OECD Economic Outlook, Volume 2025 Issue 1

Sweden

Sweden’s economy is expected to grow by 1.6% in 2025 and 2.3% in 2026. In the short term, heightened uncertainty will dampen investment, though domestic demand is expected to gradually recover as confidence improves. Private consumption will strengthen, supported by rising real incomes and improving employment conditions. Unemployment is set to decline steadily as labour demand increases. However, risks remain skewed to the downside, particularly due to heightened global uncertainty.

The Riksbank has appropriately paused monetary easing, but should remain agile and respond to incoming data. The mildly expansionary fiscal policy supports the economy and defence needs but could be better targeted. To sustain employment growth amid an ageing population, Sweden must address skill gaps among inactive and unemployed adults. Easing rental regulations and land‑use planning would improve housing supply and mobility. Rising climate costs highlight the urgent need for stronger market-based adaptation measures.

Growth momentum is weak

Economic activity continued to recover in late 2024, supported by easing inflation and monetary accommodation. However, recent indicators, including monthly GDP and industrial production, suggest that momentum weakened in early 2025. Domestic demand remains subdued. Inflation, measured by the consumer price index with a fixed mortgage rate (CPIF), the key metric for the Riksbank, is falling again following a temporary spike driven by rising food prices and changes in the consumption basket. Wage growth is set to remain contained in 2025-26 in line with negotiated industrial pay increases totalling 6.4% over two years. Labour market conditions had shown signs of stabilising, but forward-looking indicators point to further softening in the short term. An improvement in business sentiment has stalled, with declining hiring plans. Household sentiment has deteriorated sharply, with increased concerns about unemployment. Although the household saving rate is declining, it remains elevated by historical standards.

Sweden

Source: National Institute of Economic Research; Sveriges Riksbank; and Statistics Sweden.

Statlink

Sweden: Demand, output and prices

Statlink

Weak demand from key trading partners, particularly Germany and other euro area countries, continues to weigh on exports. While Sweden’s diversified export portfolio provides some resilience to trade disruptions and the increase in the US tariff on merchandise imports from Sweden, industries such as automotive and steel face mounting challenges, notably those lacking a local manufacturing or assembly footprint in the United States.

Monetary policy easing is on hold while fiscal policy turns slightly expansionary

The Riksbank paused monetary easing in March 2025, holding the policy rate at 2.25% in response to elevated inflation. The rate is assumed to remain at this broadly neutral level through the end of 2026. Against the backdrop of subdued domestic demand, the 2025 budget introduced new measures worth nearly 0.9% of GDP. These include tax cuts on fuel and pensions, an enhanced earned income tax credit and lower taxes on investment savings. Additional stimulus of 0.2% of GDP was announced in the April Spring budget bill, including a new home renovation tax break and increased road maintenance spending. Defence spending will rise further in 2025 to 2.4% of GDP (NATO’s definition), with a goal of reaching 3.5% of GDP by 2030. Fiscal policy is expected to remain slightly expansionary in 2026 as economic slack persists. The move from a surplus target to a balanced budget rule, effective from 2027, is expected to influence fiscal planning already in 2026.

Near-term headwinds slow demand as recovery gains traction

The economy is projected to grow by 1.6% in 2025 and 2.3% in 2026. Near-term uncertainty will continue to weigh on household consumption and business investment. Private consumption is expected to recover gradually, supported by rising real incomes and improving labour market conditions. Inflation is projected to stabilise around target, with continued economic slack helping to contain price pressures. Risks to the outlook remain tilted to the downside. A prolonged slowdown in key trading partners and spiralling trade protectionism could further strain the highly open economy. A more persistent-than-expected increase in precautionary saving could slow the recovery of household consumption. On the upside, a stronger rebound in private consumption, driven by a sharper-than-anticipated decline in the household saving rate, could support a more robust recovery.

Supporting the recovery through targeted measures and structural reforms

The Riksbank should keep the policy rate unchanged for now, while remaining agile in a volatile environment. The mildly expansionary fiscal stance supports recovery, but tax measures need to be better targeted. Fuel tax cuts are regressive and ineffective in easing cost-of-living pressures, while tax relief for investment savings may raise equity concerns. Looking ahead, addressing skills deficiencies among unemployed and inactive adults and further improving support for adult education and training of individuals at risk of unemployment will be essential to continue to expand employment in the face of an ageing population. Easing rent controls and streamlining land‑use planning would boost housing investment and improve affordability and job matching. The costs of climate change are rising, while funding for adaptation investments remains insufficient. Accelerating market-based measures, particularly risk-based insurance premiums and taxes, is important to close the gap.