Economic Snapshot for the Nordic Economies

May 2, 2019

Denmark

The economy appeared to ease in Q1 following a strong Q4 last year. In the first quarter, business confidence remained in the doldrums, which, coupled with softer credit growth in January and February, could have kept fixed investment depressed. Moreover, in January and February retail sales were muted, amid higher inflationary pressures and lower consumer confidence, which suggests modest private consumption despite a tight labor market. The manufacturing PMI also ebbed in Q1. In politics, the latest polls suggest the Social Democrats—headed by Mette Frederiksen—hold a commanding lead ahead of general elections which must be held by 17 June, and the center-left bloc is on course for a parliamentary majority. A center-left victory is unlikely to significantly change the current prudent fiscal stance and will likely have a minimal impact on growth prospects this year.

The economy should strengthen this year, driven by still-solid domestic demand amid a tight labor market and robust wage gains. Uncertainty regarding immigration policies following this year’s election, ongoing trade tensions, a global economic slowdown and Brexit uncertainty pose risks to growth.

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Finland

Finland likely recorded a slower economic expansion in the first quarter of this year. Annual economic growth moderated in February from January due to weaker momentum in both services and primary production. More positively, public finance data released in April showed the government’s fiscal deficit fell last year and represented the best fiscal reading since the 2008 financial crisis. Moreover, public debt as a percentage of GDP fell below 60% for the first time since 2013. Meanwhile, in the political arena, the Social Democrats narrowly came out on top in the 14 April general election, while the outgoing Centre Party, which generally favors less government spending than the Social Democrats, slumped to fourth place. As the election winners, the Social Democrats officially began coalition-building talks on 25 April.

The economy is seen slowing this year as government consumption growth moderates on fiscal consolidation efforts and fixed investment growth slows, partly due to a meek housing market. On the other hand, private consumption, fueled by a tighter labor market and cheap credit, should support growth.

Norway

Quarter-on-quarter economic growth appears to have decelerated in the first quarter of this year. New GDP estimates show both the total economy and mainland economy—which excludes hydrocarbon extraction activity and related transport—shrank in February from the previous month. This comes after modest growth for both economic groupings in January. Weighing on the economy was a wobbly industrial sector: Industrial output declined month-on-month in February for the fourth consecutive month. In addition, customs data reveals the merchandise trade deficit widened in Q1 over the previous quarter. More positively, the unemployment rate remained low in January, meaning household incomes likely continued to benefit from a tight labor market in Q1.

The economy should gain momentum this year. Greater investment in the hydrocarbon industry should drive growth, while a healthy labor market and lower corporate tax rates will also brighten prospects. However, tighter monetary policy, a slowdown in Europe and global trade tensions all cloud the economic outlook.

Sweden

The economy likely grew at a softer pace in the first quarter of this year, following the fourth quarter’s robust showing. Industrial production was subdued in January and February, while the manufacturing PMI was broadly stable in March, but rounded out a weaker average reading for the quarter. Meanwhile, the services sector appears to have lost momentum at the end of Q1, as reflected in a fall in the services PMI. Nevertheless, retail sales were upbeat in January and February, supported by low unemployment. Turning to Q2, leading data shows consumer confidence remained downbeat in April. In other news, on 10 April the Ministry of Finance announced amendments to this year’s budget. The reforms totaled SEK 4.5 billion in additional expenditure and included new commitments to tackle climate change, reduce employer tax contributions and hire more teaching assistants in schools.

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

Iceland

The economy appears to have taken a hit in the first quarter, reflecting a poor performance in the key sectors of fishing and tourism. The total fish catch nosedived through the quarter as vessels failed to find any capelin, one of the industry’s primary exports by volume. Turning to tourism, data shows a slight decline in overnight stays in January and February, while March traffic data for the island’s main airport corroborates a slowdown in the sector in the quarter. Moreover, the tourism sector’s woes will likely be amplified, in Q2 and beyond, by the recent collapse of low-cost airline WOW Air on 28 March. The Central Bank said the collapse will likely dent economic growth noticeably, though it does not pose a serious risk to financial stability.

Economic growth is expected to slow markedly this year as the country’s tourism boom fades, which will likely weigh particularly on residential investment and the construction sector. Furthermore, a marked slowdown in the Eurozone, Iceland’s main trade partner, remains a principal downside risk to the outlook.

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