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Nordic Outlook: Muted global growth amid extreme yields

The global economy is seeing a noticeably pessimistic bond market and increased uncertainty due to trade and geopolitical issues, write SEB's economists in a new issue of Nordic Outlook.

SEB’s economists say their main scenario is still that outright recession will be avoided. Financial markets have been highly dramatic in recent months. This applies, above all, to the radical repricing in the bond market. Developments in the real economy have been far less dramatic, however. Although manufacturing has continued to weaken and global trade growth has stagnated, the domestic economy has been resilient in most countries.

Combined with an escalation of the trade war, this has led SEB’s economists to revise their global GDP growth forecast 2 tenths of a percentage point lower for 2019 and 3 tenths for 2020 − bringing them to 3.1 per cent and 3.2 per cent, respectively. These downward adjustments mainly apply to emerging market (EM) economies and the euro area, which are being pulled down as the Chinese economy again decelerates and the German “export engine” sputters. As for the United States, the economists are still forecasting a gradual slowdown to somewhat below trend growth, as the tight labour market sets a limit on the expansion and the effects of President Donald Trump’s tax cuts fade.

They also expect the Fed to change strategy and follow up its July key interest rate cut with three more “insurance cuts” in the coming year, decreasing the risk that policy mistakes will trigger a recession. Low inflation − despite unemployment at 40-year lows in advanced economies − is giving central banks manoeuvring room to continue supporting the economy. The ECB will lower its deposit rate for banks in two 10 percentage point steps to -0.60 per cent and will restart its asset purchase programme.

Moderate debt in the private sector will also decrease the risk that the manufacturing slump will trigger a global recession. Political uncertainty has continued to increase, but such factors in themselves have rarely caused recessions. Downside risks are bigger today than before. The trade war (and other conflicts) between the US and China continues to escalate, increasing the risk of more lasting negative growth effects, due to disruptions in global supply chains and the trade system. A traumatic Brexit process (British withdrawal from the European Union) and various geopolitical trouble spots are adding to the risk picture.

Norway to lead economic growth in Nordic region

Norway’s economy will grow faster than that of the other Nordic countries in 2019-2021. Positive impulses from the oil sector continue to drive the economy, and a favourable labour market is supporting private consumption. Growth in the mainland economy (excluding oil, gas and shipping) will accelerate from 2.2 per cent last year to 2.6 per cent this year. Waning petroleum sector contributions will slow growth to 2.1 per cent in 2020 and 1.9 per cent in 2021. Norges Bank is going against the central bank current, delivering a final key rate hike in Norway this autumn.

Falling interest rates are enabling Danish households to refinance their mortgage loans and − together with modest fiscal expansion − will support domestic demand. Denmark’s GDP will grow by nearly 2 per cent this year, followed by a gradual slowdown to 1.5 per cent in 2021.

Looking ahead, Finland’s manufacturing sector will be hampered by euro area weakness. Rising employment and somewhat faster pay hikes will nevertheless enable Finnish GDP growth to stay at around 1.5 per cent during 2019-2021.

The Swedish economy is entering a phase of slower growth, despite support from both monetary and fiscal policy. Unemployment will climb to 7 per cent by the end of 2020, and for the first time in years the upturn will be driven by weak job growth and not by rising labour force participation. Due to weak economic conditions, low inflation and even more expansionary policies by the European Central Bank (ECB) and the Fed, Sweden’s Riksbank will be forced to retreat from its rate hiking plan. The EUR/SEK exchange rate will move towards 11.00 by the end of 2019.

Baltic economies to cool down significantly

In the Baltic economies, growth will cool significantly as exports weaken and capital spending appetite fades. In Lithuania, growth will remain around 3.5 per cent this year but then slow to around 2.5 per cent in 2020 and 2021. Latvia will decelerate from nearly 5 per cent last year to 2.0-2.5 per cent during 2019-2021. Estonia’s growth will gradually slow from nearly 4 per cent last year to 2 per cent in 2021.

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