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Nordic Outlook: War and inflation will hamper growth

The global growth outlook has been lowered significantly since the outbreak of the Ukraine war, while inflation forecasts have been revised upward. Russia's invasion of Ukraine will have serious consequences for both consumers and producers for years to come, and energy prices will remain high. Central banks will implement a number of interest rate hikes in the near future to instil confidence in their inflation targets. We have sharply lowered our Swedish GDP growth forecast, as households are being squeezed by high inflation and rising interest rates. The Riksbank is facing a difficult balancing act, with bloated home prices and interest-sensitive households. Despite slower growth than the Riksbank expects, continued upside inflationary surprises will force its policymakers to move even a little faster than the repo rate path they published in April.

“The international economic outlook has greatly deteriorated. There are positive counterforces, and our main scenario is still a global soft landing in which GDP growth slows down moderately and the upturn in unemployment is small. But given a more protracted war, high inflation and central banks that must focus on inflation, downward risks dominate,” says SEB's Chief Economist Jens Magnusson.

Global economy: Poorer growth outlook, but central banks are focusing on inflation

The war in Ukraine is having a profound effect on global economic and security policy developments. In addition to the tragic humanitarian consequences of the war, an already strong inflation impulse is now intensifying, with widespread increases in commodity prices. COVID-19 lockdowns in China are worsening the situation further. We are not expecting any substantial easing of global supply chain disruptions until early next year.

We have made sizeable downward adjustments in our global GDP growth forecasts for 2022 since the last Nordic Outlook forecast, published in January. We now expect global GDP to increase by 3.0 per cent, followed by a slight acceleration to 3.4 per cent in 2023: a bit lower than in our previous forecast. Our downgrades are biggest for the euro area, especially Germany, mainly due to the need for rapid energy transition. The outlook for the United States has gradually deteriorated as the Federal Reserve’s need for monetary tightening has become increasingly evident. Norway is coping better with the changing environment than other Nordic countries. Larger trade with Russia makes Finland and the Baltic countries more vulnerable, while the long-term trend is that economic relations between these countries and Russia are becoming weaker and weaker.

Our main global scenario is still a soft landing, supported by a number of positive forces: fiscal policy measures including subsidies for increasing energy costs as well as intensified investments in defence and green transition, large household savings buffers and strong private sector balance sheets, a continued reopening of the service sector and an eventual easing of supply side problems. Despite key interest rate hikes, real interest rates will also remain low.

“Fiscal policy still has an important role to play in offsetting various negative forces. But the role of fiscal policy has meanwhile become more complex. There is a risk that fiscal and monetary policymakers will end up in a destructive tug-of-war, with expansionary fiscal policies increasing inflationary pressures and forcing central banks into even more severe tightening,” says Håkan Frisén, SEB’s Head of Economic Forecasting.

Despite the deteriorating economic growth outlook, central banks must focus on overcoming inflation. The inflation upturn has broadened as companies have increasingly passed rising costs onward to consumers. This increases the risk that long-term inflation expectations will also take off. As for pay increases, the situation remains divided. The risks of an upward wage-price spiral are greatest in the United States and the United Kingdom. We have adjusted our central bank forecasts upward to include the banks’ front-loaded key interest rate hikes out of concern for their inflation targets. The Fed will hike its key rate by 50 basis point steps at its next few policy meetings. The European Central Bank will start its rate hiking as early as July.

Sweden: High inflation and rising interest rates will squeeze Swedish households

We have lowered our GDP growth forecast for Sweden by about one percentage point to 1.8 per cent in both 2022 and 2023. Rapidly rising inflation is eroding household income, while the outlook for the manufacturing sector is mixed. Its favourable structure − with an emphasis on investment goods – and far smaller Swedish electricity price increases than the European average suggest a relatively mild slowdown. The labour market is strong at present but will soften, with unemployment levelling off at around 7.5 per cent. The upcoming national wage round is the topic of a special theme article in this issue of Nordic Outlook. Negotiations will be the most difficult for many years, but there is little risk of a serious wage-price spiral.  

