This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Helge J. Pedersen, global chief economist for Nordea gives his outlook for the Nordic region.
The Nordic countries are still at various stages in the economic cycle. Norway and Sweden are well under way, while Denmark is only slowly ascending from the bottom.Finland is hit by a renewed risk of ending up in a protracted economic recession.
The Scandinavian countries can still boast large surpluses on the external balances and healthy public finances. This illustrates that the Scandinavian countries are readyto step in as safe havens in the financial markets whenever it might be needed.
In Sweden strongly accelerating domestic demand is one of the main growth drivers this year. Although economic policy is very expansionary, unemployment is still relatively high and inflation far below the Riksbank’s target. This paves the way for the bank lowering rates one more time this year to 0.5%, which marks the bottom of the current easing cycle.
The Norwegian economy has so far this year been stronger than initially assumed. Notably the housing market seems to be gaining traction after a brief period of price declines towards the end of 2013, aided by the banks’ easier credit standards and lower lending rates.
However, we still look for a slight slowdown during the forecast horizon notably as a consequence of a decline in overall investment activity.
In Denmark the government has continued its reform and growth-oriented economic policy line. And the housing market finally shows signs of moderate improvement, although there are still considerable regional differences. Employment is rising again and domestic demand looks set to revive from recent years’ slumber during the forecast period.
Finland has found it very difficult to shake off the financial crisis. Following recent years’ steep declines in economic activity, the downturn continued this year. One of the chief reasons is the slowdown in the Russian economy and its severe impact on exports and cross-border shopping. However, in step with the international recovery, prospects will also brighten for Finland. Small open economies such as the Nordic countries are very reliant on international economic trends. Our latest March forecasts envisaged milder winds blowing from this front in the years to come, benefiting the Nordic countries’ export sectors. This is still our baseline scenario, but as growth in the global economy was considerably weaker in Q1 than we projected in March, we have downgraded our 2014 growth estimate for the world economy to 3.5% this year versus 3.7% in March, whereas we reiterate our 2015 growth estimate of 3.9%.
Hard Winter Hit the US
The downward revision for 2014 is mainly due to a weak Q1 in the US not least due to the hard winter. And although we maintain an overall positive view on the world’s largest economy, we have lowered our 2014 growth forecast quite significantly. Economic trends so far this year in China and the Euro area have also disappointed, but we stick to our March forecasts for these two economies. One of the reasons for leaving our forecast for China unchanged is that the government launched a growth package as early as in April. For the Euro area the reasons are further monetary policy easing and generally improved confidence indicators for both households and businesses.
Persistent Risks and Low Interest Rates
We should point out that we still see the biggest risks for growth on the downside. The conflict between Ukraine and Russia is still the source of strong geopolitical risks.
Moreover, it is still uncertain to which extent the generally improved confidence indicators will lead to rising demand. Lastly, we still see a major risk of the current slowdown in the emerging economies spilling over to the “old world”.
Given the fragile growth in the world economy and the low inflation, monetary policy will remain lenient for a long time to come. Particularly the Euro area can look forward to a long period of ultra-low interest rates and massive liquidity infusion to avoid an unintended tightening of monetary conditions, while monetary policy in the US where economic trends are more favourable will gradually be tightened from early next year.
Against this background, we expect a general weakening of the euro, which will contribute to boosting competitiveness in Finland and Denmark. On the other hand, the NOK and the SEK will stabilise or even firm again following their sharp weakening when the need for safe havens eased as the financial markets started to emerge from the grip of the euro crisis.
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