REPORT: Sweden's economy facing 'most severe shock since early 1990s'
In a new report by Danske Bank on the economic outlook in the Nordic countries in 2023, the bank warns that the country's economy could be facing its most severe shock since the 1990s, and that the outlook for consumers is 'bleak'.
In the report, carried out by Danske Bank, it warns that Sweden's economy will enter "a brief recession", with growth in 2023 expected to be "negative".
It further adds that "the outlook for Swedish consumers cannot be described as anything other than bleak," citing the fact that workers in Sweden lost "at least four years of real wage growth in one fell swoop in 2022, even if we exclude the effects of rising interest rates and power prices".
In addition to this, the bank further predicts that real wages will continue to drop throughout 2023, albeit at a slower rate than previously, with real wage growth not improving again until 2024.
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Despite this, it predicts that the situation will "begin to normalise" in the second half of the year.
The bank warns that, despite there being lower demand for electricity in spring due to less of a need for heating, it believes it is possible that electricity prices could be "permanently higher" due to war in Ukraine, gas shortages in Europe and heavy investment in industry placing more demand on electricity production.
The report also addresses the government's proposed energy price subsidy, describing it as "relatively small" given the price of electricity, and adding that the uncertainty over when it will be paid out to companies could cause a "risk of bankruptcies rising", with this in turn potentially leading to a rise in unemployment.
Inflation could decrease 'quickly' in 2023
Despite this, the bank believes that inflation could subside "comparatively quickly" in 2023, primarily due to international factors like the price of industrial goods and container freight rates falling in 2023, which could dampen inflation in 2023.
However, it predicts that inflation will rise by around 1 percent in the beginning of 2023, with bank charges, energy company fees, district heating prices, water and wastewater fees, housing association fees and preschool fees all likely to increase due to the high rate of inflation in autumn 2022. After this, the report states, inflation may peak and start to drop again.
The bank also warns that, despite the labour market holding up well until now, it predicts that redundancies and bankruptcies will slowly start to increase as companies make cuts in their workforces, pushing up unemployment to 8.5 percent by the end of 2023.
This is slightly higher than that predicted by Sweden's National Institute of Economic Research (KI) in its most recent report in September 2022, where it predicted that unemployment would peak at 7.7 percent in 2023.
Property prices will fall by 'total of 20 percent'
Despite house prices already dropping by 12 percent on average in Sweden, the bank predicts that there is still some way to go before the market hits bottom, predicting a total drop of 20 percent since the last peak in early spring 2022.
It predicts that house prices will stabilise in late spring 2023, when interest rates and inflation start to decrease.
More interest rate hikes on the way
In terms of interest rates, Danske Bank predicts that the Swedish Central Bank, the Riksbank, will raise rates by 0.5 percent in February to 3 percent total, with a possible second hike of 0.25 percent predicted for April, depending on inflation in the first quarter of 2023.
In terms of drops in the interest rate, it predicts that rates will remain high throughout 2023, with the Riksbank waiting until 2024 to lower the rate by a total of 1 percent.
Fiscal policy 'overly cautious'
Describing the government's restrictive financial policy as "deliberately cautious, and maybe overly cautious in our view," the bank's financial experts state that they do not deem the risk of the energy price subsidy fuelling inflation to be significant.
They state, however, that they believe the coming recession, rather than restrictive fiscal policy, will cause a budget deficit, or a situation where tax revenue is falling and government expenditure is rising.
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In the report, carried out by Danske Bank, it warns that Sweden's economy will enter "a brief recession", with growth in 2023 expected to be "negative".
It further adds that "the outlook for Swedish consumers cannot be described as anything other than bleak," citing the fact that workers in Sweden lost "at least four years of real wage growth in one fell swoop in 2022, even if we exclude the effects of rising interest rates and power prices".
In addition to this, the bank further predicts that real wages will continue to drop throughout 2023, albeit at a slower rate than previously, with real wage growth not improving again until 2024.
READ ALSO:
- Sweden’s government warns of three-year economic slump
- Swedish economy to grind to a halt as interest rates kick in
Despite this, it predicts that the situation will "begin to normalise" in the second half of the year.
The bank warns that, despite there being lower demand for electricity in spring due to less of a need for heating, it believes it is possible that electricity prices could be "permanently higher" due to war in Ukraine, gas shortages in Europe and heavy investment in industry placing more demand on electricity production.
The report also addresses the government's proposed energy price subsidy, describing it as "relatively small" given the price of electricity, and adding that the uncertainty over when it will be paid out to companies could cause a "risk of bankruptcies rising", with this in turn potentially leading to a rise in unemployment.
Inflation could decrease 'quickly' in 2023
Despite this, the bank believes that inflation could subside "comparatively quickly" in 2023, primarily due to international factors like the price of industrial goods and container freight rates falling in 2023, which could dampen inflation in 2023.
However, it predicts that inflation will rise by around 1 percent in the beginning of 2023, with bank charges, energy company fees, district heating prices, water and wastewater fees, housing association fees and preschool fees all likely to increase due to the high rate of inflation in autumn 2022. After this, the report states, inflation may peak and start to drop again.
The bank also warns that, despite the labour market holding up well until now, it predicts that redundancies and bankruptcies will slowly start to increase as companies make cuts in their workforces, pushing up unemployment to 8.5 percent by the end of 2023.
This is slightly higher than that predicted by Sweden's National Institute of Economic Research (KI) in its most recent report in September 2022, where it predicted that unemployment would peak at 7.7 percent in 2023.
Property prices will fall by 'total of 20 percent'
Despite house prices already dropping by 12 percent on average in Sweden, the bank predicts that there is still some way to go before the market hits bottom, predicting a total drop of 20 percent since the last peak in early spring 2022.
It predicts that house prices will stabilise in late spring 2023, when interest rates and inflation start to decrease.
More interest rate hikes on the way
In terms of interest rates, Danske Bank predicts that the Swedish Central Bank, the Riksbank, will raise rates by 0.5 percent in February to 3 percent total, with a possible second hike of 0.25 percent predicted for April, depending on inflation in the first quarter of 2023.
In terms of drops in the interest rate, it predicts that rates will remain high throughout 2023, with the Riksbank waiting until 2024 to lower the rate by a total of 1 percent.
Fiscal policy 'overly cautious'
Describing the government's restrictive financial policy as "deliberately cautious, and maybe overly cautious in our view," the bank's financial experts state that they do not deem the risk of the energy price subsidy fuelling inflation to be significant.
They state, however, that they believe the coming recession, rather than restrictive fiscal policy, will cause a budget deficit, or a situation where tax revenue is falling and government expenditure is rising.
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