Initially driven by high energy prices, inflationary pressures in Sweden have broadened dramatically. Our forecast is that inflation will fall back when supply chain problems ease and the demand for consumer goods slows. We expect CPIF (CPI less interest rate changes) to fall below the Riksbank’s 2 per cent inflation target some months into 2023. Short-term upside risks compared to the Riksbank's inflation forecast will lead to front-loaded key interest rate hikes, including a 50 basis point hike in September. Our pessimistic growth picture suggests that the Riksbank will nevertheless stop its rate hikes at 1.75 per cent, ending its hiking cycle by the middle of next year.

“The Riksbank will prioritise the fight against inflation for some time to come. But meanwhile it cannot ignore the consequences of high interest rate sensitivity in the economy. Bloated home prices will create the risk of a significant decline in growth if the key interest rate is hiked quickly and sharply. Like many other central banks, the Riksbank is now facing a difficult balancing act between inflation risks and risks to the real economy,” says Chief Economist Jens Magnusson.

Key figures: International & Swedish economy (figures in brackets are from the February 2022 issue of Nordic Outlook, published in late January)

International economy, GDP, year-on-year change, % 2020 2021 2022 2023
United States -3.4 5.7 (5.6) 2.6 (3.5) 1.7 (2.1)
Euro area -6.4 5.4 (5.3) 2.1 (4.0) 2.8 (2.9)
United Kingdom -9.3 7.4 (7.2) 3.7 (4.5) 2.5 (2.9)
Japan -4.5 1.6 (2.0) 2.3 (3.2) 1.9 (1.2)
OECD -4.6 5.5 (5.2) 2.6 (3.7) 2.3 (2.4)
China 2.2 8.1 (8.1) 5.0 (5.2) 5.2 (5.4)
Nordic countries -2.1 4.3 (4.2) 2.4 (3.3) 2.1 (2.5)
Baltic countries -1.8 5.6 (5.6) 1.1 (3.8) 2.0 (3.4)
The world (purchasing power parities, PPP) -3.2 6.1 (5.8) 3.0 (4.1) 3.4 (3.6)
Nordic and Baltic countries, GDP, year-on-year change, %        
Norway -0.7 3.9 (3.9) 3.6 (4.0) 2.9 (2.5)
Denmark -2.1 4.8 (4.0) 2.4 (3.3) 2.4 (3.0)
Finland -2.3 3.5 (3.5) 1.8 (3.0) 1.5 (1.6)
Lithuania  -0.1 5.0 (4.9) 0.9 (3.5) 1.8 (3.3)
Latvia -3.6 4.8 (4.5) 1.8 (4.6) 2.5 (3.8)
Estonia -3.0 8.3 (8.2) 0.6 (3.2) 2.0 (3.0)
Swedish economy, year-on-year change, %        
GDP, actual -2.9 4.8 (4.9) 1.8 (3.0) 1.8 (2.7)
GDP, working day corrected -3.2 4.7 (4.8) 1.9 (3.1) 1.9 (2.8)
Unemployment, % (EU definition) 8.5 8.8 (8.8) 7.6 (7.6) 7.5 (7.2)
CPI (consumer price index) 0.5 2.2 (2.2) 6.1 (3.1) 4.2 (1.7)
CPIF (CPI minus interest rate changes) 0.5 2.4 (2.4) 5.9 (3.3) 3.0 (1.5)
Government net lending (% of GDP) -2.7 -0.2 (-0.6) 0.3 (0.7) 0.2 (0.7)
Repo rate (December) 0.00 0.00 1.25 (0.00) 1.75 (0.50)
Exchange rate, EUR/SEK (December) 10.05 10.29 10.15 (10.05) 9.70 (9.70)

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
Lina Fransson: +46 8 506 232 02
Per Hammarlund: +46 76 038 9605
Olle Holmgren: +46 70 763 8079
Elisabet Kopelman: +46 70 655 3017
Marcus Widén: +46 70 639 1057

Press contact:

Frank Hojem, Chief Corporate Communication
+46 70 763 9947

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