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"As we are welcoming 2024, it is time to look back at the fourth quarter, and the year as a whole - what a chicken-race for the financial market and Swedish economy. Falling interest rate expectations are fuelling the upswing of the market during Q4, but the question remains; whether central banks will be able to meet market expectations without a deeper economic downturn?"
Macroeconomics
The Swedish inflation rate continued to decline alongside with the underlying inflation pressure also appears to be decreasing fairly rapidly, even the absolute numbers are still uncomfortably high, but the trend has triggered extensive market discussions for the Swedish central bank to change course.
In October, the 10-year US Treasury note yield exceeded 5%, reaching a level not seen since 2007. This peak, mainly driven by investors' concerns of US economic growth, significant government budget deficit and congressional debates, accelerated by Federal Reserve Chair Jerome Powell’s remark about potentially tightening financial conditions.
The market however reacted positively when stronger-than-expected GDP numbers were released for the third quarter in November, prior to the last Fed meeting, in December. The Fed expressed interest in cutting rates as early as March 2024 during the meeting, in which the equity market reacted positively. However looking ahead to 2024, questions linger over when the central bank will begin initiating those expected cuts, and how many actually will occur.
There were mixed signals when Statistics Sweden (SCB) released the Swedish inflation figures for December in early January. On the positive side, the inflation rate continues to decline at a fairly rapid pace. The broad Consumer Price Index (CPI) inflation dropped from 5.8% in November to 4.4% in December. This was primarily driven by base effects, as electricity prices were exceptionally high in December 2022. Although electricity prices also rose in December 2023, they were 39% lower than last year. Additionally, the CPI inflation came in 10% lower than what Swedish Riksbank had forecasted.
The Swedish krona performed strongly during December, significantly appreciating against both the US Dollar and the Euro. Based on the Trade Weighted Index, the krona is now at its highest level since fall of 2022. A progressively stronger krona, although with some reservations, increases the likelihood of a rate cut in Q2 2024.
Even though there had not been too many macroeconomic events to impact overall market sentiment during Q4, various statements and significant geopolitical tensions have disrupted the calm.
The weak German economy and Europe
The German economy's performance has been adding pressure on the European Central Bank (ECB). Germany's economic growth was surpassing expectations, with its economy growing by 2.7% in 2023, significantly higher than the 1.8% forecasted earlier the same year. This robust growth was driven by strong domestic demand and a rebound in exports, especially to the United States and China. Additionally, Germany's labor market was showing resilience, with unemployment reaching a record low of 3.1%. However, this economic strength is also leading to inflationary pressures, with Germany's annual inflation rate hitting 6.3% by the end of 2023, the highest in over 40 years.
As a result, there were increasing calls for the ECB to revise its monetary policy stance. Some economists argued that the ECB should consider tightening its monetary policy to address inflation concerns. However, others caution against premature tightening, emphasising the need to support economic recovery amid ongoing global uncertainties. In the meantime, Germany's robust economic performance is expected to continue influencing the ECB's policy decisions and shaping the broader economic landscape in the Eurozone.
The Swedish property market 2023
In 2023, the transaction volume in the Swedish real estate market amounted to 90 billion SEK, marking a significant decrease of 60% compared to 2022.
In 2023, the transaction volume in the Swedish real estate market amounted to 90 billion SEK, marking a significant decrease of 60% compared to 2022. This decrease brought transaction volumes back to the same level as in 2013. Despite such decline, international investors continued to view Sweden as an attractive market with significant potential. For instance, Blackrock launched its new value-add fund, the BlackRock Europe Property Fund VI, to capitalise such window of opportunity and drive the future requirements, citing “the best real estate buying opportunity since 2008”, on their strategic focused markets in the Nordic countries, the UK, France, Germany and Spain, highlighting the appeal of the Swedish real estate market to international investors.
During 2023, the Swedish real estate stock market experienced significant fluctuations, with listed property companies witnessing their lowest share values of the year on 25th of October. However within two months, by 31st of December, the index had risen by approximately 47%, showcasing a notable recovery. Such volatility reflected the sensitivity to macroeconomics and central bank’s monetary policy, as well as the dynamic nature of the real estate sector to the market’s responsiveness to various investor sentiment.
Furthermore, M&A activities within the Swedish real estate sector are becoming increasingly relevant, as companies seek to enhance their market positions and optimise the capital efficiencies, indicating a growing trend towards consolidation in the industry.
