Cocktail of external shocks to weigh on growth in 2023
Additionally, weaker purchasing power is unlikely to be compensated by higher wages despite pay talks in March 2023. Moreover, consumer prices will increase further during 2023, but at a slower pace than in 2022, thereby prompting the Riksbank to hike its policy rate, but in smaller steps than in 2022 when it rose by 250 basis points to 2.5%. Sharply rising interest rates have also caused trouble for private homebuilders as most real estate mortgages in Sweden are granted with variable interest terms. Since the beginning of 2022, home prices have been decreasing as less people can afford them
In addition, shortages of labour and construction materials have pushed construction costs up noticeably in recent years. Construction activity should therefore stabilise or even decrease during 2023. Additionally, foreign trade will be slightly less positive. Goods exports should increase at a slower pace due to supply-chain issues and lower external demand. Despite robust state support measures such as fuel tax cuts, unemployment benefits and local government grants, private investment should slow in the first half of 2023. However, financing provided by the EU Recovery and Resilience Facility, which is expected to include disbursements of around 0.2% of GDP, will support climate-related investments.
Return to twin surpluses just out of reach
The country’s current account surplus will remain unchanged in 2023 as the trade in goods surplus will stabilise slightly thanks to a lower inflation rate for imports that will balance out a decrease in external demand. The trade in services switched to deficit in 2022 and is set to remain there as Sweden is a very expensive tourist destination for Western Europeans. The general government budget balance is likely to show a slight deficit as the government maintains its robust support measures to address high energy prices and bolster Sweden’s defence capabilities. However, public debt should decrease further and remain at a very low level.
A conservative government and NATO membership application
The last parliamentary election in September 2022 was a very close fight. The difference between the two major factions of the Swedish political system was tiny, with the former right-wing opposition party narrowly winning with 176 seats (out of 349 seats in the parliament). The former ruling Social Democratic Party (SAP) secured 107 seats (up 7 seats compared to the previous election in 2018) and became the largest party in the Riksdag.
However, with the exception of the Green party (18 seats, up 2 seats), the other former coalition partners (Left and Centre parties) turn in a disappointing performance, losing a total of 11 seats. What is more, these 11 seats were won by the far-right anti-immigration Sweden Democrats (SD) party, which, with 73 seats, became the second-biggest party in Parliament and therefore the kingmaker. Third in the race was the liberal-conservative Moderate Party (70 seats, down 2 seats). In the past, all parties in Parliament refused to work directly with the Sweden Democrats, which would again have caused a political gridlock. After a fiery debate between lawmakers, Sweden’s parliament narrowly approved centre-right Moderate Party leader Ulf Kristersson as Prime Minister. The Kristersson cabinet (formed by Moderates, the Liberals and the Christian Democrats) is a minority government, which has 103 out of 349 seats. The SD is not a formal member of the coalition, but is backing it in Parliament in exchange for some influence over government policy. The new government’s coalition agreement includes proposals to cut taxes and cap welfare benefits, but is also heavy on law and order, and plans to crack down on criminal gangs. It aims to build more new nuclear power plants.