IMF Executive Board Concludes 2016 Article IV Consultation with Sweden

IMF News, November 17, 2016

Source details

Canonical URL: IMF Executive Board Concludes 2016 Article IV Consultation with Sweden

Real GDP growth:
- 2015: just over 4 percent (expansion)
- 2016: heading for about 3.4 percent
- 2017: expected to moderate to 2.4 percent
- Projections table shows Real GDP: 2013: 1.2; 2014: 2.6; 2015: 4.1; 2016: 3.4; 2017: 2.4; 2018: 2.2; 2019: 2.1
Domestic demand and components (selected projection entries):
- Domestic demand 2013–2016: 1.6; 2.9; 4.0; 4.3
- Private consumption (partial table): 1.9; 2.3
- Public consumption (partial table): 1.3; 1.5; 2.5; 3.6; 1.0
- Gross fixed investment 2013–2019: 0.6; 5.5; 7.2; 6.9; 3.9; 3.8
- Net exports (contribution to growth) 2013–2017: -0.3; -0.1; 0.3; -0.6; 0.0
Output gap: 2013: -2.8; 2014: -2.2; 2015: -0.7; 2016: 0.9
HICP core inflation:
- Average of 1.2 percent in 2016 (core inflation on HICP basis)
- HICP inflation (e.o.p) series in table: 2013: 0.4; 2014: 0.7; 2015: 2.0
Labor market:
- Employment increased by 1.5 percent so far in 2016
- Unemployment down to about 7 percent (2016)
- Unemployment rate series: 2013: 8.0; 2014: 7.9; 2015: 7.4; 2016: 6.7

Policy actions and instruments:
- Repo rate kept at ‑0.5 percent after further easing in early 2016
- Central bank continued bond purchases
Executive Directors’ view:
- Welcome rise in inflation expectations as signal of Riksbank commitment to inflation target
- Recommended monetary policy remain stimulatory for some time given prospect for inflation to rise only gradually
- Any unwinding of stimulus should await confirmation of a durable rise in inflation; greater stimulus would be appropriate if inflation or inflation expectations weaken
- Strong encouragement to monitor effects of negative interest rates on financial sector and bank profitability

House prices:
- House price rises slowed to about 5 percent annualized in the last ten months (prior: around 15 percent for most of 2015)
- Housing prices stand at some 40 percent above their 20-year average relative to income
- Growing share of new borrowers taking on high debts relative to their income
Recommendations to contain housing and household debt risks:
- Reforms to maintain an adequate land supply for construction
- Phasing out tax deductibility of interest payments
- Phasing out rent controls while protecting the vulnerable
- Reinforce macroprudential policies through timely adoption of a debt‑to‑income limit

FSAP (2016) summary findings:
- Swedish banks are largely resilient to solvency shocks
- Banks are very reliant on wholesale funding
Executive Directors’ recommendations to strengthen financial resilience:
- Welcome expansion of FI’s ability to take macroprudential measures; recommend expanding FI’s resources to achieve an appropriate frequency of supervisory inspection
- Support timely adoption of a leverage ratio as a backstop
- Recommend strengthening foreign exchange liquidity requirements on banks given high reliance on wholesale funding
- Continue monitoring effects of negative interest rates on financial sector and bank profitability

Fiscal balances and public finances:
- Fiscal deficit expected to be small in 2016
- Migration-related government spending almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015
- Budget for 2017 provides for initiatives totaling 0.5 percent of GDP in education, active labor market policies, and child and elder care, yet still targets a small fiscal deficit
- General government gross debt (official statistics) series: 39.8; 44.6; 42.9; 41.6; 40.5; 39.4; 38.8 (2013–2019)
- Gross national saving (percent of GDP) series: 27.8; 28.0; 29.5; 30.4; 31.1; 31.3
- Gross domestic investment (percent of GDP) series: 22.5; 23.3; 24.2; 25.5; 26.0; 26.3; 26.5
- Public finance entries (partial): Total revenues 50.9; 50.1; 49.1; 48.9; 48.7; Total expenditures 52.2; 51.7; Net lending -1.3; -1.6; 0.2; -0.2; Structural balance (as a percent of potential GDP) -0.5; -0.9
Executive Directors’ fiscal guidance:
- Given Sweden’s strong fiscal position, fiscal policy should accommodate temporary migration‑related costs; modestly expansionary fiscal stance planned for 2017 considered appropriate
- Proposed revisions to fiscal framework would continue to protect Sweden’s fiscal health
- Support utilizing fiscal room in coming years to further support migrant integration given employment and long‑term fiscal benefits within the new fiscal targets

Observations:
- Integration of migrants into jobs is lengthy despite favorable labor market conditions
- Unemployment is high among less educated foreign‑born workers
Recommended measures:
- Further initiatives to provide affordable housing and ensure sufficient educational capacity at municipalities
- Improved coordination across agencies for migrant reception and settlement
- To alleviate high and rising unemployment among less educated workers born outside Sweden, most Directors recommended social partners allow temporary and targeted exceptions to high entry‑level wages to enable on‑the‑job skill building
- Streamline employment subsidy programs and improve employer‑employee matching to maximize employment gains

Current account (percent of GDP): 5.3; 4.6; 5.2; 5.1; 5.0; 4.7 (2013–2018)
Foreign direct investment, net: 4.4; 2.8 (selected years)
International reserves, changes (in billions of US dollars) 4/: 14.6; 0.5
Reserve cover (months of imports of goods and services): 3.3; 3.5
Net international investment position: -12.6; 8.1; 10.1; 12.0 (selected years)
Exchange rate (period average):
- SEK per euro 2/: 8.7; 9.1; 9.4
- SEK per U.S. dollar 2/: 6.5; 8.4
Nominal effective rate (2010=100) 5/: 108.5; 103.7; 97.5; 96.7
Real effective rate (2010=100) 5/ 6/: 103.4; 98.8; 94.7; 95.7
Interest rates (end of period):
- Repo rate 2/: 0.8; -0.4 (selected entries)
- Ten-year government bond yield 2/: 1.7
Money and credit (year-on-year, percent change, eop) 1/:
- M3: 3.1; 7.6; 8.5; ...
- Bank lending to households: 4.9; 6.0
Other indicators:
- GDP per capita (2015, USD): 50,591
- Population (2016, million): 9.9
- Main products and exports: Machinery, motor vehicles, paper products, pulp and wood
- Key export markets: Germany, Norway, United Kingdom

IMF Executive Board press release, November 17, 2016.