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Sweden - Economy

Sweden is a highly industrialized country. Agriculture, once accounting for nearly all of Sweden's economy, now employs less than 2% of the labor force. Extensive forests, rich iron ore deposits, and hydroelectric power are the natural resources which, through the application of technology and efficient organization, have enabled Sweden to become a leading producing and exporting nation. Sweden is the largest market in the Baltic Sea region, and is ranked among the most competitive and corruption-free economies in the world.

Sweden’s economy performed 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 was expected to continue into 2016.

Sweden is expected to enjoy solid economic growth of about 3 percent y/y in 2015 and 2016, yet it faced intertwined challenges: Large migration inflows with effects on the labor market and on the budget; Rapid housing price increases associated with rising household indebtedness; and Low inflation and weakened inflation expectations. Macroeconomic policies should support a rise in inflation and contain upside risks to unemployment. The firmly stimulatory stance of monetary policy is needed to avoid prolonged low inflation that would prevent monetary policy from regaining space to cushion shocks. Such a stance should continue until core inflation is durably close to target. The broadly neutral fiscal stance appropriately avoids impeding these efforts to raise inflation. Likely additional expenses related to migration should be accommodated in the near term.

Sweden was not affected by the financial crisis to the same extent as the US, since Swedish banks had been more restrictive with loans due to lessons learned from the financial crises in Sweden during 1990 and 1994. Growth had been strong in recent years, with an annual average GDP growth rate of 2.7% in 2005, 4.1% in 2006, and 2.6% in 2007, but growth slowed significantly in 2008 to 0.9%. GDP was predicted to decrease by almost 1% in the first half of 2009. Partly because of an expansionary economic policy, GDP growth was predicted to turn positive again in the second half of 2009, but growth remained very weak until 2010.

Sweden's economy was set to resume its growth trend in 2010, according to a prognosis from Sweden's Central Bank. GDP growth in Sweden was expected to pick up to 1.9% in 2010. The inflation rate was low in 2006, with an annual average of about 1.5%. The rate increased to 2.2% in 2007 but fell again in late 2008 to 1.6%. Inflation is expected to continue to drop during 2009. Unemployment had been a stubborn problem. In 2006 the unemployment rate reached 7.1%, but in 2007 it fell to 6.2%. Unemployment rose, however, to 7.3% in January 2009.

Since the mid-1990s, Sweden's export sector has grown significantly as the information technology (IT), telecommunications, and services industries have overtaken traditional industries such as steel, paper, and pulp. However, Swedish exports are expected to decrease, consumption to stagnate, investment to fall, and the labor market to weaken in the first half of 2009. The overall current account surplus has traditionally been much smaller than the merchandise trade balance, as Sweden has generally run a deficit on trade in services, net income flows, and unrequited transfers. Since 2003, however, this has not been the case, as the services balance swung into surplus in 2003 and has improved further since then.

Since 2003, the income account has been slipping back to register small deficits in the years through 2007. The transfers balance remained in deficit, mainly as a result of Sweden's increasing contributions to the EU budget. The current account balance improved to an estimated $35.22 billion in 2008 compared to the corresponding period in 2006. The increase mostly consisted of a strong increase in the trade in services balance, where strong increases of both exports and imports, primarily of computer licenses, computer services, and merchandise, are included.

Central government debt rose from 2002-2005 but fell between 2005 and 2008. As a percentage of GDP, public debt was 36.5% (2008 est.). The central government had a surplus of $17.2 billion in 2007 and a surplus of $19 billion in 2008. Sweden projects a deficit $10.6 billion for the end of 2009. Corporate income taxes have decreased to 28% and are now among the lowest in Europe. The government has set a goal of selling some $31 billion in state assets during the time period 2007-2010 to further stimulate growth and raise revenue to pay down the federal debt. To date, the Swedish Government has sold V&S (Vin & Sprit AB) to French Pernod Ricard for some $8.3 billion and the Swedish OMX stock exchange to Borse Dubai/Nasdaq for $318 million.

The new, strict budget process called for spending ceilings set by Parliament. The ceiling was set at $159.8 billion in 2007 and at $140.6 billion in 2008. These budget reforms, in combination with a constitutional change to the Swedish Central Bank, an independent entity, have greatly improved policy credibility. The effects of this improved credibility can be seen in the long-term interest rate margin compared against the Euro, which is negligible. From the perspective of longer-term fiscal sustainability, the anticipated reform of old-age pensions entered into force in 1999. The pension reform entails a far more robust system vis-à-vis adverse demographic and economic trends, which should keep the ratio of total pension disbursements to the aggregate wage bill close to 20% in the decades ahead. Both fiscal consolidation and pension reform have put public finances back on sustainable footing.

Almost 80% of the Swedish labor force is unionized; however, membership is decreasing. For most unions there is a counterpart employers' organization for businesses. The unions and employer organizations are independent of both the government and political parties, although the largest federation of unions, the National Swedish Confederation of Trade Unions (LO), always has maintained close links to the largest political party, the Social Democrats. There is no national minimum wage. Instead, wages are set by collective bargaining.

U.S. direct investment in Sweden was $10 billion in 2006, $497.7 million in 2007, and $609.2 million in 2008 (January-September). Major investments were made in computer software and hardware, IT/telecommunications, industrial goods, and health care. Conditions for doing business in Sweden improved under the Moderate Party-led coalition government that was elected in September 2006.