VZCZCXYZ0000
PP RUEHWEB

DE RUEHSM #0734/01 3280644
ZNR UUUUU ZZH
P 240644Z NOV 09
FM AMEMBASSY STOCKHOLM
TO RUEHC/SECSTATE WASHDC PRIORITY 4929
RUEATRS/DEPT TREASURY WASHDC PRIORITY
INFO RUEHBS/USEU BRUSSELS
RUEHCP/AMEMBASSY COPENHAGEN 3212
RUEHHE/AMEMBASSY HELSINKI 0353
RUEHTL/AMEMBASSY TALLINN 0008
RUEHRA/AMEMBASSY RIGA 0875
RUEHVL/AMEMBASSY VILNIUS 2022

UNCLAS STOCKHOLM 000734 
 
TREASURY FOR DAVID WEINER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV PREL SW
SUBJECT: Sweden's Economic Outlook Improves, But Problems Remain 
 
REF:  A) STOCKHOLM 714 
B) STOCKHOLM 570 
C) STOCKHOLM 446 
 
 
¶1.  (U) Summary: Sweden's economy continues to recover.  Although 
still in recession, the 2009 fall in GDP is projected to be less at 
4.6 percent.  Unemployment will peak earlier than expected, and at a 
slightly lower level of 10.7 percent. Finance Ministry projections 
remain somewhat more negative than Central Bank and other forecasts. 
 The Swedish Federation of Enterprise notes that improvement in the 
overall economic outlook masks the continued dire situation for 
Sweden's leading industries.  Somewhat surprisingly, median income 
and housing prices have grown, despite the recession.  Although the 
Federation does not expect a housing bubble, it predicts that 
structural failings will keep youth unemployment high even as 
overall employment starts to recover in 2010.  The Federation hopes 
the current recession will spark much needed reforms for small 
businesses, but is not optimistic that strong labor unions will 
allow reforms needed to foster youth employment.  End Summary 
 
 
Third Quarter Numbers Looking Less Grim for Sweden 
--------- ----------- ---------- ----- -------- -- 
 
¶2.  (U) Third quarter results show continued improvement in Sweden's 
economic outlook, or at least a less grim picture than earlier in 
2009 when GDP fell 6.5 percent during the first quarter and 2009 GDP 
was projected to fall close to 6 percent by some estimates.  The 
Central Bank now predicts GDP will fall 4.6 percent for the year. 
Other estimates (see table below) range from 4.3 to 5.2 percent 
negative growth.  Forecasts presented in November are notably more 
optimistic than forecasts from August. 
 
¶3.  (U) According to the Central Bank, the economy is predicted to 
grow 2.0 percent in 2010, and 3.4 percent in 2011.  Unemployment had 
been predicted to peak in 2011 at 11 percent, but is now predicted 
to peak at the start of 2010 at 10.7 percent.  Employment will not 
grow until 2012, however. 
 
Finance Minister Criticized for Being Overly Negative 
---- -------- -------- ----- -------- ------- ------ 
 
¶4.  (U) Finance Minister Anders Borg has been criticized by the 
political opposition for presenting overly pessimistic forecasts to 
the Parliament in the Budget Bill presented in September (Ref A). 
He had expected the economy to contract 5.2 percent 2009, grow by 
0.6 in 2010 and 3.1 in 2011 respectively. He projected unemployment 
to reach as high as 11.4 in 2010, and 11.6 percent in 2011.  His 
Finance Ministry's projections were more pessimistic than those by 
other leading forecasters at the time. (See chart below) 
 
¶5. (U) While the Finance Ministry has not yet issued revised 
projections, in a public statement November 9   Borg describes 
Sweden's economic situation, as "troublesome but (perhaps) under 
control".  He noted that Sweden has avoided a depression and a 
banking crisis, and public finances are stable and on a reasonable 
footing.  Over the course of the whole financial crisis, Borg 
predicted unemployment will fall by 250,000 - compared to 500,000 
jobs lost during Sweden's domestic banking crisis in the early 
nineties. 
 
