Analysis of the Current Swedish Economy

Analysis of the Current Swedish Economy 1

Analysis of the Current Swedish Economy 1

Analysis of the Current Swedish Economy 3

Analysis of the Current Swedish Economy

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Econ 104 DXX

This paper will provide an in depth look into the economy of Sweden over the past year as it has dealt with COVID-19 with the goal of helping our company determine if Sweden is a good place for us to expand our operation to. We will also take into consideration trends in the past to help predict where Sweden will be in the post COVID-19 world. Using a variety of data we will address many of the key factors that should be considered before making a decision about the newly proposed swedish location. Our focus will primarily be on the opportunities and hurdles presented by Sweden’s diminishing GDP, negative inflation rates, rising unemployment, international trade, low interest rates as well as growing debt-to-GDP ratio.

Through the first three quarters of 2020 Sweden has been experiencing a period of contraction(Look to figure 1). This is largely in part due to COVID a trend that will be present throughout this analisis. It should be noted that prior to this three quarter period of contraction Sweden experienced a period of four quarters of non-stop expansion and has shown trends of long term growth even through large scale recessions. Although a decreasing GDP presently would not bode well for business in the short term in the long run the trend of constant overtime growth shows a light at the end of the tunnel.

Contrary to the short term problems and decreasing GDP brings, Sweden has seen decreasing rates of inflation all year(figure 2). This affords us several opportunities. With decreasing inflation rates comes much more security. It becomes a lot easier to predict what our costs in the future will be, allowing us to both plan and time an expansion to sweden. The downside of this lower inflation rate signals a lower demand for goods and an increase in the amount people are wanting to save their money. The want to save is also supported by increasing unemployment(figure 3).

With both of these factors in mine the GDP and inflation rates we can make certain assertions about the viability of doing business in Sweden. Firstly in the short term there will probably be very little demand for our product or services. This is supported by a diminishing inflation rate. However in the long run there is a high probability of the swedish economy recovering to or surpassing what it was a year ago. As people begin to get rehired luxury spending on normal goods will increase and the GDP will increase alongside the increasing demand of more goods. These factors lend to a strategy of using the decreased inflation rate to predict our costs and commencing our operation before the economy is fully recovered from COVID so that when demand begins to increase again we are there to capitalize. This functions under the assumption that we are able to take on the short term costs with little hope for return until Sweden return to a period of expansion. The other opportunity that could be presented in the short term is if we are able to sell inferior goods. Seeing as the sweedish economy is in a time of contraction this would be the ideal time to be selling inferior goods; this could be a good way to subsidize initial start up cost.

One of the other advantages we get from beginning to set up business now as opposed to later when other businesses have already hit their stride is capitalizing on the increasing unemployment rate(figure 3). For the first time since 2013 Sweden has experienced an overall increase in unemployment in 2019 and that has been accentuated by the COVID-19 crisis in 2020. This intern would allow us to hire people at lower costs then normal as people are looking for jobs and will be less selective when trying to find a job. Sweden also has a very high average level of education so it would not be hard to gain a lot of human capital in the form of education at very low cost.

Sweden has a diverse amount of exports mostly focused on industrial machinery, vehicles and natural resources like wood and Iron. In these markets there is very little opportunity as it would cost us much more money to make these products then their local industry and the market for these products are quite saturated. Conversely they have a very hard time growing enough food for their population especially fruits and vegetables needing to import a sizable amount of these products to help supplement their lacking agricultural industry. With this in mind there is a big opportunity if we are either able to focus on importing fruits and vegetables to Sweden or growing these products in sweden and selling them there at cheaper prices then the current firms operating in Sweden. Similar opportunities are present in plastics, pharmaceuticals, and technology like computers.

Another opportunity of doing business in Sweden is its low interest rates. Over the last year Sweden’s interest rates to households and non financial institutions have been slowly reduced (shown in figure 5 & 6) to help encourage borrowing and reduce the interest on mortgages and other long term loans. This is known as expansionary monetary policy with the goal of freeing up income and promoting borrowing to help stimulate the economy through COVID. This is a good thing for businesses like us who will be hoping to sell things as well as potentially take out loans to help us start up our business. Because low interest rates can help free up income for households in sweden they are more likely to have more disposable income to spend on our products. The low interest rates are a result of the zero interest rate policy(ZIRP) the central bank of Sweden has adopted when dealing with other financial institutions. By having a zero percent interest rate it makes it cheaper for other institutions to borrow money. These institutions then give us low interest rates as a result making it more affordable to take out loans.

This ZIRP could be considered a form of aid to help its people through the COVID-19 crisis. However there are also several programs that the government has started that are directly targeted to help struggling businesses during COVID. First is temporary tax payment respite which allows companies to postpone their tax payments, social security fees, and value added tax. Secondly there is the Reorientation Support meant for companies that experienced loss during covid. This was a subsidy for any business that had lost a certain percent of the business they did in the 2019. The first of these two policies could represent an opportunity where value added tax for imports where we finish assembly in Sweden is reduced. In addition fees can be postponed giving us more money in the short term to focus on expanding and then later pay them off. This is one of the ways we could take advantage of the low interest rates by taking out loans to pay for these fees. Because of the low interest this would effectively increase our purchasing power in comparison to taking out loans in Canada. Unfortunately the second policy will have very little direct benefit for us as we did not operate in Sweden during 2019. That being said the more money other business are able to pay their employees the more disposable income these people will have to buy our products.

Another benefit to operating in Sweden is its relatively stable economy. As shown below its debt to GDP ratio has increased over the last year(Figure 7) however when taking into account the years before this it doesn’t seem like a very large change over all. In addition when we factor in the change to GDP that was addressed at the beginning of the analysis these numbers are not surprising and do not warrant raising any major concerns as it can be expected that the ratio will fall again once the GDP and employment rate rise once more.

There are many good reasons to look to expand to sweden. You need look no further than its trends of consistent long term growth over the past years and its well trusted central bank Riksbank the oldest central bank in the world a leader in monetary policy. This stable economy with a multitude of opportunities for long term economic growth lends to the belief that we should try and expand our firm. With this in mind it is important for us to address what type of business we are looking to do in Sweden. If we are looking to sell inferior goods there is more opportunity in the short term then the long term and for normal good the opposite is true. A combination of these two is most likely the ideal plan for expanding into the swedish economy if possible.

Appendix

Figure 1

Statistics Sweden, 2020, GDP:expenditure approach by observation, type use and quarter, Sweden, Statistics Sweden.

Figure 2

Statistics Sweden, 2020, Consumer Price Index(CPI) annual changes(Inflation Rate) 1980=100, Sweden, Statistics Sweden.

Figure 3

Note: Values are in thousands

Statisitics Sweden, 2020, Unemployed persons age 15-74 by duration of unemployment, sex age. Month 2005 M04-2020 M11, Sweden, Statistics Sweden.

Figure 4

Statistics Sweden, 2020, Trade Balance total and components 2000-2019, Sweden, Statistics Sweden.

Figure 5

Statistic Sweden, 2020, Lending Rates to households and non-financial corporations, Sweden, Statistics Sweden.

Figure 6

This table was calculated using data from Figure 2 and Figure 5.

Figure 7

https://www.imf.org/external/datamapper/profile/SWE ,​ 2020, GDP-to-debt ratio/Sweden, International Monetary Fund.

Last Updated on April 14, 2021