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Nordic Outlook
15 June 2017
Economic and financial trends
• Denmark: as good as it gets
- The recovery has gained momentum, but is not likely to accelerate further
• Sweden: was that it?
- Growth is stabilising at a lower level, but is also becoming better balanced
• Norway: returning to normal
- The recovery is beating expectations
• Finland: full speed towards potential
- Strong growth is rapidly normalising the economy
I m po rta nt di sc l osu r es a nd cer t if icat ions ar e containe d f ro m p a ge 3 5 of th i s r e p o r t .
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Nordic Outlook
Analysts
Editorial deadline 14 June 2017
Investment Research
Editor-in-Chief:
Las Olsen
Chief Economist
+45 45 12 85 36
[email protected]
Macroeconomics:
Bjørn Tangaa Sillemann
Louise Aggerstrøm Hansen
Christian Alexander Lilholt Toftager
Denmark
Denmark
Denmark
+45 45 12 82 29
+45 45 12 85 31
+45 45 12 81 57
[email protected]
[email protected]
[email protected]
Roger Josefsson
Frank Jullum
Pasi Petteri Kuoppamäki
Minna Emilia Kuusisto
Sweden
Norway
Finland
Finland
+46 8 568 80558
+47 85 40 65 40
+358 10 546 7715
+358 10 546 7955
[email protected]
[email protected]
[email protected]
[email protected]
This publication can be viewed at www.danskebank.com/danskeresearch
Statistical sources: Thomson Reuters Datastream, Macrobond Financial, OECD, IMF, National Institute of Social and Economic
Research, Statistics Denmark and other national statistical institutes as well as proprietary calculations.
Important disclosures and certifications are contained from page 35 of this report.
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Nordic Outlook
Contents
Nordic outlook
At a glance – A truly pan-Nordic recovery
5
Denmark
As good as it gets
6
Sweden
Norway
Finland
Global overview
Forecast at a glance
11
Was that it?
12
Forecast at a glance
17
Returning to normal
18
Forecast at a glance
23
Full speed towards potential
24
Forecast at a glance
29
Easing tailwinds for the global economy
30
Economic forecast
33
Financial forecast
34
The Nordic Outlook is a quarterly publication that presents Danske Bank’s view on the economic outlook for the Nordic
countries. The semi-annual publication The Big Picture sets out our global economic outlook.
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At a glance
A truly pan-Nordic recovery
Growth is converging…
No country left behind
This year has so far been one of mostly pleasant surprises in the Nordic
economies. In particular, growth in Finland has staged a remarkable comeback
driven by increasing demand from consumers, investments and exports, and
Finnish growth will be significantly above the European average this year.
Norway has clearly turned the corner after the slowdown caused by lower oil
investments, as other sectors are taking over. Danish growth has been above
expectations, in line with what we see in most of Europe. The exception is
Sweden, where growth has slowed, but there are signs that it is becoming more
balanced and thus sustainable. After several years of very different outcomes
across the Nordic countries, we now have convergence in growth of around 2%
or better.
Prospects are good, but not likely to become much better. The recovery in
Norway has room to accelerate but in the other countries, growth next year will
at best be similar to what we are seeing now. We expect global growth to cool
somewhat, as China slows down and the political boost to growth in the US
that many were looking for is not materialising. That will affect the Nordic
countries. The very high current growth rate in Finland will be challenged by
lower spending power in households and the need for fiscal consolidation. In
all four countries, as in the rest of the world, a slowdown in productivity growth
has lowered the potential growth rate in the economy. Growth of 2% is now
higher than can be expected in the long run.
Low inflation continues
Despite the clear recovery, wage pressure remains weak across the Nordics,
and indeed across the world. Finland is going through an internal devaluation
this year, which will actually see hourly wages decline and the labour markets
in the other countries are not producing wage growth that would normally be
associated with an economic recovery. That is at the core of why inflation
remains low and interest rates are set to be low for a long time yet. The
combination of modest real GDP growth and low inflation means that this
economic recovery is felt less keenly in many businesses than previous
recoveries. Turnover growth in kroner, kronor and euro is at levels more
normally associated with stagnation.
