Nordic Economies Economic Outlook January 2019

Nordic Economies: Economic Snapshot for the Nordic Economies

December 20, 2018

A strong performance in the external sector drove a solid GDP result in the third quarter. However, although export growth recovered in the quarter, the positive contribution to headline growth was largely due to a sharp fall in imports. The domestic economy meanwhile suffered from a marked contraction in fixed investment mostly due to a one-off effect caused by important ship purchases in the prior quarter, while private consumption was lackluster. Data for the fourth quarter has thus far been mixed. The manufacturing PMI receded in November, primarily due to slower growth in new orders and production, but remained in expansionary territory nonetheless, while industrial production growth moderated in October. Economic sentiment has been more downbeat in the quarter, with consumer confidence falling for the fifth consecutive month in November and business confidence remaining pessimistic. On the other hand, wage growth has been robust in most sectors and should feed through to stronger household spending, while a rebound in merchandise exports in October bodes well for the external economy.

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Although the economy gained some steam in the third quarter according to comprehensive GDP data, this was largely due to a surge in inventories, and the underlying picture was less positive. Private consumption and fixed investment contracted sharply in the quarter, while exports also declined—likely linked in part to the wider economic slowdown within the Eurozone. Looking to the fourth quarter, while the GDP outturn should have been supported by faster growth among key European trading partners, recent indicators are mixed. On one hand, in October, the unemployment rate remained at a multi-year low and wage growth was robust, while consumer sentiment was fairly upbeat in November. While this should support private consumption, gains could be limited by falling vehicle sales following the introduction of new emissions tests in September. Moreover, the economic sentiment index dipped for the second straight month in November.


The economy found its feet again in October as month-on-month growth rebounded, contrasting the decline in September, according to fresh GDP data. The improvement in October was primarily due to greater public and private consumption and fewer imports, although fixed investment and exports decreased. Moreover, separate data showed that industrial production increased in October across all sub-sectors compared to the previous month. However, quarter-on-quarter GDP growth slowed in the August-to-October period compared to July–September. Meanwhile, higher oil production appears to be buffering the public finances this year, with the fiscal surplus rising over a third year-on-year in NOK terms in January–September


The economy shrank in the third quarter according to recent figures, although this was due in large part to temporary factors. Lower vehicle sales—following tax changes which caused a front-loading of sales in the second quarter—depressed private consumption, while inventories subtracted notably from GDP. In contrast, fixed investment rose strongly, while the external sector strengthened. The underlying picture was one of an economy still in good health, but losing momentum compared to the high growth observed in previous quarters. The economy should have rebounded in the fourth quarter, and available indicators for the period point to fairly robust activity. Both the services and manufacturing PMIs were comfortably in expansionary territory in November thanks to solid growth in new orders, while in December the economic tendency indicator remained well above the neutral 100 mark. On the political front, the country is still without a government following the general election over three months ago. On 14 December, parliament voted against Social Democrat leader and caretaker Prime Minister Stefan Löfven becoming prime minister, a few weeks after Annie Lööf—leader of the Centre Party—abandoned her attempt to form a government.


The Icelandic economy slowed markedly in the third quarter, despite a robust performance from the crucial tourism sector which supported private outlays. The downswing was due exclusively to lower fixed investment, itself driven by a sharp contraction in business investment and a softer decline in residential construction investment. On the flipside, public investment surged in the quarter, both private and public spending growth picked up slightly, while the external sector’s growth contribution improved thanks to a rebound in exports, despite a marginal recovery in imports. Meanwhile, the country appears to be headed towards difficult wage negotiations in coming months, as the powerful labor unions push for steep minimum wage increases.

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