; 2018: 6.9; 2019 (proj): 7.6.
- Nominal effective rate (2010=100): 2016: 97.1; 2017: 96.2; 2018: 91.5.
- Real effective rate (2010=100): 2016: 94.5; 2017: 93.7; 2018: 89.4.
- GDP per capita (2017, USD): 52,925; Population (2017, million): 10.1.
- Public sector balance sheet (selected): Net financial wealth 29 percent of GDP in 2018; net worth (including non-financial assets) about 90 percent of GDP.
- Debt sustainability and demographics:
  - Total aging-related expenditures expected to increase by 1.6 percentage points of GDP by 2070.
  - Old age dependency ratio increase by 2040: 10 percentage points (Sweden).

### Executive Directors’ assessment and consolidated policy guidance
- Overall assessment: Directors commended strong recent performance — solid growth, rapid job creation, and narrowing current account surplus — while noting slowing growth and heightened uncertainties.
- Monetary policy:
  - Maintain a cautious, data‑dependent stance; ensure inflation remains close to target and inflation expectations anchored.
  - Riksbank’s deferral of further rate increases until the second half of 2019 was considered appropriate.
- Fiscal policy:
  - Allow automatic fiscal stabilizers to operate fully in 2019.
  - Support reducing the cyclically‑adjusted surplus to the medium-term target of 0.33 percent of GDP by 2020 to modestly support reforms.
  - If public investment needs rise (demographics), consider temporary cut to surplus target while preserving credibility.
- Labor market:
  - Encourage reforms to enhance employment of migrants and the low‑skilled: education and training, Public Employment Service reforms, adjustments to employment protection.
  - Welcome social partners’ “entry agreements” plan.
  - Urge updating wage formation to better align wage rises with productivity and inflation expectations.
- Housing and macroprudential:
  - Encourage comprehensive housing market reforms: liberalize rents for newly built apartments, phase out rent controls (expand housing allowance), higher recurrent property taxes, phase out mortgage interest deductibility, strengthen competition in construction.
  - Welcomed stricter mortgage amortization requirements; monitor effectiveness and household-level balance sheets.
  - Continue review of banks’ commercial property risk management.
- Financial integrity and payments:
  - Correct remaining AML/CFT deficiencies and strengthen regional cooperation.
  - Explore the e‑krona and assess economic and regulatory implications to ensure reliable and efficient private payments.

*Source: IMF staff report for the 2019 Article IV consultation with Sweden (selected excerpts).*

### 2.6 percent in 2018. Headline inflation at around the 2 percent target rate in 2017-18 partly

### SWEDEN: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

### Recent developments
- Real GDP growth averaged 2.4 percent in 2016–2018:Q3; labor productivity growth slowed to about 0.6 percent.
- Employment growth has averaged nearly 2 percent since 2015, led by 6.4 percent growth for foreign born persons, who accounted for 60 percent of employment gains.
- Labor force participation (15–74 year olds) increased to above 73 percent; participation of the foreign born rose by 2 percentage points.
- Unemployment fell to 6.2 percent in 2018:Q4; job vacancy rates reached the highest level this century.
- Wage rises edged up to 2.6 percent y/y in 2018, from 2.4 percent y/y in 2015–17.
- Headline inflation around 2 percent in 2017–18 partly reflected rising energy prices; core CPIF inflation averaged 1.5 percent in 2018, broadly unchanged from 2016.
- Core HICP rose to 2.1 percent y/y in July 2017, then fell to 1.3 percent y/y by December 2018; an adjusted core HICP has been around 1–1¼ percent y/y, with an estimated trend of 1¼ percent y/y.
- The Riksbank deferred its first interest rate increase until late 2018, raising the repo rate by 25 basis points to -0.25 percent.
- The Swedish krona depreciated 4.3 percent in effective terms in 2018.
- Housing: a 6 percent housing price decline in late 2017 followed a surge in luxury apartment completions; housing prices have since stabilized and household credit growth eased to 5.3 percent y/y in 2018. Construction activity is slumping despite high housing price levels, partly due to reduced availability of pre-sale financing for small developers.

### Prospects and risks
- Growth projection: Real GDP 2.3 percent in 2018 (estimated) slowing to 1.2 percent in 2019 due to lower global growth and weaker domestic demand.
- Drivers of slowdown: falling dwelling investment, cooling consumption growth, and weaker external demand.
- Output gap: 1.2 percent of potential in 2018, projected 0.3 percent in 2019 and 0.1 percent in 2020.
- Inflation outlook: underlying inflation expected to rise gradually but with widened uncertainties; a data-dependent approach to monetary policy is appropriate.
- Fiscal outlook: fiscal surplus estimated just under 1 percent of GDP in 2018; lower growth in 2019 implies the fiscal surplus will likely be below the budget estimate of 0.9 percent of GDP.
- Fiscal buffers: public debt moderate at 38 percent of GDP; general government gross debt (official statistics) 39.0 percent of GDP in 2018, projected 37.2 percent in 2019 and 35.5 percent in 2020.
- Balance of payments and external metrics: current account 2.0 percent of GDP in 2018, projected 2.4 percent in 2019 and 2.5 percent in 2020; net international investment position 6.9 percent of GDP in 2018, projected 7.6 percent in 2019 and 8.4 percent in 2020.

### Executive Directors’ assessment and policy guidance
- Directors commended strong recent performance: solid growth, rapid job creation, and narrowing current account surplus.
- Monetary policy:
  - In view of heightened uncertainties, monetary policy should remain cautious and data-dependent to ensure inflation remains close to target and inflation expectations are firmly anchored.
  - The Riksbank’s deferral of further rate increases until the second half of 2019, dependent on the economic outlook and inflation prospects, was considered appropriate.
  - The Riksbank stated that the next repo rate increase will likely be in the second half of 2019, provided the outlook evolves as expected.
- Fiscal policy:
  - Given prudent policies and strong fiscal buffers, Directors welcomed allowing automatic fiscal stabilizers to operate fully in 2019.
  - Supported reducing the cyclically-adjusted surplus to the new medium-term target (0.33 percent of GDP) by 2020, releasing modest resources to facilitate reforms with little risk of overheating.
  - Some Directors noted higher public investment needs from demographic shifts could be addressed by budget shifts; any temporary cut to the medium-term surplus target should preserve credibility.
- Labor market:
  - Encourage reforms to enhance employment of migrants and the low-skilled, including education and training improvements, reforms of public employment services, and adjustments to employment protection.
  - Welcomed social partners’ plan for “entry agreements” to enable migrants and the low-skilled to combine work and training at reduced cost to employers.
  - Urged the social partners to update wage formation (e.g., including more sectors in forming the national wage norm) to better align average wage rises with productivity trends and inflation expectations.
- Housing market and macroprudential:
  - Encouraged comprehensive housing market reforms to improve affordability, supporting labor mobility and inclusive growth.
  - Recommendations include liberalizing rents for newly built apartments, phasing out rent controls (cushioned by expanding access to the housing allowance), higher recurrent property taxes, phasing out mortgage interest deductibility, and strengthening competition in construction to lower costs.
  - Welcomed stricter mortgage amortization requirements; called for monitoring effectiveness and continued close watch of household-level balance sheet data.
  - Supported continued review of banks’ commercial property risk management and health of commercial property borrowers.
- Financial integrity and payments:
  - Emphasized correcting any remaining deficiencies in Sweden’s AML/CFT framework and strengthening regional cooperation.
  - Welcomed exploration of the e-Krona and encouraged assessment of potential economic implications and regulatory options to ensure reliable and efficient private payments.

