Macro Research - Macro Focus

Macro Research
10 November, 2015

Macro Focus
Wave of refugees propels growth

Refugee-related fiscal policy raises Swedish GDP

Riksbank faces a new reality

Long-term effects depend on how well integration succeeds

Summary
Sweden finds itself in an exceptional situation. The refugee crisis in Syria
has in short order caused the largest immigration to Sweden in modern
times (see figure 1). Our analysis shows that spending on refugees could
raise Swedish GDP by between and percentage point in 2016 and
2017 and that unemployment will drop much faster than it otherwise would
have. This in turn is expected to accentuate the mismatch in the labor
market and increase wage drift slightly. Public finances will come under
greater pressure and the governments net borrowing requirement is
expected to further increase, at the same time that the situation for
municipalities worsens. For the Riksbank the growth spurt is welcome.
Inflation gets nudged higher and the Riksbank may have to change
direction as soon as next year.

Effects on the Swedish Economy of the

refugee influx
Household Consumption
Government Consumption
Housing Investments
Public Investments
Imports (deduction)
GDP
Employment level
Unemployment
Wages
Inflation
General Government Budget Balance (% of GDP)

Repo rate (bp)

2016
0,4
0,4
0,05
0,03
-0,2
0,7
35 000
-1,1
0,2
0,2
-0,6
25

2017
0,3
0,3
0,02
0,03
-0,1
0,5
50 000
-0,9
0,2
0,2
-1,1
25

Source:Swedbank
Note: Net contribution to GDP

In the medium term the consequences for the Swedish economy are much
more uncertain. They will depend on how well these new arrivals are
integrated. We present two scenarios for the long-term effects of this huge
wave of immigration with largely quantitative conclusions. Our assessment
of the effects on the Swedish economy in 2018-2020 in a negative
scenario assumes that employment for non-natives remains at todays low
level. Integration costs will increase during this period. Unemployment
rises as the new arrivals begin to seek out jobs and the labor force gains
momentum. Growth slows in 2018-2020. This negative effect on the
Swedish economy could be offset by reforms that improve integration of
the newcomers into the labor market. If, with the help of reforms,
employment rates among non-natives can be raised to the same levels as
native Swedes, a positive scenario could instead become a reality with
beneficial impacts on growth and public finances.

Increased refugee costs provide fiscal stimulus

Accommodating the new arrivals will place great pressure on social
institutions and public finances. The Swedish Migration Agency recently
revised its projected costs for asylum-seekers substantially higher: by SEK
29 billion in 2016 and SEK 37 billion in 2017. We base our assumptions
on the Migration Agencys latest projections, along with Statistics
Swedens long-term demographic projections. The government has
announced that rising immigration will be financed through a combination
of increased borrowing, spending cuts and a redistribution of the
development budget. We feel it will be politically difficult to greatly cut
spending and that as a result of some form of agreement between the
political blocs the higher costs will be financed mainly through increased
funding and money from the foreign aid budget. Since the crowding out
effects in todays interest rate environment are minimal (debt financing),
and given the redistribution from foreign to domestic demand (reducing
foreign aid costs), this will contribute to higher economic activity in
Sweden. Fiscal policy will be more expansionary, which will contribute to
November 10, 2015

Analysts:
Anna Breman
anna.breman@swedbank.se
+46 (0)703 149587
Knut Hallberg
knut.hallberg@swedbank.se
+46 (0)76 1033930

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Macro Research - Macro Focus

higher growth.
The development budget is only a short-term solution, however. In the
longer term integration costs will rise and will have to be financed mainly
through higher taxes and funding, but also through redistributions within
other spending areas. In the short term, creative budgeting will become a
big part of the governments efforts to push forward and delay major
expenditures to 2015 and 2017, respectively, in order to reduce the risk of
breaking through the spending ceiling next year. We expect the
governments net borrowing requirement to coalesce at a significantly
higher level in the years ahead.
Figure 1 Swedens population and number of asylum-seekers
Swedish population

