RaboResearch says Sweden’s weak Q1 GDP was driven by lower government spending but partly offset by household consumption and inventories. It argues that soft CPI and CPIF readings may understate underlying price pressures, especially as VAT cuts distort the data, while Riksbank minutes point to hawkish concern over upside inflation risks.

Soft data mask underlying inflation pressures

"The contraction in Swedish Q1 GDP was mostly due to a 2.1% q/q drop in government spending. The positive contribution due to inventory build-up is also a concern. That said, encouragingly household spending grew 0.6% q/q in Q1 with real disposable income increasing by 1.0% y/y."

"The Bloomberg survey also forecasts that Swedish CPI inflation will be just 0.8% y/y this year. The combination of softer Q1 GDP growth and CPI inflation on first look would appear to justify a steady policy outlook from the Riksbank. However, just as the breakdown of the GDP data is not as bad as the headline number suggests, price pressures in Sweden may be building at a faster pace than the official data indicate."

"The release of final April Swedish CPI inflation data confirmed a surprisingly soft reading of -0.1% y/y for the headline rate, flat for the ex-energy reading and 0.8% y/y for the CPIF inflation measure. The Bloomberg survey suggests that this is expected to rise to 1.3% y/y in May. The Riksbank targets CPIF inflation at 2%."

"Last September it was announced that the government would halve VAT on food products as part of its 2026 budget to reduce the impact of inflationary pressures on consumers. This followed some sticky CPI inflation readings last summer. The reduction in VAT on food took effect in April."

"While the data appeared to justify last month’s decision by the Riksbank to leave rates unchanged, the release of the minutes of the meeting contained some hawkish commentary. Deputy Governor Seim saw “significant upside risks to inflation going forward” due to the impact of the Iran war, though she favoured keeping rates on hold in May. In her view, “if the shock risks leading to wider and more persistent effects on inflation, we should restrain demand appropriately.”"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)