Interest rate cuts will help but not completely reinvigorate the economy
The Swedish economy in 2024 faces a complex interplay of trends. Tight credit conditions have not only impacted household consumption but also resulted in a decline in business investment as variable interest rates frequently used by households and businesses contribute to the overall economic slowdown. Anticipated rate cuts later in the year are seen as a vital measure to counteract these adverse effects and slowly start to stimulate economic activity.
In the housing market, both prices and activity are on a swift decline as households and real estate companies adjust to the new normal of higher interest rates. This adjustment period has introduced a challenging phase for the real estate sector and has implications for broader economic sentiment.
While government spending is expected to remain stable, albeit at a slower pace, a notable concern lies in the reduced contribution of net exports due to a slowdown in the global economy. The weak exchange rate between the Swedish krona and major currencies like the US dollar and euro adds an additional layer of complexity, and presents a potential obstacle for the central bank in implementing necessary rate cuts. Striking a delicate balance between monetary policies and economic conditions will be crucial.
Rising debt should not be an issue
Sweden's current account balance is expected to maintain its usually stable surplus in 2024, driven by a surplus in both the balance of goods and primary income. Despite recent deficits in the balance of services in 2022 and 2023, there is an expected improvement in 2024. Anticipated adjustments include a weakening of the balance of goods, coupled with minor enhancements in both the balance of services and primary income. These changes suggest an overall current account balance quite similar to the ratio from the previous year.
In 2024, Sweden's public balance is anticipated to experience a slight widening of the deficit, primarily attributed to increased spending and investments, notably in defence. This strategic fiscal approach aligns with the government's commitment to increase defence spending. Consequently, public debt is expected to rise, but still remain below 40% of GDP. The measured increase in public debt reflects a balance between stimulating economic growth and maintaining fiscal responsibility. That said, Sweden’s fiscal situation is still strong and should not worry investors.
NATO membership is in sight but political intricacies are slow the process
In 2024, Sweden's political landscape is expected to be relatively subdued as the next general election is not scheduled until 2026. The current government, comprising the Moderates, Christian Democrats, and Liberals, along with the far-right Swedish Democrats, collectively maintains around 50% of votes in polls, with the Swedish Democrats emerging as the largest party. The upcoming European Parliament elections in June 2024 have added an intriguing dimension to the mix especially given the Swedish Democrats' current strength and their anti-EU stance.
Sweden grapples with the ongoing process of joining NATO and at this stage is only waiting approval from Turkey and Hungary. While both nations have expressed commitment to advancing Sweden's NATO accession through parliamentary sessions, domestic and bilateral political considerations are prolonging the approval process. The complex dynamics involved underscore the intricate interplay between Sweden and these NATO member states, adding a layer of diplomatic intricacy to one of the key issues facing the nation.