(Bloomberg) -- Danske Bank A/S painted a more upbeat scenario for the Swedish economy than most other forecasters, as it expects the Nordic region’s largest country to return to output growth next year when inflation subsides and the Riksbank reduces interest rates. 

The Copenhagen-based bank now sees an 0.2% contraction this year for the economy which has been battered by rising borrowing costs and a plunge in housing construction, to be followed by 1.3% growth in 2024, on a calendar-adjusted basis. That view contrasts with most of its peers, who have penciled in two consecutive years of declining gross domestic product in Sweden. 

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“Several parts of the Swedish economy are still strong,” the bank’s analysts said in a Nordic Outlook report published Tuesday. “Manufacturing investment seems to be unaffected and is still steadily growing. Consumption and retail sales are both stable and actually stronger than six months ago.”

Danske Bank also noted that the Swedish export sector is benefiting from a weak krona, and said that the country’s industrial production is outperforming that of Germany, and added that consumer spending should be supported by recovering real wages. 

The forecast comes after recent data has indicated a slowdown in activity and a long-awaited rise in unemployment, materializing after a long period of unexpected resilience to rising borrowing costs. 

The weakening economy, coupled with signs that upward pressure on consumer prices is easing, provided the Riksbank with arguments to keep its benchmark rate at 4% last week. While the central bank kept the door open to hike again early next year, Danske’s experts believe the current level is the peak. 

“Once inflation nears the 2% target, which will not be until the second quarter next year, the Riksbank will begin to lower the policy rate again,” the bank said. It expects a quarter percentage-point cut in June, followed by two similar moves before the end of next year. 

Danske’s Forecasts

(previous forecasts, from Sept., in parentheses)

  • “The big drag on the Swedish economy is still residential construction. It does, however, seem to have bottomed out in recent months,” Danske said.
  • While Denmark’s economy is “essentially stagnant,” Novo Nordisk is keeping overall activity growth above water, according to Danske.
  • The bank expects that situation to remain in the coming years, as the pharmaceuticals giant’s production growth will noticeably boost growth.
  • Danske says there are clear signs of a broad-based economic slowdown, as mainland GDP grew by only 0.1% in the third quarter, and “the only ray of light right now is oil services,” as high levels of oil investment are boosting activity.
  • Norges Bank is likely to keep rates on hold this month, and Danske says that its analyses suggest that it would seem sensible to start cutting during the spring. “We therefore predict four rate cuts next year and a further three in 2025,” it said.
  • “Finland’s economy is in recession, but it will pick up during 2024,” Danske said, as export demand gradually recovers and private consumption should be supported by slowing inflation.
  • “Sluggish demand, increased construction costs and the higher interest rate level lead to a notable downward trend in housing construction, which will last throughout 2024.”

--With assistance from Sanne Wass.

©2023 Bloomberg L.P.