Long awaited reversal

The Swedish economy rebounded swiftly after the pandemic, with GDP exceeding pre-crisis levels by nearly +5% by the end of 2021. In 2022, strong domestic demand – particularly consumer spending fueled by residual savings and rising house prices – along with robust private investment, drove growth. Yet, in 2023, the economy entered a recession, contracting by -0.1%. Consumption fell sharply due to rising mortgage costs and inflationary pressures, leading to an increase in unemployment to +7.7% in 2023. The labor market has shown remarkable resilience despite weak economic growth, partly due to a shift in domestic demand towards labor-intensive services like health, ICT, restaurants and hotels. However, the typical delay in labor market responses to broader economic trends suggests that employment growth will begin to accelerate to +8.4% in 2025, with the unemployment rate expected to decrease to 7.8% by 2026. The real estate market also contracted as it adjusted to the higher interest rates, impacting construction activity and overall investments amid broader economic uncertainty. But the worst is over: home prices began to rise in spring 2024 following the Riksbank's first rate cut, and household consumption is expected to improve further. After modest growth in 2024, the Swedish economy is anticipated to rebound by +1.9% in 2025 and +2.1% in 2026.

Inflationary pressures remain modest with all subcategories except services decelerating sharply. As a result, inflation is expected to drop to 2.9% in 2024 and reach the target level of 2% by 2025 sustaining into 2026. This is a result of several factors: the diminishing impact of supply bottlenecks, a significant negative output gap, a continued decline in energy prices and a recovery in the effective exchange rate since mid-2023. With inflation slowing, the weak economy takes precedence in monetary policy decisions. Lower global interest rates are likely to ease depreciation pressure on the Swedish crown, supported by structural strengths like a competitive business sector and low public debt. In 2024, the Riksbank cut rates by 150bps between May and December, reducing them from 4% to 2.5%. An additional reduction of 75bps expected in 2025 due to ongoing economic weakness.

Sweden boasts one of the world's best business environments, recognized for its innovation, strong R&D performance and a vibrant start-up scene. The country is a global leader in cleantech and circular economy models. This favorable business climate is supported by a highly skilled workforce, robust infrastructure and strong appeal for foreign investment.

Since September 2022, Sweden has been governed by a coalition of the Moderate Party, Christian Democrats and Liberals, with external support from the far-right Sweden Democrats. Ulf Kristersson serves as Prime Minister. The country is currently undergoing a significant transformation in security and defense policy. Sweden joined NATO in March 2024 and has already doubled its defense spending since 2020, with plans for a further 10% increase as part of a long-term goal to reach 2.4% of GDP by 2025.