Sweden Economic Forecast

As our analysts had anticipated, GDP plunged 1.5% quarter on quarter in Q2—the steepest decline in three years. Q2’s deterioration was partly due to an unfavorable base effect. While detailed national accounts data has not yet been published, the downturn was likely broad-based. Domestic spending was likely restrained by a higher unemployment rate in Q2 and softer year-on-year nominal wage growth in April–May. Moreover, inflation remained markedly above target in Q2, which the Riksbank met with aggressive monetary policy tightening in April and June. Additionally, industrial output declined at a steeper month-on-month pace on average in Q2, and conditions in both the manufacturing and services sectors deteriorated at steeper rates in Q2. GDP is expected to post a marginal quarterly decline in Q3, dragging Sweden into a technical recession.

Consumer price inflation with a fixed interest rate (CPIF) was steady at June’s 6.4% in July, while core inflation ticked down to 8.0%. In the remainder of H2, CPIF is expected to ease from its current level and average below H1’s level, thanks to higher interest rates. Still, it will remain markedly above the Riksbank’s 2.0% target.