Swedbank Economic Outlook: Swedish rate hike in sight

The Swedish economy continues to recover after the peak of the pandemic, although supply-chain problems and higher prices, not least for electricity and fuel, are expected to have a dampening effect. Higher inflation will lead the Riksbank to begin reducing its balance sheet in 2022 and to start hiking the repo rate in 2023, according to Swedbank Economic Outlook.

The economic recovery in Sweden is continuing, but the growth rate will dampen going forward. Household consumption will continue to drive the economic recovery, but we estimate that high electricity prices will limit households’ scope for spending by about SEK 25 billion.

“We are entering a calmer phase of the economic recovery. Global supply-chain problems have worsened during the autumn, and this is hurting Swedish exports. At the same time, producer prices as well as raw material and input prices are historically high,’’ says Swedbank Group Chief Economist Mattias Persson.  

Inflation has been higher than expected so far this year and is forecasted to remain near the inflation target of 2 per cent going forward, when companies that are dealing with higher prices will transfer more of the cost to consumers. The Riksbank is therefore expected to shift to a less expansionary monetary policy.

“Toward the end of the forecasting period, inflation will be around 2 per cent. This is considerably higher than the historical average since the year 2000. The Riksbank will therefore begin to reduce its balance sheet during the second half of 2022. We now expect a first rate hike from the Riksbank in 2023, which is considerably earlier than the Riksbank itself has forecasted,” Mattias Persson says.

The global economic recovery is continuing, albeit at a calmer pace. Supply-chain problems and higher electricity prices are having a clear effect. Global growth is expected to be 5.7 per cent in 2021 and 4.3 per cent in 2022, a downward revision from 4.6 per cent. The Swedish economy is expected to grow by 4.3 per cent during 2021 and 3.3 per cent in 2022. For 2022 we see a downward revision from the 3.6 per cent stated in our previous forecast. Downward risks for the recovery remain dominant and are linked to worsening problems with bottlenecks and the development of the pandemic.

Sweden is facing extensive investment needs due to factors such as its ageing population, integration problems and the climate transition. Public debt is low from both a historical and an international perspective, so there is economic scope to meet the challenges. However, investments are hindered by the current fiscal policy framework. A review of the budget surplus target could enable public investments on a larger scale than what is possible today. Considering the low level of public debt, a review of the framework should be carried out earlier than planned.

“Sweden can afford to ease its fiscal policy framework to meet the needs ahead. For 2023 we expect unfinanced measures of SEK 70 billion, where the lion’s share is public consumption and investments. Despite a relatively large budget, public debt will fall to 32 per cent of GDP in 2023, which is lower than before the pandemic and lower than the level of the so-called debt anchor for fiscal policy of 35 per cent,” Mattias Persson says.

Please see attached pdf for tables. 

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

Contact:

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

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