Swedish purchasing power trumps tariff threats

Despite the uncertain global outlook, the conditions for a recovery in the Swedish economy are in place, according to Handelsbanken's latest global macro forecast.

The increase in income among Swedes is sufficient for both more savings and higher consumption.

"Fiscal policy is expansionary. We believe it is enough for the interest rate to be cut to a normal level, such as 2.25 percent, to secure the recovery and for inflation to achieve the 2 percent target", says Handelsbanken's Chief Economist Christina Nyman. 

Handelsbanken's economists forecast another couple of years of moderate global GDP growth, but an escalation of trade conflicts, especially between the US and China, could threaten the recovery and breathe life into inflation. 

While tightening policy rates may be required in the US, the UK and Norway, Handelsbanken's economists envisage a normalisation of interest rates in the eurozone and Sweden.

Tariff threats risk hurting growth and fuelling inflation
With a trade conflict on the horizon, developments are difficult to forecast and there are many possible outcomes. Handelsbanken's economists assume that the US will raise tariffs against China and that the Trump administration will implement a limited increase against other countries, with restrained counter-increases in response.

"However, there are many other outcomes, and we assume that more of them are negative than positive", says Christina Nyman.

The consequences of Handelsbanken’s main scenario, with an estimated probability of 25%, are slightly lower global GDP, with a slightly greater negative impact on the US and China than on the eurozone. The sectors in Sweden with the largest exports to the US are motor vehicles and transport equipment, which account for almost a third of total exports to the US. Nevertheless,  the impact on the Swedish economy is expected to be limited in this scenario.

Improved household purchasing power leads to a pickup in consumption
There are signs that the weak Swedish economy is about to improve. Expansionary fiscal policy, lower interest rates and rising real wages are lifting household purchasing power and paving the way for a rebound in household consumption. The strength and timing of the recovery in household purchasing power will be determined by the prioritisation Swedes make between consumption and savings.

"We expect households to save a little more of their income than they did before interest rates increased, but the strong income development still leaves room for a clear rise in consumption this year", says Christina Nyman.

Growth will pick up this year and the labour market situation will gradually improve, but the recovery in the Swedish economy will be held back by the weak economic development in the eurozone and continued low housing construction, according to the forecast.

"We estimate that employment will increase by almost 150,000 people by the end of 2027. Increased purchasing power creates more jobs in the service sector and in commerce, but as the recovery broadens, most sectors will be positively affected, with the exception of the construction sector", says Christina Nyman. 

The majority of wage agreements will be renegotiated this spring. The forecast is a two-year agreement with central agreements of around 3.2 percent per year and that total wage increases in the economy will amount to just over 3.5 percent in 2025 and 2026. Real wages will therefore rise relatively quickly. However, at the end of 2027, there will still be some way to go before real wages catch up with 2021 levels.

Mortgage borrowers see rapid effect of falling interest rates
Most households will now have increased purchasing power. This is especially true for high-income earners and homeowners. This paves the way for a faster increase in lending to households and a continued recovery in the housing market.

"We expect housing prices to rise, in line with increased incomes. In addition, we forecast an easing of mortgage requirements, which will drive prices up further. We believe that housing prices will increase by about 6 percent per year in 2025-27", says Christina Nyman.

Handelsbanken expects variable average mortgage rates to fall to about 3.2 percent in the first quarter and remain at around that level next year as well. Fixed mortgage rates fell early on expectations of upcoming rate cuts and have been lower than variable rates for some time, but this is now changing, according to the bank's economists.

"During the autumn, mortgage rates with longer maturities looked relatively favourable, but at present there is little difference between choosing a variable and a fixed interest rate", says Christina Nyman.

Inflation target in sight, but krona appreciation delayed
Inflation is strongly influenced by energy prices, but underlying inflation is at the 2 percent target. Handelsbanken's economists expect the Riksbank to make a final interest rate cut to 2.25 percent in January.

"With inflation on target and an economic recovery expected to pick up in 2025, we do not see any need for more interest rate cuts", says Christina Nyman.

The krona is weak and is currently being affected to a large extent by global interest rates and trade policy uncertainty. Only when international interest rates fall, uncertainty eases and risks decrease in 2026 is a clearer, albeit gradual, appreciation of the exchange rate expected.

For further information, please contact

Christina Nyman, Chief Economist, +46 70 778 77 65

Handelsbanken's Press Office, +46 8 701 80 18

For the full report, see Global Macro Forecast.
For more information about Handelsbanken, please visit: www.handelsbanken.com

Tags: