(Bloomberg) -- Sweden’s economy fell into a recession in the third quarter as inventories declined and households cut back spending amid increasing borrowing costs and rising prices.

Calendar-adjusted gross domestic product shrank by 0.3% in the three months through September, compared with the second quarter, according to figures published by Statistics Sweden on Wednesday. An initial estimate published last month had indicated stagnation in the quarter. The drop marks the second consecutive quarter of contraction after a 0.8% decline in the second quarter.

A rapid increase in prices and borrowing costs is weighing heavily on the Swedish economy, as households are forced to reduce spending and housing construction has plunged. Most forecasters now expect the largest Nordic country to see its output contract for two consecutive years, and the European Commission forecasts that Sweden will be the only member state that will see its output decline next year. 

“The outcome confirms a weak development in the Swedish economy,” Swedbank AB’s analysts Pernilla Johansson and Maria Wallin Fredholm said in a note to clients. “A development that we think will continue during the winter.” 

They pointed out that a negative contribution from household consumption for the fifth straight quarter matches the previous longest decline in 1992 to 1993.

Still, it was mainly the slump of inventories that pushed the GDP down by 1.4%, while household spending contributed 0.2% to the decline, same as investment, the statistics office said. Net exports had a 1.5% positive impact.

What Bloomberg Economics Says...

“Sweden’s technical recession, confirmed by the negative print for the third quarter, is only the start of bad news. The economy is set to contract by 0.7% overall this year and remain close to stagnation in 2024. We don’t see a full recovery in the growth rate until 2025.”

— Selva Bahar Baziki, economist

The krona, which has been the best performer in the G-10 space of major currencies in the second half, eased following the news, trading 0.3% down at 11.3749 versus the euro at 9:50 a.m. in Stockholm.

The development in Sweden mirrors those in neighboring Denmark and Finland, where economy also contracted in the third quarter. In fossil-fuel rich Norway, GDP eked out a gain in the period, thanks in part to wetter weather boosting hydropower output.

The Swedish central bank raised its benchmark interest rate to 4% from zero in 18 months of back-to-back hikes before deciding to keep borrowing costs unchanged at a meeting earlier this month. As a majority of Swedish mortgages have rates fixed on three-month terms, the time it takes for rate increases to hit borrowers is relatively short.  

Read More: Riksbank Shirks From Rate Hike as Swedish Economy Stumbles

In a separate report suggesting not all is bad on the consumption front, statistics office said retail sales grew 1.4% on the month in October, the fastest pace since March 2022, with the increase driven by non-durable goods.

Despite the pressure from rising rates and elevated inflation, the country’s labor market has shown resilience, with the share of people who have jobs hitting record levels earlier this year. However, according to recent data, weakening demand is starting to translate into more joblessness. 

Danske Bank A/S’s economist Michael Grahn said the report indicates industry is “doing very well,” based on net exports, while final demand is “not as weak as suggested by the GDP overall print.”

--With assistance from Joel Rinneby.

(Updates with Bloomberg Economics’ view, retail sales data. A previous version of this story corrected the month in the second paragraph.)

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