Nordea Bank, Economic Outlook Nordics, Dec 2013. "Divergence"

8/13/2019 Nordea Bank, Economic Outlook Nordics, Dec 2013. "Divergence"

1/14

Overview

1 E CONOMIC O UTLOOK N ORDICS DECEMBER 2013 NORDEA MARKETS

Divergence

Overview 02 DIVERGENCE

Sweden 03 RECOVERY FOR HARD HIT EXPORT INDUSTRY

Norway 05 DOWNTURN DRIVEN BY THE HOUSING MARKET

Denmark 07

S HIFTING GEARS Finland 09

ANOTHER COLD WINTER

Key figures 11 FORECASTS FOR THE GLOBAL ECONOMY

ECONOMICOUTLOOK N ORDICS

D E C E M B E R 2 0 1 3


2/14

Overview


Divergence

The Nordic countries currently display diverging econom-ic growth patterns. The once so strong Norwegian econ-omy is heading for a sharp downturn, while Denmark, the

past years growth laggard, is gaining momentum after several years of housing market crisis. The Swedish export sector has faced massive problems over the past few years, but now better times are ahead as activity interna-tionally picks up. Finland is struggling with huge growth

problems related to both domestic and foreign demand.

World economy on an uptrendBeing small, open economies the Nordic countries relyheavily on global economic trends. And our current fore-casts for the Nordic economies build on expectations ofsofter winds sweeping over the Nordics from around theglobe in coming years. The US seems to be undergoing a

self-sustaining economic recovery, the Euro area finallyescaped the grip of recession during the spring, and theUK is currently witnessing a small economic miraclethat will contribute to improving the export potential of

Nordic companies. Moreover, the risk of a hard landingfor the Chinese economy now seems to be eliminated, andJapan, the other Asian superpower, is back on the growthtrack. This also supports the outlook for the Nordic coun-tries both directly and indirectly through Asias growingeconomic significance.

We see global economic growth at 3% this year, acceler-ating to close to 4% in 2015, see the table below. This is a

small downward revision compared to our Septemberforecast. We have revised down our growth forecasts forthe Nordic region for the years 2013-15 by about %

point.

New Nordic growth patternAfter several years of very high growth the Norwegian economy is now showing clear signs of a marked slow-down, and we have revised down our growth forecast sig-nificantly since the September issue of Economic Out-look . We see clear evidence of a housing market setbackand expect home prices to decline in both 2014 and 2015.This will adversely affect housing construction. Declining

house prices, lower income growth and mounting eco-nomic uncertainty will affect consumer spending, whichis already showing lower-than-expected growth this year.At the same time oil investment is about to peak andlooks set to decline sharply as early as 2015. MainlandGDP growth next year and in 2015 is expected to end upat around 1% or nearly half of what we projected threemonths ago. But two rate cuts and a potential substantialincrease in oil revenue spending coupled with a weak

NOK and higher global activity should dampen the down-turn.

The Danish economys expected shift into a higher gearwill be driven by improved business cycles abroad and

gradually rising domestic demand. By agreeing on the budget for 2014, a majority of Danish MPs offered a mild boost to the economy in 2014, for instance by bringing

forward some of the tax cuts designed to improve thecompetitiveness of Danish businesses, which were in-cluded in Growth Plan Denmark. Against this backdropwe still expect growth in the Danish economy to be suffi-ciently strong to trigger a real labour market turnaroundsometime next year. The housing market, for severalyears the Achilles heel of the Danish economy, is alsostabilising, and in the years ahead we expect to see slight-ly rising home prices nationwide, albeit still with signifi-cant geographical differences.

Growth in the Swedish economy has remained weak in2013. Domestic consumption is growing at a decent pace,

but exports have not started to pick up mainly due toweakness among European economies. The economy willgain momentum in 2014, when exports contribute togrowth as global demand improves. In election year 2014the domestic economy is stimulated by an expansionaryeconomic policy mainly benefitting households. Invest-ment activity will pick up as production rises. Employ-ment continues to increase, gradually reducing unem-

ployment. Meanwhile, inflation remains below the 2%target during the forecast period. Household debt and a

positive economic outlook have made the Riksbank re-frain from cutting the repo rate, and persistent low infla-tion and a high unemployment rate will delay the first rate

hike until late 2014.

The short-term outlook for the Finnish economy is weak-ened by the lack of both international and domestic de-mand. Aggregate demand in the economy does not in-crease at all in 2013. Foreign trade volumes and invest-ment are predicted to fall compared with the year earlier,and with stagnant purchasing power households can onlyincrease their spending moderately. The labour market isexpected to deteriorate throughout the year. Exports areexpected to recover following a pick-up in world tradevolumes. In 2014, we see exports as well as investmentand private consumption gradually gaining more momen-

tum.

Source: Nordea Markets, IMF, own calculations

Helge J. Pedersen, Global Chief [email protected] +45 3333 3126

Real growth, %2011 2012 2013E 2014E 2015E

World 4.0 3.3 3.0 3.7 3.9Nordics 2.2 1.0 0.8 1.6 1.8

Denmark 1.1 -0.4 0.3 1.3 1.7Finland 2.7 -0.8 -1.0 0.8 2.0Norw ay 2.5 3.4 1.8 1.3 1.2Sw eden 2.9 0.9 1.0 2.4 2.4


3/14

Sweden


Recovery for hard hit export industry

Exports increasing again

Labour market continues to strengthen

Inflation to remain low for a long time Sidelined Riksbank will not hike rates until H2 2014

More broadly based growth next yearThe Swedish economy has shown signs of weakness inthe past two years, mainly due to hard times for the ex-

port industry. The domestically oriented sectors, on theother hand, have performed better. But next year we ex-

pect the export sector to recover slightly in tandem withthe improved economic momentum globally. Also do-mestic demand will likely grow further from an alreadydecent level. Against this backdrop we expect GDP

growth to pick up to around 2.5% next year, while slow-ing somewhat in 2015 (calendar adjusted). We thus fore-see a modest recovery in coming years mainly becausethe global economy is still suffering from the repercus-sions of the financial crisis.