Asylum-seekers

10 000 000

100 000

90 000
9 500 000

80 000
70 000

9 000 000

60 000
50 000

8 500 000

40 000
30 000

8 000 000

20 000
10 000

7 500 000

Population

Number of asylum-seekers

Sources: Statistics Sweden and Swedish Migration Agency

Positive short-term growth effects from refugees

We are revising Swedish GDP growth higher by 0.7 percent for 2016 and
0.5 percent for 2017 due to the greatly increased migration. There are now
expected to be an estimated 520,000 asylum-seekers in 2015-2019, and
upward revision of about 200,000 compared with last summers projection.
This corresponds to an added increase of 2 percent to the Swedish
population. Such a high level of immigration means increased household
consumption, higher public spending and higher investment, including in
housing, the public sector and parts of the service sector. Employment
and hours worked will increase significantly in the short term, reducing
unemployment faster than otherwise would be the case (see table 1).
The recent increase in activity and sentiment indicators, not least for the
service and construction sectors (PMI and Economic Tendency Indicator),
as well as forward-looking labor market indicators strengthen the
impression of a faster improving labor market. Mismatch problems will
worsen in the short term, causing more wage drift, mainly in domestic
sectors. According to the Economic Tendency Indicator, the labor
shortage has already begun to increase, mainly in the construction sector,
but also in parts of the service sector. This is also contributing to higher
domestic inflation pressure owing to stronger domestic demand and a rise
in service prices. Higher consumption and investment are leading to
higher imports at the same time that exports are unaffected. Net exports
are slowing as a result, offsetting the increase in GDP somewhat. As a
whole, we expect increased immigration to generate higher growth.

Major forecast revisions due to migration

The biggest impact on the Swedish economy in 2015-2017 is from higher
household consumption spending. Nearly 200,000 more people are
migrating than had been expected at the beginning of the year. This
November 10, 2015

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Macro Research - Macro Focus

means a corresponding increase in spending on food, clothing and

housing. We are revising our forecast of household consumption higher by
0.7 percentage points on average in 2016-2017. This will add 0.4
percentage points to GDP growth in 2016 and 0.3 percentage points in
2017 (see table 1).
Public sector spending and investments will also increase as a result of
rising immigration. Nearly 70,000 refugees in 2015-2017 are expected to
be unaccompanied children, who place an extra burden on municipalities.
The agreement reached between the government and opposition in
October will require the government to borrow SEK 10 billion this year to
accommodate refugees. Most of the money will be used by municipalities
in 2016. We have revised our growth forecast for public spending higher
by 1.6 percentage points in 2016 and 1.1 in 2017. This will contribute
about as much to GDP growth as the increase in consumer spending: 0.4
percentage points in 2016 and 0.3 percentage points in 2017.
Municipal investment in basic services such as childcare, education and
infrastructure will rise due to the big jump in population. Investments by
county councils in more healthcare and mass transit are also a factor to
consider. These effects will be greater in the medium term, since capacity
cannot be expanded quickly enough to satisfy demand. There will be a
slight increase in 2016-2017, however. We are therefore revising our
forecast of growth in total investment upward, all else being equal, by 0.7
percentage points in 2016 and 0.4 percentage points in 2017 due to
increased public investment and housing construction. Together they will
contribute 0.1 percentage point in 2016 and 2017.
Figure 2 Spending on migration and integration
SEK bn
70

60

50

40

30

20

10

0
2010

2011

Migration(Oct)

2012

2013

Migration(July)

2014
Integration (Oct)

2015

2016
Integration(July)

2017
Total (Oct)

2018

2019
Total (July)

Source: Swedish Migration Agency

Job growth is affected positively and unemployment will fall in 2015-2017.

This is largely the result of greater demand by municipalities for municipal
services and increased staffing for refugee housing. The increased
demand cannot be met entirely with new resources. Other services will
have to take a hit due to a shortage of qualified staff. Public service
production will rise, putting a severe pressure on public sector employees.
Quality may be negatively affected. Hours worked will climb, however,
since current employees will be working more overtime. We estimate that
around 50,000 more jobs will be created than previously forecast and that
unemployment will drop to 6.2 percent in 2017, compared with our
previous forecast of 7.2 percent.
Inflation will depend on a number of factors. It is hard to separate the
effect of immigration on inflation. We expect, however, that slightly higher
wage increases (the rate for 2016-2017 has been revised upward by
about 0.2 percentage points) and increased domestic demand with higher
November 10, 2015

