Like other small industrialized countries, Sweden is very dependent on international trade to maintain its high productivity and living standards. In 1994 exports were equivalent to more than one third of Gross Domestic Product (GDP). About 80% of total exports consist of industrial products.
The most important export markets are in Western Europe. More than half of Swedish exports go to the European Union (EU). Also important are the neighboring Nordic countries of Finland and Norway. Although these countries plus Denmark have populations totaling only 1415 million, they buy about one fifth of Swedish exports.
Although Sweden is a relatively small country, its economy is unusually diversified. Traditional industries based on the two most important raw material resourcesiron ore and woodstill play an important role, but the engineering industry and various high-tech sectors have grown in significance. Few other countries of Sweden's size have their own aviation and nuclear power industries as well as two domestic automotive manufacturers, an advanced war materiel industry, a state-of-the-art telecommunications industry and two major pharmaceutical groups.
It is obvious that the development of such an advanced and differentiated industrial structure would not have been possible if these products were only sold in the domestic market. By expanding internationally, Swedish companies have been able to spread the costs of research and development over a larger production volume, thereby carving out their respective niches in an efficient way.
Another characteristic feature of the Swedish economy is the comparatively extensive production of services and (to some extent) goods under public auspices. The expansion of the public sector has meant the creation of new jobs, but has also laid the groundwork for larger labor force participation by women. The creation of a public child care system has been of particular importance.
The high female labor market participation rate has meant a relatively low average work week. A full-time job normally means a 40-hour work week. The average work week, however, is less than 37 hours. Only 60% of women work full-time.
Major trends 19801995
Like many other highly developed industrial countries, Sweden has experienced weaker growth in
recent decades. Between 1980 and 1990, GDP rose by an average of 2.0% annually. This can be
compared with 3.3% during the 1950s and 4.6% in the 1960s.
During the 1980s, economic growth in Sweden was at about the same level as in the rest of Western Europe. In a number of respects, however, Sweden developed differently. Unemployment remained low, while in many other countries it tended to stay at high levels. Prices and wages rose far faster in Sweden than elsewhere. The Swedish balance of payments on current account continued to show large deficits.
One significant factor in this context is that to a greater extent than in other Western European countries, the growth of Swedish output during the 1980s was based on higher employment. Productivity, i.e. output per hour worked, showed weak growth.
The combination of strong growth in demand, weak improvement in productivity and relatively low initial unemployment led to clear bottleneck problems in the late 1980s. As the economy became increasingly overheated, cost and inflation problems worsened. For Swedish exporters, this resulted in sagging market share and weaker earnings.
Between 1990 and 1993, GDP declined by 5%. At the same time, employment fell by nearly 10%. At the end of 1993, registered unemployment totaled more than 8%, or twice as high as at any other time since World War II. In addition, more than 7% of the labor force were participating in various government-sponsored job or training (labor market) programs.
The economic reversals that Sweden experienced coincided with an international recession, but the decline in output and employment was on a larger scale than in other comparable countries. A number of domestic factors contributed to this development. Of central importance was the transition from high to low inflation.
The shift from positive to negative growth led to a rapid decline in inflation. Interest rates remained at high levels, however. The combination of high interest rates and lower inflation resulted in widespread price drops in a number of asset markets. High real interest rates also helped further to weaken industrial profitability. The result was a sharp fall in capital spending. At the same time, rising unemployment, declining asset values and a high level of indebtedness triggered a higher household savings ratio. Overall, this meant a sudden and dramatic drop in demand from the private sector. In addition, government consumption fell.
The Swedish economic downturn was so deep and long-lasting largely because of the trend of domestic demand. During the 199093 period, net exports contributed positively to GDP.
After the negative trend of the past few years, the Swedish economy is now in the early stages of a recovery. This recovery, that began late in 1993, had become robust by the first half of 1995. Full- year 1995 GDP is expected to be more than 3% higher than in 1994. Exports were the main factor behind the rapid resurgence in demand. The competitive position of Swedish industry is strong, among other things due to the decline in the value of the krona late in 1992.