Better prospects for the export sectorExports of goods fell 1% last year and there is every in-dication that the downtrend will continue this year. Thismeans that for the first time in decades exports of goodswill decline for two consecutive years. The main reasonsfor the prolonged downtrend are subdued demand in therest of Europe as well as a weak trend in exports to the

US and the BRIC countries despite growth in these mar-kets. A closer look at the distribution of exports acrossdifferent types of goods reveals that most goods are af-fected by the downtrend. Heavy cyclical sectors such asthe capital goods and commodities sectors have gradually

shrunk over the past year or two. Meanwhile, during thesame period the SEK has strengthened against many cur-rencies, thus adding to the pressure on export businesses.

Over the past months the decline in exports of goods haslevelled out. Indicators overall have improved, but stillsuggest a slow recovery. Our baseline scenario factors inrising growth in Swedens export markets. One excep-tion, however, is Norway where economic growth is ex-

pected to decelerate. In recent years Norway has been the biggest buyer of Swedish exports, and with a growthslowdown here and huge challenges in the Euro area therecovery in exports will be relatively slow. Not until2015 will exports of goods have returned to the levels

prevailing before the 2008 financial crisis, reflecting anearly 7-year period of stagnation. Exports of services,

currently accounting for one-third of exports, have showna more stable trend and also look set to perform well go-ing forward.

Household demand hits new highs, budget in the redHouseholds are still the key driver of growth. Conditionsare even more benign following the surprisingly strongincrease in employment. Real incomes should rise bysome 2.5% annually in 2013-15, partly driven by low in-terest rates and tax breaks next year. Household savingsare already high and both stock markets and house priceshave increased. Against this background it is hardly sur-

prising that sentiment has improved, indicating healthy

growth in household consumption going forward.

The budget for election year 2014 includes unfunded re-forms worth some SEK 25bn, most of them benefitinghouseholds. The reforms provide some stimulus to the

* Contribution to GDP growth (% points)

Sweden: Macroeconomic indicators (% annual real changes unless otherwise noted)2010 (SEKbn) 2011 2012 2013E 2014E 2015E

Private consumption 1,617 1.7 1.6 1.9 2.4 2.2Government consumption 890 0.8 0.3 1.3 1.3 0.8Fixed investment 602 8.2 3.3 -1.2 3.3 3.7 - industry 74 17.1 8.3 -3.4 3.1 5.5 - residential investment 110 10.4 -11.2 7.0 10.1 3.4Stockbuilding* 23 0.5 -1.2 -0.2 0.4 0.0Exports 1,651 6.1 0.7 -1.4 2.9 4.7Imports 1,445 7.1 -0.6 -2.0 3.4 4.5GDP 2.9 0.9 1.0 2.4 2.4GDP, calendar adjusted 2.9 1.3 1.0 2.5 2.2Nominal GDP (SEKbn) 3,337 3,481 3,550 3,619 3,765 3,916

Unemployment rate, % 7.8 8.0 8.0 7.7 7.5Employment grow th 2.3 0.6 1.1 1.0 0.5Consumer prices, % y/y 3.0 0.9 0.0 0.9 2.1Underlying inflation (CPIF), % y/y 1.4 1.0 0.9 1.1 1.4Hourly earnings, % y/y 3.2 3.3 2.5 2.9 3.0Current account (SEKbn) 258 224 218 218 232 - % of GDP 7.3 6.3 6.0 5.8 5.9Trade balance, % of GDP 2.6 2.4 2.4 2.4 2.4

General govt budget balance (SEKbn) 0 -20 -52 -67 -44 - % of GDP 0.0 -0.5 -1.4 -1.8 -1.1Gross public debt, % of GDP 38.6 38.2 41.4 41.6 41.6


4/14

Sweden


economy, but result in a budget deficit corresponding toalmost 2% of GDP. No unfunded reforms are likely for2015 so the budget deficit should decline thanks to high-er economic activity.

Labour market to improve

In both 2012 and 2013 the number of people employedrise largely in step with the pick-up in GDP, which is un-usual and partly a consequence of low productivitygrowth. The number of people employed should continueto rise at a healthy clip also in coming years despiteslightly higher productivity. However, unemploymentlooks set to decline modestly and even at the end of theforecast period to remain above 7%, in our view equal-ling the structural level of unemployment. The employ-ment ratio, which in many ways is a more relevant indi-cator than unemployment, is already at the historical av-erage.

A difficult balancing act for the RiksbankInflation is largely influenced by the slowdown in theglobal economy. Firstly, the pay deal of the hard-pressedmanufacturing industry is a benchmark for other sectors,which has led to historically low pay deals in most sec-tors. Secondly, price pressures around the world are lowoverall, which spills over to Swedish inflation throughlow import prices. Lastly, the relatively slow recoverysuggests that cost pressures will remain moderate also incoming years. We expect core inflation (CPIF, defined asthe CPI with fixed mortgage rates) to remain below the2% target also in 2015.

For the Riksbank this is a difficult balancing act, with astrong domestic economy and an improved outlook over-all versus sustained low inflation. Rising house pricesand higher credit growth are products of the benign trendin the domestic economy, and these two factors areamong those still carefully watched by the Riksbank. TheSwedish Financial Supervisory Authority now has prima-ry responsibility for macroprudential policy, but this doesnot imply any radical changes to monetary policy in theshort term, although it should have an impact longerterm. Against this backdrop we expect the repo rate toremain at the current level of 1.0% until H2 2014, whenwe see the first rate hike coming. The hiking cycle

should, however, be moderate over the forecast period.

Although the Riksbank will likely act carefully, a changeto its monetary policy line will stand out in an environ-ment where rate hikes in many cases seem very remote.The level of interest rates and the relatively strong Swe-dish economy support the SEK. We see the SEK gainingground versus the EUR, but weakening versus the USD.

