2014 In-Depth Review for Sweden

March 28, 2014DG ECFIN

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Agenda

Macroeconomic Imbalance Procedure

In-depth review of Sweden

Next steps

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Macroeconomic Imbalance Procedure

- Alert Mechanism Report – yearly… proposes on the basis of a scoreboard of indicators which countries are susceptible to imbalances and need to have an In-Depth Review

AMR IDR

14 Feb 2012 30 May 2012 12 Member States

28 Nov 2012 6 March 2013 14 Member States

13 Nov 2013 5 March 2014 16 Member States

MIP: the Procedure

Alert mechanism

report

Nov. 2013

Programme countriestheir own enhanced

surveillance

No problemProcedure

stops

In-depth reviews

Commission prepares in-

depth country reviews (IDR),

using a wide set of indicators and analytical tools.

No problemProcedure stops

Excessive imbalances

ImbalancesRecommendations under

European SemesterJune 2014

Decision on triggering corrective action

(it depends on quality of NRPs and SPs/CPs)

June 2014

Monitoring andsubsequent steps

Findings of the 2014 IDRs

Excessive Imbalances SI, HR, IT

opening of corrective arm will be decided in June after examination of NRPs and SGPs

ImbalancesBE, BG, DE, IE, ES, FR, HU,

NL, FI, SE, UK

of which requiring decisive action: IE, ES, FR, HU

No Imbalances DK, MT, LU

IDRs Cover a Very Wide Range of IssuesMain issues

External sustainability ES, IE, FR, HR, HU

Persistent large surplus DE, (NL, SE, LU)

Price/non-price competitiveness BE, FR, IT, HU, SI, FI, UK, ES, HR, DK, LU

Housing and mortgage markets ES, NL, SE, UK, IE, HU

Households indebtedness DK, IE, ES, FR, HR, HU, MT, NL, LU, SE, UK

Firms indebtedness IE, ES, HR, HU, NL, SI, UK, LU

Labour market BG, IE, ES

Financial sector stability IT, ES, IE, SI

Other issues

Public debt, potential growth, subdued demand/low investment Unemployment, energy dependence, innovation and R&D, state-owned enterprise,

networks, FDI

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Agenda

Macroeconomic Imbalance Procedure

In-depth review of Sweden

Next steps

• MIP scoreboard of indicators for Sweden (AMR

2013) Sweden Thresholds 2008 2009 2010 2011 2012

External imbalances and competitiveness

Current Account Balance as % of GDP

3 year average -4/+6% 8.9 8.3 7.5 6.9 6.9

p.m.: level year 2012 - 9.1 6.7 6.8 7.0 6.9

Net International Investment Position as % of GDP -35% -11.1 -8.3 -5.7 -6.9 -15.5

Real Effective Exchange Rate (HICP

deflators)

% Change (3 years) ±5% & ±11% -2.0 -8.5 -3.4 2.9 10.1

p.m.: % y-o-y change - -2.2 -7.3 6.5 4.1 -0.8

Export Market Shares

% Change (5 years)

-6% -8.5 -15.0 -12.2 -11.8 -16.9

p.m.: % y-o-y change - -4.1 -6.9 -1.6 -0.5 -5.0

Nominal ULC

% Change (3 years)

+9% & +12% 6.9 12.2 5.1 1.4 0.3

p.m.: % y-o-y change - 3.1 4.4 -2.3 -0.6 3.2

Internal imbalances

% y-o-y change in deflated House Prices +6% -1.8 0.6 6.7 1.0 -0.2

Private Sector Credit Flow as % of GDP (NCO) 15% 27.0 9.0 6.5 10.9 0.1

Private Sector Credit Flow as % of GDP (CO) 14% 21.1 4.9 4.2 6.2 0.9

Private Sector Debt as % of GDP (NCO) 160% 253.4 270.0 254.8 256.4 254.8

Private Sector Debt as % of GDP (CO) 133% 215.9 229.1 215.4 213.0 213.1

General Government Debt as % of GDP 60% 38.8 42.6 39.4 38.4 38.1

Issues at stake for Sweden

Issues

Current account

Export market share

Private debt

Housing

Potential concerns Misallocation of resources?

Loss of competitiveness?

Vulnerability to interest rate, income or employment changes?

Impact on consumption and investment? Impact on financial sector?

Impact on private indebtedness? Hampering labour mobility?

Current account surplus•- not indicating an imbalance

•- caused by prudent policies (high savings by households and govt) and strong competitiveness,

•not by artificially boosted exports or

•lower demand (except construction)

•- on a downward trend

CLEAREDCLEARED

Flashing indicators – Sweden

Flashing indicators - Sweden

Losses in export market shares

- Not due to weak competitiveness

- Common feature for all "old" MS

- Losses in goods compensated

partly by gains in services

CLEAREDCLEARED

Flashing indicators – Sweden

High private debt

CSR2 2013- Households (83% of GDP)

- Corporations, consolidateddebt (128% of GDP, EU-average: 91% of GDP)

WATCH OUT !

WATCH OUT !

