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Nordic Outlook: Normalisation continues despite rising challenges

As 2022 begins, recovery from the COVID-19 pandemic is being challenged by high inflation, rapid virus transmission and geopolitical risks. Central banks are speeding up their normalisation of key interest rates, and the US Federal Reserve's plans to start trimming its balance sheet are scaring the stock and fixed-income markets. Security policy tensions between Russia and nearby European countries are a new risk factor, especially for the Nordics, the Baltics and Germany. But growth continues to be supported by large household savings buffers and pent-up needs for service consumption when the pandemic eases, and we expect inflationary forces to culminate early this year. Our growth forecasts thus remain relatively stable. The Swedish economy will grow by about 3 per cent both this year and next, and the Riksbank will hike its key rate twice in the second half of 2023. We expect the other Nordic economies to continue to grow at a healthy pace this year, with only minor revisions in our forecasts.

“For various reasons our forecast picture has become more uncertain, but we are also seeing increased hopes of relief from the pandemic once the latest wave has passed. Our forecast is based on the assumption that its effects on the economy will ease in the near future and that significant new disruptions can be avoided in Europe and North America,” says SEB's Chief Economist Jens Magnusson.

The global economy: Central banks seek to balance high inflation and markets
We expect global growth to slow from nearly 6 per cent in 2021 to just over 4 per cent this year. High inflation, which undermines household purchasing power, and the effects of the Omicron wave early this year are contributing to a downward adjustment in our 2022 GDP growth forecast by about a quarter of a percentage point, both for the global economy and the mainly affluent OECD countries. Faster fiscal tightening after US President Joe Biden's failure to unite the Democratic Party behind his reform plans is one factor behind the downward revision in our US growth forecast, while European households are being squeezed by high energy prices.

Inflation looks set to persist longer than expected, but we are sticking to our view that it will fall sharply late in 2022, due to peaking energy prices and a gradual easing of disruptions in production chains. Unemployment in many countries has fallen to pre-pandemic, or nearly pre-pandemic, levels. This has increased the pressure on central banks to withdraw stimulus programmes. The Fed will begin gradual key rate hikes in March, reaching 2.0 per cent by the end of 2023, thus following the same path as the central banks of the United Kingdom and Norway. Meanwhile the European Central Bank (ECB) will not start tightening until late 2023. Downside risks in our forecast are primarily connected to the inflation shock and the risk that central banks will be forced to act in a way that kills the recovery. Escalating security policy tensions between Russia and nearby European countries are another threat.

“If we should see signs of a clear wage-price spiral, central banks would have to tighten their policies to ensure that inflation expectations don’t soar and completely lose touch with inflation targets. In that case, there would be a risk of plunging share and home prices. As for geopolitics, experience indicates that it takes an exceptional turn of events for this type of tensions to affect economic activity over an extended period. But a Russian invasion of Ukraine might have almost incalculable consequences for energy prices,” says Håkan Frisén, SEB’s Head of Economic Forecasting.

Sweden: The Riksbank will bring forward its first rate hike
The Swedish economy will also lose momentum over the next few quarters, but we expect growth to regain speed when global production disruptions ease and energy prices fall back. After a stronger-than-expected upturn of nearly 5 per cent last year, GDP will grow by 3 per cent this year, about half a percentage point lower than in our November forecast. Meanwhile, we have adjusted our 2023 forecast slightly higher, to 2.7 per cent. Consumption is increasing despite inflation headwinds, and the labour market is heating up. Home prices will continue to rise, but at a slower pace than before in a more uncertain interest rate environment.

We expect CPIF inflation (CPI less interest rate changes) to remain above 4 percent during the first half, before falling in the latter part of 2022. The upturn in Swedish core inflation excluding energy prices appears moderate compared to other countries, but core inflation will still reach the highest levels since the Riksbank introduced its inflation target in the mid-90s. This raises questions about the Riksbank's cautious interest rate path.

“The Riksbank has historically not been afraid to stand out. But with an increasingly tight labour market and accelerating pay increases, it is doubtful whether the Riksbank will really choose a completely different path than most other central banks. Our forecast is two rate hikes during the second half of 2023, while the Riksbank will begin to trim its balance sheet as early as this year,” says Jens Magnusson.

