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Nordic Outlook: Eagerly awaited interest rate cuts in a turbulent world

The economic situation is characterised by increased optimism, despite worsening geopolitical risks. Falling inflation will persuade central banks to start cutting key interest rates this spring and summer. We continue to believe that a soft landing is possible and that the slowdown in the world economy will be mild. The Swedish economic outlook has also improved; after a 0.4 per cent decline last year, GDP will increase slightly this year. In 2025, GDP will grow by almost 3 per cent ‒ well above trend. Sweden’s Riksbank will cut its policy rate in May, and government fiscal policy will also support growth in 2025.

“After several truly challenging years, the world economy is moving towards greater stability. Inflation is falling on a broad front, opening the way for lower interest rates, lower costs for businesses, better household finances and more stable consumption,” says Jens Magnusson, Chief Economist at SEB. 

Mild growth slowdown as inflation falls and unemployment rises slightly

This year’s growth will be anaemic, but the foundations are being laid for a recovery in 2025, despite an environment of heightened security policy concerns. The US economy has shown continued resilience, slowing down for a couple of quarters but avoiding a recession. Compared to November, we have revised our US forecast for 2024 upward to 1.6 per cent, a decline from 2.4 per cent in 2023. We believe that euro area GDP fell during the second half of 2023, but growth will pick up during the second half of this year and avoid a major slump. Overall, euro area GDP will grow by 0.5 per cent in both 2023 and 2024. In 2025, growth in both the United States and the euro area will rebound to nearly 2 per cent. Emerging market (EM) economies are growing in somewhat more stable fashion, but China is struggling to boost demand as households increase their savings, real estate sector woes continue and geopolitical tensions diminish trade. Global GDP will increase by around 3 per cent during all three years, 2023–2025, a modest growth rate by historical comparison.

“Several major concerns of recent years have faded to varying degrees. Although energy prices continue to fluctuate, not least in Sweden (which has had a cold winter so far), the price situation has greatly stabilised. We do not expect the extreme price peaks of 2022 to return. The stress in global value chains we saw in 2021 and 2022 is also largely gone,” says Daniel Bergvall, Head of Economic Forecasting at SEB.

Labour markets are worsening, but not significantly. The historical pattern is that high inflation has been brought under control only at the cost of a sharp downturn in the economy. However, developments so far suggest that this economic cycle may be an exception. Falling inflation will pave the way for central banks to start cutting key interest rates this spring. The European Central Bank (ECB) will be first to do so in March, followed by the US Federal Reserve (Fed) in May.

Geopolitics may fuel new burst of inflation, but downside risks predominate near-term

The global security situation is serious and has deteriorated further, with continued Russian aggression in Ukraine, clear risks that the war in Gaza may spread and increased tensions in East Asia.

“The attacks on shipping in the Red Sea are an uncertainty factor that may lead to short-term production disruptions and inflationary impulses, but we do not consider these disruptions sufficiently widespread to fundamentally change the picture of falling global inflation,” says Daniel Bergvall.        

Inflation is the focus of our risk outlook. In a theme article, we present examples of what low- and high- inflation scenarios may look like. Other theme articles deal with the sputtering German growth engine, a fateful US election and the “new world order” in economic policy.  

“There are many signs that we may be moving into a new world economic policy order in which politics, security aspects and a desire for ‘strategic independence’ are replacing the globalisation and liberalisation trend of recent decades,” says Jens Magnusson.

Read our latest Nordic Outlook report