Swedbank Economic Outlook: Belt-tightening for the Swedish economy

The Swedish economy is slowing down markedly. Inflation has peaked, but the Riksbank is expected to continue raising the policy rate until the summer. At the beginning of next year, policy rate cuts should be expected, according to Swedbank Economic Outlook.

“Household interest-rate sensitivity is higher than ever, and this means that higher interest rates are rapidly deteriorating the scope for other household consumption this year. Unemployment is also starting to rise as companies cut their costs, which is further weakening purchasing power and is creating a challenge for households,” says Mattias Persson, Group Chief Economist, Swedbank. 

Policy rate cuts will not be made until 2024
Inflation has now peaked, but in the short term it will remain high as a result of the weak Swedish krona, increases in rent and tenant-owner association fees, and extended price pressure from producers. Swedbank therefore expects the Riksbank to continue to tighten monetary policy and to raise the policy rate by 50 basis points to 3.00 per cent at the upcoming monetary policy meeting in February and by 25 basis points at the meetings in April and June, respectively. 

“With inflation remaining high and other central banks continuing to tighten monetary policy, we forecast that the Riksbank will continue to raise the policy rate. We expect the rate to peak at 3.50 per cent in June. Next year, the Riksbank is expected to implement a series of rate cuts totaling 100 basis points, which will ultimately result in a policy rate of 2.50 per cent towards the end of 2024,” says Mattias Persson. 

Swedish growth will weaken
The forecast for Swedish growth in 2023 has been revised down to -1.1 per cent for 2023 and to 0.9 per cent for 2024, compared with the October 2022 forecasts of -0.9 per cent and 1.0 per cent, respectively. Globally, economic growth will stagnate in 2023, but the growth outlook for 2024 will pick up slightly. Sweden’s high interest-rate sensitivity, resulting from high household debts that often have variable interest rates, means that its economy will be affected to a greater extent than that of other countries.

The chill in the Swedish housing market is expected to continue in the first half of this year and, from top to bottom, prices are expected to fall by around 20 per cent. Given the fact that the Riksbank is expected to start cutting the policy rate in 2024, at the same time as housing investments will fall back sharply, housing prices can then be expected to begin rising somewhat. It will take several years before prices are back at the previous peak, seen in February 2022. 

A need for targeted support and tax cuts is foreseen
For 2023, Swedbank expects SEK 10 billion in fiscal policy measures entailing additional support to municipalities and households as a result of the demographic challenges that Sweden is facing. Electricity support payments to households will be significantly lower than expected. Swedbank expects SEK 55 billion in support this year, of which just over SEK 20 billion will be for households. 

For 2024, Swedbank expects unfunded fiscal measures of SEK 30 billion, most of which comprises tax cuts announced in the Tidö Agreement, and additional electricity support payments totaling SEK 35 billion. The government budget balance will deteriorate slightly and will result in deficits over the next two years of -0.3 per cent and -0.7 per cent of GDP, respectively.

“Given that households are experiencing a sharp decline in purchasing power, we would prefer to see more support for vulnerable households, and there are additional measures the Swedish government could take in this regard without fueling inflation. These could include increased housing allowances, for example, but also educational initiatives to get more people into work. A welcome measure for vulnerable households would be if the proposal for reduced tax on lower incomes were implemented in accordance with the Tidö Agreement,” says Mattias Persson.   

Additional tables can be found in the attached press release. For the full report, see attachment or visit: www.swedbank.com/seo.

Contact:
Mattias Persson, Group Chief Economist Swedbank, tel +46 73 094 29 56 
Hannes Mård, Communication Manager Swedbank, tel +46 73 057 41 95

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