Mundus Brief – May 2021

Last month we quoted economist Kjell A. Nordström, who made the analogy between the Swedish economy and motor racing: “Sweden has built a technological Ferrari that so far has only been driven at 20 km/hour … now the Ferrari has had to stretch out and proved to work very well.” We continued the metaphor, adding that the Ferrari seemed to perform pretty well around the corona curves, but asked will it gun it down the straight? The answer to that question now appears to be emerging. As the wintry mists evaporated and the terrain levelled out the economy has stepped up a gear. A quick glance at the dashboard shows that things are going well across most areas. The flash indicator of GDP suggests that Sweden’s economy grew by 1.1% in the first quarter, returning to pre-pandemic levels. By comparison, Germany’s GDP fell by 1.7%, and the eurozone as a whole fell by 0.6%. Judged by forward looking views of economic health things are going to get even better. The April Economic Tendency Indicator was at its highest level in more than a decade, having risen from 60 last April to 113 a year later. Reinforcing this picture is the manufacturing PMI, which rose to 69, its second highest reading ever. It is not just strength in manufacturing that is contributing to the feel-good factor, retail too is beginning to feel confident, with its indicator up 18 points on rising expectations for sales volume in the coming month. Meanwhile the consumer confidence indicator climbed 6 points to 103, the highest figure recorded since September 2018.

So, the economic engines are racing, but does that mean that the car is performing? As we reported in Mundus Business Insights, the inflation rate of 1.9% suggests that for the moment, the engine is not overheating. But, we caution that this measure only looks at the price of goods and services. A look at asset price inflation gives a completely different picture. The price of houses in suburban Stockholm rose 4.6% in April, and over the last year, prices have increased by around 25% in many Swedish regions. On the Stockholm Stock Exchange the value of its main index, the OMXS30 has risen from 1521 to 2255 over the last year – that’s up nearly 50%. Admittedly that is measured from the nadir of the pandemic scare, but the index is still up by nearly 20% in comparison with its pre-pandemic peak.

Consequently, even if the engine isn’t currently running too hot, the experts are starting to wonder if it will. Annika Winsth, Nordea’s Chief Economist warned, “The Swedish economy is very strong. We see how house prices are rising, households have strong economies and very low interest rates. At the same time, we have not been able to spend money and that contributes to asset inflation, which means risks.” 

Why doesn’t the Riksbank start to increase the interest rate? The challenge reveals the weak point in Sweden’s economic model. Unemployment is running at 9%, a combination of the hit taken by job generating industries such as hospitality during the pandemic, with the structural problem that Sweden has with integrating those with a skills mismatch for the technocratic labour market. 

Job, Jobs, Jobs

In addition to being a personal tragedy for those stuck in long-term unemployment, it  explains why in describing the spring budget, Finance Minister Magdalena Andersson said “there are three issues that permeate the Government’s policy, it is jobs, jobs and jobs.” The May edition of the Monthly Policy Review analyses the budget from the perspective not only of the “jobs, jobs, jobs” focus, but also pandemic support for businesses, and looks at commitments made to the finance of the healthcare sector, security and the supposed “green restart”. The political problem for the Löfven Government is its promise that Sweden would have the lowest unemployment rate in Europe. This was promised by the Social Democrats (S) 8 years ago, but the lofty goal has never been in sight. In fact, unemployment has gone up under Löfven, and given that Sweden now has the fifth worst unemployment in the EU27.

Politic omens treacherous for the Government

The tectonic plates have been slowly shifting since Sweden’s 2018 election. The initial realignment split the Liberals (L) and Centre Party (C) off from their old Alliance partners – the Moderates (M) and Christian Democrats (KD). That left the right’s only option being to find a way to dance with the far-right Sweden Democrats (SD). With that new alliance cemented the right-wing grouping has been able to split the Liberals away as a Government support party. In pure percentage terms there are now two equal blocks S+C+MP (Greens, with support from the Left Party) and M+KD+L (supported by SD), both of which attract around 39% of voters each. But, nothing can be taken for granted as MP, L and KD all risk falling out of the Riksdag at the election. If their votes then get reallocated elsewhere, it could completely change the picture. The ruling Social Democrats need to reinvigorate their base support amongst union members by growing jobs, while at the same time they deliver on their commitments under the January Agreement and try to hold together their partnership with the Greens. This is not a completely impossible mission, but it is not at all easy, which perhaps explains why political observers say that the Prime Minister is looking tired and distracted.

