Sweden Concluding Statement for the 2019 Article IV Consultation
IMF News, February 21, 2019
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- Published: February 21, 2019
Macroeconomic overview and policy priorities
- Growth is expected to decline to 1.2 percent in 2019, before rebounding to around 2 percent in later years.
- Material downside risks: weaker global growth, potential trade disruptions, and domestic demand weakness (notably dwelling investment and housing market sentiment).
- Policy guidance:
- Monetary policy should defer further rate hikes until the outlook is consistent with durably meeting the inflation target.
- Automatic fiscal stabilizers should operate fully to cushion lower growth.
- Reducing the fiscal surplus to its medium-term target by 2020 would provide a small stimulus while protecting buffers.
- Timely structural reforms (labor market, housing, education/training) to sustain strong and inclusive growth.
Monetary Policy
- Recent past: Accommodative policy supported strong domestic demand and solid growth in 2016-18.
- Labor market and inflation facts:
- Unemployment reduced to 6.2 percent by the end of 2018.
- CPIF inflation of just over 2 percent during 2018; CPIF inflation excluding energy running at 1.5 percent in 2018’Q4.
- Outlook and recommendation:
- CPIF inflation excluding energy is expected to rise to 1.7 percent by end 2019 and gradually converge to target thereafter.
- A patient and data‑dependent monetary policy is appropriate; consistent with the Riksbank’s deferral of further rate increases until the second half of 2019 depending on the outlook.
- Institutional recommendation:
- The parliamentary review of the Riksbank law should put the Riksbank’s financial stability role on a firmer legal footing by providing explicit mandates to monitor systemic financial risks and provide emergency liquidity to banks.
- Protect the Riksbank’s financial autonomy (e.g., capital and dividends).
Fiscal Policy
- Fiscal position and buffers:
- Gross debt of 38 percent of GDP.
- Net debt among the lowest of advanced economies.
- Surplus of about 0.8 percent of GDP in 2018.
- Medium-term target and stance:
- New medium-term target for the fiscal surplus: 0.33 percent of GDP (effective this year).
- Reducing the cyclically-adjusted surplus to this target by 2020 would release a modest 0.2 percent of GDP in resources to facilitate reforms for inclusive growth.
- The resulting fiscal stimulus in 2019-20 would be small with low risk of overheating; fiscal buffers would remain strong.
- Investment needs:
- Anticipated increases in public investment for schools, healthcare, housing, and major infrastructure (e.g., new railway lines).
- If public investment rises beyond past norms, consider a temporary cut in the medium-term surplus target to avoid adjustments in taxation or other spending.
Labor Market
- Inclusion and unemployment:
- Employment of the foreign born has increased substantially, but foreign born unemployment still greatly exceeds that of natives.
- Social partners’ plan for “entry agreements” to enable migrants and the low‑skilled to combine work and training at reduced employer cost is expected to help.
- Policy recommendations:
- The “January agreement” should include steps to strengthen migrant integration and enhance education and training.
- When reviewing employment protection, social partners should facilitate labor market entry for low‑skilled and migrants (e.g., extend trial periods) and increase flexibility for small- and medium-sized enterprises.
- Reforms of the Public Employment Service should be carefully designed and monitored to improve job matching and skills development.
- Wage formation:
- Swedish wage rises tend to follow those in Germany via the Industrial Agreement of 1997, contributing to subdued domestic wage growth and low inflation.
- The social partners should consider updating wage formation to reflect structural changes (e.g., rise of services). Options include broadening benchmark sectors and removing the National Mediation Office’s adherence to the industrial sector wage benchmark to focus on real wage growth, higher employment, reducing conflicts, and facilitating relative pay changes.
Housing Market
- Recent developments and indicators:
- Housing prices declined by 6 percent in late 2017, then rose by 2 percent in 2018.
- Housing starts fell sharply by 16 percent in 2018.
- Pre-sale financing for some developers has become much less available.
- Consequences and challenges:
- A notable fall in dwelling investment is expected in 2019 despite housing prices remaining high relative to household income in main centers.
- Long queues for rent-controlled apartments push households into expensive purchases or higher rents, raising debt burdens, reducing labor mobility, lowering productivity and incomes, and increasing regional and generational inequality.
- Recommended reform package (key elements):
- Making the rental market work:
- Fully liberalize rents of newly constructed apartments and phase out existing controls (e.g., apply market rents at tenant changes).
- Expand access to the housing allowance to cushion adjustment and 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.
- Tax property to rebalance the market:
- Consider a broad-based increase in the ceiling on the property tax, or a targeted increase in main centers.
- Abolish interest on deferrals of capital gains taxes; consider taxing only a portion of capital gains on primary dwellings.
- Implement a phase out of mortgage interest deductibility.
- Produce affordable housing:
- Simplify planning to reduce construction costs.
- Enhance productivity in construction by strengthening competition, harmonizing land sale procedures across municipalities, and preventing requirements beyond national building standards.
- Expand subsidies for affordable rental apartments, student housing, and elder housing.
Financial Sector
- Macroprudential framework and measures:
- Finansinspektionen’s (FI) macroprudential mandate expanded from February 2018, addressing an IMF FSAP recommendation from 2016.
- Stricter amortization requirement effective from March 2018 targets high loan-to-income (LTI) mortgages.
- A 0.5 percentage point increase in the countercyclical capital buffer from September 2019 helps address broader bank risk-taking.
- The macroprudential stance is appropriate, but risks require close monitoring.
- Remaining vulnerabilities and data needs:
- Housing prices now more in line with longer-run fundamentals; mortgage lending growth has declined and the share of high LTI mortgages has decreased.
- Persisting vulnerabilities include potential spillovers from financing difficulties among smaller property developers.
- Collecting household level balance sheet data is essential for monitoring macrofinancial risks and designing/evaluating measures.
- AML/CFT and regional cooperation:
- Swedish AML/CFT framework strengthened recently, including new legislation in 2017; FI has allocated additional AML/CFT supervisory resources and is monitoring domestic institutions.
- Authorities should identify and address any issues in Swedish institutions and continue correcting remaining deficiencies.
- Given the integrated Nordic-Baltic financial sector, strong cooperation and frameworks are key to AML/CFT effectiveness.
- Nonbanks, commercial property, and payments:
- Nonbanks have entered the mortgage market; they should meet the same consumer protection and macroprudential requirements while keeping compliance costs manageable.
- Commercial property valuations appear stretched; FI should review banks’ risk management and borrowers’ health.
- After a clearing member default in Nasdaq Clearing, FI should assess measures to contain risks and improve default management procedures.
- The Riksbank’s e-krona project should continue; authorities should also explore regulatory options to ensure reliable and efficient private payments as digital, “cash-free” transactions expand.
Closing
- The mission appreciated candid and insightful discussions with the Swedish authorities and other counterparts.
Source: Sweden Concluding Statement for the 2019 Article IV Consultation — February 21, 2019, IMF Communications Department.