### Key quantitative indicators (selected from Table 1)
- Real GDP (percent change): 2016: 2.7; 2017: 2.1; 2018: 2.3; 2019 (proj): 1.2; 2020 (proj): 1.8.
- Domestic demand (percent change): 2016: 3.2; 2017: 2.7; 2018: 2.0; 2019 (proj): 1.1.
- Private consumption (percent change): 2016: 2.9; 2017: 2.2; 2018: 1.2; 2019 (proj): 1.7.
- Gross fixed investment (percent change): 2016: 4.2; 2017: 6.0; 2018: 3.3; 2019 (proj): 0.0.
- HICP inflation (e.o.p): 2016: 1.4; 2017: 1.8; 2018: 2.2; 2019 (proj): 1.8; 2020 (proj): 1.7.
- HICP core inflation (e.o.p): 2016: 0.9; 2017: 1.6; 2018: 1.3; 2019 (proj): 1.5.
- Unemployment rate (percent): 2016: 6.9; 2017: 6.7; 2018: 6.3; 2019 (proj): 6.3.
- Gross national saving (percent of GDP): 2016: 28.3; 2017: 28.4; 2018: 28.3; 2019 (proj): 28.5.
- Gross domestic investment (percent of GDP): 2016: 24.5; 2017: 25.6; 2018: 26.3; 2019 (proj): 26.1.
- Output gap (percent of potential): 2016: 0.5; 2017: 0.9; 2018: 1.2; 2019 (proj): 0.3.
- Total revenues (percent of GDP): 2016: 49.9; 2017: 49.9; 2018: 49.5; 2019 (proj): 49.4.
- Total expenditures (percent of GDP): 2016: 48.8; 2017: 48.4; 2018: 48.7; 2019 (proj): 48.8.
- Net lending (percent of GDP): 2016: 1.1; 2017: 1.5; 2018: 0.8; 2019 (proj): 0.5.
- Structural balance (percent of potential GDP): 2016: 0.7; 2017: 1.2; 2018: 0.5; 2019 (proj): 0.4.
- General government gross debt, official statistics (percent of GDP): 2016: 42.4; 2017: 40.8; 2018: 39.0; 2019 (proj): 37.2.
- Bank lending to households (year-on-year, percent change, eop): 2016: 7.1; 2017: 6.8; 2018: 5.3; 2019 (data as of January): 5.3.
- Repo rate (percent, end of period): 2016: -0.5; 2017: -0.5; 2018: -0.5; 2019 (eop): -0.25.
- Current account (percent of GDP): 2016: 3.8; 2017: 2.8; 2018: 2.0; 2019 (proj): 2.4.
- Net international investment position (percent of GDP): 2016: 0.1; 2017: 4.4; 2018: 6.9; 2019 (proj): 7.6.
- Nominal effective rate (2010=100): 2016: 97.1; 2017: 96.2; 2018: 91.5.
- Real effective rate (2010=100): 2016: 94.5; 2017: 93.7; 2018: 89.4.
- GDP per capita (2017, USD): 52,925; Population (2017, million): 10.1.

### Key policy recommendations (summary)
- Monetary: maintain a cautious, data-dependent stance; defer further tightening until clearer inflation evidence.
- Fiscal: allow automatic stabilizers to operate in 2019; reduce cyclically-adjusted surplus to 0.33 percent of GDP by 2020 to modestly support reforms.
- Labor market: enhance employment of migrants and low-skilled through training, public employment service reforms, employment protection adjustments, and entry agreements.
- Wage formation: broaden sectors forming the national wage norm to align wage growth with productivity and inflation expectations.
- Housing: liberalize rents for new construction, phase out rent controls on existing apartments (with housing allowance expansion), raise recurrent property taxes including phasing out mortgage interest deductibility, and strengthen construction sector competition.
- Macroprudential and financial oversight: monitor mortgage amortization effectiveness and household balance sheets, review banks’ commercial property risk management, and address AML/CFT framework deficiencies.
- Payments innovation: assess economic and regulatory implications of the e-Krona to ensure reliable and efficient private payments.

*Source: IMF staff report for the 2019 Article IV consultation with Sweden (selected excerpts).*

### 1.6 percent y/y, little changed from early 2017 before the impact of temporary factors.

### 1.6 percent y/y, little changed from early 2017 before the impact of temporary factors.

### Housing market and household credit
- Housing prices declined 6 percent in seasonally adjusted terms from their August 2017 peak to end‑2017, driven by a surge in apartment completions at the luxury end of the market.
- Price growth slowed to 2 percent y/y in 2018.
- Household expectations for housing price gains fell to levels well below 2013–17 norms.
- Household credit growth eased to 5.3 percent y/y in December 2018 from 6.8 percent a year earlier.
- Housing starts dropped about 16 percent in 2018, contributing to a 14 percent fall in dwelling investment from 2018:Q1 to 2018:Q4.
- Aggregate household debt: average loan-to-value ratio of 55 percent (67 percent for new loans).
- Three-quarters of mortgages have variable rates.
- Commercial property: prices rising rapidly; valuations appear stretched by historical standards though rental yields remain favorable relative to bonds.
- Vulnerabilities noted: potential spillovers from financing difficulties among smaller property developers; households with high debt relative to income could reduce consumption and reinforce downturns.
- Staff estimate of house price overvaluation: 2 percent in 2018:H2 (methodology in Nan Geng, 2018).

### External position, exchange rate, and current account
- Current account surplus trended down since 2009 as investment recovered to over 25 percent of GDP.
- Current account surplus: 2.8 percent of GDP in 2017; preliminary estimate of 2.0 percent in 2018 (decline may be overstated due to discrepancies between national accounts trade balance and BOP).
- Krona depreciated by 4.3 percent in effective terms in 2018.
- EBA REER models find an exchange rate gap of 17–19 percent in 2018.
- ULC-based REER about 6 percent below historical average in 2018.
- Staff assessment: external position remained moderately stronger than the level consistent with medium-term fundamentals and policies in 2018.
- Medium-term projection: current account surplus to stabilize at around 3 percent of GDP.

### Macroeconomic outlook and risks
- Real GDP growth projections (y/y percent change):
  - 2018: 2.3
  - 2019: 1.2
  - 2020: 1.8
  - 2021: 1.9
- Selected macro indicators (y/y percent change or levels as reported)
  - Domestic demand: 2018: 2.0; 2019: 1.1; 2020: 1.9; 2021: 2.1
  - Fixed investment: 2018: 3.3; 2019: 0.0; 2020: 2.2; 2021: 3.2
  - Exports of G&S: 2018: 3.5; 2019: 1.7; 2020: 2.5; 2021: 2.8
  - HICP core inflation (e.o.p): 2018: 1.3; 2019: 1.5; 2020: 1.5; 2021: 1.8
  - Unemployment rate (percent): 2018: 6.3; 2019: 6.3; 2020: 6.3; 2021: 6.4
  - Output gap (percent of potential): 2018: 0.3; 2019: 0.1; 2020: 0.0
  - Current account (percent of GDP): 2018: 2.0; 2019: 2.4; 2020: 2.5; 2021: 2.6
- Near-term outlook:
  - Growth expected to slow to about 1.2 percent in 2019 before returning near the estimated 2 percent potential growth medium term.
  - Unemployment expected to remain around current low levels with the modestly positive output gap closing by 2020.
  - Inflation: staff expects CPIF ex. energy to reach 1.7 percent by end‑2019 and rise toward the 2 percent target by 2021–22.
  - Eventual interest rate normalization likely associated with some krona appreciation.
- Downside risks:
  - Fall in dwelling investment could exceed projections, depending on construction sector response to reduced pre‑sale financing.
  - Weaker global growth from sharp tightening of global financial conditions or trade disruptions (including a no‑deal Brexit) could have material effects.
  - Prolonged low inflation and interest rates could promote housing and commercial property price rises and exacerbate debt vulnerabilities.

### Demographics and fiscal implications
- Population projections 2018 to 2030 by cohort (percent growth):
  - Total population: 9.3 percent
  - Population aged 80+ expected to rise 55 percent by 2030 while total population rises 9 percent.
  - Cohort aged 10–19 years also rises relatively quickly.
- Implications: significant fiscal costs and need for higher employment in social services.

