Sweden’s economy contracted more than economists had anticipated last quarter, reviving prospects of a hard landing and causing the krona to weaken.
(Bloomberg) — Sweden’s economy contracted more than economists had anticipated last quarter, reviving prospects of a hard landing and causing the krona to weaken.
Gross domestic product, adjusted for seasonal swings, dropped 1.5% in the second quarter from the previous three-month period — the steepest decline since the second quarter of 2020, according to data from Statistics Sweden on Friday.
The contraction exceeded all estimates, and came after 0.6% growth in the first quarter. Economists surveyed by Bloomberg had a median projection of a 0.5% drop, as did the Riksbank.
The krona, which has been the weakest performer among the G-10 major currencies in the past three months, shed as much as 0.5% after the data to 11.6016 versus the euro, trading 0.4% lower at 9:58 a.m. in Stockholm.
The data is likely to renew gloomy predictions about the largest Nordic economy, which has been pegged as one of the worst performers in the European Union this year by institutions such as the European Commission. It may cool pressure on the Swedish policymakers to further tighten monetary policy.
“Ouch,” said Nordea Bank Abp analyst Gustav Helgesson, noting the reading was “much lower” than what the central bank had expected.
“Today’s flash report indicates that the Riksbank’s rate hikes might finally be feeding through to economic activity more clearly,” Helgesson said. “The monthly figures are subject to revision, but taken at face value combined with lower economic optimism and falling price plans, the risk for further rate hikes after September has diminished somewhat.”
The use of variable interest rates is prevalent in Sweden, meaning central bank rate increases feed through to the economy at a fast pace. The Riksbank has raised its key rate to 3.75% from zero since April last year, trying to tame stubbornly high inflation that’s partly spurred by a weaker krona that boosts imported price growth.
While the indicator data is scant on detail, more information is due in the Aug. 29 GDP release. Still, the “downturn seems broad based,” Nordea’s Helgesson said. Reduced activity in June stemmed from the weaker export of goods, officials said.
Read More: Swedish Prices Rise More Than Expected in Riksbank Setback
Prospects for Sweden’s economy have recently looked dire after a yearlong slump in its housing market spilled over into the commercial real estate sector, where a number of landlords are struggling to refinance maturing debt after years of leveraged growth.
Earlier this month, an indicator of Sweden’s residential construction declined to the lowest level in almost nine years, signaling that the decline in home values is weighing on building activity. The pace of borrowing by Swedish households has also slowed to a record low as rising credit costs weigh on loan demand.
Read More: Swedish Household Lending Growth Hits All-Time Low on Rates
“Very weak June and second-quarter GDP prints this morning,” said Michael Grahn, chief economist at Danske Bank A/S. “The data seems to suggest a very drastic deterioration which is pretty hard to comprehend.”
In contrast, France’s economy grew significantly faster than estimated and inflation eased, providing a positive surprise as rising interest rates stoke recession fears in the 20-nation euro area, while Germany’s output stagnated, according to preliminary data.
The central bank sees the economy shrinking through the end of this year, for a calendar-adjusted contraction of 0.2% that would be followed by stagnant output next year. That compares with a median estimate of a 0.3% decline this year and 0.7% growth in 2024 by economists in a Bloomberg poll published last week.
–With assistance from Mark Evans and Joel Rinneby.
(Updates with analyst comments from sixth paragraph)
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