Nordic outlook: More growth, new risks

Recent political events have not made the world easier to navigate for businesses, investors and other decision-makers. It is hard to know how we will be affected when Donald Trump's administration seeks to live up to what appears to be contradicting economic policy goals. There are signs of escalation in Russia's war against Ukraine, the situation in the Middle East remains very tense and the political conflict between China and several other countries, especially the US, might well worsen. In Europe, the collapse of the German government could be the latest sign that political polarisation is making it difficult to form coalitions with the strength to address structural economic problems.

These are all important problems, but it is also important to not only focus on uncertainties and complications. Many economies, including the Nordic countries, stand to benefit from increasing spending power among households and lower interest rates, which should gradually support demand. The short-term outlook in China is also for higher demand growth as authorities work to support both the housing market and consumer demand, even if they might not succeed completely. Even with all the political conflicts over trade, that should also benefit industrial exporters in Europe.

We do not forecast strong recoveries in the Nordics and the euro area, as these economies have not really been in a crisis to recover from. Instead, our outlook is for what could be called normal growth, with normalisation also in unemployment, inflation and interest rates. When interest rates have been cut in the past, it has often been in response to a crisis in demand resulting in high unemployment and other signs of spare capacity. This time, the rate cuts are in response to the fact that the inflation problem, which they were raised to address, is more or less gone.

What exactly this normal growth level is, however, is more uncertain than usual. Recently, we have seen strong growth in the US economy at the same time as pressure has been easing in the labour market. In the euro area, it has been the other way around with very weak productivity growth. Some of this is no doubt due to cyclical factors, but we and many others are increasingly worried that the structural growth level in Europe could be very low in the years ahead, at least until we see reforms and investments that can boost productivity - not easy when there is also an urgent demand for much more defence investment. In the US, one big question mark for underlying growth is what the new administration will do to the work force.

Another potentially disruptive new policy is higher tariffs on US imports. We would not expect them to have much impact on growth in either the US or other countries in the short run. If the tariffs are matched by reductions in other taxes, US and global demand will still be roughly the same, and price mechanisms - such as a stronger USD, as we have already seen - should come into play to allow US imports to continue. The same applies to the retaliatory measures we would likely see from other countries. However, tariffs, trade wars and distortions will likely undermine potential growth in all countries, as well as add to the uncertainty and unpredictability that is already plaguing businesses everywhere.

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