Sweden Politics August 2018

Sweden

Sweden: Elections likely to result in a fragmented parliament; unlikely to significantly dent economic momentum

August 22, 2018

Parliamentary elections on 9 September will likely lead to a divided parliament, making the formation of a strong government and the passage of meaningful legislation difficult. Nevertheless, the outcome of the elections should have little impact on economic growth, which is expected to remain robust. In addition, fiscal policy will likely stay prudent going forward and monetary policy should be unaffected.

The center-right Moderate Party, the right-wing Sweden Democrats (SD) and the center-left Social Democratic Party (SDP)—which currently heads a minority government with the support of the Greens—are the three parties with a realistic chance of winning the elections. However, even if the Sweden Democrats were to top the polls, they would struggle to form a government seeing as other political parties would be unlikely to back them.

Regarding economic policy, the Moderate Party has promised tax cuts for low- and middle-income earners, the elderly and certain public-sector workers. In contrast, the SDP has explicitly stated that tax cuts are not a priority, and instead promises an extra SEK 30 billion of investment in welfare. However, despite this more expansionary fiscal stance, the SDP would still maintain a strong fiscal position, as has been the case throughout the current legislative period. The SD has placed much greater emphasis on immigration and crime policy, two issues that have become key battlegrounds of the election campaign. Their proposal for a planned referendum on EU membership is likely to generate the most economic uncertainty; however, at the current juncture such a referendum lacks sufficient backing in parliament to go ahead.

Several different governments could be formed post-election, although all are likely to lack an absolute majority in parliament. The first option is a renewal of the current center-left minority coalition headed by the SDP, with the Alliance—a grouping of four center-right parties, including the Moderate Party—continuing to allow the passage of key financial legislation. The second option would be the exact opposite; a center-right minority government led by the Moderate Party, with left-of-center groupings providing a constructive opposition. A third possibility is a Moderate Party minority government supported in some form by the Sweden Democrats. The SD would demand a tightening of immigration and crime policy in exchange, although center-right groups such as the Centre Party and the Liberals would be unlikely to support such an arrangement. The fourth combination would be a grand coalition between the SDP and the Moderate Party. This is an unlikely pairing, however, due to ideological differences and the potential political backlash in both parties.

Economists at Danske Bank predict a combination of the second and third options: “There seem to be no viable majority alternatives. […] Most likely there will be a minority right-wing government, which will seek support from both SD and the left-green bloc depending on the question.” Jessica Hinds, European Economist at Capital Economics, holds a similar view: “A minority centre-right “Alliance” government is the most likely outcome. Granted, the Alliance is split on accepting a tie-up with the Sweden Democrats. But it might ultimately do so after the election. And since the Sweden Democrats are more likely to prop up the centre-right than the centre-left, a minority Alliance government has a better chance of passing a Budget.” According to Oscar Andersson, an economist at Swedbank, “A minority government with one or a couple of parties is the most likely outcome with some support regarding the budget from other parties in the Riksdag. But it might be an unstable government and an uncertain four years term.”

Whatever the political stripes of the next administration, the government-formation process may be long, which according to analysts at ING could “lead to at least a short-term political risk premium being priced into the krona”. In addition, potential short-term political instability could dampen business confidence to a degree, although the impact on the economy should be minimal.

Looking further ahead, despite a possible weak minority government, the economy will remain competitive and should continue to perform well relative to the EU average, supported by solid growth in private consumption and exports. In addition, fiscal policy should remain measured, supporting a continued reduction in the public-debt-to-GDP ratio. Regarding monetary policy, the outcome of the election is unlikely to cause the Riksbank to significantly change its stance or alter the planned tightening over the next few years.


Author:, Economist

Sample Report

Looking for forecasts related to Politics in Sweden? Download a sample report now.

Download




Sweden Economic News

More news

Search form