Sweden: Will COVID-19 Economics be Different?

IMF News, June 4, 2020

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Sweden’s less restrictive containment strategy may have resulted in a milder economic contraction at the onset of the crisis, but uncertainty remains about its implications for the rest of the year.
Other factors, including falling external demand, will heavily weigh on growth.
Concerns have been raised about the country’s death rate which, although lower than in Europe’s worst-affected countries, is a multiple of its Nordic neighbors.

Strategy rationale: measures based more on recommendations and social responsibility than legal obligations, chosen under the view that the pandemic would last a long time and measures need to be socially and economically sustainable while keeping infection rates at a level the Swedish health system can handle.
Outcome noted: the objective of keeping infections within health system capacity "seems to have been achieved," but the death toll so far has been relatively high.
Concentration of deaths:
- "50 percent of deaths occurred in elderly care facilities."
- The "70+ age group accounted for almost 90 percent of all deaths."
- "Greater Stockholm accounts for 50 percent of the deaths," with higher impact in areas with a higher share of persons that are foreign-born or have foreign-born parents.
Immunity uncertainty: recent tests indicate that immunity gains have been lower than initially projected, leaving open the question of whether Sweden may be closer to achieving herd immunity.

Quarter-level outcome: Sweden had a "small increase in GDP for the first quarter of 2020" contrary to other advanced economies.
Consumption and exports:
- Consumption declined less than in other countries.
- Exports temporarily increased.
Employment: a relatively large fall in employment in recent weeks suggests economic strain.
Forecasters' view: most forecasters agree that Sweden will face a severe recession this year, but it is too early to say whether the strategy will prolong the recession or aid the recovery.

Mobility patterns:
- Decline in mobility in Sweden was less than in other Nordic countries (based on cell phone data).
- Visits to workplaces appear to have fallen more than predicted by the less restrictive containment policies.
Implication: voluntary changes in behavior can play an important role, irrespective of regulations, and mobility reflects economic activity to some degree but is not the sole determinant.

Domestic demand vs. external demand:
- Domestic containment policies have a greater bearing on domestic demand, particularly on non-tradeable sectors such as services.
- Tradeable sectors, notably export-oriented manufacturing, are heavily affected by falling external demand and supply chain disruptions, which are not determined by Sweden’s own containment policy.
Indicators:
- The decline in service activity in Sweden between "February and April," although significant, was much less than among European peers.
- Swedish manufacturing: the fall in the manufacturing PMI in Sweden that started in "March" was in line with what other European countries are experiencing.

Macroeconomic policy: swift decisive macroeconomic policy action remains critical to avert more dire economic outcomes.
Assessment of Sweden’s response: Sweden’s policy response to combat the economic impact of the pandemic has been "prompt, large, and well-designed."
Institutional strengths highlighted:
- Importance of having built up ample fiscal space.
- Preserving the operational independence of the central bank (Riksbank), enabling it to quickly deploy a broad menu of instruments.

IMF News, June 4, 2020.