Other Economic Indicators Looking Up 
--- ------- -------- -------- -- --- 
 
¶6.  (U) Other economic indicators are turning more positive.  The 
Stockholm Stock Exchange Index has risen around 46 percent this 
year. Sweden's "Purchase Executives Index" (equivalent to the U.S. 
Institute for Supply Management Manufacturing Index) has gone above 
the critical 50 mark -- indicating growth in Sweden.  An index above 
50 indicates increased economic activity compared to the month 
before.  The index measures demand across Sweden, based on monthly 
surveys of procurement and purchasing managers in manufacturing. 
This index shows a stronger value than in the rest of the European 
Union area, and the United States. The Consumer Confidence Indicator 
is also showing a positive value, and is stronger than the EU and 
the U.S. 
 
¶7.  (U) Although the decline in exports has been drastic, the rate 
of export orders is now picking up significantly. Unemployment 
continues to rise, but at a slower pace.  The rate of advanced 
notices of firings has slowed, but is still above normal levels. 
Budget Deficit Will Naturally Decline 
------ ------ ------ ----- ----- ---- 
 
¶8.  (U) The fiscal stimulus has led Sweden from stable budget 
surpluses well above European averages to a deficit of 3 percent of 
GDP in 2010. Sweden's strong automatic stabilizers will bring the 
economy back toward budget surplus as the economy recovers. 
Moreover, Sweden has a Parliament-set budget target that seeks to 
generate a public sector surplus of 2 percent of GDP over the course 
of a business cycle. 
 
¶9. (U) The budget deficit for 2009 is somewhat smaller than 
expected, because tax revenues on income and VAT have been greater 
than expected, as has revenue from corporate taxes; while 
expenditure on unemployment benefits have been smaller than 
expected. 
 
 
More Optimistic Numbers Mask Pain For Swedish Industry 
-------- --------- ---------- ------- ----- ---- ----- 
 
¶10. (U) On November 12, Econoff discussed the latest figures with 
Stefan Folster, Chief Economist for the Confederation of Swedish 
Enterprise.  He said the more optimistic numbers mask the 
seriousness of Sweden's recession.  True, there is recovery, but it 
is from very low levels and economic performance will not reach 
pre-crisis levels until 2012.  He said traditional industry is 
performing just as bad as predicted, not yet showing signs of 
improvement.  So far, there have not been repercussions in the 
commercial property market, although there have been a few 
bankruptcies in that sector. 
 
¶11. (U) Folster said the situation is particularly "dire" for 
Sweden's leading firms, which depend on exports of investment goods 
- the type of exports that are slow to recover after a global 
economic downturn.  For example, he noted, Scania Trucks production 
numbers have improved by 1 to 2 percent, but the firm's production 
level is 30% of what it was pre-crisis. 
 
¶12.  (U) Folster predicted that demand for Swedish exports will grow 
3 percent in 2010, which is half of its long term growth rate.  He 
believes export growth will be more normal in 2011, but industrial 
production will remain far below capacity. 
 
¶13.  (U) While some observers told Econoff that major Swedish firms 
were squeezing their suppliers, Folster did not see many cases of 
that. Instead, he said large firms like Scania and Volvo were 
strategically working with suppliers to keep going, even helping 
some financially strapped suppliers re-organize with new owners. 
 
¶14.  (U) The problem he saw was that banks have been restricting 
lending in order to consolidate their balance sheets.  So, customers 
for companies like Scania were originally unable to borrow money to 
buy trucks.  Now that lending has eased a bit, these firms do not 
want the trucks and other investment goods because their own 
business has declined. 
 
Households Doing Absurdly Well 
------- ----- ----- ----- ---- 
 
¶15.  (U) Households are faring much better than companies, Folster 
continued, if they have work.  It's actually "absurd" that median 
income has risen 5 percent this year, at the same time GDP fell 5 
percent.  The rise in median income, he explained, was due to wage 
increases negotiated three years ago, before the crisis, and to 
lower inflation, tax cuts on earned income (Ref A), and record-low 
interest rates for mortgages. 
 
Solid Household Income Supporting the Economy 
-------- -- ------ ------- ---- ---- -------- 
 
¶16.  (U) Folster noted that two-thirds of this increased household 
income has been saved, which is a higher savings rate than seen for 
decades. He predicted that this high level of savings would lead to 
a fairly rapid rise in household spending giving Sweden a rapid 
recovery from the recession once employment started to rise.  The 
regular Swedish pattern, he said, is for household savings to 
provide momentum for a faster recovery after a crisis.  Household 
spending was already improving. 
 