Torbjrn [email protected] +46 8 614 8859

The export sector to recover

High unemployment despite increased employment

Inflation (CPIF) to stay below 2% target

Temporarily weaker SEK in the autumn

Source: Nordea Markets and Reuters Ecowin

94 96 98 00 02 04 06 08 10 12 14100

125

150

175

200

225

250

275

300

325

40

50

60

7080

90

100

110

120 Index 2005=100 SEKbn

Global trade, advancedeconomies (Source: CPB)

Swedish exportsof goods perquarter, sa, rhs


01 02 03 04 05 06 07 08 09 10 11 12 13 14 155.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

4300

4400

4500

4600

4700

4800

4900 % of the labour force

Employment, sa

Thousands of people

Unemployment, sa,rhs


03 04 05 06 07 08 09 10 11 12 13 14 15-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5 % y/y

CPI

% y/y

CPIF


10 11 12 138.00

8.50

9.00

9.50

10.00

10.50

6.00

6.50

7.00

7.50

8.00

8.50 EURSEK

EURSEK, rhs

USDSEK

USDSEK


5/14

Norway


Downturn driven by the housing market

Norwegian economy set to weaken

Housing market and oil investment act as a drag

Rate cuts and oil money spending dampen downturn NOK to stay relatively weak

We have sharply revised down our growth forecast for Norway since the latest issue of Economic Outlook inSeptember. There are clear signs of a turnaround in thehousing market, and we see house prices declining in

both 2014 and 2015. This will contribute to a sharp dropin housing construction. Meanwhile, oil investment isabout to peak. Going forward, we expect oil investmentto grow moderately in 2014 and decline sharply in 2015.Declining house prices, lower income growth and mount-

ing economic uncertainty will affect consumer spending,which is already showing lower-than-expected growthrates this year. Growth in mainland GDP next year and in2015 is now expected to be around 1%, roughly halfthe rate we projected three months ago. A weak NOKand slightly higher growth outside Norway will help mit-igate the slowdown. Other supporting factors should betwo rate cuts and a potential substantial increase in oilrevenue spending.

Consumers tighten their purse stringsThe weak trend in consumption in Q2 and Q3 was a dis-appointment. The decline in retail sales over the summer

can be explained by the exceptionally nice and warmweather, but retail sales did not recover during the au-tumn. Lower growth in households purchasing power,slightly higher unemployment and mounting uncertaintyabout housing market trends will likely continue todampen consumer spending growth going forward.

Also housing market indicators disappointed during the

autumn, with bigger-than-expected price declines, a ris-ing number of unsold homes, strong growth in the num-

ber of homes on the market, a slower sales process and

lower turnover than last year. New home sales plummet-ed to levels similar to those prevailing at the beginning ofthe financial crisis in 2008. Against this backdrop ofhousing market weakness we have changed our forecastfor housing prices: we see prices declining 7% in 2014and 8% in 2015. By end-2015 house prices should havedropped 15-20% from current levels.

Given the sharp pick-up in house prices over the past tenyears, we do not consider a drop of 15-20% outrageous.And average house prices will not fall below the levelsseen at end-2010. But key factors here are the potentiallylarge swings in household demand. The decline in new

home sales suggests that the drop in housing starts willcontinue and, in our view, likely result in a steep declinein housing investment over the next two years.

Declining oil investmentWeaker consumption growth and decelerating housingconstruction are not the only reasons for the markedslowdown in the economy in the years ahead. Also oilinvestment appears to be about to peak, with relativelymodest growth next year, according to Statistics Nor-ways investment survey. Estimates from The NorwegianOil and Gas Association suggest that oil investment willdecline sharply in 2015. This will have an adverse effect

on mainland companies through lower demand, and thereduced profitability of oil-related sectors will dampengrowth in both wages and consumption.

Lower growth and economic uncertainty will curb main-land business investment. However, the already low levelof investment in many sectors, the improved global out-

Norway: Macroeconomic indicators (% annual real changes unless otherwise noted)2010 (NOKbn) 2011 2012 2013E 2014E 2015E

Private consumption 1,132 2.5 3.0 2.2 1.5 1.8Government consumption 591 1.8 1.8 2.1 2.5 3.5

Fixed investment 537 7.6 8.0 6.3 0.2 -4.0 - gross investment, mainland 383 8.5 3.7 2.9 -0.8 -1.3 - gross investment, oil 141 9.8 19.1 14.0 2.0 -10.0Stockbuilding* 126 0.1 -0.2 -0.1 0.0 0.0Exports 1,141 -1.8 1.8 -2.5 1.9 1.4 - crude oil and natural gas 562 -6.2 0.9 -5.0 2.0 0.0 - other goods 316 0.0 2.6 0.3 2.0 3.0Imports 776 3.8 2.4 2.3 1.8 0.8GDP 2,750 1.2 3.1 1.0 1.4 1.0GDP, mainland 2,090 2.5 3.4 1.8 1.3 1.2

Unemployment rate, % 3.3 3.2 3.6 3.8 4.2Consumer prices, % y/y 1.2 0.8 2.1 1.8 1.8Core inf lation, % y/y 0.9 1.2 1.6 2.0 1.8

Annual wages, % y/y 4.2 4.0 3.6 3.5 3.3Current account (NOKbn) 351.0 413.2 312.6 374.0 389.0 - % of GDP 12.8 14.2 10.6 12.0 12.0

Trade balance, % of GDP 13.3 13.2 9.7 11.0 11.1

General govt budget balance (NOKbn) 373.6 417.9 345.0 350.0 365.0 - % of GDP 13.6 14.3 11.7 11.2 11.3



6/14

Norway


look, the weaker NOK and plans of large-scale invest-ment in power plants suggest that mainland business in-vestment overall may increase slightly in coming years.

Exports a bright spotA much weaker NOK and rising growth in export mar-

kets indicate that exports from the mainland economywill rise going forward. But exports of oil-related equip-ment and services have risen sharply over the past years,so the upside potential here is somewhat weaker. Moreo-ver, the past years relatively sharp pick-up in wage costsin Norway will also dampen the uptrend in exports.

Public consumption also on the increaseDeclining housing construction and a weak trend in bothoil investment and consumer spending will lead to mark-edly lower growth momentum in Norway, allowing thegovernment to fulfil a number of its pre-election pledges.A combination of tax cuts and increased infrastructure

investment should mitigate the downtrend. We also expect Norges Bank to cut rates to counter the slowdown ingrowth.

