Sweden is one of the most important economies in the world, despite having a relatively small population. Even though it’s a member of the European Union, the country uses its own currency – the Swedish krona, which allows for full control over monetary policy and adaptation to current situations on currency markets. Although many countries aspire to reach a similar standard of living to Sweden, the country has not avoided similar problems that have affected the rest of Europe, both socially and economically. As we can see, being a technological leader in Europe, maintaining a highly social policy and controlling its own monetary policy is not enough to avoid problems associated with participation in the global economy.
Swedish Economy
The Swedish economy is an example of a well-functioning social democratic model. Her success is based on several pillars: innovation, especially in the technological sectors, a highly skilled workforce, an extensive social care system, and sustainable development. Openness to international trade and strong trade unions also play a key role. This model, although it has evolved over time, is still based on a balance between the market and the state. However, like any economy, Sweden also faces challenges such as an aging population and climate change.
Thanks to its approach to social policy, Sweden encourages risk-taking and innovation. This is why we have companies like Volvo, Saab, many defense companies, as well as globally recognized technology companies such as Spotify, Skype, Viaplay, and also the older generation of technology companies like Ericsson.
Is it really so good? Swedish economy slows down
In 2023, Sweden’s GDP was almost $600 billion, which per individual was about $55,000 nominally, ranking 16th in the world. According to purchasing power parity, it was around $65,000. Although it lacks the record levels of Luxembourg or Norway, Sweden still ranks among the world’s strongest economies.
From another perspective, the economy has been stalling for some time. The economy seems to be declining every other quarter, indicating a lack of a clear trend. In the first quarter of this year, GDP grew by 0.8% quarterly, while in the second quarter it was a decrease by 0.3% QoQ. Although we still observe growth on a yearly basis and expect around 1% growth for the whole of 2024, it should be noted that the Swedish economy has decreased in 2023.
In Sweden, more and more companies are declaring bankruptcy. Analyzing data from June, nearly 6,000 companies declared bankruptcy, an increase of nearly 40% compared to the same period the previous year. Fewer companies undoubtedly mean a decrease in the number of jobs, and a high unemployment rate is a significant problem in Sweden.
After the first resurgence after the initial hit of the pandemic, the Swedish economy lapsed into stagnation. A similar situation occurred after 2012. Source: Bloomberg Finance LP, XTB
Looking at the moods among entrepreneurs, the situation in Sweden does not seem bad. Is the problem related to something else then? What’s happening on the labor market? Source: Bloomberg Finance LP, XTB
Massive unemployment
The situation on the labor market in Sweden is quite challenging. The unemployment rate dropped to 7.9% for August, but in June it dangerously approached the 10% level. The adjusted unemployment rate is stable at 8.3%, fluctuating between 8.2% and 8.6% for half a year. The last time this country saw double-digit unemployment was in 2021. It should be noted that the unemployment rate in Sweden is one of the highest in the European Union countries. Although the unemployment rate does not deviate significantly from the 10-year average, its high level is associated with weak assimilation of immigrants. The unemployment rate among non-native people is around 17%. High unemployment is also visible among people with a lower level of education. Of course, considering the decrease in interest rates in recent times, this may stimulate the economy to generate new jobs, but the problem of unemployment in this case may be more structural, which the strength of economy might struggle to fix.
The seasonal unemployment rate has dropped slightly for August, but it remains at an elevated level. Source: Bloomberg Finance LP, XTB
Interest Rates
The Riksbank (Sweden’s Central Bank) assesses that the Swedish economy is in a "mild recession". The Riksbank has decided this year to start interest rate cuts and will be doing it more quickly than many other central banks in the world, or primarily in Europe. The Riksbank has decided on twice cuts in the interest rates this year, both 25 basis points: May and August. The main rate has therefore dropped from 4% to 3.5%. The Riksbank indicates that two or three interest rate cuts are likely this year. However, it should be remembered that Sweden was among those countries where unconventional monetary action was taken in the years 2015-2019 in the form of negative interest rates or asset purchases. This allowed for a fairly stable economic situation at the time, but at the same time led to a massive weakening of the Swedish krona.
Despite interest rate cuts in Sweden, their level still seems restrictive looking at inflation. This determines, probably, pressure for further cuts. Source: Bloomberg Finance LP, XTB
Will the krona undergo a further downward pressure?
High inflation in Sweden is no longer a problem. A more significant issue is definitely the economy and labor market. However, a too weak krona might also not be the Riksbank’s goal. The EURSEK pair grew in 2023 to almost 12. The last time the krona was so weak was in 2009. EURSEK is relatively low, considering the past few months and slightly higher than at the beginning of this year. It may turn out that the SEK may not enjoy its recent strength for long. Interest rate cuts in Sweden can be stronger than in the euro zone, and rates in Sweden may drop below the deposit rate in the euro area. This, in turn, may lead to pressure to sell the krona. Of course, it doesn’t have to happen, but then the economy would have to start responding to the cuts and bounce back stronger from the entire euro zone. This may be difficult to achieve given the current high unemployment rate, strong social policy, and global geopolitical problems related to, among others, the war between Russia and Ukraine.
It’s worth remembering that Sweden, like all of Scandinavia, is considered a fairly expensive country, but looking from a three-year perspective, the Swedish krona weakened against the Polish zloty by over 17%. Over the years, we have gotten used to that for the Swedish krona we paid around 45 groszy (cents). Now it’s already below 38 groszy, and it cannot be excluded that it will be even cheaper. Right before the financial crisis of 2007, we paid less than 35 groszy for the crown, and at the beginning of the 90s, it was closer to 20-30 groszy. If the economic and monetary situation does not begin to support the krona in a larger degree, we cannot rule out that in Sweden, for popular meatballs, we will pay from the perspective of the Polish zloty a dozen or even several dozen percent less than now.
Conclusion
Sweden faces a series of problems, mainly internal, though naturally related to the global economic and geopolitical situation. Higher interest rates in Sweden compared to the eurozone led to an appreciation of the SEK compared to the EURSEK highs in 2023, but the prospects of further interest rate cuts by Riksbank in relation to the interest rates in the eurozone may not necessarily bode well for the Swedish krona. Of course, if the economy performs better, which is not excluded given the significant share of the defense sector, then further SEK appreciation and strengthening the image of the economy and currency on the international stage will be possible.
Author: XTB Analysis Department
Source: https://ceo.com.pl/szwedzka-gospodarka-lider-technologiczny-zmagajacy-sie-z-rosnacymi-wyzwaniami-81280
