OECD sees Swedish economy shrinking this year as inflation weighs

"Sweden's economy is under renewed pressure following Russia's illegal war of aggression against Ukraine and its weaponization of energy," it said. The Swedish central bank has carried out a string of hikes to leave its policy rate at 3.5% at its most recent meeting, up from zero at the beginning of 2022.

The Swedish economy is facing headwinds from rising interest rates, high inflation and a slump in private consumption and is seen contracting this year, the Organization for Economic Cooperation and Development (OECD) said on Wednesday. After faring relatively well through the pandemic, soaring consumer price rises and interest rates have begun taking a toll. Swedish households are among the most heavily indebted in Europe while many have floating-rate mortgages, meaning central bank rate hikes quickly result in higher costs.

The OECD said in a survey of the Swedish economy it expected gross domestic product to shrink by 0.3% this year and grow only 1.4% in 2024. "Sweden's economy is under renewed pressure following Russia's illegal war of aggression against Ukraine and its weaponization of energy," it said.

The Swedish central bank has carried out a string of hikes to leave its policy rate at 3.5% at its most recent meeting, up from zero at the beginning of 2022. It has forecast another quarter point hike either in June or in September. The OECD said highly leveraged commercial real estate developers posed a financial vulnerability as the sector faced challenges refinancing debts. Commercial real estate loans amount to around 18% of total bank loans, one of the highest levels in the OECD.

The OECD also said government reforms had damaged Sweden's ability to reach its climate targets. The right-wing coalition government has cut fuel taxes, raised tax breaks for people driving to work, ended new electric vehicle subsidies and eased requirements on the amount of biofuel that must be added to diesel and gasoline.

"Recent policy changes have likely put the 2030 target out of reach unless new ambitious policies are put in place," the OECD said.