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Nordic Outlook: Cautious optimism despite inflation pressure

Sweden: Temporary loss of momentum due to production disruptions

Global economic growth is encountering resistance from an overextended production system, continuing pandemic-related disruptions and energy price shocks. High inflation and wage pressures, but also rising resource utilisation, will force central banks in countries such as the United States, the United Kingdom and Norway, to accelerate their key interest rate hikes. In the euro area, price increases are more focused on energy, enabling the European Central Bank (ECB) to hold off on rate hikes. We are lowering our GDP forecast for the US but raising it for the euro area. The overall growth outlook is reliably positive, however, and we still believe that today’s high inflation is mainly transitory. We have adjusted our global growth forecast slightly downward to 5.7 per cent in 2021 but have left it unchanged at 4.4 per cent in 2022. Weaker international demand, production disruptions and some pressure on consumption from rising energy prices will temporarily slow Swedish growth. We have lowered our forecast for 2022 from 3.9 to 3.6 per cent, while for 2023 we have adjusted it 0.2 percentage points higher to 2.5 per cent. The Riksbank will take small steps towards tighter monetary policy, and in 2023 the Swedish central bank will carry out an initial rate hike.

Strong global demand is testing a pandemic-affected supply side

Our positive global growth outlook is now being challenged by growing uncertainty on several fronts. Disrupted value chains are hampering industrial production. Sharply rising energy prices are undermining household purchasing power, at the same time as the US is phasing out its earlier household stimulus measures. The labour market is showing clear bottleneck tendencies in many countries, also manifested in faster pay increases in the US and the UK. The pandemic continues to affect the economy, as China's zero tolerance towards COVID-19 transmission impedes global transport and as new waves of infection hold back US labour supply. The world economy is also facing structural challenges connected to China's need to shift from a credit-driven economy, as well as the global transition to an energy supply without fossil fuels. The main focus of this November 2021 issue of Nordic Outlook is on analysing the duration and impact of these various factors, partly through a number of theme articles.

High but transitory price pressures test the patience of central banks

Most of the growth outlook in our August issue of Nordic Outlook is still relevant, but our forecasts for major advanced economies are converging, with downward adjustments for the US and upward ones for Western Europe. We are lowering our global GDP growth forecast for 2021 slightly, to 5.7 per cent from the previous 5.9.  Our GDP growth forecast for 2022 remains at 4.4 per cent, buoyed by new Japanese stimulus packages, while we have adjusted our 2023 global forecast marginally higher to 3.5 per cent. The inflation impulse will be both more powerful and longer-lasting than expected, especially in the US, while the upturn in Western Europe is focused on energy prices. The overall consumer price index (CPI) will peak somewhat above 4 per cent in the euro area by around year-end. US inflation will peak at roughly 7 per cent early next year and will probably exceed 3 per cent throughout 2022. Yet our main scenario is that inflation will generally fall as the post-pandemic situation normalises and as energy prices retreat. We expect production disruptions to culminate in the first quarter of 2022. A global shift from goods to service consumption will ease production pressure. In the US, we expect a faster upturn in labour supply − as stimulus payments decrease and fear of COVID-19 diminishes − to ease wage pressure. Productivity-raising investments can make faster pay increases possible without generating inflation.

Over the next year, central banks will face a classic dilemma: hike key interest rates and amplify the tightening effect of an energy supply shock or risk soaring inflation expectations, especially in countries like the US and the UK where pay increases have accelerated. We generally regard market pricing as a bit too aggressive, but we have adjusted our key rate forecasts higher. We now expect the Fed to begin raising its key rate in September 2022 to a level of 1.50 per cent by the end of 2023. The Bank of England's key rate will end up close to that of the Fed. Meanwhile the ECB will lag far behind the English-speaking countries, leaving its refi rate at zero throughout our forecast period. The bond market is dominated by a belief that central banks will prioritise inflation-fighting. This will put a lid on long-term growth and inflation expectations and dampen upward pressure on long-term government bond yields. Changes in relative monetary policies are driving the foreign exchange market. The Fed's policy normalisation will strengthen the dollar at most to 1.11 per euro by the end of 2022. We believe the dollar will again lose some ground further ahead, given higher US external debt and inflation. The Swedish krona has room to appreciate a bit more against the euro in the long term, supported by a stronger economy and earlier Riksbank key interest rate hikes. The EUR/SEK exchange rate will reach 9.70 towards the end of our forecast period. If supply shocks fade as expected, if inflation slows and if rates/yields do not rise too fast, stock markets will still have upside potential.

