Leading economic indicators suggest that the world economy is facing a very uncertain period. Activity has slowed sharply in both the US and the Euro area, and our baseline scenario now factors in low growth in the "old world" over most of the forecast period (now up to and including 2013). It must be emphasised that the risk of a new, but shallow recession in both regions is quite high.
There are, however, still signs of high economic growth in the increasingly important Emerging Markets. Therefore we are not in the middle of a horror déjà vu from the Great Recession, but "merely" undergoing an extended period of low growth in the "old world" countries. The Nordics have peaked. The Nordic economies can still boast solid public finances. However, the growth engines are running out of steam amid the international slowdown.
After vigorous growth in H1 2011 the Swedish economy is losing steam. Economic growth will be sluggish in 2012 as a result of the global slowdown. Export growth has already been affected and the recent fall in the stock market and a weaker labour market will hamper consumption in 2012. Investment is also affected by the financial unrest and will grow slowly next year. Public finances are balanced and will even improve slightly despite weak growth. Inflation is in line with the 2% target. Financial unrest will keep the Riksbank on hold this year. A deteriorating labour market will result in a lowering of the repo rate in 2012. Though the outlook for the Norwegian economy has weakened there is reason to believe that Norway will be less hit than many other countries. Oil companies will increase investment activity sharply both in Norway and abroad. With low unemployment and decent wage growth, consumption growth will keep up, although the turmoil and stock market slide could dampen the pace. Given unchanged interest rates among Norway's trading partners, Norges Bank will only hike interest rates gradually and slowly, but still hike rates more than in other countries. Combined with the very strong public finances, this will help keep the NOK strong.
The Danish economy is still feeling the aftermath of the downturn in the housing market and the Great Recession. Economic improvement since the end of 2009 has not been convincing and Denmark is again in a technical recession. Domestic demand growth has been lacklustre and many factors of uncertainty are at play, including the outcome of the upcoming parliamentary election and international economic trends. Against this background, we have revised down our growth forecast for both 2011 and 2012. In both years we now expect economic growth to be just around 1%. But growth will accelerate during the period, rising to 1.5% in 2013. The economic outlook in Finland has turned gloomier. Exports are going to be much weaker than expected earlier and companies are thus likely to postpone investment projects. A fall in consumer confidence puts brakes on both private consumption and housing investment. We have almost halved our GDP growth forecast for 2012 from 3% to 1.6%. With such modest growth, employment hardly improves, and the new government will be forced to strike a balance between growth stimulating and public deficit narrowing policy actions. The outlook for 2013 is brighter, following that of key export markets, and total production is expected to increase by 2.7%.
The full report is available on www.nordea.com.
For further information: Helge J. Pedersen, Global Chief Economist, + 45 33 33 31 26