The Swedish economy is set to contract mildly in 2023 as high inflation, rising household debt service and uncertainty weigh on household consumption and investment. Wage pressures are projected to remain contained, in line with the rise in unemployment. This, along with falling commodity and freight prices and easing supply bottlenecks is expected to contribute to the decrease of inflation over the forecast horizon, supporting a gradual recovery as of the second half of 2023. The general government balance is projected to show a slight surplus.
Last update (11/11/2022)
|GDP growth (%, yoy)||5,1||2,9||-0,6||0,8|
|Inflation (%, yoy)||2,7||8,1||6,6||1,8|
|General government balance (% of GDP)||-0,1||0,2||0,2||-0,0|
|Gross public debt (% of GDP)||36,3||32,1||29,4||28,5|
|Current account balance (% of GDP)||5,3||3,3||3,3||4,2|
Rising interest rates and inflation weigh on domestic demand…
Sweden had robust real GDP growth in the first half of 2022, supported by strong income and employment gains during the recovery from the pandemic. Private consumption and investment were the main drivers, whereas net foreign demand lowered growth, due to high import growth. Services imports were particularly strong. Inflation started to rise sharply and broaden to a wide range of goods and services during the year. This impacted disposable income and profit margins, contributing to a loss in growth momentum towards year-end.
…inducing a modest fall in real GDP
This slowdown is expected to continue in 2023 with private domestic demand under pressure from higher input costs, consumer prices and interest rates. Profit margin erosion and broader uncertainty about the outlook weighs on business investment, even though high capacity utilisation and a need for energy savings call for investment. Private consumption is projected to fall on the back of tighter financing conditions, sharply lower consumer confidence, falling house prices, and lower disposable income. Household real disposable income is particularly vulnerable to monetary tightening as variable interest rates on mortgages are widespread. Private consumption is expected to be cushioned, however, by savings accumulated during the pandemic.
Having grown close to 3% in 2022, real GDP is forecast to decrease by 0.6% in 2023. The economy is expected to recover and grow at a moderate pace of just below 1% in 2024 in view of improved global economic conditions and fading drags from inflation. Risks to private consumption and, thereby, to the recovery, are on the downside, should there be a rise in precautionary savings.
Relatively robust labour market
In view of labour shortages in a wide range of sectors, the labour market is set to remain relatively robust in the face of the projected slowdown. Nevertheless, the unemployment rate is set to rise to just below 8% in 2024 in a delayed response to the expected slowdown.
In the upcoming round of wage negotiations social partners are set to agree to limit nominal wage growth to retain the competitiveness of Swedish manufacturing industry, despite eroding purchasing power for employees and labour market shortages in several sectors. A substantial part of the terms-of-trade losses will, therefore, be absorbed through falling real income of wage earners. Wage drift is expected to edge higher against the background of persistent skills mismatches. This reflects some employees seeking to partly offset cost increases affecting their disposable income.
Inflation to fall gradually
At the beginning of 2022, sharp increases in imported commodities pushed up headline inflation, subsequently spreading to core inflation. At the end of 2022 the HICP inflation rate is set to peak at around 10%. Falling commodity prices, normalising supply conditions expected over the forecast horizon and assumed moderate wage increases pave the way for a decline in inflation over the forecast horizon, to just below 2% in 2024. In 2023, however, the delayed pass-through of the weakening in the krona exchange rate in 2022, along with stickiness of broad-based inflation, is set to lead to a slow pace of reduction.
Fiscal outlook remains strong
The general government balance is expected to remain close to balance over the forecast horizon. In 2022, a small budget surplus is set to be supported by still strong tax revenues, while expenditure should be contained as remaining COVID-related support measures were phased out during the year. The surplus outcome comes despite several amending budgets which have been adopted during the year, encompassing measures equivalent to around ¼% of GDP aimed at mitigating the impact of high energy prices, and emergency spending directed at countering the impact of Russia’s invasion of Ukraine.
In the absence of a budget proposal for 2023, following September’s general election and the subsequent change of government, the projection reflects the measures that have been announced by the forecast’s cut-off date. Notably, these measures do not include a longer-term electricity cost compensation scheme for households and businesses that is expected to be put into place, details of which are not yet known. Overall, this is projected to result in a government budget position close to balance in 2023 and 2024.
The public debt-to-GDP ratio is set to resume its downward path due to a denominator effect and fall to below 30% in 2023 and 2024. This expected decrease reflects to some extent the stepwise debt-reducing repayment of a Riksbank loan for foreign currency reserves over 2021-2023, equivalent to around 3½% of GDP.