Sweden’s economy underwent a number of changes in 2018. A long period of growth suddenly showed signs of coming to an end. The Riksbank’s 7-year-streak of a falling repo rate also ended towards the end of the year, with the rate moved from -0.50 to -0.25 per cent. Sweden also became more aware of its dependency on the surrounding world, as the ghost of a no-deal Brexit came to appear all the more real, with Theresa May’s postponement of the Parliamentary vote on her Brexit deal. Trump’s tariff-threats against the EU and the rest of the world also contributed to this renewed awareness. Finally, analysts are still awaiting the full effects of the Financial Supervisory Authority’s decision to implement a sharpened amortisation requirement in the beginning of 2018. Some figures suggest that this is putting a cap on the crucial​ investment volumes that ​are driving Sweden’s growth, as a result of which 2019 may come to deliver clear signs of an emerging Swedish recession.

Sweden’s economy showed signs of shrinking in 2018

For Swedes, 2018 is likely to become known as the year when Sweden’s economy ended its 5-year growth boom. Sweden’s GDP fell (by 0.2 per cent) in the third quarter compared to the second quarter, which has not occurred since the second quarter of 2013. The driving forces behind this development is “a downturn in both household consumption and household investment, according to Nordea’s Head of Analysis.” Household consumption decreased by 1.0 per cent compared to the previous quarter, whereas public consumption remained unchanged and exports rose slightly by 0.3 per cent. According to Statistics Sweden, the increased exports figure should be seen in the light of a decrease in import volumes by 0.6 per cent. In fact, Sweden’s exports have faced a negative trend in most years since 2010, despite the Swedish krona’s substantial weakening against the dollar and euro during the same period.

The downturn of the Swedish economy was also a product of international trade-tensions, which unfolded gradually throughout the year. When Finance Minister Magdalena Andersson (S) revised the Löfven government’s growth prognosis downwards in June, she emphasised the negative impact of international trade woes on Sweden. At the time, she was about to participate in a meeting of the EU’s Finance Ministers, where the trade war with the United States was on the agenda. Since then, President Trump has continued to threaten to impose 25 per cent import tariffs on all cars, trucks and auto parts entering the United States. Despite the fact that this threat was enough to make the President of the European Commission, Jean-Claude Juncker, agree to negotiate the EU’s trade relations with the United States, Trump has still left it hanging.

In December, Sweden also broke an a 7-year monetary policy trend, when the Riksbank hiked the rate for the first time in 7 years. The shift followed 2017, a year when consumers and firms were optimistic and unemployment decreased in an extremely low interest rate-environment. The rate had been locked at -0.50 for almost 3 years. Directors were nonetheless uncertain about the change, and at one point it looked like they would not hike the rate at all in 2018. The rise was scheduled for the summer, but then it was re-scheduled for the end of the year. Inflation finally reached the 2 per cent target but was helped by a strong krona and the ECB’s continued expansionary monetary policy.

2018 was also the year when the Financial Supervisory Authority’s (Finansinspektionen) sharpened amortisation requirement was implemented. Households with a new mortgage exceeding annual income by 4.5 times have to pay off the new mortgage even faster than the initial amortisation requirement demanded. It has yet to be seen whether this policy has been successful in stifling the dangerous long-term trend of rising housing prices that Sweden has experienced in recent years. However, it is nonetheless an important event that is likely to be used to guide future policy decisions.

Statistics from the housing website, Hemnet, demonstrate that the latest amortisation requirement is having a much bigger impact that the first one that was implemented in 2016. Following an initial drop in the number of apartment sales in 2016, sales quickly recovered, continuing as if nothing had happened throughout 2017. But, in March 2018 this was brought to a halt. As the year comes to an end, the market has not recovered from the drop in apartment sales that followed in the wake of the implementation of the new sharpened amortisation requirement. New properties were particularly affected, with statistics showing that the prices on these dropped by 10 per cent nationwide throughout June, July and August, compared to the same period in 2017. And Stockholm suffered the most, registering 22 per cent lower prices.

These effects have had dire consequences for property developers specialising in building new properties. One example was Oscar Properties, which is well known for having launched some very high profile projects in Stockholm in recent years. The sales of these apartments have not gone as smoothly as expected, which is causing the construction of the new properties to stall. This, in turn, has led to some buyers suing the property developer for being unable to move into their new homes at the time specified in the contracts, demanding the right to cancel their purchases entirely.

Erik Thedéen, Head of the Financial Supervisory Authority, is nonetheless pleased with how the sharpened requirement has impacted Sweden’s housing market. His critics have suggested that the sharpened requirement is excessive, considering the fact that the first requirement caused prices on properties to drop drastically in 2017, from about SEK 75,000 per square meter to about 67,000 in Stockholm, a year after it was implemented. To this Thedéen has said that “we introduced the sharpened requirement in order to insure ourselves against a development in the wrong direction. Our specific targets were those households with very high amounts of debt.”