### Monetary and exchange rate policy
- Riksbank actions and stance:
  - First repo rate hike of 25 basis points occurred in late 2018, lifting rates to -0.25 percent.
  - Riksbank concluded government bond purchases in December 2017 after acquiring some 40 percent of outstanding Swedish government bonds; reinvestments of principal and coupon payments will continue until further notice.
  - In February 2019, Executive Board chose not to extend a mandate facilitating rapid FX intervention (mandate originally adopted in early 2016); the Riksbank remains able to intervene with Executive Board approval.
- Inflation expectations and forecasts:
  - Riksbank projects CPIF excluding energy inflation to rise from 1.5 percent in 2018 to 1.9 percent in 2019 and remain around that level subsequently.
  - Staff projects a more gradual return: CPIF ex. energy reaching 1.7 percent by end‑2019 and rising toward 2 percent by 2021–22.
  - Significant uncertainty remains around the timing of durably reaching the inflation target.
- Policy recommendation:
  - Continue a data‑dependent approach to monetary policy; deferring further rate increases until the second half of 2019 and conditioning them on evolving economic outlook and inflation prospects is appropriate to keep inflation expectations well anchored.
- E‑krona / CBDC:
  - Riksbank launched the e‑krona project in 2017 to evaluate issuance of a CBDC; initial assessment of demand at roughly 1–2 percent of GDP.
  - Further work should explore regulatory options to ensure reliable and efficient private payments (standards for business continuity, regulation of fees) and involve a wider set of institutions in analysis.

### Labor market policies
- Labor market context:
  - Sweden adopted reforms to raise employment of the low‑skilled and migrants; 2018 budget boosted resources for education and streamlined active labor market policies.
  - Unemployment rates of the foreign born and low‑skilled much exceed those of natives.
  - High minimum wages in collective agreements and relatively strict employment protection contribute to these outcomes.
  - Nominal wage rises in Sweden have become closely linked to those in Germany.
- Policy recommendations:
  - Further reforms of employment protection and Public Employment Service should support employment of low‑skilled and migrants, combined with enhanced education and training.
  - Implementation of the social partners’ plan for entry agreements in 2020: provide jobs for migrants and long‑term unemployed at a lower cost to employers with state benefit supplements for up to two years; include training courses agreed with employers, including Swedish language.
  - When reviewing employment protection in collective agreements, consider increased exceptions for SMEs and other steps to facilitate labor market entry (e.g., extending trial periods).
  - Reforms of the Public Employment Service to use private providers for job placement need careful design and monitoring to improve job matching and ensure migrants and difficult cases are not left behind.

*International Monetary Fund staff summary of Sweden consultation (excerpts).*

### 20.      Wage formation led by the industrial sector seeks to protect competitiveness. The

### 20.      Wage formation led by the industrial sector seeks to protect competitiveness.

### Wage formation: findings and mechanics
- The agreement between industrial sector employers and unions sets a benchmark wage rise that other sectors are expected not to exceed, despite the industrial sector employing only 11 percent of workers.
- This centralized agreement is the principal wage driver, as “wage drift” over the agreement has declined notably.
- In practice, since 2012 nominal wages have remained quite stable relative to those in Germany (see chart), as the industrial sector seeks to maintain international competitiveness.
- Resulting wage rises have been subdued relative to the tightening of labor markets and rising inflation expectations; this has contributed to prolonging low inflation and low interest rates, which may also weaken the krona.
- Note: Sweden’s free floating krona implies that matching Swedish nominal wage growth to that in Germany is not sufficient to stabilize relative ULC and maintain competitiveness.

### Policy recommendations on wage formation
- Social partners should consider updating wage formation to reflect structural changes in the Swedish economy, including the rise of other sectors such as services.
- One option: broaden the range of sectors that set the benchmark for wage rises, with the National Institute for Economic Research continuing to provide information to the social partners.
  - Such an approach would likely tighten wage linkages to domestic economic trends such as inflation expectations, productivity, and business profitability, enhancing Swedish macroeconomic stability.
- Increase scope for wage variation across sectors:
  - Sweden’s pattern bargaining tends to limit wage differentiation across sectors, limiting flexibility to adapt to shifting labor demand including from demographic change.
  - To facilitate greater flexibility at the sectoral level to deviate up and down from the national benchmark, amend the mandate of the National Mediation Office in mediating sectoral wage negotiations to drop adherence to the industrial sector wage benchmark and enable greater focus on goals for real wage growth, higher employment, reducing labor market conflicts, and facilitating changes in relative pay.

### Authorities’ and social partners’ views on wages
- Authorities: recognize need for further progress on labor market challenges, note Sweden’s integration framework and high level of general welfare (such as right to daycare) contributed to relatively high labor participation rates among the foreign-born compared with national averages in European countries; are alert to “cherry picking” risks in private employment services and intend to study international experience to mitigate problems.
- Unions: emphasized that Sweden’s employment protection was more flexible in practice than might appear; agreed that mediators sought agreements—including the value of terms and conditions—near the industrial wage benchmark.
- Social partners: saw no barrier to broadening the range of sectors setting the wage norm, while noting the current system delivered positive results in employment, real income growth, and low labor disputes in the past two decades.

### Housing policies: problems and recommended reforms
- Findings:
  - House prices have tripled in real terms since the mid-1990s, lifting the price-to-income (PTI) ratio to almost 30 percent above its 20-year average, with Stockholm’s PTI nearly twice the national average and among the highest worldwide.
  - New purchasers must take on high debts relative to income (DTI), typically at floating rates — a macrofinancial vulnerability.
  - Long queues for rent-controlled apartments mean those unable to purchase face much higher rents on subletted or newly constructed apartments, estimated to be 65 percent higher on average.
  - Labor mobility to main centers is most impaired for those without parental assistance for large down payments, creating an “insider-outsider” problem that impedes growth and exacerbates intergenerational and regional inequality.
- Key elements of a reform package:
  - Making the rental market work:
    - Fully liberalize rents of newly constructed apartments and phase out existing controls (common approach: apply market rents when there is a change in tenant).
    - Expand access to the housing allowance to cushion adjustment; consider a temporary “windfall” tax on significant rental income gains.
    - Increase rental supply by reducing impediments to sub-letting and to households renting out their own apartments, while containing macrofinancial risks from buy-to-let housing.
  - Taxing property to rebalance the housing market:
    - Sweden’s property tax was capped in 2008 to be among the lowest in the OECD.
    - Options: broad-based increase in the ceiling on the property tax (most efficient); or increase targeted to main centers to incentivize mobility.
    - Abolish interest on deferrals of capital gains taxes; consider taxing only a portion of capital gains on primary dwellings.
    - Implement phase out of mortgage interest deductibility (MID); impact would be limited on household finances given low interest rates.
  - Producing affordable housing:
    - Simplify planning to reduce construction cost increases (construction costs have risen by over 28 percent in real terms over the past 15 years, compared with 10 percent in the euro area).
    - Enhance productivity in construction by strengthening competition, harmonizing land sale procedures across municipalities, and preventing requirements beyond national building standards in the approval process.
    - Expand subsidies for construction of affordable rental apartments, plus subsidies for student and elderly housing in view of changing demographics.
- Transition protection:
  - On average, the share of rental expenditure in disposable income would increase from 24 percent to 31 percent, with most impact on households in the lowest income decile; cushion by expanding housing allowance payments.
  - Current housing allowance is seldom paid to households in the second or third income quintiles, contributing to relatively low total expenditure on housing allowances in Sweden; review coverage and amounts to ensure transition to market rents is manageable.

### Authorities’ views on housing
- Authorities: recognize long-standing structural weaknesses; note political contention limits feasibility of some reforms (e.g., raising property taxation); implementing measures in the “January agreement” during the government term would represent progress.

