Sweden the Only EU Country to Experience Housing Contraction

Sweden will probably be the only economy in the European Union to contract this year as high inflation erodes private spending and a housing slump hits construction, European Commission said.

The largest Nordic nation faces a 0.8% decline in its gross domestic product in 2023, followed by expansion of 1.2% next year, according to new projections by the Brussels-based trading bloc. While the commission had in November also forecast a contraction for Germany, it now sees the EU’s biggest economy growing 0.2% this year.

Sweden’s economy is set to enter a recession as higher borrowing costs and a slump in purchasing power weigh on consumption, while the country’s housing market is in one of the worst routs globally. GDP unexpectedly contracted in the fourth quarter, but that didn’t deter the Riksbank from raising borrowing costs by half a point last week and flagged more hikes as it seeks to quell inflation that’s at a three-decade high.

The housing-price rout that is already weighing on consumption is also expected to lead to a dramatic drop in construction of new homes. Sweden’s National Board of Housing estimates that housing starts will fall by 44% this year to 33,000, and the number of bankruptcies in the construction sector increased by almost 50% from a year earlier in January, according to credit reference agency UC.

The commission said it expects Sweden’s construction activity to contract strongly in 2023, as costs rise and demand is depressed by rising interest rates and dropping real disposable incomes.