Sweden

The Swedish economy quickly bounced back after the pandemic. By the end of 2021, GDP had already surpassed pre-crisis levels by nearly 5%. However, the output gap still has not closed, unlike in the US. While domestic demand — consumer spending in particular, due to strong residual savings and wealth effects from the unprecedented increase in house prices — and private investment were strong drivers of growth in 2022, overall growth already came to a halt during the last quarter of 2022 as some parts of the economy began to slow. In early 2023, production and the labor market proved resilient and order books were still full. But the outlook ahead is gloomy: consumption plunged due to pressures from higher mortgage costs and price levels, and trade followed suit. In addition, the Swedish real estate market contracted as a correction to the new interest environment. It will continue to weigh on construction activity and, together with broader uncertainty and price increases, is set to put overall investments down. Over our forecast horizon, we expect the Swedish economy to contract by -0.5% in 2023 before growing again by 0.9% in 2024. Like in many industrialized economies, business insolvencies will slightly increase compared to 2022 but return to average pre-crisis levels.

Sweden's unemployment rate dropped from 8.7% in 2021 to 7.5% in 2022, thanks to sustained employment growth. It is projected to only marginally increase to 7.7% in 2023 due to adverse economic developments in construction and real estate keeping the labor market relatively tight. Demographic challenges are likely to make the normalization of labor markets slow. Hence, wage growth is expected to remain strong, contributing to persistent inflation until the end of 2023. Sweden currently struggles with a weak crown and still-high but falling inflation, as well as concerns about financial stability. This complicates the situation for the Riksbank, which has joined other central banks around the globe in implementing steep rate hikes to tame inflation and is likely to reach a peak policy rate of 4.25% in 2023. Rate cuts are to be expected beginning of 2024 the earliest.

Sweden ranked 10 out of 190 countries in the World Bank Doing Business index in 2020 as its business environment is one of the best in the world. Sweden is particularly well-ranked in the categories of registering property, getting electricity, resolving insolvency and trading across borders. In recent years, the government has implemented a series of reforms to make it easier to transfer property by increasing administrative efficiency, as well as to start a business by requiring the registry of companies to register a company within five days. The quality of the business environment comes from a high-quality workforce, infrastructure and attractiveness for foreign investment.

Since September 2022, Sweden has been governed by a coalition between the Moderate Party, Christian Democrats and Liberals, with external support from the far-right Sweden Democrats, and led by Ulf Kristersson. Sweden is currently facing a massive shift in security and defense matters as the government has set a focus on strengthening security by applying to NATO and signing agreements with Finland and Turkey. It also aims to increase defense spending to 2% of GNP by 2026.