Handelsbanken: Expect a stronger krona - but after the holidays

Brighter future for households - consumption driving Sweden's recovery
Handelsbanken's economists expect GDP to increase by 0.4 percent this year, before rising by 2.8 percent next year and 2.4 percent in 2026. This means that, in 2025 and 2026, growth will be  stronger than in most other European countries. A more expansionary fiscal policy in Sweden and the fact that the Swedish economy is more sensitive to interest rates will contribute to a more robust recovery when interest rates are lowered. This, above all, is due to a rebound in household consumption, although public investment and public consumption are also increasing vigorously.

"Households' outlook for the future has brightened and activity in the housing market is increasing. We believe that house prices will rise by 3-4 percent per year. The high level of savings also indicates that households as a whole have a buffer and that the current level of consumption is not high given household incomes", says Christina Nyman.

Combined with rising real wages, income tax cuts, increased employment and lower interest rates, this will lead to household consumption increasing by more than 3 percent next year, which makes consumption the most important driver of the recovery.

Low housing construction the new normal
The slowdown in housing construction has been dramatic, with the number of construction starts being more than halved. Sharply rising construction costs, higher interest rates and lower house prices in the secondary market are driving the decline. Handelsbanken's economists do not expect to see a major increase in construction starts. The most recent population forecasts show sharply reduced population growth over the next ten years in Sweden − most counties can expect to see their populations shrink.

"Keeping up with the population would mean halving construction from today's already low levels. We don't think it will be quite that weak. There is still a shortage of housing, especially in the metropolitan and university counties, where the population is expected to continue to increase", says Christina Nyman.

The labour market will improve next year
The weakening of the labour market over the past year has mainly affected young people and the decline in employment has been entirely driven by fewer temporary employees. This suggests that companies have been able to meet weaker demand by reducing new hires and cutting back on temporary employees rather than having to lay off permanent staff. Moreover, forward-looking indicators suggest that labour demand is stabilising.

"We expect employment to remain almost unchanged over the next six months and unemployment to rise slightly. At the end of the year, a recovery in the labour market will begin, which will strengthen in 2025", says Christina Nyman.

Riksbank first to make cuts, but other central banks are catching up
In the US, economic activity remains strong, unlike Sweden and the eurozone, but, at the same time, the decline in inflation has come to a halt, which has caused the Federal Reserve to postpone its first interest rate cut. Nonetheless, Handelsbanken's economists expect growth and inflationary pressures to slow and the Fed to start cutting rates in September. In the eurozone, economic activity has cooled, but the labour market remains tight. Inflation is on the way down and the ECB is likely to cut interest rates in June, which will contribute to higher growth next year. In Sweden, inflation continues to fall, both the economy and the labour market have cooled and the Riksbank has already initiated interest rate cuts. Our forecast is that the interest rate will be cut further in September and December this year.

"Inflation in Sweden continues to fall, but it is a bumpy road, and the Riksbank will weigh the risks of a weakening of the krona as well as the risks of a too-rapid recovery in the economy from the interest rate cuts, which could pose a risk to the decline in inflation", says Christina Nyman.

"We are not giving up on the krona. The krona has been controlled by US interest rates, and when the Fed starts its rate cuts in September, the krona may also strengthen", states Christina Nyman.

In the long run, the interest rate will be determined by more than inflation
Based on our forecasts for next year, the interest rate will be cut at every other meeting, taking it down to 2.25 percent, which is considered to be a normal level for the policy rate in the coming years. In the longer term, the interest rate will be determined not only by the inflation target, but also by factors such as population growth and productivity, whereby technological advancement is crucial.
The report analyses the long-term interest rate and potential effects of Artificial Intelligence (AI). The latter is considered to have the potential to reshape the global economy in the coming decades. The effects of which are highly uncertain but could be significant, with higher productivity and thus interest, but also higher living standards.
"AI is likely to crowd out certain jobs while creating new ones, and we expect a broadly neutral long-term impact on employment. Nonetheless, there is a risk that unemployment may increase during the transformation process", says Christina Nyman.