Not all prices are stagnant – house prices continue to increase at a rapid pace
in Sweden. In Norway, it seems that regulatory measures to dampen them have
worked and we expect to see more of that in Sweden as well if price growth
does not slow by itself. Stretched house prices remain a risk for both countries,
but it is a risk that is being addressed. House prices in Denmark and Finland
are also increasing in local areas with risks for buyers, but on a national level
prices remain moderate.
Source: National Statistics, Danske Bank
…but different composition
Source: National statistics
Low wage growth implies low inflation
Source: OECD
House prices have slowed in Norway but not Sweden
Source: National Statistics, Danske Bank
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Nordic Outlook
Denmark
As good as it gets

The recovery has gathered further momentum this year, with
consumption, exports and employment all higher.

We expect GDP growth to slow slightly in 2018 due to a deceleration in
the global economy and reduced tailwinds from higher real income .



Changes vs previous forecast
Denmark
Current forecast
2017
2018
2017
2018
GDP
1.9
1.7
1.7
1.7
Interest rates are set to remain low and thus should continue to support
the housing market although apartment prices could face headwinds.
Private consumption
2.2
2.1
2.0
2.1
Public consumption
0.9
0.8
0.1
0.8
Gross fixed investment
0.2
4.1
4.2
3.5
Rising employment has been offset by an expanding workforce but the
labour market has remained rather tight.
Exports
3.7
2.4
4.4
2.7
Imports
2.4
3.0
4.8
3.4
Exports have grown rapidly recently and the current account surplus
continues to surprise on the upside.
Gross unemployment (thousands)
111.9
Denmark’s recovery surprised positively going into the New Year and 2017
looks set to produce the highest GDP growth for seven years. Consumers in
Denmark and abroad are turning rising real income into rising consumption and
housing investment is increasing. Business investment is also picking up
fundamentally, although the overall growth rate for this year is unlikely to be
particularly impressive. Employment has now risen for five consecutive years
and job growth has not yet stalled – even though the pool of unemployed ready
to be hired is not as large as previously. So, the Danish economy is doing well
as such. On the other hand, growth of around 2% looks set to be as good as it
will get this time around. Real incomes are being squeezed by gradually rising
inflation and a global outlook that is being weighed down by the Chinese
economy, which is slowing. Even though we expect investment to accelerate
further, our overall forecast is for growth to slow a little in 2018. Looking
further ahead, we clearly cannot have a perpetual upswing with rising
employment. Unless we see a marked improvement in productivity, the longterm outlook is for lower GDP growth than at present.
114.5
113.0
113.7
Inflation
1.1
1.4
1.2
1.5
Government balance, % of GDP
-1.1
-0.3
-1.2
-0.6
Current account, % of GDP
8.3
8.1
7.8
7.7
Source: Danske Bank
Not like the old days
Source: Statistics Denmark, Danske Bank
The Danish government has presented its 2025 plan, which aims to increase
underlying GDP growth from 1.5% to 2% annually. The proposed path to this
is reform and tax cuts that would boost the labour supply by 55-60,000 and
raise annual productivity by 0.2 percentage points. If this becomes a reality,
growth could continue at its current level for a number of years, including
beyond our forecast, but the government is setting the bar high. Government
finances are in a healthy state and there is scope for investment, tax cuts or
increased consumption over the next eight years. However, given where we are
in the economic cycle, we do not need a more accommodative fiscal policy –
more the reverse. Hence, any easing in 2018 should be financed by cutbacks or
tightening in other areas.
Our forecast has the potential for both upside and downside surprises. The
investment upswing could materialise faster than we expect if corporate faith
in the future is significantly restored. In addition, households could begin to
increase their levels of debt and hence their consumption at a faster pace. In
contrast, the slowdown in income growth could also cause consumption to
slow, while the global situation is extremely uncertain. Our forecast for growth
also presumes sufficient labour is available.
