Stockholm (HedgeNordic) – Both the Nordic region and the wider euro area are tiptoeing into or already are in recessionary territory. 2023 will prove particularly challenging for the Swedish economy, which may be one of the most vulnerable economies, according to the team at Nordkinn Asset Management.
“In a number of aspects, Sweden may be one of the most vulnerable economies given the developments in 2022,” argues the team via Marcus Söderberg (pictured), Investment Strategist at Nordkinn. Söderberg sees three important factors that will weigh on the economy: interest rate-sensitive households, skyrocketing electricity prices coupled with modest fiscal support, and muted wage growth.
“In a number of aspects, Sweden may be one of the most vulnerable economies given the developments in 2022.”
“Firstly, Sweden is one of the most interest rate-sensitive economies with a highly indebted private sector and a relatively low usage of fixed-rate mortgages,” starts Söderberg. With the debt-to-income ratio for Swedish households exceeding 200 percent and the low share of fixed-rate mortgages, recent rate hikes by the Riksbank and additional rate hikes expected in the coming months can seriously affect households’ real disposable income. As inflation is expected to reach double digits in the early stages of 2023, the Riksbank will continue to focus on restoring price stability, according to Söderberg. “At 2.50 percent, the key policy rate is probably at restrictive levels already, yet the market discounts another 115 bps or so by rate hikes in the next six months.”
“Sweden is one of the most interest rate-sensitive economies with a highly indebted private sector and a relatively low usage of fixed-rate mortgages.”
The second factor weighing on the Swedish economy is the jump in electricity prices. “As electricity prices have sky-rocketed by tracking European natural gas prices, Swedish households have received modest financial backing from the government,” says Söderberg. Not only does this push up inflation directly through households’ electricity bills, but higher electricity prices also have an indirect impact through higher transportation costs and higher production costs.
Thirdly, wage growth has remained muted despite a tight labour market. “More worrisome for households is that the signals so far ahead of new wage deals, to be concluded by the end of March, have not been very encouraging,” according to Söderberg. The industry unions, as a benchmark for the entire labour market, have demanded a wage increase of about four percent, while employers seem to offer a mere one percent, says Nordkinn’s Investment Strategist. “This indicates that real wage growth will be clearly negative also in 2023, and nominal wage growth will be a bit lower than what has been negotiated in Europe and Germany so far.” This comes after workers already lost four years of real wage growth in 2022, even after excluding the effects of rising interest rates and power prices.
Given the signals ahead of the wage negotiations, “the balance of risk is skewed towards a somewhat less pronounced tightening of monetary policy than the market currently discounts,” argues Söderberg. Nonetheless, the Swedish economy is visibly facing its most severe shock since the early 1990s and is more vulnerable than the rest of Europe and the Nordic region.