Economy and Trade
Sweden is one of the world’s most highly developed, post-industrial societies. Public-private partnership is at the core of “the Swedish model,” which was developed by the Social Democrats, who governed for most of the 70 years until 2006. However, a center-right government elected in 2006 is committed to reducing the role of the state in the economy. Although it has been a member of the European Union since 1995, Sweden remains outside the Eurozone. In a referendum held in 2003, Swedish voters rejected membership of the Single European Currency by a clear majority.
Agriculture, which once accounted for nearly all of Sweden’s economy, now employs less than 2% of the labor force. Sweden’s natural resources include extensive forests, rich iron-ore deposits, and hydroelectric power. Sweden is dependent upon foreign trade, with exports accounting for around 45% of GDP. Around 75% of Sweden’s foreign trade is conducted with other European nations.
Economic Policy over 12 Months
The center-right coalition, elected in September 2006, has focused on reducing the role of the state in the economy, adopting pro-business policies, and improving the investment climate. The government has cut taxes, and reduced benefits and active labor-market programs. The government’s vast privatization program involves raising around US$31 billion from the sale of shares in six state-owned companies during the period 2007–2010, with the goal of stimulating economic growth, and raising revenue to pay down the federal debt.
By March 2009, the government had sold part or all of its stakes in four of the six companies, raising around US$20 billion, but global financial turbulence has stalled the privatization process. The government’s refusal, in early 2009, to bail out the carmaker, Saab, part of the troubled General Motors empire, highlighted the government’s laissez faire approach to business. The government’s policy has popular backing. Opinion polls showed that only one-third of voters supported government intervention to rescue Saab. Sweden learned a hard lesson in the 1970s, when the government spent billions of krona trying to bail out a faltering ship-making industry, to no avail.
However, the government has adopted a looser fiscal policy, launching various stimulation packages in late 2008 and early 2009, to counter the impact of the global economic crisis on Sweden. Inevitably, the government’s finances have deteriorated markedly as a result. In March 2009, Sweden’s National Debt Office said that it expected the country’s budget deficit to balloon to SEK135 billion (US$14.7 billion) in 2009, just one year after posting a SEK135 billion surplus.
In February 2009, the government announced measures to shore up confidence in the country’s banks, some of which fueled a lending boom in the Baltic countries, which has left them exposed to the sharp economic downturn in that region. In February 2009, the government unveiled a bank-support scheme that would inject up to SEK50 billion (US$5.7 billion) into its financial sector as well as guaranteeing SEK1.5 trillion in new bank loans. Prime Minister, Fredrik Reinfeldt, said Swedish banks would be able to use the state aid package to prop up subsidiaries in Eastern Europe, as well as ensuring that domestic companies obtain access to capital.
Sweden’s monetary policy is based upon an inflation-targeting regime (2%, with a margin of one percentage point either side), while the Swedish krona is allowed to float freely. During the first eight months of 2008, the central bank was focused upon reining in inflation, and gradually tightened monetary policy. Interest rates peaked at 4.75% in early September 2008. In October 2008, the central bank announced a cut of 50 basis points, coordinated with other central banks and prompted by a severe deterioration in the global financial system. The central bank continued to cut rates during the remainder of the year and into 2009, slashing rates by a record 175 basis points in December 2008 alone. By the end of February 2009, the country’s key interest rates stood at just 1%.
Economic Performance over 12 Months
Sweden has enjoyed strong economic growth in recent years, with an annual average GDP growth rate of 2.7% in 2005, 4.1% in 2006, and 2.7% in 2007. However, the global economic slowdown has affected Sweden very badly. GDP shrank by an annual 4.9% in the fourth quarter of 2008, the worst performance in at least 14 years, as demand for Swedish exports slumped. Sweden is more vulnerable than many other countries to slowing world growth, as exports account for about half of its economy.
Following the announcement of the figures in February 2009, the Bloomberg news agency quoted Stefan Hoernell, a senior economist at Svenska Handelsbanken AB, as describing them as “incredibly bad.” Private and public consumption were the biggest downside surprises, he said. The only positive surprise was the bigger-than-expected stock reduction. Hoernell also said the figures were among the worst in the industrialized world, and forecast that the economy would contract by 2.7% in 2009, “the weakest figure since 1940.” In March 2009, Sweden’s National Debt Office said that it expected the Swedish economy to contract by 2.0% in 2009, before bouncing back to see growth of 2.0% in 2010.
Unemployment had been on an improving trend until the global financial crisis broke in 2008. In 2006, the unemployment rate reached 7.1%, but in 2007 it fell to 6.2%, and, by the end of 2008, had increased slightly to 6.4%. In January 2008, the jobless rate jumped by almost a full percentage point to 7.3%, as Swedish exporters laid off thousands of workers. In February 2009, SEB AB, Scandinavia’s third-largest bank by market value, forecast that the jobless rate would rise to 10.2% in 2010.
Inflation fell sharply in the second half of 2008. In December, the annual rate of inflation posted its biggest monthly decline since records began in the 1950s. Consumer prices rose by just 0.9%, the slowest pace in almost three years, reflecting weak demand, and falling prices for international commodities. The decline in inflation occurred despite the weakness of the currency. By March 2009, the Swedish krona had suffered its steepest fall since it was allowed to float in 1992, and was the worst-performing major currency during the financial crisis that began in September 2008 with the collapse of Lehmans, dropping by 20% against the euro, and 27% against the US dollar.
Support for Inward Investment and Imports
Following Sweden’s entry into the European Union in 1995, the investment climate has greatly improved, and the country has attracted significant foreign investment. Conditions for doing business in Sweden have also improved under the coalition government that was elected in September 2006. Corporate income taxes are now among the lowest in Europe. A government body, the Invest in Sweden Agency, provides support to foreign investors.
Following entry into the European Union in 1995, Sweden has applied the customs laws and trade regulation of the union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Sweden are currently taken at the community level. Information on the EU’s trade policies can be found on its website.
Dividends paid by foreign subsidiaries in Sweden to their parent company are not subject to Swedish taxation. The Ministry of Finance has produced a guide with full information on the tax system in Sweden.
GDP per capita: US$39,600 (2008, est.)
CPI: 0.9% (December 2008, official statistics)
Key interest rate: 1% (end-February 2009)
Exchange rate versus dollar: Swedish kronor per US dollar—6.4074 (2008, est.)
Unemployment: 6.4% (December 2008, official statistics)
FDI: US$225.9 billion (2008, est.)
Current-account deficit/surplus US$35.22 billion (2008, est.)
Population: 9,045,389 (July 2008, est.)
Source: CIA World Factbook except where stated