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Nordic Outlook: Soft landing in the shadow of debts and geopolitics

The global economy is decelerating, but at different rates in different parts of the world. Lower inflation, high employment and rising real wages will continue to support a soft landing. Key interest rates have peaked, and the US Federal Reserve will begin its rate cutting cycle by the middle of next year. This will contribute to a moderate recovery during the latter part of our forecast period. Meanwhile geopolitical turmoil is creating growing downside risks. The question of how well economies – and the financial system – can continue to withstand increasingly tight financial conditions is another uncertainty. Swedish GDP will continue to decline until the middle of next year, falling by 1 per cent this year and 0.4 per cent in 2024. Unemployment will rise to 9 per cent, and the Riksbank will begin cutting its policy rate in September next year.

“The Middle East war adds to an already uncertain geopolitical situation, with several ongoing conflicts and great human suffering. Its proximity to oil-producing countries is a risk factor, but our main scenario is that the economic consequences of the war will be limited. Uncertainty about global cooperation, trade and climate change will affect the behaviour and future plans of countries and businesses. Everyone is adapting to the new world. Although abrupt fluctuations in trade flows are unusual, we are now seeing, for example, that US imports from Mexico have surpassed those from China,” says Jens Magnusson, Chief Economist at SEB.

Global growth of 3 per cent for 3 years
The latest statistics support our view that a deep economic downturn can be avoided. China’s outlook has improved somewhat, and emerging market (EM) economies are holding up relatively well. The slowdown in the 38 mainly affluent OECD countries is clear, but uneven. American growth has again surprised on the upside but is expected to decelerate around the turn of the year. In the euro area, growth rates are already around zero. The next few quarters will be weak, but both the United States and the euro area will avoid a recession. Overall, GDP growth in the OECD countries will decelerate from 1.6 per cent this year to 1.2 per cent next year, followed by a recovery to 2 per cent in 2025. Global GDP will increase by a moderate 3 per cent per year during 2023-2025. The changes in our forecast compared to the August issue of Nordic Outlook are minor. 

Complicated monetary policy balancing act
Although growth will remain below normal for a while longer, the impact of the rapid interest rate hikes and inflation shock has so far been surprisingly limited. Strong labour markets, remaining household savings buffers and well-filled company order books after the COVID-19 pandemic have contributed to a gentle slowdown. But looking ahead, we expect these forces to fade. Rising long-term bond yields have recently contributed to further tightening of financial conditions during this late stage in the central bank hiking cycle.

“There is thus reason to fear that the impact on the real economy and the financial system may be greater now than at the start of the tightening cycle. This suggests that central banks will refrain from new rate hikes, even though underlying inflation remains a bit above target, and will instead increase their preparedness for monetary easing in 2024,” says Daniel Bergvall, Head of Economic Forecasting at SEB.       

Can differences in inflation dynamics change the order of central bank rate cuts? 
A continued decline in the inflation rate towards 2 per cent is crucial for our forecast. The drivers of inflation have clearly lost momentum, especially energy and other goods as manufacturing activity has weakened. Meanwhile the service sector has held up better. Once demand falls more generally and labour markets cool, wage pressures will subside. This will help core inflation to reach its target late in 2025. Because of higher costs than during the decades before the pandemic, core inflation will not fall back below 2 per cent. The biggest upside risk is that the upturn in service prices will not subside, along with the risk of compensation demands aimed at restoring real wages. This autumn, the euro area has also seen surprisingly low inflation figures for service prices, but uncertainty ahead of next spring’s wage and salary negotiations makes us cautious about extrapolating these trends. 

“If the downside risks to the euro area were to materialise at the same time as US growth continues to surprise on the upside, we may see a situation in which the European Central Bank cuts interest rates earlier than the Fed, which would be the opposite of the order most observers have predicted so far. This is not our main scenario, but the probability has swung in that direction and so has market pricing,” says Jens Magnusson.

High public sector debt and inflation risks will hold back interest rate downturn
Our main scenario is that the Fed will lead with a key rate cut in May 2024 and that the ECB will follow suit at its June policy meeting, while somewhat more persistent inflation problems may lead to a further rate hike by Norges Bank and the Bank of England. At the end of 2025, the Fed’s key rate will stand at 3.00 per cent and the ECB’s deposit rate at 2.50 per cent. Key interest rate cuts will be a driver of lower US bond yields in 2024 and 2025, while the downside potential in the euro area is limited, given already depressed levels. Worryingly high levels of public sector debt − especially in the US − as well as reduced central bank asset purchases and increased inflation risk premiums suggest that in the future, investors will demand a larger premium to invest in fixed income instruments with longer maturities. Because of already large budget deficits and more nervous fixed income markets, fiscal policies will be largely neutral during the next couple of years, despite the slowdown in growth. 

Sweden: Continued headwinds for growth next year 
Swedish GDP growth has been on a downward trend since the end of 2022, and the decline is expected to continue until mid-2024. Sentiment indicators have fallen again and are generally pointing to declining GDP. After a somewhat stronger third quarter, we have raised our GDP forecast for 2023 from -1.2 to -1.0 per cent but lowered our forecast for 2024 from +0.1 per cent to -0.4 per cent. In 2025, we expect GDP to grow by 2.5 per cent. The GDP downturn is mainly being driven by residential investments and household consumption. During the second quarter 2023, the number of housing starts was 70-75 per cent below its peak in late 2021. Company reports imply that housing starts continued to decline during the third quarter.