Despite the changes to economic policy, growth in Nor-way will slow markedly and unemployment will go up.However, some factors will contribute to limiting the in-crease in unemployment. We think that both lower

productivity growth and lower working hours will causeemployment growth to slow less than mainland economicgrowth. A lower labour participation rate and reduced netimmigration will also curtail the labour supply anddampen the pick-up in unemployment.

Moderate wage and price growthA modest increase in unemployment coupled with hardtimes for many industries points to moderate wagegrowth well below Norges Banks projection for thecoming years. But with weak productivity growth and aweak NOK, core inflation will nevertheless stay around2% next year, ie close to Norges Banks estimate. In2015 the effect of the NOK weakening should fade, caus-ing inflation to drop slightly.

Rate cuts and a weaker NOKAgainst the backdrop of rising unemployment, lower ca-

pacity utilisation and prospects of gradually declining in-flation, Norges Bank will likely cut rates twice in 2014.Markets are currently not pricing in any rate cuts and arenot likely to do so until well into 2014, when we expectthe NOK to weaken further. But until then we see some

NOK appreciation from current levels as the NOK weak-ening during the autumn appears to be an overreactioncompared to the development of interest rate differen-tials, risk appetite and oil prices.

Erik [email protected] +47 2248 4449

Katrine Godding [email protected] +47 2248 7977

Housing investment down due to lower house prices

Weak income growth; even weaker spending growth

Manufacturing industry boosted by oil investment

NOK relatively weak now versus 2Y yield spread


00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15-15

-10

-5

0

5

10

15

20

-15

-10

-5

0

5

10

15

20

House prices

% y/y% y/y

Housing investments

Forecasts


08 09 10 11 12 13 14 150.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0% y/y% y/y

Privateconsumption

Real disposableincome


94 96 98 00 02 04 06 08 10 1295.0

97.5

100.0

102.5

105.0

107.5

110.0

112.5115.0

117.5

120.0

122.5

15

20

25

30

35

40

45

50NOK

Manufacturingproduction, 4Q mov. avg., rhs

Investment petroleumsector, 4Q mov. avg.

Index


Feb11Aug Nov

12Feb May Aug Nov

13Feb May Aug Nov

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.97.27.37.47.57.67.77.87.98.08.18.28.3

8.4EURNOK % points

EURNOK

Spread Norwegianand EUR 2Y rate, reversed rhs


7/14

Denmark


Shifting gears

Optimistic households, cautious consumers

Exports could be key

Investment appetite returning slowly Fiscal policy giving maximum support to economy

The Danish economy is shifting gears, driven by improv-ing business cycles internationally and gradually risingdomestic demand. Against this backdrop we maintain ourgrowth forecast for the coming years, projecting growthof 0.3% in 2013, 1.3% in 2014 and 1.7% in 2015.

In the next couple of years the Danish economy will thusgrow at a faster rate than the potential growth rate of justunder 1%. This means that unemployment will begin toedge lower and other idle capacity in the economy will

be brought into use. However, with an output gap ofaround 2% it will still take a long time before the Danisheconomy is again operating at full capacity.

Exports could be keyOver the past year the value of Danish exports has in-creased to DKK 1,000bn. Accounting for around 55% ofGDP, exports will therefore be a key component of theengine driving the Danish recovery. And at first glance,the odds of rising exports are good. Confidence indica-tors in Germany and the UK, takers of more than one-fourth of total Danish goods exports, reflect a resumeduptrend in demand. In stark contrast to previously, de-velopments in the other Nordic countries constitute the

biggest uncertainties for exports. Especially the steepslowdown in the Norwegian economy may adversely af-fect exports. Currently, Danish goods exports to Norwaytotal around DKK 43bn annually, making Norway thefourth-largest export market. Denmark is mainly export-ing machinery and processed goods to Norway.

Optimistic households, cautious consumersAccording to current confidence indicators, Danishhouseholds are still upbeat about both their own financial

situation and the economy going forward. However, thegrowing optimism has yet to show through in actual con-sumer spending, which grew by a mere 0.7% in the firstthree quarters of 2013. Especially the retail sector has

been hard hit as retail sales over the past year alone havedeclined by more than 2% to a 10-year low. We expectconsumer spending growth to gradually gain momentumgoing forward.

Investment appetite returning slowlyDespite record low interest rates and the opening of thetemporary investment window, investment activity re-mains at a low level. One reason for this is probably sig-

nificant underlying uncertainty about the strength of therecovery. But against this backdrop there is a goodchance that business investment will rise fairly sharplyonce the recovery gains momentum.

Gradually higher inflationDuring the summer the year-on-year rate of increase inconsumer prices fell to a 45-year low. Accordingly, infla-tion dropped from 2.6% in August 2012 to a mere 0.4%in August 2013. But over the past two months inflationhas started to edge higher. We see this as the beginningof a new uptrend mainly driven by base effects related toenergy prices and the fading effect of the indirect tax on

fat and sugar.

Fiscal policy giving maximum support to economyBy agreeing on the budget for 2014, a majority of DanishMPs offered a mild boost to the economy in 2014, for in-stance by bringing forward some of the tax cuts ofGrowth Plan Denmark and jacking up the job allowance

Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted)2010 (DKKbn) 2011 2012 2013E 2014E 2015E

Private consumption 855 -0.7 -0.1 0.5 1.2 2.0Government consumption 510 -1.4 0.4 0.3 0.6 0.6Fixed investment 301 3.3 0.8 1.7 3.4 2.9 - government investment 39 4.4 7.7 5.0 -4.0 -3.5 - residential investment 67 17.8 -8.0 -6.2 3.3 3.8 - business f ixed investment 194 -1.7 2.8 4.0 5.2 4.0Stockbuilding* -3 0.4 -0.3 0.2 0.0 0.0Exports 888 7.0 0.4 0.6 2.9 3.6Imports 790 5.9 0.9 1.7 3.2 3.8GDP 1.1 -0.4 0.3 1.3 1.7Nominal GDP (DKKbn) 1,760 1,792 1,826 1,847 1,898 1,961

Unemployment rate, % 6.1 6.2 5.9 5.9 5.8Gross unemployment level, '000 persons 160 162 153 154 151Consumer prices, % y/y 2.8 2.4 0.8 1.4 1.6Hourly earnings, % y/y -2.8 1.5 1.2 1.5 1.9Nominal house prices, one-family, % y/y -2.8 -3.3 2.7 2.0 2.9Current account (DKKbn) 107 109 120 110 100 - % of GDP 5.9 6.0 6.5 5.8 5.1

General govt. budget balance (DKKbn) -34.9 -77.5 -20.0 -25.0 -35.0 - % of GDP -1.9 -4.2 -1.1 -1.3 -1.8Gross public debt, % of GDP 46.4 45.6 44.1 43.7 44.4



8/14

Denmark


to make it more attractive for people to work. Longerterm, this will contribute to lifting the potential growthrate of the Danish economy. However, the risk is that thisrelatively accommodative fiscal policy line implies huge

pressure on GDP growth next year. If GDP growth onceagain turns out to be a disappointment, there is a risk that

public finances end up violating the cap on the structural budget deficit of maximum 0.5% of GDP set by the Dan-ish Budget Act.

