Sweden's Economic Outlook: Stable Course Amidst Geopolitical Challenges

Sweden's economy is well-positioned to navigate geopolitical uncertainties, according to Nordea Bank Abp's latest economic outlook. The nation's robust economic foundation is expected to withstand several challenges arising from the conflict in the Middle East. However, the prolonged closure of the Strait of Hormuz presents a significant unknown.

The global environment is described as turbulent, with the war in Iran creating widespread uncertainty. Nordea's baseline scenario anticipates the Strait of Hormuz reopening by summer, thereby limiting economic repercussions. Nevertheless, a protracted conflict could lead to higher global inflation due to increased energy and fertilizer costs. Should the strait remain closed and companies implement price increases, it might prompt the ECB and Riksbank to raise interest rates. A more severe impact on the Swedish economy would necessitate a significant escalation of the conflict.

Domestic strengths are supporting Sweden's economic performance. The business sector is competitive, employment remains high, and public finances are sound. Households are sensitive to interest rates, though less so than prior to the pandemic. Nordea's forecast projects gradual interest rate increases over the forecast period, underpinning solid economic growth. Swedish exports have shown unexpected strength, particularly in services. Growth is also influenced by EU trade agreements and the country's defense industry.

Inflationary pressures in Sweden are currently low. The multi-year strengthening of the trade-weighted exchange rate and declining energy prices have curbed inflation. Reductions in VAT on food and fuel taxes have also contributed to the current price levels. Nordea forecasts that the inflation target will not be threatened, and the Riksbank is expected to maintain its current policy rate for the year. A moderate increase in the policy rate is anticipated by 2027.