The economy is expected to grow modestly by 0.6% in 2024, followed by stronger growth of 1.8% in 2025 and 2.8% in 2026. Private consumption will recover from late 2024, supported by reduced debt servicing costs, rising real incomes, and improvements in the labour market. Inflation is set to remain below target until mid-2026. Private investments will be bolstered by gradually easing credit conditions and construction costs, and external demand. Unemployment is expected to decline steadily as labour demand rises.

The Riksbank has appropriately accelerated monetary policy easing amid rapidly falling inflation and weak domestic demand. The planned slightly expansionary fiscal stance will provide further support to the economy. Tapping into underutilised labour resources is needed amid an ageing population and high long-term unemployment. Structural reforms, such as relaxing rent controls and streamlining land-use planning to make housing more affordable in high-demand areas, would help improve labour market efficiency and matching.

Economic activity remained subdued in the first half of 2024, with contractions in both private consumption and investment. Recent indicators, including monthly GDP, the preliminary third-quarter GDP estimate, and industrial production, suggest this sluggish trend continued into the third quarter. Inflation measured by the consumer price index with a fixed mortgage rate, the key metric for the Riksbank, remains low at 1.5% in October after falling sharply in June 2024, due to declining commodity prices. Despite easing inflation and interest rates, household finances remain tight, prompting them to prioritise saving over spending. The construction sector continues to struggle with elevated borrowing costs and a tepid housing market, even as housing prices ticked up. Labour market conditions have weakened, with rising unemployment and fewer vacancies, although labour shortages persist in some sectors, including education and healthcare. However, forward-looking indicators, such as companies’ hiring plans and business confidence, point to a gradual recovery.

Weak demand from key trading partners, particularly Germany and other euro area countries, together with a weaker Swedish krona, affects Sweden’s export growth. Easing global financial conditions, along with lower inflation, have alleviated some near-term financial stability risks.

The Riksbank has cut the policy rate in steps from 4% since May 2024 to 2.75% in November. Continued monetary easing is assumed, with policy rates declining by another 50 basis points by early 2025. Fiscal policy in 2025 is expected to be slightly expansionary. The 2025 budget bill includes new measures totalling SEK 60.65 billion (0.9% of GDP), focused on households, healthcare, elderly care and defence, partially offset by structural savings. Some 0.4% of GDP is allocated to household relief, including a reduced employment tax credit, lower taxes for pensioners, marginal tax cuts, reduced taxes on transport fuels and aviation and reduced taxes on investment savings accounts. Military aid to Ukraine amounting to SEK 23.35 billion is held outside of the fiscal framework. The fiscal stance in 2026 is assumed to be slightly expansionary as well, reflecting the government's fiscal space for 2026-28 estimated at around SEK 60 billion under the current domestic framework.

The economy is projected to grow modestly by 0.6% in 2024, picking up to 1.8% in 2025 and 2.8% in 2026. Private consumption is projected to gradually recover throughout 2025 and 2026, driven by rising real incomes, decreasing debt servicing costs, and a strengthening labour market. A gradual easing of credit conditions and lower construction costs will support private investments. Inflation is expected to gradually approach the 2% target from its current low levels as monetary easing takes effect and the economy rebounds. Stronger-than-anticipated lagged effects of monetary policy transmission and a more persistent than expected increase in precautionary savings could slow the recovery of household consumption. A prolonged slowdown in key trading partners could also further weigh on the export-oriented Swedish economy. Upside risks include more buoyant private consumption supported by a more substantial than expected lowering of the household saving rate.

Easing macroeconomic policies are appropriate to support the economy. Given low inflation and weak domestic demand, some further interest rate cuts are likely needed, complemented by clear forward guidance to anchor inflation expectations. As the population ages, Sweden must mobilise underutilised labour resources, especially among the low-skilled, elderly, and foreign-born populations, while addressing skills mismatch. Reforming the education system to incentivise providers of upper secondary and post-secondary education to provide more labour market-relevant skills, and strengthening active labour market policies through tailored training and reskilling programmes, will help alleviate skills mismatches, labour shortages and long-term unemployment. Relaxing strict rental regulations and streamlining land-use planning would stimulate housing supply and improve labour mobility. Finally, plans to reduce taxes on transport fuels and aviation should be reconsidered to support the green transition and help achieve climate goals in a fair and low-cost way.