Download Towards Stronger EU Economic Governance

2014 In-Depth Review
for Sweden
March 28, 2014
DG ECFIN
Agenda
Macroeconomic Imbalance Procedure
In-depth review of Sweden
Next steps
2
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
3
MIP: the Procedure
Alert
mechanism
report
Nov. 2013
No problem
Procedure
stops
Programme
countries
their own
enhanced
surveillance
In-depth
reviews
Commission
prepares indepth country
reviews (IDR),
using a wide set
of indicators and
analytical tools.
No problem
Procedure stops
Imbalances
Recommendations under
European Semester
June 2014
Excessive imbalances
Decision on triggering
corrective action
(it depends on quality of
NRPs and SPs/CPs)
June 2014
Monitoring and
subsequent 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
Imbalances
of which requiring decisive action:
No Imbalances
BE, BG, DE, IE, ES, FR, HU,
NL, FI, SE, UK
IE, ES, FR, HU
DK, MT, LU
IDRs Cover a Very Wide Range of Issues
Main 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
Agenda
Macroeconomic Imbalance Procedure
In-depth review of Sweden
Next steps
7
• MIP scoreboard of indicators for Sweden
(AMR 2013)
Sweden
Thresholds
2008
2009
2010
2011
2012
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
-35%
-11.1
-8.3
-5.7
-6.9
-15.5
±5% & ±11%
-2.0
-8.5
-3.4
2.9
10.1
-
-2.2
-7.3
6.5
4.1
-0.8
-6%
-8.5
-15.0
-12.2
-11.8
-16.9
-
-4.1
-6.9
-1.6
-0.5
-5.0
+9% & +12%
6.9
12.2
5.1
1.4
0.3
-
3.1
4.4
-2.3
-0.6
3.2
% 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
Current Account
Balance as % of GDP
Net International Investment Position as % of GDP
Real Effective
Exchange Rate (HICP
deflators)
External imbalances
and competitiveness
% Change (3 years)
p.m.:
% y-o-y change
% Change
(5 years)
Export Market Shares
p.m.:
% y-o-y change
% Change
(3 years)
Nominal ULC
p.m.:
% y-o-y change
Internal imbalances
Issues at stake for Sweden
Issues
Potential concerns
Current account
 Misallocation of resources?
Export market share
 Loss of competitiveness?
Private debt
 Vulnerability to interest rate, income or
employment changes?
 Impact on consumption and investment?
 Impact on financial sector?
Housing
 Impact on private indebtedness?
 Hampering labour mobility?
Flashing indicators – Sweden
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
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
Flashing indicators – Sweden
High private debt
CSR2 2013
- Households (83% of GDP)
- Corporations, consolidated
debt (128% of GDP,
EU-average: 91% of GDP)
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
debt at 90% of GDP… still high !
% of GDP
- Excluding intra-group loans,
200
180
160
140
120
100
80
60
40
20
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
intra-sector lending within Sweden
intra-company from abroad
debt excl. intra-company loans from abroad
Source: SCB
Note: The blue and yellow areas in this Graph taken together represent the
traditional definition of "consolidated debt", the blue area represents the
"super-consolidated" view, i.e. consolidated debt excluding intra-company
loans from abroad.
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
25
Share of households with a
deficit, %
Low imminent deleveraging pressures but
macroeconomic risks on consumption
Discretionary income for
Swedish households
15
0
1
2
3
4
5
Interest rate increase, %
Without amortisation
With amortisation
10
5
0
<0
0-1
2-3
4-7
8-10
11-15
16-25
> 25
SEK thousand
Banks' discretionary income
FSA's discretionary income
Source: Banks and Financial Supervisory Autority (FSA)
Share of households with negative
equity
Share of households, %
20
Stress test on interest rate
10
9
8
7
6
5
4
3
2
1
0
Stress test on house price
60
50
40
30
20
10
0
0
5
10
15
20
Fall in prices, per cent
2012
2011
Source: Financial Supervisory Authority (FSA)
25
30
Evolution of financial resilience since the late 1990s
Major trends
Loan-to-value ratio of new
mortgages
• Increase of the loan-to-value
ratio of new mortgages
70
%
• Lengthening of actual repayment
periods
75
65
• Predominance of variable
interest rate loans
60
55
• Risk of income loss related to
unemployment or sickness has
become more significant
03
04
05
06
Source: FSA, banks' calculations
07
08
09
10
11
12
13
Despite the measures taken so far, debt-to-GDP is
still pointing upward
Measures taken
12
Decomposition of y-o-y changes in debt-to-GDP ratios,
households
10
8
6
y-o-y change
• 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
4
2
0
-2
-4
-6
-8
05Q1
06Q1
Credit flow
07Q1
08Q1
Real growth
Source: Commission Services
09Q1
Inflation
10Q1
11Q1
Other changes
12Q1
13Q1
D/GDP, change
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…
Housing market developments
Graph 3.37: Real house prices in the Nordic
region, Index 2010=100
130
120
110
100
90
80
70
60
50
40
30



80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: OECD
Denmark
Finland
Sweden
EU
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
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
Graph 3.40: Price to income ratio; index 2000=100
150
140
• - Traditional indicators, such as affordability
(price-to-income) and dividend (price-torent) 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)
Index, 2000=100
130
120
110
IDR: Can house price increases be
explained by favourable fundamentals
only? Is there a macroeconomic risk?
100
90
80
70
60
90 92 94 96 98 00 02 04 06 08 10 12
Source: OECD
EA
OECD
SE
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, nonamortised 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:
Residential investment in % of GDP
8
7
6
%
5
4
3
2
1
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Denmark
Finland
Source: Commission Services
Sweden
UK
- 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, …)
Supply-side constraints (2):
utilisation of existing stock
Rent Control in the EU27 (quantitative indicators for
rent setting)
0.20
0.15
0.10
0.05
0.00
-0.05
-0.10
-0.15
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, ..
ES IT PT FI UK EL LV PL BE LT SKBGFR IE NL DECZ AT DK LU SE
Source: Commission services
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,
...)
Agenda
Macroeconomic Imbalance Procedure
In-depth review of Sweden
Next steps
25
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!