Sweden: Great Economic Performance but Mind the Debt

IMF News, November 17, 2016

Source details

The Swedish economy is in good health and growing robustly.
Growth was very strong at 4.1 percent in first half of 2016 (after 4.1 percent in 2015), driven mainly by domestic demand.
Unemployment has come down to just under 7 percent (from 8 percent in 2011-14).
The relative comfort of the broader economic situation masks several challenges: housing market imbalances, the need to upgrade prudential oversight to match the scale of the financial sector, and ensuring labor-market integration of refugees received in 2015.

Home prices in Sweden have risen to high levels, especially in the main cities.
Rising shares of new mortgage borrowers have debts that are "staggeringly high relative to income" (see Chart 1 referenced in source).
Quote: “As more people take on a lot of debt, the economy becomes vulnerable over time,” said Craig Beaumont.
The primary risk is not a wave of mortgage defaults but a cut in household spending as households prioritize servicing their debts, with knock-on effects on employment, demand, and small firms.
Policy suggestions from the report:
- Build more housing to moderate the long uptrend in housing prices.
- End the deductibility of mortgage interest.
- Phase out rent controls while protecting the vulnerable.
- In the shorter term, the financial supervisor should adopt tools to lean against the rise in the share of highly indebted households.

Sweden’s financial system is one of Europe’s largest relative to the country’s economy (see Chart 2 referenced in source).
The sector is complex and highly interconnected domestically and internationally, reflecting Sweden’s role as a regional financial hub.
Quote: “The systemic nature of the Swedish financial sector raises expectations for the quality of the financial sector policy framework and financial safety nets,” said Martin Cihak.
Analysis findings:
- Swedish financial institutions are largely resilient to solvency shocks.
- Reliance on funding through capital markets makes institutions sensitive to global market sentiment.
- A house price decline combined with lower confidence in Swedish housing market collateral could trigger disturbances across the region.
Key recommendations:
- Upgrade the financial oversight system in terms of resources, toolkit, and mandate.
- Fix deficiencies in the legal framework for macroprudential policy to allow timely action.
Recent development noted: Swedish authorities recently announced a political agreement on expanding the ability of the country’s financial supervisory authority to counteract financial imbalances in the credit market.

Almost 163,000 asylum seekers arrived in Sweden last year—the highest in Europe relative to population.
Asylum applications dropped to roughly 15,000 in the first half of 2016.
The stretched administration struggles to process residence permit applications and to find suitable housing in municipalities, slowing migrants’ integration into the labor market and Swedish society.
Recommendations from the report:
- Focus on affordable housing.
- Streamline wage subsidies.
- Introduce temporary targeted exceptions to high entry-level wages.
Fiscal note: Migrant-related spending doubles from 2015 to 2017; the country’s strong fiscal position and the temporary nature of this spending has not compromised the country’s overall fiscal health.

IMF News — Sweden: Great Economic Performance but Mind the Debt (November 17, 2016).