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Sweden’s near-term economic headwinds will be better by summer

Inflation will fall, interest rates will decline and household real income will rise in 2024 – paving the way for the Swedish economy to rapidly recover in 2025. However, the near-term outlook presents challenges, and the labour market will weaken this year. The Riksbank will start lowering the policy rate in May, and fiscal policy will become more expansive in 2025, according to Swedbank Economic Outlook.

“After two years of declining income, households are beginning to see signs of hope as inflation falls and public transfers to households increase,” commented Mattias Persson, Group Chief Economist, Swedbank. “However, consumption will remain subdued until the summer, but in the second half of the year we believe that households will become more optimistic, and that consumption will then start to increase. Above all, it will be housing investments that hold the Swedish economy back this year; they have come to a rapid halt and are expected to fall by 16% this year.”

Fragmentation on a deteriorating labour market

The Swedish labour market has started to weaken. The situation will continue to deteriorate in 2024, as economic growth will remain subdued, and unemployment will peak at 8.5% in the fourth quarter of the year. Yet, there is a risk that the labour market will weaken even more.

“The outlook for the labour market varies depending on industry,” Persson noted. “Subdued domestic demand is weighing on employment in the retail, hotel and restaurant sectors as well as on housing construction and related industries. At the same time, demand for labour remains high or stable in other industries such as defence, crisis preparedness, green technology and IT.”

Inflationary pressure will fall rapidly and the Riksbank will make more cuts

Inflation is now clearly on a downward trend in Sweden and is expected to reach the target of 2% by summer – CPIF inflation in June and CPIF excluding energy in July. Subsequently, Swedbank expects inflation to be below the inflation target by the end of 2025.

“We expect the policy rate to be cut by 25 points in May, to 3.75%, followed by further cuts,” said Persson. “Swedbank’s assessment is that a normal policy rate in Sweden is approximately 2%. The policy rate will be gradually lowered to 2% by the middle of 2025, which means that monetary policy will remain tight, although to a lesser extent, until the middle of 2025.”

The Swedish economy will recover rapidly

The Swedish economy’s growth is expected to be weak this year, but a rapid upturn will follow in 2025. For 2024, Swedbank’s forecast has been revised up and we expect the economy to grow by 0.1% compared to our preceding forecast in November, in which we estimated that GDP would shrink by 0.4%. In 2025, there will be a strong recovery, and the Swedish economy will grow by 3.0%, an upward revision from Swedbank's previous forecast of 2.0%.

“The Swedish economy will continue to face headwinds in the first half of 2024, but after that the recovery will become increasingly evident,” added Persson. “In line with falling inflation, policy rate cuts and a more expansive fiscal policy in 2025, Sweden’s economy will grow faster than that of many other countries. The Swedish economy will make a comeback in 2025.” 

Neighbourly comparisons

There are some clear distinctions and parallels between Sweden's and Norway's economic outlooks for 2024, according to the comparison group at CasinospotFR. The high rates of inflation in both nations are having an impact on domestic demand. Both countries look set to see a decline in the labour market in 2024, but they have different predictions for the unemployment rate. While Sweden’s peak unemployment rate is projected for 8.5% in 2024, in Norway a steady climb to about 4% by 2025 is anticipated.

While both nations will maintain strict monetary policies to control inflation, it is projected that the key rate in Sweden will gradually decline to 2% by mid-2025, while in Norway, it will rise to 3.25% in 2024. In turn, while Sweden is predicted to see sluggish economic growth this year and a sharp recovery in 2025, Norway is predicted to see its mainland GDP growth decline following solid growth in 2021 and 2022, at 3.9% and 3.28%, respectively. Estimates from Statista show Norway’s annual GDP dropping to 2.28% in 2023, 1.5% in 2024 and 1.23% in 2025.

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