Sweden’s economic model begins to crumble (Video)
The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss the liberal, model economy, of Sweden, which has recently taken a steep downturn and faces recession.
With growth faltering nationally, and the prospect of hard Brexit and a global trade war on the horizon, is it time for Sweden to start getting ready for an economic downturn?
Ylva Hedén Westerdahl, head of forecasting at the National Institute of Economic Research, said Swedes should not think today’s good times will continue forever.
While external shocks like Brexit or a trade war will only hit exporters directly, indirectly they could push down house prices, destabilize financial institutions, make salary growth stagnate and cause rising unemployment.
“When house prices fall, then house-owners start to feel poorer and so they cut their consumption and start to save more,” she told the TT news agency.
Another big worry for the property market is whether the large numbers of newly built houses shortly to come onto the market will be sold.
“The question is how they are going to be sold,” Westerdahl said. “Overproduction means that housing investments and prices could fall even more.”
But banks are not as exposed to mortgages as they were in the run up to the 2007 and 2008 financial crisis.
John Hassler, Professor of Economics at Stockholm University’s Institute for International Economic Studies, argues that households in Sweden are not generally financially overstretched.
A bigger worry, he said, was commercial property owners, some of whom could go bankrupt in a downturn.
“That’s the part of the loan portfolio which is a little more uncertain,” he said.
If that leads to a confidence crisis in the housing sector, banks could star pulling in lending to households and other investment projects, he warned.
“The blood flow in the system might ground to a halt and that’s very serious.”
If the crisis is serious enough to push any of the banks into a crisis, then that could hit the entire economy seriously, forcing the national government to come to the rescue and guarantee some banks’ borrowing.
Luckily, he said, Sweden’s cautious fiscal policy over the past 20-25 years had left it with considerable firepower to bail out banks in the event of a crisis.
“If we had the same debt levels as France or Italy we would have been toasted.”
Most economists see Sweden’s next economic downturn as coming from external factors, such as a financial crisis in Sweden, a crisis in the Eurozone, or a trade war between the US and China.
The first industry segments to be hit will be big exporters such as Scania and Swedish steel giant SSAB.
How much their troubled hit the wider Swedish market depends on how willing they are to hold onto their staff despite drops in sales, Hassler said.
“They were willing to do that during the  finance crisis but not during the 1990s economic crisis, when companies realized they weren’t competitive enough,” he said.
If there are mass layoffs, he said, the weakest members of the workforce would be the worst affected.
“It has been tough for those with a low level of edcuation or a foreign background to get a job even during an economic boom, and for them a downturn would of course be much worse.”
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