Sweden: economic activity is weakening rapidly as 1991 begins, and key indicators are pointing to tougher times ahead - includes related article on best sales prospects in Sweden - Business Outlook Abroad

Business America, Jan 14, 1991

SWEDEN

As 1991 began, activity in the Swedish economy was weakening rapidly and key indicators were telling an unambiguous tale of tougher times ahead. Orderbooks and the expectations of firms pointed to declining industrial production until at least mid-year 1991, with the added risk that imponderables such as the Middle East situation and disruption in Eastern Europe could prolong the downturn. The overheating which had affected large sectors of the Swedish labor market for several years was showing signs of cooling by the fall of 1990. Consequently unemployment, which until that time had been standing at the very low level of around 1-1.5 percent of the work force, began to increase; it is expected to rise to at least 3 percent by the end of 1991, a historically high level for Sweden.

The overheated labor market pushed average hourly wages up by around 10 percent in 1989. This, combined with the effects of financing a general tax reform, brought the 12-month inflation rate in the fall of 1990 up to no less than 11 percent, or well above the average of major competitor countries. Supplementary changes enacted to finance the tax reform will affect consumer prices in 1991 as well. Although the government hopes it can persuade labor and management to show general wage restraint in 1991 and hold the hourly average wage increase (including wage-drift) down to 4 percent, it is likelier that its more pessimistic alternative of 7 percent will prove to be closer to the mark. In this assumption, the 12-month inflation rate at the end of that year will stand at 9 percent, or still well above the average of competitor countries.

Overgenerous pay awards have cast a long shadow over Sweden's economy for decades (incomes during the 80s, for instance, rose by 66 percent but purchasing power by only 8 percent). Their bad effects, however, were masked by devaluations in the late 70s and early 80s, followed by a protracted international upswing, falling oil prices, a weakening dollar, and consequent weakening of the krona against other currencies (because of the construction of the currency "basket" against which the krona is valued). Most of these factors no longer apply, yet labor and management continue to reach inflationary wage settlements. (The Prime Minister noted in an address in mid-November 1990 that wage costs in Sweden had risen by 28-30 percent over the past three years but by only 14 percent in Germany and 15-17 percent in Denmark and Norway.) This cost problem has been augmented by poor development of productivity. According to official sources, productivity in Swedish industry in the last three years rose by a total of 4.5 percent, compared with 11.5 percent in the OECD area as a whole.

Approximately five times as large as incoming investment, Swedish outgoing investment, oiled by deregulation of foreign exchange controls, has increased sharply in recent years. In current prices, outgoing investment doubled between 1987 and 1989 (from US$0.6 billion to $1.3 billion). Purchases of foreign real estate, which are included in these figures, have also increased sharply in recent years. In 1987 they represented 2.7 percent of Swedish investment abroad. By 1989 the proportion had risen to 18.2 percent and in the first half of 1990 to as much as 24.4 percent.

The lion's share of outgoing Swedish investment is being made in the EC countries. The increase noted over the past few years may in part have been due to a fear among Swedish businessmen that the country could be left out in the peripheral cold of European integration, but the magnetic pull of the integration process itself, "Europhoria," and, not least, deregulation of Swedish foreign exchange controls, have doubtless contributed to this development. The Federation of Swedish Industries noted in late 1990 that 25 of Sweden's largest corporations had more employees engaged in production abroad than they had in Sweden. What may stem this tide is a recent turnaround in official Social Democratic attitudes to membership in the European Community (see below).

Sweden's balance on current account is also deteriorating, from a deficit of 0.4 percent of GDP in 1988 to an estimated 3 percent in 1990 and 3.5 percent in 1991. While some of this is being caused by a weakening trade balance exacerbated by increased oil prices, part of the deterioration is the result of rising deficits in the net yield on capital and in tourism payments.

In all, the negative trends reduced Sweden's GDP growth from just over 2 percent in 1989 to just under an estimated 1 percent in 1990, and, unless unprecedented wage restraint is forthcoming, Swedish GDP growth may actually decline in 1991.

When this bleak outlook elicited no firm changes in economic policy by the government nor any sign of radical reduction in pay awards, rumors of impending devaluation began to circulate in the fall of 1990 and investors fled the krona, bleeding the country of foreign exchange at an alarming rate. This forced the Central Bank to intervene in the money market and to raise interest rates by five percentage points before currency flows were reversed.