Sweden's Economic Outlook Improves, But Problems Remain

UNCLAS STOCKHOLM 000734 TREASURY FOR DAVID WEINER SIPDIS E.O. 12958: N/A TAGS: EFIN ECON PGOV PREL SW SUBJECT: Sweden's Economic Outlook Improves, But Problems Remain REF: A) STOCKHOLM 714 B) STOCKHOLM 570 C) STOCKHOLM 446 ¶1. (U) Summary: Sweden's economy continues to recover. Although still in recession, the 2009 fall in GDP is projected to be less at 4.6 percent. Unemployment will peak earlier than expected, and at a slightly lower level of 10.7 percent. Finance Ministry projections remain somewhat more negative than Central Bank and other forecasts. The Swedish Federation of Enterprise notes that improvement in the overall economic outlook masks the continued dire situation for Sweden's leading industries. Somewhat surprisingly, median income and housing prices have grown, despite the recession. Although the Federation does not expect a housing bubble, it predicts that structural failings will keep youth unemployment high even as overall employment starts to recover in 2010. The Federation hopes the current recession will spark much needed reforms for small businesses, but is not optimistic that strong labor unions will allow reforms needed to foster youth employment. End Summary Third Quarter Numbers Looking Less Grim for Sweden -------------- -------------- -------------- -------------- -------------- -- ¶2. (U) Third quarter results show continued improvement in Sweden's economic outlook, or at least a less grim picture than earlier in 2009 when GDP fell 6.5 percent during the first quarter and 2009 GDP was projected to fall close to 6 percent by some estimates. The Central Bank now predicts GDP will fall 4.6 percent for the year. Other estimates (see table below) range from 4.3 to 5.2 percent negative growth. Forecasts presented in November are notably more optimistic than forecasts from August. ¶3. (U) According to the Central Bank, the economy is predicted to grow 2.0 percent in 2010, and 3.4 percent in 2011. Unemployment had been predicted to peak in 2011 at 11 percent, but is now predicted to peak at the start of 2010 at 10.7 percent. Employment will not grow until 2012, however. Finance Minister Criticized for Being Overly Negative -------------- -------------- -------------- -------------- -------------- -------------- -------------- ¶4. (U) Finance Minister Anders Borg has been criticized by the political opposition for presenting overly pessimistic forecasts to the Parliament in the Budget Bill presented in September (Ref A). He had expected the economy to contract 5.2 percent 2009, grow by 0.6 in 2010 and 3.1 in 2011 respectively. He projected unemployment to reach as high as 11.4 in 2010, and 11.6 percent in 2011. His Finance Ministry's projections were more pessimistic than those by other leading forecasters at the time. (See chart below) ¶5. (U) While the Finance Ministry has not yet issued revised projections, in a public statement November 9 Borg describes Sweden's economic situation, as "troublesome but (perhaps) under control". He noted that Sweden has avoided a depression and a banking crisis, and public finances are stable and on a reasonable footing. Over the course of the whole financial crisis, Borg predicted unemployment will fall by 250,000 - compared to 500,000 jobs lost during Sweden's domestic banking crisis in the early nineties. Other Economic Indicators Looking Up --- -------------- -------------- -------------- -- --- ¶6. (U) Other economic indicators are turning more positive. The Stockholm Stock Exchange Index has risen around 46 percent this year. Sweden's "Purchase Executives Index" (equivalent to the U.S. Institute for Supply Management Manufacturing Index) has gone above the critical 50 mark -- indicating growth in Sweden. An index above 50 indicates increased economic activity compared to the month before. The index measures demand across Sweden, based on monthly surveys of procurement and purchasing managers in manufacturing. This index shows a stronger value than in the rest of the European Union area, and the United States. The Consumer Confidence Indicator is also showing a positive value, and is stronger than the EU and the U.S. ¶7. (U) Although the decline in exports has been drastic, the rate of export orders is now picking up significantly. Unemployment continues to rise, but at a slower pace. The rate of advanced notices of firings has slowed, but is still above normal levels. Budget Deficit Will Naturally Decline -------------- -------------- -------------- -------------- -------------- -------------- ¶8. (U) The fiscal stimulus has led Sweden from stable budget surpluses well