For the first time in five years, fixed investments are now also rising. Domestic consumption, however, remains weak, due to a continued decline in government consumption. The growth in output is entirely concentrated in the business sector, where manufacturing shows the highest growth figures.
Industry
The Swedish economy is highly dependent on a limited number of very large international
companies. In 1992 the United Nations estimated that there are a total of some 35,000
multinational corporations in the world. Of these, about 2,700 have their headquarters in Sweden.
The dominant role of a few large companies is especially apparent in manufacturing. In 1990 the ten largest Swedish industrial companies employed nearly 600,000 people. Of these, 240,000 worked in Sweden. The top ten companies thus accounted for about one fourth of all manufacturing employees in Sweden.
The concentration of industrial output to a small number of very large companies is one contributing factor behind the relatively high level of research and development (R&D) spending in Sweden. Swedish multinationals are among the most R&D-intensive in the world, and over the years most of this R&D work has taken place in Sweden.
During the 1980s there was a slowdown in the growth of knowledge- and research-intensive industry. This weakening can to some extent be explained by the overheating that prevailed in the Swedish labor market at that time. Banks and other financial service companies as well as the public sector, were recruiting well-educated people and driving up pay levels. Many companies chose instead to expand abroad. During the second half of the 1980s, there was an increase in both Swedish direct investments abroad and the percentage of R&D that major corporations performed in units outside Sweden.
Between mid-1989 and the end of 1993, manufacturing employment in Sweden declined by 260,000. This means that during this period, one out of every four industrial employees lost his or her job. It should be emphasized that this decline was not offset by a corresponding expansion in the output of Swedish-owned companies in other countries. In 1993 the net flow of direct investments shifted to a positive influx into Sweden for the first time in 25 years.
The sharp fall in the number of industrial employees should instead be seen in the context of corporate downsizing and a dramatic decline in capital spending. Swedish manufacturing output fell by 6% between 1990 and 1992 but has risen sharply since then.
Very strong improvement in productivity, lower employer payroll fees and the de facto devaluation of the krona in November 1992 resulted in a dramatic improvement in Sweden's cost situation. Strong exports led to a marked improvement in Swedish industrial earnings. Companies reported high profit levels in international terms as well. The rapid rise in manufacturing output has begun to result in bottlenecks. High capacity utilization combined with favorable earnings have triggered a record resurgence in industrial capital spending, which climbed 28% during 1994; the growth rate during 1995 is expected to be even faster.
Construction and real estate
One of the sectors hardest hit by the economic reversals of recent years has been construction.
Between 1990 and 1994 the number of employees in the building trades declined by about one
fourth. This represented a loss of some 100,000 jobs.
The magnitude of this decline is largely explained by the expansion that occurred during the late 1980s. Rapidly growing demand for commercial space and housing contributed to extremely rapid price and rent inflation. Expectations of continued increases accelerated the expansion of the construction sector. When the downturn came and demand weakened, there was a large surplus of available properties, with falling rents and real estate prices as a consequence.
The commercial space and real estate markets are among those most dramatically affected by the readjustment that the Swedish economy is now undergoing. There is still substantial imbalance between supply and demand. Despite cutbacks in rent levels and new construction, numerous existing properties remain unleased.
During 1995, construction investments stopped falling. Output in the construction sector appears to have risen slightly. This increase is mainly attributable to government programs aimed at stimulating activity in the construction sector. These include immediate expanding of construction investments in the business sector and various forms of subsidies in the transportation field, the municipal sector and the housing sector.
Private services
The private service sector grew sharply in importance during the 1980s. Its relative importance
continued to increase during the first half of the 1990s. Service production admittedly fell sharply
between 1992 and 1993, but since then it has grown substantially. The decline in service sector
employment was not as dramatic as in other sectors, either. During 1996, the labor force in the
private service sector is expected to be back at the same level as during the boom year of 1989.
The trend varies from one subsector to another, however. Durable goods, haulage and the hotel and restaurant trade were severely affected by the recession. The deregulation of postal services, telecommunications and civil aviation led to major reductions in employment. Less cyclical businesses such as convenience goods retailing, however, reported only a minor downturn. A number of service-oriented businesses have continued to gain in importance. One explanation is that tasks once performed by the public sector are increasingly being contracted out.
