Economy shifts into reverse in Q1

Economy unexpectedly contracts in Q1: A downwardly revised national accounts release showed that the economy started the year on a sour note, contracting 0.2% on a seasonally adjusted quarter-on-quarter basis in the first quarter. The reading was a deterioration from the 0.5% increase recorded in Q4 2024 and an initial estimate of a stagnation, and marked the first contraction since Q4 2023. Moreover, the result was one of the weakest in the post-Covid era and fell short of market and Riksbank forecasts for an expansion. On an annual basis, seasonally adjusted GDP grew 1.1% in Q1, following the previous period's 2.2% expansion.

Weaker domestic demand outweighs healthy net trade: Domestically, the quarterly downturn was largely driven by fixed investment, which fell 3.8% in Q1 (Q4 2024: +0.7% qoq s.a.), the sharpest decline since the pandemic due to weaker capital outlays on buildings and construction. In addition, private spending—which forms over 40% of GDP—fell 0.2% in Q1, swinging from Q4’s 0.6% increase: The unemployment rate rose to the joint-highest since Q2 2021, and wage growth cooled while inflation picked up, hitting household budgets. Meanwhile, government expenditure growth was unchanged at Q4’s 0.1% in Q1. On the external front, strong defense demand due to European military rearmament and export front-loading ahead of U.S. tariffs drove exports of goods and services growth to accelerate to 1.8% in the first quarter from the prior quarter’s 1.2% expansion. Meanwhile, imports of goods and services—which contribute negatively to GDP—rebounded, growing 0.3% in Q1 (Q4 2024: -0.1% s.a. qoq). As a result, net trade contributed 0.8 percentage points to the overall GDP reading.

Growth to return ahead, but outlook is clouded by global trade turmoil: Following Q1’s meek performance, our panelists expect sequential growth to return in Q2 and then broadly stabilize through Q4 2025. Our Consensus is for the economy to gain momentum overall in 2025, with GDP growth roughly doubling to around its 2015–2024 average of 2.1%. Private spending and fixed investment should lead the charge, boosted by interest rate cuts; the country has a large share of variable mortgages. Additionally, exports should remain supportive. That said, the external sector outlook hinges crucially on U.S. trade policy. Further U.S. tariffs would hit the Nordics and EU economies and therefore demand for Swedish goods, and Sweden would also suffer a direct hit as the U.S. is one of its biggest export markets. The strength of German industry will be another key factor to monitor.

Panelist insight: Swedbank analysts commented: “US tariffs and the prevailing uncertainty will weigh on Swedish exports, investment and consumption during the forecast period. Weaker GDP growth will delay the labour market recovery, while homebuyers will remain cautious. We expect a more expansionary economic policy to provide some relief and that Europe’s defence buildup will stimulate Swedish growth noticeably from next year.” Meanwhile, Nordea’s Torbjörn Isaksson commented on the implication for monetary policy: “GDP growth has been weaker than expected. The Riksbank will note the sluggish domestic demand in Q1. In addition, the growth outlook is uncertain due to the trade conflict and the weak consumer sentiment. GDP forecast for FY 2025 will be revised down substantially due to the weak start of the year. For now, we stick to our view that the Riksbank will stay on hold in June, but the surprisingly weak growth has increased the probability for a rate cut.”

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