Sweden’s recession seen lasting longer with households pressured

SWEDEN’S economy is facing two years of contraction – more than previously thought – as rising costs force consumers to continue paring back spending into next year, according to economists at the country’s second-largest bank by market value.

In 2023, calendar-adjusted gross domestic product is likely to shrink by 0.9 per cent, Swedbank said in a report published on Thursday (Aug 18). While that is a slightly milder contraction than previously seen, the bank now expects a GDP decline of 0.3 per cent in 2024, having previously forecast 0.3 per cent growth.

“The economic downturn has begun, and things will get worse before they get better,” chief economist Mattias Persson said in a statement. “We expect households to continue to cut back on consumption for a while longer, given that their incomes are under pressure from high inflation and rising interest expenses.”

Increasing interest rates have also put pressure on Sweden’s heavily indebted commercial real estate companies, and that turmoil is set to continue as vacancies may increase and landlords have to refinance large amounts of maturing bonds, Swedbank said. While some landlords could default, the bank said the effects on financial stability or on the economy in general are expected to be limited.

After a period of stabilisation in the country’s market for private homes, economists at the bank now expect housing prices to end up 15 per cent lower than at the peak in early 2022. They had previously pencilled in a 20 per cent drop.

“We expect that the current plateau for housing prices will be temporary, and that prices will fall slightly during the autumn and winter,” the bank said. “The recovery will begin in 2024, but the housing market will not take a clear upturn until later during the forecast horizon.”

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The Swedish krona is expected to weaken further in the near term, Swedbank said, adding that it sees the currency “gaining some lost ground” beginning mid-2024. BLOOMBERG