above European averages to a deficit of 3 percent of GDP in 2010. Sweden's strong automatic stabilizers will bring the economy back toward budget surplus as the economy recovers. Moreover, Sweden has a Parliament-set budget target that seeks to generate a public sector surplus of 2 percent of GDP over the course of a business cycle. ¶9. (U) The budget deficit for 2009 is somewhat smaller than expected, because tax revenues on income and VAT have been greater than expected, as has revenue from corporate taxes; while expenditure on unemployment benefits have been smaller than expected. More Optimistic Numbers Mask Pain For Swedish Industry -------------- -------------- -------------- -------------- -------------- -------------- -------------- ¶10. (U) On November 12, Econoff discussed the latest figures with Stefan Folster, Chief Economist for the Confederation of Swedish Enterprise. He said the more optimistic numbers mask the seriousness of Sweden's recession. True, there is recovery, but it is from very low levels and economic performance will not reach pre-crisis levels until 2012. He said traditional industry is performing just as bad as predicted, not yet showing signs of improvement. So far, there have not been repercussions in the commercial property market, although there have been a few bankruptcies in that sector. ¶11. (U) Folster said the situation is particularly "dire" for Sweden's leading firms, which depend on exports of investment goods - the type of exports that are slow to recover after a global economic downturn. For example, he noted, Scania Trucks production numbers have improved by 1 to 2 percent, but the firm's production level is 30% of what it was pre-crisis. ¶12. (U) Folster predicted that demand for Swedish exports will grow 3 percent in 2010, which is half of its long term growth rate. He believes export growth will be more normal in 2011, but industrial production will remain far below capacity. ¶13. (U) While some observers told Econoff that major Swedish firms were squeezing their suppliers, Folster did not see many cases of that. Instead, he said large firms like Scania and Volvo were strategically working with suppliers to keep going, even helping some financially strapped suppliers re-organize with new owners. ¶14. (U) The problem he saw was that banks have been restricting lending in order to consolidate their balance sheets. So, customers for companies like Scania were originally unable to borrow money to buy trucks. Now that lending has eased a bit, these firms do not want the trucks and other investment goods because their own business has declined. Households Doing Absurdly Well -------------- -------------- -------------- -------------- -------------- ¶15. (U) Households are faring much better than companies, Folster continued, if they have work. It's actually "absurd" that median income has risen 5 percent this year, at the same time GDP fell 5 percent. The rise in median income, he explained, was due to wage increases negotiated three years ago, before the crisis, and to lower inflation, tax cuts on earned income (Ref A),and record-low interest rates for mortgages. Solid Household Income Supporting the Economy -------------- -- -------------- -------------- -------------- -------------- -------------- ¶16. (U) Folster noted that two-thirds of this increased household income has been saved, which is a higher savings rate than seen for decades. He predicted that this high level of savings would lead to a fairly rapid rise in household spending giving Sweden a rapid recovery from the recession once employment started to rise. The regular Swedish pattern, he said, is for household savings to provide momentum for a faster recovery after a crisis. Household spending was already improving. ¶17. (U) Despite increased savings, Folster said the government's tax cuts for lower wage earners and low interest rates have kept consumption levels reasonable, so retail trade "is doing alright," which is better than expected. Fiscal Stimulus To Be Kept Long Enough to Avoid a Second Downturn -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ¶18. (U) Folster said there was some risk of a second economic downturn if the fiscal stimulus were withdrawn too quickly. And, there was a risk that too large a stimulus kept too long could fuel the next bubble. ¶19. (U) Finance Minister Borg is well aware of this dilemma. Following the G-20 in Pittsburgh he told the Swedish press that "it is much worse to remove stimulus measures to soon than to keep them too long," and that he expected the gigantic stimulus measures injected into the world economy will remain for "a good