Nordic Outlook: Stable growth despite challenges from all sides

Global growth will continue to be just over 3 per cent annually in 2025‒2026. We have raised our growth forecast for the United States but lowered our projection for the euro area, which is weighed down by a weak Germany. The big risk to growth is that politics, with Donald Trump and the US in the spotlight, will deliberately or accidentally worsen the conditions for economic growth, the disinflation process and financial markets. Swedish economic growth will accelerate from 0.5 per cent in 2024 to 3.1 per cent in 2026, when consumption finally picks up. Core inflation will climb early in 2025 but fall during the second half. The Riksbank will cut its policy rate to 2 per cent in May. Fiscal policy will remain expansionary in 2026, and public sector finances will weaken. 

“At present, it is difficult to put together an overall picture of US economic policy. We have chosen to make a cautious interpretation of what may become reality. Trump wants to see a strong economy and stock market, which may limit his most extreme policy choices. There are both upside and downside growth risks in relation to our forecast. The US is now adding to global uncertainty, which will hamper growth in China, the European Union and elsewhere. Meanwhile tax cuts, deregulation and greater business optimism may stimulate faster US growth,” says Jens Magnusson, Chief Economist at SEB.

Many sources of uncertainty and volatility in 2025‒2026
President Trump is now moving from words (and threats) to action with a business-friendly policy (for the US), but with inflationary risks. China and Germany are grappling with structural problems. Market concerns about high public sector debt are increasing in an environment of higher nominal and real interest rates and yields. Several countries in Europe face important political and economic choices: an election in Germany on February 23 and perhaps also in France this summer or autumn, while the Labour government in the United Kingdom is under heavy pressure. We predict global growth of just over 3 per cent in 2025 and 2026, which is largely unchanged compared to November’s Nordic Outlook. Despite the overall stability of GDP growth, developments in individual countries and sectors will show a much more fragmented picture than before. The US will continue to show faster economic and productivity growth than the euro area. Globally, the service sector continues to outperform manufacturing.

“The focus is on households; consumption should drive growth as new tariffs and trade barriers risk weakening both industry and trade. Drivers include increased real incomes, a good wealth position and continued key rate cuts. Households do not need to strengthen their balance sheets to any great extent. Increased income can instead go straight to consumption. But optimism and purchasing power must first overcome saving and anxiety ‒ especially in European countries with weak growth where recovery has not taken root, but where we expect faster growth by autumn 2025,” says Daniel Bergvall, Head of Economic Forecasting at SEB. 

The fight against inflation has largely been won
The overall picture is that global disinflation processes are continuing, which leaves room for further interest rate cuts. But the US Federal Reserve’s rate cutting cycle is slowing, while the European Central Bank is speeding up its cuts. The result will be a wider Fed-ECB key rate gap, reaching 2.50 percentage points by year-end. Overall, our forecasts for growth and interest rates in an uncertain global environment ‒ and with a tariff risk premium ‒ imply continued US dollar strength. The euro will also initially be weak, bringing the EUR/USD exchange rate to 1.01 at mid-year. During the rest of 2025 and in 2026, EUR/USD will slowly climb to 1.07. In two theme articles, we take an in-depth look at Germany ahead of the February 23 parliamentary election – can the election help get the economy moving? – and at how demographic changes are challenging economies and societies. 

Sweden: Eagerly awaiting a surge in consumption
After falling in 2022-2023, Swedish growth has rebounded, albeit weakly. We are sticking to our forecast that GDP growth will accelerate from 0.5 per cent last year to 3.1 per cent in 2026. There are now indications of a consumption-led recovery: good real wage growth, falling mortgage rates and fiscal stimulus. Partly due to rising food prices, core inflation in 2025 will be just above the Riksbank target ‒ slightly higher than we previously expected. But in the long term there is a greater risk that inflation will fall slightly below target, provided that a broad trade war is avoided. We still expect the Riksbank to lower its policy rate to 2.00 per cent but are moving the last rate cut from March to May.

“In Sweden, we expect an economic turnaround during 2025 and believe that after a couple of years of weak performance, we will see a growth surge. However, this will require households to use at least part of future improvements in their finances for consumption, which is probable but not inevitable,” says Daniel Bergvall. 

