Swedish Economy Strengthening

Stronger than expected economic growth in Sweden has shown “the Swedish model can continue to deliver”, the country’s finance minister said as the government upgraded its growth forecasts for the next two years.

The finance ministry expects the economy to expand by 2.6% this year and a further 2.1% in 2018, up from growth forecasts of 2.4% and 1.8% in December, news outlets reported.

Magdalena Andersson of the ruling social democrats said the economy is “going strong”, and said the government expects to succeed in generating a budget surplus every year of the current parliament from 2015 through to the next general election in 2018.

Capital investment, net exports and business productivity growth will all be higher than previously expected, though forecasts for growth in household consumption were cut.

The government’s positivity follows similarly optimistic updates from independent economists. SEB upgraded its growth forecasts for Sweden earlier this year, while economists at Nordea noted last month that the economy was looking “surprisingly strong”.

 Illiquid Bond Market Problem

Sweden could set up a sovereign wealth fund as a way of solving its illiquid bond market problem, Andersson said in a Reuters interview.

The idea is to issue more government bonds—to increase the market supply—and put the money into the fund because it is not needed for the general coffers.

Andersson would not specify any trigger level for the state debt, but said that Sweden’s next door neighbor Norway, despite having the world’s largest wealth fund, has a debt level of 30% of gross domestic product.

Swedish government projects debt is falling to around 31% of GDP by 2020 thanks to a surging economy. A plan to cut the currency reserve in half over the next few years will knock roughly 5% off that figure.

With the eurozone countries struggling with debt levels close to 90% of output on average, Sweden’s situation may seem enviable. But it brings with it problems. With so little debt, there is a liquidity premium to hold Swedish bonds. The concern is that investors may stay away, making it more costly and more difficult to borrow, for example if the government needed to bail out the banks during a future crash.

Norway’s $915 billion wealth fund, the world’s biggest, invests the proceeds of Norway’s vast offshore oil and gas production and owns about 1.3% of all stocks listed globally.

Any fund created by the Swedish government, which recently set a target of having debt of 35% of GDP, would be considerably smaller than that of its Nordic neighbor.