Sweden's Economy Faces a ‘Beating’ With New Low-Growth Economy

  • Immigration restrictions could slow Swedish economic expansion
  • Economy also facing bottlenecks amid increasing taxes

Just a few years ago, the Swedish economy was likened to Pippi Longstocking -- the fictional girl who is so strong she can lift her own horse. 

That metaphor is now looking threadbare. The currency is in a near free fall and problems are mounting for one of its bellwether companies, network giant Ericsson AB. The country may find it increasingly difficult to fight gravity in a sclerotic world economy.

“Pippi Longstocking is about to get a beating,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “We’re about to normalize and slow down to a low-growth economy, and it won’t be fun.”

Fortunes may be turning for an economy that has largely been a winner from globalization, generating companies such as Spotify. Its openness to immigration has attracted labor to help fuel an expansion that has averaged more than twice the pace of the euro area.

Now, with protectionism on the rise and amid a groundswell of nationalism across Europe and the U.S., Sweden may find its recipe outdated. The country’s establishment parties are putting the breaks on immigration to beat back a surging far-right movement.

Growth Driver

For Anna Breman, chief economist at Swedbank AB, the new restrictions are bad news since an inflow of foreigners has been one of the main growth drivers. In the last decade, Sweden has created more than half a million jobs -- a formidable feat given Sweden’s 5 million workers. Two out of three new jobs have gone to immigrants.

“GDP wouldn’t have been even close to where it is today if it hadn’t been for those 350,000 people born abroad who have joined the labor market,” she said. Fewer immigrants means Sweden will have to rely on reversing slowing productivity to boost growth. And in that regard, Sweden is no better than anyone else, Breman said.

The authorities’ ability to stimulate is also far from what it once was. The central bank has little ammo left after cutting rates far below zero and unleashing a massive asset buying program to spark inflation. The government, meanwhile, is raising taxes, reversing several years of cuts that helped raise disposable incomes by 25 percent since 2006. The government is also forcing more homeowners to pay down their mortgages to coral a runaway property market fueled by a lack of housing.

Taking Steps

Finance Minister Magdalena Andersson says the government is not unaware of the challenges and is taking steps to boost growth. It’s investing in education and infrastructure, increasing public sector jobs and making it cheaper for firms to hire people who have been out of the labor market for an extended period of time.

“Sweden has a lot going for it,” including high population growth, beneficial demographics and a competitive industry, she said in an interview on Thursday in Stockholm. Low inflation and interest rates and high unemployment suggest there’s room for growth to pick up again after cooling over the next couple of years, she said.

The Organization for Economic Development and Cooperation -- which coined the Pippi Longstocking metaphor back in 2011-- still predicts growth will be almost twice as high next year as the average of its 35 member countries. SEB AB chief economist Robert Bergqvist, for his part, says concerns among foreign investors are exaggerated since the slowdown is mainly due to bottlenecks rather than weak demand.

Slowing Potential

They “ask themselves the question: Is Sweden already entering a period of weak growth when you have a main lending rate of minus 0.5 percent, a QE program, an undervalued krona and expansionary fiscal policy,” he said. “And then they start wondering what should Sweden do when things start to slow down? No-one really goes deep and thinks about what it is that’s slowing down the Swedish economy.”

Even so, Swedbank and Danske Bank are not as optimistic. They estimate that potential growth -- or growth consistent with stable inflation -- has fallen to just 1.5 percent as exports remain sluggish even as the krona has weakened to its lowest level against the euro in more than six years.

“It’s a sign that our competitiveness is not as good as we may have thought,” Danske’s Josefsson said.

For people like Spotify founder Martin Lorentzon, the best way to keep Sweden’s economy as strong as Pippi Longstocking is to address its housing shortage, improve its universities and avoid taxing entrepreneurs too much.

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