Svanteson´s optimism for Swedens economy

Svantesson’s Sweden in the coming year

If the Minister for Finance Elisabeth Svantesson's (M) predictions hold true, Sweden is on its way out of the mild recession it has suffered in recent years. On 24 June she presented her forecast based on the Ministry of Finance’s analysis where GDP growth will jump to 2.6% in 2026, unemployment will fall below 8%, interest rates will drop to

1.75% at the end of 2025, inflation will stay near or under the 2% target and the SEK will remain strong. This would indeed be good news for Swedes, as the forecast for the first quarter of 2025 did not hold true. GDP growth was expected to remain at 1.6% for 2025 but fell to 0.9%, the strengthening of the SEK was unexpected, and generally the numbers were disappointing. All of this indicated a minor recession in the Swedish economy, which the Riksbank attributed to the geopolitical turmoil around US tariff policy and uncertainty in the global economy. Already in May 2025 the Riksbank flagged elevated financial stability risks with concerns for the slow return from recession in the Swedish economy. In its revision of the GDP growth for 2025 in June, NIER downgraded 2025 GDP growth to 0.9% and, based on these numbers for the first half of 2025, it might seem unlikely that the economy will demonstrate a turnaround to more robust growth in the second half of 2025.

In its June 2025 forecast, NIER observed that supply and demand were suboptimal, resulting in what economists refer to as an output gap – when the supply and demand in the national economy do not reach an equilibrium. The key driver for increased GDP growth is households, as NIER suggests in its publication from June, “[..] for an extended period, households have been reluctant to increase their consumption, despite rising real wages and falling interest rates, but there are now signs that a turnaround is underway. Households are starting from a position of high savings, and with real disposable incomes rising rapidly this year, household consumption is expected to be the strongest driver of the recovery.”

To support its forecast, NIER measures on a monthly basis the expectations of trade, industries and households to the economy in the coming months. In its July measurement, households showed the highest jump of 5.8 index points, the second highest since measurement began in the 1990s. Household optimism is mostly driven by a 3.3% real increase in wages. Not surprisingly manufacturing and construction show a slight decrease in light of the uncertainties surrounding the global economy.

It seems in the cards that the economy will pick up in the last quarters of 2025, the question is how much, and how much inflationary pressure it brings.

The forecast of the NIER for 3Q and 4Q is that inflation will fall as low as 1.5%, which is a prerequisite for the Riksbank to cut rates further.

Not everyone agrees with the Government's prognosis. Nordea's Chief Economist Annika Winsth believes that GDP will land at 1-1.5% growth in 2025 instead of 0.9%, with households being the driving factor in turning the recession around. She points out in an interview with the Sweden Herald that businesses have stopped waiting and are adapting to the uncertainties, and that the households are soon picking up their consumption.

Will the Riksbank cut interest rates?

The policy rate of the Riksbank follows the European Central Bank's policy rates, which are down to 2% but are unlikely to fall below that. At a press conference on 24 July, ECB President Christine Lagarde stated that there would not be a further rate cut, and the 2% policy rate would remain unchanged into 2026. This is a change from previous expectations that predicted a rate cut to 1.75% in September 2025. At the same press conference, Lagarde stated that the Eurozone economy was in a good place in spite of uncertainties and that the ECB would stabilise its rate at the 2% in view of the inflation for the Eurozone staying steady on target at 2%.

The Riksbank has been one of the most aggressive central banks within the G10 in cutting rates the past year, lowering the policy rate 200 basis points from 4% to its current 2%, levelling the policy rate with the 2% target inflation.

When Svanteson made her announcement, NIER had assumed a rate cut to 1.75%, global market analysts were getting on the ECB to cut below 2% in September. With Lagarde's statement on 24 July, that it will not cut further this year, that might change the picture for the Riksbank. It now depends on interest rate parity and inflation. If SEK's interest rate goes down to 1.75% and the ECB stays at 2%, it moves investors away from the SEK to the EUR, thereby weakening the SEK. A weaker SEK means higher inflation due to higher import prices, but a (much needed) boost in export. Add to that the reluctance of the US Federal Reserve to cut interest rates from its current 4.25-4.50% range, attempting to curb US inflation and strengthen the USD against the EUR.

What needs to happen for the Riksbank to cut rates another 25 bps, is the economy showing continued sluggishness, with the resulting inflation falling under the target of 2%. Thus the prediction that the Riksbank will cut rates another 25bps is contingent upon the economy showing continued weak domestic demand, giving the Riksbank the right conditions to further ease its monetary policy. It is then assumed that the economy will pick up again and domestic demand moves from its soft demand to stronger growth, combined with low inflationary pressure. In the Riksbank’s evaluation of the effects of the rate cuts, they have not contributed to an increase in the housing market, with the expected increase in construction activity, a key economic factor. Even if the households are offered lower interest rates and real wages rise, it does not show in the real estate market to the same degree. That is why the Riksbank is hesitant to predict a strong return for the economy in spite of low inflation, wage increase and low interest rates. The Riksbank attributes this development mostly to the uncertainties for the future economy, so even if NIER barometer shows increased optimism,

the fact remains that unemployment is 8.8% and manufacturing and construction expect a decrease in their activities which in turn contributes to the households holding on to their savings.

54 Ministry of Finance economic forecasts - Government.se

55 See a detailed analysis of the economic outlook for Sweden in Mundus MPR June issue

56 Risks to financial stability in Sweden have increased, Riksbank says | Reuters

57 swedish-economy-june-2025.pdf

58Ibid.

59 swedish-economy-june-2025.pdf

60 https://www.konj.se/publikationer/konjunkturbarometern/2025-07-30-mycket-kraftig-forbattring-av-hushallens-stamningslage/ 61Ibid.

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62Ibid.

63 Nordea Economist Criticizes Government's Pessimistic Economic Outlook | Sweden Herald

64 Euro zone economy holds up even as ECB speakers look to temper market view of no more cuts | Reuters

65Ibid.

66 Big central bank rate cuts slow with tariffs and politics in headlights | Reuters

67 A detailed discussion on SEK strength can be found in Mundus Monthly Policy review for July.

68 https://www.reuters.com/business/feds-reticence-rate-cuts-forces-market-rethink-outlook-2025-07-31/

69 Penningpolitisk rapport - Juni 2025 - Riksbanken

70Ibid.

71 Penningpolitisk rapport - Juni 2025 - Riksbanken

VOL. 8 ⧫ 2025 The Monthly Policy Review The August 2025 edition