Swedbank Economic Outlook: the Swedish economy continues to shrink

Winter has come early for Sweden’s economy this year, and it is expected to cool down even more as rising interest rates and high inflation continue to weigh on households’ purchasing power. The Riksbank will raise the policy rate one more time in the current cycle, but policy rate cuts are expected next year, according to Swedbank Economic Outlook.

“Households continue to hold back on spending, and this is expected to weigh on GDP for some time to come. At the same time, housing construction is at a standstill and housing investments will fall further in the future. We also expect significantly more subdued export growth against the backdrop of weak prospects in Europe and the United States,” says Mattias Persson, Group Chief Economist, Swedbank.

Economic decline: Sweden will stand out among peers
The Swedish economy is expected to shrink both this year and next, with significantly weaker development than in other European countries. For 2023, Swedbank’s forecast is that Sweden’s GDP will shrink by 0.5 per cent, which is a slightly better development compared to our previous forecast, issued in August. For 2024, our forecast is fundamentally unchanged; the economy is expected to contract by 0.4 per cent. A clear recovery will not take place until 2025, with growth of 2.0 per cent.

Housing: a fair way to go until the bottom is reached
On the Swedish housing market, the cooling trend continues. Mortgage rates are rising at the same time as many newly produced homes are still being completed, contributing to the record number of unsold homes.

“Housing prices are expected to fall by a further 5 per cent before stabilising in the first half of 2024. During the spring, households’ real incomes will start to increase, and mortgage rates are expected to start falling during the summer,” says Mattias Persson.

A diversified labour market with varied resilience
It is becoming increasingly evident that the Swedish labour market is weakening. The number of temporary workers has been decreasing since mid-2022, indicating that overall employment will soon start to decline. Swedbank expects unemployment to peak at 8.5 per cent in 2024; however, there is a risk that the labour market will weaken even more if the public sector experiences pressure to make major staff cutbacks. However, the resilience of the labour market will vary, given that demand differs between industries. 

“Service exports are expected to hold up somewhat better, and industries such as IT, defence and green technology will continue to meet strong demand. Industries such as hospitality and retail, on the other hand, are struggling as households cut back on consumption. In total, we expect the number of unemployed people to rise by just over 40,000 in Sweden in the coming year,” says Mattias Persson.

Inflationary pressures will ease and the Riksbank will hike one last time
Inflation has continued to fall during the year, although high inflation is expected to linger a little longer in Sweden. The downturn in inflation can mainly be explained by declining electricity prices, but also by the normalisation of underlying price pressure. Swedbank expects CPIF inflation to continue to fall in the future, approaching 2 per cent in the summer of 2024 and then falling below the 2025 inflation target.

“Given the high inflation and the weak Swedish krona, the Riksbank will continue to tighten its monetary policy during the winter. We expect the policy rate to be raised by 25 points in November, to 4.25 per cent. In June next year, a series of policy rate cuts will begin, and the policy rate will eventually fall to 2.5 per cent by the end of 2025,” says Mattias Persson. 

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 
Charlotte Nilsson, Press Communicator, Swedbank, tel. +46 76 534 66 12

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