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Previous forecast
% y/y
15 June 2017
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Nordic Outlook
Interest rates to remain low for some time yet
The start of the year again saw FX inflows into Denmark, in part due to
uncertainty on the EU ahead of the French presidential election, as some
investors see the Danish krone (DKK) as a safe haven in preference to the euro
(EUR). This prompted market intervention from Danmarks Nationalbank. In
recent months, however, Danmarks Nationalbank has not needed to intervene
in order to stabilise the DKK, which has led to a slight increase in money
market rates. Should Denmark again experience an FX inflow, for example in
connection with the upcoming Italian parliamentary election, we expect
Danmarks Nationalbank to react again by intervening in the currency market
rather than by cutting rates. Nevertheless, the result would be downward
pressure on Danish yields and interest rates. In the bigger picture, however, we
are talking about rather insignificant fluctuations. For bank interest rates to
change significantly it would require a rate hike from the ECB, which we do
not expect to see either this year or next. That said, long interest rates on, for
example, 30Y mortgage loans will probably rise slightly on the prospect of
future rate hikes from the ECB and with the Fed having started its hiking cycle
already.
Market rates tend to rise when DKK is stable
Source: Nasdaq OMX, Danmarks Nationalbank
Construction and machinery investment still low
Investment picking up, but fluctuating
considerably
Job growth without wage growth?
Job growth continued unabated in Q1 17, with employment increasing by
94,300 or 3.3% over the past two years. However, unemployment has not fallen
since mid-2016. In part, this was due to a decision that ‘integration benefit’
recipients should to a greater extent be considered fit to work and thus be
included in the unemployment statistics, though there are also signs that the
workforce has grown in real terms. Despite the rise in employment, there has
been no increase in the number of companies reporting labour shortages. We
also expect the workforce to continue to grow in coming years, in part because
the retirement and early retirement age have been raised. Nevertheless, the
labour market remains relatively tight and an insufficient influx of new labour
could slow the upswing.
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Note: Four-quarter moving average.
Source: Statistics Denmark.
Vacant office space is decreasing
Source: Ejendomstorvet.dk
Low wage growth vs unemployment …
6
5
Wage growth, %
Both business and housing investment are now rising substantially after being
in the doldrums for many years. Nevertheless, business investment dipped
significantly in Q1 2017, mostly due to investment being boosted the year
before by investments in shipping that were not repeated this year. Hence,
business investment may fall overall in 2017 even though we actually expect
decent growth here in the coming quarters. Apart from shipping, the business
sector has also invested heavily in intellectual rights, while investment in
buildings and construction remains low. The number of vacant commercial
properties is declining, so there is reason to believe this area of business
investment will also begin to pick up more noticeably. Business investment is
generally being supported by further growth in the economy and employment,
which together with the low level of interest rates should mean an expanding
number of profitable investment opportunities. This is one of the reasons why
we expect growth to be less based on further increases in employment going
forward and slightly more on better productivity growth. Government
investment has been relatively high in the wake of the crisis, but is now slowly
normalising, though with significant fluctuations along the way.
q1 1997
4
3
2
1
q1 2017
0
3
4
5
6
7
Unemployment (LFS), %
Source: Statistics Denmark
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9
Nordic Outlook
Slightly higher inflation ahead – though underlying
price pressures remain modest
…but not when taking into account low inflation
5
4
Real wage growth
A situation like the current one in the labour market would have resulted
previously in significantly higher wage growth than we are actually seeing. In
Denmark, like many other places in Europe, the correlation between
unemployment and wage growth appears to have broken down. One obvious
explanation is that employees and employers have got used to a much lower
rate of inflation than earlier. The past four years have seen ever greater
increases in real wages, which last year exceeded GDP growth by increasing
1.5%. In that sense, the tighter labour market has produced a result for
employees, and wage growth in Denmark is actually a little higher than among
Denmark’s trading partners. However, that does not explain why wage growth
in the private sector almost stalled in Q1 17. That said, we expect wage growth
to accelerate a little going forward. New wage agreements typically lift wages
when they come into force, as will happen in much of the private sector labour
market in 2017, while rising inflation could also fuel increased pay rises.
