Sweden’s economic recovery gathered pace in 1Q21, in line with our view that output will return to and then surpass pre-pandemic levels in 2021, Fitch Ratings says. Covid-19 still presents risks to growth, but Sweden has fiscal flexibility to increase support for the economy if needed.
Real GDP grew by 1.1% qoq despite movement restrictions introduced in December due to rising Covid-19 cases. Sweden has absorbed the pandemic shock relatively well due to high domestic savings, a sound government balance sheet and a strong banking sector.
Government measures and less stringent restrictions than in most European peers have further supported the economy, with non-essential businesses remaining open. The 2.8% real GDP contraction in 2020 was among the smallest in the EU.
Nevertheless, Sweden’s unemployment rate rose to 9.5% in March from 6.6% a year earlier (according to Eurostat), a much larger increase than in Denmark (1.1pp), Finland (0.8pp), and Norway (1.4pp). The pandemic has not significantly affected Sweden’s high labour market participation rate (a feature of Scandinavian economies), but there has been a large decline in temporary employment, particularly in the hospitality sector. Part-time and temporary employment was 37.6% of total employment in Sweden in 2019 compared with the EU average of 34.8%.
The rise in job vacancies, to 117,619 in February from a low of 56,610 in August according to the Swedish Public Employment Service, shows that labour market prospects are improving. However, structural issues, including a large share of foreign and young workers, and skills mismatches, suggest a potential lag between the economic recovery and the decline in headline unemployment, which we expect to remain above pre-pandemic levels this year at 8.5%, before gradually declining.
The government’s Spring Amending Budget on 15 April increased spending support for the labour market – to help tackle long-term unemployment and improve job-matching services – and businesses affected by the pandemic, as well as healthcare, education, and green initiatives.
Various budget amendments in recent months, including the Spring Budget, amounting to SEK121 billion (2.4% of 2020 GDP) will add to expenditure of SEK105 billion (2.2% of GDP) already outlined in the 2021 Budget Bill approved in November.
In maintaining an accommodative fiscal stance to support economic growth, the government projects a fiscal deficit of 4.5% of GDP in 2021, from 3.1% in 2020. In Fitch’s opinion, Sweden has fiscal flexibility to accommodate increased expenditure, which is one factor supporting its ‘AAA’ rating. Sweden’s general government debt, at 39.9% of GDP (2020), is significantly lower than the EU average (90.7%) and below the current median of ‘AAA’ rated sovereigns (46.5%).
A record of fiscal prudence, underpinned by a sound fiscal framework that targets a headline fiscal surplus of 0.33% of GDP over a business cycle, gives us confidence the authorities will adopt deficit-reduction measures once the pandemic shock subsides. We forecast general government debt to peak at close to 40% of GDP this year, before declining to 39.1% in 2022.
Fitch forecasts the Swedish economy to expand by 3.5% in 2021. This compares to the government’s 3.2% forecast in the Spring Fiscal Policy Bill. The recovery will benefit both from fiscal support and an expansionary monetary stance, as the Riksbank continues its asset purchasing programme and has left the main repo rate at 0%.
We expect the economic recovery this year to be largely domestically driven, and therefore dependent on vaccination progress. The government set an original target to offer vaccinations to all adults by end-1H21, but supply delays mean only 28% of adults had received their first dose, and 10% of adults were fully vaccinated, as of 1 May. The government now expects to offer all adults at least one vaccination shot by early September.
