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Nordic Outlook: Eagerly awaited interest rate cuts in a turbulent world

The economic situation is characterised by increased optimism, despite worsening geopolitical risks. Falling inflation will persuade central banks to start cutting key interest rates this spring and summer. We continue to believe that a soft landing is possible and that the slowdown in the world economy will be mild. The Swedish economic outlook has also improved; after a 0.4 per cent decline last year, GDP will increase slightly this year. In 2025, GDP will grow by almost 3 per cent ‒ well above trend. Sweden’s Riksbank will cut its policy rate in May, and government fiscal policy will also support growth in 2025.

“After several truly challenging years, the world economy is moving towards greater stability. Inflation is falling on a broad front, opening the way for lower interest rates, lower costs for businesses, better household finances and more stable consumption,” says Jens Magnusson, Chief Economist at SEB. 

Mild growth slowdown as inflation falls and unemployment rises slightly 
This year’s growth will be anaemic, but the foundations are being laid for a recovery in 2025, despite an environment of heightened security policy concerns. The US economy has shown continued resilience, slowing down for a couple of quarters but avoiding a recession. Compared to November, we have revised our US forecast for 2024 upward to 1.6 per cent, a decline from 2.4 per cent in 2023. We believe that euro area GDP fell during the second half of 2023, but growth will pick up during the second half of this year and avoid a major slump. Overall, euro area GDP will grow by 0.5 per cent in both 2023 and 2024. In 2025, growth in both the United States and the euro area will rebound to nearly 2 per cent. Emerging market (EM) economies are growing in somewhat more stable fashion, but China is struggling to boost demand as households increase their savings, real estate sector woes continue and geopolitical tensions diminish trade. Global GDP will increase by around 3 per cent during all three years, 2023–2025, a modest growth rate by historical comparison.

“Several major concerns of recent years have faded to varying degrees. Although energy prices continue to fluctuate, not least in Sweden (which has had a cold winter so far), the price situation has greatly stabilised. We do not expect the extreme price peaks of 2022 to return. The stress in global value chains we saw in 2021 and 2022 is also largely gone,” says Daniel Bergvall, Head of Economic Forecasting at SEB.

Labour markets are worsening, but not significantly. The historical pattern is that high inflation has been brought under control only at the cost of a sharp downturn in the economy. However, developments so far suggest that this economic cycle may be an exception. Falling inflation will pave the way for central banks to start cutting key interest rates this spring. The European Central Bank (ECB) will be first to do so in March, followed by the US Federal Reserve (Fed) in May.

Geopolitics may fuel new burst of inflation, but downside risks predominate near-term
The global security situation is serious and has deteriorated further, with continued Russian aggression in Ukraine, clear risks that the war in Gaza may spread and increased tensions in East Asia.

“The attacks on shipping in the Red Sea are an uncertainty factor that may lead to short-term production disruptions and inflationary impulses, but we do not consider these disruptions sufficiently widespread to fundamentally change the picture of falling global inflation,” says Daniel Bergvall.        

Inflation is the focus of our risk outlook. In a theme article, we present examples of what low- and high- inflation scenarios may look like. Other theme articles deal with the sputtering German growth engine, a fateful US election and the “new world order” in economic policy.  

“There are many signs that we may be moving into a new world economic policy order in which politics, security aspects and a desire for ‘strategic independence’ are replacing the globalisation and liberalisation trend of recent decades,” says Jens Magnusson.

Sweden: Lower inflation increases hopes of a turnaround
Swedish GDP fell during the second half of 2023, but a deeper slump seems avoidable. After last year’s 0.4 per cent decline, we expect full-year GDP to increase again during 2024, but only marginally. Because of lower inflation and falling interest rates, downside risks have diminished greatly and also suggest a stronger recovery. Growth will be 2.8 per cent next year, well above trend. We have revised our forecasts for 2023, 2024 and 2025 upward compared to November.

“Because of high debt, often at variable interest rates, rate hikes have had a large negative effect in Sweden. Now that interest rates will be cut, the positive impact will also be large,” says Daniel Bergvall.

Resilient manufacturing sector and good investment climate, except for housing   
The Swedish manufacturing sector has remained surprisingly resilient. Relatively strong service exports have enabled total exports to continue rising, and the decline we previously expected now seems less likely. Resilience in the manufacturing sector is supporting capital spending. Important factors are the weak krona, which has helped keep corporate earnings up, and the green transition. Public sector investments have also increased steadily over the past 2-3 years, as have investments in heating and energy production. Except for housing, capital spending as a share of GDP has risen to almost 23 per cent, the highest since at least the early 1980s. Residential investments are continuing to decline rapidly, however. We continue to expect a clear downturn in capital spending during 2024 but believe that this decline will be somewhat smaller than we previously estimated.

