Swedbank Economic Outlook: Two tough years ahead for the Swedish economy
The Swedish economy is stagnating in the wake of continued high inflation and eroded purchasing power. The Riksbank is expected to continue raising the policy rate until June and fiscal policy is austere, which will further weaken household consumption, according to Swedbank Economic Outlook.
"In Sweden, household purchasing power is under pressure from high inflation. Last year, purchasing power fell by almost SEK 190 billion due to the price increases alone, and we expect it to continue to decline by about the same amount. Households' interest costs have doubled, and we expect them to double again this year. This means that purchasing power will be further eroded, which will have a clear impact on the Swedish economy," says Mattias Persson, Group Chief Economist, Swedbank.
Continued high inflation
In Sweden, the price increase rate rose at the beginning of 2023, and underlying inflation has risen faster this year than in the first quarter of last year. Companies' increased costs, and consequently falling margins, mean that prices are continuing to rise for consumers. The weakening of the Swedish krona is another factor driving inflation, especially for food.
"Given that inflation is high and that it's falling slowly, the Riksbank will continue to raise the policy rate in the near future. We expect the policy rate to peak at 4 per cent in June. Next year, the Riksbank is expected to implement a number of policy rate cuts totalling 125 bps, which will ultimately result in a policy rate of 2.75 per cent towards the end of 2024," says Mattias Persson.
Swedish growth has been revised down for 2024
Swedbank's projection for Swedish growth in 2023 remains unchanged since the previous forecast; the Swedish economy is expected to shrink by 1.1 per cent. For 2024, growth has been revised down to 0.3 per cent, which can be compared with the previous forecast of 0.9 per cent. The number of people employed is expected to start falling later this year, and unemployment is expected to rise to 8.6 per cent in 2024.
"Swedes are highly indebted. Around 60 per cent have variable interest rates on their mortgages, and approximately another 15 per cent have mortgages that will be renegotiated within a year, which is why we expect a weaker trend in Sweden than in other countries. This means that purchasing power and growth will be further weakened during the year," says Mattias Persson.
Swedish government underestimating impact of its fiscal policy
Swedbank expects further measures to be taken in the future when inflation has fallen back down and economic growth is low. In 2024, Swedbank's macroeconomists forecast unfunded fiscal measures totalling SEK 40 billion, most of which are tax cuts announced in the Tidö Agreement, and an increase of SEK 15 billion in government grants in the light of the demographic challenge and the cost increases resulting from the high inflation. In 2024, Swedbank also expects additional electricity support payments of SEK 25 billion to be paid to households.
"Our assessment is that fiscal policy will have a stronger impact this year than the government expects. We believe there is scope to do more in the future. The combined surplus from the tight fiscal policy in 2023 and 2024 frees up budgetary scope of around SEK 100 billion. In the long term, especially in the light of demographic developments and the green transition, the surplus target should be replaced with a balance target - and a discussion about this should start right now," 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