Sweden: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, February 5, 2025
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- Published: February 5, 2025
Context and outlook
- After contracting in 2023, economic activity started to recover in 2024, and growth is expected to pick up further in 2025.
- Real GDP growth is estimated to have recovered to 0.6 percent in 2024 and is expected to pick up to 1.5 percent in 2025.
- Headline inflation (CPIF) fell to 1.5 percent y/y in December 2024, down from an average of 6 percent in 2023, and is expected to be slightly below 2 percent in 2025 before stabilizing around the 2 percent target in 2026.
- Uncertainty is high: downside risks to growth include geoeconomic fragmentation, trade uncertainty and escalating protectionism, and possible continued weakness in private consumption; risks to inflation are two-sided.
- Sweden’s strengths: solid policy frameworks, well-functioning financial system, robust fiscal accounts, large external buffers, comprehensive social safety net, highly skilled labor, strong innovation capacity, and track record of sound policy implementation.
- Slowing productivity growth and an aging population weigh on longer-term growth.
Key macroeconomic figures and projections
- Real GDP growth: 0.6 percent in 2024; 1.5 percent expected in 2025.
- CPI (CPIF): 1.5 percent y/y in December 2024; average 6 percent in 2023; slightly below 2 percent in 2025; around the 2 percent target in 2026.
- Fiscal deficit: projected to narrow by 0.3 percentage points to -1.4 percent of GDP in 2025.
- Risk weight floors for mortgages and CRE extended until 2027.
Monetary policy
- Assessment:
- Monetary policy has eased to the midpoint of the neutral range and should remain agile given high uncertainty and two-sided risks to inflation.
- The pace of quantitative tightening appears adequate; increased supply has been absorbed without disruption.
- The exchange rate retains its two-way flexibility.
- Recommendations:
- The Riksbank should continue scenario analysis and publish associated interest paths as communication tools.
- Leverage published scenario analysis to explain changes to projected interest rate paths to support market understanding.
- Monitor effects of amended Riksbank Act provisions on bank deposits and adjust parameters as needed.
Riksbank Act and central bank balance sheet
- Issues noted:
- Balance sheet deterioration from valuation losses on bond holdings, structurally low seigniorage revenues, and structural liquidity surplus in the banking system.
- The amended Act strengthens the balance sheet and preserves operational independence but does not guarantee recapitalization when requested.
- The Act enables the central bank to require credit institutions to hold interest-free deposits at the Riksbank when equity falls below target.
- Guidance:
- Recapitalization of the Riksbank would be ideal when necessary.
- With current excess liquidity and chosen parameters, the measure is not expected to impair the Riksbank’s ability to guide interest rates.
- Riksbank should monitor impact on credit institutions and adjust parameters as needed.
Financial stability and macroprudential policy
- Current assessment:
- Downside risks to financial stability have subsided somewhat, but structural vulnerabilities remain high.
- Households continued to deleverage, but debt levels remain high.
- Corporate balance sheets outside CRE are broadly robust; some sectors face weak demand and higher bankruptcies with minimal impact on banks’ balance sheets.
- CRE sector: operating environment remains complex with rising vacancies and lower revenues; easier financial conditions may encourage risk-taking and renewed vulnerabilities.
- Banks: solid balance sheets overall, but high exposures to real estate; some small banks and consumer credit banks less profitable and facing higher loan-losses.
- NBFI solvency is stable, but risks stem from high interconnectedness, complexity, and liquidity risks at investment funds.
- Macroprudential stance:
- Current settings, including borrower-based measures (BBMs), are appropriate and should remain in place until risks materially subside.
- The level of the countercyclical capital buffer rate (CCyB) is appropriate given systemic risks and no signs of constrained credit supply.
- Extension of risk weight floors for mortgages and CRE until 2027 is welcome; monitor risk weight densities and internal-ratings-based models.
- If downside risks materialize and credit constraints bind, lowering the CCyB could be considered.
- Over the medium term, capital requirements for banks’ CRE exposures could be considered.
- Recent measures to contain high growth in consumer credit and transposition of EU directives to manage liquidity risks at investment funds will enhance resilience.
