OECD Economic Outlook, Volume 2023 Issue 2

Sweden

After a projected 0.5% contraction in 2023, GDP is projected to rise by 0.9% in 2024 and 2.6% in 2025. In the near term, elevated inflation will continue to weigh on households’ real disposable income and private investment, which is also held back by higher construction costs and declining demand for manufactured goods. Private consumption growth is expected to start regaining momentum in early 2024 as real disposable incomes start recovering.

Monetary policy should remain restrictive until inflation is clearly moving towards target. Continued fiscal restraint would help to combat inflation and maintain fiscal space. Tax reform, including aligning property taxes more closely with market values and phasing out mortgage interest deductions would improve tax efficiency and fairness. Loosening rent controls and other reforms facilitating mixed-background neighbourhoods, equal opportunities in schools, and the integration of disadvantaged groups into the labour market remain priorities.

Economic activity has declined

After declining by 0.8% in the second quarter, mainly due to falling exports and investments, preliminary estimates suggest output remained unchanged in the third quarter. Recent indicators show a deterioration in economic activity, with the monthly GDP indicator and household consumption declining. High production costs and falling housing prices continue to weigh on housing investment. Confidence remains low among households and businesses. The labour market is deteriorating with declining employment, increased layoff notices and rising new unemployment registrations. Long-term unemployment is below pre-pandemic levels, but many jobseekers lack necessary skills. In October, consumer price inflation with a fixed mortgage rate (CPIF) was down to 4.2%, but CPIF inflation excluding energy remained at 6.1%. The Swedish krona has depreciated significantly, recently hitting all-time lows against the euro.

Sweden: Monetary and confidence indicators

Source: Sveriges Riksbank; Statistics Sweden; and National Institute of Economic Research.

Statlink

Sweden: Demand, output and prices

Statlink

The Swedish economy remains affected by Russia’s war of aggression against Ukraine and the ongoing global economic slowdown. Despite a recent fall, persistently elevated commodity prices are still exerting pressure on economic activity. Tightening global financial conditions, together with the depreciation of the Swedish krona, have heightened the risk of financial stress and are adding to debt servicing costs. Swedish exporters benefit from the weak krona, but sluggish demand in key trading partners is constraining export growth.

Macroeconomic policies are restrictive

The Riksbank held its policy rate unchanged at 4% in November, likely signalling that the Swedish policy rate has reached its peak. Monetary easing is expected from early 2025, with policy rates declining by 50 basis points through the year. The fiscal stance over 2023 and 2024 remains broadly neutral with discretionary spending being scaled back. Ageing-related public expenditure is projected to increase by 1.8 percentage points of GDP by 2040. The 2024 budget bill features new measures of around SEK 38 billion (0.7% of GDP), primarily targeting households, welfare and defence. This includes an earned income tax credit (0.2% of GDP), tax cuts for pensioners (0.1% of GDP), cuts in petrol and diesel taxes (0.1% of GDP) and targeted grants to local governments for healthcare and education services (0.1% of GDP). The budget also aims to increase defence spending from 1.3% in 2023 to 2% of GDP in 2024, aligning with the NATO target. These measures are to be largely funded through cost-saving measures, such as a temporary pause of the state income tax threshold indexation and the more efficient use of central government and labour policy resources.

A rebound is expected from 2024

The economy is projected to contract by 0.5% in 2023 before rebounding by 0.9% in 2024 and 2.6% in 2025. In the near term, economic activity will be held back by elevated inflation and tighter macroeconomic policies. Employment is set to shrink further as companies adjust staffing plans in response to reduced demand. Inflation is projected to revert to target by late 2025, amid fading commodity price pressures and monetary policy restraint. A gradual increase in household consumption is expected from early 2024, driven by real wage growth. Significant risks surround the outlook. Escalations of the conflict in the Middle East and Russia’s ongoing aggression against Ukraine could lead to renewed supply chain disruptions, affecting the export-oriented Swedish economy. Tighter than foreseen ECB policy may prompt the Riksbank to follow suit to keep disinflation on track and prevent an excessive weakening of the krona. Tighter interest rates and financial conditions in turn may be challenging for highly leveraged commercial real estate developers and households. Lower-than-expected inflation could lead to a faster‑than-assumed downward adjustment of policy rates and a quicker economic recovery.

Making economic growth more inclusive and sustainable

Continued fiscal policy restraint is warranted to help combat inflation and preserve fiscal space. Aligning property taxes with market values and gradually phasing out mortgage interest deductions should also be considered. Policies to enhance inclusion, equal opportunity and make use of underutilised labour resources include loosening rent controls and ensuring that schools effectively counterweigh social disadvantage. A recent overhaul of the employment service can help reduce persistently high long‑term unemployment if implemented effectively. Temporary gasoline and diesel tax cuts should be phased out to align with climate goals. Streamlining permitting procedures is also essential to sustain the ongoing green transition.