Sweden falls into recession

20th March 2023
-IAM, News

Hugues Chevalier, Economist

According to the latest forecasts from the European Commission, Sweden will be the only country in the European Union to experience a recession in 2023 with a GDP contraction of -0.8%. Already in the last quarter of 2022, GDP had shrunk by 0.6%. Why is the Swedish economy performing worse than all other EU countries and Switzerland? The main reason for this underperformance is the monetary policy of the Swedish central bank (remember: Sweden refused to adopt the single currency by referendum in 2003). Indeed, faced with the acceleration of inflation in 2022 (10.2% y/y in December), the Riksbank took too long to raise its key rates and has done so massively in recent months. These rates rose to 3% in February, their highest level since 2008. Swedish households are very sensitive to interest rates for two reasons. First, they are among the most indebted in Europe, with a rate equivalent to 100% of GDP and 180% of their disposable income. Secondly, most households that have taken out a property loan are indebted with variable-rate loans, which makes them very vulnerable to each rate rise by the central bank. These households are therefore simultaneously suffering from an increase in the cost of their credit and inflation that exceeds 10%. The consequences were not long in coming. Household consumption, investment and GDP are contracting. Unemployment is on the rise again. And the krona has already lost 10% against the euro, further reinforcing imported inflation. As the central bank’s objective is to bring price increases down to 2%, interest rate hikes will continue, which will further penalise households and companies over the coming months. The “Swedish model” is therefore no longer really a model to follow.