Sweden's Tenuous Economic Turnaround: Navigating Sectoral Shifts in a Stagnant Landscape

Sweden's economic recovery in 2025 has been a tale of two halves. After a 0.2% contraction in Q1 2025, the Nordic nation eked out a meager 0.1% GDP growth in Q2, far below the 1.2% forecast by the Riksbank. While this marks a technical rebound, the broader picture remains one of fragility. Investors must now dissect which sectors are poised to thrive in this environment and which are likely to falter under the weight of global trade risks and domestic headwinds.

The Export Conundrum: Strength in Uncertainty

Sweden's export-driven sectors—machinery, automotive, and defense—have historically been the backbone of its economy. In Q2 2025, these industries showed flickers of resilience. Foreign orders for Swedish manufacturing surged 19.7% year-on-year in March 2025, driven by pre-tariff export front-loading and a surge in defense spending linked to European rearmament. However, this optimism is tempered by the looming threat of U.S. tariffs, which could erode margins for firms like Volvo and Ericsson. The Swedish Export Credit Corporation has already warned of a potential 10% decline in U.S.-bound exports in 2025, a red flag for companies overly reliant on American markets.

Domestic Demand: A Mixed Bag

While exports offer some hope, domestic demand remains a drag. Private consumption, a key component of Sweden's GDP, has been sluggish, with households hoarding savings and wary of rising interest rates. The Riksbank's rate cut to 1.75% in Q2 2025 is a lifeline, but it may take time to translate into higher consumer spending. Fixed investment in construction and manufacturing has also declined, with capital outlays shrinking by double digits in Q2.

Yet, not all is bleak. The services sector, which includes healthcare, education, and professional services, has shown unexpected vigor. The June 2025 PMI for services hit 54.6, the highest in three years, with new orders and business volume surging. This suggests that sectors insulated from global trade volatility—like healthcare and green energy—are gaining traction.

Green Energy: The Bright Spot

Sweden's push for climate neutrality has created a green energy boom. Investments in battery production, green steel, and renewable energy infrastructure are not only policy-driven but also aligned with global demand for sustainable technologies. Companies like Northvolt and SSAB are attracting capital despite the broader economic slowdown. The government's fiscal stimulus—预留 SEK 110 billion for 2026–2029—further underlines the commitment to this sector.

However, investors must tread carefully. The green energy sector is capital-intensive and highly dependent on policy continuity. A shift in political priorities or a funding shortfall could derail progress.

The Investment Playbook

Given Sweden's fragile recovery, a sectoral pivot is warranted. Here's how to position your portfolio:

1. Export-Driven Firms: Proceed with Caution
   While defense and machinery exports are currently buoyant, the risk of U.S. tariffs and geopolitical fragmentation remains high. Investors should consider hedging exposure to these sectors or favoring companies with diversified markets. For example, Ericsson's recent pivot toward 5G infrastructure in Asia and the Middle East could mitigate U.S. trade risks.

2. Domestic-Focused Sectors: A Safe Bet
   Healthcare, consumer staples, and green energy are better insulated from global volatility. AstraZeneca and Essity, for instance, benefit from stable domestic demand and long-term demographic trends. Meanwhile, green energy firms like Northvolt could capitalize on Sweden's policy tailwinds.

3. Services Sector: The Hidden Gem
   The services PMI's upward trajectory signals untapped potential. Companies providing digital services, healthcare, or education are likely to outperform in a low-growth environment.

The Bottom Line

Sweden's economy is at a crossroads. The Riksbank's rate cuts and fiscal stimulus may provide short-term relief, but the path to a robust recovery hinges on global trade stability and a rebound in domestic demand. For investors, the key is to balance exposure to export-driven sectors with defensive plays in domestic-focused industries. While the road ahead is uncertain, those who adapt to Sweden's shifting economic landscape will find opportunities in its resilience.