### Fiscal policy: stance, targets, and options
- Allow full operation of automatic fiscal stabilizers.
  - A surplus of about 0.8 percent of GDP is expected in 2018, implying a cyclically-adjusted surplus of about 0.5 percent.
  - Public debt projected at 38 percent of GDP in 2018, declining in a baseline scenario to below 30 percent by 2024.
- Medium-term target change:
  - In 2016, Sweden lowered the medium-term fiscal surplus target from 1 percent of GDP to 0.33 percent, with effect from 2019, and established a debt benchmark of 35 percent of GDP.
  - Meeting the surplus target implies the net financial worth of the general government, of 27 percent of GDP in 2017, will be broadly stable, declining only a few percentage points over 10 years in baseline projections.
- Near-term options:
  - Transitioning to the new medium-term target by 2020 would release modest resources to facilitate structural reforms (about 0.2 percent of GDP); staff assumes the surplus would be reduced to about 0.5 percent of GDP in 2019, mostly reflecting lower growth.
  - A temporary cut in the surplus target could help address higher public investment needs from demographic shifts or other sources.
- Investment and demographic needs:
  - Studies indicate needs for at least 1,400 additional schools, 700 housing facilities for the elderly, and 93 healthcare facilities through 2026.
  - If public investment rises beyond past norms, consider a temporary cut in the medium-term surplus target.

### Authorities’ views on fiscal policy
- Authorities: confirm automatic stabilizers will operate fully; transition to the new medium-term target started in 2018 and remaining resources to be released are small; see little room for measures without new financing while meeting the new surplus target.
- Fiscal Policy Council: any adjustments to the medium-term surplus target should be made at the eight-yearly reviews, which could take into account public investment needs.

### Macrofinancial stability: measures, risks, and recommendations
- Recent strengthening:
  - FI’s macroprudential mandate was expanded from February 2018 to apply measures subject to government approval without requiring parliamentary approval.
  - March 2018: a stricter amortization requirement became effective, raising minimum amortization on new mortgages with a loan-to-income (LTI) over 450 percent.
  - September announcement: increase of ½ percentage point in the countercyclical capital buffer to 2½ percent from September 2019, the highest in Europe.
- Monitoring and data needs:
  - Macroprudential policy should remain on alert; household-level data collection should be enhanced to evaluate effectiveness.
  - As stricter amortization requirements take hold, FI expects the share of new high LTI mortgages to decline substantially.
  - Use of higher amortization targeted at high LTI loans provides greater flexibility than an outright LTI ceiling; effectiveness needs close monitoring, especially if low interest rates persist.
  - Essential to collect household-level balance sheet data to facilitate assessments.
- High-LTI mortgage shares (share of new mortgage loans exceeding 450 percent of households' gross income, percent):
  - 2011: 9.9
  - 2012: 11.8
  - 2013: 11.6
  - 2014: 14.1
  - 2015: 16.2
  - 2016: 14.7
  - 2017: 15.0
  - 2018F: 7.0
- AML/CFT and regional cooperation:
  - Recent reports suggest Swedbank handled about US$4.3 billion in suspicious transfers in the Baltics between 2007 and 2015.
  - Authorities should continue to correct remaining deficiencies in Sweden’s AML/CFT framework and strengthen regional cooperation.
- Nonbank mortgage entrants and prudential risks:
  - New nonbank entrants provide low-cost mortgages to high-quality borrowers and transfer credit risk to end-investors; currently a small share but important that they meet macroprudential and consumer protection requirements.
  - Commercial real estate: nonbank financing is growing; bank exposure remains material—FI should continue close review of banks’ risk management and commercial property borrowers’ financial health.
  - September 2018: one clearing member in Nasdaq Clearing defaulted due to insufficient collateral to cover losses from trading power derivatives; FI should assess adequacy of measures to contain default risks and improve default management procedures.

### Authorities’ views on macrofinancial stability
- Authorities: agree it is appropriate to review effectiveness of recent macroprudential steps before launching further measures; exploring household data collection options concluded new legislative authority required.
- Authorities take reports of banks in the Nordic-Baltic region being used for money laundering very seriously; Swedish and Estonian financial supervisors initiated a joint investigation with authorities of Latvia and Lithuania.
- Authorities note Sweden’s AML/CFT framework has been strengthened (including new legislation in 2017) and FI has allocated additional AML/CFT supervisory resources, while recognizing further action may be necessary.

*Source: IMF staff report (excerpts covering paragraphs 20–37).*

### 38.      After sustained strong performance, Sweden’s economy is slowing. Accommodative

### After sustained strong performance, Sweden’s economy is slowing.

### Economic outlook and key findings
- Accommodative monetary policy supported strong domestic demand gains in recent years, driving solid economic growth while narrowing the current account surplus.
- Job creation was rapid, especially among those born outside Sweden, although wage growth remained subdued and underlying inflation was broadly flat.
- Low inflation contributed to krona depreciation and the external position remained moderately stronger than the level consistent with medium-term fundamentals and policies in 2018.
- Falling dwelling investment, softening consumption, and weaker exports are likely to slow growth notably in 2019, with material downside risks from the global economy and domestic demand.

### Monetary policy
- A data-dependent monetary policy should continue.
- CPIF inflation excluding energy is expected to rise modestly by end 2019 and to gradually converge to target in following years, benefiting from a further pickup in wage rises.
- The inflation outlook is subject to heightened uncertainty considering the risks to growth.
- The Riksbank’s deferral of further rate increases until the second half of 2019, depending on whether the economic outlook and inflation prospects are as it expects, was appropriate in these circumstances.

### Fiscal policy
- Fiscal policy should support Sweden’s economic resilience.
- Given Sweden’s strong fiscal buffers, its relatively strong automatic fiscal stabilizers should operate fully to cushion lower growth in 2019.
- Reducing the cyclically-adjusted surplus to the new medium-term fiscal target by 2020 would release resources to facilitate reforms.
- The resulting fiscal stimulus would be small, with low risk of overheating at a time of slowing growth and still low inflation.
- If demographic or other factors require public investment above past norms, a temporary cut in the medium-term surplus target should be considered to avoid tax or spending adjustments while protecting fiscal buffers.

### Labor market and skills policy
- Labor market reforms should aim to support employment of the low-skilled and migrants, aided by enhanced education and training.
- The unemployment rate of the foreign born and low-skilled remains very high.
- The social partners’ plan for “entry agreements” to enable migrants and the low-skilled to combine work and training at reduced cost to employers will help to address these challenges.
- When reviewing employment protection arrangements, the social partners should seek to facilitate labor market entry by the low-skilled and migrants.
- Reforms of the Public Employment Service need to be carefully designed and monitored to improve job matching and work skills development, especially for migrants and the low-skilled.

### Wage formation and macro stability
- The social partners should consider updating wage formation to reflect structural changes in the Swedish economy, including the rise of other sectors such as services.
- Swedish wage rises tend to follow those in Germany, resulting in wage rises that are subdued relative to the tightness of domestic labor markets in recent years, contributing to low inflation, thereby prolonging low interest rates and a weak krona.
- One option is to broaden the range of sectors that set the benchmark for wage rises, which would likely tighten linkages to domestic economic trends such as inflation expectations and productivity, enhancing Swedish macroeconomic stability.

### Housing market reforms
- Comprehensive housing market reforms are essential to lower barriers to labor mobility and growth and to contain inequality.
- Reforms required include rent controls, tax policies, and construction regulation.
- Policy options noted:
  - Fully liberalize rents of newly constructed apartments and phase out existing controls, such as by applying market rents when there is a change in tenant.
  - Expand access to the housing allowance to cushion adjustment and apply a temporary “windfall” tax on significant rental income gains.
  - Increase recurrent property taxes—including by phasing out mortgage interest deductibility—while reducing taxes incurred when moving.
  - Simplify the planning process to reduce construction costs and enhance productivity in the construction sector by strengthening competition, including by reducing barriers at the municipal level.

### Financial sector risks and macroprudential policy
- The macroprudential stance is appropriate following the adoption of stricter mortgage amortization requirements, yet risks should remain under close watch.
- Household level balance sheet data should be collected to enhance monitoring of macrofinancial risks and facilitate the design and evaluation of measures.
- In view of stretched commercial property valuations, the authorities should continue to review the adequacy of banks’ risk management and the health of commercial property borrowers.
- Any AML/CFT issues in domestic institutions must be addressed; the authorities should continue to work to correct any remaining deficiencies in Sweden’s AML/CFT framework, and regional cooperation should be strengthened.
- In future inquiries related to the e-krona, the authorities should also explore regulatory options to ensure reliable and efficient private payments.

