Swedbank Economic Outlook: The economic downturn has begun and it will be lengthy

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Swedish GDP is falling as a result of weak domestic and global demand. Economic policy is tightening, which is contributing to the downturn. The Swedish krona will remain weak for the rest of the year, inflation will remain at high levels in the near term, and the Riksbank is expected to continue raising the policy rate during the autumn, according to Swedbank Economic Outlook.

“The economic downturn has begun, and things will get worse before they get better. We expect households to continue to cut back on consumption for a while longer, given that their incomes are under pressure from high inflation and rising interest expenses. In the corporate sector, the situation has been varied, but now tougher times lie ahead on a broader scale than what we’ve seen so far,” says Mattias Persson, Group Chief Economist, Swedbank.

Swedbank expects margins to be under pressure in several industries and that companies’ profit shares will decline in the future. This will be especially prevalent against the backdrop of weakening global demand which will now also affect export companies. The declining demand will force companies to cut back on investments.

Weak growth will affect the labour market this autumn
For 2023, the forecast is that Swedish growth will shrink by 0.9 per cent, which is somewhat better than the amount stated in our previous forecast, in April. For 2024, growth has been revised down and Swedbank expects the economy to shrink by 0.3 per cent, compared to growth of 0.3 per cent as stated in our April report. A clear recovery will not be seen until 2025, with growth of 2.3 per cent.

The labour market has been strong so far, and the employment rate is at its highest level since the 1990s. However, the labour market will soon shift from surprising resilience to a clear deterioration. Towards the end of the year, Swedbank expects employment to decline and unemployment to rise. 

“Some household-related industries which involve many employees, such as retail, are already struggling and are therefore expected to reduce their workforce. The deterioration will continue in 2024 and unemployment will peak at 8.3 per cent, which means that the number of unemployed people will increase by 50,000 by the beginning of 2025,” says Mattias Persson.

Inflation will remain high in the near term
Inflation has fallen back down from its peak but remains high. Price pressure in the services sector has increased while commodity inflation has fallen back down slightly, and the Swedish krona is weak, which is keeping inflation up. In the slightly longer term, Swedbank expects inflation to continue to fall as a result of higher interest rates and a weaker economy; it will eventually approach 2 per cent.

“Given the high inflation and the weak Swedish krona, the Riksbank will continue to tighten its monetary policy this autumn. We expect the policy rate to be raised by 25 points at the meetings in both September and November, reaching 4.25%. A series of interest rate cuts will begin in June next year, and by the end of 2025 we expect the policy rate to be 2.5 per cent,” says Mattias Persson. 

Fiscal policy will tighten, but transfers to households will increase
Swedbank expects unfunded fiscal measures of SEK 30 billion per year in 2024 and 2025. However, tax cuts aimed at households will be delayed until 2025 to avoid making inflation worse. Furthermore, Swedbank does not expect any additional electricity support payments in the coming winters, but transfers to households will increase as a share of GDP due to increased price base amounts.

“The government will present its budget for 2024 on 20 September. This will take place at a time when the outlook for the Swedish economy is gloomy, with a weak krona and high inflation. The government’s fiscal policy must reach a balance between helping households and not fuelling inflation. As a result, our assessment is that fiscal policy will tighten in 2024,” says Mattias Persson.
For the full report, see attachment or visit: www.swedbank.com/seo.

Mattias Persson, Group Chief Economist, Swedbank, tel. +46 73 094 29 56 
Hannes Mård, Media Relations Manager, Swedbank, tel. +46 73 057 41 95 

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