The Nordics and Baltics: Domestic markets drive economic growth

Norwegian GDP growth will accelerate to 2.8 per cent in 2021 and 3.7 per cent in 2022, followed by a slowdown to 2.6 per cent in 2023. Domestic demand will be sustained by solid household financial buffers and an improving labour market, while high capacity utilisation will help fuel capital spending outside the oil sector. Norway’s mainland economy will grow by 3.5−4 per cent during both 2021 and 2022, before growth is slowed by gradually higher interest rates. Norges Bank will accelerate its rate hikes due to high resource utilisation, and despite below-target CPI-ATE inflation throughout our forecast period. By end-2023 the key rate will stand at 1.75 per cent. The Danish economy will also be driven by consumption and investments. GDP growth will climb to 5.0 per cent this year and 3.5 per cent in 2022, followed by a slowdown to 2.5 per cent as Denmark approaches full employment. Finland’s GDP will grow by 3.5 per cent during 2021 and 3.0 per cent in 2022 after surprisingly quick labour market improvement, rising residential investments and support for household consumption due to a more limited inflation upturn than in other countries. In 2023, Finnish growth will cool to 1.6 per cent. The Baltic economies will show a strong recovery. Headwinds from increased COVID-19 transmission have slowed Latvia’s economy in the near term, but growth will accelerate next year with the help of higher exports and EU funds. In Estonia, increased withdrawals from the pension system and strong pay increases have led to a surprising surge in consumption, and overall GDP; strong indicators suggest brisk and well-balanced growth in 2022. Lithuania’s economy is increasingly constrained by bottlenecks in materials supply and in the labour market, and inflation will approach double digits early next year. The output gap will close this year, and economic growth will be close to trend during 2022–2023.

Sweden: Temporary loss of momentum due to production disruptions

Slightly weaker international order bookings, production disruptions and a minor slowdown in consumption due to rising energy prices will lead to more sedate growth in the coming quarters. We have lowered out 2022 growth forecast from 3.9 per cent to 3.6 per cent, while raising our 2023 figure by 0.2 points to 2.5 per cent. GDP growth will surpass its previous trend towards the end of next year.

Manufacturing sector optimism is close to historical peaks, but its current drivers are mainly record-sized order books and low inventory levels rather than order flow and production. We expect production problems in the manufacturing sector to ease in mid-2022. The downgrade in our 2022 export forecast is offset by an almost equal upward adjustment for 2023. High capacity utilisation and full order books indicate that investments in the manufacturing sector will accelerate significantly over the coming year. A clear recovery in home construction is contributing to a brighter capital spending outlook. Household consumption has been divided – a strong upturn for retail, while service consumption has been depressed for a long time − but with a vigorous recovery since the lifting of pandemic-related restrictions. Consumption is still well below the earlier trend, while household finances are strong and the labour market is improving. This suggests a continued robust upturn. We expect consumption to climb by 3.7 per cent in 2022 and grow by 2.2 per cent in 2023. A restructuring of statistical methods makes it difficult to interpret the Swedish labour market. According to our own estimates, employment has recovered almost its entire decline, and short-term indicators point to a continued upturn. We expect unemployment to approach its pre-pandemic level of about 7.2 per cent, while labour supply growth will decelerate compared to its earlier strong upturn. Resource utilisation is thus approaching historical peaks, but because of multi-year collective agreements that specify relatively low annual pay increases, the wage response will nevertheless be weak. The next national wage round is far in the future and will occur in a situation when inflation will have decelerated, although it is uncertain to what extent Swedish labour unions will demand compensation for earlier inflation.

Swedish inflation has climbed sharply this autumn, although the upturn is moderate compared to other countries. So far, energy prices are the dominant driver, but due to rising international food prices, CPIF inflation excluding energy will gradually climb to 2.5 per cent by mid-2022, then fall to around the 2 per cent Riksbank target by year-end. So far, the central bank has insisted that key rate hikes will not happen in the foreseeable future. But strong economic growth and an increasingly tight Swedish labour market raise the question of whether the Riksbank will actually choose a completely different path than most other central banks. We expect that in November, the Riksbank will indicate a certain probability of a hike in 2024 in its rate path. After that, it will begin more clearly signalling some monetary policy normalisation. The first step will be to trim its balance sheet; during 2023 we believe it will deliver an initial rate hike.   

