Economic development in the wake of the coronavirus

27 March 2020 | News

Coronavirus and the Swedish economy

As recently as February, the Swedish National Financial Management Authority (ESV) was anticipating a GDP growth of 1 per cent this year. We expected a normal slowdown in economic activity after several years of economic boom. Since then, we have seen dramatic developments in the wake of the coronavirus. Day by day, and even hour by hour, new information is released on redundancy notices, stock market falls, exchange rate fluctuations, etc., as well as monetary and fiscal measures to counter the crisis. The downturn is global, and we are observing a similar trend in many countries.

At present, it is almost impossible to determine the extent of the effects of the virus on the Swedish economy. The level of uncertainty in the forecasts and calculations is therefore significantly greater than normal. The extent of the impact on the macroeconomy and public finances will ultimately depend on factors such as the spread of the virus, the level of uncertainty caused by the virus, as well as the extent to which and for how long businesses and national borders are kept closed.

The forecasts for growth have been successively lowered

In our March forecast, updated with information up to and including 12 March, growth is projected to be 0.4 per cent this year. Today, on 24 March, this appears less and less likely. In two alternative scenarios, we therefore assume that growth will be negative in 2020. In the first scenario, we expect the economy to recover relatively quickly, while in the second we assume that the process will be more protracted.

The first alternative scenario assumes that GDP will decline by 1 per cent in 2020. Growth will consequently be 2 percentage points below the assessment we made as recently as February this year. This scenario is comparable with the OECD’s estimate from early March regarding the impact of a pandemic. At the time, they estimated that a full-blown pandemic would reduce global growth by 1.5 percentage points this year.

In the second alternative scenario, we assume sharply negative growth in 2020, at -3 per cent. It should be noted that both scenarios are only estimates and not fully calculated forecasts in line with ESV’s normal forecasting procedures.

Policy helping to mitigate the effects

Sweden’s monetary and fiscal policy is helping to mitigate the impact on the economy. The Riksbank and other central banks have taken steps to reduce the economic effects of the virus, and have stated their willingness to take further action if necessary. There is considerable space for fiscal policy in Sweden. Central government debt is low and the fiscal framework provides an opportunity to deviate from the surplus target in the event of a severe shock to the economy. At this point, it is important to support individuals and businesses to try to avoid bankruptcies and layoffs.

The local government sector also needs support in order to cope with increased demands for care and to avoid staff cutbacks as tax revenues fall. In the same way as governments in many other countries, Sweden’s Government has launched, comprehensive packages of measures to limit the harmful economic effects of the coronavirus. For example, the Government has proposed expanding the support to companies that use short-term layoffs, that. The central government will take over the liability for employers’ sick pay costs in April and May, that companies may defer the payment of preliminary tax, employers’ contributions and VAT, the introduction of Government credit guarantees up to a maximum of SEK 5 billion, as well as expanding the Swedish Export Credit Agency’s credit guarantee framework by SEK 50 billion. In addition, Almi has received a capital injection of SEK 3 billion. Local authorities and regions are receiving government grants for increased health and care costs. The Government has also proposed abolishing the qualifying day. These measures are in line with recommendations from the IMF and the OECD amongst others.

Scenarios for the Swedish economy

The table below presents a number of key economic variables from the March forecast, which include information up to 12 March, as well as for the two alternative scenarios.

In the March forecast, we are expecting GDP growth to be weak, but still positive this year. The coronavirus is contributing to a dampening of growth. There will be a recovery next year, however, when GDP will increase significantly more. The slowdown in GDP growth is reflected in a slowdown in labour demand. Growth in employment will slow down and the level of unemployment will rise.

A weaker increase in several tax bases will result in tax revenues increasing considerably more slowly than previously. At the same time, expenditure will increase more this year than last year, which means that last year's surplus in general government net lending will shift to a deficit corresponding to 0.5 per cent of GDP.

Negative growth in the alternative scenarios

In the first alternative scenario, we are assuming a negative growth of -1 per cent in 2020. The scenario is based on the assumption that the economy will return to normal within a few months and that the most significant effects of the pandemic being over within a year. In other words, the recovery will be relatively rapid. Supported by expansionary fiscal and monetary policy, growth in Sweden and globally is expected to recover fully within two years. As the recovery is expected to be relatively quickly, the scenario assumes that there will not be any lasting effects on the Swedish economy. Neither the labour force nor the potential growth in productivity will be affected.