Thedéen’s detractors, such as SBAB Bank’s Chief Economist, Robert Boije, have responded by saying that his policies are shutting younger people out of the housing ladder. According to the Boije’s calculations, people looking to buy 1-room apartments now have to amortise substantially more compared to a couple of years ago. For example, if one compares amortisation amounts in Jönköping in 2012 and 2018 for such apartments, the difference is SEK 773 per month. But, in Gothenburg and Stockholm, the difference is SEK 2,800 and 3,600 respectively. Similarly, when the sharpened requirement is combined with the requirements imposed by banks (e.g. being able to repay loans at a 7 per cent interest rate), the average three-room apartment now requires a couple to have a total income of SEK 67,000 before tax, which contrasts radically with the SEK 37,200 needed to sustain such an apartment with no amortisation requirement and the current standard commercial mortgage rate of 1.5 per cent.

Thedéen does not dispute these calculations, but he denies that his policies are the problem. According to the Financial Supervisory Authority’s own calculations, only 14 per cent of households are affected by the sharpened requirement. Furthermore, whereas the original requirement affected far more households (approximately 50 per cent), the real issue is the rapid housing price increase. According to Thedéen, this is the variable that explains why younger people are getting excluded from the housing market. The amortisation requirement is not.

It remains to be seen how the sharpened requirement will affect housing prices. It is a fact that it had a much more significant impact on sales volumes than the previous requirement, despite allegedly only affecting some 14 per cent of househ​olds. It is also worth emphasising that it took the previous requirement about a year to impact prices, in which case the effects should become visible sometime around March 2019.

Stockholm’s economy is threatened by no-deal Brexit

Stockholm faces several challenging trends, some of which have grown more threatening throughout 2018. For one, Stockholm’s GRP (gross regional product) was 0.9 per cent last year, below the national average of 2.1 per cent. The capital falling has not fallen behind the national average since 2010. According to Andreas Hatzigeorgiou, CEO of the Stockholm Chamber of Commerce, these statistics pose a serious problem. He is particularly concerned that the next government has yet to be decided upon, since he believes that this is liable to exacerbate the effects. Hatzigeorgiou is also worried about the effects of Brexit on Stockholm and Sweden. The failure of Theresa May to gain parliamentary backing for her Brexit plan, resulting in the vote being postponed until January, has caused worries that Britain is now inching closer to a no-deal Brexit. This is a shift in attitude that has only grown prominent in the latter half of 2018, as Theresa May has repeatedly travelled back and forth between Brussels to no avail. Hatzigeorgiou has commented on how “the EU has been very clear that this is the only viable deal and that no further delays to implementing the divorce. Theresa May’s claim that a vote on her deal would be rejected by Parliament therefore increases the risk of a hard Brexit.” Hatzigeorgiou says that a no-deal Brexit would cost Sweden 8,200 jobs, which would have a notable effect on the country’s economy. According to an analysis of how a no-deal Brexit would affect Sweden, which was carried out by Oxford Economics on behalf of the Chamber of Commerce, it would cost Swedish GDP SEK 18 billion over 2 years. Stockholm would lose 2,100 of these jobs.

Besides Stockholm, other regional economies across Sweden have also shown signs of significant change in 2018. Skåne, in southern Sweden, has experienced a serious wave of layoffs. Multinational pharmaceutical company Baxter is cutting 360 staff, and packaging giant Tetra Pak is cutting another 150, whilst Sony and British ARM are dismissing 200 and 50 workers as well. On top of this, iconic Swedish company IKEA has flagged that it will lay remove 650 positions across Sweden, approximately 500 of which are located in Skåne.33 Following the wave of layoffs, the Minister for Enterprise, Mikael Damberg (S), assembled a special crisis commission whose task will be to investigate Skåne’s employment market.

An anxious year awaits in 2019

Next year will no doubt be defined by how many of the issues discussed above come to unfold; the Riksbank’s future interest rate changes, Sweden’s growth figures, the fallout of the FSA’s sharpened amortisation requirement, Trump’s trade wars with the EU and beyond, as well as Brexit.

The Riksbank has not scheduled to hike the rate further until the second half of 2019, at which point it will stand at zero. It will take until 2021 for it to reach 1 per cent. However, as was clearly seen in 2018, this is a fragile plan that could easily change depending on how Sweden’s economy develops.

According to the National Institute of Economic Research’s last report on the Swedish economy for the year, 2019 will see a continued decline in the kinds of investments that are driving Sweden’s growth. To a large extent, growth in 2018 was fuelled by strong demand for new housing and housing investment climbed to historically high levels at the beginning of the year. Since then, housing investment has decreased partly due to housing prices falling. Although housing prices now seem to have bottomed out, there is a not insignificant risk of further decreases. In that event, housing investment will probably fall even further than projected, NIER concludes.

With a meeker housing market development and a rising Riksbank repo rate, Swedish banks have tougher times ahead of them. Profits will take a hit as both the mortgage and credit markets will come to experience impeded growth. Since the big bank profits are often aligned with Sweden’s GDP development, this provides a further clue as to what kind of economic development Sweden will experience in 2019.

Note: This is a shortened version of the original article, which was published in the January 2019 edition of the Monthly Policy Review. Footnotes, infograms and graphs are only available in the subscriber version of this article.