Sweden just formed a new government and approved its 2019 budget: what does it mean for the economy?
For several months following last September’s general elections, Sweden had a taste of something relatively unheard of in its recent memory: political paralysis. The vote had seen a surge in support for the right-wing Sweden Democrats alongside a slump in seats for Sweden’s two largest parties, the Social Democrats and the Moderates. This robbed both the center-left and center-right political groupings of a parliamentary majority, hamstringing the formation of a government.
The impasse was only broken in mid-January after Stefan Löfven, the leader of the Social Democrats, reached across party lines and brokered a deal with two parties from the center-right bloc, alongside longstanding allies the Greens. The result is a broad political church and a government with a decidedly more economically liberal flavor.
Sweden’s economic shift to the right—and the sway that the center-right bloc holds in parliament—was brought into sharp relief in December, when the 2019 budget proposal of the opposition Moderates and Christian Democrats was approved by parliament. It was classic fare, characterized by sweeping income tax cuts and extra spending on the police and defense.
To discuss what’s in store for the Swedish economy and politics going forward, we spoke to Olle Holmgren, chief Sweden strategist at SEB (OH), Chiara Silvestre, economist at Unicredit (CS), and Oscar Andersson, economist at Swedbank (OA).
How will the new administration’s economic policy differ from the previous administration’s?
OH: The parties in the government are the same as before, but during the previous term the government took the support from the left party. During the next 4 years the government is planning to co-operate with the center and liberal parties to get the budget through parliament which means that policy will be significantly more liberal/right wing (deregulation, tax cuts etc).
CS: With a mix of center-left and center-right policies and with Mr. Löfven being forced to concede tax cuts, deregulation and more labor market flexibility.
OA: The new administration, with support from the center-Liberal parties, will have more power to do structural reforms. The new policy will clearly be more right-wing (liberal) oriented. The January agreement (73 points agreement) is in my view rather expansionary and also includes some positive steps for important structural reforms. The aims are to increase productivity and potential growth in the long term.
How significant is the additional fiscal impulse announced in the 2019 budget?
OH: The right-wing budget that was accepted by parliament in December is estimated to include fiscal stimulus totaling 0.6-0.7% of GDP. The new government’s supplementary bill will add another tenth or more according to our expectations.
CS: About 0.6-0.7 percentage points of GDP.
Will the change in economic policy direction also change the stance of the Riksbank? Do you think the Riksbank is now likely to hike rates faster/further than before?
OH: The supplementary budget will not have any important implications. The fiscal expansion is expected to support growth, but the Riksbank continues to be mainly focused on inflation.
CS: No, it won’t. I think that only a strong and persistent acceleration of CPIF inflation is likely to change the stance of the Riksbank leading it to hike interest rates eventually faster than before.
OA: All in all, we think the new government and the January agreement is positive for the Riksbank. Structural reforms, slightly expansionary and green taxes that might help to push up CPI by 0.1-0.2 p.p.
Do you see the new government being stable, and/or lasting for its full four-year term?
OH: This government will be able to get the budget bills through parliament. The left party has said that it will raise a vote of no confidence if certain policies regarding market liberalization and reversal of reforms during the previous term are passed in parliament. Still, to vote down the government support is needed from right-wing parties including the Sweden Democrats. Given a chance the right-wing parties would probably bring down the government, but it seems unlikely the left party will give them the opportunity. A larger risk for the government is that the Liberals/Center parties and Social Democrats/Greens disagree on many of the important economic issues (market liberalization and taxes).
CS: I see the new government coalition as highly fragile, because it holds only 167 (of 349) seats in Parliament and lost the support of the Left Party whose influence has been totally excluded from the government coalition deal. The situation remains very uncertain and to survive, this center-right minority government is likely to be forced to concede tax cuts, deregulation and more labor market flexibility, all right-swing policies that are likely to be welcomed also by other parties which didn’t vote Mr. Löfven as PM.
OA: It’s an unproven agreement. For the time being the parties seems to be very keen to keep the agreement. But there will be three budget bills (besides four spring bills) so there will be a hard fight about reforms and fiscal room between the parties, particularly if budget development is not as good as expected.
How will the change in economic policy affect the krona going forward?
OH: The marginal impact from slightly more expansionary policy is judged to be small.
CS: It may help to reduce pressure on the SEK.
OA: The fact that Sweden finally has a Government and the contents of the January agreement (structural reforms and expansionary) are krona positive factors. We think the krona will strengthen gradually going forward.
5-year economic forecasts for 130+ countries & 30 commodities.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: January 25, 2019
TagsForexEuropean UnionBase Metals CommoditiesConsensus ForecastelectionEnergy CommoditiesInflationInfographicAsiaHealthcareUSACanadaTradeJapanMENAGDPBitcoinIMFSpainRussiaUkraineprecious metalsUnited KingdomHousing MarketCompany NewsFranceEconomic Growth (GDP)CryptocurrencyGermanyUnemployment rateBrazilAustraliaEuro AreaItalyEmerging MarketsUKVietnamOilGreeceAgricultural CommoditiesPrecious Metals CommoditiesTPPSub-Saharan AfricaMajor EconomiesIranTPSArgentinaSouth AfricaAfricaNordic EconomiesVenezuelaEconomic DebtChinaEurozoneG7InvestmentTurkeyBrexitPortugalBanking SectorMexicoOPECColombiaExchange Rateoil pricesIndiaLatin AmericaTunisiaAsian Financial CrisisCentral AmericaUnited StatesAseanEastern EuropeGoldCommodities
The cracks show in China's economy: July data on lending and industrial production point to ebbing momentum. Read… https://t.co/r4XycS8QkN
1 day ago
The U.S. labor market remained seemingly impervious to the escalating trade war, logging solid wage and payroll gai… https://t.co/ezTpMZwG7q
1 day ago
The meteoric rise of India & China: China is rapidly gaining ground on the U.S. and India will become the world’s 5… https://t.co/SRtpCyy6mx
1 day ago
Protests in Hong Kong hit activity: The private-sector PMI sank in July amid political and social instability. Rea… https://t.co/WsJv9m3FBo
1 day ago
PLATINIUM: Panelists expect prices to average USD 884 per troy ounce in Q4 2019 and USD 955 per troy ounce in Q4 20… https://t.co/5bFJyQLCGh
2 days ago