Sweden: IMF Staff concluding statement of the 2025 Article IV Mission

Washington DC, February 5, 2025

Context and outlook

Sweden’s economy remains strong and resilient, despite the challenges from a protracted cyclical downturn and structural shifts in the global economy. Economic activity is recovering, and inflation has been brought under control. However, the external environment is turning less supportive amid high uncertainty and structural shifts in global production and trade patterns, which will test Sweden’s export-oriented economy. Additionally, slowing productivity growth and an aging population weigh on longer term growth. Sweden’s fundamental macroeconomic and institutional strengths—solid policy frameworks, a well-functioning financial system, robust fiscal accounts, large external buffers, a comprehensive social safety net, highly skilled labor, strong innovation capacity and track record of sound policy implementation—position it well to navigate these challenges.

Real GDP growth is estimated to have recovered to 0.6 percent in 2024, following a small contraction in 2023, and is expected to pick up further to 1.5 percent in 2025, on the back of policy support and improving real incomes. Headline inflation (CPIF) fell to 1.5 percent y/y in December 2024, down from an average of 6 percent in 2023, and is expected to be slightly below 2 percent in 2025 before stabilizing around the 2 percent target in 2026.

Main Policy Recommendations

Monetary policy has appropriately eased to the midpoint of the neutral range and should remain agile amidst high uncertainty and two-sided risks to inflation. While inflation could undershoot the target if domestic demand does not recover as anticipated, it could also accelerate in response to global shocks. The Riksbank’s scenario analysis and the publication of the associated interest paths are important communication tools to help navigate uncertainty and manage expectations. The Riksbank should continue to leverage these tools to explain the reasons for changes to its projected interest rate path, which helps support the market’s understanding of its decision-making process. The pace of quantitative tightening appears adequate, as the increased supply has been absorbed without disruption. The exchange rate retains its two-way flexibility.

The recent amendments to the Riksbank Act will strengthen its balance sheet and preserve its operational independence. Over the past years, the Riksbank’s balance sheet has suffered from valuation losses on its bonds holdings, structurally low seigniorage revenues (given declining use of cash), and the structural liquidity surplus of the banking system that has increased the costs of monetary policy operations. Given the public good nature of central banks’ responsibilities, the Riksbank should ideally be recapitalized when necessary. The measures proposed by the amended Act would help strengthen the central bank balance sheet, which is welcome, since the Act does not guarantee the recapitalization of the Riksbank when it uses the option to request recapitalization. The Act enables the central bank to require credit institutions to hold interest-free deposits at the Riksbank when its equity falls below the target level. At this juncture, with excess liquidity and given the chosen parameters, the measure is not expected to impair the Riksbank’s ability to guide interest rates. The Riksbank should monitor the impact on credit institutions and adjust the parameters as needed.

While subsiding, systemic financial risks remain elevated. While households continued to deleverage in response to elevated interest costs, their debt level remains high. Corporate balance sheets outside the Commercial Real Estate (CRE) sector remain broadly robust, but some sectors are facing still weak demand, and bankruptcies have risen to high levels in some sectors, with minimal impact on bank’s balance sheets. While the outlook for CRE firms has improved somewhat, their operating environment remains complex amid rising vacancies and lower revenues. At the same time, easier financial conditions might encourage increased risk taking in the sector and a renewed buildup of vulnerabilities. Banks’ balance sheets are solid overall, but high exposures to the real estate sector pose risks, while some small banks and consumer credit banks are less profitable and face higher loan-losses. Solvency in the non-bank financial sector (NBFI) is stable, but risks arise from high interconnectedness and complexity, as well as from liquidity risks at investment funds.

Against this backdrop, macroprudential policy settings are appropriate and should remain in place until risks materially subside. The level of the countercyclical capital buffer rate (CCyB) is appropriate given systemic risks and no signs of constrained credit supply. The extension of the risk weight floors for mortgages and CRE until 2027 is welcome, but the authorities should monitor risk weight densities to ensure that internal-ratings-based models properly reflect credit risk. If downside risks materialize and credit constraints become binding, the authorities could consider lowering the CCyB rate. Over the medium term, capital requirements for banks’ CRE exposures could be considered. Recent measures introduced to contain high growth in consumer credit, and the ongoing work to transpose EU directives to manage liquidity risks at investment funds will enhance financial system resilience. Introducing a consolidated credit registry would contribute to better monitoring of household indebtedness.

