Economic pitfalls await next Swedish government

Stockholm

THE next Swedish government, whatever it may be, won't be wanting for economic hurdles.

And with the rise of the nationalist Sweden Democrats, the country is poised to emerge from Sunday's election in one of the most difficult parliamentary situations in the history of its democracy. The deadlock that could follow has investors, executives and economists worried that key tests will not be met.

The first hurdle to clear could be a recession. Sweden's economic expansion has now reached 20 consecutive quarters and is showing signs of cooling as production bumps up against capacity.

The next government should expect little help from the central bank in fighting off a downturn. Monetary policymakers are just now preparing to raise interest rates from a record low of minus 0.5 per cent. Their balance sheet is stuffed after they snapped up almost half of the Swedish government bond market over past few years to drive down longer rates.

Rising rates in themselves also present a challenge for the next government, whether Prime Minister Stefan Lofven gets renewed confidence or his main challenger, Moderate Party leader Ulf Kristersson, wins. Households have loaded up on debt amid years of record low borrowing costs and are vulnerable. Higher rates could also reignite declines in the housing market.

Bettina Kashefi, chief economist at Sweden's Confederation of Enterprise, the main business group, said that the country needs broader thinking on how to secure competitiveness and ensure that companies find skilled workers. Sweden is falling behind other developed countries if you look at gross domestic product per capita, she said.

"We're at the peak of an economic upturn, and we have an extremely weak krona, which means businesses are doing quite well as Swedish products then become cheap," she said. "But what happens when the economy weakens?" That sentiment is also echoed by the opposition, which wants to cut taxes and warns that the government has wasted the economic boom. Sweden has some of the highest marginal tax rates in the world after the current government raised them to pay for increased welfare services and integration of immigrants.

Talks on a broader tax reform, including on housing-related taxes, have gone nowhere over the past four years, though the government did lower corporate tax rates. Elisabeth Svantesson, the economic spokeswoman for the opposition Moderates, said that Sweden needs a productivity commission. "We need to figure out the causes of this decline, otherwise we'll have problems securing our welfare going forward," she said.

Housing also poses a key structural challenge. After decades of low construction rates, Sweden faces a housing shortage. That is particularly problematic in the capital, Stockholm, where many big companies rely on recruiting workers from abroad. BLOOMBERG