KI Reports Iraq War Dampens Swedish Economy with Rising Inflation and Shifts in Confidence

The ongoing conflict in the Middle East, referred to as the Iraq war, is having a noticeable impact on the Swedish economy, according to the latest forecasts from the Konjunkturinstitutet (KI).

KI highlights that the war’s economic consequences are causing increased concern, particularly due to rising energy prices which are projected to drive inflation upward. The institute's forecast shows inflation is expected to increase by 0.6 percentage points in 2026 and by 0.2 percentage points in 2027. This inflationary pressure has led KI to predict that Sweden's central bank, Riksbanken, will raise interest rates towards the end of 2026 in response.

Despite these pressures, KI’s main scenario suggests that the overall macroeconomic effects on Sweden’s economy will be relatively modest, with little significant impact expected during the upcoming autumn.

In terms of economic sentiment, recent monthly data show a slight rise in the overall economic indicator to 99.9 from 99.7 in February. However, household confidence has fallen, with the household confidence index dropping to 95.2 from 96.3. This decline reflects households’ growing pessimism about the economic outlook. In contrast, business sentiment remains largely normal, with the notable exception of the construction sector, which is performing stronger than usual and exceeds normal sentiment levels. Businesses also expect sales prices to rise moderately over the next three months.

Ylva Hedén Westerdahl, KI’s chief forecaster, noted the pressure from higher oil prices as a key factor influencing these developments. Overall, while the Iraq war is dampening the Swedish economy through inflation and subdued household confidence, KI foresees that the fundamental economic impact will remain limited for the time being.