It would be prudent to maintain the set of borrower-based-measures (BBMs) and the current institutional arrangements, which have been effective and are crucial to maintain macro-financial resilience. Improved granular data collection on households’ balance sheets and cash flow would enable a reliable assessment of any potential changes in BBMs. Housing market and affordability challenges, particularly for younger generations, should be addressed through structural reforms in rental and housing markets to reduce long queues and to increase housing availability, as well as through tax policy to reduce pressures on house prices—such as by reconsidering the costs and benefits of the tax deductibility of mortgage interest or raising property taxation. The current institutional arrangement for macroprudential policy making has advantages in balancing the need to foster strong willingness to act quickly to tackle risks and to ensure accountability.

The authorities have made important progress in addressing the recommendations of the 2023 Financial System Assessment Program, and the momentum should continue. Among others, they have refined and increased the frequency of stress tests related to CRE, enhanced transparency on CRE firms’ funding arrangements, and introduced stress tests on investment funds and Nasdaq Clearing. Continued efforts to strengthen systemic risk assessment and analysis—including by closing data gaps related to household balance sheets, cross-border and cross-sectoral exposures— would enhance macroeconomic stability and resilience. The development of a robust macroprudential framework for NBFIs within the EU, along with comprehensive data reporting mechanisms to enhance granular risk analysis, is important. Ensuring strong interagency cooperation both within Sweden and the EU will further improve regulation and supervision. The authorities should continue to prepare contingency plans and develop crisis playbooks in case the CRE market weakens markedly.

The moderately expansionary fiscal stance envisioned in the 2025 budget is appropriate given the large negative output gap. The fiscal deficit would narrow by 0.3 percentage points to -1.4 percent of GDP in 2025, implying a moderate structural expansion. Consolidation would continue until 2027, when a new balanced budget rule would come into effect, in line with past IMF advice. New tax measures in the budget are appropriate, but further compensatory measures for lower-income households could be considered to mitigate any potential impact on income inequality from the increase in the earned income tax credit, while monitoring the impact on labor supply would help calibrate any further adjustments. The broad-based fuel tax cuts introduced in 2022 could be better targeted to support vulnerable populations, while preserving price signals to support the green transition. Planned risk-sharing mechanisms to finance higher investments in nuclear power, if decided, should be carefully designed and monitored to mitigate fiscal risks. Substantial available fiscal space allows for policy support if downside risks materialize.

Medium-term fiscal policy should focus on enhancing growth and resilience while addressing emerging fiscal pressures. It should prioritize measures that boost economic growth, strengthen resilience, continue facilitating the green and digital transitions, and further enhance inclusion. At the same time, fiscal pressures are accumulating stemming from aging, climate change, and defense. The authorities’ fiscal sustainability report has identified increasing spending needs from aging; similar analysis should be extended to other areas, including the climate transition. Such an analysis would support policy formulation, facilitate spending prioritization, and improve the utilization of the additional fiscal space generated by the new balanced budget target in 2027, while also informing the next review of the fiscal framework.

The authorities’ efforts to lift productivity and medium-term growth are welcome. Labor productivity in Sweden is among the highest in Europe but its growth rate has been experiencing a secular decline. Priorities for domestic reforms include: (i) further simplifying and harmonizing regulations to ease the administrative burden on firms, especially smaller ones with limited resources; (ii) improving housing and rental market functioning to help facilitate labor mobility; (iii) raising educational outcomes especially among immigrants, addressing skill mismatches, and enhancing efforts to upskill and reskill the labor force; (iv) maintaining transport infrastructure; (v) further deepening Sweden’s already sophisticated R&D model by ensuring that the R&D ecosystem aligns with industry needs, attracts ample talent, supports basic research, and facilitates commercialization; (vi) maintaining a strong focus on venture capital (which is already among the strongest in Europe) and more broadly ensuring adequate access to capital for small and medium-sized companies to enable rapid scaling up.

Supporting measures to strengthen the EU single market would bolster this agenda. The EU is Sweden’s most important market, but it remains fragmented, limiting the benefits of economies of scale and network effects. Supporting a deeper integration with and within the EU would help leverage Sweden’s relative advantages, including the possibility of small firms to scale up, and support the productivity agenda. Key areas for strengthening the single market include: (i) facilitating labor mobility; (ii) streamlining trade procedures and improving border infrastructure; (iii) opening protected sectors; (iv) harmonizing rules for doing business across borders; (v) reducing administrative and regulatory hurdles to stimulate business dynamism and help firms scale up, particularly for start-ups; and (vi) strengthening the EU capital markets union.

Sweden has ambitious climate targets, but additional measures might be needed to achieve the 2030 interim targets. The authorities expect that under current policies Sweden’s Effort Sharing Regulation (ESR) targets towards the EU will be met by a small margin. However, there is significant uncertainty surrounding the projected path, and further offsetting measures might be required.

—

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The IMF delegation expresses its gratitude to the Swedish authorities and other counterparts for their hospitality and the constructive and insightful discussions.

Source – IMF