The extraordinary economic experiment that is going on in Sweden

One of the features of the economic environment right now is the extraordinary economic experiment being inflicted on the Swedish economy by its central bank called the Riksbank. It was not so long ago (20th April 2014) that it was being described by Paul Krugman of the New York Times in the terms below.

Whatever their motives, sadomonetarists have already done a lot of damage. In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.

Their crime? In Paul Krugman’s eyes it was to raise interest-rates as they are only for cutting. The “tale of stagnation and deflation” was an odd description for an economy which had just had an annual rate of GDP growth of 1.7% and was just about to have one of 2.7%. Some people call that solid economic growth especially as it was followed by 2.6% and then 2.6% in the final quarters of 2014.

Inflation Targeting

Here there was an issue for those like Paul Krugman who do not like lower prices as the Swedish inflation rate or CPI had fallen to -0.6% in March 2014. Amazing is it not the fear generated by small falls in inflation as opposed to the treatment of overshoots? In fact since then it has often been below 0% but by small amounts and in April was -0.2%.  The Riksbank has seized on this as a reason to cut interest-rates in a manner in which Professor Wren-Lewis whom I referred to on Wednesday would adore. I will come to that in a moment but for the moment let me point out that as the inflation index is influenced by the interest-rate changes there has been positive feedback or something of an own-goal here. The index which takes out the interest-rate cuts is running at 0.4%. It is not a perfect measure as it has indirect taxes too but you get the idea.

The Swedish worker or consumer

The ordinary Swede is likely to be confused by all this as you see for them an inflation rate of -0.2% can be compared to this.

Compared to March 2014, labour costs have increased by 1.7 percent for wage-earners and 2.7 percent for salaried employees.

Not exactly the same time period but higher wages combined with falling prices leads to what is for these times is a substantial real wage boost. If we look at the underlying data we see that much of the real wage boost has been caused by the lower oil price as elsewhere. The transport inflation index fell by almost 6% between July of last year and January of this as it followed the oil price trend.

Sadly that ended in January and we have returned to a more familiar pattern of price rises as workers and consumers frown.

The Riksbank

Now you might think that solid economic growth and real wage gains provided something to please a central bank. After all if we look south from Sweden there are quite a few places which would regard it as an economic nirvana and ask it to “come as you are”. Not the Riksbank which had cut interest-rates into negative territory on February 11th and started Quantitative Easing as well. It is hard not to have a wry smile at someone who things that cutting interest-rates by 0.1% will have any effect but it will be unprovable as they cut again in late March to -0.25%. Enough? Not quite as in what can only be described as a type of panic they keep deciding to add to the amount of QE with the latest addition in April shown below.

the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.

Actually bond yields were being driven lower by developments in the Euro area so it would be fascinating to be able to ask the Riksbank if this has made any difference at all so far. But in my view I wish that the Smiths had added Stockholm to the list below.

Panic on the streets of London
Panic on the streets of Birmingham

Today’s data

The latest economic growth numbers show little sign of the stagnation we were assured above.

Sweden’s GDP increased 0.4 percent in the first quarter of 2015, seasonally adjusted and compared to the fourth quarter of 2014. GDP increased 2.5 percent, working-day adjusted and compared to the first quarter of 2014.

Actually the annual rate of growth has been remarkably stable over the past year or so. It does not seem that there is panic in the underlying Swedish economic model either. From the Huffington Post yesterday.

Beginning in 2016, men in the country will be entitled to a third (yes, third) month of paid paternal leave based on a new government proposal.

Of course this time next year there will also be the economic boost from hosting Eurovision which Sweden has just won. If the country is in need of an economic boost via the music industry perhaps ABBA could be persuaded to reform, after all they were right about this.

It’s a rich man’s world

Side Effects

This is a clear issue in medicine so as central banks indulge in their own form of junkie culture we need to look for them in economies too. Sadly consumer inflation measures have often been neutered but such factors as household borrowing help. How has it responded to ever lower interest-rates and other monetary easing? From Sweden Statistics.

