Swedish Economy Faces Uncertainty amid Middle East Conflict but Growth Expected

The ongoing conflict in the Middle East continues to cast a shadow over Sweden's economic outlook for 2026, with Handelsbanken economists projecting cautious optimism amid uncertainties. The critical factor influencing Sweden's economy is the trajectory of the conflict, which affects global oil prices and inflation dynamics.

Handelsbanken’s chief economist Christina Nyman outlined two main scenarios: one where the conflict de-escalates leading to falling oil prices and improved supply chains, fostering economic recovery; and a more severe scenario involving heightened conflict causing surging oil prices, broader inflation spikes, and possible interest rate hikes despite weaker economic conditions. Currently, the bank’s main scenario favors conflict de-escalation.

Despite a previously slowing economy with weakened business sentiment and slower consumption growth, inflation in Sweden has surprisingly declined. However, household concerns remain high due to rising electricity and fuel prices. The bank predicts a temporary pause in economic recovery during the first half of 2026, with expanding growth prospects as uncertainty dissipates.

Sweden’s GDP is forecast to grow by 2.1% this year and 2.5% in 2027, supported by gradual improvements in the labor market—especially in service and public sectors. Inflation is expected to stay below the Riksbank's 2% target, leading to no interest rate hikes this year, with the key rate remaining at 1.75%. Consequently, household mortgage rates are likely to stay stable in 2026, with only slight increases anticipated next year.

The housing market outlook is positive, with prices projected to rise 4-5% in 2026 and about 6% in 2027. This growth is driven by improved incomes and eased mortgage regulations. Additional factors such as lowered food VAT and higher purchasing power from reduced inflation and rising incomes contribute to a more favorable consumer environment.

In sum, while uncertainty remains due to geopolitical risks, Svenska Handelsbanken's analysis offers hope for moderate economic growth and stable financial conditions, contingent on the conflict’s resolution trajectory.