The deregulation of the credit market led to rapid expansion in financial services during the late 1980s. The enormous loan losses caused by the collapse of the real estate market later led to a major restructuring and streamlining of financial services, especially banking.
The situation of Swedish banks improved noticeably during 1993. Loan losses diminished, while earning capacity rose. This trend has continued during 1994 and 1995. The capital adequacy of the banks is currently high enough to allow them room to respond to growing demand for loans.
Government services and consumption
The Swedish public sector consists of central and local government (i.e. municipal and county
council) agencies, plus the social insurance sector. During the period 19501980, government
services and consumption grew rapidly. Government consumption increased from 12.5% to 29.3%
of GDP. The number of public employees rose by nearly one million.
During the 1980s, the public sector grew more slowly. Government consumption thus fell to 27.4% of GDP. The number of public sector employees increased by more than 100,000, however.
The Swedish economic downturn between 1990 and 1993 led to a substantial weakening of public sector revenues. At the same time, the recession resulted in sharply higher transfer payments to households and companies. This left less room for public services and consumption.
Far-reaching cutbacks and efficiency-raising measures have been implemented in recent years, especially in the local government sector. This trend has meant an overall reduction in the number of public employees. The number of jobs in public agencies during 1994 fell to about the level prevailing in 1980. Since then the number of public sector employees, as well as government consumption, has continued to fall.
The labor market
For many years, Sweden has had one of the highest labor market participation rates in the world.
While unemployment in other countries continued to mount after the oil crises of the 1970s,
Sweden remained a sterling exception. The percentage of the population aged 1664 with paid jobs
rose sharply from about 70% in the early 1950s to 82.6% in 1990. The continuous expansion of the
public sector is one important reason for this trend. Since 1950 all employment growth has taken
place in the public sector.
So far during the 1990s, the situation in the labor market has drastically changed. Sweden's lead has vanished. Between 1990 and 1994 the labor force shrank by more than half a million people. As a result, the participation rate among people aged 1664 slid to 72.6%.
The fall in gainful employment resulted in a dramaticaly higher jobless rate. In 1994 registered unemployment totaled 8.0%, compared with 1.7% in 1990. The increase in registered unemployment was far less than the decline in employment, however, because many people who lost their jobs entered labor market programs, became students or began collecting disability pensions.
During 1995 the labor market situation improved and employment rose. Both the number of jobless and the number of people in labor market programs therefore decreased. However, registered unemployment is still four times higher in absolute terms than in 1990.
Social welfare and government finances
Compared to other countries, Sweden is characterized by relatively even distribution of incomes
and wealth. This is partly due to the comparatively large role of the public sector. Public agencies
employ one third of the labor force. Their consumption and capital spending absorb 30% of GDP,
and they redistribute another 40% in the form of transfer payments.
A sizeable proportion of government expenditures consist of transfer payments to households. The central government (Swedish State) disburses basic pensions, child allowances and housing allowances. Via the social insurance sector, it disburses income-based supplementary pensions as well as payments designed to maintain income during illness, parental leave and unemployment. The municipal sector pays social assistance to individuals with incomes below the poverty line.
The characteristic features of Swedish social insurance are that it is universal, compulsory and designed to protect living standards. It is financed mainly via taxes and employer payroll fees.
Economic trends in recent years have led to a drastic decline in household income from gainful employment. In real terms, the total income of employees and entrepreneurs fell by 16% between 1990 and 1993. Sweden's broad social welfare safety net has gone a long way toward softening the effects of this income loss. Public sector transfer payments in the form of unemployment compensation and pensions have risen sharply. Overall real disposable household income rose 4.7% between 1990 and 1993. At the same time, this trend contributed to an extremely rapid weakening of public sector finances.
Economic policy
During the past few years, economic policy has changed in a number of respects. In recent years,
Swedish governments have implemented major structural reforms, while shifting their fiscal and
monetary policy. These changes are related both to the recession of recent years and developments
during the 1980s.
Structural reforms
Structural reforms in particular should be viewed in the light of the relatively low productivity
growth and high inflation rate that characterized the 1980s. The governments have taken various
steps to improve the way the economy functions.
