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Country Commercial Guides for FY 2000: Sweden Report prepared by U.S. Embassy Stockholm, released July, 1999 Note*

II. ECONOMIC TRENDS AND OUTLOOK

- Major Trends and Outlook

The Swedish economic picture has brightened significantly in recent years, though serious structural problems remain. Growth is fairly strong, with an expected GDP growth of 3.0 and 3.5 percent for 1999 and 2000 respectively. The inflation rate is at a record low, with projections for continued low levels over the next 2-3 years. Since the mid-nineties the export sector has been booming, acting as the main engine for economic growth until 1997. Since then, domestic demand has picked up, through strong domestic consumption and investment. Swedish exports have also proven to be surprisingly robust. A marked shift in the structure of the exports, where services, the IT industry, telecommunications, and pharmaceuticals have taken over from traditional industries such as steel, paper, and pulp, has made the Swedish export sector less vulnerable to the international down-turn as a result of the crises in Asia, Russia and Latin America. The telecommunication industry, for example, increased its share of the total export from 8 to 12 % in 1998 alone.

The government budget balance has improved dramatically, from a record deficit of over 12 % of GDP in 1993 to a surplus in 1998, and expected large surpluses in the period 1999-2002. The new, strict budget process with spending ceilings set by parliament, and a constitutional change to a truly independent central bank, have greatly improved policy credibility. This can be seen in the long-term interest rate margin versus the Euro, which is negligible. The government still has a high level of consolidated debt, although it is declining after a peak of 79 % of GDP in 1994. Projections for 1999 and 2000 are 67.6 and 62.2 % respectively.

These figures show a quite remarkable improvement of the Swedish economy since the crisis in 1991-1993, and that Sweden could easily qualify for membership of the third phase of the European Monetary Union. The government, however, decided for largely domestic political reasons that Sweden would not enter into the EMU from the start on January 1, 1999, but will keep its options open for a possible entry at a later date. How and when Sweden will decide on EMU participation, remains very much an open question.

Sweden's primary economic problem remains its high level of unemployment. During a very short period in the early nineties the rate rose from levels among the lowest in the industrialized world to average EU-levels. It remained at record high levels until quite recently, when the up-turn in the business cycle, combined with government training schemes and early retirement programs, started to have an impact. The latest monthly figure for open unemployment is just under 5 % and the total figure, including those involved in training schemes, is 8.7 %. The government has set a goal to reduce the open unemployment rate to 4 % at the turn of the century. Few believe that it will be fully met, although the unemployment is dropping quicker than most observers expected. The government recently announced another goal- that 80 % of the working age population will have a regular job by 2004. Last month that rate was 76.1 %, up from 73.7 % one year earlier.

Both the IMF and the OECD have recently presented reports, which commend Swedish economic management since the mid-nineties. In particular they praised the budget consolidation program and the monetary policy. Both organizations pointed out, however, that in order to raise the potential growth rate above the present estimate of 2 %, structural reforms will be needed. The recommendations for reform were very similar; both the IMF and the OECD emphasized reform of the labor market to increase flexibility. Furthermore, they called for lower taxes and highlighted the need to keep within the spending ceilings.

Clearly Sweden needs structural reforms in its labor market. One sign of which, was that the high levels of unemployment during the past decade did not moderate wage increases. Since 1991 real wage increases have exceeded those of most of Sweden's foreign competitors. Most independent observers have recommended fundamental labor market reforms, including the following measures: wage differentiation to reduce labor costs for low skilled jobs and introduce an incentive to increase individual competence levels; tougher eligibility requirements for unemployment benefits, and a shortening of their duration; cutting income taxes and non-wage labor costs; making the unions and their members bear the cost of the unemployment insurance system; and liberalizing employment protection legislation.

- Principal Growth Sectors

Despite Sweden's recent economic growth, Swedish consumers remained cautious until the second half of 1997, when the first signs that private household consumption was picking up could be seen. Domestic demand is expected to grow by 3.5 % annually in both 1999 and 2000. The real disposable income of households will increase by 3.6 % 1999 and by as much as 4.3 % in 2000, which is a marked shift from the years in the middle of the decade, when disposable income decreased by 4 %. GDP growth will to an increasing extent come from domestic private consumption, even though export industries still are competitive enough to generate large current account surpluses, forecasted to be 2.3 % of GDP in 1999 and 1.8 % in 2000.

Overall public expenditure as a share of GDP will remain high. Although the government is working to fulfill its goal that the state budget should generate an average surplus of 2.0 percent of GDP over a business cycle, political demands for public spending will keep expenditure cuts marginal in the near term.

The healthiest sectors of the Swedish economy will continue to be the export-oriented sectors, such as traditional cyclical manufacturers (cars and construction equipment), services, information technology, and telecommunications.

- Government Role in the Economy

Sweden combines a free market economy with extensive social welfare services. Central and local authorities play a dominant role in providing educational, health, old age, disability, unemployment, and a wide variety of other social services.

The governing Social Democratic Party, in particular, includes full employment and maintenance of current living standards among its basic planks. While government expenditure is equal to about two-thirds of GDP (65.8 % of GDP in 1996, projected to fall to 62.1 in 1999), almost half of that amount is expended as domestic transfer payments, the bulk of which are to households.

- Balance of Payments

Sweden is a small country with a large dependency on international trade. Exports have long been an important growth and employment generator. Sweden's combined exports and imports account for approximately 55 percent of GDP. Sweden's international competitiveness is therefore of utmost importance.

Competitiveness dropped considerably in the second half of the 1970s, due to a rapid increase in costs. Sweden lost market share and suffered from weaker trade and current account balances. The devaluation in the 1980s improved competitiveness only temporarily, since costs increased faster in Sweden than in its main competitors.

After the Swedish Krona was de-linked from the ECU in 1992, the currency dropped considerably. Together with drastic rationalization of Swedish industry, this led to increased competitiveness. Sweden started to regain lost market share. The current account returned to surplus in 1994 after nine years of deficit, and it has showed stable surpluses since 1995. A substantial and increased surplus in the trade of goods has been only partially offset by higher interest payments on external debt, larger transfers arising from EU-membership, and a declining surplus on the services balance.

- Infrastructure

Sweden has world-class infrastructure with excellent highway and railway systems; modern ports for containerized shipping, and deregulated telecommunications.

Sweden ranks among the top group of countries in the world, in terms of dealing with the Y2K issue. The public sector and large businesses are well on their way towards Y2K compliance. The situation is a little less clear for the small and medium sized enterprises. No major disruptions, however, are expected in key areas such as telecommunication, finance, energy, transportation, and emergency services.