Nordic Economies Economic Outlook August 2018

Nordic Economies: Economic Snapshot for the Nordic Economies

July 29, 2018


Data from the second quarter suggests that GDP growth picked up in year-on-year terms from the previous quarter’s weak performance, but it likely remained mediocre due to mounting external headwinds. Consumer confidence improved throughout the quarter, reaching an over three-year high in June. Growing confidence among consumers largely reflects higher wages and a strengthening labor market, with the unemployment rate at a multi-year low in May. In addition, business confidence moved back into positive territory in Q2 following several negative readings in Q1. However, the three-month average of the manufacturing PMI in the second quarter was significantly below the average recorded in the first quarter, largely due to declining new orders. A drop in new orders is indicative of weaker overseas demand and could hurt not only exports growth but also manufacturing activity in the second half of the year

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The economy seems to have shrugged off its weak start to the second quarter, as indicated by the latest economic data. Economic activity gained traction in May, boosted by accelerating growth in services activity. Moreover, the labor market improved as the unemployment rate ticked down in May to the lowest level in over six years. Rising wages, solid retail sales in May and elevated consumer confidence in June point to solid private consumption growth in Q2. Weakness lingered, however, in the external sector, which appears to be losing some of its impetus. The current account balance registered a third consecutive deficit in May. Moreover, export growth declined in May, albeit partly due to a base effect from strong shipments in May 2017.


Latest indicators suggest that the economy grew at a good pace in Q2, following a weak start to the year. Retail sales in May grew at the fastest pace since December 2017 amid a tight labor market and high wage growth. Moreover, data suggests that house prices bottomed out at the beginning of 2018 and are slowly recovering, as evidenced by price increases in Q2. The recovery in house prices has been supported by low interest rates and declining unemployment. Meanwhile, exports of goods increased at the fastest pace in over a year in Q2, buttressed by higher oil prices. However, complicating the economic picture for Q2 is industrial production, which contracted for the fourth consecutive month in May.


The economy likely lost some steam in the second quarter, although fundamentals are still healthy. Both the services and manufacturing PMIs averaged lower in Q2 relative to Q1, despite remaining well in positive territory, while annual growth in industrial production also shifted into a lower gear in April and May following a stellar first quarter. The economic tendency indicator paints a similar picture; readings are below the highs seen at the end of 2017, but still point to robust economic activity. Furthermore, the labor market is firm, with the smoothed unemployment rate at a multi-year low and strong employment gains in April and May. However, consumer confidence dropped to a near two-year low in June, likely influenced by recent softness in the housing market. Property prices resumed their month-on-month decline in the same month following a brief rebound, and were down over 4% in annual terms.


After hitting an over one-year high in the first quarter, growth in the second quarter was likely robust, thanks largely to the dynamism of the tourism sector, which is now in its high season. After a disappointing start in April, overnight stays grew robustly in May. The sector likely contributed to the decrease in unemployment observed in May—which should continue to support wage growth—while also benefiting residential construction investment, which had surged in Q1. However, the external sector probably detracted from growth due to higher imports of fuel, ships and aircrafts, while fish catch volumes in May and June showed some weakness.

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