*Source: 1sweea2019001 - 38.      After sustained strong performance, Sweden’s economy is slowing.*

### 45.      It is proposed that the next Article IV consultation with Sweden take place on the

### 1sweea2019001 - 45.      It is proposed that the next Article IV consultation with Sweden take place on the 

### Macroeconomic indicators and outlook
- Strong economic and employment growth has closed the estimated output gap and turned it mildly positive.
- Recent growth drivers:
  - Investment and private consumption drove growth.
  - Exports were outweighed by imports in recent years.
- Current account:
  - The current account surplus declined to 2 percent of GDP by 2018.
- Selected statistics and projections (from Table 1):
  - Real GDP: 2016: 2.7; 2017: 2.1; 2018: 2.3; 2019: 1.2; 2020: 1.8; 2021: 1.9; 2022: 2.0; 2023: 2.0; 2024: 2.0 (percent change)
  - Output gap (percent of potential): 2016: 0.5; 2017: 0.9; 2018: 1.2; 2019: 0.3; 2020–2024: 0.1/0.0/0.0/0.0/0.0
  - Current account (percent of GDP): 2016: 3.8; 2017: 2.8; 2018: 2.0; 2019: 2.4; 2020: 2.5; 2021: 2.6; 2022: 2.7; 2023: 2.8; 2024: 2.9

### Inflation and monetary policy
- Core HICP inflation increased in mid-2017 but subsequently subsided as mid-2017 package holidays and bank fees effects faded.
- Survey measures of inflation expectations have risen to target, supported by monetary easing.
- Riksbank policy path:
  - The Riksbank deferred its first rate hike to late 2018 and lowered the projected path for the repo rate.
  - Markets expect the Riksbank to increase rates into positive territory sooner than the ECB.
- Interest rates and inflation projections (from figures and Table 1):
  - HICP inflation (e.o.p): 2016: 1.4; 2017: 1.8; 2018: 2.2; 2019: 1.8; 2020: 1.7; 2021: 1.9; 2022: 2.0; 2023: 2.0; 2024: 2.0
  - HICP core inflation (e.o.p): 2016: 0.9; 2017: 1.6; 2018: 1.3; 2019: 1.5; 2020: 1.5; 2021: 1.8; 2022: 2.0; 2023: 2.0; 2024: 2.0
  - Repo rate (end of period): 2016: -0.5; 2017: -0.5; 2018: -0.5; 2019: -0.25 (Table 1 shows -0.25 for 2019)

### Labor market developments
- Employment and participation:
  - Strong employment growth, especially in the services sector.
  - Labor force participation increased; unemployment fell to pre-crisis levels.
- Slack and shortages:
  - Survey and other indicators point to rising labor shortages and declining slack.
  - Employment gap and hours gap indicators show limited remaining slack.
- Wages:
  - Wage growth remains subdued and is falling behind the sum of trend productivity growth and inflation expectations.
- Key indicators (from figures):
  - Unemployment rate (percent): 2016: 6.9; 2017: 6.7; 2018: 6.3; 2019: 6.3; 2020: 6.3; 2021: 6.4; 2022: 6.5; 2023: 6.6; 2024: 6.6
  - Underlying drivers of nominal wage growth chart shows expected inflation (2 years ahead), trend productivity growth, and nominal wage growth (4-quarter moving average) with nominal wage growth below the sum of the other two.

### Housing market developments
- House prices:
  - House prices bottomed out and started to rise again after declining in late 2017 and early 2018.
  - The decline was led by a 10 percent drop in apartment prices in Stockholm.
- Credit and supply:
  - Growth in mortgage credit has edged down despite very low mortgage interest rates.
  - House prices remain high and there are substantial cumulative supply shortfalls.
  - Housing starts are slowing, likely indicating a decline in dwelling investment.
  - Continued conversion of apartments into condominiums limited the increase in rental housing supply.

### Financial markets and institutions
- Exchange rates and markets:
  - The krona weakened most of 2018 even as spreads to bunds remained flat; Swedish equity prices climbed to all-time records.
  - Yields on government bonds track German bunds closely; market assessments of credit risk remain minimal.
  - Interbank rates hover around the policy rate; covered bond spreads for mortgages are low.
- Household balance sheet (cross-country indicators):
  - Swedish household assets are broadly evenly split across financial and non-financial assets.
  - Household debt represents about 1/4 of assets.
  - Household debt relative to net worth is just above the median of comparator peers with high housing ownership.
  - Debt to disposable income is higher than the median; household debt relative to GDP is around the median, similar to the U.K.

### Banking sector soundness and structure
- Profitability and asset quality:
  - Swedish bank profitability remains strong and exceeds European averages despite negative interest rates.
  - Loan quality is high after resolving NPLs to normal post-crisis levels.
- Capital and liquidity:
  - Capital positions of major Swedish banks are healthy and comfortably above regulatory minima.
  - Leverage ratio around 5 percent for most banks.
  - Banks have good liquidity buffers for short-term foreign currency and total exposure.
- Financial soundness indicators (Table 5, selected):
  - Regulatory Tier 1 and 2 capital to risk-weighted assets: 2012: 12.5; 2013: 12.7; 2014: 22.4; 2015: 24.2; 2016: 26.7; 2017: 26.2
  - Nonperforming loans to total gross loans: 2012: 1.5; 2013: 1.3; 2014: 2.1; 2015: 1.9; 2016: 2.0; 2017: 0.9
  - Return on assets (net income as percent of average total assets): 2012–2017: 0.5/0.6/0.5/0.6/0.7/0.7
  - Leverage ratio (implied): "around 5 percent for most banks" (figure note)

- Financial system structure (Table 6, selected):
  - Total financial system assets (2017): 23,162 (billions of SEK); Percent of GDP: 505.9
  - Total banking sector (2017): 14,483 (billions of SEK); Percent of GDP: 316.3
  - Top four banks, consolidated (2017): Total Top Four Banks 11,981 (billions of SEK); 55.5 percent of total assets; 285.2 percent of GDP

### Public finances and fiscal outlook
- Fiscal position and projections (Table 2, selected):
  - General government gross debt (percent of GDP): 2016: 42.4; 2017: 40.8; 2018: 39.0; 2019: 37.2; 2020: 35.5; 2021: 33.9; 2022: 32.3; 2023: 30.9; 2024: 29.4
  - Net lending / borrowing (percent of GDP): 2016: 1.1; 2017: 1.5; 2018: 0.8; 2019: 0.5; 2020–2024: 0.3/0.3/0.3/0.3/0.3
  - Structural balance (percent of potential GDP): 2016: 0.7; 2017: 1.2; 2018: 0.5; 2019: 0.4; 2020–2024: 0.3/0.3/0.3/0.3/0.3
  - Fiscal impulse (expansionary +): 2016: -1.1; 2017: -0.5; 2018: 0.7; 2019: 0.1; 2020–2024: 0.1/0.0/0.0/0.0/0.0
- Selected nominal magnitudes (billions of SEK):
  - Total revenue (2018): 2,371; 2019 projection: 2,446; 2024 projection: 2,956
  - Total expenditures (2018): 2,332; 2019 projection: 2,419; 2024 projection: 2,938
  - Net lending / borrowing (billions of SEK) 2016: 49; 2017: 69; 2018: 39; 2019: 27; 2020–2024: 16/17/17/18/18

### Current account, investment, and savings decomposition
- Historical and recent trends:
  - Sweden shifted to an external surplus after the early-1990s financial crisis and pension reforms.
  - Current account surplus rose to about 8 percent of GDP when the share of prime savers peaked in 2008, and has since declined to 3 percent (historical narrative).
  - Total savings have remained high since the mid-2000s; a decline in nonfinancial corporate savings was offset by higher household savings.
  - Investment recovered for nonfinancial corporates and residential investment rose, driving total investment to new highs.
  - The external surplus is largely due to the household sector’s savings-investment balance; the corporate sector’s investment exceeds its savings; general government has relatively little net impact.
- Investment and external numbers (Table 4 and figure notes):
  - Investment by sector (percent of GDP) charts and data show rising household and nonfinancial corporation investment shares (detailed series in figures).

