2016 Article IV Consultation with Sweden - Concluding Statement of the IMF Mission
IMF News, September 28, 2016
Source details
- Canonical URL
- 2016 Article IV Consultation with Sweden - Concluding Statement of the IMF Mission
Other formats
Bibliographic details
- Published: September 28, 2016
Overview and headline findings
- Sweden is enjoying a revival of growth and inflation after a difficult period, supported by accommodative monetary policy and migration‑related fiscal spending.
- Growth and labor market:
- Growth is heading for about 3½ percent in 2016, after an expansion of just over 4 percent in 2015.
- Employment has risen by 1½ percent so far in 2016, pushing unemployment down to about 7 percent.
- Key risks:
- Domestic demand will cool as monetary and fiscal impulses fade; growth is expected to ease to about 2½ percent in 2017 and 2 percent thereafter.
- External downside risks include weakness in major advanced and emerging economies, and political fragmentation in Europe (including post‑Brexit uncertainty).
- High housing prices and rising household indebtedness increase downside risk to consumption and amplify the impact of shocks.
Key policy priorities (mission summary)
- Return inflation to target to promote macroeconomic stability and rebuild space for monetary policy.
- Contain vulnerabilities from household debt and address housing market imbalances that crimp growth and threaten stability.
- Ensure that Sweden’s large financial sector remains resilient.
- Accelerate integration of refugees into the workforce.
Monetary policy
- Historical context and outcomes:
- Slack widened to 2-3 percent by 2013-14; core HICP inflation declined to only ½ percent; two-year ahead inflation expectations fell to just 1 percent by end‑2014.
- Monetary easing has kept Swedish yields roughly in line with German Bunds and the krona broadly stable in 2015‑16.
- Core HICP inflation has risen to about 1.2 percent and inflation expectations have moved up closer to the target.
- Outlook and guidance:
- Core HICP inflation is expected to pick up from 2017 and approach target by 2019, though the rise is relatively gradual.
- Monetary policy needs to remain stimulatory for some time; unwinding stimulus should await clear confirmation of a durable rise in inflation.
- If inflation or expectations were to weaken, greater stimulus would be appropriate; foreign exchange intervention should be a last resort.
- Institutional recommendation:
- The parliamentary review of the Riksbank law should:
- Base the inflation target on HICP for international comparability.
- Clarify the Riksbank’s financial stability mandate, including a specific role in identifying, monitoring, analyzing, and reporting systemic financial risks and authority to provide liquidity for financial stability purposes.
Housing market and household debt
- Current situation:
- Annualized housing price gains have slowed to about 5 percent since the Fall of 2015.
- Prices stand at some 40 percent above their 20-year average relative to incomes.
- Spending by highly‑indebted households is more sensitive to interest rate moves; deleveraging can worsen recessions.
- Structural reforms recommended:
- Improve municipal land sale and planning processes to maintain an adequate supply of land ready for development and sustain construction.
- Phase out rent controls to encourage more efficient use of housing.
- Consider temporary removal of the capital gains deferral threshold.
- Phase out mortgage interest tax deductibility to reduce incentives to finance housing with large debts.
- Macroprudential recommendations:
- Implementation of minimum amortization requirements on mortgages is welcome.
- Introduce a measure targeted at highly‑indebted households, such as:
- A debt‑to‑income threshold that only a minority of borrowers may exceed; or
- High risk weights on mortgages exceeding that threshold coupled with supervisory monitoring of such lending by each bank.
- Timely implementation could be followed by regulation if needed; either approach would moderate lending responses when housing prices rise faster than income.
Prudential supervision and financial stability
- Immediate legal and institutional needs:
- Fix deficiencies in the legal framework for macroprudential policy to allow timely action; Finansinspektionen (FI) requires timely capacity to adopt new tools as risks emerge.
- Expand joint work in the Financial Stability Council (FSC) on risk analysis and design/impact assessment of potential measures; structure FSC operations to support FI’s macroprudential mandate.
- Supervisory capacity:
- FI should expand resources to increase supervisory inspection frequency, especially if Nordea’s regional subsidiaries are converted into branches.
- Minimize delays in introducing regulations while legislation and ordinances are amended.
- Capital and liquidity measures:
- A leverage ratio would provide a useful backstop to risk‑based capital requirements given modeling challenges of tail risks.
- Evaluate strengthening bank liquidity requirements in foreign currency, considering potential sizable liquidity support needs in foreign currency depending on the duration of a funding shock and market liquidity in securities held by banks.
- Regional coordination:
- Enhance regional cooperation in supervision, liquidity support, and resolution across the interconnected Nordic‑Baltic financial system.
- Memoranda of Understanding being negotiated among regional supervisors should entail full access to supervisory information including participation in on‑site inspections.
- Cooperative agreements are needed regarding liquidity support and to ensure financial stability is protected in the event of resolution.
Fiscal policy
- Migration‑related spending and overall stance:
- The surge in asylum seekers has almost doubled spending on refugee reception and introduction to about 1.5 percent of GDP.
- The budget deficit is still expected to be small owing to robust revenues and lower‑than‑expected spending elsewhere; the fiscal stance is broadly neutral.
- 2017 Budget and initiatives:
- The Budget for 2017 preserves a small fiscal deficit while providing initiatives totaling 0.6 percent of GDP in education, child and elder care, and active labor market policies.
- Spending on refugee reception and introduction is expected to remain historically high.
- Fiscal framework and sustainability:
- Proposed revisions to the fiscal framework strengthen Sweden’s fiscal health.
- New surplus target of 0.33 percent of GDP (lowered from 1 percent) will continue to protect buffers.
- New debt anchor at 35 percent of GDP is valuable.
- These targets should be achieved over periods sufficient to avoid a pro‑cyclical fiscal stance.
Migration-related and labor market policies
- Labor market integration challenges:
- Job creation has been concentrated in skilled occupations; unemployment is high and rising among less educated workers born outside Sweden.
- The large number and heterogeneity of new arrivals from 2015 is putting pressure on integration frameworks.
- Recommended actions to improve integration:
- Improve refugee reception and establishment: provide affordable housing to avoid settlement delays; ensure sufficient municipal capacity for language training and basic education; improve coordination among agencies involved.
- Medium-term fiscal projections show room to support such investments while observing the new fiscal targets.
- Social partners should support integration through adult education, vocational training, and enabling on‑the‑job skills building.
- Consider temporary and targeted flexibility in high entry‑level wages, combined with expanded tax credits and strengthened benefit conditionality, to boost demand for lower skill workers while protecting living standards.
- Streamline employment subsidy programs to increase take‑up and improve employer‑employee matching to boost subsequent employment outcomes.
Source: Mission Concluding Statement (2016 Article IV Consultation with Sweden)