The Swedish economy is projected to contract in 2023, broadly stabilise in 2024 and show moderate growth in 2025. Tightened financial conditions and high energy prices hit the Swedish economy, in particular the household and construction sectors, reflecting high debt and overvalued house prices. A cooling labour market is expected to contribute to a drag on domestic demand. Inflation is expected to fall appreciably in 2024, but to rise back to slightly above 2% in 2025. The general government balance is expected to show a small deficit in 2023, and a somewhat larger deficit in the subsequent two years. The general government debt ratio is set to decline from 32.9% in 2022 to just under 30% of GDP in 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,5 | -0,2 | 1,3 |
| Inflation (%, yoy) | 5,7 | 1,8 | 2,2 |
| Unemployment (%) | 7,6 | 8,5 | 8,6 |
| General government balance (% of GDP) | -0,2 | -0,7 | -0,6 |
| Gross public debt (% of GDP) | 30,4 | 30,1 | 29,6 |
| Current account balance (% of GDP) | 5,3 | 4,8 | 4,9 |
High interest sensitivity shapes muted recovery
The Swedish economy contracted in the 2023, chiefly due to declining private consumption and a slump in housing construction, driven by high inflation, uncertainty and increasing interest rates. Macroeconomic imbalances that were built up over the years had left the Swedish economy vulnerable to a tightening in monetary conditions.
Highly leveraged households were particularly sensitive to higher interest and rising inflation because of the quick changes in interest rates on their accumulated debt, in line with higher policy rates. Relatively tight financial conditions will continue to restrain domestic demand over the forecast horizon. In 2024, private consumption is projected to be held back by uncertainty about income as the labour market is set to cool and net wealth would remain under pressure from the housing market. Support from real disposable income gains on the back of falling inflation is set to support the expected recovery in household consumption in 2025. In all, the cooling in the labour market and muted household income trends are set to limit the strength of the forecast recovery, despite relatively supportive profit developments, mirroring trends in the interest burden, real wages, domestic demand and the terms of trade.
Housing construction is forecast to decline, reflecting lower valuation of dwellings, constrained borrowing capacity of households and real estate companies, and increasing construction costs. By contrast, healthy corporate balance sheets and innovative projects in manufacturing should support investment in equipment and ICT. Against the backdrop of weak domestic demand and overall strong competitiveness, exports are set to contribute positively to economic growth in 2023, and subsequently moderate in response to sluggish import demand from trading partners before rebounding again in 2025. Risks to the outlook are skewed to the downside, chiefly related to the possibility of a further correction in real estate markets extending the duration and depth of balance sheet adjustments.
A cooling labour market
The Swedish labour market remained resilient in 2023, despite the weakening in economic activity. This reflected reluctance among employers to shed employment against a background of skills mismatches and labour shortages. However, employment growth is expected to stall, reacting to the cyclical downturn with a lag. The unemployment rate is set to increase from 7.6% in 2023 to 8.6% in 2025. Wage agreements have remained moderate while wage drift is foreseen to remain limited. Average real wages are projected to gradually move into positive territory on the back of falling inflation.
Drops and bounces in the inflation rate
The headline HICP inflation rate peaked at the end of 2022 and has declined since in tandem with a drop in energy prices and the fading of supply constraints. The feed-through of import prices and the exchange rate into inflation has been relatively strong, contributing to inflation remaining high in 2023. Slower demand will contribute to lower underlying price pressures. This, together with lower energy prices and base effects, is projected to bring down the headline inflation rate to below 2% in 2024. Increases in service prices, the fading of base effects and higher energy prices are forecast to take inflation somewhat above 2% in 2025, in spite of contained medium-term inflation expectations and productivity growth turning positive towards the end of the forecast period.
General government balance to turn to deficit
After reaching a surplus in 2022, the general government balance is expected to be in slight deficit in 2023. While central government tax revenues remain strong, notably from corporate income tax, there is also higher expenditure on items such as indexed social transfers and pensions.
In 2024, the deficit is set to increase somewhat to 0.7% of GDP, mirroring weakening nominal income trends and the lagged impact of price rises. Rising unemployment is set to weigh on income tax revenue, while automatic stabilisers are set to increase expenditure through social transfers to households. The spending measures of the 2024 annual budget, taken together with the autumn amending budget, are relatively modest. This notwithstanding, government investment continues to grow over the forecast horizon, due in part to the build-up of spending on defence towards the goal of 2% of GDP. A moderate general government deficit is expected also for 2025.
The public debt-to-GDP ratio is set to resume its downward path towards just under 30% in 2025, chiefly due to denominator effects.