The tax reform implemented in 199091 was primarily intended to stimulate work and savings. It included cutting marginal tax rates on earned income and introducing more uniform taxation of capital.
Another important change in policy was Sweden's application for membership in the EU, submitted on July 1, 1991. Sweden entered the European Union as a full member on January 1, 1995.
A new Competition Act was recently adopted. A number of regulatory systems affecting Swedish goods and services have also been abolished or modified. They include such sectors as construction, agriculture, the taxi business and civil aviation. Various State enterprises are beginning to lose their monopolies, while a new central government block grant system has given municipalities and county councils greater incentives to open up their operations to competition and more efficient working methods.
Social insurance systems have been reformed. Insurance deductibles (self-insurance thresholds) have been increased and compensation levels have been lowered. The former government (non- socialist) also submitted a proposal for a new pension system, in which there would be a closer link between the total fees paid into the system and the pensions disbursed. A modified version of this system began to be phased in during the mid-1990s.
Fiscal policy
The recession of the past few years led to a dramatic worsening of government finances. Tax
revenues declined while expenditures have risen sharply. In 1989 Sweden's public sector showed a
financial surplus equivalent to 5.4% of GDP, the largest among the 24 members of the
Organization for Economic Cooperation and Development (OECD). By 1993 it was showing a
deficit of 13.4% of GDP, the largest among the OECD countries.
This sharp deterioration in government finances was one important factor behind the growing lack of confidence in the Swedish krona late in the summer of 1992. By autumn, this situation became acute. Sweden's non-socialist coalition government joined forces with the largest opposition party, the Social Democrats, to develop a reform package aimed at improving public finances. It included higher excise taxes and lower transfer payments to households.
As a result of the continued worsening of public finances, the non-socialist government introduced additional proposals aimed at coming to grips with the imbalances. The Social Democratic government which took office in October 1994 presented a four-year program of concrete measures to strengthen public finances. This program called for a combination of savings and revenue enhancements totaling SEK 118 bn, equivalent to 7,5% of annual GDP. The government has declared that its goal is to bring Swedish public finances into balance by 1998.
Monetary and foreign exchange policy
In the past 120 years, except for brief intervals during the interwar period, Sweden's currency was
pegged at more or less fixed foreign exchange rates. On November 19, 1992, however, the central
bank (Riksbank) was forced to abandon fixed rates and let the krona float freely.
Because of this shift to variable exchange rates, monetary policy has also changed direction. The Riksbank's market operations are now aimed at meeting an inflation target. This is defined as an annual 2% change in the Consumer Price Index (CPI) starting in 1995, with a maximum deviation of one percentage point.
After Sweden switched to variable exchange rates, the krona immediately fell by almost 20%. Swedish market interest rates have also fallen. This trend coincides with a decline in interest rates elsewhere in Europe, but it also indicates that inflationary expectations have diminished.
Inflation has now reached a very low level in Sweden, both in historical and international terms. During both 1994 and 1995, the CPI rose at an annual rate of 23%. This is a remarkably low figure, especially in light of the sharp decline in the value of the krona.
Key economic indicators, 1994
Household saving ratio (level, %)1) 8.3
Government financial balance, % of GDP 2) -10.4
Current account balance, % of GDP 2) 0.3
Registered unemployment, % of labor force 3) 8.0
1) % of disposible income
2) % GDP
3) % of labor force
| 1990 | 1994 | ||
| Employed | 82.6 | 71.5 | |
| Unemployed | 1.4 | 6.2 | |
| In labor market programs (not in labor force) | 0.7 | 2.9 | |
| Other categories | 15.3 | 19.4 | |
| Total | 100.0 | 100.0 |
SEK 1 (Swedish krona) = USD 0.15 or GBP 0.10 (May 1996)
bn = billion = 1,000 million
This fact sheet is part of SI´s information service. It can be used as background
information on condition that the source is acknowledged.
The tables on Employment by sector 1970-1994,
Demand and output 1980-1994 and Productivity in manufacturing 1970-1994, are not included in the Internet version of this fact sheet.
March 1996
Classification: FS 1 x Qad
ISSN 1101-6124
Fact Sheets on Sweden