Clear shift in fiscal policy
In recent years, fiscal policy in Sweden has been restrained in order not to fuel inflation and counteract the effects of the tightening monetary policy. Given that inflation is now normalising, and economic activity is weak, while central government finances are strong, we expect an expansionary fiscal policy next year with unfunded reforms of around SEK 70bn. We also believe that fiscal policy will be expansionary in the election year of 2026, with a focus on tax cuts for households, more money for the municipalities and money for the ongoing upgrade of Sweden's defence forces. Meanwhile, public debt is expected to remain low and stabilise at just under 33 percent of GDP in 2025 and 2026.

Click here  (https://www.handelsbanken.se/sv/foretag/placera/konjunkturprognos)to view the webinar.

For further information, please contact: Christina Nyman, Chief Economist: +46 70 778 77 65 Handelsbanken's Press Office: +46 8 701 80 18

For the full report in Swedish, seeEconomic Forecast (https://eur06.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.handelsbanken.se%2Fsv%2Fforetag%2Fplacera%2Fkonjunkturprognos&data=05%7C02%7Cmaria.lindblad%40handelsbanken.se%7C52fafc57f2274a99abb708dc764e4b4b%7C4aba1e73421d4e8f895a786b597ba991%7C0%7C0%7C638515325846605216%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C0%7C%7C%7C&sdata=kf6r%2FzDy4meJSmJya%2FkltecGtYy%2FA5%2FtqXy%2FdQZ71Ss%3D&reserved=0) and GlobalMacro Forecast (https://eur06.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.handelsbanken.se%2Fen%2Fcorporate%2Finvestments%2Fglobal-macro-forecast&data=05%7C02%7Cmaria.lindblad%40handelsbanken.se%7C52fafc57f2274a99abb708dc764e4b4b%7C4aba1e73421d4e8f895a786b597ba991%7C0%7C0%7C638515325846616091%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C0%7C%7C%7C&sdata=AcjhurVWrdDBzsanioM1Yfxt3PzWwYdrhKyUjuBEplE%3D&reserved=0)
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GDP Annual average
2023 2024p 2025p 2026p
Sweden* 0.0 0.4 (0.1) 2.8 (2.4) 2.4 (2.5)
Finland -1.0 -0.2 (0.1) 1.5 (1.7) 1.6 (1.5)
Norway. mainland economy* 1.1 0.8 (0.1) 1.2 (1.4) 1.5 (1.8)
Eurozone 0.5 0.7 (0.4) 1.3 (1.3) 1.5 (1.7)
United Kingdom 0.1 0.6 (0.5) 1.4 (1.7) 1.5 (1.8)
United States* 2.5 2.5 (1.6) 1.8 (1.6) 1.6 (1.7)
China 5.2 5.0 (4.5) 4.5 (4.3) 4.2 (4.1)
*Calendar adjusted

Interest rate forecast End of year
Policy rates 2023 2024p 2025p 2026p
United States 5.375 4.875 (4.375) 3.875 (2.875) 3.125(2.50)
Eurozone 4.00 3.25 (3.25) 2.25 (2.00) 2.00 (1.75)
Sweden 4.00 3.25 (3.25) 2.25 (2.25) 2.25 (2.25)
United Kingdom 5.25 4.75 (4.50) 4.00 (2.75) 3.00 (2.25)
Norway 4.50 4.50 (3.75) 3.75 (3.00) 3.25 (2.50)

FX forecast End
of
year
2023 2024p 2025p 2026p
EUR/SEK 11,10 11,35 (10,70) 10,90 (10,20) 10,60 (10,00)
USD/SEK 10,04 10,51 (9,47) 9,91 (8,79) 9,46 (8,51)
GBP/SEK 12,75 13,35 (12,59) 12,82 (12,00) 12,47 (11,76)
NOK/SEK 0,99 0,99 (0,96) 0,98 (0,94) 0,97 (0,93)
CHF/SEK 11,98 11,35 (10,92) 10,69 (10,30) 10,19 (10,00)
JPY/SEK 7,12 7,35(6,76) 7,23(6,42) 7,06(6,35)
CNY/SEK 1,42 1,46(1,35) 1,44(1,27) 1,41(1,27)
EUR/USD 1,11 1,08 (1,13) 1,10 (1,16) 1,12 (1,18)
EUR/GBP 0,87 0,85 (0,85) 0,85 (0,85) 0,85 (0,85)
USD/CNY 7,08 7,20 (7,00) 6,90 (6,90) 6,70 (6,70)
Source:
Handelsbanken
Parenthesis:
Handelsbanken
forecast 24
januari, 2024