Nordics: Norges Bank continues to hike rates
The other Nordic economies will continue to grow at a healthy pace this year, with only minor revisions in our forecasts compared to November. However, a tight resource situation will lead to increasing price and wage pressures in Norway, and Norges Bank will continue to raise its key interest rate, with four hikes this year. In Denmark, short-term pressure on the krone may force the central bank to intervene again.

Key figures: International & Swedish economy (figures in brackets are from the November 2021 issue of Nordic Outlook):

International economy, GDP, year-on-year changes, % 2020 2021 2022 2023
United States -3.4 5.6 (5.6) 3.5 (3.9) 2.1 (2.2)
Euro area -6.4 5.3 (5.1) 4.0 (4.4) 2.9 (2.6)
United Kingdom -9.4 7.2 (6.9) 4.5 (4.9) 2.9 (2.8)
Japan -4.6 2.0 (2.5) 3.2 (2.7) 1.2 (1.2)
OECD -4.6 5.2 (5.2) 3.7 (3.9) 2.4 (2.4)
China 2.2 8.1 (8.2) 5.2 (5.2) 5.4 (5.4)
Nordic countries -2.2 4.2 (4.1) 3.3 (3.5) 2.5 (2.4)
Baltic countries -1.7 5.6 (5.7) 3.8 (4.0) 3.4 (3.5)
The world (purchasing power parities, PPP) -3.3 5.8 (5.7) 4.1 (4.4) 3.6 (3.5)
Nordic and Baltic countries, GDP, year-on-year changes, %        
Norway -0.7 3.9 (2.8) 4.0 (3.7) 2.5 (2.6)
Denmark -2.1 4.0 (5.0) 3.3 (3.5) 3.0 (2.5)
Finland -2.8 3.5 (3.5) 3.0 (3.0) 1.6 (1.6)
Lithuania  -0.1 4.9 (4.9) 3.5 (3.6) 3.3 (3.3)
Latvia -3.6 4.5 (4.5) 4.6 (5.0) 3.8 (4.2)
Estonia -3.0 8.2 (8.8) 3.3 (3.8) 3.0 (3.0)
Swedish economy, year-on-year changes, %        
GDP, actual -2.8 4.9 (4.6) 3.0 (3.6) 2.7 (2.5)
GDP, working day corrected -3.0 4.8 (4.5) 3.1 (3.6) 2.8 (2.6)
Unemployment, % (EU definition) 8.8 8.8 (8.8) 7.6 (7.7) 7.2 (7.3)
CPI (consumer price index) 0.5 2.2 (2.0) 3.1 (2.5) 1.7 (1.5)
CPIF (CPI minus interest rate changes) 0.5 2.4 (2.3) 3.3 (2.6) 1.5 (1.5)
Government net lending (% of GDP) -2.8 -0.6 (-1.0) 0.7 (0.0) 0.7 (0.7)
Repo rate (December) 0.0 0.0 (0.0) 0.0 (0.0) 0.50 (0.25)
Exchange rate, EUR/SEK (December) 10.05 10.29 (10.00) 10.05 (9.90) 9.70 (9.70)

You can find more information about Nordic Outlook, as well as the presentation of the report, at sebgroup.com/nordicoutlookreport


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

SEB is a leading northern European financial services group with a strong belief that entrepreneurial minds and innovative companies are key in creating a better world. We take a long-term perspective and support our customers in good times and bad. In Sweden and the Baltic countries, SEB offers financial advice and a wide range of financial services. In Denmark, Finland, Norway, Germany and the United Kingdom, the bank's operations have a strong focus on corporate and investment banking based on a full-service offering to corporate and institutional clients. The international nature of SEB's business is reflected in our presence in more than 20 countries worldwide, with around 15,500 employees. At 30 September 2021, the Group's total assets amounted to SEK 3,585bn while its assets under management totalled SEK 2,422bn. Read more about SEB at https://www.sebgroup.com