¶17.  (U) Despite increased savings, Folster said the government's 
tax cuts for lower wage earners and low interest rates have kept 
consumption levels reasonable, so retail trade "is doing alright," 
which is better than expected. 
 
Fiscal Stimulus To Be Kept Long Enough to Avoid a Second Downturn 
----- --------- -------- ----- ----- ------- ---- ------ 
 
¶18.  (U) Folster said there was some risk of a second economic 
downturn if the fiscal stimulus were withdrawn too quickly. And, 
there was a risk that too large a stimulus kept too long could fuel 
the next bubble. 
 
¶19.  (U) Finance Minister Borg is well aware of this dilemma. 
Following the G-20 in Pittsburgh he told the Swedish press that "it 
is much worse to remove stimulus measures to soon than to keep them 
too long,"  and that he expected the gigantic stimulus measures 
injected into the world economy will remain for "a good while 
longer."  The official assessment of Sweden's governing coalition is 
that Sweden's stimulus measures are expected to remain two more 
years, although many of the measures including deficit spending will 
phase out naturally as the economy recovers. 
 
 
 
High Youth Unemployment To Remain After Economic Recovery 
---- ----- ------- ------ ----- -- -------- ---- -------- 
 
¶20.  (U) Folster has written extensively about youth unemployment. 
His writings echo concerns voiced by Finance Minister Borg that the 
current crisis risks exacerbating long term unemployment, especially 
for the young.  Folster told Econoff that youth unemployment is 
"very high" at 28 percent of people age 18-25 active in the labor 
market. Ten percent of these unemployed youth are seeking jobs while 
studying.  But, there are an additional 10 percent of 18-25 year 
olds not counted as unemployed only because they are not studying 
and not actively seeking employment. 
 
¶21.  Even amid a recession, Folster explained, firms in Sweden are 
having trouble finding experienced employees, but are reluctant to 
employ young, inexperienced people.  Sweden could thus have 
persistent high unemployment and a labor shortage.  He noted that 
youth unemployment stems from structural problems. It was also high 
in 2004-2006, a period of strong economic growth in Sweden. The 
problem, he said, was that unions are reluctant to allow lower wages 
or apprentice programs; and employment protection rules force firms 
to fire the young first. 
 
¶23. (U) The rigidity of Sweden's labor market is a drag on the 
economy.  Folster said that interest rates in Sweden tend to be 
unnecessarily high because if the economy worked better, young 
people would fill gaps in the labor market and Sweden would have the 
same level of economic activity for the interest rate. 
 
Housing Prices Will Fall, But Not Collapse 
----- ----- ----- ----- ----- ----- ----- 
 
¶24.  (U) Folster says there is a risk of inflation once Sweden comes 
out of recession, but confidence is high that the Central Bank will 
control inflation even as the economy returns to its pre-crisis 
production capacity.  The Central Bank has publicly stated that 
although it plans to hold to hold its record-low 0.25 percent 
benchmark rate until the autumn of 2010, it will then raise interest 
rates toward a more normal level of 4 percent. 
 
¶25.  (U) Regarding questions about whether Sweden risked a housing 
bubble, Folster said there was no chance of a bubble because there 
are not many speculative buyers in the housing market. Housing 
prices will fall when interest rates rise, but they will not 
collapse. 
 
¶26.  (U) Folster said "it is quite amazing" that after an initial 
slight drop housing prices have risen amid Sweden's recession. 
Although the Central Bank has had to publicly defend its low 
benchmark rate against concerns of a housing bubble, Folster said 
interest rates have only a short term effect, the real problem was a 
constant housing shortage caused by the bureaucratic hassle inherent 
in building new housing, especially on the vast tracts of unused 
land around Stockholm. Problems included over-regulation, especially 
strict environmental regulations, and the ease at which numerous 
parties could provoke years of legal delays via the courts to 
challenge new projects. 
 
