Nordic Outlook: Growth remains strong, but cannot resist the slowdown in Europe forever

At a glance

A darkening outlook

Since our last Nordic Outlook, the global economic situation has taken a turn for the worse. Manufacturing seems to be in a global recession, with Germany especially hard hit. The trade war between China and the US no longer looks likely to be resolved soon, and that is affecting global investments. The Nordic countries have held up remarkably well, but weaknesses are beginning to show, and it looks like the best part of the recovery is behind us or soon will be, even in Norway which remains supported by strong growth in oil investment.

That does not mean that we are facing an economic crisis in the Nordic countries. We still forecast growth not too far from the economies' potential, with Sweden as the most troubling case. We have had a period of strong growth and rising employment across the Nordics and it is natural for that to come to an end. But the risk is that a natural slowdown turns into something worse. That risk is not equal across the Nordic countries. A crisis looks highly unlikely in Norway, whereas Sweden is at risk not just from the global slowdown, but also from a sharp decline in domestic spending growth, especially within housing investment.

If it becomes necessary, the Nordics are well placed to react to signs of crisis. Again Norway is ahead, with both ample room to loosen fiscal policy and as one of the few countries in Europe that has the option of cutting interest rates substantially – although in our main scenario, it looks more likely that rates will be hiked. Also Sweden and Denmark have very sound public finances and can easily afford to mitigate a crisis. According to the thinking in the European Central Bank, they should probably ease fiscal policy even in the absence of a crisis to take the pressure off monetary policy, but that is not on the agenda of either government. Finland's position is a little more difficult, as public finances are less strong and face strong structural headwinds in the future.

Brexit is a further risk

Trade war tensions are mostly between China and the US, with limited direct effect on the Nordics, although sectors such as Danish shipping are clearly affected. If the US starts to target Europe, Nordic producers would also be affected, for instance as part of the European car industry. A disorderly Brexit would create problems closer to home and affect many Nordic companies directly. If it triggers a short-term recession, this would be felt in the rest of Europe. In terms of direct effects, Nordic exporters would be likely to face tariffs on some on their UK exports and all Nordic countries have a surplus against the UK in goods (but a deficit in services). Norway has the most exports, but 80% of this is oil and gas, which face only 2.5% tariffs under rules and on which the UK government intends to impose no tariffs in the event of a no-deal Brexit. Denmark's substantial food exports would have to deal with more significant tariffs and would also face increased competition from non-EU producers. However, the total value of agricultural exports to the UK is only 0.5% of Danish GDP. The UK is not as important as it once was to the Nordics and we do not expect a major economic impact beyond the immediate effect.

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