3
q1 1997
2
q1 2017
1
0
-1
-2
3
4
5
6
7
8
9
Unemployment (LFS), %
Note: Real wages is wage growth minus inflation the year before
Source: Statistics Denmark
Real wage increases set to continue – but more
subdued
Slightly higher wage growth in itself could also begin to push prices up next
year, especially on domestically -produced services.
A couple of technical factors will also contribute to pushing inflation a little
higher in the time ahead. Last year’s pronounced decline in mobile phone
roaming charges will slip out of the inflation statistics over the summer. While
roaming prices could fall further, rising prices on mobile phone subscriptions
will pull in the other direction. Overall, we calculate this will push inflation
back above 1%. We also expect rents to rise more next year than in previous
years, as developments in the regulated sector of the housing market depend on
the rate of inflation in the previous year. Hence, the higher inflation we have
seen recently will via this route automatically lift inflation a little higher.
However, there is nothing to suggest that underlying price pressures in the
Danish economy will increase significantly anytime soon. We estimate
inflation will come in at 1.1% this year and 1.4% next year.
Note: Dotted lines indicate forecasts
Source: Statistics Denmark and Danske Bank
Declining supply of homes for sale means buyers less
able to press prices
House prices set to continue rising
The housing market is buoyant, with house prices continuing to rise in the
spring, while apartment price growth slowed somewhat. Activity has picked up
recently, with a rising number of both house and apartment sales and increased
property showings indicating a healthy appetite for home-buying in the spring.
A reduced supply of homes for sale and still very low interest rates indicate
further upward pressure on prices. Together with the generally solid state of the
Danish economy, this leads us to expect an increase in house prices of 3.5%
this year and next. The outlook for house price growth to slow slightly
compared to 2016 reflects the dampening effects of increasing new home starts
and gradually rising long interest rates.
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Source: Finance Denmark, own seasonal adjustment
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A reform of the property tax system from 2021 was agreed in M ay. This
brought some clarity after several years of great uncertainty about the future
tax set-up. The new system suggests property taxes would have a stabilising
effect on future price fluctuations, as a link between house price growth and
taxes has been re-established. Despite a gentle transition to the new system in
2021, with the introduction of a so-called ‘tax rebate’, the tax reform could,
nevertheless, contribute downside pressure to apartment prices in the major
cities – particularly in the Copenhagen area. This is because the new property
valuation system due to be launched in 2019 is likely to produce a very sharp
rise in the land valuations of many apartments, in particular, which will have a
tax impact on people who buy property after 2020. With respect to the years
covered by our forecast, we do not expect the property tax agreement to have
any noticeable impact on house prices, while the effect on apartment prices is
less certain.
Home prices continue to appreciate, with house price
growth now outpacing apartments
Source: Statistics Denmark, own seasonal adjustment
Car sales lifting consumption
Private consumption making strong contribution
to growth
Private consumption got off to a good start in 2017 and continues to be
supported by a buoyant labour market, real wage growth and appreciating
house prices across much of the country. Q1 consumption growth was driven
by car sales in particular, which were very high in the first three months of the
year. Energy consumption also continued to make a positive contribution,
while core private consumption rose more modestly.
Danes having more money in their wallets reflects, in particular, that wages
have grown faster than prices. This effect peaked in 2016 due to the very low
level of inflation, but will also continue during our forecast period, when we
expect inflation to remain below the rate of wage growth. We look for a modest
uptick in borrowing to also help lift consumption in 2017 and 2018. This is
possible because the Danes have come far in rebalancing their finances after
several years when many used their growing incomes to reduce debt rather than
spend the additional money on consumption.
Source: Statistics Denmark, own seasonal adjustment
Lending growth still very modest, but expected to
pick up
Overall, we expect moderate consumption growth of just over 2% this year and
next. Our forecast carries both upside and downside risks. Should borrowing
really begin to take off or nascent bottlenecks give higher wage growth than
expected, the consumption upswing could potentially be even stronger.
However, if borrowing remains flat, then lower real income growth may mean
consumption disappointing.
