New risks emerge as recovery is nearing end
The Nordic economies are more or less free of the COVID-19 crisis measured on economic aggregates. The latest data for GDP and employment match or exceed pre-crisis levels. Restrictions have been lifted as vaccine programmes have neared completion, and as restrictions have been lifted, activity has very quickly returned, with Denmark a little ahead of the other Nordic countries in the normalisation process. All four countries have suffered substantial losses in terms of lost production during the crisis, but losses are significantly smaller than elsewhere in Europe. The COVID-19 crisis and its aftermath are very different from previous crises – the decline was extremely steep, but so was the recovery, and we do not now have a long recovery period ahead of us – most of it has already happened.
Instead, we are now facing risks in different directions. Our main scenario for Nordic and global economies is a soft landing where we return to more or less normal levels of growth, which is the aim of economic policies. We are already seeing a moderation in global growth, and there is clearly a risk that this moderation turns into a more severe slowdown, which would impact the open Nordic economies. Global supply disruptions are limiting activity and are part of the reason why inflation has increased, leading to so-called stagflation risks – not a return to the economic problems of the 1970’s under that name, but a tricky situation for global policy makers and central banks as they may face both economic slowdown and accelerating prices at the same time. We have no experience with this very different type of crisis and recovery and the risk of misjudging is high.
Domestic markets heating up
Domestically, many Nordic businesses are having difficulties not only with global supplies but also with finding employees. To some extent, that is the result of a reopening process where a lot of companies need to hire at the same time, and we expect the market to become more balanced, but the labour market is clearly one candidate for signs of overheating. Another is housing markets, where we have seen house price growth moderate to some extend following reopening but where prices have increased strongly during the restriction period. Fiscal policies are being tightened across the Nordics as the various support programs end. In terms of monetary policies, Norway has already seen its first rate hike of the cycle and is likely to see several more in the coming months and years. In Sweden, on the other hand, the central bank is signalling unchanged rates for the foreseeable future, and that is essentially also the case in the euro area, which means Finland and de facto Denmark – the small Danish rate cut in September should be seen as a minor adjustment within the framework of the fixed exchange rate policy, not as a signal about the Danish economy.
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