Exports are resisting weakness in Europe 
Swedish exports have been surprisingly strong, given weaknesses among German and other European manufacturers. This has prevented even worse GDP figures in recent years. A gradual recovery in Europe suggests that the Swedish manufacturing sector will also show gains, but the upturn looks likely to be moderate compared to historical economic rebounds, partly because the US economy will slow. Due to relative energy prices and a weak krona, Swedish industry is well equipped. Consolidation in the previously fast-growing electrical apparatus sector (batteries, electrical transmission, etc.) is expected to dampen the upturn, and to some extent employment, but we believe this will not affect exports and production to any great extent. A theme article in this Nordic Outlook takes a more detailed look at developments in Swedish industry. Residential investments are rebounding and will shift from pulling down to pushing up capital spending, as home prices continue to climb at about 5 per cent yearly. 

Unemployment will fall this summer 
The anaemic economic growth of the past two years is reflected in a weaker labour market. We expect a turnaround to come only in the second quarter, with unemployment rising to 8.7 per cent before it starts to fall. The weak labour market situation is confirmed by the continued decline in the Riksbank’s resource utilisation indicator (RUI). Its level is now below the historical average – indicating that Sweden is in an economic slowdown. National wage negotiations are in full swing. We expect two- or three-year agreements at just above 3.0 per cent annually, with wages and salaries increasing by 3.6 per cent in 2025 and 3.5 per cent in 2026. Our forecast is close to that of the Riksbank.

Riksbank rate cuts in January and May
After the low inflation figure in December and continued uncertainty about economic developments, we believe that the Riksbank will cut the policy rate again in late January and confirm that its December interest rate path, in which the interest rate will bottom out at 2.25 per cent, still applies. We are sticking to our forecast that the Riksbank will cut the interest rate once more, to 2.00 per cent, but this will not happen until May. According to our forecast, the interest rate will be slightly below 2.25 per cent, which is the midpoint of the Riksbank’s new range for a neutral rate (1.5 – 3.0 per cent). 

“Since the economy, home prices and lending are recovering, we believe that the Riksbank Executive Board wants to avoid adding more fuel and to await the effects of previous cuts. We believe that the Executive Board wants to avoid cutting the policy rate too much unless there is a deeper economic crisis. But since the economic situation is weaker than normal, a slightly lower level is reasonable,” says Jens Magnusson. 

Continued expansionary fiscal policy 
The Swedish government unveiled SEK 60 billion in unfunded reforms in its budget bill for 2025, rather evenly divided between tax cuts and increased spending. We expect about 15 billion more in the spring budget bill this April: a total of SEK 75 billion, or 1.2 per cent of GDP. There are many indications that fiscal policy will continue to be expansionary in the 2026 election year budget, since we believe that the government will present unfunded reforms totalling an additional SEK 60-70 billion. The government and the opposition have agreed to lower the public sector savings target to a balanced budget, from the +0.3 per cent of GDP that currently applies. This change actually goes into effect starting in 2027 but may help increase the scope for reforms as early as next year.

“When economic activity strengthens in 2025 and 2026, the central government deficit will decrease, but expansionary fiscal policy and spending on support to Ukraine indicate that the deficits in 2025 and 2026 will be larger than the long-term target level. In an international comparison, however, Swedish government finances continue to look incredibly strong,” says Daniel Bergvall. 

Swedish krona will weaken against US dollar this spring 
We expect a volatile spring for the Swedish krona, ending in a slight appreciation against the euro, mostly driven by euro area weakness but also stronger economic growth in Sweden. A tariff premium will contribute to weaker exchange rates against the dollar. As always, there are risks to our forecast. If the foreign exchange (FX) market were to focus again on the carry trade, with Riksbank rate cuts resulting in globally low interest rates, the krona could become a financing currency. The FX market may also regard the krona as a relative loser if higher US tariffs were to be imposed, since Sweden is a small open economy.

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

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

Press contact:
Petter Brunnberg, Head of Media Relations & External Communication
+46 70 763 35166
petter.brunnberg@seb.se

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