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Nordic Outlook: Soft landing possible, but very little growth momentum

Growth will be anaemic in 2023 and 2024, but the global economy will still experience a relatively soft landing as the United States − among other countries − avoids a recession. Inflation is falling, and the important question for central banks is no longer how many key interest rate hikes remain, but when their first rate cuts will occur. However, the economic outlook will continue to be weighed down by geopolitical turmoil, extreme weather, increased trade barriers and a flare-up of subsidy competition between the US and the European Union. The economic outlook for China has also deteriorated. In Sweden, GDP will fall by 1.2 per cent this year due to weak households and a deep decline in housing construction, followed by essentially zero growth in 2024. The Riksbank is being squeezed by the weak krona, but falling inflation suggests that its September policy rate hike will be the last.

“We foresee relatively good potential for avoiding an economic hard landing. Meanwhile we must not forget that we are living in unique economic times and cannot rule out that, for example, the record-fast key rate hikes of the past 18 months may have a larger negative impact on the world economy than we have seen so far," says Jens Magnusson, Chief Economist at SEB. 

Global deceleration at varying speeds

High inflation and rapid interest rate hikes have had a substantial economic impact on the euro area and especially on its former growth engine Germany, which is being weighed down by the energy price shock and by weak global industrial demand. Our forecast is that the euro area economy will basically stagnate for the rest of this year, followed by weak growth in 2024. In contrast, we are significantly upgrading our US forecast after unexpected economic resilience this past spring. As a result, our growth forecast for the 38 mainly affluent OECD countries has been revised upward to 1.4 per cent, from 0.9 per cent in the May issue of Nordic Outlook. We are lowering our 2024 OECD forecast slightly, to 1.2 per cent from 1.4 per cent, since we expect labour markets to weaken and US households to begin applying the brakes on spending. In 2025, when inflation has fallen further and interest rates are lower, growth will accelerate back to slightly above trend. We are lowering our GDP outlook for China after last spring’s disappointing growth. Weak domestic demand, a troubled real estate market and a government that is holding back on stimulus are some of the problems. Thus, China’s recovery will not add much momentum to the world economy. 

“The overall picture is mixed. There are several challenges, but the situation is far from hopeless. At the same times as inflation is falling, labour markets in many countries remain characterised by high employment and low jobless rates. Furthermore, consumption has been holding up in nominal terms, and worries about the financial system have clearly decreased compared with what we experienced during the spring’s banking sector problems in the US and Switzerland,” Jens Magnusson says.       

Inflation will fall to target, with only moderately higher unemployment

Rapid interest rate hikes, along with supply-side normalisation in the economy, have had an impact on inflation. Weaker economic activity and household incomes continued, high interest rates, and base effects as last year’s large increases in food and energy prices vanish from inflation metrics, suggest that inflation will keep falling this autumn and next year. The decline in core inflation − excluding food and energy − will be more protracted, but it will also be back at central bank targets by the end of our forecast period. 

“The inflation downturn we are now seeing is very welcome, but the important question is whether we will make it all the way to the finish line, or whether a stronger economic slump will be necessary to complete the difficult ‘last mile’. Our conclusion is that a relatively mild upturn in unemployment should be sufficient for wage pressure to decelerate and end up in line with inflation targets,” says Daniel Bergvall, Head of Economic Forecasting at SEB. 

Fed will be first with key interest rate cuts during 2024

Although some central banks may have one or more rate hikes left, the focus of attention has shifted to the dates when rates cuts will begin. The US Federal Reserve will go first by starting to cut its key rate in May next year, somewhat later than previously expected, followed by the European Central Bank in mid-2024. The key interest rate spread between the Fed and the ECB will gradually narrow, and at the end of our forecast period both the Fed and the ECB key rates will stand at 2.50 per cent, which is broadly neutral. Due to the challenges of an overheated labour market and rapid pay increases, the Bank of England will keep its key rate at the peak for longer. The Bank of Japan’s monetary policy shift is happening slowly, but the BoJ will abandon its negative key rate later this autumn. Long-term government bond yields usually peak slightly earlier than key rates, but this time their downside potential is limited because long-term yields are currently at relatively low levels in relation to key rates. In addition, downward movement in long-term yields will be limited by high private and public debt and by the quantitative tightening (QT) policies of central banks. This autumn will begin with further US dollar strength, which will fade as the market focuses increasingly on interest rate cuts. When the euro begins an upward trend against the USD, the Swedish krona may also receive support against the euro, given historical patterns. A Swedish fiscal policy that promotes investments in infrastructure, for example, may also help to strengthen the krona in the long term. 

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