The Mundus Take: Sweden’s economy holding up in the short term. How does the long-term look?

History was not ending, it was just buffering. As streaming recommences we shall see if Sweden’s future is to be as good as its past.

One of the pleasures of Mundus’ daily work is to listen and read thought-leaders work. During May, the number, variety and quality of webinars was impressive, giving us insights to reflect on Sweden’s future. Hence our tongue-in-cheek introduction, which draws inspiration from a famous Fukuyama book title.

In The End of History and the Last Man (1992), Francis Fukuyama argued that with the ascendancy of Western liberal democracy and the dissolution of the Soviet Union, humanity had reached “not just … the passing of a particular period of post-war history, but the end of history as such.”

The idea of history is something that future generations will consider worth studying about the past, as a time when things went very well or very badly, or when great change happened. Fukuyama’s book, written at the end of the Cold War, supposed that mankind had reached its political end state, with liberal-democratic government. At around the same time the Great Moderation of economic volatility became entrenched, reducing boom-and-busts in the economic cycle. With few economic or political disturbances for historians to review the book’s title implied that “history had ended”.

This era also coincided with the rollback of many of the elements of the socialistic economy in Sweden and a long economic upswing. However, the Financial Crisis, European Debt Crisis, Immigration Crisis, the forthcoming climate crisis and now the corona crisis seem to have bookended this calm period. History has re-emerged, and events are coming thicker and faster.

At a time of great change, history is determined both by the events and how leaders respond to the events. Of our period’s great events, on the Financial Crisis and climate crisis, Sweden has generally chosen a proactive position that history will probably be viewed positively. Arguably, history will be more critical of Sweden’s response to the immigration and corona crises. Nonetheless, our base case scenario is that the future will suit Sweden’s talents, although the risks that it won’t are high.

The economy is weak, but it is stable

The daily flow of information reported in Mundus News indicates that overall Sweden’s economy is doing OK, relative to other parts of the world (see the previous Mundus Take). Against all expectation, 1Q20 actually produced economic growth, and the latest bankruptcy numbers show that the first wave of the crisis has past. Sweden’s manufacturing industry has weathered the worst of the storm, and is now gearing to restart, a point confirmed by the latest Confidence Indicators published by the National Institute of Economic Research (NIER) this week. For some industries though, the situation is dire – especially retail, bars and restaurants and travel.

The Swedish Government (like many other governments) has invested huge amounts of GDP to keep people in jobs, with a result that while large numbers of employees have been furloughed, Swedish unemployment has only risen to 8.2%. If the recovery is V-shaped, most of those furloughed should soon return to their jobs. But, as Citi explained in a webinar hosted by AmCham Sweden in May, there is much that could go wrong, especially if export markets suffer greatly, or consumers don’t resume their spending once the restrictions are lifted.

Where is the economy heading over the long term?

Despite the evident risks in the short-term, this near future still feels more knowable than the longer term, where so much is at play. Mundus also listened in to key parts of a three day Global Boardroom online summit presented by the Financial Times. The line-up that the FT put together was outstanding, including to name just a few, Kristalina Georgieva, MD of the IMF, Angel Gurría, Secretary General of the OECD, Håkan Samuelsson, CEO of Volvo Cars, Brian Gilvary, Group CFO of BP, Michael O’Leary CEO of Ryanair, numerous partners from McKinsey, Al Gore and Tony Blair. Subjects ranged from the medical and financial response to the crisis, search for a vaccine to the future of work and climate change, which many predict as the next crisis.

An overarching theme over the three days was that corona speeds up much of what was already happening, from increasing digitisation of business to the reversal of fortunes for globalisation. This is the buffering that we referred to in the first paragraph.

The future of work was discussed in the broadest of contexts. Corona has clearly seen a huge step increase in the amount of remote working, but this does not necessarily spell the end for the office. After the crisis there will need to be a re-optimisation trying to get the balance right  for office vs home. As many have found, working from home is not a nirvana, and the office can be improved, for example, by giving people time back in their schedule, instead of back-to-back meetings and deliverables. Machines and automation are also going to have an increasing effect, as computers and robots support humans in getting jobs done.

The transport and energy industries were also predicting increased change. Teslas have been around for some time, but Håkan Samuelsson, CEO of Volvo, argued that electrification will go faster, with governments promoting the new technology, and corporates pushing new business models, such as loaning vehicles rather than owning them. He also predicted the relocation of significant amounts of manufacturing back to the US/EU.

BP’s Brian Gilvary spoke about the future of the energy industry. Despite the crash in oil prices, he said that BP’s policies will stay the same. “Everything gets driven by strategy, especially given our Net Zero target for 2050.” With this target, it means that BP is promising to become something that looks very different from a twentieth century oil company, drilling for oil and pumping diesel into cars. But what BP might look like 30 years from now is unclear.