Recession Could Bring Needed Economic Reforms 
-------  --- --- ------- -   -----  --------- 
 
¶27. (U) Despite his view that the current outlook for Swedish 
industry is not as rosy as the picture for the overall economy, 
Folster was optimistic for the long run because "downturns do some 
good" for Sweden by leading to structural changes that promote high 
productivity growth.  He praised the current government's reforms of 
sick leave and early retirement rules.  He noted that with 500,000 
people on early retirement, however, it will take a decade to shrink 
the numbers enough to reduce the drain on the economy.  He said 
government income tax cuts have not only supported household 
consumption, but have made work more attractive keeping people in 
the work force. 
 
¶28.  (U) Of course, he said, the Swedish Federation of Enterprise 
would like to see more reforms. The government has yet to make it 
attractive enough to start new businesses.  The problem was not so 
much the regulatory burden of starting a business, but the 
regulatory and tax burden of running a small business.  He explained 
that unlike most countries in Europe, Sweden did not have easier 
regulations for small businesses because of labor market regulations 
and strong unions.  Small firms pay higher taxes than elsewhere in 
Europe and are hurt by over regulation.  One example was the 
requirement to pay taxes in advance, which is very difficult for any 
new business, especially a small one. 
 
 
Comparing the Finance Ministry's With Other Forecasts 
----- ------ ------ ------ ----- ----- ----- ----- --- 
 
FM:  Finance Ministry 
CB:  Central Bank 
LRC:  Local Regional Councils 
HUI: a business research organization 
KI:  National Research Institute 
SB:  Swedbank 
SEB: SEB Bank 
NOR: Nordea Bank 
 
 
The Most Recent Forecasts Have Become More Positive 
---- ------ ----- ----- ---- ---- ---- ---- ----- -- 
 
     FM  CB  LRC  HUI 
Date Forecast Made  Sept 09 Oct 09 Oct 09 Sept 09 
 
2009 Forecast 
 
GDP     -5.2  -4.6  -4.3  -4.5 
Household Cons   -1.8  -0.7  -0.9  -1.0 
Public Cons    1.2   1.5   1.7   1.0 
Gross Invs   -16.6  -17.3 -17.4    -15.0 
Stock Contrb. to GDP -0.7  -1.4  -1.2   0.0 
Exports    -15.3 -12.8 -12.6    -14.0 
Imports    -16.1 -15.0 -15.2    -13.5 
 
Ratio 
Industry production  -18.6 ----  ----  ---- 
Salaries    3.1  3.8  3.4  ---- 
CPI, year avg.   -0.4  -0.4  -0.2  -0.3 
Disposable Income  0.6  ----  0.4  2.5 
Unemployment   8.9  8.5  8.5  8.6 
Current Acct Balance 7.2  7.6  ----  ---- 
Public budget surplus -2.1  -2.2  ----  ---- 
 
 
 
All Along, Finance Ministry Largely the Most Pessimistic 
----- ------ ------- ------ ------- ----- ------ --- --- 
 
     KI  SB  SEB  NOR      Aug 09 Oct 09 Sept09 Sept 09 
2009 Forecast 
 
GDP     -5.0   -4.6  -5.0  -4.2 
Household Cons   -1.5    -0.9  -2.0  -0.7 
Public Cons    1.0     1.5    1.0   0.9 
Gross Invs.       -16.2 -14.0 -14.0    -16.0 
Stock Contrb. to GDP -0.8  -1.1  -1.0  -0.8 
Exports    -14.7   -13.8 -13.3    -13.5 
Imports    -15.7  -14.6 -13.7    -15.1 
 
Ratio 
 
Industrial production -19.2     -13.2     -19.0      ---Salaries 
 3.2    3.0       3.3      3.1 
CPI, year avg.    -0.2      -0.2    -0.2     -0.3 
Disposable Income    0.2    0.5    1.4     ---- 
Unemployment     8.8    8.9      8.4     8.6 
Current Acct Balance   6.7    7.1     6.5     6.9 
Public budget surplus  -2.3      -2.3      -2.6    -2.2 
 