Labour market turnaround only in H2 2014Labour market trends throughout 2013 have been quiteextraordinary. Since the beginning of the year registeredunemployment (gross) has declined by 10,000 persons(full-time equivalents). The drop took place despite anaverage growth rate of a meagre 0.1% in the first threequarters of the year, which is below the level normallyrequired to trigger actual progress in the labour market.The surprise decline in unemployment was prompted by

a higher registered labour force exit rate caused for in-stance by the unemployment benefit reform.

Stabilising housing marketAfter a long, turbulent period the housing market seemsto be stabilising. In the course of 2013 prices of both sin-gle-family houses and owner-occupied flats have movedhigher, albeit amid low turnover and with substantial ge-ographical differences. We think the ongoing stabilisa-tion is coming from a strong foundation, with historicallylow interest rates and rising disposable incomes contrib-uting to ensuring the long-term sustainability of the re-covery. Against this backdrop we expect home prices to

continue to gradually pick up in coming years, driven especially by the market for homes in and around the majorcities.

The biggest risk to the fragile housing market recovery issudden rapid upward pressure on interest rates, especiallyif this is not accompanied by a pick-up in employment.However, we see only marginally higher policy ratesover the forecast period as the ECB is not likely to sanc-tion its first rate hike until sometime during H2 2015.And even though both market rates and the Danish cen-tral banks lending rate are expected to rise before that, itshould not disturb the uptrend in the housing market.

Helge J. [email protected] +45 3333 3126

Jan Strup [email protected] +45 3333 3171

Higher GDP growth

Value of Danish goods exports

Slow labour market turnaround

Ongoing stabilisation of the housing market


92 94 96 98 00 02 04 06 08 10 12 14275

300

325

350

375

400

425

450

275

300

325

350

375

400

425

450 DKKbn

Trend,1992-2012

DKKbn


03 04 05 06 07 08 09 10 11 12 13 14 1540

60

80

100

120

140

160

180200

220

2.725

2.750

2.775

2.800

2.825

2.850

2.875

2.900

2.9252.950

2.975

3.000

Employment

mill.persons

Gross unemployment, rhs

'000 persons


00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 1540

50

60

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40

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90

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110 DKK per sqm.

Single-familyhouses

DKK per sqm.

Owner-occupied flats


9/14

Finland


Another cold winter

Economic recovery still elusive

Exports will not recover until 2014

Employment will continue to weaken Consumption will grow much slower than normal

Economic recovery still elusiveRecovery still eludes the Finnish economy. The lateststatistics offer very few signs of recovery, even thoughthe outlook has improved clearly in the rest of the worldand global leading indicators point towards continuedeconomic activity across the board. With this in mind, wehave revised down our growth estimates for the Finnisheconomy in 20132015. Our new GDP growth forecastsare -1.0% for 2013 (down from -0.5%), 0.8% for 2014

(down from 1.5%) and 2.0% for 2015 (down from 2.3%).

We have revised down the growth estimates of virtuallyall components of GDP for the entire forecast period.One sign of weak activity is that aggregate demand willsubtract this year as it did last year with decreasedexports and investment and stagnated privateconsumption. 2014 will be slightly better, as exports and

private consumption will grow moderately butinvestment will continue to decrease. It is not until 2015that all demand components are expected to be rising.

Exports will not recover until 2014

We said in our September forecast that the recovery ofthe Finnish economy rests on a pick-up in exports, as theoutlook for domestic demand will inevitably remainsubdued with employment falling. This is still true.However, as opposed to earlier expectations, the pick-upin exports now does not seem likely before 2014, either.Global trade has still not reached the pace that the

confidence indicators have for long anticipated.Consequently, trade flows have not increased asexpected. This is also reflected in the imports of

Finland's most important trading partners: their importshave either increased very moderately (for example, theUK, the US and Russia) or even decreased further(Sweden and Germany). In order for the Finnish exportsto grow, the imports of the trading partners must alsogrow. From this point of view, the significant slowdownof Russian growth is a bad thing. In the short term,another obvious obstacle is the notable share ofinvestment goods within exports.

Employment will continue to weaken beyond thesummer of 2014During the four latest quarters with published data, total

production has contracted in Finland around 2% from theyear earlier. It is not surprising that employment hasweakened, but it is surprising how little unemploymenthas risen. There seems to exist a worrying trend in whicha certain portion of the unemployed drops entirely out ofthe labour market. This is bad news for efforts to narrowthe sustainability gap in public finances. Theunemployment rate of somewhat above 8% paints too

pretty a picture.

The labour market will continue to weaken becauseeconomic growth will remain subdued. We estimateemployment to decrease well into 2014. The

simultaneous decrease in the labour force will restrict therise in the unemployment rate and keep the rate at 8.4%on average.

