The Riksbank building in Stockholm. Sweden's central bank is widely expected to hike it's key lending rate above the current one per cent on Wednesday.BOB STRONG
It's not often these days that a European leader urges "humility" when referring to his nation's economic health. But this is the unusual position Swedish Prime Minister Frederik Reinfeldt found himself in after the country posted its strongest third-quarter economic growth on record.
As Europe's sovereign debt crisis threatened to engulf Portugal and Spain, Sweden's economy swelled by 6.9 per cent compared to the same three-month period last year. That's an increase of 2.1 per cent on the second quarter and the biggest jump since the Scandinavian country's national statistics office started making comparisons in 1970. Impressive figures, even if they partly reflect the deep hole Sweden found itself in last year, when its economy shrank a full 5.3 per cent.
Compared to its European neighbours, it would seem Sweden has little to worry about. It's debt-to-GDP ratio, currently at about 35 per cent, is expected to fall to just 29 per cent by 2012. A budget surplus is expected next year.
Beneath the rosy numbers, however, analysts fret. As in Canada, excessive consumer borrowing has become a problem in Sweden. The ratio of household debt to income hit a record 140 per cent in 2009, and is growing at nine per cent annually. With incomes growing at just 4 per cent a year, the situation seems unsustainable.
The concern, of course, is that any future economic turbulence could push consumers to the brink.
Sweden has put new caps on lending and the Riksbank - which has ratcheted up the repo three times since July - is widely expected to hike it above the current one per cent on Wednesday.
But what the Swedish situation illustrates is how inadequate a tool lending rates can be when it comes to controlling consumer behaviour, said Filip Andersson, a Stockholm-based analyst with the Royal Bank of Scotland Group.
Even when rates climbed to five per cent a few years ago, Swedes kept borrowing, fueling a hot housing market where prices have increased for 18 consecutive quarters. As long as house prices kept rising, people kept borrowing and banks were happy to lend.
"Ideally, I think the Riksbank would have one separate rate they can control for households and one for the rest of the economy," Mr. Andersson said. "But I don't know anywhere where that exists."
It's worth noting that Sweden endured an ugly financial crisis in early 1990s that included a housing bubble, a credit crunch and government funded bank bailouts.
"We learned a bit from the but there is still quite excessive lending going on," Mr. Andersson said.
So hold the herring.
"We must remember that when countries explode, as we have seen in Iceland and Ireland, this has usually been preceded by extreme confidence," Swedish Finance Minister Anders Borg said. "Things have looked good and one has been afflicted by hubris. But we will not let that happen to us."
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