A particularly startling comment came from Jesper Brodin of IKEA, who described the current times as “the most important decade in the history of mankind.” He said that humanity needed to choose between the old economy, or something new to replace it. In his view, morally and financially there was only way to go. IKEA has committed itself publicly to becoming 100% circular, so the company has credibility on this issue.

“This is the most important decade in the history of mankind.”

Jesper Brodin, IKEA

A conclusion from listening to these European business leaders is that they are steering their global corporations towards a radically different future. And an interesting point to note was that despite the Anglo-Saxon audience, Swedes were over-represented amongst the speakers.

It is relevant to speculate what could be pushing these tough-minded business leaders towards a radical future. One likely driver is shareholder activism, which would be particularly relevant in BP’s case. Another driver would surely be the politics of the EU, which is becoming progressively greener. And while the pace at which the EU had transitioned to date has left many environmentalists disappointed, the corona crisis could be the point at which a new level of green impetus is forced through. One sign of this is that beyond the recovery funding, jobs and healthcare, the Next Generation EU package put forward to EU27 countries includes two main social outcomes – the greening of the economy and more digital. Further, there are other major EU initiatives that aim to take the green transition further – including the European Green Deal and a new climate law proposed by the European Parliament that aims for a 65% reduction in CO2 by 2030.

A greener, digital and innovative economy plays to Sweden’s strengths

If this does happen, it should be good news for Sweden and Sweden’s economy.

Firstly, Sweden is regularly cited as a leading developed economy which has managed to generate sustainable GDP growth, while also lowering emissions. It is not coincidence that two of the companies invited to speak at the FT summit were Swedish. This reflects the social and cultural dynamic of Sweden, and Swedish multinationals have been studying what business models they can apply. Sweden is probably the only industrialised country with a set of roadmaps designed to transition the country’s industries to meet the Paris goals.

Secondly, Sweden is a leader in digitalisation. Successful Swedish companies include Ericsson, Skype and Spotify. Stockholm gave itself the title of unicorn factory, and while some of the gloss may have faded, Stockholm is still one of the most prominent tech hubs in Europe.

Thirdly, the Swedish economy is world class when it comes to innovation. It ranks consistently alongside Switzerland, Singapore, South Korea, the Netherlands, Israel and the USA at the top of the leader board.

Hence, a world which promotes green, digital and innovation should be a strong positive for Sweden’s economy. In addition, a relocation of supply chains back from the developing world to Europe would likely benefit Sweden, which retains a significant manufacturing sector.

There are of course many risks, which could hurt Sweden. The corona crisis could morph into something even more difficult to manage, and Sweden’s reputation could be damaged. Further disruption to global trade could result in Sweden losing its export dynamism. And it is possible that the green agenda may not be adopted outside of Europe – which, given the current focus of the USA, might make Sweden less competitive. But in a hotter climate case the Swedish economy would probably suffer less from global warming, being less prone to droughts and bushfires, and with agriculture likely to benefit from a milder climate.

Will it happen?

Of course, it might not happen. The risks above might prove to be impossible to solve. The EU might unravel further as an effective force.

Current indications are that Swedish companies are already making the change. A recent study published by the Swedish American Chamber of Commerce in New York (SACCNY) looked at how companies were responding to Covid-19. The first 4 findings related to the immediate business challenges. The fifth finding was that companies said that they were cooperating more with their peers. The sixth and seventh finding were that companies were massively upping their pace of digital transformation, both internally and externally.

The final insight was that companies were already “Adapting to the New Normal”, using lessons learned from COVID-19 in their response to future challenges. There was a need for increased agility and comfort with change, as well as heightened ability to proactively anticipate future global challenges. Surprisingly, only 4% of all respondents were limiting their innovation and R&D at this time. Instead, they spoke of accelerating or readjusting such efforts. Most notably, the threat of climate change was a recurring topic. “As we now seem to have lost momentum on the climate crisis transformation, we risk forgetting about the fundamental changes that still need to happen”, warned a senior-level executive.

Hence, our conclusion is that events will probably favour a set of factors that are good for Swedish companies and the economy. The companies themselves are already adjusting for it. If the current pace of events continues then we will soon see how right this view is.

Sean is responsible for Mundus’ strategy and commercial activities. He began his career in the oil industry Australia. After working internationally in commercial roles with BP in South Africa, the UK and Singapore he moved to Sweden with his family in 2009. He worked in business development and then as the Strategy and Growth Director for NASDAQ Commodities from 2009 to 2015. Sean holds an engineering degree from Adelaide University and an MBA from the Darden Business School at the University of Virginia.