What's the prognosis for Sweden's GDP?
In its new Economic Outlook report, Swedbank predicts that Sweden "is facing two years of shrinking GDP", citing low domestic demand and a slowdown in export growth, with GDP expected to shrink by 1.1 percent in 2023 and 0.3 percent in 2024.
"The economic downturn has begun and will intensify during the autumn," the report reads.
Compared to the other countries in Swedbank's report – the US, China, Germany, France, Italy, Spain, Estonia, Latvia, Lithuania, Norway and the UK – Sweden has the second-worst figure for 2023 (only Estonia's GDP is expected to shrink more, at -2 percent).
Sweden is the only country in the report where GDP is expected to shrink in 2024.
Swedbank also predicts that Sweden's economy is likely to be "one of the EU's worst-performing economies" next year.
When will GDP start growing again?
GDP is expected to start to recover next year, with Sweden's GDP growing again by 2.1 percent in 2025 as inflation falls to 2 percent and monetary policy – key interest rate hikes, for example – eases.
Swedbank adds that there is a high degree of uncertainty about what could happen, and that the economy has proved surprisingly resilient. Sweden has its highest employment rate in decades, for example.
"We are not ruling out the possibility that this resilience could persist, leading to a milder downturn than we are forecasting," the report reads.
Things could also go the other way, it warns, with a hard landing equally possible. This could hit the economy hard, but strong public finances could lessen the blow somewhat.
When will the value of the Swedish krona improve?
The Swedish krona is currently at a record low against the euro, and close to the record low against the dollar it hit this time last year.
According to Swedbank, the currency will continue to weaken up until the middle of 2024, when the global economy will start to recover and interest rates to decline. This will lead to the US dollar weakening while both the Swedish krona and Norwegian krone gain some lost ground.
Swedbank said that the krona's weakness reflected a flight away from smaller, more illiquid currencies, but also reflected concern about the high level of private debt in the Swedish economy, and its resulting vulnerability to interest rates.
Are Swedish households in a good position to weather the storm?
Swedish households have been tightening their belts, reducing spending even during the summer holiday months, and well beyond what they need to do match reduced real incomes.
Real disposable income per capita will fall this year and then fall somewhat further next year, leaving incomes at the level they were at in 2020. Swedbank does not expect incomes to start to recover until 2025, when it expects inflation to have subsided.
Despite falling incomes, households in Sweden are strengthening their financial positions, the bank notes, with their financial assets increasing and the savings rate high in a historical and international perspective.
Household credit, meanwhile, is growing at its slowest pace since 1996, with fewer housing transactions and falling housing prices. Some households are increasing their monthly amortisation amounts or making extra repayments.
The bank expects house and flat prices to fall by about 15 percent from their peak in February 2022 to their expected trough in the first half of 2024. with prices falling slightly this autumn and winter.
Mortgage rates are expected to remain high for virtually the whole of next year as inflation continues to weigh on households, although the bank expects the Riksbank central bank to start cutting the policy rate in the summer.
When will the key interest rate peak and how high will it be?
The bank expects the Riksbank's key interest rate to peak at 4.25 percent in November 2023, following 25 basic point raises in both September and November.
It is possible, it believes, that the bank could decide to stop raising the rate after September.
The bank expects the bank to keep this rate in place until June next year, when it will gradually begin to bring in cuts.
Swedbank expects the bank to gradually reduce the rate in 25 basis point cuts until it reaches a rate of about 2.5 percent towards the end of 2025, by which time the Swedbank expects inflation to have dropped below the 2 percent target.
Is inflation going to increase?
The good news in Swedbank's report is that it believes that inflation has peaked, pointing to a "clear downward trend almost everywhere", driven by slowing economic activity, and falling costs of transport and raw materials.
This will be counteracted by the weak krona, which will keep inflation higher in Sweden than in many other places.
Will there be a deeper recession?
Swedbank's biggest worry is that the Riksbank and Sweden's government, together with other governments worldwide, are overreacting to inflation, with its analysts rating the probability of hard economic landing for the global economy as "uncomfortably high".
The bank expects unemployment in Sweden to rise next year, peaking at 8.3 percent at the end of 2024.
Will there be tax cuts or more electricity subsidies for households?
Swedbank believes that most of the tax cuts aimed at households (like earned income tax credits and reduced taxes on pensions) will not be implemented until 2025.
It also does not believe there will be additional electricity support payments for households and businesses this coming winter.
It expects the government to include an extra 30 billion kronor in new spending in its budget for 2024, with some 10 billion kronor going in extra funding to local and regional government, and increased spending on government grants to the local government sector, extra spending on defence and criminal justice, and loss of tax income due to a pause in the indexation of fuel and energy taxes.
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