Swedish Economy Report March 2023

Swedish Economy Report

The Swedish economy will move to operating below capacity in 2023. Both households and firms are being squeezed by high inflation and ever higher interest rates.

Real disposable income will decrease this year, causing households to cut back sharply on spending. Housing investment will fall markedly due to a drop in housing prices and increased production costs. The export sector will also be affected by a weaker global economy. Infla-tion has remained high at the beginning of 2023, which means that the Riksbank is expected to continue to raise interest rates. The hiking cycle is expected to end in July with the policy rate at 3.75 per cent. It has taken longer than anticipated for inflation to change direction, but many of the factors behind the high inflation rate are now reversing. Inflation is therefore set to drop back. Excluding energy, inflation will nevertheless remain high throughout 2023 and will not reach the Riksbank’s target level of 2 per cent until the second quarter of 2024. We expect the Riks-bank to commence a series of rate cuts at the beginning of next year to stimulate demand. The output gap will not, however, begin to narrow appreciably until 2025 and is not expected to close until 2026. We estimate a fiscal space of around SEK 100 billion in the period 2024-2027 and assume that SEK 25 billion of this is used in 2024.