IMF Predicts Both Growth and Increasing Challenges in Sweden’s Future

The International Monetary Fund (IMF) has recently finished their 2015 review of the Swedish economy. Their overall impression is quite positive, despite the many financial challenges ahead. The Swedish economy is currently preforming well, with a GDP growth rate of about 3% per year which is expected to continue at least into 2016. The IMF also expects a continued increase in Swedish exports, unless hampered by financial difficulties among the country’s trading partners.

Like many other EU countries Sweden has had a hard time avoiding deflation in recent years. This has forced the Bank of Sweden to apply a negative reference interest during much of 2015. The low interest rates have made it easier for companies and individuals in need of loans, but both the IMF and the Swedish authorities warn of the risks posed by the rising debts of Swedish households. The IMF therefore recommends the gradual discontinuation of Sweden’s current practice of allowing private individuals to deduct their interest costs from their taxable income. Such a change is currently being discussed in the Swedish parliament, and a new rule regulating the amortization of private mortgages is already under implementation. The IMF also wants to see stricter regulations on which debt-to-income ratios can be allowed when private individuals apply for new mortgages.

The low interest rates coupled with the recent decades low output within the Swedish construction sector has increased the demand on the Swedish housing market, and despite hardening rules this development is expected to continue. The IMF therefore suggests that the Swedish government and municipalities should take more active measures to stimulate increased construction, for example by introducing a tax on undeveloped urban plots, but they also urge for a simplification of the Swedish planning procedure.

The Swedish unemployment rate has gone down during the last year, and the IMF describes the current overall employment as high. Their report does, however, warn of an increasingly polarized labor market, where groups such as the foreign born and people with low education have a much harder time finding a job. According to the IMF’s analysis this discrepancy is, in part, a result of the tight Swedish rules and norms with regards to entry salary and employment protection, which make the country’s employers more careful with to whom they give a job offer.

The increasing number of mainly Syrian refugees arriving in Sweden is regarded by the IMF as both an opportunity and a financial risk. Like many other west European countries Sweden has an aging labor force, which could potentially benefit from the influx of younger immigrants. As previously noted Sweden does on the other hand have a hard time integrating the new arrivals on the labor market. According to the IMF, Sweden’s current integration programs are already well developed, but their report also states that further improvements and regulatory changes are needed if Sweden is to avoid an increasing unemployment rate caused by a growing number of unintegrated refugees.