What about being the first fossil-fuel free welfare state?

What we left out of Löfven’s equation to hold on to power was his other big promise, made in 2015, that Sweden would become the first industrial nation to go fossil-free. We have chosen to omit this because based upon the policy actions that the Government has presented, the Government’s commitment to the goal is questionable. Three recent pieces of news underline the point. The most newsworthy was a meeting between Löfven and Greta Thunberg, after which Thunberg stated bluntly that Sweden had given up on meeting its 1.5°C goal, leaving Löfven to try to defend his record. The second, was a debate article, published in Dagens Nyheter by Svante Axelsson, Coordinator for Fossil-free Sweden, in which he tabled his proposals for five major investments for Sweden to continue with its transition. Although radical in their departure from the status quo, we believe that the ideas are generally sensible steps for a roadmap that seeks to deliver climate neutrality (see Mundus Nordic Green News for more coverage). They include;

  • A green investment bank
  • Financial instruments to reduce the risk of investments
  • Large-scale education and skills development
  • Tripling investment in power lines
  • Investments in hydrogen pipelines

The challenge for Axelsson (and the Löfven administration) is that rather than the proposals being presented as a Government initiative, they are beginning to sound like a complaint from the opposition. In his article, Axelsson, who is a Government appointed investigator, identifies that the businesses [that he is speaking to] “are impatient”, for fear of missing out on [some the best] business opportunities of this generation. The brackets are our insertion, but we think that the complaint is clear. Many other major economies are now mobilising on climate, whilst policy action in Sweden focuses on jobs. This point is also made by two Wallenberg cousins who manage the investments of Sweden’s most wealthy family. In an interview, Marcus Wallenberg said that “The climate situation is serious and we must re-prioritise in a number of areas. Among other things, we must work with the infrastructure in an intelligent way …”, whilst Jacob’s view was even more direct: ”Sweden is underinvested in infrastructure in all areas, aviation, trains, shipping, roads. As a nation, we need a vision of what we want in the future. Investment is needed, but also a common political line.”

Forests, forests, forests

Meanwhile, elsewhere in environmental policy, the issue of forests has been thrust upon the Government, via a culmination of several forces. For millennia, forests have been a silent resource for Swedes to tend to and harvest. Different eras have used them to build ships and houses, and then as society industrialised to make pulp and paper. For over a decade it has been the dream of some entrepreneurs to use forests as a bio feedstock to generate power and make biofuels and bio-chemicals. But a group of European activists sees that the forests have a higher calling – carbon sequestration and nature preservation. As part of the January Agreement, the Centre Party pushed for an investigation on forests that would give economic certainty for its rural support base, many of whom are owners of forests. This Inquiry tabled its findings late last year, but the outcome has been far from a happy compromise. Instead, different stakeholders are competing vigorously in order to have their opinion heard. Our lead story in the May Monthly Policy Review looks at Sweden’s “Green Gold”.  

Strategic Autonomy

The final story in the Monthly Policy Review considers what Sweden’s opinion is of the relatively new concept of strategic autonomy. A phrase first coined in 2013 in relation to the EU’s Common Security and Defence Policy became far more relevant as Europe began to fathom the cultural divide opening up with the Trump Administration at the same time as Europe labelled China a systemic rival. But, as Hans Dahlgren, the Swedish Minister for EU Affairs puts it, “I have so far not met anyone… who can give a clear and agreed definition of what this concept of strategic autonomy really means.” Given the lack of clarity on the entire agenda, Mundus reads the tea leaves to see if Sweden’s objectives are any clearer. Part of the answer is defence and security, but it also appears to lead back to the quest for green and digital transitions, which for the Government is another way of saying it is looking for opportunities for its exporters.

Returning to the Swedish economy, there are two competing visions for Sweden’s future. Post pandemic, a jobs, jobs, jobs focus looks at how the unemployed can be gotten into work quickly – hopefully before the next election. The alternative investment focus would look at what Sweden needs to do to make a rapid transformation to a greener society and greener export industries. It’s not obvious that these two visions conflict with each other, after all the investment will also provide jobs. But it is apparently a question of where Ministers put political focus and how political capital is spent in a race that is getting more and more challenging for the Löfven administration.