(Bloomberg) -- Sweden’s economy fared worse in the final quarter of last year than seen previously, upending a narrative in which the biggest Nordic nation had escaped a short-lived recession.

Seasonally adjusted gross domestic product shrank by 0.1% in the three months through December, compared with the third quarter, according to figures published by Statistics Sweden on Thursday. The median estimate of economists surveyed by Bloomberg was for 0.1% growth, in line with a flash estimate published last month. The drop marks the third consecutive quarter of contraction.

“The Swedish economy developed on a weak note,” Swedbank AB’s economist Pernilla Johansson said in a note to clients. “We expect growth to remain subdued in the first half of this year, before falling inflation, rising real incomes and lower interest rates contribute to a rapid recovery in the Swedish economy in 2025.”

The largest Nordic economy has been one of the hardest hit in western Europe by rising borrowing costs, as many households have large debts with interest rates fixed on short terms. That has led to lower spending at the same time as home prices have slumped and housing construction has plunged. The weak domestic demand is partly offset by the country’s export sector, which is benefiting from a weaker krona.

What Bloomberg Economics Says...

“Sweden’s 2023 recession is not as bad as feared but the Riksbank will not necessarily read this milder downturn as a risk to the inflation outlook. Underlying dynamics show investment still struggled in the final quarter of the year. More pain is in store for 2024 with a sluggish overall performance of 0.4% annual GDP growth.”

— Selva Bahar Baziki, economist

The krona rose somewhat after the news, later giving up the gains to trade at 11.2075 versus the euro at 9:30 a.m. in Stockholm. The central bank has said it could lower borrowing costs as soon as in the first half of this year, following an 18-month tightening campaign that saw its benchmark rate rise to 4% from zero.

The statistics office cited reduced investments in intellectual property products and in dwellings as well as increased service imports as the main reasons behind the decline, which contributed to a full-year economic contraction of 0.2%. Still, household consumption expenditure increased at the end of the year for the first time in six quarters. 

Sweden’s development was mirrored by neighboring Finland, which also revised down its earlier estimate for the fourth quarter, to a 0.7% contraction. The change highlights the mixed fortunes of the Nordic economies at the end of the year, with output expanding in Norway and Denmark, helped by their respective fossil fuel and pharmaceuticals industries.

Read More: Finland’s 4Q Economic Contraction Deeper as Recession Takes Hold

--With assistance from Joel Rinneby and Niclas Rolander.

(Adds comments from analysts, krona reaction from third paragraph.)

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