Nordea chief economist: Soft landing likely, but risks remain

After some turbulent years, the global economy seems to be moving into a more stable period, where inflation again will fall into place at around 2% and monetary policy will normalise. The current activity indicators suggest that the moderate growth that characterised the global economy last year has continued into 2024. The US economy is steaming ahead, China is growing as expected, whereas the Euro area is still struggling to shift into a higher gear after the energy shock, the downturn in the manufacturing sector and the significant monetary policy tightening.

While the large economies have developed very differently over the past few years, the outlook has now also improved for Europe. Despite the weak economic trend, Euro area unemployment is record low. Coupled with significant real wage increases and prospects of lower interest rates, this paves the way for a consumer-driven upswing towards the end of the year. 

While the service sector so far has been favoured by consumers, much suggests that the manufacturing sector will now also join the upswing. This is, among other things, because the inventory reduction, which has resulted in thin order books at many companies, now seems to be coming to an end. This will also help global trade to come out of the doldrums after a long period.  Against this backdrop, we estimate that this year, global economic growth will be around 3%, or largely the same level as last year. Also, in 2025, we expect global growth above 3%. This is slightly higher than we expected in January. 

Although economic data indicate that the likelihood of a soft landing for the global economy has risen since our January forecast, there is still reason to be cautious. This is not least owing to the drastically deteriorated geopolitical situation after the escalation of the Middle East conflict as well as Russia’s aggression towards Ukraine, which does not seem to be likely to end any time soon. Both conflicts could lead to new supply chain disruptions and fuel inflation. Freight rates have already risen after the attacks on international shipping in the Red Sea, but the situation will become far more serious if energy prices are hit by large increases as well. 

A more concrete risk that it will be difficult to curb inflation entirely is related to the currently high wage growth. This is something central banks are obviously monitoring closely and one of the main reasons why the US Federal Reserve will hardly loosen monetary policy to the extent expected by financial markets. The trend in the pace of wage growth is also at the top of the agenda at the monetary policy meetings at the ECB and may, if it does not fall enough, imply that the ECB will be more cautious with cutting rates than otherwise expected. 

The soft landing is thus not without challenges for central banks. And perhaps the strong labour markets and the general resilience of the economies to significant monetary policy tightening imply that the level of the (activity-) neutral rate needs to be reconsidered. During the many years with very low inflation, the perception was that the monetary policy rate adjusted for inflation expectations was close to or maybe even below zero in the Euro area and only slightly higher in the US. Now much suggests that the level may be a whole percentage point higher or even more due to strong labour markets, almost chronically large public budget deficits and the massive need for investment in the green and digital transitions as well as the defence industry. In practice, this means that the zero interest rate regime is a thing of the past. Only if the global economy is hit by a new large crisis and/or we get a period with deflation could interest rates fall to such low levels again. 

The expected growth in global trade will also benefit the small open Nordic economies, although the trade climate in general has deteriorated sharply since the golden years during the globalisation. For one thing, this is because China has become increasingly self-sufficient and many countries have become more protectionist than they were before the financial crisis. Finally, the new geopolitical reality implies that going forward, trade and investment activities will to a greater extent take place between political allies to ensure security of supply. In this respect, it is remarkable that both Danish and Swedish exports have performed exceedingly well in recent years. This is not least thanks to competitive service sectors and, for Denmark, the sensational trend in the pharmaceutical industry’s export performance. 

This performance has also been the main reason that the Danish economy generally has seen high growth since the pandemic. Also, the Norwegian economy is seeing solid growth, and much indicates that the Swedish economy has bottomed out after a couple of difficult years which especially hit construction and the property sector hard. Finland is currently facing the largest growth challenges in the Nordic countries. 

However, all the Nordic countries do seem to be getting inflation under control and have prospects for lower interest rates. So, in that respect, more normal times are also coming in the Nordic countries, although the new geopolitical reality with a much greater focus on security will surely influence the future.

This article first appeared in the Nordea Economic Outlook: Falling into place, published on 24 April 2024. Read more from the latest Nordea Economic Outlook.