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Sweden’s government predicts a sharper GDP decline




  • New data from the Swedish government estimates that GDP will contract more than expected, worsening the already “gloomy” outlook for the economy.
  • Swedish GDP is now expected to fall by 1%, instead of 0.7%, according to government data.
  • Inflation eased slightly in March, but wages are still lagging and the housing market may experience a “false dawn”.

People in Sweden feel the effects of high inflation and falling house prices.

JONATHAN NACKSTRAND / Contributor / Getty Images

The Swedish government is now forecasting a deeper-than-expected GDP decline in 2023, according to data released on Monday, worsening an already bleak outlook for the country’s economy.

Sweden’s finance ministry estimated in December that GDP would shrink by 0.7%, but it now forecasts a 1% decline as it reassesses the “challenging economic environment”.

– We are facing major challenges, but we will get through them together, said Sweden’s Finance Minister Elisabeth Svantesson in a press release on Monday.

“Many people are struggling to make ends meet, so it is important for the government to fight inflation and support those in the most difficult circumstances.”

Sweden’s government had already described the country’s economic outlook for 2023 as “bleak” in a report in October 2022, expecting the economy to slide into recession. The latest CPI data shows that inflation is finally starting to ease, but wages are lagging and house prices are facing a serious downturn.

The European Commission, the EU’s executive arm, echoed the downbeat tone in its latest growth outlook, with Sweden the only country where GDP growth is projected to slip into negative territory this year.

The commission forecast a fall of 0.8% for 2023, and a gain of 1.2% in 2024, which is the second lowest estimate after Italy. So where does the economy falter?

Sweden’s inflation rate is beginning to slow, according to core CPI data released on Friday, with the headline rate for March falling to 8% compared to 9.4% last month, but the figure remains well above the central bank’s target rate of 2%.

While March’s CPI data is a sign that inflation is moving in the right direction, Swedish households are unlikely to get much reprieve from the numbers.

“People have lower purchasing power than they have had for a number of years… So many people are struggling with basic things and are also cutting back on consumption,” says Ola Olsson, professor of economics and vice dean at the Norwegian Business School. Law at the University of Gothenburg, told CNBC before the inflation figures were released.

The National Institute of Economic Research said last month that it expects inflation – excluding energy – to remain high throughout the year, and it will take until the second quarter of 2024 before it finally falls below 2%.

The Swedish think tank also warned that it would take until 2025 before the economy turns clearly upwards, and an expected recession cannot now be assumed to have ended until 2026.

Expenses for homeowners have seen a sharp increase since 2020, according to the Homeowners Index by the comparison service Zmarta. Housing expenses, which include costs involving the house and its grounds such as electricity and water, taxes and interest costs, today come to 206,039 Swedish kroner ($20,000) per year, compared to 116,483 per year as calculated in the first half of 2020.

The inflation figure will also not affect the central bank’s interest rate increase cycle, which unexpectedly started in April last year, according to Swedbank.

“We maintain after [Friday’s] data that the Riksbank will raise by 50 basis points [on April 26]”, the bank said in a note.

Most European countries are experiencing sky-high inflation, which means that real wages are lagging behind. In Sweden, a new two-year wage agreement sets the reference increase in real wages at 4.1% for 2023 and 3.3% in 2024 – well below even the latest, slightly lower, inflation rate.

Jens Magnusson, chief economist at Swedish bank SEB, told CNBC that the figures give the Riksbank more time to tame inflation, but they mean Swedes will lose around six to eight years of real income growth with the new deal.

“Households are under pressure and we see that the interest rate increases have not yet had the full effect on households,” he added.

The pressure on household incomes has led to wage-related strikes in parts of Europe – but not in Sweden, where people accept real wage declines as inevitable, according to Olsson.

“There’s been a big acceptance … among working people that we have to have real wage decline this year because otherwise it’s going to be like a wage-price spiral that can get out of control, like we had in the seventies,” Olsson said.

Swedish house prices have long been some of the strongest in Europe, but Stefan Ingves, who led the country’s central bank from 2006 to 2022, has previously warned that the country will face its “rainy day” thanks to a “dysfunctional” system.

House prices then defied economists’ expectations when they experienced a second monthly increase in a row in March, according to data from Svensk Maklarstatistik, but analysts have warned that a further downturn is still on the horizon.

– We are quite surprised by the unchanged price development [at] the beginning of the year in unadjusted figures … I would call this a false dawn,” Gustav Helgesson, an analyst at Nordea, told CNBC before the release of the latest home price data from Svensk Maklarstatistik.

“We’re not out of the woods,” he added.

Danske Bank recently revised its previous estimate of a 20% drop in real house prices, top to bottom, to a 25% drop. Prices are currently down 12% from the peak recorded in February 2022, according to Danske, leaving prices “still only halfway to the bottom”.



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