Sweden has weathered the recent global financial and economic crisis well thanks to strong economic institutions and fundamentals, not least a sound fiscal position. The main challenge going forward is to strengthen institutions and fundamentals even further so as to keep enhancing resilience and sustainable long-term growth. The crisis has revealed that on the whole the monetary and financial framework is sound. Continuing labour market and education system reform is key to avoid entrenched long-term unemployment and to bring workers with weak attachment to the labour market back into employment. Sweden is contributing to global welfare through its ambitious actions to mitigate greenhouse gas emissions, but these targets could be achieved at lower cost.

Sweden endured a deep contraction during the recent global economic and financial crisis but the recession was short and the economy has bounced back strongly. A key reason why Sweden performed well in the face of this major external shock was that it learned the right lessons from the severe banking crisis it experienced in the early 1990s. This earlier banking crisis triggered far-reaching reforms to restore fiscal sustainability, to put in place a robust monetary policy framework and to improve labour market and social policies. As a result, Sweden entered the latest crisis with strong economic institutions and fundamentals. Moreover, Sweden addressed the crisis through structural reforms, such as the increase in the earned-income tax credit, with positive effects both on the demand side of the economy in the short term and on the supply side in the longer term. Going forward, the challenge is for Sweden to strengthen these fundamentals even further to enable the country to enjoy robust economic growth.

Sweden is recovering strongly from the recent deep recession, supported by substantial fiscal and monetary policy easing and a pick-up in external demand. A relatively accommodating monetary stance coupled with an improving labour market are expected to help sustain growth. Though Sweden’s fiscal position is enviable compared with many other countries, there is scope to further strengthen the fiscal framework. Medium-term fiscal pressures could be reduced by encouraging greater labour force participation and increasing the efficiency of public spending. Closing the income gap vis-à-vis leading OECD economies will require further labour market reforms, further tax reforms to enhance work incentives, and a reduction in the extent of public ownership in market-related activities to boost competition and productivity.

In the wake of the global financial and economic crisis, the Swedish central bank aggressively cut interest rates and introduced an array of unconventional policy measures. This helped limit the depth and length of the recession and facilitated a strong recovery. Moreover, the Riksbank has successfully maintained low and stable inflation, and longer-term inflation expectations are well anchored, notwithstanding occasional communication problems. While the financial sector experienced stress, in part due to bank exposures to the Baltic countries, it coped well on the whole. However, there is room to improve financial sector regulation and to revisit the financial supervision framework.

After the onset of the crisis, unemployment in Sweden increased markedly, though much less than expected and than during the early 1990s, even as participation in the labour market held up well. The challenge going forward is to ensure that high unemployment does not become entrenched or leads to withdrawals from the labour force. The government has taken measures to mitigate this risk, particularly in the areas of job-search incentives and enrolment in education. Nevertheless, additional reforms are needed to ensure a sustained job-rich expansion. Such reforms should focus on increasing the flexibility of the labour market and strengthening job-search incentives further.

Sweden has developed an extensive and sound policy framework to limit greenhouse gas emissions. It is now one of the OECD countries with the lowest greenhouse gas emissions per capita and it has successfully managed to decouple GDP growth from emissions growth. However, as Sweden has already significantly lowered its greenhouse gas emissions, the cost of reducing them further could be very high, making it urgent to improve the cost-effectiveness of Sweden’s climate change policies. A strategy to enhance the cost-effectiveness of this policy framework would include: i) reducing differences in carbon prices between sectors and increasing even further the role of market-based instruments; ii) limiting overlap between targets and policies; iii) raising Sweden’s participation in greenhouse gas emission reductions abroad; and iv) improving the assessments of the policy framework.