“Economic activity has been sustained in the short term. This is positive because it allows more time to prepare for the challenges that the world economy now faces, while the upcoming period of rising unemployment may also be shorter. But it is hard to foresee any lasting relief, as long as the fundamental problems related to inflation, energy supply and geopolitical turmoil persist," says SEB’s Chief Economist Jens Magnusson.
A widespread consumption-led downturn after a resilient 2022
We have revised our forecasts for 2022 upward. We expect GDP growth in advanced economies (the 38 OECD countries) to reach 2.7 per cent this year, but we expect 2023 to be characterised by a widespread consumption-led economic downturn. In the United States, GDP will fall in both the first and second quarters of next year. In Western Europe, we expect negative full-year 2023 growth in both the euro area and the United Kingdom. We have lowered our forecasts of GDP growth in the OECD countries for 2023 and 2024 to 0.5 per cent and 1.9 per cent, respectively. In the emerging market (EM) sphere, our forecasts are relatively unchanged. Due to Chinese recovery, overall EM growth will accelerate slightly in 2023. Global GDP growth will reach a low of 2.3 per cent in 2023, slightly above the 2 per cent often used as a benchmark for global recession.
"Historically, recessions have often been triggered by imbalances in the corporate sector, for example via investment excesses or large inventory fluctuations, and in recent decades also via financial imbalances, which have led to major changes in access to credit. Today companies are more resilient, and parts of the manufacturing sector will benefit from increased rearmament and underlying investment needs related to the climate transition. Instead, because of inflation and interest rate shocks, households are the most severely affected,” says Håkan Frisén, SEB’s Head of Economic Forecasting.
Rising unemployment and, to varying degrees, falling home prices will probably also contribute to ever-stronger headwinds facing households. The risks to our GDP forecast are on the downside. A complete shutdown of Russian gas supplies this winter cannot be ruled out. Aggressive key rate hikes raise the question of whether the US Federal Reserve and other central banks are underestimating the interest rate sensitivity of their economies and the risks of financial stress symptoms.
Inflation and key interest rates are close to peaking
Inflation signals have become more mixed, and the differences between the US and Western Europe are more evident, especially in the energy field. We expect euro area inflation to peak towards the end of 2022, six months after the US. This coming spring, inflation will fall noticeably. Yet we expect inflation to stay relatively high during 2023 and to remain above the 2 per cent central bank target for quite some time. Cost increases are so large that many actors − both businesses and households − will seek compensation for them. Their dispersion in the economy will be more prolonged. Central banks will continue to raise their key rates a bit more, but the end of the hiking cycle is approaching. We expect the US key interest rate to peak at 4.75 per cent (upper end of range) and the ECB deposit rate to peak at 2.75 per cent in early 2023. After that, long-term government bond yields may begin to fall. The US dollar will maintain its grip for some time to come. The dollar’s tailwind from Fed rate hikes will fade next year. But high energy prices, which are putting pressure on euro area economies and weakening their current account balances, are delaying the euro’s low point.
Sweden: More vulnerable than the rest of Europe and the Nordic region
Like the rest of Europe, the Nordic economies have so far shown great resilience. In Sweden, third quarter GDP was surprisingly strong, leading to an upward revision in our full-year 2022 growth forecast to 2.9 per cent. Going forward, however, we will see clearer negative effects from depressed real household incomes, rising mortgage rates and a weaker housing market. Swedish sentiment indicators have fallen in recent months to levels indicating negative GDP growth. We have revised our 2023 growth forecast rather sharply downward, from 0 to -1.5 per cent. We still expect a recovery in late 2023, but we have still lowered our 2024 full-year forecast from 1.7 to 1.3 per cent.
Due to several factors, GDP will fall further in Sweden next year than in Western Europe generally. The post-pandemic recovery has been stronger. As in the US, this implies a tighter resource situation at the outset. Sweden’s high proportion of floating-rate loans means that rising interest rates quickly have an impact, for example by squeezing household purchasing power. This is one reason behind a sharper decline in home prices than elsewhere. We now expect home prices to have fallen 20 per cent by mid-2023, and risks are still on the downside. Government compensation for high electricity prices and lower petrol taxes will soften the decline in household purchasing power. But Sweden’s fiscal support measures look weaker than those of neighbouring countries and are lower than we had previously assumed. Due to the GDP downturn, we now expect the labour market to weaken, with unemployment gradually rising and levelling off at above 8 per cent during the first half of 2024. We expect wages and salaries to rise by 4.5 per cent next year. Labour unions have demanded one-year pay increases of 4.4 per cent, which indicates some downside risk to our estimate.
