Swedbank Economic Outlook: Higher prices and more rate hikes amid the war

The war in Ukraine is causing turbulence in the Swedish economy. Growth is levelling off and inflation is on the rise. The Riksbank is expected to raise the repo rate at its meeting in April. At the same time, fiscal policy will become more expansionary as a consequence of new crisis budget measures, according to Swedbank Economic Outlook.

The war in Ukraine is affecting the Swedish economy. Households and businesses are becoming more cautious.

“Following strong growth at the end of 2021, we expect weaker growth during the first half of this year because of the war in Ukraine. The development of household consumption and corporate investments has been weaker than we previously expected. On the other hand, wages are expected to increase faster going forward,’’ says Mattias Persson, Group Chief Economist, Swedbank. 

Prices were already rising in the wake of the pandemic, and the war is driving inflation up even more. The high pace of inflation is contributing to a decline in real wages and is reducing households’ purchasing power. Inflation rose broadly during the beginning of 2022; more companies have started raising their consumer prices, and Swedbank expects to see more price hikes in the future.

In Sweden, inflation is forecast to reach 6 per cent during the spring, and the Riksbank is therefore expected to bring forward the tightening of its monetary policy. Swedbank’s forecast is that the Riksbank will raise the repo rate by 0.25 percentage points in April, and then continue to raise the rate by 0.25 percentage points at every monetary policy meeting until April 2023, when the repo rate is expected to reach 1.5 per cent.

“We need to get used to the thought of higher interest rates. Our forecast shows that higher inflation will cause the Riksbank to tighten Sweden’s monetary policy considerably faster than it previously expected and raise its repo rate in April. At the same time, we can’t rule out the possibility that the Riksbank will clearly signal a rate hike in April and that it will raise rates by 0.5 percentage points at its June meeting,’’ Mattias Persson says.

The Swedish housing market is moving into more uncertain times. After a sharp price increase at the beginning of the year, a slowdown is expected during the second half of the year due to higher interest rates. House prices are expected to increase by 5 percent this year.

“As mortgage rates rise, potential home buyers will see a more moderate increase in their real disposable income. From the second half of this year and through 2023, we expect prices to remain largely unchanged,’’ Persson says.  

Economic growth is levelling off in the shadow of the war in Ukraine, and growth prospects have been revised down. Global growth is expected to be 2.7 per cent in 2022 and 3.3 per cent in 2023, a downward revision from 4.1 per cent and 3.8 per cent in our January forecast. The Swedish economy is expected to grow by 2.8 per cent in 2022, compared to the 3.3 per cent we expected in our forecast in January. Energy and commodity prices are expected to remain on a high level following the sharp increase.

Swedish fiscal policy is becoming more supportive following the outbreak of the war in Ukraine; the situation has changed completely. Security policy is undergoing a significant reversal, larger defence budgets are being discussed, and inflows of refugees are increasing as people flee Ukraine. Higher prices for fuel and electricity have led to new support packages. Public consumption is expected to be higher both this year and next. Support to households is expected to become more extensive this year. The budget deficit is expected to be 0.5 per cent of GDP this year, and public debt is forecast to reach 31 per cent of GDP in 2023.

“Fiscal policy is becoming more expansionary as a result of heightened uncertainty and the war. Swedish public finances remain strong despite increased spending on defence and crisis measures,’’ Mattias Persson says.   

Link to the report: www.swedbank.com/seo 

Please see the attached pdf for tables. 

Contact:

Mattias Persson, Group Chief Economist Swedbank, tel +46 73 094 29 56
Amanda Billner, Press Manager Swedbank, tel +46 73 045 11 68

Swedbank empowers the many people and businesses to create a better future. Our vision is a financially sound and sustainable society. Swedbank is the leading bank with over 7 million retail customers and 600 000 corporate customers in our four home markets Sweden, Estonia, Latvia and Lithuania. Swedbank is also present in other Nordic countries, the U.S. and China. Together we make your financial life easier. Find out more: www.swedbank.com