Sweden: Recovery firms, geopolitical inflation risks rise
The Swedish economy started 2026 on a weak note but regained momentum in the second quarter. The labour market continued to recover gradually.
Inflation is currently below the 2% target, helped by a stronger krona and temporary tax cuts. Rising energy prices are, however, expected to lift inflation above target, leading the Riksbank to increase the policy rate to 2.00% by the end of 2026 and 2.25% in February 2027.
Baltics: Resilience holds as inflation diverges
All three Baltic economies recorded solid GDP growth in the first half of 2026, driven mainly by household consumption. Exports also contributed significantly to economic activity. However, manufacturers are likely to face growing competitiveness pressures. Given the strong first-half performance and early Q3 data, GDP growth in Estonia and Latvia could exceed the current forecasts of 2.0% and 2.3%, respectively. Growth in Lithuania is expected to moderate slightly as the consumption boost fades, averaging 3% in 2026.
Inflation has eased in both Estonia and Latvia compared with 2025, with the slowdown more pronounced in Estonia, where inflation fell to 1.5% in August, while it stood at 3.2% in Latvia. Inflation shot up to 6% in Lithuania, as the effects of pension withdrawals, higher excise taxes, and a sizeable minimum wage increase accumulated. Falling food prices this year are easing inflationary pressures across the Baltics. Higher energy prices will keep inflation elevated in Lithuania and push it higher in Estonia and Latvia this autumn.
Risk balance becomes less favourable
Growth risks remain tilted to the downside, while inflation and policy rate risks are tilted to the upside.
Escalating tensions in the Middle East, Ukrainian drone attacks on Russian oil refineries, stronger competition from Asia for natural gas, and low inventories have pushed energy prices higher. Moreover, supply disruptions could further weigh on economic activity and trigger renewed volatility in financial markets.
Higher import tariffs remain a risk, as the US trade investigations continue and EU-China trade tensions risk further escalation.
Sustainability: Progress nearly at a standstill
Countries have made only marginal progress on sustainable development. The Baltic states edged up slightly in the 2026 SDG Index, while scores for Sweden and the EU average declined. Overall, Sweden ranks 2nd, Estonia ranks 16th, Latvia 20th and Lithuania 26th.
Clean energy continues to advance, particularly in the Baltics. Nevertheless, dependence on fossil fuels in transport remains high across all three states, leaving them more exposed to energy price shocks, such as the war in the Middle East.
