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Continued recovery – greater downside risks

Due to such factors as heightened geopolitical uncertainty and weather effects, growth forecasts for this year and for 2015 are lower than those presented by the SEB economists in the May 2014 issue.

Overall, the 34 countries of the Organisation for Economic Cooperation and Development (OECD) will show GDP growth of 1.9 per cent this year. This is up from 1.4 per cent in 2013. Next year, growth will be 2.5 per cent, followed by 2.4 per cent in 2016, but the SEB economists warn that there is a higher probability that these figures may need to be revised downward than upward.

On their current scale, the trade sanctions between Western countries and Russia will have relatively little direct impact on growth, although their effects on such economies as Finland and the Baltic countries will be more noticeable.

“In a long-term perspective we can expect a fading of the stimulative effects that were generated by decades of relaxed tensions due to increased trade, as well as destabilising medium-term economic, financial and political developments in Russia,” says Robert Bergqvist, Chief Economist at SEB.

Overall global monetary policy will remain highly expansionary during Nordic Outlook’s forecast period – which runs until the end of 2016 – even though the Bank of England (BoE) and the US Federal Reserve (Fed) will take their first cautious steps towards normalisation of key interest rates in the spring of 2015.

“Looking ahead, central banks face difficult trade-offs. In particular, there is uncertainty about the interest rate sensitivity of their economies and how monetary policy will interact with new macroprudential supervision policies. There are many indications that the normal key rate has shifted significantly downward and that central banks may carry out their rate hikes at a cautious pace,” says Håkan Frisén, head of Economic Forecasting at SEB and Editor-in-Chief of Nordic Outlook.

The outlook for the Nordic countries is divergent. The Norwegian economy is dominated by forces that are pulling in different directions. The headwind is coming from lower capital spending in the oil and gas sector as well as weak residential investments. But the labour market has stabilised, along with the housing market, and good real income increases are providing support to consumption.

In Denmark, there are increasingly clear signs that the recovery will gain a stronger foothold due to falling unemployment, rising home prices and stronger optimism. However, the Finnish economy faces major challenges. Structural problems connected to the forest product industry and the information and communications technology (ICT) sector, as well as relatively large exposure to Russia, are squeezing growth. The Finnish economy cannot avoid a recession in 2014.

Sweden’s economic recovery is proving more sluggish than anticipated, but growth is still expected to be somewhat above trend this year and during 2015 and 2016. Growth is being driven by private consumption, which is benefiting from rising real incomes and asset prices and from lower saving.

An unclear parliamentary situation is expected after the election. A minority government of Social Democrats and the Green Party is the most likely outcome based on the current voter opinion situation. This makes future economic policy difficult to assess.

“The gap between the number of seats won by the ruling Alliance and the red-green opposition bloc, the outcome for the Social Democrats compared to the 2010 election, party leader Stefan Löfven’s choice between leftist or centrist policies, the strength of the anti-immigrant Sweden Democrats and the relative parliamentary strengths of the Alliance parties after the election will affect the chances of putting together a credible, sustainable support base for a government,” Bergqvist says.

The SEB economists believe that the Riksbank will cut its key interest rate again in October to 0.15 per cent due to low and falling inflation expectations, a slow economic recovery and further ECB stimulus measures. Not until early 2016 – once the BoE and Fed have made some headway in their respective rate hiking cycles – is the Riksbank expected to begin raising its key interest rate. By the end of 2016, the repo rate is expected to stand at 1.00 per cent.