Consumption will grow much slower than normalIn the next few years, private consumption will growmuch slower than normal with various factors hindering

Finland: Macroeconomic indicators (% annual real changes unless otherwise noted)2010 (EURbn) 2011 2012 2013E 2014E 2015E

Private consumption 99 2.6 0.2 0.0 0.5 1.5Government consumption 44 0.5 0.6 0.5 0.4 0.4

Fixed investment 34 5.7 -1.0 -2.4 -0.2 4.1Stockbuilding* -1 1.4 -1.3 -0.6 0.2 0.1Exports 72 2.7 -0.2 -1.8 3.0 5.4Imports 70 6.2 -1.0 -1.9 2.4 4.9GDP 2.7 -0.8 -1.0 0.8 2.0Nominal GDP (EURbn) 178.7 188.7 192.5 195.0 199.3 206.7

Unemployment rate, % 7.8 7.7 8.1 8.4 8.1Industrial production (output), % y/y 3.8 -2.1 -4.0 1.5 3.0Consumer prices, % y/y 3.4 2.8 1.5 1.5 1.6Hourly w ages, % y/y 2.7 3.2 2.0 1.6 1.5Current account (EURbn) -2.7 -3.6 -3.9 -4.0 -3.9 - % of GDP -1.5 -1.8 -2.0 -2.0 -1.9Trade balance (EURbn) -1.3 0.1 1.0 0.9 1.2 - % of GDP -0.7 0.1 0.5 0.5 0.6

General govt budget balance (EURbn) -1.3 -3.4 -4.5 -4.7 -4.3

- % of GDP -0.7 -1.8 -2.3 -2.3 -2.1Gross public debt (EURbn) 92.8 103.1 111.5 120.2 128.3 - % of GDP 49.2 53.6 57.2 60.3 62.1



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Finland


the household purchasing power. Employment willdecrease more than estimated, income level and pensionswill rise clearly less than in the past few years and taxeswill be higher, as more than 100 municipalities will raisetheir tax rate and commodity taxes will be raisedselectively. Weaker labour market and minute

improvement in the purchasing power will keephouseholds cautious and force them to carefully considermajor purchases despite the fact that interest rates areexpected to remain exceptionally low for a long while.

Household cautiousness is reflected in the reducedwillingness to take out loans, decreased demand ofdurable goods and drop in the number of housing sales.In January-September, the volume of new housing loanstaken out by households decreased 20% from the yearearlier. At the same time, housing sales decreased a littleless than 15%.

Weak short-term outlook in investmentConstruction companies do not want to build apartmentsfor later demand, so the cooling down in the housingmarket has made them wary. New home building permitsdecreased 30% in January-September compared to oneyear ago and were in September close to the bottomreached in 2009 after the financial crisis. The lownumber of permits and initiated projects suggests thatnew construction will continue to decrease in the firsthalf of 2014 at least. The shortage in the supply of newresidences will compensate for weak demand andstabilise housing prices. Reconstruction will, however,moderate the decline in construction.

Moreover, the outlook for traditional machinery andequipment investment as well as non-residentialconstruction is subdued. The capacity utilisation rate ofthe manufacturing industry is lower than usual, and neworders still do not show any signs of pick-up. Theindustrial sector suffers directly from the difficulties inexports, as the value of goods exports corresponds toabout half of its turnover. In addition, it suffers indirectlyfrom the weakness of private consumption throughorders from the domestic retail sector. Due to thechallenging demand situation, there is no significant needto increase capacity in manufacturing and retail.

Consumer price inflation to slow downThe economic recession, unused production capacity,weaker employment, lower producer prices and stabilisedwholesale and housing prices will restrict the rise inconsumer prices to 1.5% this year. Due to the weakeconomic outlook, the upward pressure on prices willremain limited in the forecast period, so we have reviseddown our price forecasts. We estimate consumer pricesto rise 1.5% in 2014 and 1.6% in 2015.

Pasi [email protected] +358 9 165 59942

Imports of major trading partners not expanding

Finnish manufacturing heading up from the bottom

Employment to deteriorate past summer 2014

Less upside pressure on consumer prices


05 06 07 08 09 10 11 12 13-50.0

-40.0

-30.0

-20.0

-10.00.0

10.0

20.0

30.0

40.0

50.0

-50.0

-40.0

-30.0

-20.0

-10.00.0

10.0

20.0

30.0

40.0

50.0% y/y% y/y

Note: 3M mov. avg.

GermanyUnited KingdomRussiaSwedenUnited States


11/14

Key figures


rowt , n at on,2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E

World 1) 4.0 3.3 3.0 3.7 3.9 World 1) 5.0 3.9 3.6 3.7 3.9

USA 1.8 2.8 1.7 3.0 3.2 USA 3.1 2.1 1.5 1.8 2.3Euro area 1.5 -0.5 -0.4 1.0 1.5 Euro area 2.7 2.5 1.4 1.0 1.5China 9.3 7.8 7.7 7.4 7.0 China 5.4 2.6 2.7 3.5 4.0Japan -0.6 2.0 1.8 1.4 1.0 Japan -0.3 0.0 0.4 2.3 1.7

Denmark 1.1 -0.4 0.3 1.3 1.7 Denmark 2.8 2.4 0.8 1.4 1.6Norw ay 2.5 3.4 1.8 1.3 1.2 Norw ay 1.2 0.8 2.1 1.8 1.8Sw eden 2.9 0.9 1.0 2.4 2.4 Sw eden 3.0 0.9 0.0 0.9 2.1

UK 1.1 0.2 1.4 2.5 2.0 UK 4.5 2.8 2.5 2.0 2.3

Germany 3.4 0.9 0.5 1.6 2.0 Germany 2.5 2.1 1.6 1.6 1.8France 2.0 0.0 0.2 0.8 1.5 France 2.3 2.2 1.0 1.0 1.3Italy 0.5 -2.4 -1.9 0.4 1.0 Italy 2.9 3.3 1.3 1.3 1.4Spain 0.1 -1.6 -1.3 0.9 1.5 Spain 3.1 2.4 1.5 0.7 1.0Finland 2.7 -0.8 -1.0 0.8 2.0 Finland 3.4 2.8 1.5 1.5 1.6Estonia 9.6 3.9 1.0 3.1 3.8 Estonia 5.0 3.9 2.9 2.3 3.1

Poland 4.5 1.9 1.4 3.2 4.0 Poland 4.3 3.7 1.0 2.1 2.5Russia 4.4 3.5 1.9 2.0 2.2 Russia 8.5 5.1 6.3 5.9 5.8Latvia 5.5 5.6 3.9 4.4 3.2 Latvia 4.4 2.3 0.7 3.0 2.3Lithuania 5.9 3.6 4.0 3.8 4.0 Lithuania 3.4 2.8 1.7 2.5 2.8India 7.5 5.1 5.0 6.0 6.5 India 9.5 7.5 6.0 6.5 7.0Brazil 2.8 0.9 2.4 2.2 2.5 Brazil 6.6 5.2 6.2 5.8 5.6

