Sweden’s government predicts steeper GDP contraction

The Swedish government is now predicting a deeper than expected GDP contraction in 2023, according to data released Monday, worsening an already gloomy outlook for the country’s economy.

Sweden’s Ministry of Finance estimated in December that GDP would shrink by 0.7%, but it now predicts a 1% downturn as it reassesses the “challenging economic environment.”

“We face major challenges, but we will get through them together,” Sweden’s Minister for Finance, Elisabeth Svantesson, said in a press release Monday.

“Many people are struggling to make ends meet, so it is important for the Government to fight inflation and support those in the most difficult circumstances.”

Sweden’s government had already described the country’s economic outlook for 2023 as “gloomy” in a report in October 2022, with the expectation that the economy would slip into recession. The latest CPI data shows inflation is finally starting to slow, but wages are limping behind and house prices are facing a serious downturn.

The European Commission, the EU’s executive arm, echoed the downbeat tone in its latest growth outlook, in which Sweden is the only country where GDP growth is projected to slide into negative territory this year.

The Commission predicted a drop of 0.8% for 2023, and a gain of 1.2% in 2024, which is the second-lowest estimate after Italy. So, where is the economy faltering?

Sweden’s inflation rate is starting to cool, according to core CPI data released Friday, with the headline rate for March having fallen to 8% compared to 9.4% in the previous month, but the figure remains well above the central bank’s target rate of 2%.

While March’s CPI data is a sign inflation is moving in the right direction, Swedish households are unlikely to get much reprieve from the figures.

“People have lower purchasing power than they’ve had for a number of years … So many people struggle with basic things and also cut down on their consumption,” Ola Olsson, professor of economics and vice dean at the School of Business, Economics and Law at the University of Gothenburg, told CNBC before the inflation figures were released.

The National Institute of Economic Research said last month that it expects inflation — excluding energy — to remain high throughout the year, and it will take until the second quarter of 2024 before it finally comes down below 2%.

The Swedish think tank also warned it would take until 2025 before the economy clearly turns upward and an expected recession may now not be assumed to have ended until 2026.

Expenses for homeowners have seen a sharp increase since 2020, according to the Homeowners Index by comparison service Zmarta. Housing expenses, which include costs involving the house and its plots such as electricity and water, tax and interest costs, currently come to 206,039 Swedish krona ($20,000) per year,…