### Balance sheet and reserves
- Public sector balance sheet (Table 3, selected):
  - Assets (billions of SEK): 2009: 5,414; 2010: 5,686; 2011: 5,967; 2017: 7,985
  - Liabilities (billions of SEK): 2009: 1,837; 2010: 1,868; 2017: 2,687
  - Net worth (billions of SEK): 2009: 3,577; 2017: 5,298
  - Financial net worth (percent of GDP): 2009: 16.5; 2017: 25.1
- Balance of payments (Table 4, selected):
  - Current account balance (billions of SEK): 2016: 166; 2017: 128; 2018: 94; projections: 2019: 121; 2024: 172
  - Trade balance (billions of SEK): 2016: 194; 2017: 130; 2018: 101; 2019: 108; 2024: 132
  - Exports of G&S (billions of SEK): 2016: 1,925; 2017: 2,046; 2018: 2,193; 2024: 2,642
  - Imports of G&S (billions of SEK): 2016: 1,731; 2017: 1,916; 2018: 2,093; 2024: 2,509

### Key macroeconomic metadata (from tables)
- GDP per capita (2017, USD): 52,925
- Population (2017, million): 10.1
- Fund position (December 31, 2018):
  - Quota (in millions of SDRs): 4,430
  - Reserve tranche position (in percent of quota): 10.5
  - Holdings of SDRs (in percent of allocation): 98.5

*Sources: IMF World Economic Outlook, Statistics Sweden, and Fund staff calculations.*

### Appendix I. Underlying Inflation Developments

### Appendix I. Underlying Inflation Developments

### Headline inflation and drivers
- Headline inflation has returned to the 2 percent target.
- Both the CPI with fixed interest rates (CPIF) and the HICP have varied around 2 percent y/y since mid-2017.
- Energy price increases have contributed heavily to headline inflation since 2016.
- Food prices and energy together accounted for nearly half the headline rate in 2018.

### Traditional core inflation measures and their limitations
- Core measures (excluding energy and unprocessed food) of both the CPIF and the HICP:
  - Jumped to about 2 percent in mid-2017.
  - Declined quickly to as low as 1.0 and 0.8 percent y/y respectively by August 2018.
- This pattern suggests temporary factors other than energy and food drove up core inflation, making traditional core inflation a less informative indicator of underlying inflation.

### Main contributors to the mid-2017 spike in core inflation
- A change to the measurement of package holiday prices produced a large (about 20 percent m/m) increase in this component in June and July 2017.
  - Package holidays had a weight of only 1.6 percent in the core HICP but contributed 0.5 ppts to y/y core HICP inflation of 2.1 percent in July 2017.
- One-off increases in financial services fees (3.2 percent weight) in June 2017 and social protection services (1.5 percent weight) in March 2017 together contributed an additional 0.3 ppts to the July 2017 peak in core HICP inflation.
- The air transport services series (1 percent weight) made highly volatile month-to-month contributions during this period.

### Adjusted core HICP (excluding volatile components)
- Removing package holidays, air travel, bank services, and social protection services from the core HICP produces an “adjusted core HICP.”
- The adjusted core HICP is notably more stable in recent years, remaining around 1–1¼ percent y/y since 2015.
- Traditional core HICP has recently declined to around the same level as the adjusted measure.

### Trend estimation via state space model / Kalman filter
- Approach: model core HICP as the sum of a stochastic trend (with slope following a random walk) plus a stationary AR(1) component for temporary deviations; estimate the trend slope with a Kalman filter.
- The Kalman filter estimate of the slope is smooth and shows a broadly flat profile around 1¼ percent over the last two years.
- There is significant uncertainty around this estimate:
  - Standard deviation of the estimate is 0.2 percent.
  - This implies a 66 percent confidence interval of 1.1 to 1.5 percent.

*Source: Appendix I. Underlying Inflation Developments (IMF staff calculations and cited data).*

### Appendix IV. Debt Sustainability Analysis

### Appendix IV. Debt Sustainability Analysis

### Sweden’s intertemporal fiscal position — main conclusions
- Sweden’s fiscal position is sustainable in the face of population aging given a sound initial balance sheet and relatively small expected increases in total aging-related expenditures.
- Pension system reforms are projected to reduce public pension spending as a share of GDP by shifting payments from public (income pension) to private (premium pension) schemes.
- Long-term care and health spending rise over time, but expected increases are lower than in many peers due to favorable demographic trends (higher fertility and immigration).

### Key statistics on balance sheet and demographics
- Gross debt has fallen from around 70 to 40 percent of GDP over the past two decades.
- Net financial wealth (financial assets less gross debt) turned positive in mid-2005, reaching 29 percent of GDP in 2018.
- Net wealth (including sizable non-financial assets) is about 90 percent of GDP.
- Old age dependency ratio: about 30 percent (Sweden), similar to Germany.
- Increase in old age dependency ratio by 2040: 10 percentage points (Sweden), about half the increase expected in Germany.

### Projected aging-related expenditures (2016–2070)
- Total aging-related expenditures are expected to increase by 1.6 percentage points of GDP in Sweden by 2070.
- Comparator increases (2016–2070):
  - Norway: 6.2 ppts
  - Germany: 4.1 ppts
  - U.K.: 4.5 ppts
- Component contributions (Sweden, 2016–2070):
  - Long-term care: rise by 1.7 percentage points of GDP (from just over 3 percent in 2016 to almost 5 percent)
  - Health care (excluding long-term care): rise by 0.8 percentage points of GDP (to 7.7 percent by 2070; current around 7 percent)
  - Public pension expenditure: projected to fall as a share of GDP (as public income pension share declines and premium pension/private funds grow)
  - Other social spending (education, unemployment benefits): relatively marginal changes

### Drivers of public pension expenditure decline
- European Commission decomposition attributes changes in public pension expenditures to:
  - Dependency ratio
  - Coverage ratio
  - Benefit ratio
  - Labor market dynamics
  - Interaction effect (residual)
- In Sweden, the largest contributor to the deceleration of public pension expenditures is a falling benefit ratio (smaller share of pension payments from public income pension; more from premium pension funds outside general government).
- The “sustainability factor” introduced in the reform smooths pension payments over a longer retirement period in anticipation of rising life expectancy and is a secondary contributor to lower public pension spending growth.
- Despite the public pension share falling, total pension spending still rises faster than GDP in the projection period.

### Fiscal projections and intertemporal net wealth (NIER projections)
- Total government consumption (including publicly-funded welfare services) projected to rise from 26 to 28 percent of GDP.
- Social transfers (including public pensions) projected to fall from 14 to 12 percent of GDP.
- Government investment expected to remain broadly unchanged at around 4.5 percent of GDP.
- Revenue ratio projected to stay flat at around 44 percent of GDP assuming unchanged tax policy.
- Projected net lending: around 0.5 percent of GDP (positive throughout the projection period).
- NIER projects net financial wealth to rise from 26 percent in 2016 to close to 30 percent in 2040.
- Net present value (NPV) of the change in future public spending on pensions and health care is negative, contributing positively to Sweden’s intertemporal net wealth (even when accounting for rising long-term care spending).