Consumption acceleration this autumn despite higher unemployment
Household consumption continues to be the most important factor in determining how deep and protracted the Swedish downturn will be. Lower inflation and interest rates will continue to reduce downside risks. We expect consumption to fall slightly during the first half of 2024 and for the recovery to begin during the second half, after the Riksbank has begun to cut its policy rate. Home prices remained largely unchanged in 2023. We expect this sideways trend to continue over the next six months. From mid-2024, we foresee a gradual home price increase. The labour market is now showing clearer signs of deceleration. We still expect the jobless rate to level off at around 9 per cent after this summer. As the recovery picks up speed in 2025, unemployment will gradually fall.

Inflation temporarily below target
Swedish inflation has finally also fallen. The downturn in Sweden is still lagging the euro area, but the gap has narrowed in recent months. We expect CPIF (the consumer price index with constant interest rates) excluding energy to fall to slightly below the Riksbank’s 2 per cent inflation target late in 2024 and then rise roughly to target in 2025. Because of lower energy prices, CPIF will fall below target as early as this summer. The appreciation of the krona late in 2023 is reducing upside risks significantly, although the exchange rate will continue to contribute to higher inflation for most of 2024.

Interest rate cut before this summer
There is a very high probability that the Riksbank is done with rate hikes and that it will cut the policy rate this year. We have brought forward the first expected cut from June to May, but January’s hard-to-assess inflation figures are creating uncertainty. We expect cuts totalling 100 basis points this year and a further 75 bps, bringing the policy rate down to 2.25 per cent by the end of 2025.
“The Riksbank’s Executive Board wants to ensure that long-term inflation is in line with its target. This suggests that market expectations of a rate cut by March are too optimistic. We also believe that the Board wants to avoid renewed krona depreciation and that they are happy to let the ECB cut its key rate first. At the same time, the labour market and economic growth are weaker in Sweden, where high interest rate sensitivity makes the price of postponing rate cuts high,” says Jens Magnusson. 

We are sticking to our assessment that the Riksbank will decide in early February to expand its monthly divestments of government bonds (quantitative tightening, QT) from SEK 5 billion to SEK 7–8 billion. The Swedish government is continuing to prioritise inflation-fighting, and its fiscal policy is very cautious. 

“Now that inflation is on its way down, the inflation argument will fade, but we believe that the Swedish government will nevertheless wait until 2025 before shifting to more expansionary fiscal policy, partly because of economic developments and the economic policy framework, and partly because of the approaching 2026 election. We expect expansionary measures totalling SEK 60-80 billion in 2025, equivalent to 1-1.5 per cent of GDP,” says Jens Magnusson.

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

International economy. GNP. Year-on-year changes, % 2022 2023 2024 2025
United States 1.9 2.4 (2.3) 1.6 (1.1) 1.8 (1.8)
Euro area 3.4 0.5 (0.5) 0.5 (0.7) 1.8 (2.0)
United Kingdom 4.3 0.5 (0.4) 0.2 (0.5) 1.4 (1.7)
Japan 1.0 1.7 (1.8) 1.2 (1.2) 1.2 (0.9)
OECD 2.9 1.6 (1.6) 1.4 (1.2) 2.0 (2.0)
China 3.0 5.2 (5.2) 4.6 (4.6) 4.4 (4.5)
Nordic countries 2.7 0.1 (0.2) 0.8 (0.5) 2.4 (2.3)
Baltic countries 2.0 -1.0 (-0.7) 1.2 (1.5) 2.9 (2.9)
World (PPP) 3.3 3.1 (3.0) 2.9 (2.8) 3.1 (3.2)
Nordic and Baltic countries. GDP, year-on-year changes, %        
Norway 3.0 0.5 (1.6) 2.1 (0.8) 1.6 (1.5)
Denmark 2.8 1.0 (1.1) 1.5 (1.5) 3.0 (3.0)
Finland 1.6 -0.5 (-0.1) -0.2 (0.5) 2.0 (1.8)
Lithuania 2.4 -0.2 (-0.2) 1.5 (1.5) 2.8 (2.8)
Latvia 3.4 -0.4 (-0.2) 2.0 (2.2) 2.7 (2.7)
Estonia -0.5 -3.4 (-2.5) -0.5 (0.4) 3.5 (3.5)
Swedish economy. Year-on-year changes, %        
GDP, actual 2.6 -0.4 (-1.0) 0.1 (-0.4) 2.8 (2.5)
GDP, day-adjusted 2.7 -0.2 (-0.8) 0.1 (-0.3) 3.0 (2.7)
Unemployment rate, % (EU definition) 7.5 7.6 (7.6) 8.6 (8.6) 8.7 (8.9)
CPI 8.4 8.5 (8.6) 3.0 (4.2) 1.4 (2.0)
CPIF 7.7 6.0 (6.1) 1.9 (2.7) 1.9 (1.9)
Public sector balance, % of GDP 1.3 -0.3 (0.3) -2.2 (-1.2) -0.9 (-0.5)
Policy rate (December) 2.50 4.00 (4.00) 3.00 (3.50) 2.25 (2.50)
Exchange rate, EUR/SEK (December) 11.12 11.13 (11.60) 10.95 (11.25) 10.75 (10.95)

For further information, contact:
Jens Magnusson: +46 70 210 2267
Daniel Bergvall: +46 73 523 5287
Robert Bergqvist: +46 70 445 1404
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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