The US trade war is delaying the economic recovery and lowering household confidence in both personal finances and the broader economy. "The conditions are still in place for a recovery, but the economic uncertainty must ease before house-holds dare to spend more and companies invest and hire," says Handelsbanken's Chief Economist Christina Nyman. In its latest Global Macro Forecast, Handelsbanken projects that the Riksbank will cut the policy rate in both June and August, bringing it down to 1.75 percent. According to Handelsbanken's Chief Economist, "The Riksbank can cut the interest rate without risking rising inflation."

It has been a turbulent year since President Trump took office. The conditions for global trade have changed, as has the global security order, resulting in uncertainty among households and companies, as well as financial market volatility. Initial US agreements with the UK and China have eased these concerns somewhat. Handelsbanken's forecast assumes that the US will maintain a basic tariff on most of its trading partners of around 10 percent, while tariffs on China will be higher, as will some sectoral tariffs.

However, the bank's economists warn of new setbacks.
"Tariffs and uncertainty are weighing down the global economy, even though the situation has improved somewhat recently," says Christina Nyman.

Compared with the economic update on 9 April, the outlook in Handelsbanken's economic forecast is somewhat brighter, but the economic recovery is still being delayed. Swedish GDP is expected to expand by a moderate 1.5 percent this year and 2.1 percent next year. In 2027, stronger growth of 2.6 percent is expected. The weak growth this year means that the recovery in the labour market will be more gradual, and employment is not expected to start increasing until the beginning of next year.

Limited inflation risk in Sweden
For central banks, the challenge is to weigh the risks of slowing demand against those of inflation. Handelsbanken's economists believe that inflation risks are significant in the US, which has imposed tariffs on all its imports, and that the Federal Reserve will therefore be cautious and pause until September before delivering another rate cut. In the eurozone and Sweden, the situation is different, as the risks of slowing demand are considered to be more dominant than inflation risks. The effects of tariffs on inflation are very limited here - as long as the trade war does not spread to include more countries. Instead, weak demand is expected to put downward pressure on inflation. According to the Riksbank's target variable CPIF, the inflation rate in Sweden was 2.3 percent in April. Energy prices are now falling sharply, and so, excluding energy, inflation is higher at 3.1 percent. At the same time, food prices are about to stop rising.

"Our forecast is that CPIF inflation will be around 2 percent and that inflation excluding energy will move towards 2 percent, although this will take longer. The combination of a benign inflation outlook and a weaker economic outlook means that we expect the Riksbank to cut the policy rate to 1.75 percent," says Christina Nyman.

The krona is expected to continue to strengthen against the dollar
The recent appreciation of the krona has surprised many, especially as it has happened in a time of heightened global uncertainty. The main reason is a weaker dollar due to a changed view on the US economy, where Trump's tariff policies and the market's high valuations of US assets have caused investors to reduce their exposure to the US. This has weakened the dollar and benefitted other currencies, not least the krona. The strength of the krona is also due to additional fundamental advantages, such as an undervalued currency, an expected stronger economic recovery and sound government finances. The krona is expected to continue to strengthen, especially against the dollar, but at a slower pace.

Swedish export companies are directly affected - sentiment plummeting on the west coast of Sweden
Increased US tariffs will reduce exports to the US, and in addition to the direct effect of higher tariffs, exports will also be dampened by a broader weakening of global growth prospects. Given that Swedish exports of goods to the US only account for around 9 percent of total exports of goods, the direct effect on Swedish GDP will be limited, based on the assumed general tariffs of 10 percent and tariffs on cars of 25 percent. Over 80 percent of Swedish exports go to the EU's internal market or to markets with which the EU has free trade agreements.
Some companies are postponing investment decisions due to uncertainty. High construction costs and hesitant households mean that housing construction is expected to remain at low levels. The increased economic turmoil is thus dampening the broader outlook in the business sector, not least in the consumer-oriented retail sector.
"We think that we can see growing regional differences in manufacturing, which is the sector mostly affected by the US tariff increases. We see the greatest pessimism among industrial companies in export-heavy western Sweden, where hiring plans are now significantly weaker than normal," says Christina Nyman.
The automotive industry is the single largest sector in western Sweden and is negatively affected by increased tariffs on cars, the German slowdown and a stronger krona. The situation also looks bleaker in Upper Norrland, which is also likely to be weighed down by Northvolt's bankruptcy.
"In the eastern parts of central Sweden, industrial companies are more optimistic and report that they intend to increase the number of employees, where Östergötland, among others, benefits from the government's announced defence investments," says Christina Nyman.

Conditions for households in place when concerns ease
Rising real wages together with tax cuts support a solid increase in real disposable income this year, but we are seeing clear signs of increased caution among households. Although inflation concerns among households appear exaggerated and may fall back, the gloomy outlook suggests that many households will continue to be hesitant to spend, engage in precautionary saving and postpone major purchases.
"We forecast that interest rate cuts and a gradual easing of concerns will strengthen household confidence and pave the way for increased consumption and a resumption of the housing market recovery towards the end of the year," says Christina Nyman.

For further information, please contact:
Christina Nyman, Chief Economist, +46 70 778 77 65
Handelsbanken's Press Office, +46 8 701 80 18

For the full report, please see Global Macro Forecast, and In-depth Sweden report (in Swedish).
For more information on Handelsbanken, please visit: https://www.handelsbanken.com/en/