Sweden is not well. One of the only developed economies to experience a decline in its GDP in 2023, it is preparing to suffer the same fate in 2024. Two years of recession will undoubtedly leave traces on the first Scandinavian economy. Considering that other, less risky and well-paid opportunities are coming elsewhere, we choose to turn our back on Swedish financial assets.
A difficult economic environment
The Swedish economy, which is traditionally competitive for export and has a dynamic domestic market, is now in a complex and long-term situation. On the foreign trade front, the news is terrible: its main export markets are slowing down, or not at all.
The eurozone is on the brink of recession, the US is trying to avoid it and Asian - and Chinese in particular - demand is much less dynamic than in the past.
There is still domestic demand, which shows nothing good. In 2023 and 2024, Swedish household disposable income will decline due to soaring debt charges linked to rising interest rates. A phenomenon that is known everywhere but taking a particular scale in Sweden.
High inflation will do the rest, lowering purchasing power. As a result, the outlook is bleak.
Debt charges are exploding
Few countries are as exposed to the consequences of rising interest rates as Sweden. The country has a very high level of gross household debt, at 168% of disposable income for 2022, according to Eurostat, and a culture of variable rates - or licensed mortgages with a short period of fixed rates - which offers little protection to households in the event of rising credit prices.
According to the Riksbank (Swedish Central Bank), less than 10% of mortgage rates have a fixed rate period exceeding two years at this stage. Interest rates on these loans have tripled from less than 1.5% until early 2022 to nearly 4.5% today. As a result, more than 90% of households with a mortgage are already exposed to a very high debt burden or will be within 24 months.
The dangers of interest-only
Many Swedes still have a mortgage. The favourable tax treatment of debt charges, as well as the regulations in force, allows to stop the repayment of capital (paying only the interest of the debt) as soon as the outstanding balance falls below half the value of the property under a mortgage, the mountain of debt that weighs on households, decreases only very gradually.
When all goes well, these interest-only loans are attractive because they allow households to limit the share of their income devoted to housing and lend a hand to purchasing power. But in the current scenario, where interest rates have tripled, and property prices are falling, they significantly impact households' spending ability. As a result, trust is no longer there.
Investment suffers
In the first half of the year, new housing construction fell by 57% compared to the same period in 2022. In the major cities, the fall was even more significant (-66% in Stockholm). The impact is still manageable, with the construction sector accounting for just over 5% of GDP.
Consumption is not left behind. The fact that households that have been housing cheaply in recent years see the value of their property fall and their disposable income decline as inflation erodes their purchasing power is dramatic. This weighs heavily on the economy, pushing it into recession.
Riksbank is not in a hurry to cut rates
Given that the impact of rising interest rates on the Swedish economy is powerful, it is essential to look at the interest rate trajectory expected by the Riksbank. And here, too, the news is far from reassuring. Indeed, inflation has fallen sharply, moving away from the peaks of more than 12% experienced in late 2022/early 2023. But at 6.5% in September, it remains one of the highest among industrialised economies, and Stockholm's monetary authorities are concerned about it.
Having raised their interest rates to 4.0% in September, they are not sure they have finished with the bullish cycle. They, therefore, expect a slightly higher rate within a year and a return to the current level in two years. It is only in the next three years, in the autumn of 2026, that they expect to see a policy rate a little lower, around 3.7%.
Knowing that debt charges will impact more households, the latter will not soon return to the levels that prevailed until this summer in three years. The outlook for domestic demand is not very encouraging. It is, therefore, not the export bias that will allow the economy to regain some dynamism from 2025. But again, Sweden will not return to its former form and risks falling behind many other economies.
The disappointing outlook for the coming years leads us to turn our backs on Swedish assets, which have long been present in our fund portfolios. While the country remains competitive, given the economy's deterioration - particularly on the domestic demand front - other markets seem much more promising and less risky.