Nordic Countries: A mixed picture at home and abroad – Danske Bank

Analysts at Danske Bank note that the recovery continues both in the world economy and in the Nordic countries and in the euro area especially, growth indicators have turned a little less upbeat recently, partly reflecting the weight of a stronger euro on businesses.

Key Quotes

“The risk of a trade war has increased, which is not good news for small open economies, even if the argument is mainly between the US and China. In Denmark, a range of indicators has turned out on the disappointing side. In Sweden, the decline in house prices looks as though it is continuing, which, in our view, will definitely hurt construction and might hurt consumers as well. Finland has revised the very strong 2017 growth numbers down a little but is otherwise continuing its robust recovery. Norway has few signs of weakness in its current cycle, especially as the housing market is looking more stable and more balanced.”

“We do not forecast big differences in headline GDP growth rates, which we expect to stick fairly close to 2%. In today’s world, this is above trend, also in the Nordic countries. However, the feeling could be quite different. Finland still has spare capacity to be activated by strong demand. Norway is closing the gap, as Denmark has also done. Economic discussions tend to be about risks related to overheating, such as a lack of qualified labour or economies too dependent on credit. In Sweden, the slowdown could shift the focus and there is a risk that growth could fall below potential, which would lead to a less welcoming labour market.”

“Different economies, different rate outlooks

Different economic circumstances are also reflected in different outlooks for inflation and interest rates. The contrast is especially clear between Sweden and Norway. The Norwegian economy is likely to produce increasing inflation, partly because a tighter labour market leads to higher wage growth and Norges Bank is likely to hike interest rates in September.

On the contrary, inflation in Sweden is already declining and we expect it to go lower, as temporary factors have kept price growth elevated recently. There is not enough wage growth in Sweden to support the current level of inflation. It seems that high economic growth and low unemployment are no longer directly leading to higher wage growth the way they did in the past, possibly because a long period of very low inflation has resulted in lower wage demands. This does not look likely to change, especially given the weaker growth we expect this year and next. In our view, this makes it likely that the Riksbank will have to postpone its plans for a rate hike this summer.”