Rest of World 4.5 3.7 3.1 3.9 4.2 Rest of World 6.8 6.3 6.3 5.9 5.5

u c nances, o urrent account, o2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E

USA -8.4 -6.8 -3.9 -3.1 -2.4 USA -2.9 -2.7 -3.0 -3.0 -3.0

Euro area -4.1 -3.7 -3.1 -2.5 -2.4 Euro area 0.3 1.8 2.3 2.8 3.0China -1.1 -1.6 -1.9 -2.0 -2.1 China 2.8 2.6 2.2 1.5 1.0Japan -10.0 -10.2 -10.0 -9.5 -9.0 Japan 2.0 1.0 1.5 1.0 0.5

Denmark -2.0 -4.2 -1.1 -1.3 -1.8 Denmark 5.9 6.0 6.5 5.8 5.1Norw ay 13.6 14.3 11.7 11.2 11.3 Norw ay 12.8 14.2 10.6 12.0 12.0Sw eden 0.0 -0.5 -1.4 -1.8 -1.1 Sw eden 7.3 6.3 6.0 5.8 5.9

UK -7.8 -6.3 -6.3 -5.5 -3.0 UK -1.5 -3.8 -4.1 -4.0 -3.5

Germany -0.8 0.1 0.0 0.1 0.2 Germany 6.3 7.0 7.0 6.6 6.3France -5.3 -4.8 -4.2 -3.8 -3.7 France -2.5 -2.1 -1.8 -1.5 -1.5Italy -3.7 -2.9 -2.8 -2.5 -2.3 Italy -3.1 -0.5 1.0 1.2 1.1Spain -9.6 -10.6 -6.8 -5.5 -4.1 Spain -4.0 -1.2 1.4 2.6 3.1Finland -0.7 -1.8 -2.3 -2.3 -2.1 Finland -1.5 -1.8 -2.0 -2.0 -1.9Estonia 1.2 -0.2 -0.4 -0.5 -0.1 Estonia 1.8 -1.8 -0.9 -1.2 -1.3

Poland -5.0 -3.9 -4.4 4.5 -3.0 Poland -5.0 -3.7 -2.0 -1.7 -1.8Russia 7.0 0.0 -0.7 -0.8 -1.0 Russia 5.4 3.5 3.3 3.1 3.0Latvia -3.5 -1.5 -1.0 -0.5 0.0 Latvia -2.2 -1.7 -1.5 -2.2 -2.7Lithuania -5.5 -3.0 -2.8 -2.4 -2.0 Lithuania -3.7 -0.5 -0.5 -1.5 -2.0India -6.7 -5.5 -5.3 -5.5 -5.0 India -3.4 -5.1 -5.5 -5.3 -4.5Brazil -2.6 -2.1 -3.3 -3.6 -3.0 Brazil -2.1 -2.6 -3.5 -3.2 -2.7

1) Weighted average of 184 countries. Weights f or all co untri es and dat a for R est of Wor ld are fro m the most recent W orld Economic Outloo k, by the IMF. The weights are calculated fro m PPP-adjusted GDP-levels


12/14

Key figures


Monetary policy rates Monetary policy rate spreads vs Euro area4.12.13 3M 30.06.14 31.12.14 31.12.15 4.12.13 3M 30.6.14 31.12.14 31.12.15

US 0.25 0.25 0.25 0.25 1.25 US 0.00 0.00 0.00 0.00 0.50Japan 0.10 0.10 0.10 0.10 0.10 Japan 1 -0.15 -0.15 -0.15 -0.15 -1.15Euro area 0.25 0.25 0.25 0.25 0.75 Euro area - - - - -Denmark 0.20 0.20 0.20 0.40 1.00 Denmark -0.05 -0.05 -0.05 0.15 0.25Sw eden 1.00 1.00 1.00 1.50 2.00 Sw eden 0.75 0.75 0.75 1.25 1.25Norw ay 1.50 1.50 1.25 1.00 1.00 Norw ay 1.25 1.25 1.00 0.75 0.25UK 0.50 0.50 0.50 0.50 1.25 UK 0.25 0.25 0.25 0.25 0.50Sw itzerland 0.00 0.00 0.00 0.00 0.75 Sw itzerland -0.25 -0.25 -0.25 -0.25 0.00Poland 2.50 2.50 2.50 3.00 3.50 Poland 2.25 2.25 2.25 2.75 2.75Russia 5.50 5.25 5.25 5.00 4.75 Russia 5.25 5.00 5.00 4.75 3.75China 6.00 6.00 6.00 6.50 6.50 China 5.75 5.75 5.75 6.25 5.75India 7.75 8.00 8.00 7.50 7.00 India 7.50 7.75 7.75 7.25 6.25Brazil 10.00 10.25 10.25 10.25 10.25 Brazil 9.75 10.00 10.00 10.00 9.50For Russia, the forecast is made for the Key Rate, as oppo sed to the Refi Rate in earlier p ublications

3-month rates 3-month spreads vs Euro area4.12.13 3M 30.6.14 31.12.14 31.12.15 4.12.13 3M 30.6.14 31.12.14 31.12.15

US 0.24 0.30 0.35 0.55 1.60 US 0.00 0.10 0.15 0.35 0.85Euro area 0.24 0.20 0.20 0.20 0.75 Euro area - - - - -Denmark 0.24 0.30 0.35 0.45 1.00 Denmark 0.00 0.10 0.15 0.25 0.25Sw eden 1.08 1.25 1.25 1.60 2.30 Sw eden 0.84 1.05 1.05 1.40 1.55Norw ay 1.68 1.70 1.38 1.20 1.20 Norw ay 1.44 1.50 1.18 1.00 0.45UK 0.52 0.50 0.50 0.60 1.40 UK 0.28 0.30 0.30 0.40 0.65Poland 2.65 2.75 2.80 3.25 3.75 Poland 2.41 2.55 2.60 3.05 3.00Russia 6.95 6.75 6.55 6.45 6.50 Russia 6.71 6.55 6.35 6.25 5.75Latvia 0.25 0.20 0.30 0.35 1.00 Latvia 0.01 0.00 0.10 0.15 0.25Lithuania 0.40 0.50 0.50 0.35 1.00 Lithuania 0.16 0.30 0.30 0.15 0.25

