The Swedish economy is projected to recover in 2024 with the expansion gathering pace in 2025. Domestic demand is driving the turnaround, thanks to continued disinflation, easier financing conditions, and still strong external competitiveness supporting exports. Inflation is expected to fall to just below 2% in 2025. The labour market is set to improve only in 2025. Public finances are projected to weaken further in 2024, but the deficit is expected to decrease somewhat in 2025. The general government gross debt ratio is set to rise slightly in 2024, albeit from a comparatively low level and is expected to resume its long-standing downward trend in 2025, reaching just above 31% of GDP.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0.2 | 0.2 | 2.1 |
| Inflation (%, yoy) | 5.9 | 2.0 | 1.8 |
| Unemployment (%) | 7.7 | 8.4 | 8.2 |
| General government balance (% of GDP) | -0.6 | -1.4 | -0.9 |
| Gross public debt (% of GDP) | 31.2 | 32.0 | 31.3 |
| Current account balance (% of GDP) | 6.7 | 6.6 | 6.7 |
Contraction in economic activity followed by a subdued recovery
The Swedish economy contracted slightly in 2023 on the back of tightening monetary conditions. This notwithstanding, the labour market showed resilience while the financial position of corporates outside commercial estate remained strong. Lower inflation and easing financial conditions are set to support a cyclical recovery over the forecast horizon. Substantial payouts of tax rebates to households notably related to interest deductibility of mortgage loans in April 2024 could support a nascent recovery in consumer spending. As from the second half of the year, lower debt service costs coupled with lower inflation should support real disposable income and household consumption. The expected recovery in household consumption is set to gather pace in 2025 when the labour market is projected to improve. Housing construction is expected to stabilise only towards the end of the forecast horizon, whereas non-residential construction is set to remain resilient, partly on account of defence spending. Other business investment, on the other hand, is projected to remain lacklustre, mirroring low capacity utilisation rates in the wake of the recession and the delayed effect of lower financing costs. Relatively weak demand from abroad is set to dampen the growth of Swedish exports in 2024. In 2025, however, exports are projected to contribute positively to economic growth.
Overall, real GDP is set to grow by 0.2% in 2024, and to pick up to just above 2% in 2025. Risks to the outlook appear broadly balanced. Export competitiveness and strong corporate balance sheets could lift growth more than expected. Downside risks relate to uncertainty weighing on the spending plans of economic agents and possible stickiness of underlying inflation.
The labour market shows resilience but is set to slow down
The Swedish labour market is expected to respond to economic activity with a lag. Employment growth is projected to fall slightly in 2024 but to pick up again from the second half of the year in the wake of the projected recovery. The unemployment rate is set to increase from 7.7% in 2023 to somewhat above 8% in 2024 before falling back in 2025. Wage agreements – extending to the spring of 2025 - have remained moderate, while wage drift is expected to remain limited. Average real wages decreased markedly in 2023 but are set to rise over the forecast horizon on the back of falling inflation.
Inflation to drop markedly
HICP inflation declined sharply throughout 2023, mainly on account of lower prices for energy and raw materials. Base effects for energy prices led to a rise in headline inflation at the beginning of 2024, but disinflation is set to continue over the forecast horizon. It should be driven by policy-induced falls in fuel prices, the absence of labour cost pressures given moderate wage agreements, downward adjustments of firms’ pricing plans against the background of weak domestic demand, and the fading impact of supply shocks. The profile for inflation is further affected by the delayed effect of past swings in the effective exchange rate. In the period of rising inflation, the pass-through is estimated to have been particularly high, but it is expected to normalise over the forecast period. Overall, HICP inflation is expected to average 2% in 2024 and 1.8% in 2025 with consumer price inflation excluding energy, food, alcohol and tobacco projected to reach 2% in 2025.
Public finances weakening
The general government balance recorded a slight deficit of 0.6% of GDP in 2023 chiefly on account of revenue growth slowing on the back of sluggish domestic demand.
In 2024, given the usual delayed response to an economic slowdown, the deficit is projected to increase somewhat to 1.4% of GDP. The main drivers are weakening growth in tax revenue and increased expenditure on social transfers to households, in particular on index-linked pensions in the regional and municipal subsector. The last measures to mitigate the impact of high energy prices, representing less than 0.1% of GDP, are being phased out in 2024. This notwithstanding, energy taxes on petrol have been reduced, adding up to a fiscal cost of 0.1% of GDP in 2023 and 0.2% annually in 2024 and 2025. Interest costs are estimated to broadly stabilise in 2024 and come down somewhat in 2025. Government investment is expected to remain strong over the forecast horizon, notably mirroring outlays on defence and correctional facilities.
With the economy strengthening in 2025, the deficit is be expected to slightly decrease, to just below 1% of GDP based on unchanged policies.
The general government gross debt ratio is projected to rise somewhat to 32% of GDP in 2024, before falling slightly in 2025.