 
Looking into the Future, 2010 
---------------------------- 
 
     FM  CB  LRC  HUI 
Date Forecast Made  Sept 09 Oct 09 Oct 09 Sept 09 
 
2010 Forecast 
GDP     0.6  2.5  2.7  1.5 
Household Cons   1.2  2.0  2.0  2.0 
Public Cons   1.1  0.6  0.9  1.0 
Gross Invs.   -6.6  -1.8  -2.6  -2.0 
Stock Contrb. to GDP 0.4  1.1  0.8  0.0 
Exports    2.2  4.6  4.3  3.0 
Imports    1.3  4.1  2.3  2.0 
 
Ratio 
 
Industrial production 3.1  ----  ----  ---- 
Salaries    2.0  2.1  2.3  ---- 
CPI, year avg.   0.4  0.9  1.0  1.2 
Disposable Income  1.2  ----  0.9  0.7 
Unemployment   11.4  10.3  10.7  10.8 
Current Acct Balance 7.1  7.7  ----  ---- 
Public budget surplus -3.5  -2.5  ----  ---- 
 
 
2010 Forecasts, Continued 
------ ------ ----- ----- 
 
     KI  SB  SEB  NOR      Aug 09 Oct 09 Sept 09 Sept09 
2010 Forecast 
 
GDP     1.5   1.5    2.0   2.8 
Household Cons   2.2   1.7   1.5  2.5 
Public Cons   1.0   1.3   1.0  1.1 
Gross Invs.       -4.0  -3.5  -3.0  -5.3 
Stock Contrb. to GDP 0.4   0.3    0.3  0.8 
Exports    3.1   3.3    5.4  6.3 
Imports    2.7   2.1    3.5  4.1 
 
Ratio 
 
Industrial production 4.3   3.5    4.0  ----Salaries    2.0   2.0 
1.9  2.3 
CPI, year avg.   0.6     1.0    1.6   1.6 
Disposable Income  0.1   1.2    1.2  ---- 
Unemployment   11.4     10.7   10.5  10.2 
Current Acct Balance 6.4    6.7    6.0   7.4 
Public budget surplus -3.5  -3.2   -4.0   -3.6 
 
 
Looking Into the Future, 2011 
------ ----- ----- ----- ---- 
 
     FM  CB  LRC  HUI 
Date Forecast Made  Sept 09 Oct 09 Oct 09  Sept09 
 
2011 Forecast 
GDP     3.1  3.4  2.5  ---- 
Household Cons   3.0  2.1  2.8  ---- 
Public Cons.   -0.3  0.6  0.9  ---- 
Gross Invs.   4.0  5.7  4.2  ---- 
Stock Contrb. to GDP 0.4  0.2  0.3  ---- 
Exports    6.7  7.3  4.8  ---- 
Imports    6.2  6.2  6.0  ---- 
 
Ratio 
 
Industry production  7.0  ----  ----  ---- 
Salaries    1.9  2.6  2.3  ---- 
CPI, year avg.   0.8  3.3  1.3  ---- 
Disposable Income  1.2  ----  1.7  ---- 
Unemployment   11.6  10.3  10.6  ---- 
Current Acct Balance 7.4  8.3  ----  ---- 
Public budget surplus -2.1  -1.0  ----  ---- 
 
 
2011 Forecasts, Continued 
---- ----- ----- ----- --- 
     KI  SB  SEB  NOR      Aug 09 Oct 09 Sept 09  Sep09 
 
2011 Forecast 
 
GDP     2.9   2.3  2.6   2.0 
Household Cons   3.0    2.2  2.0   2.0 
Public Cons.   0.4   0.4  1.0  0.7 
Gross Invs.   4.3   2.9  4.0   3.2 
Stock Contrb. to GDP 0.2       0.3       0.2       0.0 
Exports    5.7       5.2       6.9       4.0 
Imports    5.6       5.1       6.9       4.0 
 
Ratio 
 
Industrial production 6.3       5.5       7.0       ---- 
Salaries    2.1       2.0       2.3       2.5 
CPI, year avg.   1.6       1.9       2.1       1.9 
Disposable Income  2.8       1.6       1.9       ---- 
Unemployment       11.8      11.6      8.1       9.9 
Current Acct Balance 6.7       7.2       5.5       8.4 
Public budget surplus -3.5      -2.8      -3.9      -2.6