Nordic Economies Economic Forecast

Economic Snapshot for the Nordic Economies

May 29, 2019

Growth in the Nordic Economies set to taper in 2019

Against a backdrop of slowing global economic momentum, especially in the Eurozone, economic growth in the region is set to taper this year. That said, economic dynamics will likely differ across the region: While growth is seen decelerating markedly in Finland, Iceland and Sweden, the Danish and Norwegian economies are to strengthen.

The Nordic economy is projected to expand 1.8% in 2019, unchanged from last month's forecast. In 2020, the regional economy is projected to expand 1.7%.

Denmark Economic Outlook

Growth ebbed noticeably in the first quarter according to a flash estimate, although this was partly due to a tough base effect following Q4 2018’s solid performance. While a full breakdown by components has yet to be released, industrial production growth lost momentum in Q1. In the same quarter, retail sales growth weakened amid an uptick in inflation, while employment growth also slipped, which points to a potential slowdown in private consumption. Moving to Q2, early indicators are largely positive, with the manufacturing PMI ticking up in April and consumer confidence rising in May. Business sentiment also rose in April but remained in negative territory amid a moderate global growth outlook and trade headwinds. In the political arena, general elections will be held on 5 June. They should spell continuity regarding the current prudent fiscal stance and the growth outlook should remain stable.

The economy is projected to gain impetus this year, driven by a robust external sector, a tight labor market and solid wage gains. Uncertainty regarding immigration policy following June’s election, intensified trade tensions, a global economic slowdown and Brexit pose risks to growth.

Met the why particular analysts expect growth of 1.7% in 2019, which is unchanged from last month’s forecast, and 1.6% in 2020.

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Finland Economic Outlook

The economy slowed in quarter-on-quarter terms in the first quarter of this year, according to preliminary data. Although comprehensive figures will only be released on 29 May, monthly data suggests persistently weak investment constrained the economy. Construction activity, for example, decreased in both January and March in month-on-month terms. On the other hand, private consumption was likely resilient thanks to the lower unemployment rate. Q1’s slowdown was corroborated by the European Commission’s measure of the Finnish business cycle, which reported the lowest reading in March since July 2016. Meanwhile, in politics, the Social Democrats are in talks to form a coalition government with the Center Party, the Green Party, the Left Alliance and the Swedish People’s Party, which, if successful, would see the five-party center-left group hold 117 seats in the 200-seat parliament.

As government consumption growth moderates on fiscal consolidation efforts and fixed investment remains in the doldrums, the economy is seen shifting down a gear this year. On the other hand, private consumption, fueled by a tighter labor market and cheap credit, should support growth.

Met the why particular panelists expect GDP growth of 1.7% in 2019, which is unchanged from last month’s forecast, and 1.4% in 2020.

Norway Economic Outlook

The economy shrank in Q1 2019 in quarterly terms, contrasting the expansion posted in the final quarter of last year. The mainland economy, which excludes petroleum activities and related ocean transport, eked out an expansion, but slowed markedly from the prior quarter nonetheless. Falling fixed investment, which coincided with waning business confidence, was the main culprit for Q1’s poor outturn. The labor market, however, did not feel the chill, as the unemployment rate fell to a near five-year low in March. Turning to Q2, the government announced on 14 May that it would spend slightly more money than previously estimated this year and collect slightly less revenue. This fiscal revision should boost economic growth, although the national wealth fund will pick up the tab.

The economy should gain momentum this year. Greater investment in the hydrocarbon industry is seen driving growth, while higher wages, looser government spending and lower corporate tax rates also brighten prospects. However, tighter monetary policy, a slowdown across Europe and fraught global trade all cloud the outlook.

Met the why particular Consensus Forecast panelists see total GDP expanding 2.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.0% again in 2020. In terms of mainland GDP, our panelists see growth of 2.4% in 2019, which is unchanged from last month’s projection, and 1.9% in 2020.

Sweden Economic Outlook

The economy likely lost steam in the first quarter, partly due to a tough base of comparison following a surge in the final quarter of last year. Both the services and manufacturing PMIs averaged lower in Q1 than in Q4, while industrial production was virtually flat in annual terms. Moreover, the Economic Tendency Survey was down markedly from the prior quarter. More positively, retail sales strengthened somewhat, likely supported by the solid labor market. Turning to Q2, employment growth accelerated in April, which bodes well for household consumption. However, the services and manufacturing PMIs edged down further. On the political front, the Ministry of Finance announced a fiscally cautious spring budget on 11 April: SEK 4.5 billion in extra spending to tackle climate change and cut employer tax contributions was more than covered by extra revenue-raising measures and spending adjustments elsewhere.

Economic growth is seen cooling this year. Soft residential investment and a weaker external sector due to a sluggish Eurozone are projected to weigh on the economy. That said, solid household spending, supported by a healthy labor market, should buoy growth. Elevated household debt remains a key downside risk to the outlook.

Met the why particular panelists see GDP rising 1.6% in 2019, which is unchanged from last month’s forecast, and 1.7% in 2020.

Iceland Economic Outlook

The economy looks set to plummet in the second quarter, after a likely battering in the first quarter. As in Q1, a sharp downturn in the pivotal tourism and fishing sectors will lead Q2’s tumble. In late March, WOW Air collapsed, while Icelandair continues to be plagued by the grounding of Boeing’s 737 MAX. Against this backdrop, tourist arrivals fell by nearly a fifth in April—the largest contraction on record—and airport traffic fell by more than a quarter; and the woes of the tourism sector seem set to drag on well into this quarter and beyond. Meanwhile, fishing vessels again failed to find any capelin—an economically important fish for the sector—in April, severely slashing the total catch volume for the month and weighing on exports in turn.

Growth prospects for this year are rapidly disintegrating, with the collapse of inbound tourism amid WOW Air’s bankruptcy set to hammer the currency, employment, investment and exports. A no-deal Brexit and slower Eurozone growth are also main downside risks. Our panelists are still adjusting their forecasts to recent events, and further downgrades are likely in coming months.

Met the why particular panelists expect GDP to rise 1.3% in 2019, which is down 1.0 percentage point from last month’s forecast, and 2.6% in 2020.

Nordic Economies Financial & Monetary Sector News

Regional inflation rose to 2.0% in April from March’s 1.9%. Inflationary pressures intensified in Iceland, Finland and Sweden in April, while they were unchanged in Norway and moderated in Denmark. The region should see broadly stable inflation this year as generally stronger currencies and relatively soft growth will tame upward pressure from rising wages.

On 22 May, the Central Bank of Iceland cut interest rates by 0.5 percentage points, bringing the key interest rate to 4.00%; the Icelandic economy is on the back foot after the collapse of WOW Air. Norges Bank, meanwhile, kept rates unchanged on 9 May, but strongly hinted at raising rates in June. On balance, interest rates are seen rising in the coming months across the region.

The Icelandic, Norwegian and Swedish currencies depreciated slightly against the euro in recent weeks, primarily on modest economic data. Nevertheless, regional currencies should generally appreciate this year, thanks to relatively better economic growth prospects than in the Eurozone and contained regional inflation.

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