III. ECONOMIC TRENDS AND OUTLOOK - Major Trends and Outlook Sweden is currently pulling out of the deepest and most protracted recessionary period experienced since the depression years of the early 1930s. The visible cost to the country is unemployment at an unprecedented high level. This cost, together with the cost of shoring up the banking system, have swelled public sector borrowing to alarming levels. The reduction of government deficits and servicing of still-growing debts have cost a very tight hold on the nation's purse-strings and will continue to do so in the foreseeable future, regardless of what government is in power. The more than 20-percent trade-weighted depreciation of the krona against other currencies after the enforced "float" of November 1992 has brought a strong export-led recovery in the economy, but the domestic market is lagging behind and there has been little overall effect on unemployment. Two major imponderables face the Swedish economy in the latter part of 1994. The first will be the outcome of the general elections scheduled for September 18. The second imponderable is whether or not Sweden will choose to join the European Union in a referendum to be held on November 13. - Principal Growth Sectors See appendix B. - Government Role in the Economy Government activity is designed to assist the maintenance of full employment, particularly in such areas as northern Sweden where persist high unemployment exists; to influence restructuring and modernization of Swedish industry; and to provide resources for projects that are unattractive to private industry because of risks involved. Sweden combines a free enterprise economy with extensive government social welfare activities. The state, in cooperation with local authorities, plays a vital role in providing medical, family, old age, disability, unemployment, and other social services. In the past, Sweden's prevailing economic philosophy held the theory that monetary and fiscal policies can and should be actively utilized for achieving full employment, restraining inflation, maintaining a favorable balance of payments, and moderating business cycles. Now that Sweden plans to join the European Union, its economic and trade policies will become more closely aligned with the rest of Europe. - Balance of Payments Situation Sweden's current account balance, which improved from a deficit equivalent to 2.7 percent of GDP in 1992 to only a slight deficit in 1993, is expected to show a large surplus equivalent to 2.2 percent of GDP in 1994 and to 3.5 percent of GDP in 1995. The chief cause of this turnaround is the burgeoning trade balance resulting from the strong ongoing export-led upswing. Among the components of the current account balance, the services balance showed a marked improvement from 1992 to 1993, thanks to a sharp drop in net expenditures on tourism. This was the result of the combined effects not only of the depreciation of the krona but also of lowered disposable income, which reduced travel from Sweden and increased tourism in Sweden. This improvement is not expected to last, however, and the deficit in net tourism is again expected to rise in 1994, with the trend further reinforced in 1995 as a result of greater Swedish travel abroad and rising personal consumption. - Trade and Investment Barriers With the exception of a few strategic areas of the economy, Sweden is generally open and receptive to foreign investments in almost all sectors of the economy, although there is no effective government program to attract foreign investments. - Labor Force Swedish unions have helped to implement rationalization and strongly favor employee education and technical progress. Management-labor cooperation tends to be excellent and non- confrontational. The old system of centralized wage bargaining between the employers' association and the trade union confederation has been replaced by more decentralized negotiations. In recent years, the unions have been in a weaker position vis-a-vis employers and have made relatively moderate wage demands. The 1993 round of wage negotiations was settled without any major strikes or disruption. The next round will take place in the spring of 1995. Long accustomed to unemployment rates of 3 percent and less, Sweden's labor force is currently suffering its highest jobless rate since the 1930s. The government's labor market policy has been to try to place emphasis on active measures rather than passive handouts. About 5 percent of the work force is currently in these government training or work programs and another 8 percent are openly unemployed. - Major Local and Third-Country Competitors in Specific Sectors Germany has been Sweden's largest supplier country for many years. One fourth of all imported engineering products and a substantial proportion of all imported chemical products and semi-manufactures originate in Germany. Germany is also a very important supplier of cars, automotive parts, trucks, iron and steel. The second largest supplier to Sweden is the United Kingdom. More than one third of import value consists of engineering products, but the U.K. is also an important supplier of chemicals and semi- manufactures. The third most important supplier country for Sweden is Denmark. Aside from various finished goods, imports from Denmark include relatively large quantities of food-stuffs and petroleum products. Agricultural Products - France and the Netherlands among EU countries are major apple suppliers. France also dominates the markets for wine in Sweden. Italy provides stiff competition with carrots, grapes, plums and kiwi fruit. Spain, a very efficient and quality conscious producer of fruits and vegetables, is a major supplier to the Swedish market of tomatoes, celery, oranges, tangerines, lemons, strawberries, plums and wines. The Netherlands is also a major supplier of quality produce. Israel is a major competitor with avocados and grapefruit. Morocco supplies half of the tangerine market. Chile is a major supplier of grapes and apples. Argentina is a major supplier of apples and pears. Australia, Chile, Austria and Germany also are major wine competitors. Hungary and Denmark are the major competitors with beef liver. Italy, Israel, Spain, Australia and New Zealand are especially active with market promotion budgets in Sweden. With the approach of EU membership, Germany has also become more active. Fishery Products - Norway is the largest supplier of fish to Sweden, followed by Denmark. Other major suppliers include Iceland and Canada. Forestry Products - Within the very broad forestry products sector, major competitors vary depending on the type of product. Among the major product categories, Germany, Russia and Norway stand out among groundwood (for pulp production) suppliers. Finland, Norway and Germany are the most significant suppliers of woodchips. The dominant supplier of hardwood plywood is Finland. The United States which was the largest softwood plywood supplier to Sweden in 1992 saw its market share decline in 1993 due to the devaluation of the Swedish krona against the dollar and high U.S. wood product prices. Norway dominates the particle board market and along with Finland supplies most of the soft wood lumber. - Infrastructure Situation The infrastructure situation is comparable to the United States. Practices that might restrict competition are prohibited. New regulations have been laid down to strengthen the position of the consumer on the market. The self-service system has become wide- spread in the trade in convenience goods. - Major Infrastructure Projects Underway Investments in infrastructure totalling USD 10 billion will be made in Sweden over a ten-year period, according to a government program supported by private industry. The government plans to invest USD 14 billion in roads, railways and ports while private business will bear most of the cost of building the Oresund Bridge between Sweden and Denmark and other major construction works, such as a railway link between the City of Stockholm and Arlanda Airport. A comprehensive construction program for roads, railways and bridges will be carried out in Stockholm. A total of USD 4.5 billion will be allocated during the decade for traffic and transport within the greater Stockholm area, including a ring-road around the capital. The latter project (the "Dennis package") has become a controversial political issue because of its environmental consequences. Other major projects include upgrading air navigation services at Arlanda Airport, building the High Coast Suspension Bridge along the north-eastern coast and a third run way at Arlanda Airport. Additional investments in Sweden would be for conventional power stations, repairs of nuclear power plants, rebuilding of ports, new purification and waste-treatment plants, hospitals and schools.