In the second alternative scenario, the effects of the coronavirus will be more extensive and the process will be more protracted. GDP growth is expected to be -3 per cent in 2020. Growth will be strong next year, but the recovery will still take longer than in the first alternative scenario. The effects will be longer-lasting.

Unemployment will rise

In both alternative scenarios, the number of hours worked and the number of people employed will decrease. However, the impact on employment levels will not be as great as on the number of hours worked. This is because many companies are expected to retain their staff and take advantage of the new system for short-term layoffs of employees, in the anticipation of growth picking up again. The effect of this will be that average hours worked will fall when employed individuals are absent from work. Increased sick leave will also contribute to a fall in average hours worked. Productivity growth is expected to be slightly lower than in the March forecast. Wages will rise more slowly and inflation will decrease.

In the first alternative scenario, employment will fall by just over 25,000 people this year. Compared with the assessment in February, there will be 50,000 fewer people in employment. Unemployment will rise to almost 8 per cent. There will be a recovery over the next two years, and employment will rise again next year. However, it will not rise enough to allow unemployment to fall appreciably. Unemployment will stand at 7.8 per cent. It will then drop to around 7 per cent in 2022.

In the second alternative scenario, the number of hours worked and employment will decrease by more than in the first scenario. The number of employed will fall by almost 70,000 this year. Compared with the assessment in February, there will be almost 90,000 fewer people in employment. Unemployment will rise to 8.5 per cent. More people will become sick and more companies will take advantage of short-term layoffs than in the first alternative scenario. Employment will rise next year, but it will remain at a lower level for a longer period of time than in the first alternative scenario.

Large deficit in both alternative scenarios

Tax revenues, particularly revenues from tax on labour, will be significantly reduced due to falls in GDP and the number of hours worked. Spending will also increase more as unemployment rises. The Government’s package of measures will also lead to increases in spending. Compensation to companies for sick pay costs and support for short-term layoffs will have the greatest impact. Spending for these measures is expected to reach SEK 7 billion and SEK 4 billion respectively in the first alternative scenario. In the second, these figures are expected to reach SEK 10 billion and SEK 12 billion respectively.

Reduced tax revenues and higher expenditure will contribute to significantly weaker general government net lending in the alternative scenarios compared to the March forecast. In both scenarios, we are assuming that local authorities and regions will be compensated for their reduced tax revenues this year. As a result, consumption in the local government sector will be able to be maintained at the same level as in the March forecast.

In the first alternative scenario, the deficit in general government net lending will amount to SEK 98 billion this year, which corresponds to 1.9 per cent of GDP. The local government sector will receive SEK 12 billion in grants as compensation for lost tax revenues. This support will remain in place for the entire period, i.e. it is assumed to be permanent. Growth will be significantly stronger next year, and the deficit is expected to diminish to SEK 36 billion.

In the second alternative scenario, the deficit in net lending is expected to amount to SEK 161 billion this year. The grants to the local government sector will amount to SEK 17 billion. The deficit will also be large next year, although it will be smaller than this year.

Finally, we should mention once again that there is considerable uncertainty about future economic development. Growth may be even weaker and the deficit may be greater than that presented in the second alternative scenario.

Scenarios for the Swedish economy

The March forecast*
Alternative scenario 1
Alternative scenario 2
  2019 2020 2021 2022 2020 2021 2022 2020 2021 2022
GDP, constant prices, calendar-adjusted,
annual percentage change
1.3 0.4 1.9 1.8 -1.0 2.7 2.4 -3.0 4.0 2.1
Hours worked, annual percentage change -0.3 -0.2 0.6 0.6 -1.5 1.5 1.3 -3.0 2.4 1.0
Employment, annual percentage change 0.7 0.1 0.6 0.6 -0.5 0.6 1.3 -1.3 0.9 1.1
% of the labour force
6.8 7.4 7.2 7.1 7.9 7.8 7.1 8.5 8.0 7.5
Net lending,
SEK billion
18 -23 -13 19 -98 -36 7 -161 -56 -15
Net lending,
% of GDP
0.4 -0.5 -0.2 0.3 -1.9 -0.7 0.1 -3.3 -1.1 -0.3
Budget balance,
SEK billion**
112 -14 10 51 -120 0 80 -170 -30 60

* The March forecast includes information up to and including the 12th of March.

** In the scenarios, we have not taken into account the Government’s proposal regarding the potential for companies to strengthen their liquidity via the tax account. To the extent this is used, the budget balance will be reduced by the same amount.