Nordic Outlook: Too soon to celebrate a soft landing

admin Jul 09, 2023

Low unemployment, declining inflation, and real income growth. The economy is doing better than feared. However, uncertainty remains high and it is too soon to celebrate a soft landing. That is one of the conclusions of the new Nordic Outlook.

There is much to feel good about when evaluating the economy right now. Unemployment remains very low across Europe and the US. Inflation has declined sharply and many people are again experiencing real income growth.  

Many businesses are reporting higher incomes and a brightening outlook in the service sector. 

The situation is about as good as could be hoped for, following the sharp decline in spending power and the sharp increase in interest rates that has taken place over the last year and a half. 

However, it is too soon to celebrate. We do not have a soft landing because the economy has not landed yet, points out Las Olsen, our chief economist and Editor in Chief of Nordic Outlook.  

Denmark: a mild slowdown 
Looking at Denmark’s economy it has surprised me to the upside in that GDP and employment have performed better than expected while inflation has fallen.  

However, Danish GDP has been borne higher on the shoulders of the pharmaceutical industry – without that, we would likely have seen GDP decline in both Q4 last year and Q1 this year. 

In addition, we still need to see that the economy has truly landed after overheating. 

“Inflation is falling like a stone, but underlying price pressures remain quite high. We still need to see the broad-based decline in inflation that will confirm the economy has truly landed after overheating. Until that happens, we continue to perceive a significant risk of a genuine crisis,” says Las Olsen, who emphasises that we have not experienced the full impact of the monetary policy tightening seen in 2022 and 2023.  

Despite great uncertainty and the risk of a crisis, the main scenario for the Danish economy is for a rather mild weak spell in the coming quarters. This will produce a modest decline in the number of people in work and a slight increase in unemployment. 

Sweden will avoid recession 
If we look at Sweden, the Swedish economy has exceeded expectations during the late winter and spring months, and it is no longer expected to drop into recession this year.  

According to the Nordic Outlook, the economy is increasingly running on two tracks, with the drag from consumers and the housing market offset by a strong export-driven business sector and labour market. 

The outlook for 2023 is therefore revised up considerably and now anticipates a period of weak but positive growth. 

Despite high inflation, it is expected that the peak has passed, and the 2 per cent inflation target will be reached earlier than in the Eurozone, particularly due to the comparatively lower wage agreement.

Norway: Risk of a hard landing  

Growth in the Norwegian economy has now dropped off, but activity levels remain high. Unemployment is rising slightly but still low.  
 
Inflation has been higher than expected and interest rates are expected to rise further.

There remain considerable variations between sectors, with strong and growing optimism in oil services, normal growth in the service sector, zero growth in mainland manufacturing and growing pessimism in retail and construction. 
 
Overall, the Nordic Outlook points to an increased risk that the Norwegian economy will face a hard landing as the weak Norwegian Krone could force Norges Bank to raise rates further than the underlying inflation picture would warrant. 

Stagnant growth in Finland 
Finland’s economic growth is expected to stagnate this year. 

Inflation remains high and rising interest rates are holding back the economy with lagged effects. In addition, the flow of export orders is sluggish and house prices are under pressure.  

Labour markets remain steady even though some sectors will reduce their workforce. Many companies are still struggling with labour shortages and wages are rising faster than in recent years. Finland’s economic growth is expected to pick up in 2024 as a result of private consumption and export supported by falling inflation and lower interest rates.