Corporate debt

- Overstated by a large share of intra-group loans (lower risk)

- Intra-group loans related to efficient tax planning by multinationals

- Indicators of financial health OK

- Excluding intra-group loans,

debt at 90% of GDP… still high !

Household debt

83% of GDP or 158% of gross disposable income

Factors: •Low interest rates•Debt-bias in taxation•Limited amortisation•House price growth•Low supply of new housing

Low imminent deleveraging pressures but macroeconomic risks on consumption

Evolution of financial resilience since the late 1990s

Major trends

• Increase of the loan-to-value ratio of new mortgages

• Lengthening of actual repayment periods

• Predominance of variable interest rate loans

• Risk of income loss related to unemployment or sickness has become more significant

Loan-to-value ratio of new mortgages

Despite the measures taken so far, debt-to-GDP is still pointing upward

• 85% loan-to-value cap• 15% risk weight floors on

mortgage loans• Amortisation culture:

amortisation down to 70% and individual amortisation plan

• Regulation on fairer rules for mortgages repayment: interest rate compensation and repayment in case of a general downturn in housing market

Measures taken

Policy avenues to curb household indebtedness

• Promote sound lending practices• Increase amortisation pace and requirements• Base lending on actual repayment ability rather than

value of underlying asset

• Review taxation• Reduce gradually tax deductibility of mortgage interest:

rate, maximum deductible amount, scope• Strengthen recurrent property taxation

• Address housing market imbalances…

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60

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80

90

100

110

120

130

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Graph 3.37: Real house prices in the Nordic region, Index 2010=100

Denmark Finland

Sweden EUSource: OECD

- Steady, sharp and almost uninterrupted house price growth since 1994

- Nominal house prices increased by more than 205% (EU: 80%), while real house prices increased by 128% (EU: 25%)

- Prices remained relatively stable even during the crisis

Housing market developments

But: House price increases are fuelling private indebtedness and can have an important impact on consumption, economic performance and financial stability -> more in-depth analysis is required

House price levels

• - Traditional indicators, such as affordability (price-to-income) and dividend (price-to-rent) ratios suggest that house price levels are above their long-term average;

• - Price-to-income ratio: increased dynamically and remained higher than EA/OECD average after the crisis.

• - Prices are not growing excessively since 2010, rather on a stabilising path (but at historically high levels)

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90

100

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90 92 94 96 98 00 02 04 06 08 10 12

Ind

ex, 2

000=

100

Graph 3.40: Price to income ratio; index 2000=100

EA OECD SESource: OECD

IDR: Can house price increases be explained by favourable fundamentals only? Is there a macroeconomic risk?

House prices have been largely driven by favourable fundamentals…

• - A steadily rising population, in particular in the major cities• - Strong economic fundamentals of Sweden (high employment rate,

steeply growing disposable incomes, …)• - Highly favourable credit conditions (low interest rates, non-amortised

mortgage loans, …)• - Strong tax incentives for house purchase (generous income tax

deductibility, limited recurrent property tax, …)

• - but: particularly sharp increase of house prices in the main urban areas (in particular Stockholm) cannot be explained by favourable fundamentals only; additional inefficiencies also fuel price increase• Lack of sufficient housing supply (widespread housing shortage in Sweden)• Non-efficient use of the existing housing stock (rental market inefficiencies, high

transaction tax)

Supply-side constraints (1): New constructions

Lack of new constructions due to:- Long and complex planning and zoning

process; - Local municipalities have a key role

(planning monopoly, procedures, land ownership, ..), but have no real incentives to support housing;

- Value of land increases more than housing;

- Non-transparent land allotment;- Limited competition in the construction

sector;- Additional support would be needed for

housing segment typically not provided by the market (student, affordable, …)

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00 01 02 03 04 05 06 07 08 09 10 11 12 13

%

Residential investment in % of GDP

Denmark Finland Sweden UK

Source: Commission Services

Supply-side constraints (2): utilisation of existing stock

Rental market: -Strong rigidities market: wide divergence between rental prices and market prices in Stockholm mainly -Wide price divergence creates excessive demand, lock-in effect, limited new constructions, price pressure on comparable housing segments, ..

Existing housing stock•High level of transaction tax disincentives transactions (lock-in)

Policy recommendations on housing

• Reduce generous tax incentives (possible reduction of tax rates, limitation of

scope, time, deductible amounts, maximum amounts, ...);

• Increase recurrent taxation/decrease transaction tax;

• Address factors holding back new construction (simplify planning and building

process, revise municipalities’ incentives, increase competition, address specific

segments, …);

• Tackle most pressing rental market inefficiencies (reform rent setting to close

such wide divergence compared to market prices, ...)

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Agenda

Macroeconomic Imbalance Procedure

In-depth review of Sweden

Next steps

Next steps

• European Semester: country specific recommendations based on the IDR; proposed by

European Commission, agreed by Member States

• Monitoring of on-going developments in Sweden

• Careful implementation of the recommendation is needed: measure are interlinked and

reinforce each other, have strong macroeconomic impact, political consensus needed

• ‘Stock’ type of imbalances require more time to unwind

• Will forthcoming stronger economic growth and the ongoing wide debate in Sweden pave

the way for further sound policy actions?

•

Thank you!