“There is a risk that housing construction will come to an almost complete standstill. It is difficult to see how the situation can be improved as long as interest rates are not lowered or the government approves further support measures,” says Daniel Bergvall.

High mortgage rates and a large supply of unsold flats suggest that housing prices may fall again over the next 6-9 months. Gradually improving real wages should provide some support to households going forward, but rising unemployment is expected to cause households to continue reducing their consumption in the near term. We predict a gradual recovery in consumption during 2024 that will increase in strength in 2025, once fiscal policy has also shifted in a more expansionary direction.

“Thanks to Sweden’s very strong public sector finances, the scope for more expansionary fiscal policy is considerable. The government has continued to focus on inflation risks, and the fiscal policy stance in its 2024 budget is largely neutral. When inflation declines, we expect a shift to large-scale fiscal expansion in 2025,” says Jens Magnusson.

Unemployment will climb to 9 per cent and inflation will fall faster this winter
The Swedish labour market has shown increasingly clear signs of weakening this autumn and will gradually deteriorate in the period ahead. We have raised our unemployment forecast and predict that the jobless rate will reach 9 per cent next year before falling slightly in 2025. Lower energy prices have contributed to a significant reduction in CPIF inflation (the consumer price index excluding interest rate changes), but the decline in core inflation is lagging behind the euro area.

“Among other things, the impact of exchange rates appears to be somewhat stronger than we previously estimated. On the margin, this puts greater pressure on the Riksbank, although the current favourable inflation developments in the euro area should eventually be reflected in Sweden as well,” says Jens Magnusson.

Indicators suggest that core inflation will begin to fall faster in Sweden too this autumn and winter.  Retail pricing plans signal a clear decline in goods inflation going forward. Wage inflation has accelerated less than in the euro area and the US, and it was slightly below the Riksbank’s forecast during the summer, prompting us to lower our forecast for wage and salary increases.

The Riksbank will cut its policy rate in September 2024
We still believe that the Riksbank is done with rate hiking, but this is very uncertain. Inflation data for October will be of great importance, and if the figures come in high, the central bank’s decision in November may shift to a rate hike. During 2024, rate cuts will begin in September. We expect cuts totalling 50 basis points in 2024 and another 100 bps in 2025. By the end of 2025, the Swedish policy rate will be back at 2.50 per cent.

Key figures: International and Swedish economy (figures in brackets are from Nordic Outlook, August 2023)

International economy. GNP. Year-on-year changes, % 2022 2023 2024 2025
United States 1.9 2.3 (2.0) 1.1 (0.9) 1.8 (2.0)
Euro area 3.4 0.5 (0.6) 0.7 (0.8) 2.0 (2.0)
United Kingdom 4.3 0.4 (0.1) 0.5 (0.5) 1.7 (1.8)
Japan 1.0 1.8 (1.8) 1.2 (1.2) 0.9 (0.9)
OECD 2.9 1.6 (1.4) 1.2 (1.2) 2.0 (2.1)
China 3.0 5.2 (5.2) 4.6 (4.7) 4.5 (4.8)
Nordic countries 2.7 0.2 (0.1) 0.5 (0.7) 2.3 (2.3)
Baltic countries 2.0 -0.7 (-0.4) 1.5 (1.2) 2.9 (1.8)
World (PPP) 3.3 3.0 (2.8) 2.8 (2.7) 3.2 (3.2)
Nordic and Baltic countries. GDP, year-on-year changes, %
Norway 3.3 1.6 (1.4) 0.8 (0.6) 1.5 (1.8)
Denmark 2.8 1.1 (1.2) 1.5 (1.5) 3.0 (3.0)
Finland 1.6 -0.1 (-0.3) 0.5 (0.7) 1.8 (1.8)
Lithuania 2.4 -0.2 (-0.2) 1.5 (1.8) 2.8 (3.0)
Latvia 3.4 -0.2 (0.4) 2.2 (2.5) 2.7 (2.5)
Estonia -0.5 -2.5 (-1.8) 0.4 (1.5) 3.5 (3.0)
Swedish economy. Year-on-year changes, %
GDP, actual 2.6 -1.0 (-1.2) -0.4 (0.1) 2.5 (2.5)
GDP, day-adjusted 2.7 -0.8 (-1.0) -0.3 (0.1) 2.7 (2.6)
Unemployment rate, % (EU definition) 7.5 7.6 (7.5) 8.6 (8.3) 8.9 (8.4)
CPI 8.4 8.6 (8.6) 4.2 (3.7) 2.0 (1.7)
CPIF 7.7 6.1 (5.9) 2.7 (2.5) 1.9 (1.8)
Public sector balance, % of GDP 1.1 0.3 (0.0) -1.2 (-2.2) -0.5 (-0.5)
Policy rate (December) 2.50 4.00 (4.00) 3.50 (3.50) 2.50 (2.50)
Exchange rate, EUR/SEK (December) 11.12 11.60 (11.90) 11.25 (11.30) 10.95 (11.00)

For further information, contact:
Jens Magnusson: +46 70 210 2267
Daniel Bergvall: +46 73 523 5287
Robert Bergqvist: +46 70 445 1404
Pia Fromlet +46 70 739 3266
Olle Holmgren: +46 70 763 8079
Elisabet Kopelman: +46 70 655 3017
Marcus Widén: +46 70 639 1057

Press contact:
Niklas Magnusson, Head of Media Relations & External Communication
+46 70 763 8243

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