Sweden defied its reputation as the sick man of Europe after the economy expanded more than expected at the start of year, with net exports and inventories helping offset a decline in private spending.

First-quarter gross domestic product in the biggest Nordic nation increased 0.6% from the previous three-month period, according to Statistics Sweden. That compares with a median estimate of 0.2% growth in a Bloomberg survey of economists, matching the pace indicated by a flash estimate.

The increase, which follows a 0.5% contraction in the final quarter of 2022, further improves the picture for an economy that has so far defied forecasts of a recession. Last week saw Swedish unemployment fall to the lowest level in seven months. The brighter data points come even as households and the housing market are being hit by higher prices and surging borrowing costs.

SEB AB Chief Strategist Olle Holmgren said the latest numbers will likely lead the Riksbank to adjust its estimate for an 0.7% contraction this year, and added that a firm labor market and a stronger economic development will make it easier for the central bank to increase interest rates at its next meeting, in June.

The benchmark rate has gone to 3.5% from zero in the space of 12 months, and the Riksbank said in April it expects to announce another hike, to 3.75%, in June or September. While high levels of household debt with mortgage rates fixed at short terms makes the Swedish economy sensitive to higher borrowing costs, the evidence so far suggests that it has been more resilient than expected.

Read More: Sweden Set for EU’s Worst 2023 Economic Slump, Commission Says

In the first quarter, inventory investments contributed 0.6 percentage points to GDP growth, while net exports added 0.3 percentage points, the office said. Household consumption, meanwhile, fell by 1.2%. As spending drops and investments in housing construction plummets, forecasters still believe that Sweden’s economic output will shrink this year. The European Commission projects that Sweden will undergo the worst contraction in the European Union.

Also on Tuesday, a survey from the National Institute of Economic Research indicated that Swedish households have become less gloomy in recent months, after its consumer confidence indicator fell to a record low last year. The survey also showed that businesses still see room to increase prices.

“All in all, today’s Swedish data support another rate hike in June,” Handelsbanken’s Chief Strategist Claes Mahlen said, noting the country’s economic resilience and “fairly high” price pressures.

“The weak krona is another factor but even excluding the currency, the data should tilt the Riksbank to a hike in June rather in September,” he added.

--With assistance from Joel Rinneby.

(Adds context and analyst comments throughout.)