Economic Snapshot for the Nordic Economies

June 26, 2019

Growth in the Nordic Economies to stabilize in 2019

Economic growth in the region will stabilize this year, amid slowing global economic momentum, especially in the Euro area, and rising trade tensions. That said, economic dynamics will differ across the region: While growth is projected to slow in Iceland and Sweden, the Danish and Norwegian economies are seen strengthening. Growth in Finland will be stable.  

Denmark Economic Outlook

Growth slowed in the first quarter due to a weaker external sector and a contraction in public spending. However, private consumption was solid, buoyed by a surge in vehicle sales, and fixed investment rebounded firmly. Turning to Q2, momentum has likely picked up slightly. In April, annual retail sales growth hit a five-month high, which, coupled with a pick-up in annual private sector credit growth, likely propelled domestic demand. Moreover, an extremely tight labor market in April, a solid pick-up in consumer confidence in Q2 and tepid price pressures further suggest the domestic economy will likely drive growth in the second quarter—amid an uncertain external environment. In politics, the Social Democrat Party won parliamentary elections on 5 June. While forming a stable government could be difficult, the impact on growth should be negligible irrespective. 

The economy is likely to pick up pace this year, driven by solid fundamentals, a strong labor market and robust wage gains. Uncertainty regarding domestic immigration policy, trade tensions, a global economic slowdown and Brexit pose risks to growth.

FocusEconomics analysts expect growth of 1.8% in 2019, which is up 0.1 percentage points from last month’s forecast, and 1.5% in 2020.

See the Full FocusEconomics Nordic Economies Report

Finland Economic Outlook

Quarter-on-quarter economic growth accelerated in Q1 according to a comprehensive GDP release, matching the initial estimate and up from Q4’s reading. The acceleration was due to a sharp increase in government consumption and a large growth contribution from the external sector on higher exports and lower imports. Turning to Q2, economic activity rose annually in April at the fastest pace since March 2018; however, the unemployment rate ticked up. In politics, the Social Democrats recently formed a majority coalition government with the Center Party, the Green Party, the Left Alliance and the Swedish People’s Party. The government pledged to raise public spending by EUR 1.2 billion every year and spend EUR 3 billion in one-off investments over the next four years in a bid to make Finland a carbon neutral country by 2035; extra spending is to be financed by fossil fuel taxes and state asset selloffs.

The economy is set to remain broadly stable this year. Modest public spending growth, despite the government’s spending pledges, and feeble fixed investment are expected to weigh on momentum, while a solid external sector should support growth. 

FocusEconomics panelists expect GDP growth of 1.7% in 2019, which is unchanged from last month’s forecast, and 1.4% in 2020.

Norway Economic Outlook

The economy expanded at a solid month-on-month pace in April, matching the expansion in March. Higher fixed investment again supported the expansion, while industrial production increased in April for the first time in six months. Reinforcing this positive picture, Norges Bank released a quarterly survey of businesses in June that indicated stronger economic growth over the next six months than had been expected in March. It also noted strong growth over the past few months, particularly on the back of higher oil investment, purchases of technology-related services and large-scale public investment, while the labor market has remained tight. Also in June, the IMF said that government spending is likely to be “mildly expansionary” this year and called for a “modest consolidation” next year to minimize risks of overheating.

Economic growth should pick up this year on greater investment in the hydrocarbon sector, while higher wages, government spending and lower corporate tax rates should also provide a boost. However, tighter monetary policy, a slowdown across Europe, Brexit uncertainty and fraught global trade could all weigh on the outlook.

FocusEconomics Consensus Forecast panelists see total GDP expanding 1.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.0% in 2020. In terms of mainland GDP, our panelists see growth of 2.4% in 2019, which is unchanged from last month’s projection, and 1.9% in 2020.

Sweden Economic Outlook

The economy hit a soft patch in the first quarter. Sluggish domestic demand in Q1 was the result of a downturn in private consumption and a dip in fixed investment, weighed on by weaker residential investment. Spending by consumers and businesses were likely both hampered by concerns over the weak housing market. Available data for Q2 suggests the economy likely remained weak. Consumer confidence was entrenched in pessimistic territory in May and June, although retail sales increased in April. More positively, the industrial sector appears to have stabilized in the second quarter: Industrial production rebounded in April on recovering manufacturing output, while operating conditions in the manufacturing sector improved at a faster clip in May, thanks to rising new orders. Moreover, a weaker krona throughout the quarter bodes well for export-oriented sectors.

Growth seems set to decelerate this year owing to weakening domestic demand and mounting headwinds to the external sector. Particularly, waning momentum in the Euro area and heightened trade tensions appear poised to dampen exports and fixed investment. Nonetheless, solid household spending, supported by a healthy labor market, should buttress the economy. 

FocusEconomics panelists see GDP rising 1.7% in 2019, which is up 0.1 percentage points from last month’s forecast, and 1.6% in 2020.

Iceland Economic Outlook

Economic momentum slowed considerably in Q1 2019, with year-on-year growth more than half that of Q4 2018’s. The slowdown came in good part on the back of a sharp contraction in business investment, resulting largely from lower sales of ships and aircrafts, which was likely affected by WOW Air’s bankruptcy. Meanwhile, private consumption slowed, while government spending growth was broadly stable. On the flipside, both exports and residential investment rebounded from Q4’s contraction, with the latter reaching a record high. Nevertheless, the picture looks set to deteriorate again in Q2 amid a further collapse in tourism and fishing. Airport traffic fell by about a quarter in April and May, weighing on overnight stays, while fish catch volume contracted in the same period.

The economic outlook appears bleak this year. An expected severe downturn in tourism—exacerbated by WOW Air’s bankruptcy—will hamper investment, exports and employment, while also weighing on the krona. Brexit uncertainty and a slowdown in the Euro area present further downside risks.

FocusEconomics panelists expect GDP to rise 0.6% in 2019, which is down 0.7 percentage point from last month’s forecast, and 2.2% in 2020.

Nordic Economies Financial & Monetary Sector News

Regional inflation decelerated to 1.8% in May from 2.0% in April. Inflationary pressures weakened in Denmark, Finland and Norway, and intensified in Iceland and Sweden. Inflation in the region should be stable this year compared to 2018 as generally stronger currencies and modest growth tame upward pressure from rising wages.

The standout news this month was Norges Bank’s decision to hike the sight deposit rate to 1.25% from 1.00% on 19 June in a bid to keep inflation close to target. Meanwhile, Iceland’s Central Bank governor said on 19 June that the institution was ready to cut rates again if necessary. On balance, interest rates are seen rising towards the end of the year across the region.

The Norwegian and Swedish currencies strengthened slightly in recent weeks on positive economic data. The Icelandic currency, meanwhile, weakened in the wake of the country’s subdued growth momentum. Overall, the Icelandic and Swedish currencies will depreciate this year compared to 2018, while the Norwegian krona is set to strengthen.

See the Full FocusEconomics Nordic Economies Report