Economy holds on to handbrake in Q1

Flat reading disappoints markets: The Swedish economy kicked off 2025 on a weaker footing, with GDP growth grinding to a halt on a seasonally adjusted quarter-on-quarter basis in Q1, according to preliminary figures from the statistics office. The reading fell short of market expectations and Q4’s downwardly revised 0.6% rise. In annual terms, seasonally adjusted GDP grew 1.1% in Q1, half of Q4’s 2.2% increase and similarly surprising markets on the downside.

Weak industrial output dents growth: While details of the release are still pending, the sequential reading appears to have been driven by a weaker industrial sector outturn. Factory output fell from Q4’s average in January–February, weighed on by weaker global car demand. Still, strong defense demand due to European military rearmament and export front-loading ahead of U.S. tariffs drove goods exports to rise at a faster sequential pace in January–February than in Q4, capping the slowdown. Meanwhile, private spending probably remained supportive; recent interest cuts by the Riksbank will have bolstered household budgets—given the country’s large share of variable mortgages—largely offsetting drags from a higher unemployment rate and weaker real wage growth in January–February. A more comprehensive breakdown of national accounts data for Q4 will be released on 30 May.

Growth to return but remain below trend: Our Consensus is for the economy to regain its footing in sequential terms in Q2, and to maintain robust momentum through Q4. As a result, our panelists see GDP growth accelerating to double 2024’s pace this year, with sturdy real wage growth, expansionary fiscal policy, interest rate cuts and stronger EU demand providing key tailwinds. Still, the four-year high GDP growth projected for 2025 will fall short of the pre-pandemic 10-year average of 2.5% as mounting protectionism in the U.S. keeps a lid on exports growth. A protracted malaise in the German manufacturing sector plus further deteriorations in the global trade environment are downside risks.

Panelist insight: Nordea’s Torbjörn Isaksson commented: “All in all, the gradual recovery in the Swedish economy started in Q3 2024, growth was healthy in Q4 while the flash indicate an unchanged GDP in the beginning of the year. The bumpy road is a part of a gradual recovery. Moreover, it is a flash estimate and the numbers should be taken with a pinch of salt. More important is that the growth outlook has indeed become more uncertain due to the turbulence globally. If growth would deteriorate going forward, then the Riksbank could consider lowering rates.”

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