IMF Executive Board Concludes 2015 Article IV Consultation with Sweden
Sweden’s economy is performing well, with real GDP growth of 3.4 percent per year in the first three quarters of 2015, up from 2.3 percent in 2014. Job creation was robust in the first three quarters of 2015, helping bring the unemployment rate down to 7.2 percent in the third quarter. Solid growth of about 3 percent is expected to continue into 2016.
Core inflation (HICP basis) rose to 1.4 percent per year on average in recent months, but remains below the 2 percent target. Since early 2015 the Riksbank has implemented negative interest rates, cutting the repo rate in three steps to -0.35 percent. It is also purchasing 135 billion Swedish Kronor in government bonds in 2015, some 20 percent of the outstanding stock, and further purchases are planned in the first half of 2016.
Migration inflows to Sweden have surged to over 1.5 percent of the population in 2015, with the majority being asylum seekers, and these inflows could remain high. Historical experience is that the employment rates of migrants rise toward the high level of Swedes, but this integration process is lengthy. Unemployment rates among the foreign born, as with the low skilled, are notably higher than the overall unemployment rate.
Housing price inflation has accelerated to 18 percent per year, partly reflecting urban population growth outpacing new housing construction. Mortgage credit growth rose to 8 percent per year in September, lifting household debt to a new high of 176 percent of disposable income, with about 22.5 percent of households with a mortgage having a debt-to-income (DTI) ratio over 500 percent.
Executive Board Assessment2
Executive Directors welcomed Sweden’s solid economic growth, which reflects supportive macroeconomic policies and strong domestic demand. Directors noted, however, that Sweden faces major challenges including a sharp rise in migrant inflows, rapidly rising housing prices and elevated household debt, and inflation that remains below target. Directors called for policies to work together to address these intertwined challenges so as to contain medium-term risks to growth.
Directors commended Sweden’s humanitarian migration policy and well-developed introduction program for refugees. Yet unemployment rates for the low-skilled and foreign-born are considerably higher than average. Directors therefore stressed the importance of reforms to broaden job creation and facilitate integration. They suggested that entry-level wages and employment protection should not be a barrier to hiring groups with high unemployment, and recommended that the authorities better align training with employer’s needs and improve the effectiveness of public job matching services.
Directors endorsed the stimulatory stance of monetary policy to address weak inflation expectations and protect the effectiveness of the inflation target in promoting macroeconomic stability. They supported the Riksbank’s readiness to do more, if needed, until core inflation is durably close to target, but considered that the authorities should refrain from foreign exchange intervention except as a last resort given Sweden’s strong external position.
Directors agreed that the broadly neutral fiscal stance is appropriate. They considered that additional migration-related expenses should be accommodated in the near term, noting that investments in helping migrants integrate will reduce costs in the medium term and support their contribution to growth. Such expenses should be funded over time as part of achieving the medium-term fiscal target. Directors considered that balancing the central government budget on average over the cycle would be sufficient to safeguard Sweden’s fiscal buffers.
Directors highlighted the need for broad-based efforts to rebalance the housing market to protect stability and help sustain growth. To increase housing supply they called for reforms to enable greater competition in residential construction, together with a general phasing out of rent controls, with vulnerable households protected by the housing allowance. Directors also urged phasing out mortgage interest deductibility, raising the limit on capital gains tax deferrals, and expanding subsidies for building affordable rental apartments in areas with jobs to support a soft landing of housing prices, while also aiding labor mobility and migrant integration.
Directors emphasized that the legal framework for macroprudential policies needs to be strengthened to give the FSA access to a range of tools to address risks in a timely and efficient way. They supported the planned adoption of a regulation on the amortization of high loan-to-value mortgages. Directors recommended that Sweden also limit the share of mortgages with high debt-to-income ratios to reduce vulnerabilities associated with further housing price increases.
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