Sweden’s GDP contraction driven by sputtering export engine

A decline in exports dragged down Sweden’s economy in the second quarter, even as output contracted less than previously estimated.

Calendar-adjusted gross domestic product shrank by 0.8% in the three months through June, compared with the first quarter, according to figures published by Statistics Sweden on Tuesday. The drop is explained by lower goods exports and smaller inventories, authorities said.

While the data wasn’t as bad as the 1.5% contraction indicated by a preliminary release published in July, it indicates “the Swedish export motor is in trouble,” Michael Grahn, chief economist at Danske Bank A/S, said.

That adds a new level of concern for the biggest Nordic economy. It was previously seen pulled lower by consumer spending and housing construction, while a weak krona would support sales abroad.

Still, the smaller-than-feared contraction will likely provide somewhat more room for Sweden’s Riksbank at its rate-setting meeting in September as it has faced concerns about the fallout from its monetary tightening on the Nordic nation’s ailing property sector.

Real estate worries have contributed to pushing the Swedish krona to record lows against the euro, complicating the Riksbank’s task through feeding imported inflation. The central bank is widely expected to raise its benchmark rate to 4% from 3.75%, in another move aimed at containing rapid price increases on services.

What Bloomberg Economics Says...

“We see Sweden’s negative growth print for the second quarter as the start of its 2023 recession, putting the Riksbank in a tough spot: with price stability its priority, the central bank will likely be tightening rates even as economic activity contracts.”

— Selva Bahar Baziki, economist. 

For the full report, click here.

The krona, the third weakest performer in the G-10 space of major currencies this month, was little changed versus the euro at 11.8840 at 9:49 a.m. in Stockholm.

The economy last quarter “was generally weak with declines in several of the main components of GDP,” Jessica Engdahl, head of section at the National Accounts Department, said in a statement. 

“Net exports decreased, as did investments in inventories,” she said. “Household consumption expenditure was negative for the fourth consecutive quarter.”

The Swedish economy is more vulnerable to rate hikes than most peers as a large share of loans to Swedish households have interest rates fixed on short terms. That has led forecasters to pencil in a deep economic slump. SEB AB on Tuesday cut its forecasts for both this year and next.

“The Swedish economy is heading for a mild recession,” Svenska Handelsbanken AB’s economist Anders Bergvall said in a note to clients. “Most forward-looking indicators, such as the NIER Economic Tendency Survey, support our view that GDP will continue to decline in the second half of 2023, a view that also aligns well with the Riksbank.” He repeated his forecast for the key rate to be raised to a peak of 4.25% in November.