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Macro Research - Macro Focus

consumer and public spending will raise inflation slightly, all else being
equal, by 0.2 percentage points. The sectors with the biggest opportunities
to raise prices owing to demand are consumer staples and parts of the
service sector.
Long-term effects on the economy depend on integration
Integration of the new arrivals and non-natives in general will be critical to
the long-term impact on the Swedish economy. We present two scenarios
for the effects in the longer term, from 2018 onward. In the first scenario
we assume that reforms will be made to improve integration and that
employment levels among non-natives will improve. We show that
improved integration can lead to higher growth and a stronger labor
market in both the short and long term. In the second scenario we assume
that integration will continue as it does today, with an average time of 7-8
years and an employment level significantly lower than for non-natives
than natives. (We feel, however, that the average time to integrate can
probably be sped up considering that those immigrating right now are
predominantly in a favorable age span for the labor market.) A failure to
integrate newcomers quickly and efficiently would instead slow growth,
raise unemployment once again and put a further dent in the public
finances. It would also increase social and political tension with unknown
negative effects on the economy.
Potentially very positive effects on the dependency ratio
The Migration Agencys latest prognosis contains a big upward revision in
the number of asylum-seekers. In addition, the birth rate is expected to
increase by just over 100,000 during the period, according to Statistics
Swedens population projection from last May. From a demographic
perspective the change is very positive in the long term. Our calculations
show that the change since just this past summer reduces the economic
burden of an aging population. For 2019 the working age population (1574 years) is now estimated at 73.1 percent, compared with 72.7 percent in
Statistics Swedens previous projection. If the increase materializes in the
form of employment, it would greatly benefit the Swedish economy.
Statistics Sweden has gradually revised its population projection upward
in recent years, mainly due to increased net immigration, but also the
higher birth rate. One thing thats especially positive about the change in
projections in recent years is that the financial burden of the older
population decreases significantly on a relative basis, while the burden of
the younger population rises. This is because the birth rate has been
revised higher. This will increase the workforce, which is positive from a
long-term demographic perspective.
Its worth remembering that the people coming to Sweden and seeking
asylum are relatively young. Data from 2014 (see figure 6) indicate a
mean age of about 25 for new arrivals, compared with 40-45 years for
natives. The current wave of refugees is presumably also relatively young,
since about 20 percent are unaccompanied children. However, the vast
majority is in their later teenage years and will soon reach working age.
There is an opportunity to give the Swedish economy a big boost.
Whether this potential de facto can be tapped and benefit the economy
and public finances in the form of jobs, growth and increased tax revenue
depends on the extent to which, and how quickly, the refugees are
integrated into the labor market and find jobs. One challenge is the varying
level of skills and education among recent arrivals. Employment rates are
significantly lower among those with less than a high school education,
compared with those with a higher education.

November 10, 2015

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Macro Research - Macro Focus

Figure 3. Employment rate by education level and time in Sweden, nonnatives, ages 20-64 (2014)
100%

90%
80%
70%

60%
50%
40%
30%
20%
10%
0%
0-2 yrs

3-5 yrs
Primary school

6-8 yrs

9-11 yrs

12-14 yrs

Upper secondary school

15-19 yrs

20-24 yrs

25-29 yrs

30+ yrs

Post-secondary education

Sources: Statistics Sweden & Swedbank

Diagram 4 Projected number of asylum-seekers in Sweden

Prognos antal asylskande i Sverige

60000

50000
40000
30000

20000
10000
0

Forecast 2015 (Total 160 000)

Forecast 2016 (Total 135 000)

Scenario 1: Better demographics can lead to higher employment

rates among new arrivals
At this point it takes a long time for new arrivals to reach the job market
(on average about 7 years). There are hopeful signs, however, if you look
at labor market data. Since 2006 the number of working non-natives has
increased by 270,000, representing nearly 70 percent of employment
growth. Non-natives have sought out jobs to a greater degree in recent
years. Just over 70 percent are now available to work, compared with
about 65 percent nearly ten years ago (see figure 5). Recent labor market
reforms have been successful in stimulating job growth among foreign
born Swedes. Reforms, such as employer tax reductions, entry-level jobs,
subsidies on home repairs/renovations and household services, have
contributed positively by reducing the thresholds to enter the labor market
and stimulate workforce participation. Even though many non-natives
have found and will find work, their employment rates are still lower than
those of natives. Unemployment among non-natives is as high as 16
percent, compared with less than 6 percent for natives.