### Appendix VI — Update on selected 2016 FSAP recommendations (highlights, status)
- 1. Introduce a cap on the debt-to-income ratio (MoF/FI) — NT
  - Status: Finansinspektionen (FI) introduced stricter amortization requirement with Government consent. After March 1, 2018, new mortgage holders borrowing more than 4.5 times gross income must amortize at least 1 percentage point more per year. New mortgages with debt-to-income exceeding 4.5 must be amortized by at least:
    - 1 percent if loan-to-value ratio is below 50 percent
    - 2 percent if loan-to-value ratio exceeds 50 percent but is less than 70 percent
    - 3 percent if loan-to-value ratio exceeds 70 percent
- 2. Remove tax incentives to hold real estate assets and fund them with debt (MoF) — NT
  - Status: Mortgage interest tax relief likely contributed to household debt; changes must be handled with care. Government implemented more generous rules for deferring capital gains tax in 2016 to increase mobility.
- 3. Timely adoption of a leverage ratio as a backstop (FI) — NT
  - Status: FI supports near-term implementation across the EU via CRR II; adoption viewed as on track.
- 4. Monitor an extended (three-month) LCR in euro and U.S. dollar (FI) — NT
  - Status: FI introduced a Pillar 2 requirement for LCR in EUR and USD in 2018 for credit institutions in Supervisory Categories 1 and 2. FI developed a tool using the EBA Maturity Ladder to replicate extended LCR outcomes (three-month and beyond) in significant currencies.
- 5. Introduce regular surveys on the distribution of household balance sheets (RB) — I
  - Status: Riksbank (RB) collects household-level data on incomes, mortgages and other loans since 2013 but lacks assets; FI collects microdata on new mortgage borrowers but lacks financial assets. RB and FI investigating collection of detailed household data; progress made but legal obstacles remain.
- 6. Introduce regular stress tests of corporate resilience (FI) — I
  - Status: FI working with Statistics Sweden datasets; needs more granular corporate credit data. Joint project to build KRITA (credit database) and VINN (securities holdings database); full access expected from Autumn 2019. FI collected micro-level CRE exposure data in Spring 2019.
- 7. Improve stress testing framework for banks and insurance companies (FI, RB) — I
  - Status: FI improving stress testing framework, applying EBA 2018 stress test scenario to IMF Solvency Stress Testing Framework, using more granular credit loss data, developing satellite models, and liquidity stress testing methods. RB building comprehensive framework with granular exposure data and microdata incorporation. FI and RB coordinate bi-monthly and engage with other central banks and ESRB task force.
- 8. Give FI a clear legal mandate for macroprudential policy (MoF) — I
  - Status: December 2017 law broadened FI’s macroprudential toolbox; changes entered into force in February 2018. Law strengthens FI’s mandate to take measures to counteract financial imbalances but requires Government consent before new regulations are adopted.
- 9. Give FSC a statutory basis with ‘comply or explain’ and expand mandate (MoF) — MT
  - Status: Government assessment: FSC can be a forum for discussion and cooperation but cannot issue recommendations with “comply or explain” attribute because this would be unconstitutional. Authorities can issue recommendations to Government but cannot be obliged to comply or explain.
- 10. Amend the Riksbank Act to clarify RB’s role in financial stability and ensure protection when extending liquidity assistance (MoF) — MT
  - Status: Parliamentary committee reviewing monetary policy framework and the Riksbank Act appointed December 2016; committee to report by November 30, 2019; task extended in October 2017 to review laws on financial independence and balance sheet.
- 11. Seek swap agreements with Nordic central banks, the Fed, and the ECB to strengthen ELA availability (RB) — NT
  - Status: December 2016 Memorandum of Understanding signed among Nordic and Baltic central banks on cooperation regarding cross-border banks; MoU replaces earlier agreements; not legally binding.
- 12. Broaden FI’s mandate to issue binding regulations on safety and soundness issues (MoF) — MT
  - Status: FI has a relatively broad mandate allowing it to issue regulations in a number of areas.

*Italicized source attribution line.*

### Section 4 p. 4 of the Banking and Financing Business Act (SFS 2004:297). There have, however, been circumstances where

### 1sweea2019001 - Section 4 p. 4 of the Banking and Financing Business Act (SFS 2004:297). There have, however, been circumstances where

### Financial Sector Regulation and Supervision
- Recommendation 13: Ensure that the same level of protection is provided to occupational pensions as to life insurance (MoF) — Time: NT.
  - Status: Implementing Directive on Institutions for Occupational Retirement Provision (IORP II) in Sweden will be complemented with a risk-based solvency regulation. Proposals were put to a public consultation in July 2018. The proposed entry into force of the new legal provisions is May 1, 2019.
- Recommendation 14: Improve the availability and quality of investment fund data and enhance FI’s ability to conduct stress testing and other analyses for investment funds (FI) — Time: NT.
  - Status: FI is preparing new regulation to enable enhanced data collection and improved quality data from investment funds; required information will permit FI to perform stress tests when needed.
- Recommendation 15: Enhance cross-border supervisory cooperation, including in the supervision of systemic bank branches and cross-border management of investment funds (FI) — Time: NT.
  - Status: A memorandum of understanding (MoU) agreed among Nordic-Baltic stability group countries establishes coordinated supervisory approach for systemic branches and cooperation within supervisory colleges under Article 116 or Article 51(3) of Directive 2013/36/EU (CRD).
  - Ongoing work to implement EBA Guidelines on the supervision of Significant Branches (EBA/GL/2017/14) with Nordic authorities.
  - FI has initiated a Nordic cooperation for investment firms, meeting twice a year, covering cross-border supervision.
  - FI participates in the Joint Committee of the European Supervisory Authorities work program, including JC SC CPFI Sub-group on cross border supervision of retail financial services.

### Crisis Readiness, Management, and Resolution
- Recommendation 16: Under the FSC’s auspices, ensure agency-specific and national financial crisis preparedness, including a national crisis management plan, updated bi- and multilateral cooperation MoUs, and regular single- and multi-agency financial crisis simulation exercises (MoF/NDO/FI/RB) — Time: NT, C.
  - Status: FSC secretariat and preparatory group have planned and implemented regular crisis simulation exercises on three occasions: autumn 2016, spring 2017, and spring 2018.
  - Work ongoing on a common crisis management plan; authorities implementing financial crisis preparedness within own operational frameworks; regular updates to cooperation MoUs.
- Recommendation 17: Seek to revamp the Nordic-Baltic Stability Group, supported by updated bi- and multilateral MoUs, to strengthen crisis preparedness and management, including regular financial crisis simulations exercises (MoF/NDO/FI/RB) — Time: NT, C.
  - Status: MoF led initiative to revamp NBSG at October 2016 meeting; international drafting group revised MoU during 2017; revised MoU adopted February 2018.
  - Revised MoU focuses on financial stability, information exchange, preparedness, and joint crisis simulation exercises; parties include Ministries, Central Banks, Financial Supervisory Authorities, and Resolution Authorities of Signatory Countries.
  - Regional Nordic-Baltic crisis simulation exercise preparations: working group formed (led by Riksbank) with first meeting January 2017; call for tenders concluded fall 2017; preparatory team preparing exercise since January (year implied); dry run in October and actual simulation in January 2019.
  - SRB, SSM (ECB), and EU Commission involved in preparatory work.
- Recommendation 18: Expedite resolution planning for systemic financial institutions (NDO) — Time: I.
  - Status: In December 2017, the NDO formally decided on resolution plans for all 162 banks and other financial institutions in Sweden under BRRD remit.
  - NDO assessment: ten institutions are systemically important and have more complex resolution plans; remaining 152 institutions may be placed into bankruptcy or liquidation without threatening financial stability.
  - Decisions for the four cross-border banks (Handelsbanken, Nordea, SEB, and Swedbank) were taken jointly in each respective resolution college.
  - Nordea changed domicile to Finland in Fall 2018; no resolution plan produced by NDO for Nordea 2018; NDO cooperating with SRB and Finnish resolution authority to enable transitional resolution plan as early as possible in 2019.
  - NDO set an MREL requirement applying from January 1, 2018; requirement applies to size of capital base and stock of eligible liabilities; requirement already met by all institutions.
  - For the 9 systemically important banks, the recapitalization component of MREL should be fully met with subordinated liabilities by January 1, 2022 at the latest.
  - Updated decisions on resolution plans and MREL taken December 2018; updated MREL requirements apply from January 1, 2019.
  - Irrespective of resolution or bankruptcy, the deposit guarantee applies.
- Recommendation 19: Define strategies for liquidity assistance to banks in resolution, and conclude a cooperation agreement for the solvency and viability assessment of institutions that need ELA (RB/NDO/FI) — Time: I.
  - Status: Ongoing work regarding liquidity in resolution between NDO and resolution college members of four Swedish cross-border banks, including mapping access to central banks’ standard facilities and public sector mechanisms like resolution funds.
  - Preliminary findings: resolution itself is not a hindrance to access central bank ordinary facilities; central bank provision is discretionary and conditional on eligibility criteria such as solvency and ability to mobilise eligible collateral.
  - None of relevant central banks have lending facilities solely designed for liquidity support in resolution (contrast with Bank of England and Bank of Canada).
  - Amount of liquidity available in resolution limited by amount of available eligible collateral; public sector backstop mechanisms established in three relevant jurisdictions (Sweden, Banking Union, and Denmark) with origins in BRRD; mechanisms can issue loans and guarantees and are flexible in currency and duration.
  - NDO and RB hold bilateral dialogue on practical aspects of liquidity support in resolution; discussions ongoing within Swedish Financial Stability Council and EU context.
  - Ongoing parliamentary review of the Riksbank Act including analysis of RB’s role in ensuring liquidity in resolution.