while longer." The official assessment of Sweden's governing coalition is that Sweden's stimulus measures are expected to remain two more years, although many of the measures including deficit spending will phase out naturally as the economy recovers. High Youth Unemployment To Remain After Economic Recovery -------------- -------------- -------------- -------------- -------------- -- -------------- -------------- -------------- ¶20. (U) Folster has written extensively about youth unemployment. His writings echo concerns voiced by Finance Minister Borg that the current crisis risks exacerbating long term unemployment, especially for the young. Folster told Econoff that youth unemployment is "very high" at 28 percent of people age 18-25 active in the labor market. Ten percent of these unemployed youth are seeking jobs while studying. But, there are an additional 10 percent of 18-25 year olds not counted as unemployed only because they are not studying and not actively seeking employment. ¶21. Even amid a recession, Folster explained, firms in Sweden are having trouble finding experienced employees, but are reluctant to employ young, inexperienced people. Sweden could thus have persistent high unemployment and a labor shortage. He noted that youth unemployment stems from structural problems. It was also high in 2004-2006, a period of strong economic growth in Sweden. The problem, he said, was that unions are reluctant to allow lower wages or apprentice programs; and employment protection rules force firms to fire the young first. ¶23. (U) The rigidity of Sweden's labor market is a drag on the economy. Folster said that interest rates in Sweden tend to be unnecessarily high because if the economy worked better, young people would fill gaps in the labor market and Sweden would have the same level of economic activity for the interest rate. Housing Prices Will Fall, But Not Collapse -------------- -------------- -------------- -------------- -------------- -------------- -------------- ¶24. (U) Folster says there is a risk of inflation once Sweden comes out of recession, but confidence is high that the Central Bank will control inflation even as the economy returns to its pre-crisis production capacity. The Central Bank has publicly stated that although it plans to hold to hold its record-low 0.25 percent benchmark rate until the autumn of 2010, it will then raise interest rates toward a more normal level of 4 percent. ¶25. (U) Regarding questions about whether Sweden risked a housing bubble, Folster said there was no chance of a bubble because there are not many speculative buyers in the housing market. Housing prices will fall when interest rates rise, but they will not collapse. ¶26. (U) Folster said "it is quite amazing" that after an initial slight drop housing prices have risen amid Sweden's recession. Although the Central Bank has had to publicly defend its low benchmark rate against concerns of a housing bubble, Folster said interest rates have only a short term effect, the real problem was a constant housing shortage caused by the bureaucratic hassle inherent in building new housing, especially on the vast tracts of unused land around Stockholm. Problems included over-regulation, especially strict environmental regulations, and the ease at which numerous parties could provoke years of legal delays via the courts to challenge new projects. Recession Could Bring Needed Economic Reforms -------------- --- --- -------------- - -------------- -------------- ¶27. (U) Despite his view that the current outlook for Swedish industry is not as rosy as the picture for the overall economy, Folster was optimistic for the long run because "downturns do some good" for Sweden by leading to structural changes that promote high productivity growth. He praised the current government's reforms of sick leave and early retirement rules. He noted that with 500,000 people on early retirement, however, it will take a decade to shrink the numbers enough to reduce the drain on the economy. He said government income tax cuts have not only supported household consumption, but have made work more attractive keeping people in the work force. ¶28. (U) Of course, he said, the Swedish Federation of Enterprise would like to see more reforms. The government has yet to make it attractive enough to start new businesses. The problem was not so much the regulatory burden of starting a business, but the regulatory and tax burden of running a small business. He explained that unlike most countries in Europe, Sweden did not have easier regulations for small businesses because of labor market regulations and strong unions. Small