1. What has happened?
Swedish Prime Minister Stefan Löfven’s minority government on Thursday announced a reshuffle after the last couple of weeks’ political turmoil. The decision comes one year before the regular parliamentary elections on September 9, 2018.
2. How will the Swedish economy be affected in the short term?
The economy is fundamentally very strong with a GDP growth rate of around 3 per cent. The “balance sheet” is healthy: impressive public finances and current account surpluses with more foreign assets than liabilities. This gives the economy, and asset prices, resistance to political uncertainty. Moreover, the fact that the political parties in the Parliament (the Riksdag) endorse stable and sustainable economic policy game rules and frameworks is adding to the “immune system” and should limit the negative impact of the new political uncertainty on the Swedish economy.
3. …and long term?
Economic and political crises normally walk hand in hand. This is not the case today. But persistent political uncertainty slows down decision-making in a world that needs more, not less, predictability and stability. Sweden is struggling with several challenges that need to be resolved fairly quickly, including the housing market, immigration and integration issues, globalisation and competitiveness and transforming labour markets. Although Sweden may not pay a price for today’s uncertainty, the price of extended political uncertainty is likely to be raised in the future.
4. The krona and debt and stock markets – will they be affected?
The Stockholm stock exchange developments primarily reflect the economic and financial situation in the rest of the world. As the global economy is expected to slowly accelerate, Sweden’s political uncertainty should have limited effects on equity prices. The Swedish krona may depreciate somewhat due to an increased political risk premium but the main scenario remains that the krona will gradually strengthen in the future. Overall, government finances are strong and this will dampen any tendencies of rising Swedish bond yields compared to interest rates in the rest of the world.