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Sweden: Resilient, but downside risks remain

GDP growth again surprised on the upside in Q1, but hard-pressed households, decreased housing construction and relatively tight fiscal policy indicate that Swedish growth this year will be among the weakest in the EU. After inflation rose far faster than expected early in 2023, there are increasing hopes that it will slow more clearly after the summer. We believe the Riksbank will hike its key rate one last time to 3.75 per cent in June, with the first rate cut coming in April 2024.

After a weak final quarter of 2022, GDP recovered in Q1 2023 according to the flash estimate, rising by a stronger-than-expected 0.2 per cent. Sentiment indicators have stabilised, but they remain at low or very low levels: We expect GDP to fall during the rest of the year. After this strong start, we have adjusted our forecast for 2023 upward to -1.0 per cent from -1.2 per cent in the previous Nordic Outlook. But we have adjusted 2024 GDP downward by 0.3 points, with growth reaching only 0.8 per cent well below trend. Signals of easing price pressure have become clearer. Core inflation will fall after the summer, but in the coming months inflation risks will still be on the upside. The Riksbank will hike its key interest rate one last time to 3.75 per cent in June, followed by three cuts during 2024 to 3.0 per cent.

Key data

Year-on-year percentage change
















Wages and salaries










Net lending **





General government debt





Policy rate, %***





* % of labour force **% of GDP *** At year-end. Source: Eurostat, SEB

Mixed signals from industry

Manufacturing sector indicators have weakened significantly since early 2022, but in recent months some stabilisation has been discernible. The purchasing managers’ index (PMI) is at relatively low levels, while the National Institute of Economic Research confidence indicator is close to its historical average. One important explanation for the gaps is that companies are still fairly satisfied with their order books, which is logical since goods exports and industrial production are still rising.

But order inflow is weak. There are many indications that we are facing a downturn, and we expect gradually falling production and exports this year. Since we expect a relatively mild international recession, there is little risk that we will see as abrupt a decline as during the global financial crisis (GFC) and early in the pandemic. Service exports recovered very strongly in 2021 and 2022 and are now well above their historical trend driven by business, transport and telecom services. But we now expect a slowdown, with service exports approaching their trend. Total exports will fall more than 1 per cent this year, followed by an upturn of about 4 per cent in 2024.

Construction is facing a clear downturn. The number of housing starts is expected to halve from 67,000 in 2021 to 30-35,000 this year. Residential investments will fall by a total of 30 per cent in 2023-2024, pulling down GDP growth by about 0.7 percentage points per year and total capital spending by over 3 points per year. There is great uncertainty. Anecdotal data indicate downside risks, with signals of a halt to new projects. Some form of housing construction subsidies will probably be launched if the downturn becomes even more dramatic. Lower demand for commercial premises is also contributing to falling construction investments. Overall capital spending will fall by 3.1 per cent in 2023 and a further 3.0 per cent in 2024.

Squeezed households will cut consumption 

Financially hard-pressed households will also contribute significantly to weak GDP growth. Our forecast that real wages will fall more than 10 per cent over a two-year period remains unchanged. Although a continued rise in employment and fiscal stimulus measures will ensure that disposable incomes do not fall as much, the situation is tough for many households. In addition to high inflation, they are being squeezed by rising mortgage rates.

Savings are shrinking, but for how long? So far, households have kept increasing their consumption in current prices by reducing their savings, but it is doubtful whether this trend can continue. Household savings were initially high, but this is partly due to compulsory pension savings; the personal financial savings ratio has already fallen below zero. Households have also started to reduce consumption loans. Mortgage lending has stagnated.

Household income and savings ratio

Year-on-year percentage change






Real disposable income





Private consumption





Savings ratio, % of income





Source: Statistics Sweden, SEB

Consumption will fall by 4 per cent. As an annual average, consumption volume rose last year, but the explanation was a strong finish in 2021. During 2022, consumption fell by 2.0 per cent. In 2023, we expect a further 2 per cent drop. Such a decline of 4 per cent is almost unique. During the 1990s crisis, consumption fell by 5 per cent, but this was spread out over several years. During the global financial crisis, the decline was only 2.5 per cent. There is great uncertainty about how households will deal with shrinking real income. Our forecast implies that nominal consumption will remain high in a historical perspective and that the savings ratio will stay at the lower level established in 2022.

The decline in home prices will continue. Combined house and flat prices from estate agents (Mäklarstatistik) indicate that home prices have fallen by 12 per cent since peaking in early 2022. Prices stabilised during the first three months of 2023. According to SEB’s Housing Price Indicator, pessimism about home prices has decreased. But continued rate hikes suggest that the downturn will continue. We are sticking to our forecast of a total price decline of 20 per cent. Continued strong population growth combined with reduced construction indicate that demand may be a factor that prevents a larger price drop. 

The labour market is important for home prices and consumption. If the economic downturn is prolonged, the labour market risks weakening in a way that may create a negative spiral, with further declines in consumption and home prices. So far, the labour market slowdown has been milder than feared. Employment has continued to increase. Unemployment rose slightly early this year, but indicators like lay-off notices and hiring plans are still at levels that suggest rising employment. Here too, the forecast is more uncertain than usual. Several historical examples indicate that the number of lay-off notices can rise rapidly, driving a surge in unemployment.

