Swedbank Economic Outlook: Recession is just around the corner

The economy is contracting at the same time as unemployment is rising. The peak in inflation is ahead of us and the Riksbank is expected to raise interest rates sharply in the near future, but interest rate cuts are expected at the end of next year, according to Swedbank Economic Outlook. 

The cost-of-living shock is putting pressure on household finances at the same time as companies' willingness to invest is decreasing.   

“Households will keep a tight grip on their wallets as high inflation and rising interest costs take their toll on purchasing power. The labour market is still showing resilience, but the situation is expected to deteriorate as employment-intensive industries such as retail and construction are affected,” says Mattias Persson, Group Chief Economist, Swedbank.  

More interest-rate hikes in the near future, but cuts in sight 
In Sweden, inflation continues to rise and will peak in early 2023, but volatile electricity prices are making the forecast more uncertain than usual. The rise in inflation is broad-based, encompassing both goods and services, and is forcing the Riksbank to tighten monetary policy.

Swedbank’s forecast remains unchanged; the Riksbank is expected to raise its policy rate by 75 basis points to 2.50 per cent at its upcoming monetary policy meeting in November. For the period after November, Swedbank has revised the forecast up; a 50-basis point increase to 3.0 per cent is expected in February next year.

"With high indebtedness and a large proportion of households that have variable interest rates on their mortgages, the Riksbank will find it difficult to maintain a respectful distance from the European Central Bank. At the end of next year, the Riksbank will begin a series of policy rate cuts totalling 75 basis points, which will ultimately result in a policy rate of 2.25 per cent in 2024," says Mattias Persson. 
  
Weaker growth and a continued fall in housing prices
The forecast for Swedish growth in 2023 has been revised down to -0.9 per cent, and for 2024 growth has been revised down to 1.0 per cent compared to the previous forecast from August of 0.4 per cent and 1.5 per cent, respectively. Economic growth is also slowing globally, and the growth outlook has been revised down. 

The Swedish housing market is expected to remain hesitant in the first half of next year. Sellers and buyers are finding it difficult to reach a conclusion, leading to large numbers of unsold homes. Overall, housing prices in Sweden are expected to fall by 15-20 per cent from the peak in February 2022 to the bottom in the first half of 2023.

Sweden’s new government is expected to provide support for households 
Fiscal policy is expected to be supportive without undermining public finances. Swedbank expects approximately SEK 100 billion for high-cost protection schemes for energy expenses for households and companies. In principle, public financial savings will be in balance next year and will show a minor deficit in 2024. Public debt as a share of GDP will reach around 30 per cent of GDP in 2024.   

"Sweden’s new government has announced, among other things, that fuel prices will be reduced, that the increase in unemployment insurance payments will be permanent and that allocations for the legal system will be expanded. We also expect state subsidies to the municipal sector to be increased next year. Government finances are strong, but fiscal policy must be balanced so that inflation is not fuelled further," says Mattias Persson. 

For the full report, see attachment or visit: www.swedbank.com/seo 

Please see the attached press release for tables. 

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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