Nordic Outlook: Economic and financial trends

Denmark - Upswing facing challenges

Denmark‟s economy has begun to recover. The economy grew in H2 2009 – and we expect the pick-up to continue this year and next.

That said the recovery looks set to be weak and fragile and there is still some doubt whether it can develop into a full-blown upswing, as an actual upswing would include falling unemployment.

In our forecast we assume that the nascent upswing in Europe re-mains on track. There is, however, a risk of the European economy disappointing and if this happens the economic recovery in Denmark would be threatened.

The government is set to tighten fiscal policy over the next three years and we would endorse the move. While tightening should of course take the state of the economy into account, there is no guarantee that the economic situation will be more favourable in 2012 or 2013 – which suggests that the tightening should start soon, so that it is not too abrupt. Irrespective of when the economy is tightened, there is a risk of over-medication.

The housing market has turned – and we expect prices to rise during the forecast period – but the turnaround is being driven by unsus-tainably low interest rates, so the housing market may come under renewed pressure a few years down the line.

Unemployment has developed more benignly over recent months than we previously expected. We therefore now expect that unem-ployment will remain below 145,000.

Sweden - Waiting for the world to turn

The first few phases of the stabilisation process are nearing a close. Thanks to a never-before-witnessed stimuli from economic policy, the proverbial small open economy of Sweden, has managed to weather the global storm unexpectedly well.

But stabilisation policy can only help for so long. The Swedish econ-omy is in dire need of a decisive upturn on our main export markets. A global cyclical upswing is indeed our main scenario, but from a his-torical perspective the improvement is muted.

And this also raises the question of economic structures. To what extent is the downshift in demand structural? Can and will the Riks-bank identify such a shift and adjust its policy decisions accordingly? These questions are all near impossible to give a precise answer to, but we nonetheless have to attempt this in order to take the correct investment and allocation decisions.

Our Swedish GDP-forecast reflects the undoubtedly negative forces that the above questions pose. Together with a historically mild up-turn in global demand and a prolonged weak global investment cycle Swedish growth is estimated to be a meagre 1.5% y/y this year and a slightly more positive 2% y/y in 2011.

Still on a high level, the rise in the unemployment rate has been sur-prisingly mild given the shortfall in production and demand levels. This is nonetheless expected to imply a longer period of weak labour market developments. Weighing the different forces affecting the em-ployment and labour supply situation, we estimate that the unem-ployment rate will rise to 10.3% this year and remain at that level in 2011 as well.

Despite difficulties when estimating the potential of the economy, resource utilisation cannot be said to be anything but low at the cur-rent juncture, implying domestic, core, inflation measures will remain subdued for a long period. In addition, imported prices have been muted and inter alia our forecasts for the Swedish krona imply that import prices will continue on a low note. All in all, inflationary pres-sures are thus expected to recede over the forecast horizon.

For the Riksbank, this should eventually add up to a less disturbing inflation picture than it recently painted. Nonetheless, it has moved from a “crisis” policy stance to a more normal cyclical policy stance, which provides the Riksbank with quite a few degrees of freedom in setting rates up near-term.

However, this means that should developments continue to come in according to our forecasts, the Riksbank will have no choice but to revise its interest rate path dramatically down.

We expect the Riksbank to start hiking in September and to hike at each meeting going into 2011. Thereafter, the hikes will come at a considerably lower pace and by the end of 2012 reach a peak of 3%.

Norway - Weaker than expected

Despite an extremely stimulative economic policy, developments in the Norwegian economy have been weaker than expected since our previous quarterly report. Low interest rates and low unemployment have meant a significant increase in household disposable income. However, a sharp increase in the savings rate has helped keep consumption growth at sensible levels.

Developments in the industrial sector have been a particular disappointment. Stronger global growth and higher oil prices caused us to expect an upswing in industrial activity in Q1. A quite high level of activity to begin with could explain the delay – and we still believe that the order situation will improve as early as the current quarter.

Unemployment looks set to be lower than forecast. This is due to productivity growth being lower than normal and the supply of labour slowing more than expected. This indicates that ca-pacity utilisation in Norway is relatively high, which means eco-nomic policy makers will have limited room to manoeuvre in the next couple of years. Wage growth, on the other hand, looks set to be lower than forecast this year, and signals from the em-ployee side suggest a pronounced willingness for moderation in order to save threatened jobs. This spring‟s wage adjustment will be modest but improved profitability will increase the risk of higher wage drift.

Norges Bank revised down its interest rate projection by 0.3-0.6 percentage points in its March Monetary Policy Report. The downward revision was almost entirely due to NOK exchange rate considerations given the low interest rate expectations among Norway‟s neighbours. While we appreciate the good in-tentions, we are very sceptical about whether rates in Norway can be kept as low as in other Western countries.

Finland - Slow recovery in the bullpen

After an unprecedented 7.8% fall in GDP in 2009, we expect the economy to return to modest growth in 2010, as export markets have continued to recover and the outlook for domestic consumption has improved.

GDP is forecast to rise 1.5% in 2010 and 2.5% in 2011. So far signs of a recovery are tentative, but GDP has been remarkably stable since the second half of 2009.

The weak recovery will not create enough jobs and the unemploy-ment rate is projected to reach 10% in 2010, before moderating in 2011. Inflation is set to rise from zero in 2009 to over 1% in 2010.

The fiscal stimulus policy creates a wide budget deficit, but the trade balance should remain in surplus. Given the initially low level of state debt and the narrow spread compared with the German benchmark, Finland is expected to manage an orderly exit from its public deficit, although not in the forecast period 2010-11.