F&P Quarterly: What’s happening in Sweden?

The Swedish election on 9 September will attract global attention and the country is preparing for unprecedented political turmoil, with another heavy hit on the establishment from populism – as seen in many other countries around Europe. But according to leading economists there will be limited short-term effects on the financial markets thanks to a strong economy, solid growth and healthy public finances.

As in many other countries, the surge of populism has been fuelled by immigration and the aftermath of the refugee crisis. The Sweden Democrats is expected to become one of the country’s largest political parties with polls pointing to around 20% of the votes. The summer’s extreme drought and heavy wildfires have also affected the political dynamics with environmental issues suddenly brought back on the agenda, giving the Greens some well needed last-minute support (before the summer they balanced on the 4% electoral threshold to parliament in polls). As if that wasn’t enough for the mainstream parties, the populist left has also gained momentum according to recent polls.

The established Social Democrats and centre-right block the Alliance parties are stuck in the middle between right- and left-wing populism. The traditional blocks are asking the voters for the mandate to run the country but are relentlessly rejecting any form of negotiations with the Sweden Democrats due to the party’s xenophobic roots. A majority government is thus unlikely, however minority governments are more the rule than the exception in Swedish politics. If the current Prime Minister Stefan Löfven (Social Democrats) wants to continue to govern Sweden, he will most likely need to close a deal with at least one of the Alliance parties to back him. If the Alliance block can stick together and the Christian Democrats makes the 4% threshold, they have a fair chance of forming a minority government. Some argue for a German-style alliance between conservatives and social democrats, an idea that was promoted by leading business daily Dagens Industri last week, however broadly discarded by the parties themselves. In the unlikely event that no new government has been formed by 15 November, the current government will remain in power in the form of a transition government until a new government takes over and must present an ‘apolitical’ budget without any major reforms.

Despite the political turmoil, the short-term implications on the financial market are expected to be limited thanks to the solid Swedish economy and the established framework for financial policy (the latter provides an effective mechanism to avoid budget excesses). There is a broad political consensus to further invest in welfare, law and order and defence with good chances for deals over the isle. According to a Handelsbanken macro report (Aug 22), export is expected to pick up again despite the continuing trade conflicts, and the bank increased its GDP growth forecast. Enduring optimism leads to more jobs and lower unemployment. On the monetary policy side, the inflation rate is on target, but the Riksbank’s Executive Board is split regarding the timing of the first repo rate hike. A weak government would be less effective managing a major financial crisis or other unexpected event and less able to make important structural reforms.

The once politically stable and predictable Sweden with long traditions of seeking consensus will most likely wake up to political turmoil on 10 September. Be prepared for extensive negotiations to unlock parliamentary deadlocks, and that a re-election later this year cannot be ruled out. The strong state of the Swedish economy will be many business leaders’ best friend this fall.