Thedéen: Sweden's consumption and housing market lessons from inflation
Riksbank Governor Erik Thedéen analyzed the causes of weak household consumption and its links to the housing market in Sweden. He discussed why Swedish households were hit harder by high inflation and outlined lessons learned for future economic policy.
Krona, debt, and wages: Sweden's inflation pain
Riksbank Governor Erik Thedéen highlighted three key factors explaining why Swedish households experienced a sharper decline in purchasing power during the recent high-inflation period compared to other countries.
Firstly, real labour income grew more slowly due to moderate wage growth and higher inflation, a trend unique among major economies and Nordic neighbours.
Secondly, the krona's sharp depreciation in 2022 and 2023 significantly pushed up goods prices, potentially accounting for almost the entire difference in purchasing power development.
Thirdly, Swedish households faced a rapid doubling of interest costs as a share of disposable income, more than in other countries, due to high debt levels and a large share of variable interest rates.
This combination severely impacted household finances.
Housing market's ripple effect and future upturn
Rising interest costs not only impacted disposable income but also significantly affected the housing market, leading to a nearly 15 percent fall in house prices from peak to trough, a larger decline than in other countries.
This downturn, amplified by optimistic expectations being dashed, also saw residential investment contribute negatively to GDP growth by almost 2 percentage points in 2023 and 2024. Looking ahead, Thedéen anticipates a stable upturn in consumption, driven by rising real wages (expected to grow over 4 percent annually), lower interest rates, and a strengthening krona, which appreciated by 5 percent against the euro and over 15 percent against the US dollar last year.
Resilience tested, reality shifted
The crisis revealed unexpected resilience in the Swedish financial system, supported by high household savings and robust labor markets.
However, it underscored the critical importance of maintaining inflation target credibility and adapting to rapidly changing economic realities, especially regarding interest rate sensitivity.
The experience highlights that while policy measures like amortization requirements bolster stability, external factors and exchange rate dynamics remain powerful forces.