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Nordic Outlook: Tough policy dilemmas due to energy crisis

Because of accelerating inflation and rapid key interest rate hikes, the global economic outlook is deteriorating. We are adjusting our GDP forecasts sharply lower, especially for 2023, and expect GDP growth of only 0.9 per cent in advanced economies (the 38 OECD countries) – down from 2.3 per cent in our May forecast. Swedish GDP growth will be 0.0 per cent next year, yet the Riksbank will speed up its inflation-fighting pace and the repo rate will peak at 2.25 per cent early in 2023. Swedish households are being squeezed by falling real incomes, rising prices and doubled interest expenditures, and home prices will fall by 15-20 per cent. 

“In Europe, the energy crisis is assuming more and more dramatic forms, and no end to the Ukraine war is in sight. A consumption-driven downturn is thus inevitable this autumn. In the United States, GDP growth will continue to slow this autumn as Federal Reserve rate hikes increasingly restrain the economy,” says SEB's Chief Economist Jens Magnusson.

Only a mild recession
In a historical comparison the recession is expected to be mild, and in 2024 the OECD economies will grow by more than 2 per cent. Households still have post-pandemic savings buffers. Labour markets have shown great resilience so far, and we expect the upturn in unemployment to be relatively limited. Underlying imbalances are nowhere near as large as during the global financial crisis of 2008-2009. A deep, protracted balance sheet recession with a need for household and corporate deleveraging will thus be avoided. Another positive factor is that we now see an easing of earlier disruptions in global supply chains.

Economic policymakers are encountering major challenges. Central banks are being forced to prioritise inflation-fighting despite the economic slowdown in order to prevent long-term inflation expectations from soaring. In Europe, fiscal policymakers face a dilemma: softening the acute impact of extreme energy prices without unduly hampering central bank inflation-fighting or slowing the green energy transition.

Not a totally new inflation environment
Because central banks have speeded up their rate hikes, the end of the hiking cycle is nevertheless not far away. Our forecast is that the Fed’s key rate will peak at 3.50 per cent by the end of this year and that central banks in Western Europe will end their hiking cycles at around 2-3 per cent in early 2023. Secondary effects from high energy prices and compensatory pay hikes will delay the downturn in inflation. Yet the modest upturn in long-term inflation expectations suggests only limited concerns that we are entering a totally new inflation environment further ahead. This will make room for central bank interest rate cuts late in our forecast period.

“International organisations such as the IMF, OECD and BIS have recently focused on comparisons with the failed inflation-fighting efforts of the 1970s. But fortunately, the differences are greater than the similarities. Back then, weak international competition, frequent labour disputes and indexation of prices and wages contributed to an environment of high, volatile inflation. The contrast with today’s situation is stark,” says Håkan Frisén, SEB’s Head of Economic Forecasting.  

Sweden: Households squeezed by inflation and double-digit home price declines
Rising consumer prices and higher interest rates are severely squeezing Swedish households. GDP growth will fall from 2.6 per cent this year to 0.0 per cent for 2023 as a whole – a sharp downward revision from our 1.8 per cent forecast in the May issue of Nordic Outlook. During 2024, GDP growth will approach its long-term trend, although the annual average will be only 1.7 per cent. Unemployment will climb this autumn and reach more than 8 per cent by the end of 2023. The environment for the upcoming national wage round will be the most difficult since the 1990s. Employer and employee organisations will probably agree on front-loaded wage and salary increases to compensate for high prices. This will send a signal to the Riksbank that its inflation target is not being challenged in the long run.

Swedish inflation measured as CPIF (consumer price index excluding interest rate changes) will peak at around 10 per cent this autumn. Weak demand and stable or falling international prices will dampen price pressures further ahead. Combined with more normal energy prices, this will enable inflation to fall below the Riksbank’s 2 per cent target in 2024. The central bank will accelerate its upcoming rate hikes, and its key rate will peak at 2.25 per cent by early 2023. Falling inflation and a slowing economy will then open the way for interest rate cuts, and by the end of 2024 the Riksbank’s key rate will be 1.75 per cent.

“The response of households will determine the depth of the economic downturn. Despite fiscal stimulus measures of almost SEK 40 billion per year, real household incomes will fall. A doubling of household interest expenditure and a 15-20 per cent decline from peak home prices will also contribute to a consumption downturn late this year and during most of 2023,” says SEB's Chief Economist Jens Magnusson. 

