The Swedish economy survived the Lehman Bros. crash and subsequent financial meltdown in southern Europe fairly unscathed. Part of this can be attributed to the staunch fiscal discipline showed by finance minster Anders Borg.
However, it is also important to look beyond state finances, as the personal debt of the Swedish population has exploded over the past decade. Simply put, Sweden hasn’t had its housing bust yet. As a result, housing prices has continued its steady climb into the stratosphere uninterrupted as illustrated by this graph of the Swedish Housing Price Index 1994-2014.
Key: Brown – greater Stockholm area, blue – greater Gothenburg area, red – Sweden total
Meanwhile, the level of personal debt keeps increasing to finance these steady increases, which has been fuelled by exceptionally low interest rates for a long time. This graph shows the Swedish household debt as percentage of disposable income (red) compared to its percentage of financial assets (brown).
This has caused IMF to issue several warnings over the years, which has largely gone unheard. Fellow blogger Lars P. Syll, Ph.D. outlines the latest such warning along with some observations here (in English).
What is most striking about this housing bubble is that there are two separate worlds. In the more rural areas, housing is very cheap. There are plenty of full-sized, perfectly livable houses in the 250 000 to 500 000 SEK range. Problem is, there are no jobs there, so there can be dozens of houses sitting empty for a pittance for years. The Swedish countryside is rapidly dying, and the young can’t get out of there soon enough.
Meanwhile, the larger cities see price increase rates in the double digits annually as something perfectly normal by now. A young family buying a modest starter home may have to take on a loan of 4 or 5 million SEK. They are pretty much forced to do this, as the rental market is completely saturated yet the cities is where the jobs are. It also means the statistics shown earlier don’t fully illustrate the situation, as it includes those who have lived in their homes for decades and now have virtually no debt. A graph over those who have purchased homes in the metro areas in the past 5-10 years would be terrifying.
The decline of industry
Sweden built its prospering society on hard work turning the ample natural resources into refined, quality products. The country was fortunate in that its factories, infrastructure and workforce was intact at the end of WWII, while the rest of Europe laid in rubble. It was a golden opportunity, and the leaders of the time seized it.
The industry peak during the 60s and 70s is often referred to as the “record years” and marked the beginning of the decline. It is possible that the seemingly endless prosperity triggered a hubris amongst the politicians that followed, as there was a sharp shift from the pragmatic to the ideological at this time. A bizarre dream where a tiny nation of a few million would “save” the rest of the world through various foreign programs. And to finance it, a marginal tax rate of over 100%.
That’s right; after a certain threshold, you actually ended up owing more tax for each additional SEK you earned. Famed children’s book writer Astrid Lindgren (Pippi Longstocking etc.) was among those who ended up with 102% tax, making her poorer for each additional book sold. Seemed like a perfectly reasonable idea at the time, I’m sure.
While the western world in general has shifted its focus from industry to services, it is almost taken to an extreme in Sweden. IKEA, Volvo, Saab, ABB and all the other businesses that put Sweden on the map have been sold, moved abroad or closed shop altogether. About 28% of the workforce produce physical things, while over 70% provide services (CIA factbook)
The remaining percent and change is the Swedish agriculture. Due to stricter environmental- and animal welfare-laws, Swedish farmers have been pummeled hard by cheaper imports från other EU-countries. For example, many pig farmers make an active loss for each animal raised and sold, which has led to a sharp decrease in domestic production.
As a result, Sweden’s own food production is far from capable of sustaining its population, making the country highly dependent on imports. Miljöpartiet, the so-called green party, is pushing to tighten up the environmental rules and taxes even further for the few remaining farmers, forcing the long-distance imports to increase as well.
The immigration bomb
Another factor that will have enormous impact on future Swedish economy is the dramatic increase in immigration of low-educated people in recent years. As discussed in the Welfare System section, the Swedish system hinges on a very high employment rate. Since the vast majority of the recent immigrants are largely unemployable, means intended for other purposes must be redirected to support these masses of new welfare recipients.
Despite being at the home stretch of a tight election, prime minister Reinfeldt had to publicly acknowledge that the cost of immigration was so large there were quite simply no funds left for any reforms or initiatives. The future costs will be “enormous,” he said. Prior to that, The Economist has issued similar warnings on more than one occasion.
Strangely, this fundamental shift in immigration policy was never put to a direct vote as has been the case in other major questions (joining the EU, nuclear power etc.) nor has any party except Sverigedemokraterna questioned WHY Sweden is suddenly obligated to increase its immigration tenfold.