The economy is crashing – time to talk about it
Riksbank
It's time to talk about the Swedish stealth crash

Andreas Cervenka

Reporter and economic commentator

This is a commentary text. Analysis and positions are the writer's.

Updated 16.26 | Published 16.17
 

The Riksbank is cutting again, but despite a substantial interest rate decline this year, the Swedish economy refuses to lift.

Three and a half years without growth is more dramatic than it looks.

And it raises some difficult questions about the state of affairs in Sweden.

         

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Today, as expected, the Riksbank lowered the key interest rate from 2,75 to 2,5 percent. In May, the key interest rate was 4 percent, so it is a fairly large and rapid downward adjustment.

Four percent is not a high interest rate from a historical point of view, rather it can be categorized as normal.

In the US, the interest rate was lowered yesterday to 4.25–4.5 percent, but the American economy is doing well: GDP rose by 2.9 percent last year and is expected to have grown by a further 2.7 percent this year.

For Sweden, the corresponding interest rate level seems to be a complete setback for the economy.

The curve is instead a straight line

In its interest rate decision, the Riksbank states that the economy is still weak.

On Thursday, Finance Elisabeth Svantesson (M) was forced to lower her forecasts. As recently as last summer, the government believed in a GDP increase of 1.4 percent this year and 2.4 percent next year.

Now the turnaround is being pushed back once again. The Ministry of Finance expects GDP to grow by 0.6 percent this year and by 2 percent in 2025.

Elisabeth Svantesson also showed a diagram showing that Sweden's GDP is at about the same level as in mid-2021.

What should be a curve pointing upwards is instead a straight line.

The graph shows that even the euro area, which is burdened by Germany's poor performance, has performed stronger during the same period.

Minister of Finance Elisabeth Svantesson (M): Photo: Lars Schröder/TT

A crash in slow motion

Normally, when a recession hits, there are usually one or two really bad years with substantial GDP drops followed by a period where the economy bounces back up.

The financial crisis is a good example. In 2008 and 2009, Sweden's economy shrank by a total of just over 5 percent.

But then there was a rapid recovery and in 2011 GDP was already higher than in the starting position in 2007, before the crisis.

The sluggish development we have seen in recent years should be compared to what one would normally expect. Over the past fifty years or so, GDP in Sweden has grown by an average of two percent per year.

This means that the economy in normal conditions would be eight percentage points larger in four years. In other words, for the past three and a half years we have been at around zero. It is a crash in slow motion.

To make up for this loss and grow to catch up with the old curve, Sweden would need four consecutive years with GDP growth of 4 percent per year.

There are no signs of such an upturn.

One of the world's most heavily leveraged countries

The government predicts that GDP will rise by 2 percent in 2025, followed by 3 percent in 2026 and 2.5 percent in 2027. The Riksbank also believes in a slow and rather weak recovery.

This means that Sweden will live with the scars of this recession for a long time.

What is the reason for this? A stable tip is of course that Sweden is very sensitive to high interest rates because we have a lot of loans.

In terms of the private sector, we are one of the world's most heavily leveraged countries.

Now interest rates are on the way down again and then everything will be fine again.

Or?

A worrying thing about the Swedish economy is that it did not do particularly well even when interest rates were non-existent.

Erik Thedéen, Governor of the Riksbank. Photo: Anders Wiklund/TT

It drives up debt

Expressed as GDP per capita, which is actually the most relevant measure, average growth has been in the order of 0.7 percent per year between 2011 and 2024. During much of this period, the economy was heavily stimulated in the form of zero and negative interest rates, but also large support purchases by the Riksbank.

During the low-interest years, many economists warned that when the price of money is pushed down to extremely low levels, too much capital flows into speculation in financial assets. They skyrocket in value at the same time as investments are made in a lot of things that do not add much to the economy in the long term.

 

Over time, this reduces growth capacity.

It also drives up debt. Economic research shows that high borrowing often leads to more prolonged recessions.

During the years of low interest rates, enormous wealth was created in Sweden, not least in housing. But the, on average, record-high households have not increased their consumption in almost four years.

This should be talked about much more.

A kind of mental crash

Another possible explanation can be found in a diagram in the Riksbank's monetary policy report that was released in connection with the interest rate decision. It shows how much the economy has been fueled by politicians in the form of fiscal policy. The US stands out here, which is also highlighted by the Riksbank as an explanation for the high American growth.

Sweden stands out in the other direction, with a significantly tighter budget policy than in the US but also in the euro area.

The Swedish state has now accumulated larger financial reserves than perhaps at any time in modern Swedish history and in principle any other comparable country. So far, politicians have been very reluctant to use these to invest in order to boost long-term growth. This has left many economists in the country scratching their heads.

It's almost starting to resemble a kind of mental breakdown.