Sweden projection note OECD Economic Outlook November 2022

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Sweden Output is projected to decline in the near term, resulting in annual growth of 2.9% this year, -0.6% in 2023 and 1.9% in 2024. High inflation, rising mortgage interest rates and falling asset prices will erode household purchasing power, holding back private consumption. Unemployment will increase and inflation is expected to recede gradually and close in on the 2% inflation target in the latter half of 2024.

Monetary policy should continue to ensure that inflation expectations are anchored. Fiscal support measures should become more targeted to people vulnerable to rising living costs, while preserving incentives for energy savings. The pandemic has increased long-term unemployment, which has been a persistent policy challenge. Reskilling and upskilling the workforce are key to facilitate a reallocation of labour to expanding sectors. In addition, increasing labour mobility through more affordable housing could also help reallocation.

Strengthening electricity transmission capacity is also needed to enhance energy security.

Growth is weakening After strong quarterly growth of 0.7% in Q3 2022, the economy is slowing sharply. New export orders have plateaued, and manufacturing confidence has fallen for five successive months. Household confidence fell to a record low in October, partly reflecting negative real wage growth and rising mortgage rates. House prices have fallen sharply, but remain above pre-pandemic levels. The labour market is tight, with the unemployment rate dropping to 6.5% in September. Inflation ticked down to 9.3% in October from a threedecade high in September.

Sweden

1. The shaded area represents the Riksbank's forecast on household debt servicing costs.

Source: OECD Economic Outlook 112 database; and the Riksbank's Monetary Policy Report, September 2022.

StatLink 2 https://stat.link/f2vi8g

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

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Sweden: Demand, output and prices 2019

Sweden GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ Total domestic demand Exports of goods and services Imports of goods and services Net exports¹ Memorandum items GDP deflator Consumer price index² Core inflation index³ Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government debt, Maastricht definition⁴ (% of GDP) Current account balance (% of GDP)

2020

_ _ _ _ _ _ _ _

2022

2023

2024

Percentage changes, volume (2021 prices)

Current prices SEK billion

5 051.9 2 267.7 1 300.5 1 235.4 4 803.6 35.4 4 839.1 2 419.9 2 207.1 212.9

2021

-2.3 -3.2 -2.0 1.5 -1.7 -0.7 -2.4 -5.8 -6.3 0.0

4.8 5.9 2.5 6.0 5.0 0.4 5.4 7.6 9.3 -0.3

2.9 3.7 -0.3 6.1 3.3 1.0 4.3 4.9 8.3 -1.2

-0.6 -1.6 1.9 -1.2 -0.6 -0.2 -0.8 2.1 1.9 0.1

1.9 2.4 1.0 1.7 1.9 0.0 1.8 3.2 3.2 0.1

2.0 0.5 0.5 8.5 17.0 -2.8 39.6 5.9

3.0 2.2 2.4 8.8 15.5 -0.1 36.4 5.4

6.3 8.3 7.7 7.5 12.0 0.9 31.5 3.2

6.0 7.0 5.1 8.3 12.7 -0.4 29.1 3.4

2.3 2.3 2.2 8.5 11.3 0.4 29.5 3.4

1. Contributions to changes in real GDP, actual amount in the first column.

2. The consumer price index includes mortgage interest costs.

3. Consumer price index with fixed interest rates.

4. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 112 database.

StatLink 2 https://stat.link/v63pqe

Even with limited direct trade and financial exposures, Russia’s war of aggression against Ukraine is affecting the Swedish economy, mainly through higher energy prices and low growth in important trading partner economies. Electricity prices have soared, particularly in southern areas where they generally depend on trade with other European countries. As of early November, nearly 49 000 Ukrainian refugees (0.5% of the population) had arrived in Sweden, some of them having returned to Ukraine.

Fiscal policy remains supportive To mitigate soaring energy bills, the tax on diesel and petrol was temporarily reduced from June until October, and the housing allowance targeting economically vulnerable families with children was temporarily increased from July until December. The fiscal stance in 2023 is expected to be broadly neutral.

The new government proposes to cut fuel taxes, support electricity bills, increase unemployment benefits, and boost defence spending, costing around 0.6% of GDP. This is to be largely financed by structural savings. High inflation has forced the Riksbank to accelerate interest rate rises. After a 50 basis points rate increase in June, it raised the repo rate by a further 100 basis points in September, the biggest increase since the inflation target came into effect in 1995. The policy rate is expected to reach 3% in the first quarter of next year and to remain at that level through the rest of 2023-24.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

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The economy will contract in the near term The economy is projected to contract in the fourth quarter of 2022 and the first half of 2023. After a 2.9% expansion in 2022, output will shrink by 0.6% in 2023 before growing by around 2% in 2024. Investment is expected to decline in the near term, against the backdrop of rising input and financing costs. Inflation will remain high in 2023 as price pressures broaden. Nominal wage growth is set to increase after upcoming wage negotiations. Real wages will nonetheless decline over the projection period and will, together with falling housing prices and higher debt-service burdens, weigh on consumption. Uncertainty remains high. A long period of very low interest rates has boosted household debt, which now amounts to 200% of disposable income. This debt burden could reduce consumption further if mortgage rates rise faster, given the high prevalence of variable-rate mortgages. Highly leveraged commercial real estate developers may also face financial difficulties as interest rates rise, with potential repercussions on the financial system. On the upside, inflation could be brought under control more quickly, aided by restraint in collective bargaining, limiting the need for monetary policy tightening.

Long-term unemployment remains a major challenge The duration of unemployment spells has increased during the pandemic. This is especially the case among vulnerable groups who face difficulties getting a job amid Sweden’s compressed wage structure.

There have been continuous efforts to address this issue, notably by reinforcing activation policies. In addition, measures to increase labour mobility should be considered, notably for low-income households, including the provision of affordable homes near job opportunities. Easing rent controls for new dwellings would encourage investments in rental housing and contribute to affordable housing in the longer run. The fiscal support measures should shift from generalised energy tax cuts that can lead to overconsumption and disproportionally benefit higher-income households to targeting those most vulnerable to rising living costs. Limited electricity transmission capacity between the North and the South has resulted in large price differentials, showing that investments in the grid are needed to make the most of Sweden’s potential in the renewable energy sector.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022