Nordic Outlook: Mixed situation as central banks show true colours

So far in 2024, the growth outlook has improved a bit. The United States has again reported surprisingly strong growth, but also worrisome inflation setbacks. The inflation downtrend is alive but unstable, persuading central banks to wait longer and cut key rates more slowly. In a deteriorating geopolitical situation with constant new military, political and economic conflicts, the world remains unpredictable. In Sweden, rapidly falling inflation is opening the way for a clear shift in both fiscal and monetary policy and a strong recovery in GDP in 2025. The Riksbank will cut its policy rate in May, with a total of four rate cuts in 2024 and three in 2025. 

“Despite geopolitical turmoil and the drama surrounding the US Federal Reserve and its postponed rate cuts, the overall picture of falling inflation and a normalisation of the global economy is holding up,” says Jens Magnusson, Chief Economist at SEB. 

Some improvement in global growth prospects in a more divergent world
The US economy has continued to defy headwinds from high interest rates and consumer prices, and we have revised our 2024 GDP growth forecast for the US upward by almost one percentage point, to 2.5 per cent. Our other GDP revisions are relatively small. A weak German economy will hold back growth in the euro area during the first half of the year, and GDP will grow by 0.6 per cent. Helped by fiscal stimulus, China will achieve its growth target of 5 per cent this year despite continued headwinds from weak consumption, the real estate market and geopolitics. In the Nordic region, Denmark is enjoying a growth surge thanks to the pharmaceutical sector and Norway thanks to the oil sector.  Despite US strength, global growth will remain moderate, at around 3 per cent per year during 2024 and 2025. 

“Several factors have a big impact on where countries end up in the growth tables: interest rate sensitivity, the degree of fiscal stimulus and industrial policy, changes in asset prices, the degree of dependence on manufacturing (especially if dependent on China), exposure to the energy crisis and productivity. The more exposed countries have been to these factors, positively or negatively, the better or worse their growth has been,” says Daniel Bergvall, Head of Economic Forecasting at SEB.

Inflation on its way down, despite some setbacks
We regard the inflation downtrend as intact, but – like general economic performance – more divergent than expected. Yet most of the inflation upturns of recent years have been reversed. The economy has slowed down, including slightly in the US. This is expected to contribute to a weaker price trend going forward. Long-term inflation expectations are close to central bank inflation targets. Meanwhile the main concern is still the service sector. Demand has been sustained − combined with a labour market that has weakened only moderately − causing continued concerns. However, wage and salary increases have decelerated significantly in the US, and there have also been signs of a slowdown in Europe.

ECB ahead of the Fed 
We now expect the US Federal Reserve to hold off on interest rate cuts until at least September and then proceed more slowly than we had previously estimated, with a total of two rate cuts this year and four in 2025. As for the European Central Bank, the euro area economy is weak and inflation has fallen about as expected, but the bank’s focus has shifted to long-term inflation risks and a desire to wait until this spring’s wage rounds are completed to ensure that inflationary pressures will remain under control. The ECB has essentially “promised” a June cut. We expect a total of four ECB rate cuts in 2024 and four in 2025. The revised US outlook has contributed to higher nominal and real interest rates and a stronger dollar, creating wider gaps and tensions on several levels between the US and the rest of the world.

“US inflation disappointments have been somewhat too large to dismiss as merely temporary and as something the Fed could thus ignore. We believe that the ECB and other central banks may be a
couple of rate-cutting rounds ahead of the Fed, but after that − and largely depending on market reactions – the obstacles may be larger. The question may come to a head if the Fed postpones interest rate cuts even further. From this perspective, data during the next few months will be important,” says Daniel Bergvall.

Neutral or slightly contractionary fiscal policy
Long-standing crisis policies and the recent rise in interest expenditures limit fiscal manoeuvring room, with a few exceptions such as Germany and Sweden. Crisis policies must now be replaced by policies that will meet major investment needs in defence and security policy, as well as energy and the green transition. This is taking place in an environment of high interest rates and increasing demographic headwinds. At the same time, political leaders in many countries must deal with these structural changes without triggering even more support for extremist parties at the domestic
political level.

“In many countries, political leaders must mobilise private capital through various types of incentives. One risk is that the US, the EU and China may end up in a state aid competition. This may result in heavy costs for governments and misallocation of capital towards specific companies or sectors,” says Daniel Bergvall.