The annual growth rate for lending to households from Monetary Finance Institutions (MFIs) increased by 0.2 percentage points from 6.3 percent (revised) in March to 6.5 percent in April.

The main driver of this sort of thing is invariably the housing sector so let us drill down the numbers.

This is an increase of SEK 187 billion compared to the corresponding month last year, of which housing loans accounted for SEK 164 billion…….Households’ housing loans amounted to a total of SEK 2 541 billion at the end of April and had an annual growth rate of 6.9 percent.

The typical new mortgage interest-rate has fallen from 2.41% to 1.67% over the past year. According to The Local there has been the expected response.

Apartment prices have shot up in Gothenburg and Stockholm in recent months with one-bedroom properties in central locations regularly selling for more than three million kronor ($352,439).

Apparently even one of the Swedish banks has its concerns.

Researchers at Swedbank…. are warning that people living in the heart of the nation’s cities are facing growing “affordability problems” due to needing to fork out more than 30 percent of their post-tax salaries on mortgage payments and other related costs.

With wages up and mortgage costs down a lot we get something of a clue to what house prices must have done recently!

In May 2014 this issue troubled the Riksbank as shown below.

The analysis shows that the average debt ratio (debts in relation to disposable incomes) in July 2013 was 296 per cent for indebted individuals and 370 per cent for individuals with mortgages

If the borrowers who have reduced their debts over this period continue to reduce these debts at the same rate, on average they will be free of debt in about 100 years.

Ah free of debts in 100 years! Of course since then there has been quite a borrowing binge in Sweden (total borrowing has risen by 12.6%) mostly driven by the Riksbank. Will they now on average be free of debt in 112.6 years? What was that about inter-generational mortgages in Japan?

Even businesses seem to be getting in on the act.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.


The Riksbank seems to have taken its new policy from the lyrics of Sweden’s most famous pop music export.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny

With a narrow money annual growth rate of 13.5% it is certainly doing the central banking equivalent of splashing the cash.  The economic experiment is to do this in an economy that is growing solidly. Even the argument of low and negative inflation will fade away if the price of crude oil remains where it is now. What will be left then? Well much higher house prices I would imagine which is of course where we find inflation these days. That is also why it is officially classified as a wealth gain although I doubt that first-time buyers in Swedish cities would agree. Another inter-generational wealth transfer is in play.

Meanwhile deep underground in economic terms a tectonic plate is rumbling. So far the Swedish response to negative interest-rates seems to be to save more. Regular readers will recall my contention that interest-rate cuts can be contractionary……

Meanwhile I do hope that the swings in mood in the Riksbank do not do to Sweden what happened when they changed which side of the road they drive on.


14 thoughts on “The extraordinary economic experiment that is going on in Sweden

  1. Hey nice note and I’m glad it isn’t only me who is wondering what on earth they are thinking in downtown Stockholm: ever-easier policy and veiled threats of even more despite totally middle of the road numbers on growth, unemployment and even inflation if you use a sensible measure.

    • Hi Stuart

      Thank you and welcome to my corner of the virtual world. If you look at it logically they have eased to reduce the value of debt (via inflation) just when debt is cheap! Yet on the other side of the coin the household sector is borrowing heavily because debt is cheap. Just like a dog chasing its tail except that dogs soon tire of such games.

  2. I really do not buy in to the theory that at times of zero inflation or even deflation people defer purchases in the hope of getting things cheaper at a later date. It would require prolonged period of major price falls on big ticket items for people to even register that there is a price trend occurring. What is much more likely is that cuts in interest rates on savings have a very dramatic and instant effect on disposable income and, as we are frequently told, savers substantially outnumber borrowers, the effect on the economy is quite sudden. As you have pointed out before, the vast majority of our spending cannot be deferred in the hope of saving a few pounds in future. I also believe that projected savings have to be substantial (think annual sales) for most people to defer a purchase even for a month or so. Instant gratification and technological changes mean that people are willing to queue all night for the latest gadget and pay whatever is demanded. I will bet that the chance to buy whatever it is they are queueing for in a month for 10% less would not make many leave the queue!

