Handelsbanken: War in the Middle East slows the global economy - but Sweden gains momentum as uncertainty eases

The situation in the Middle East has once again injected uncertainty into the global economy. The scale of the effects will depend on how the conflict evolves, but the direction for the global economy is clear: higher inflation and lower growth. In Handelsbanken's main scenario, the conflict is assumed to de-escalate, oil prices gradually decline, and supply chains progressively improve.

"This is not the most benign scenario, as energy prices do not fully return to previous levels. But if uncertainty fades and inflationary pressures ease, we see good conditions for a recovery reminiscent of the one that followed last year's tariff shock", says Christina Nyman.

If the conflict de-escalates, inflationary effects are limited, allowing central banks largely to refrain from raising interest rates. At the same time, risks remain significant. In a more severe scenario, a prolonged or escalating conflict could lead to sharply higher oil prices, broader inflationary pressures, and interest rate hikes despite weaker economic growth.

"In the current environment, it is particularly important for both households and companies to be prepared for rapid changes in the outlook. We have therefore worked with alternative scenarios in this report, given the high degree of uncertainty", says Christina Nyman.

The Swedish economy regains momentum after yet another setback
The Swedish economy had already lost momentum prior to the outbreak of the war. Economic activity remains subdued and business sentiment has weakened. Consumption has continued to grow, albeit at a slower pace. Somewhat unexpectedly, inflation in Sweden has continued to fall, yet households' inflation expectations have increased following the winter surge in electricity prices and the sharp rise in oil prices.

"The recovery pauses during the first half of the year, but as uncertainty eases, the conditions are in place for an upswing in the Swedish economy", says Christina Nyman.

Rising incomes, lower overall inflation, a reduced VAT rate on food, and new electricity support measures are strengthening household purchasing power more than usual this year. GDP is forecast to grow by 2.1% this year and 2.5% next year. The labour market is expected to improve gradually as demand picks up, particularly in the services sector and the public sector.

Riksbank on hold - house prices rise
Despite volatility in individual prices, inflation remains clearly below the Riksbank's target. CPIF inflation is expected to fall below 2% this year and remain close to target in the coming years.

"The market has shifted sharply in its view of the Riksbank. However, with inflation below target, we see no reason for the Riksbank to raise interest rates this year", says Christina Nyman.

Handelsbanken expects household mortgage rates to remain close to current levels this year and to rise only modestly next year. Improving income prospects and eased mortgage regulations are expected to contribute to house price increases of 4-5% over the course of 2026 and around 6% in 2027.

"Despite rising energy prices, we have not revised our view of household purchasing power in our main scenario, which is strengthening more than usual this year. Together with easier borrowing conditions, this provides better conditions for the housing market in the coming years", says Christina Nyman.

For further information, please contact:
Christina Nyman, Chief economist, Handelsbanken, +46 70 778 77 65
Handelsbanken Press Office, +46 8 701 80 18, press@handelsbanken.se

For more information about Handelsbanken, please visit: www.handelsbanken.com

TABLES

*After tax **after inflation and tax

Source: Handelsbanken Global Macro Forecast