10-year government benchmark yields 10-year yield spreads vs Euro area4.12.13 3M 30.6.14 31.12.14 31.12.15 4.12.13 3M 30.6.14 31.12.14 31.12.15

US 2.78 2.75 2.90 3.25 3.90 US 1.06 1.00 0.80 0.85 1.15Euro area 1.73 1.75 2.10 2.40 2.75 Euro area - - - - -Denmark 1.77 1.85 2.20 2.50 2.85 Denmark 0.05 0.10 0.10 0.10 0.10Sw eden 2.32 2.40 2.85 3.15 3.50 Sw eden 0.59 0.65 0.75 0.75 0.75Norw ay 2.80 2.86 3.13 3.37 3.40 Norw ay 1.07 1.11 1.03 0.97 0.65UK 2.82 2.80 3.00 3.25 3.75 UK 1.09 1.05 0.90 0.85 1.00Poland 4.54 4.50 4.80 5.00 5.20 Poland 2.82 2.75 2.70 2.60 2.45

Exchange rates vs EUR Exchange rates vs USD4.12.13 3M 30.6.14 31.12.14 31.12.15 4.12.13 3M 30.6.14 31.12.14 31.12.15

EUR/USD 1.36 1.33 1.30 1.25 1.20 -EUR/JPY 139.5 129.0 136.5 137.5 132.0 USD/JPY 102.7 97.0 105.0 110.0 110.0EUR/DKK 7.46 7.46 7.46 7.46 7.46 USD/DKK 5.49 5.61 5.73 5.96 6.21EUR/SEK 8.86 8.60 8.45 8.35 8.35 USD/SEK 6.53 6.47 6.50 6.68 6.96EUR/NOK 8.29 8.10 8.35 8.25 8.20 USD/NOK 6.11 6.09 6.42 6.60 6.83EUR/GBP 0.83 0.84 0.83 0.81 0.78 GBP/USD 1.64 1.58 1.57 1.54 1.54EUR/CHF 1.23 1.25 1.25 1.30 1.35 USD/CHF 0.91 0.94 0.96 1.04 1.13EUR/PLN 4.20 4.15 4.05 4.00 3.95 USD/PLN 3.09 3.1 3.1 3.2 3.3EUR/RUB 45.2 44.1 42.9 40.8 39.0 USD/RUB 33.3 33.2 33.0 32.6 32.5EUR/LVL 0.70 0.70 0.70 0.70 0.70 USD/LVL 0.52 0.53 0.54 0.56 0.59EUR/LTL 3.45 3.45 3.45 3.45 3.45 USD/LTL 2.54 2.60 2.66 2.76 2.88EUR/CNY 8.27 8.11 7.80 7.44 7.02 USD/CNY 6.09 6.10 6.00 5.95 5.85EUR/INR 84.7 79.8 78.0 72.5 63.6 USD/INR 62.4 60.0 60.0 58.0 53.0EUR/BRL 3.23 2.99 2.99 2.94 2.88 USD/BRL 2.38 2.25 2.30 2.35 2.40


13/14


Sweden :

Annika Winsth, Chief Economist Sweden [email protected], +46 8 614 8608

Torbjrn Isaksson, Chief Analyst [email protected], +46 8 614 8859

Andreas Wallstrm, Senior Analyst [email protected], +46 8 534 910 88

Bengt Rostrm, Senior Analyst [email protected], +46 8 614 8378

Lena Sellgren, Senior Analyst [email protected], +46 8 614 88 62

Rickard Bredeby, Assistant Analyst

[email protected], +46 8 614 80 03Sofie Andersson, Assistant Analyst [email protected], +46 8 614 80 03

Vera Batyalova, Assistant Analyst [email protected], +46 8 614 80 03

Estonia:

Tnu Palm, Chief Economist [email protected], +372 628 3345

Latvia:

Andris Strazds, Chief Economist [email protected], +371 67 096 096

Lithuania:

Zygimantas Mauricas, Chief Economist [email protected], +370 5 2657 198

Russia:

Dmitry A. Savchenko, Chief Economist [email protected], +7 495 777 34 77 4194

Dmitry S. Fedenkov, Head of Research, [email protected], +7 495 777 34 77 3368

Poland:

Piotr Bujak, Chief Economist Poland [email protected], +48 22 521 36 51

Economic Research Nordea

Denmark:

Helge J. Pedersen, Global Chief Economist [email protected], +45 3333 3126

Johnny Bo Jakobsen, Chief Analyst [email protected], +45 3333 6178

Anders Svendsen, Chief [email protected], +45 3333 3951

Holger Sandte, Chief [email protected], +45 3333 1191

Jan Strup Nielsen, Senior Analyst [email protected], +45 3333 3171

Amy Yuan Zhuang, Senior Analyst

[email protected], +45 3333 5607Aurelija Augulyte, Senior [email protected], +45 3333 6437

Deanie Haugaard Jensen, Assistant [email protected], +45 3333 3260

Henrik Lorin Rasmussen, Assistant Analyst [email protected], +45 3333 4007

Daniel Freyr Gustafsson, Assistant Analyst [email protected], +45 3333 5115

Finland:

Aki Kangasharju, Chief Economist [email protected], +358 9 165 59952

Pasi Sorjonen, Chief Analyst [email protected], +358 9 1655 9942

Norway:

Steinar Juel, Chief Economist Norway [email protected], +47 2248 6130

Erik Bruce, Chief [email protected], +47 2248 4449

Thina M. Saltvedt, Chief [email protected], +47 2248 7993

Katrine Godding Boye, Senior [email protected], +47 2248 7977

Bjrnar Tonhaugen, Senior [email protected], +47 2248 7959


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14 E O N D 2013

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Documents

Nordea Bank, Economic Outlook Nordics, Dec 2013. "Divergence"