Sweden: the economy moved deeper into recession in 1992, and it is clear that this will be another tough year - Business Outlook Abroad: Current Reports From the Foreign Service

Business America, Feb 8, 1993

As 1993 began, Swedish economic activity was still weakening. Belated disinflationary measures and financial market unrest have aggravated the already serious effects of the international downturn, and unemployment is approaching "average" European levels. Gross domestic product is officially predicted to decline in 1993 for the third year in a row. Despite several agreements between the government and the Social Democratic opposition on measures to cut expenditures and raise taxes, which are depressing economic activity still further, a giant drain of foreign currency from the country forced the Central Bank to float the krona in mid-November. The fight against inflation and tight fiscal policy are the official watchwords of the day. It is clear that 1993 is going to be a very tough year indeed for Sweden, according to this report from U.S. Embassy in Stockholm.

During the course of 1992 the Swedish economy moved deeper and deeper into recession, and the prospect of any rapid recovery has faded. Faced with approaching integration into the European Community and the economic criteria which that development is demanding of it, Sweden is having to tighten its belt and pay the price for earlier economic policies. The result is the worst contraction since the depression years of the twenties and thirties. Moreover, all of the domestic policy adjustments are taking place under the worst possible external conditions for a small trade-dependent country--those of a worldwide downturn in economic activity.

The economic deterioration which took place in 1992 was very rapid. Official forecasts made in October 1991 indicated, for instance, that gross domestic product would grow by 0.3 percent in 1992 and by 1.9 percent in 1993. A year later those figures had been revised down to recession levels of -1.1 and -1.5 percent, respectively.

Since the business cycle reached its peak in early 1989, Swedish industrial production has fallen by almost 20 percent, and 7 percent of the country's industrial manufacturing capacity has been lost. The situation on the Swedish labor market is no less worrying. Unemployment has risen to levels which hardly anyone thought possible in 1991, with the government now forecasting open unemployment at 6.2 percent of the work force in 1993 and 7 percent in 1994. Since an estimated 5 percent of the work force will be occupied in retraining programs, relief work, etc., in those years, total unemployment will thus be in the region of 12 percent, by official and usually conservative estimates. Sweden, which not long since could pride itself on containing open unemployment to one or two percent, now finds itself in the general West European unemployment league. From 1990 to 1994 it seems that the work force will have declined by around 9 percent overall. Naturally, these developments are having a very negative effect on the government budget deficit, which, for the fiscal year ending mid-1993, is now expected to grow to the equivalent of around $27 billion, or more than 10 percent of estimated GDP.

The only truly positive signs manifest in the Swedish economy at the end of 1992 were, not surprisingly, record-low inflation of around 2 percent and the prospect of very low wage increases in 1993. However, market interest rates remain high relative to those elsewhere in Europe, and the real costs of raising loans have been a great impediment to investment. On the real estate front, prices continued to plummet, and finance institutions were, consequently, still plagued by heavy credit losses, though the government has now organized a general guarantee of the banking and finance system.

Compounding the overall situation was the turbulence in European financial markets in the fall of 1992. The Central Bank has had to go to extraordinary lengths to defend the currency against heavy speculation. For a brief period in mid-September, it raised the marginal rate it charges the commercial banks overnight to no less than 500 percent, and the right-center government backed this up with two confidence-building agreements with the Social Democratic opposition to restore stability to the economy.

The government/opposition "crisis package" measures, which have the support of 90 percent of the Parliament, are aimed at reducing the non-cyclical element of the budget deficit, at increasing revenues to finance labor market support, and at reducing employers' costs in order to stimulate business activity.

The politicians have agreed to reduce benefits in the following areas: sickness and work injury; pensions; child allowances; housing subsidies; vacation; defense; agriculture; development assistance; and refugee reception. In addition, employers' costs are being cut, and the value-added tax, personal income tax, and gasoline tax are all being raised.

The "crisis package" agreements will result in budget cuts totaling $3.5 billion in 1993, over and above cuts of a similar magnitude decided on earlier by the Bildt government. Nevertheless, the deficit in the consolidated public sector is still likely to increase to almost 10 percent of Swedish GDP in 1993. In other words, while the government is cutting expenditures and raising some taxes, the public sector deficit continues to increase because of depressed activity in an economy already in recession. An increasing number of analysts are saying that the government's efforts to cut the budget deficit are doing more harm than good to the overall Swedish economy.