Nordic Economies Economic Outlook July 2018

Nordic Economies: Economic Snapshot for the Nordic Economies

June 25, 2018


Comprehensive data confirmed that the economy lost steam in the first quarter of 2018. Quarter-on-quarter economic growth decelerated, dragged down by a slowdown in private consumption, a contraction in fixed investment and a poor performance by the external sector. Nevertheless, it is worth noting the deceleration largely reflected an unfavorable base effect following strong growth in the previous quarter, rather than a deterioration of the economy’s health. In April, industrial production rebounded after contracting in March and the labor market strengthened further, with the unemployment rate declining. Survey-based data is equally positive: Business sentiment recorded its best reading so far this year in May and consumer confidence reached a multi-year high in June.

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In the first quarter of 2018, the economy maintained its growth momentum from Q4 2017, with quarter-on-quarter growth accelerating to an over seven-year high. This was due to fixed investment surging on the back of higher private sector investment. Moreover, government consumption increased in Q1, contrasting the fall in Q4. However, although unemployment decreased, and consumer confidence hit record highs, private consumption growth decelerated in Q1 from Q4. This may have been due to high household debt levels weighing on consumer spending. The external sector, for its part, detracted from growth. Meanwhile, the economy had a weak start to Q2. In April, economic activity expanded year-on-year at the slowest pace since August 2016. The current account balance also logged a deficit for the second consecutive month in April.


The economy returned to quarter-on-quarter growth in Q1 2018 and appears well positioned to maintain that momentum in Q2. In April, retail sales grew at the fastest pace in three months. This was particularly reflective of a tight labor market and rising wages, while high housing and equity prices will have also encouraged spending. By May, the market capitalization of the energy-heavy Oslo Stock Exchange was over 20% higher than 12 months earlier. This was likely due to higher Brent Crude Oil prices, which hit a three-and-a-half year high on 22 May. Meanwhile, in a boost to the long-term prospects of industrial production, parliament approved a USD 6 billion Arctic oil project in June. In the same month, however, the government extended restrictions on mortgage lending that were about to expire to the end of 2019, citing concerns about high household debt levels and the risk they pose to economic stability and employment.


The economy expanded at a robust pace in Q1 according to recent figures. The expansion was driven by a marked increase in fixed investment against a backdrop of optimistic business sentiment and high capacity utilization, and solid private consumption, likely linked to strong growth in disposable incomes. On the other hand, the external sector softened; export growth ebbed in line with slower growth in key trading partners, while imports increased significantly. For Q2, signs point to an easing of growth momentum. Both the services and manufacturing PMIs have averaged lower in the first two months of the quarter compared to Q1, while consumer confidence reached a near two-year low in June, likely linked to recent softness in the housing market. However, the labor market has stayed robust: April and May saw healthy employment gains, and the smoothed unemployment rate is currently at a multi-year low.  


Economic growth surged in the first quarter of 2018 to the best performance since Q4 2016, following a disappointing slowdown at the end of last year. Gains in the quarter were broad based, fueled by both private consumption and investment; the external sector also recorded a robust performance. Dynamism in the tourism sector was likely a major factor, driving residential construction investment to surge by over a third year-on-year, and supporting healthy gains in the labor market. This likely continued into Q2: In May, real wages surged and unemployment fell, as Iceland entered its tourism high season.

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