firms pay higher taxes than elsewhere in Europe and are hurt by over regulation. One example was the requirement to pay taxes in advance, which is very difficult for any new business, especially a small one. Comparing the Finance Ministry's With Other Forecasts -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --- FM: Finance Ministry CB: Central Bank LRC: Local Regional Councils HUI: a business research organization KI: National Research Institute SB: Swedbank SEB: SEB Bank NOR: Nordea Bank The Most Recent Forecasts Have Become More Positive -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -- FM CB LRC HUI Date Forecast Made Sept 09 Oct 09 Oct 09 Sept 09 2009 Forecast GDP -5.2 -4.6 -4.3 -4.5 Household Cons -1.8 -0.7 -0.9 -1.0 Public Cons 1.2 1.5 1.7 1.0 Gross Invs -16.6 -17.3 -17.4 -15.0 Stock Contrb. to GDP -0.7 -1.4 -1.2 0.0 Exports -15.3 -12.8 -12.6 -14.0 Imports -16.1 -15.0 -15.2 -13.5 Ratio Industry production -18.6 -------------- -------------- -------------- Salaries 3.1 3.8 3.4 -------------- CPI, year avg. -0.4 -0.4 -0.2 -0.3 Disposable Income 0.6 -------------- 0.4 2.5 Unemployment 8.9 8.5 8.5 8.6 Current Acct Balance 7.2 7.6 -------------- -------------- Public budget surplus -2.1 -2.2 -------------- -------------- All Along, Finance Ministry Largely the Most Pessimistic -------------- -------------- -------------- -------------- -------------- -------------- -------------- --- --- KI SB SEB NOR Aug 09 Oct 09 Sept09 Sept 09 2009 Forecast GDP -5.0 -4.6 -5.0 -4.2 Household Cons -1.5 -0.9 -2.0 -0.7 Public Cons 1.0 1.5 1.0 0.9 Gross Invs. -16.2 -14.0 -14.0 -16.0 Stock Contrb. to GDP -0.8 -1.1 -1.0 -0.8 Exports -14.7 -13.8 -13.3 -13.5 Imports -15.7 -14.6 -13.7 -15.1 Ratio Industrial production -19.2 -13.2 -19.0 ---Salaries 3.2 3.0 3.3 3.1 CPI, year avg. -0.2 -0.2 -0.2 -0.3 Disposable Income 0.2 0.5 1.4 -------------- Unemployment 8.8 8.9 8.4 8.6 Current Acct Balance 6.7 7.1 6.5 6.9 Public budget surplus -2.3 -2.3 -2.6 -2.2 Looking into the Future, 2010 -------------- FM CB LRC HUI Date Forecast Made Sept 09 Oct 09 Oct 09 Sept 09 2010 Forecast GDP 0.6 2.5 2.7 1.5 Household Cons 1.2 2.0 2.0 2.0 Public Cons 1.1 0.6 0.9 1.0 Gross Invs. -6.6 -1.8 -2.6 -2.0 Stock Contrb. to GDP 0.4 1.1 0.8 0.0 Exports 2.2 4.6 4.3 3.0 Imports 1.3 4.1 2.3 2.0 Ratio Industrial production 3.1 -------------- -------------- -------------- Salaries 2.0 2.1 2.3 -------------- CPI, year avg. 0.4 0.9 1.0 1.2 Disposable Income 1.2 -------------- 0.9 0.7 Unemployment 11.4 10.3 10.7 10.8 Current Acct Balance 7.1 7.7 -------------- -------------- Public budget surplus -3.5 -2.5 -------------- -------------- 2010 Forecasts, Continued -------------- -------------- -------------- -------------- KI SB SEB NOR Aug 09 Oct 09 Sept 09 Sept09 2010 Forecast GDP 1.5 1.5 2.0 2.8 Household Cons 2.2 1.7 1.5 2.5 Public Cons 1.0 1.3 1.0 1.1 Gross Invs. -4.0 -3.5 -3.0 -5.3 Stock Contrb. to GDP 0.4 0.3 0.3 0.8 Exports 3.1 3.3 5.4 6.3 Imports 2.7 2.1 3.5 4.1 Ratio Industrial production 4.3 3.5 4.0 -------------- Salaries 2.0 2.0 1.9 2.3 CPI, year avg. 0.6 1.0 1.6 1.6 Disposable Income 0.1 1.2 1.2 -------------- Unemployment 11.4 10.7 10.5 10.2 Current Acct Balance 6.4 6.7 6.0 7.4 Public budget surplus -3.5 -3.2 -4.0 -3.6 Looking Into the Future, 2011 -------------- -------------- -------------- -------------- -------------- FM CB LRC HUI Date Forecast Made Sept 09 Oct 09 Oct 09 Sept09 2011 Forecast GDP 3.1 3.4 2.5 -------------- Household Cons 3.0 2.1 2.8 -------------- Public Cons. -0.3 0.6 0.9 -------------- Gross Invs. 4.0 5.7 4.2 -------------- Stock Contrb. to GDP 0.4 0.2 0.3 -------------- Exports 6.7 7.3 4.8 -------------- Imports 6.2 6.2 6.0 -------------- Ratio Industry production 7.0 -------------- -------------- -------------- Salaries 1.9 2.6 2.3 -------------- CPI, year avg. 0.8 3.3 1.3 -------------- Disposable Income 1.2 -------------- 1.7 -------------- Unemployment 11.6 10.3 10.6 -------------- Current Acct Balance 7.4 8.3 -------------- -------------- Public budget surplus -2.1 -1.0 -------------- -------------- 2011 Forecasts, Continued -------------- -------------- -------------- -------------- --- KI SB SEB NOR Aug 09 Oct 09 Sept 09 Sep09 2011 Forecast GDP 2.9 2.3 2.6 2.0 Household Cons 3.0 2.2 2.0 2.0 Public Cons. 0.4 0.4 1.0 0.7 Gross Invs. 4.3 2.9 4.0 3.2 Stock Contrb. to GDP 0.2 0.3 0.2 0.0 Exports 5.7 5.2 6.9 4.0 Imports 5.6 5.1 6.9 4.0 Ratio Industrial production 6.3 5.5 7.0 -------------- Salaries 2.1 2.0 2.3 2.5 CPI, year avg. 1.6 1.9 2.1 1.9 Disposable Income 2.8 1.6 1.9 -------------- Unemployment 11.8 11.6 8.1 9.9 Current Acct Balance 6.7 7.2 5.5 8.4 Public budget surplus -3.5 -2.8 -3.9 -2.6