Sweden’s public finances have remained strong throughout the pandemic. The budget deficit has shrunk from 2.8 per cent of GDP in 2020, and in 2023 the government will achieve a surplus of nearly 1 per cent of GDP. Due to the improved budget situation and rising GDP, public sector debt will probably fall below its benchmark (or “anchor”), 35 per cent of GDP, as early as next year. Changes in the official fiscal framework are again being considered. We believe that a balanced budget target will be introduced, replacing today’s budget surplus target. We also see growing support for introducing a separate investment budget, which would make it easier to borrow money for long-term investment needs related to infrastructure and climate transition. But such restructuring of the fiscal framework is unlikely to be implemented in the near future.

Key figures: International & Swedish economy (figures in brackets are from Nordic Outlook in August 2021)

International economy, GDP, year-on-year changes, % 2020 2021 2022 2023
United States -3.4 5.6 (6.0) 3.9 (4.2) 2.2 (2.1)
Euro area -6.4 5.1 (4.6) 4.4 (4.3) 2.6 (2.5)
United Kingdom -9.7 6.9 (7.0) 4.9 (5.8) 2.8 (2.2)
Japan -4.6 2.5 (2.5) 2.7 (2.3) 1.2 (1.2)
OECD -4.6 5.2 (5.1) 3.9 (4.0) 2.4 (2.3)
China 2.3 8.2 (8.6) 5.2 (5.6) 5.4 (5.4)
Nordic countries -2.2 4.1 (3.7) 3.5 (3.7) 2.4 (2.1)
Baltic countries -1.7 5.7 (4.8) 4.0 (4.3) 3.5 (3.4)
The world (purchasing power parities, PPP) -3.3 5.7 (5.9) 4.4 (4.4) 3.5 (3.4)
Nordic and Baltic countries, GDP, year-on-year changes, %
Norway -0.8 2.8 (2.7) 3.7 (3.7) 2.6 (1.9)
Denmark -2.1 5,0 (3.6) 3.5 (4.1) 2.5 (2.5)
Finland -2.9 3.5 (3.2) 3.0 (3.0) 1.6 (1.6)
Lithuania  -0.1 4.9 (4.3) 3.6 (3.6) 3.3 (3.3)
Latvia -3.6 4.5 (4.3) 5.0 (5.2) 4.2 (4.2)
Estonia -3.0 8.8 (6.6) 3.8 (4.5) 3.0 (2.5)
Swedish economy, year-on-year changes, %
GDP, actual -2.8 4.6 (4.6) 3.6 (3.9) 2.5 (2.3)
GDP, working day corrected -3.0 4.5 (4.6) 3.6 (3.9) 2.6 (2.4)
Unemployment, % (EU definition) 8.8 8.8 (8.8) 7.7 (7.8) 7.3 (7.5)
CPI (consumer price index) 0.5 2.0 (1.8) 2.5 (1.4) 1.5 (1.5)
CPIF (CPI minus interest rate changes) 0.5 2.3 (2.0) 2.6 (1.5) 1.5 (1.5)
Government net lending (% of GDP) -2.8 -1.0 (-1.2) 0.0 (-0.7) 0.7 (-0.7)
Repo rate (December) 0.0 0.0 (0.0) 0.0 (0.0) 0.25 (0.0)
Exchange rate, EUR/SEK (December) 10.05 10.00 (10.10) 9.90 (9.90) 9.70 (9.80)

For further information, contact:
Jens Magnusson: +46 70 210 2267
Håkan Frisén: +46 70 763 8067
Robert Bergqvist: +46 70 445 1404
Daniel Bergvall: +46 73 523 5287
Lina Fransson: +46 8 506 232 02
Per Hammarlund: +46 76 038 9605
Olle Holmgren: +46 70 763 8079
Elisabet Kopelman: +46 70 655 3017
Marcus Widén: +46 70 639 1057

Press contact:
Niklas Magnusson, Group Press Officer
+46 70 763 8243

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