Higher and longer pay agreements

Just before the previous collective agreements expired this spring, manufacturing sector employers and labour unions concluded agreements that provide pay hikes of 4.1 per cent effective in April 2023 and a further 3.3 per cent in April 2024. Many other unions quickly signed agreements at similar levels, and the risk of anyone diverging from this model is small. The agreements ended up a bit higher than we expected, with the employer side prepared to pay a little extra to get two-year contracts. Overall, we now expect wages and salaries to increase by 4.1 per cent this year and 3.9 per cent in 2024, which together is 0.4 points above our previous estimate. Our forecast implies that total pay will increase 0.4 percentage points per year more than the agreements. This would mean slower wage drift than in 2022 and is in line with the historical pattern that pay hikes above contractual levels are smaller when agreements are higher. The labour market is cooling, which also points to moderate wage drift. Since mid-2022, the share of firms reporting labour shortages has fallen sharply from record levels.

More signs that inflation will ease

After a sharp upside surprise in early 2023, March inflation figures provided some relief. CPIF (CPI with constant interest rates) excluding energy fell to 8.9 per cent from 9.3 per cent in February. This decline increases hopes that a turnaround is under way, but short-term indicators such as the producer price index (PPI) and company pricing plans in various surveys remain at high levels. We thus see predominantly upside risks to core inflation during the coming months. An alternative core inflation metric similar to the one used in the euro area fell to 7.1 per cent in March from 7.4 per cent. This is almost 1.5 percentage points higher than in the euro area. According to our models, the weak krona may explain almost half of this difference. Inflation in Sweden is mainly driven by the same forces as in the euro area, and developments will largely be determined abroad.

Prices are cooling. International commodity and input goods prices levelled off or began falling as early as mid-2022. In recent months there have been signs that prices of more processed goods are also easing. For example, the share of consumer goods businesses planning to raise prices has approached pre-pandemic levels, according to business tendency surveys. This decline is particularly evident for food. If these plans are confirmed by producer prices this spring, the likelihood of a more pronounced inflation slowdown in the second half increases.

Food prices keep rising rapidly. Food prices included in CPI continued to soar in March, although the year-on-year rate of change fell to 19.6 per cent from 20.9 per cent in February. Several major wholesalers have announced price cuts on parts of this grocery basket in April and May, which we believe will help food prices level off this spring and summer. Although there is great uncertainty, these price cuts may contribute to an easing of food inflation a bit earlier in Sweden than in the euro area.

Higher wages are triggering more service inflation. Service prices accelerated early in 2023, reflecting sharply higher costs for service companies. Falling energy and input costs will increase the likelihood of lower inflation in services as well. Slightly faster pay hikes will provide some upward pressure in 2024, but wages are expected to increase more slowly in Sweden than the average in Western Europe.

CPIF is falling faster and sooner than the core metric. CPIF has slowed a bit more than core inflation, mainly due to lower electricity prices, which are expected to keep falling slightly this spring and summer. We expect CPIF to be lower than core inflation throughout our forecast period. The difference will be greatest this year, but a possible easing of greenhouse gas reduction requirements on fuels could widen the difference in 2024.

Key interest rates are close to peaking

As expected, the Riksbank raised its key rate by 50 basis points at the April policy meeting. Its rate path signalled 60 per cent (15 basis points) probability of another hike in June or September. We believe the key rate will be raised by 25 bps to 3.75 per cent in June and that this will be the last hike in this cycle. Although risks to core inflation in the coming months are larger on the upside, our forecast suggests a slightly larger decline in August. The Riksbank will receive new inflation statistics (for August) a week before its September rate decision. If our forecast proves correct, this outcome should reduce pressure for further hikes.

Difficult balancing act for the Riksbank. Because of continued delay in the inflation downturn, the Riksbank faces tough choices in a situation where the Swedish economy and labour market have shown resilience so far. Meanwhile there is increasing criticism of the Riksbanks strategy. More and more people are questioning the appropriateness of hiking the key interest rate during a recession, especially when inflation is largely being driven by international trends. Falling real household incomes increase the risk that rate hikes will make households and companies unable to pay their loans. Moderate collective wage agreements have greatly reduced the risks of a harmful wage-price spiral, and wage growth is likely to slow in 2025. For now, financial markets seem to have put the March banking crisis behind them, but the bankruptcies that occurred are still a reminder that historically rapid rate hikes can threaten financial stability. 

SEK headaches. The weak Swedish krona is a source of concern for the Riksbank. Several Executive Board members have emphasised that government bond sales could help strengthen the krona by pushing up long-term yields and thus attracting foreign investors. We believe the Riksbank will expand bond sales at the June meeting.

No help from fiscal policymakers

The Swedish government has announced expansionary measures for 2023 totalling SEK 50-55 billion, of which around SEK 25 billion will be directed to households in the form of tax cuts and higher transfers. Overall, fiscal policy is expected to be neutral or even slightly contractive this year. The finance minister continues to emphasise the importance of not letting fiscal policy fuel high inflation, and the spring budget in April only contained reforms totaling SEK 3 billion. This is extremely cautious, given the weak economic outlook. An overly passive fiscal policy also has obvious downsides. However, our impression is that the government is prepared to provide more stimulus when inflationary pressures ease, or if growth falters. There are many indications that there will be fairly strong fiscal expansion later in the government’s term of office, although the timing is somewhat uncertain. We expect tax cuts and spending increases of SEK 50-60 billion in 2024, corresponding to about 1 per cent of GDP.

Strong central government finances. Government finances have continued to show surprising strength. At least initially, high inflation has boosted tax revenues more than expenditures. In recent months, the central government budget surplus has been SEK 50 billion better than the National Debt Offices forecast. Both net lending and the budget are likely to continue showing surpluses this year. As inflation falls and economic growth slows, public finances are likely to weaken, and we expect continued deficits in 2024. We also believe that the government will be forced to borrow next year in order to restore the Riksbanks equity capital after large losses on its government bond holdings.