Sweden: Well-positioned for a strong economic rebound in 2025
In Sweden, rapidly falling inflation will pave the way for a clear shift in both fiscal and monetary policy and a strong recovery in growth during 2025. GDP fell less than expected last year, and thanks to budding optimism among households and businesses, we have revised our 2024 growth forecast upward from 0.1 to 0.5 per cent. During 2025, Swedish GDP will expand by 2.8 per cent.

Strong investments (excluding housing) as industry defies euro area weakness
Exports are surprisingly strong given anaemic economic growth in Germany, which remains Sweden’s most important export market. Rising sentiment indicators suggest that exports will continue to grow, perhaps at an even stronger pace, during 2024. Gross fixed capital formation has fallen slightly since the beginning of last year, driven by a large decline in residential investments. If we exclude housing, capital spending as a percentage of GDP was at its highest since at least the early 1980s. This excessive level suggests that gross fixed investments will slow down in 2024. Meanwhile residential investments will continue falling. During 2025, residential investments will level off, while other investments will start rising again. Home prices have remained stagnant, but there are growing signals that they will rebound. We continue to expect home prices to increase gradually starting in mid-2024.

Large declines in consumption will soon end; no labour market collapse
The downturn in household consumption has almost been on a par with the deep recessions of the early 1980s and 1990s. Like during those periods, the decline has been driven by steeply rising prices. Now that inflation is decelerating, the volume of consumption has rebounded. Because of expected interest rate cuts and slowing inflation, combined with expansionary fiscal policy, there is good potential for a strong recovery in consumption during 2025. With a slight lag, the labour market is weakening − clearly but not dramatically. We expect unemployment to continue rising over the next six months, but when growth picks up in 2025, it will fall back to about today’s levels. In a historical perspective, a moderate decline in resource utilisation supports the picture of a relatively mild economic slowdown.

Inflation is approaching target
After a late start, Sweden’s inflation downturn has greatly accelerated. Monthly CPIF (the consumer price index with constant interest rates) excluding energy has been among the lowest in comparable countries, although it is difficult to make seasonal adjustments of Swedish inflation. Service inflation is still high but has also shown signs of falling in early 2024. Overall, we expect CPIF excluding energy to temporarily end up a bit below both the Riksbank’s forecast and its 2 per cent inflation target during the second half of 2024.

Gradual interest rate cuts, beginning in May
In March, CPIF excluding energy fell by four tenths of a percentage point more than the Riksbank’s forecast, making an interest rate cut in May highly probable. Inflation outcomes this spring and summer will determine how fast the Riksbank will cut its policy rate. We have changed our forecast of the second cut, from June to August, but we still expect four cuts in 2024 and three more in 2025, bringing the policy rate down to 2.25 per cent by October next year.

“We believe that against a backdrop of declining inflation but anaemic growth and a weak labour market, the Riksbank sees good reasons to cut its policy rate earlier than both the Fed and the ECB. The big worry, of course, is the krona, but the effect of a rate cut that has already been priced in by the market should not be exaggerated. There will also be great pressure from political leaders as well as labour and employer organisations to lower interest rates, especially because of the sharp slowdown in residential construction,” says Jens Magnusson. 

More fiscal stimulus, now that inflation has fallen
Despite increased expenditure in the Spring Fiscal Policy Bill, we believe that fiscal policy will be largely neutral in 2024. But falling inflation and strong central government finances will pave the way for expansionary fiscal policy in the 2025 Budget Bill, which will be unveiled in September 2024. We expect new unfunded expenditures of SEK 60-80 billion (1-1.5 per cent of GDP). A government commission of inquiry is also studying whether the official surplus target of 0.3 per cent of GDP for the public sector should be changed. 

“The government is likely to propose that the surplus target be lowered to a balance target. This would enlarge the scope of the budget by about SEK 20 billion. It will also be interesting to see whether the commission, which will present its report this autumn, will address the long-term downward trend in central government debt and the fact that public debt is now dominated by municipal and regional governments,” says Jens Magnusson. 

Key figures: International & Swedish economy (figures in brackets from Nordic Outlook, Jan. 2024)

For further information, contact:
Jens Magnusson: +46 70 210 2267
Daniel Bergvall: +46 73 523 5287
Robert Bergqvist: +46 70 445 1404 
Pia Fromlet:+46 70 445 1404 
Olle Holmgren: +46 70 763 8079
Elisabet Kopelman: +46 70 655 3017
Marcus Widén: +46 70 639 1057

Press contact:
Niklas Magnusson, Head of Media Relations & External Communication
+46 70 763 8243
niklas.x.magnusson@seb.se

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