STOCKHOLM (Reuters) – Sweden’s economic growth will stall next year as high inflation and higher interest rates cast a shadow over households and businesses as they brace for tough times ahead, data showed on Wednesday.
The general economy started off strong, but the effects of the war in Ukraine and the high energy prices it brought with it are increasingly being felt.
Gross domestic product is expected to contract in 2023 – albeit by a marginal 0.1% – after growth of 2.7% this year, the National Institute for Economic Research (NIER) said in a forecast on Wednesday.
NIER has seen a headline inflation rate of 7.7% this year and 4.6% in 2023, both higher than expected in August.
The central bank targets 2% inflation.
Headline inflation hit 9.0% in August, prompting the Riksbank to raise interest rates by a full percentage point – the most one-time tightening measure since the early 1990s.
More is set to come as the central bank puts an initial burden on its response to inflation at 30-year highs and tries to prevent prices from continuing to rise.
“Perhaps the most important message I have is that, yes, households and businesses will feel the effects of tighter monetary policy, but if inflation jumps as it did in the 1970s and 1980s, it will be much worse and worse,” Central Bank Deputy Governor Per Jansson said Wednesday during a speech.
The economy was already slowing and higher rates would further weaken demand.
Separate data on Wednesday showed that overall consumer and business sentiment is at its lowest since August 2020, although still significantly higher than in the spring of that year when Sweden was in the grip of the COVID-19 pandemic.
Retail sales fell 5.1% in August.
The bleak outlook has already hit the housing market, with prices expected to fall 20% from their spring peak to their bottom next summer.