November 10, 2015

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Diagram 5 Participation and employment for natives and non-natives

75%

70%
65%
60%
55%
50%

Participation, natives

Participation, non-natives

Employment, natives

Employment, non-natives

Sources: Statistics Sweden & Swedbank

Figure 6 Distribution natives and nonnatives, year 2030

Note: Data refers to Q1-3 each year

It would be positive if workforce participation among non-natives can stay

in line with that of natives and that employment rates gradually get closer
to those of natives. This would mean 80,000 more people working in 2019,
while significantly improving tax revenue and reducing public spending on
unemployment and labor market actions as well as welfare assistance.

12%
10%
8%
6%
4%
2%

What would suggest this? The exceptional situation that the Swedish
economy finds itself in could mean that holy cows have to be sacrificed
and that politicians will have to cross the political divide and agree how to
make the labor market more efficient. (This is similar to the crisis in the
90s when the impossible became possible, including a comprehensive
agreement on pensions). In this respect, the refugee package recently
agreed to by the government and opposition is a positive first step. But
much more has to be done to ensure that momentum doesnt slow. With a
broader-based population with different backgrounds, experiences and
education levels, the labor market will have to be broadened as well. The
markets institutions have to be reformed to quickly integrate new arrivals.
A reform package therefore has to contain a number of measures,
probably on both the supply and demand side. First, the skills of the new
arrivals will have to be put to use more quickly and to a greater extent.
This can be done through faster validations of foreign degrees and trainee
1
positions that open the door to the labor market . Secondly, it is important
to rethink the cost of hiring refugees. Possible measures include lower
employment-related costs (through lower minimum wages or subsidies),
tax incentives for low-wage-earners, more flexible rotas and expanded
and higher subsidies for household services. Thirdly, labor market mobility
has to improve to allow these new arrivals to seek out areas where the
likelihood of finding work and education is the greatest. The housing
shortage in growing regions will be more severe as the population swells.
Investments in infrastructure and reforms that encourage construction are
important to pave the way for higher employment in these groups.

0%

Distribution Natives

Distribution Non-natives

Source: Statistics Sweden & Swedbank

Positive integration in the labor market would quickly increase the labor
force in the years ahead. This could keep wage increases in check. If the
new arrivals also quickly find jobs, it would reduce the matching problems
we otherwise expect to worsen in the years ahead. Wages and inflation
can then be constrained. Conditions would then be in place for more
sustainable, higher growth.
1

A Job at Last is one such program, where foreign-born academics receive trainee positions
with companies.
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Scenario 2: Risk of economic and political setbacks if integration fails

If integration policy fails and a political deadlock paralyzes economic
policy, unemployment among non-natives could skyrocket, perhaps rising
by at least 80,000 by 2019. The unemployment rate could reach 19
percent among non-natives and nearly 9 percent in total assuming that
new arrivals gradually begin seeking jobs but the employment rate
remains unchanged (see figure 7).
Public finances would remain under great pressure in 2018-2020. When
unemployment increases, the costs of integration shoot up as well. The
new arrivals wont qualify for unemployment and instead will wind up in the
hands of municipalities, whose welfare costs would rise substantially. In
this scenario tax hikes and spending cuts are highly likely at both the
municipal and state level. Fiscal policy would be greatly constrained. In
this scenario household and business sentiment would decline. This would
adversely affect private consumption and business investment. GDP
growth would slow significantly.

Figure 7 Unemployment natives and nonnatives

20%
18%

16%
14%
12%
10%
8%
6%
4%
2%
0%

Unemployment natives

Social and political tensions in society are likely to increase with slow or
ineffective integration of new arrivals into the labor market. Political
polarization would rise, which could impact public opinion. Parliament
would reach an impasse. With a paralyzed parliament there is little
likelihood of successfully implementing reforms that strengthen the labor
market and growth. The Swedish economy would gradually slow down in
a significantly lower growth path.

November 10, 2015

Unemployment non-natives

Source:Statistics Sweden & Swedbank

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