    This deferred purchase theory is just that. A theory! The central banks need to do more consumer habit research.

    • Here’s a list of things people (sometimes) defer buying when prices fall:

      – housing

      Everything is about housing. The rest is just smoke and mirrors.

    • I might also add that due to the plentiful resources we now enjoy the moment land prices fall most people will have the choice of whether to work or not. Many will choose not to which would force salaries up and pass on the wealth generation to the labourer.

      This is the elite worst nightmare. Land must be kept high at all costs. You’ll never get a vote on changing this, you must seek more “old fashioned” methods if you want to avoid land prices being tied to the total earned over a lifetime less the cost of food.

      • hehe

        why do you think they want more people ? our demographic would mean a decline in demand for housins ( not just the taxes issue ) …..

        and then the Banks would have a load of high priced assets that no one wanted

        erm …


        • yeah demographics are at the heart of this as more young than old means increasing lending. The UK is in deflation as housing lending slows.

  3. Hello Shaun,

    isnt Sweden trying to stop hot money flowing in like Switzerland ?

    the attempt will boost growth of course – I can see their housing stock increase in cost / value

    time to buy now before the rush!

    pretty much like Denmark in the dark ages , the King seeing all around were christian countries and hearing that they had been given the God given right to invade all non christian countries as they were godless heathens , decided to convert so as prevent a war ……

    Well Sweden is following the lower rate tribes into MIRP regardless of their local conditions……

    What could go wrong ?


    • Hi Forbin

      I completely agree about the exchange rate issue and as so often you can argue that the Euro is at the heart of it. If we look at the Swedish Krona over the past year it has fallen against the US Dollar from 6.7 to 8.5 in round numbers. This would ordinarily cheer a central bankers heart by raising inflation but so far has been neutered by lower oil and commodity prices! However there has been a relatively stable pattern against the Euro which makes me wonder if the Riksbank is shadowing the Euro at least implicitly. Thus as the ECB eased into negative interest-rates and QE so then has Sweden……

      When the UK tried this under Nigel Lawson (it was the Dm then) it all went rather wrong so perhaps the Riksbank has not been reading its history books.

  4. Hi Shaun, I know nothing about Sweden but assuming they have full(ish) employment and assuming narrow money growth of 13.6% pa just started occuring now from a much lower rate they’re likely going to increase the pace of growth substantially in the next 6 – 12 months despite increased proclivity to save. I just wouldn’t want to be there at the back end of 2017!

    By the way, is that a picture of Sweden in 1967 or London in 2015?…..

    • Hi Noo2

      It all looks a bit too civilised for London traffic…

      As to the Swedish money supply we can look at it also via the broad money supply which gives a similar answer. Growth of 7%+ combined with economic growth of ~2.5% was in the past assumed to lead to inflation of 4/5%.Oops! Lets be generous and say that growth picks up to 3 to 3.5% that still leaves room for inflation to rise a lot. Of course these days the inflation will mostly be found in asset prices.

      Oh and should they get round to raising rates that will push CPI higher. In other words they may well provide a text book example of why you should not ease monetary policy in a boom.

  5. ‘Their crime? In Paul Krugman’s eyes it was to raise interest-rates as they are only for cutting. ‘

    Great column Shaun,raising questions that most of the economics literati wouldn’t have the balls or the brains to take on..

    • Hi Dutch and thank you

      In a couple of years times such things will be reported in the mainstream media as something “which could not have been expected” or as a “surprise”. The reality is that the events will not be a surprise.

  6. Great column, as usual Shaun. The picture of Swedish cars moving to the right side of the road reminded me of a joke about Olof Palme, the assassinated Swedish PM. He was the Transportation Minister at the time, and his political opponents said that it was the only time in his whole career that he had ever moved to the right.

    Statistics Sweden’s own figures support your view that the Rijksbank is building a housing bubble. They show a quarterly increase of prices for owner-occupied one- or two-dwelling buildings of 2% in 2015Q1, up from 1% in the previous quarter. I wonder why Statistics Sweden chooses to show these inflation rates only to one significant digit?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.