### Resources
- Recommendation 20: Increase financial and human resources allocated for prudential supervision, and recovery and resolution planning, to ensure that resource levels are commensurate with the size and complexity of Sweden’s financial sector and home-country responsibilities (MoF/FI/NDO) — Time: I.
  - Status: FI received substantial resource increases in recent years:
    - Government's budget for 2017: additional contribution of SEK 15 million specifically to handle new regulations and strengthen banking oversight.
    - Supplementary budget for 2017: additional SEK 25 million for increased bank supervision, including Nordea's branchification.
    - Government budget proposal for 2018: another SEK 80 million allocated to FI to strengthen bank supervision, work against money laundering and financing of terrorism, implement new regulations, and integrate sustainability into regulations and financial supervision.
  - NDO appointed as resolution authority in 2015; resolution planning work funded by state budget; administrative costs imposed on institution under resolution or, if not possible, on resolution reserve (industry collectively). Government considers NDO’s appropriation level well balanced and will review annually.
  - Human resources: NDO increased staff at Department for financial stability and consumer protection from 11, 5 FTEs when the FSSA 2016 was published (November) to 19 FTEs today, i.e. a 40 percent increase.

### Appendix VII. The Riksbank’s E-Krona Project
- Context and motivations:
  - E-krona project initiated early 2017; Riksbank at forefront of CBDC development.
  - Cash circulating in Sweden has almost halved over the last five years (from already low levels in percent of GDP); number of ATMs has fallen by over 20 percent since 2012.
  - Riksbank surveys: consumers increasingly experience situations where they cannot use cash; share of consumers using cash has fallen significantly over last four years; two-thirds of Swedish retailers expect to no longer accept cash by 2030 (survey-based estimate).
- Problems if cash disappears (Riksbank perspective):
  - Strong network externalities may lead to high market concentration in digital payments, allowing inefficiencies.
  - Economic vulnerabilities from disruptions in private payment systems would increase; Riksbank options limited when cash no longer used, especially as much private payment infrastructure is located abroad.
  - Parts of population may be unable to use or be denied access to digital payment technologies, excluding them from efficient payments.
  - Trust in monetary system could be eroded in a financial crisis because bank deposits could no longer be converted into risk-free central bank money.
  - Future developments in digital payment systems would be guided by private profit-maximization rather than societal benefits.
- E-krona objectives and design considerations:
  - E-krona would complement physical cash and be a digital claim on the central bank.
  - Could offer competitively neutral infrastructure and lower payments costs.
  - Payment system could be built with some offline functionality to ensure continuity when private systems fail.
  - Could be designed to be simple and user-friendly to meet needs of parts of the population.
  - Availability of e-krona would enable public access to risk-free assets at all times and allow state influence on payment system design.
- Demand and financial stability considerations:
  - Understanding demand for e-krona as store of value is essential; during a financial crisis e-krona could attract deposit flight, but Juks (2018) argues historical evidence makes such a scenario unlikely and suggests design mitigations.
  - Segendorf (2018) preliminary estimate: demand for e-krona to meet transaction needs will not exceed the demand for cash amounting to 1–2 percent of GDP, based on assumptions about fixed share of payments in e-krona, payment volume estimates, and liquidity management assumptions.
  - Estimates subject to significant uncertainty: first-mover advantages of existing payment systems and technological innovations could limit e-krona use initially; demand could be higher depending on design, benefits, incentives, and government use of e-krona for payments.
- Future work:
  - Riksbank published two reports on the e-krona in 2017 and 2018.
  - Separate workstreams evaluating legal, technical, and economic details; e-krona scheduled to be tested in 2020.
  - After tests, Swedish parliament would have option to adopt new legislation to underpin e-krona issuance.

### Appendix VIII. Risk Assessment Matrix (RAM)
- RAM purpose and scale:
  - Shows events that could materially alter the baseline path (IMF staff’s view of most likely scenario).
  - Relative likelihood subjective assessment: “low” = probability below 10 percent; “medium” = between 10 and 30 percent; “high” = between 30 and 50 percent.
- Selected risks, levels, and impacts:
  1. Sharp tightening of global financial conditions (could be triggered by sharp increase in U.S. interest rates or rise in risk premia).
     - Overall level of concern: Low-Medium.
     - Relative likelihood: Medium.
     - Impact if realized:
       - Swedish banks reliant on wholesale funding and directly/indirectly exposed to international financial markets.
       - Higher bank funding costs translate into higher lending interest rates and curtailed lending, weighing on growth.
       - Adverse impact could be mitigated by safe-haven flows, limiting rise in Swedish spreads.
     - Policy response: Preventively, reduce vulnerabilities of the financial sector and preserve fiscal buffers. In the event, provide liquidity support, including in foreign currency.
  2. Weaker-than-expected global growth (reflecting vulnerabilities in Euro Area, U.S., or China; unsustainable macroeconomic policies or uncoordinated Brexit).
     - Overall level of concern: Medium-High.
     - Relative likelihood: Medium.
     - Impact if realized:
       - Sweden’s economy is small and highly open with strong links to European markets.
       - Sensitivity to shocks could be increased by high household debt and more limited space for additional monetary easing.
       - As exports and income decline, investment will slow further reducing growth; inflation will decline with falling growth, lower import prices, and possibly with an appreciation of the krona.
     - Policy response: Provide additional monetary support, let automatic fiscal stabilizers operate fully, and make faster structural fiscal adjustment (easing) to medium-term targets.

*Italicized source attribution provided by the pipeline.*

### 3. Rising protectionism and

### 3. Rising protectionism and retreat from multilateralism.

### Overview and headline risk
- Escalating trade actions and spreading isolationism threatens global trade system and regional integration.
- Increased uncertainty leads to financial market volatility which exacerbates consequences for growth.
- Sweden is a small open economy, particularly exposed to international trade in machinery.
- Sweden could be negatively impacted by uncoordinated Brexit, with Sweden’s exports to the U.K. over 2 percent of its GDP.

### Key vulnerabilities for Sweden
- Higher barriers to trade—particularly those on Sweden’s vehicles and machinery exports—would dampen exports and investment and weaken growth.
- Uncertainty over Brexit negotiations could weigh on confidence and investment. A negative shock to the U.K. following Brexit would hit Swedish exports.
- Sweden’s exposure via machinery and vehicle exports concentrates trade risk.

### Potential economic impacts (scenarios and channels)
- Trade barriers and protectionist measures:
  - Dampened exports and investment.
  - Weakened growth in Sweden through trade and confidence channels.
- Brexit-related shock:
  - Direct hit to exports given exports to the U.K. are over 2 percent of GDP.
  - Uncertainty could reduce investment and confidence.
- Financial market and broader macro effects:
  - Increased uncertainty leads to financial market volatility that exacerbates growth consequences.

### Policy recommendations (from the report)
- Provide monetary and fiscal support.
- Reform wage setting to facilitate sectoral reallocation of labor and capital.

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*SWEDEN STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1sweea2019001.pdf_