- Introducing a consolidated credit registry would improve monitoring of household indebtedness.
- Data, stress testing, and contingency planning:
- Authorities have refined and increased frequency of CRE stress tests, enhanced transparency on CRE firms’ funding, and introduced stress tests on investment funds and Nasdaq Clearing.
- Continue closing data gaps related to household balance sheets, cross-border and cross-sectoral exposures.
- Prepare contingency plans and crisis playbooks in case the CRE market weakens markedly.
- Develop a robust macroprudential framework for NBFIs within the EU and comprehensive data reporting mechanisms.
- Ensure strong interagency cooperation within Sweden and the EU.
Borrower-based measures and housing policy
- Recommendations:
- Maintain existing BBMs and institutional arrangements that have been effective in maintaining macro-financial resilience.
- Improve granular data collection on households’ balance sheets and cash flow to reliably assess BBM adjustments.
- Address housing market and affordability challenges through structural reforms in rental and housing markets to reduce long queues and increase availability.
- Use tax policy to reduce pressures on house prices, including reconsidering the tax deductibility of mortgage interest or raising property taxation.
- Consider better targeting of broad-based fuel tax cuts introduced in 2022 to support vulnerable populations while preserving green transition price signals.
Fiscal policy: near-term and medium-term
- Near-term assessment:
- The moderately expansionary fiscal stance in the 2025 budget is appropriate given the large negative output gap.
- Fiscal deficit projected to narrow by 0.3 percentage points to -1.4 percent of GDP in 2025, implying a moderate structural expansion.
- Consolidation would continue until 2027 when a new balanced budget rule comes into effect.
- New tax measures are appropriate; consider compensatory measures for lower-income households given increase in the earned income tax credit and monitor labor supply effects.
- Planned risk-sharing mechanisms to finance higher investments in nuclear power should be carefully designed and monitored to mitigate fiscal risks.
- Substantial available fiscal space allows for policy support if downside risks materialize.
- Medium-term priorities:
- Focus on enhancing growth and resilience while addressing aging, climate change, and defense-related fiscal pressures.
- Prioritize measures that boost economic growth, strengthen resilience, facilitate green and digital transitions, and enhance inclusion.
- Extend fiscal sustainability analysis beyond aging to areas including the climate transition to support policy formulation, spending prioritization, and utilization of additional fiscal space generated by the new balanced budget target in 2027.
Policies to lift productivity and medium-term growth
- Observations:
- Labor productivity in Sweden is among the highest in Europe but its growth rate has been experiencing a secular decline.
- Reform priorities:
- (i) Simplify and harmonize regulations to ease administrative burden on firms, especially smaller ones.
- (ii) Improve housing and rental market functioning to facilitate labor mobility.
- (iii) Raise educational outcomes especially among immigrants; address skill mismatches; enhance upskilling and reskilling.
- (iv) Maintain transport infrastructure.
- (v) Deepen R&D model to align with industry needs, attract talent, support basic research, and facilitate commercialization.
- (vi) Maintain focus on venture capital and ensure adequate access to capital for small and medium-sized companies to enable rapid scaling up.
EU single market and external integration
- Rationale:
- The EU is Sweden’s most important market, but fragmentation limits economies of scale and network effects.
- Recommendations to strengthen single market:
- (i) Facilitate labor mobility.
- (ii) Streamline trade procedures and improve border infrastructure.
- (iii) Open protected sectors.
- (iv) Harmonize rules for doing business across borders.
- (v) Reduce administrative and regulatory hurdles to stimulate business dynamism and help firms scale up, particularly start-ups.
- (vi) Strengthen the EU capital markets union.
Climate targets
- Assessment:
- Sweden has ambitious climate targets; under current policies authorities expect Effort Sharing Regulation (ESR) targets towards the EU will be met by a small margin.
- Significant uncertainty surrounds the projected path; additional offsetting measures might be required to meet 2030 interim targets.
Mission closing
- The IMF delegation expresses gratitude to the Swedish authorities and counterparts for hospitality and constructive discussions.
Source: Sweden: Staff Concluding Statement of the 2025 Article IV Mission (February 5, 2025), IMF.