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ECONOMY

Riksbank warns of house price slump

The vice governor of Sweden's Riksbank, Lars Nyberg, has warned of the possibility of falling house prices in the country.

“My assessment is that house prices and household debt could very well have reached levels where there is a risk of a negative spiral with falling house prices and weak demand as part of a gradual economic downturn,” he said in a speech on Monday.

“Even if it would not, as I have said before, be due to a correction in an overvalued market, such an adjustment could, proportionately, be abrupt. Dealing with it early with a gradual increase in interest rates would in my view increase the possibility for a more gentle levelling off of prices, as has happened in the UK and Australia.”

Nyberg also stated in his speech that it is not just inflation which is guiding the Riksbank’s actions on interest rates. Changing prices of certain assets could make the central bank take into consideration events outside of the normal ‘forecast horizon’.

“In this situation, adjusting policies earlier would contribute to a minimised risk of a negative spiral in economic activity, which is coming sooner or later,” said Nyberg.

ECONOMY

Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s. 

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