The manufacturing downturn in Sweden will be milder than in Germany and the euro area generally. Cautious international investments are hurting the input and capital goods-oriented Swedish manufacturing sector relatively hard. On the other hand, Swedish manufacturers are not so dependent on natural gas, and electricity prices are low by European standards, especially in the northern part of the country. Because of higher costs and a weaker housing market, residential construction in Sweden will make a negative contribution to GDP growth of around 0.5 percentage points in the coming year.

The outcome of the September 11 parliamentary election is uncertain, and tough negotiations to form a new government are likely to follow. New written accords between political parties similar to the January Agreement of 2019 will be necessary, despite heavy criticism surrounding earlier accords. Because of stable Swedish public sector finances, a political risk premium is unlikely in any event. So far, the difficult balancing act associated with Riksbank inflation-fighting and the need to avoid alienating potential future partners have somewhat restrained the parties’ election campaign promises. Whichever political bloc wins, fiscal policy will be expansionary – but not enough to keep the country’s debt-to-GDP ratio from falling below 30 per cent during our forecast period.

Sweden’s election is the topic of one of the four in-depth theme articles in this Nordic Outlook. The other three examine the outlook for the Swedish housing market, the economic impact of a protracted war in Ukraine, and new global monetary policies based on key rate hikes and quantitative tightening (QT). 

Key figures: International & Swedish economy (figures in brackets are from the May 2022 issue of Nordic Outlook)

International economy, GDP, year-on-year changes, % 2021 2022 2023 2024
United States 5.7 1.5 (2.6) 0.5 (1.7) 2.0
Euro area 5.3 2.7 (2.1) 0.3 (2.8) 2.1
United Kingdom 7.4 3.4 (2.3) -0.2 (1.9) 1.3
Japan 1.7 1.9 (1.5) 1.6 (3.2) 1.1
OECD 5.4 2.4 (2.6) 0.9 (2.3) 2.2
China 8.1 3.5 (5.0) 5.3 (5.2) 5.0
Nordic countries 4.4 2.5 (2.4) 0.5 (2.1) 1.9
Baltic countries 5.6 1.5 (1.1) 1.2 (2.0) 3.4
The world (purchasing power parities, PPP) 6.1 3.1 (3.0) 2.6 (3.4) 4.0
Nordic and Baltic countries, GDP, year-on-year changes, %        
Norway 3.9 2.3 (3.6) 1.5 (2.9) 1.9
Denmark 4.9 3.0 (2.4) 0.0 (2.4) 2.5
Finland 3.0 2.1 (1.8) 0.7 (1.5) 1.5
Lithuania 5.0 1.5 (0.9) 0.5 (1.8) 3.7
Latvia 4.8 2.5 (1.8) 1.3 (2.5) 3.5
Estonia 8.3 1.2 (0.6) 0.5 (2.0) 3.5
Swedish economy, year-on-year changes, %        
GDP, actual 5.1 2.6 (1.8) 0.0 (1.8) 1.7
GDP, working day corrected 4.9 2.7 (1.9) 0.2 (1.9) 1.7
Unemployment, % (EU definition) 8.8 7.7 (7.6) 8.0 (7.5) 8.1
CPI (consumer price index) 2.2 8.8 (6.1) 7.8 (4.2) 1.9
CPIF (CPI minus interest rate changes) 2.4 8.2 (5.9) 5.9 (3.0) 1.5
Government net lending (% of GDP) -0.3 0.4 (0.3) 0.2 (0.2) 0.0
Repo rate (December) 0.00 2.00 (1.25) 2.25 (1.75) 1.75
Exchange rate, EUR/SEK (December) 10.29 10.55 (10.15) 10.15 (9.70) 9.80

For further information, contact:
Jens Magnusson: +46 70 210 2267
Håkan Frisén: +46 70 763 8067
Robert Bergqvist: +46 70 445 1404
Daniel Bergvall: +46 73 523 5287
Per Hammarlund: +46 76 038 9605
Olle Holmgren: +46 70 763 8079
Elisabet Kopelman: +46 70 655 3017
Seyran Naib: +46 70 739 1477
Marcus Widén: +46 70 639 1057

Press contact:
Niklas Magnusson, Group Press Officer
+46 70 763 8243

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