Swedish economy expanded in Q1, outlook uncertain

SWEDEN’S economy bounced back in the first quarter after shrinking at the end of 2022, data showed on Thursday (Apr 27), but economists still expect a shallow recession this year as inflation and higher rates crimp spending and investment.

Gross domestic product (GDP) expanded 0.2 per cent in the January-March period compared to the previous three months, preliminary figures from the Statistics Office showed.

GDP was up 0.3 per cent in the first quarter compared to a year earlier, the figures, which are liable to be revised, showed.

“Sweden is particularly likely to fall into recession in the coming quarters because of its high and largely variable-rate household debt burden,” Andrew Kenningham, Chief Europe Economist at Capital Economics said.

“That said, today’s data mean any downturn will come later and may be shallower than we and the Riksbank have been forecasting.”

The Riksbank, which hiked the policy rate by a half-percentage point to 3.50 per cent earlier this week, sees the economy shrinking around 0.7 per cent in 2023.

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Sweden’s GDP contracted 0.5 per cent in the fourth quarter last year as households cut spending due to soaring food, energy and housing costs.

Consumers are depressed, retail sales are down and activity in the manufacturing and service sectors has wilted.

In its latest forecast, Swedbank said inflation had reduced households’ spending power by around 190 billion Swedish krona (S$24.6 billion) with interest rate hikes costing another 60 billion.

But with inflation running hot, the central bank said it expected to hike the policy rate another quarter point in either June or September.

There were some encouraging signs for the Riksbank, however, with inflation expectations among households and businesses falling, according to a survey by the National Institute for Economic Research on Thursday.

“There are clear signs that inflation is falling, encouraging the Riksbank to take a wait-and-see stance,” Nordea economist Torbjorn Isaksson said. “We expect the Riksbank to hike the policy rate by 25 basis points in June, but it can’t be ruled out that the Riksbank will stay on hold.”