March 31, 2010Sweden Economyby EW World Economy Team

Sweden Economy

Sweden is a developed, Nordic European nation with an economy focused heavily on export trade. Timber, hydropower, and iron ore are the nation's chief resources, while motor vehicles, telecommunications, pharmaceuticals, industrial machines, precision equipment, chemical goods, home goods and appliances, forestry, iron, and steel are its chief manufactured goods.

Sweden has a mixed economy with some privatization—about five percent—but populated predominantly with privately owned companies—90 percent. The nation has one of the largest and most well developed welfare systems in the world, but it is financed through remarkably high taxes. This extremely high taxing system, designed to redistribute wealth more evenly among the population via social programs, is sometimes called the Nordic Model.

Economic History

Sweden was a largely agrarian nation, with some focus on fishing and timber throughout much of its history. Beginning in the 19th century, Sweden began a slow process of industrialization. The nation was largely impoverished as the industrial revolution began, consequently when workers began receiving higher wages at factory jobs; many used the additional funds to leave the country in a mass exodus. By the middle of the 19th century, however, economic reforms and increased wages saw the development of a more modern system of economic management that the nation still enjoys to this day.

By the 1930s, Sweden had improved to a level that a 1938 issue of Life Magazine called the "world's highest standard of living." Sweden declared itself neutral during both World Wars; thus, unlike most of its European neighbors, Sweden had no need to rebuild its infrastructure or economic base post-war, giving it an enormous leg up heading into the middle of the 20th century. The postwar boom propelled Sweden to even greater economic prosperity, taking the country all the way to third place in per capita GDP rankings in 1970.

Unfortunately, the 1990s were not kind to the Swedish economy. In the 1980s, Sweden experienced a real estate and financial bubble that burst in the early 1990s. This led to the worst economic crisis in Sweden since the 1930s. A run on currency in 1992 even led to the central bank briefly raising interest rates by 500% in an unsuccessful attempt to preserve the Swedish currency's fixed exchange rate. A number of changes to economic policy followed, particularly with regard to the Swedish welfare system.

Current Economic Situation

In 2009, Sweden had the world's tenth highest gross domestic product (GDP) per capita. Sweden remains an export-oriented mixed economy. It has excellent infrastructure, communications systems, and a highly skilled and educated labor force. Private companies own the majority of Sweden's industry, unlike some other industrialized Western nations. According to the Organization for Economic Co-operation and Development (OECD), deregulation, globalization, and growth in the technology sector have been the key drivers of economic growth.

Despite its prosperity, the typical Swedish worker takes home only about 40% of his or her income after taxes. Taxes have declined slowly since the 1990s, but they remain among the highest in the world, nearly double that of the United States. Due to its impressive welfare system, civil servants make up one-third of the Swedish workforce.

On top of that, nearly 70 percent of Swedish workers belong to a union. The nation has no minimum wage, with such conditions resulting typically from collective bargaining agreements rather than legislation. Because of these unions, Swedish workers have risen by an average annual rate of 3.75 percent from 1998 to 2000 in Sweden (as compared to just 1.75 percent in other EU nations).

Sweden continues to use the Swedish Krona (SEK) as its primary currency, having rejected the Euro in 2003. Sweden's central bank, the Riksbank, came into existence in 1668, making it the oldest central bank in the world. It is credited with helping to maintain price stability with low inflation rates that have been critical to the nation's economic recovery.

According to Heritage's 2015 Index of Economic Freedom, Sweden's economic freedom score for 2015 was a respectable 72.7, making it the 23rd freest economy in 2015.

Nevertheless, some fear a housing bubble may have formed in the Swedish market. As of mid-2014, residential property prices had reached unprecedented levels, and household debt-to-income ratios had increased above 170 percent. By August 2014, 40 percent of homeowners with loans had interest-only products and they were not repaying principal (similar to a pre-recession American housing market).

Economic Outlook

Sweden's economic outlook remains bright, despite the threat of a housing bubble. The Swedish economy accelerated at the end of 2014, and that momentum is expected to continue through 2015. The nation's private consumption rates have been on a steady upward trajectory, helping to drive economic growth. Exports have also grown, largely thanks to the recovery of nations that buy these products and services from Sweden. As the European economy improves, Sweden's economy should also increase thanks to its trading partners' enhanced purchasing power.

Concerns continue to mount regarding the overvalued housing market and the mounting levels of household debt among Swedish homeowners. Although Sweden has largely managed to avoid many of the traditional economic models thanks to its unusual history and welfare system, the current housing and finance situation bears an eerie resemblance to the American housing bubble just before the decline that led to the global recession of 2009. Some financial experts have predicted a crash leading to a contraction in early 2016, but this remains the minority view.

Nevertheless, according to FocusEconomics, the Swedish economy should expand by 2.7 percent in 2015, and improve another tenth of a point to 2.8 percent by 2016. Others put the figures even higher, around 3.0 percent in 2015 and 3.2 percent in 2016.

Sweden itself announced an economic plan in April 2015 that it predicts would push down unemployment while simultaneously allowing the nation to reach a balanced budget by 2018. The plan will involve cutting the national interest rate, increasing taxes, and rolling back a number of previously implemented tax cuts. It believes these measures should lead to a decrease in unemployment, which will feed additional revenues into the Swedish tax system and help create a balanced budget in less than three years.

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