Sweden - Business Outlook Abroad

Business America, July 16, 1990

SWEDEN

The Overheated Economy is Beginning to Cool Down, But Not Before Reawakening Interest in U.S. Products The Swedish economy is beginning to wind down after several years of operating at high speed. Swedish firms, with profits remaining high, continue to work at peak capacity. Unemployment stands at a paltry 1.5 percent of the work force, shortages of skilled labor are in evidence in many sectors, and inflation continues strong. Some dampening of business activity is expected during the course of 1990 and unemployment is likely to rise. The country's planned dismantling of nuclear power plants and its ever-growing responsiveness to environmental considerations could well provide opportunities for U.S. exporters of energy-producing and energy-conserving equipment, in addition to the staple U.S. high-technology and high-quality products already in much demand in this small but discriminating market. The United States is the preferred long-haul destination for the travel-minded Swedes. This report was filed by the U.S. Embassy in Stockholm.

After having enjoyed several successful years in the mid-1980s, Sweden is facing considerable economic difficulties which became increasingly evident in 1989 and the early part of 1990.

Chief among the problems are soaring prices and costs, which among other things are creating problems for the sectors of the economy exposed to competition. Resource utilization in the Swedish economy was high in 1989 and the production capacity of firms is strained to the limit. In this sense the economy is overheated, and prices and costs are rising much more than in competitor countries. Despite a sharp rise in the supply of labor, there are manpower shortages in many sectors and regions.

A second problem is low growth in general. Gross domestic product grew by just under 2 percent in 1989, which is remarkably little in view of the fact that the number of hours worked rose by around 1.5 percent. Economic growth is hampered by slow productivity growth. Personal saving is negative and the balance on current accounts showing rising deficits.

The economic stage darkened still further for Sweden in the early months of 1990. Activity in the industrial sector weakened and exports flagged, while domestic demand developed relatively strongly with an unabated surge in import growth. In addition, wage costs and domestic market prices continued to rise rapidly. The Swedish labor market was in a state of unrest in late 1989 and early 1990, with a number of key sectors on strike for more pay (a nationwide strike and lockout at the commercial banks, for instance, brought a halt to all their operations for three weeks in February). Oil prices and other import prices rose markedly, while export prices exhibited a stagnating trend. The balance on current account deteriorated still further. These developments are matters of serious concern to the government.

The problems were compounded in February when the minority Social Democratic Government attempted to introduce an economic restraint package containing measures distasteful to all opposition parties. The package was rejected by Parliament, whereupon the government resigned and the finance minister retired from politics. In the ensuing economic hiatus, the Central Bank intervened in the money market to raise interest rates enough to stem an outflow of currency and strengthen the krona against speculation. The Social Democratic minority government with a new finance minister and deputy finance minister was then reinstated in office without an intervening election.

A revised and politically more palatable package of economic measures was placed before Parliament. It included a temporary freeze on prices and rents, a freeze on municipal taxes in 1991, a hike in spot taxes on alcohol and tobacco, and effective January 1991 the payment by employers for the first two weeks of sick leave (previously the responsibility of the national health insurance authority).

The government hopes it can restrain pay increases in 1991, when income taxes will again be reduced, to well below the 10 percent average increase won for 1990. Various steps are being taken to improve the supply of labor.

The stabilization of the dollar has already led to an improvement in the price competitiveness of U.S. products and awakened an increased interest among Swedish buyers in the United States as a potential supplier of price-sensitive products in addition to the hightech products which Sweden has been buying from the United States in recent years. U.S. figures show a surge of 16 percent in U.S. exports to Sweden in 1989 to $3.1 billion, while U.S. imports from Sweden decreased 2.1 percent to $4.9 billion.

Although U.S. firms can not be expected to match this rate on a sustained basis, Sweden should remain an interesting market for U.S. exporters. The following markets offer excellent export opportunities.

Computers and Related ADP Equipment. This market reached around $2.5 billion in 1989 and is expected to grow by 15 percent a year. Of particular interest are add-on input/output equipment, networks, and graphics. The Swedish software market also offers good prospects. The personal computer applications software market was estimated at $85 million in 1989. It is believed that this market, together with the systems software market, will increase on the average 15-20 percent per annum during the next three years.