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  Assessment and Recommendations

  The Swedish economy has now started to recover from the relatively brief but sharp slowdown in 2001 in which growth decelerated to 1¼ per cent. The main factors behind the weakening were the slowdown of global demand in general and for telecommunication goods and services in particular, together with waning consumer confidence, prompted by the unwinding of the stock market bubble. These elements aside, macroeconomic conditions generally remained buoyant, thanks to sizeable gains in household disposable income, low interest rates, moderately increasing house prices and a weak exchange rate. Combined with the turnaround in consumer sentiment and world trade around the beginning of the year, these factors have elicited a pick-up in consumption and exports, while investment remained subdued early this year. Sweden is entering the incipient upturn in a generally healthy condition, albeit with underlying inflation well above the target rate of 2 per cent, and with robust surpluses on the government and current accounts, although private saving is relatively low.

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  Recent Developments and Prospects for the Near Term

  The Swedish economy slowed significantly in 2001. At 1¼ per cent, the expansion of output was well below its estimated potential rate of 2¼ to 2½ per cent. Decelerating from a growth rate in excess of 3½ per cent in 2000, the slowdown was more pronounced than in the euro area. Private consumption had already slowed markedly around mid-2000, and remained subdued throughout 2001. Weaker consumer confidence, driven mainly by the bursting of the stock market bubble, was important in this context. The slowing of global demand subsequently acted as a significant further brake on activity, not least because of Sweden’s specialisation in information and communication technology (ICT) goods and services. These factors aside, the macroeconomic environment has remained supportive of growth. Fiscal and monetary policies remained expansionary, while increasing house prices and a sizeable exchange rate depreciation also injected stimulus. Notwithstanding some levelling out of late, consumer and business confidence have rebounded since late 2001. Evidence that a recovery is underway has now spread to various indicators of demand and output, including exports, industrial production and retail sales. The 2001 slowdown was accompanied by a cyclical decline in productivity growth, but the pace of employment gains also abated considerably, especially when measured by hours worked (Figure 1). The unemployment rate ceased falling, but it has not risen as it has done elsewhere, and it remains below the OECD’s estimate of its structural level. Thus, with unemployment currently at 4 per cent of the labour force, Sweden is entering the recovery with a relatively tight labour market.

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  Macroeconomic Policies

  Macroeconomic policy settings have been highly supportive of growth. Discretionary fiscal easing amounts to 1¾ per cent of GDP in 2002, following a similar stimulus last year. Nominal interest rates remained low in 2001, pushing real rates down to very low levels during the course of the year as inflation picked up and the effective exchange rate depreciated by 8 per cent compared with 2000. However, the decline in equity prices probably significantly reduced the impact of low interest rates and the depreciation on overall financial conditions and, therefore, on output. Thus far this year, monetary conditions have reversed somewhat, as the currency appreciated until the spring and interest rates have risen.

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  Enhancing the Effectiveness of Public Expenditure

  The Swedish welfare state comprises a fine-mesh social insurance safety net, along with the provision of a broad range of free or almost free public services. This inevitably implies extensive public outlays and a considerable amount of redistribution of income and consumption. Despite the economic burden that these choices impose on the tax-paying public (see Chapter IV), this broad approach seems to enjoy widespread support. Nevertheless, given the challenges facing the country (see Box 4), it is necessary to consider what changes to the institutional framework governing public expenditures and to the design of public policies might help to ease the stress arising from financing the welfare state in the future.

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  Raising Sweden's Economic Capacity

  Momentum for structural reforms to further improve Sweden’s economic performance seems to have slackened. To some extent, there may be some reform fatigue following the wide range of policy changes that have already been enacted since the economic crisis of the early 1990s. The growth rate of annual total factor productivity had risen by around ½ percentage point by the end of the 1990s, boosting potential output growth. A pick-up too in the rate of expansion of the capital stock and trend labour force participation can be partly attributed to liberalisation of product and capital markets, along with greater flexibility in labour markets as a result of earlier efforts to free up the economy. However, the exceptionally strong and ultimately unsustainable rates of economic expansion of the late 1990s may have led to a degree of complacency about the need for further efforts to address the various aspects of the economy that still do not function particularly well. Addressing these shortcomings will help the nation to face more effectively the impact of demographics on future living standards.

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  Annexes
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