“The Swedish national wage round has so far confirmed our view that the risks of a wage/price spiral creating problems for the Riksbank are small,” says Håkan Frisén.
CPIF inflation (the consumer price index excluding interest rate changes) will climb above 11 per cent early next year. Higher electricity prices are the main driver, but CPIF excluding energy will also rise further. During 2023, inflation will fall again. By the end of 2024, we expect both of these inflation metrics to be back below 2 per cent. The Riksbank will raise its key rate to 2.50 per cent late this year, and it will peak at 2.75 per cent in February 2023. When inflation falls, rate hikes will end. During the second half of 2024, the Riksbank will again begin to lower its key interest rate.
“At present there seems to be little risk that the Riksbank’s efforts to combat inflation will be thwarted by overly expansionary fiscal policy, given the government’s relatively tight budget despite a strained economic situation,” says Jens Magnusson.
Key figures: International & Swedish economy (figures in brackets are from the August 2022 issue of Nordic Outlook)
|International economy. GDP, year-on-year changes, %||2021||2022||2023||2024|
|United States||5.9 (5.7)||1.8 (1.5)||0.1 (0.5)||1.5 (2.0)|
|Euro area||5.3||3.2 (2.7)||-0.4 (0.3)||1.9 (2.1)|
|United Kingdom||7.4||3.0 (3.4)||-1.0 (-0.2)||1.1 (1.3)|
|Japan||1.7||1.9 (1.9)||1.8 (1.6)||1.3 (1.1)|
|OECD||5.6 (5.4)||2.7 (2.4)||0.5 (0.9)||1.9 (2.2)|
|China||8.1||3.5 (3.5)||5.3 (5.3)||5.1 (5.0)|
|Nordic countries||4.4||2.5 (2.5)||-0.5 (0.5)||1.8 (1.9)|
|Baltics||5.9 (5.6)||1.6 (1.5)||0.4 (1.2)||3.3 (3.4)|
|World (purchasing power parities, PPP)||6.2 (6.1)||3.2 (3.1)||2.3 (2.6)||3.6 (4.0)|
|Nordic and Baltic countries. GDP, year-on-year changes, %|
|Norway||3.9||2.1 (2.3)||0.8 (1.5)||1.9 (1.9)|
|Denmark||4.9||2.5 (3.0)||-0.5 (0.0)||2.5 (2.5)|
|Finland||3.0||2.0 (2.1)||-0.2 (0.7)||1.6 (1.5)|
|Lithuania||6.0 (5.0)||2.2 (1.5)||0.1 (0.5)||3.0 (3.7)|
|Latvia||3.9 (4.8)||1.5 (2.5)||1.1 (1.3)||3.5 (3.5)|
|Estonia||8.0 (8.3)||0.6 (1.2)||0.3 (0.5)||3.5 (3.5)|
|Swedish economy. Year-on-year changes, %|
|GDP, actual||5.1||2.9 (2.6)||-1.5 (0.0)||1.3 (1.7)|
|GDP, working day corrected||4.9||2.9 (2.7)||-1.3 (0.2)||1.3 (1.7)|
|Unemployment rate, % (EU definition)||8.8||7.4 (7.5)||7.8 (7.8)||8.2 (8.1)|
|CPI (consumer price index)||2.2||8.2 (8.8)||9.1 (7.8)||2.1 (1.9)|
|CPIF (CPI excluding interest rate changes)||2.4||7.6 (8.2)||6.2 (5.9)||1.3 (1.5)|
|Government net lending (% of GDP)||-0.1 (-0.3)||0.5 (0.4)||-0.5 (0.2)||-0.5 (0.0)|
|Key interest rate (December)||0.00||2.50 (2.00)||2.75 (2.25)||2.25 (1.75)|
|Exchange rate, EUR/SEK (December)||10.29||10.75 (10.55)||10.25 (10.15)||9.90 (9.80)|