Feb 28, 2023

Sweden’s Economy Contracted More Than Expected in Fourth Quarter

Niclas Rolander, Bloomberg News

Shoppper walking along Kungsgatan shopping street, following the removal of coronavirus restrictions, in central Gothenburg, Sweden, on Wednesday, Feb. 9, 2022. Sweden will phase out the majority of its current pandemic support measures, with the decision coinciding with a lifting of most restrictions from Wednesday. Photographer: Nora Lorek/Bloomberg , Bloomberg

(Bloomberg) -- Sweden’s economic output shrank more than previously estimated at the end of last year as household finances were eroded by a rapid increase in consumer prices as well as by higher borrowing costs.

Fourth-quarter gross domestic product declined 0.9% from the previous three-month period when it had eked out some growth, according to Statistics Sweden. All economists surveyed by Bloomberg expected a smaller decline, with the average of their estimates matching the 0.6% contraction indicated by a flash estimate, while the Riksbank expected a 1.4% fall.

Sweden’s economy is expected to continue shrinking this year as the country’s central bank is battling soaring inflation by raising interest rates. That has already taken a toll on indebted Swedish households, whose mortgage interest rates are typically fixed for short periods. The most obvious effect so far has been a plunge in housing prices, at the same time as consumers are reducing spending.

The residential real estate slump has put Sweden in the spotlight globally, after prices for dwellings have ticked down for almost a year for a total drop of about 16%. That’s among the steepest declines in the world, with housing markets in Canada, Australia and the UK also recoiling.

The real estate woes are also putting a halt on much of new construction in the biggest Nordic economy and the pain is being felt by landlords in commercial property markets who have in recent years grown on borrowed money, when it was still cheap.

Forecasts from the European Commission indicate that Sweden could be the only European Union member state to experience a full-year contraction this year, as households remain under pressure and investment in new housing is set to plummet.

What Bloomberg Economics Says...

“Sweden’s economy contracted sharply in the fourth quarter of 2022, in what we see as the first quarter of a year-long recession. The Riksbank’s determination to prevent high price gains from becoming entrenched will take a toll on growth in 2023, when we see the economy shrinking by 1.1%. [That’s] slightly revised down from our earlier call of 1% given Tuesday’s data release. That will likely erase most of Sweden’s post-pandemic economic recovery.”

— Selva Bahar Baziki, economist

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The Riksbank has so far shrugged off the economic slowdown as its struggles to get price growth under control. It’s delivered a sequence of rate hikes, bringing its main rate to 3%, with more increases expected.

While Sweden’s job market has so far shown good resilience amid the slowdown in the economy, with the employment rate hitting a record high in January, leading indicators are pointing to some weakening. Hiring is likely to slow and more redundancy notices to be served over the coming months, Svenska Handelsbanken AB said earlier this month.

Among the most eye-catching job-cut plans is that of Ericsson AB, a maker of 5G networks, which plans to reduce its workforce in Sweden by about 1,400 positions. That’s part of a global plan to cut costs in response to flat demand in telecommunications, the company said earlier this month.

In the fourth quarter, inventories contributed to the quarterly decline by 0.7 percentage points, while household spending pulled the output down by 0.1 percentage points and investments by 0.2 percentage points.

“Changes in inventories contributed most negatively to the quarterly downturn, but investments, household consumption as well as exports also fell,” Swedbank AB’s economists Maria Wallin Fredholm and Pernilla Johansson said in a note to clients. “Our latest forecast of a drop in GDP by around 1% in 2023 might prove to be too optimistic in light of today’s outcome.”

Developments among Sweden’s neighbors differed, as Finland’s economy entered a recession in the quarter with a contraction of 0.6%. Denmark’s GDP expanded 0.9% in the same period, driven by the pharmaceuticals sector, bringing the growth rate for the entire year of 2022 to 3.6%, the country’s statistics office said.

--With assistance from Harumi Ichikura, Mark Evans and Christian Wienberg.

(Updates with details, comments from third paragraph.)