Source: Statistics Denmark, own calculations
Exports basically looking strong
Exports have looked strong during the recent year. True, goods exports fell in
the beginning of the year, but that was in the wake of a considerable jump at
the end of 2016, and goods exports were actually up 5% Y/Y in Q1.
M anufacturing exports, which account for around ¾ of total goods exports and
are often heavily dependent on the state of the global economy, have looked
solid over the past 6 months. Exports have looked strong during the recent year.
True, goods exports fell in the beginning of the year, but that was in the wake
of a considerable jump at the end of 2016, and goods exports were actually up
5% y/y in Q1. M anufacturing exports, which account for around three-quarters
of total goods exports and are often heavily dependent on the state of the global
economy, have looked solid over the past six months.
Trade with goods outside Denmark has been a
particular driving force for goods exports recently
% of total goods exports
18
16
14
12
10
8
6
4
2
0
10
11
Merchanting
12
13
14
15
18
16
14
12
10
8
6
4
2
0
16
17
Goods sold and processed abroad
Note: Merchanting is the profit on goods bought and sold abroad
Source: Statistics Denmark
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Nordic Outlook
This sits well with the strong global growth seen over the period. Recent
fluctuations in total goods exports should very much be seen in light of Danish
companies’ trade with goods outside the country’s borders. The value of goods
sold and processed abroad was, for example, extraordinarily high in Q4 – and
subsequently pulled exports significantly lower in Q1. Overall, however, goods
traded abroad constitute a steadily rising share of total goods exports.
Exports may well continue to grow going forward, and we estimate 2017 could
be the best year for exports since 2011. Danske Bank’s export barometer has
indicated strong growth in Denmark’s export markets since autumn 2016. This
has also been the picture recently, though growth has been slowing in Q2 –
mainly as a result of global growth becoming a little more sluggish recently
due to less momentum in China and the US.
Any slowdown in the world’s larger economies would have a disproportionate
impact on service exports, as Denmark’s sizeable shipping industry, which
accounts for almost half of total service exports, is very dependent on intercontinental trade. Nevertheless, despite the slightly less bright global growth
outlook, we still estimate that foreign demand will keep exporters busy,
enabling exports to contribute to economic growth in Denmark both this year
and next.
Solid but slightly lower growth in export markets
5.0 q/q, %
Index 60
2.5
55
0.0
50
-2.5
45
-5.0
40
-7.5
35
-10.0
30
07 08 09 10 11 12 13 14 15 16 17
Goods exports, national accounts (lhs)
Export barometer (rhs)
Note: The export barometer is a weighted consolidation of PMI
indices for our largest trading partners
Source: Markit Economics, Statistics Denmark, Danske Bank
Exports back in fine form
Huge current account surplus seems impossible
to shift
There is nothing to suggest that the current account surplus is set to decline
from the very high levels we have seen in recent years. Indeed, the surplus has
actually been growing again recently after moderating somewhat in 2016. The
recent pickup in the surplus is due, in particular, to a rising surplus on the goods
and services balance. The surplus on the goods balance has increased on the
back of solid growth in Denmark’s export markets since the autumn, but should
also be seen against a backdrop of Danish companies having little appetite for
physical investments. This has contributed heavily to keeping goods imports
low. The service balance has also experienced a comeback since the summer,
due largely to an increase in shipping, which got a helping hand from a solid
pickup in global trade in recent months.
Going forward, we expect the current account surplus to moderate a little, but
this could be a drawn out process – especially as companies are still reluctant
to make certain investments. M oreover, investment income accounts for an
increasing share of the Danish current account surplus, and we expect this trend
to continue as pension savings carry on growing. However, interest rates slowly
beginning to tick up would generate a greater return on foreign investments in
Denmark, which are, to a large extent, concentrated in bonds. That would of
course tend to slightly reduce net investment income. We expect the current
account surplus to remain high at 8.3% of GDP this year and then to begin to
decline slowly to 8.1% in 2018 as increased investment lifts imports.
Note: Horizontal lines are estimates for 2017 and 2018
Source: Statistics Denmark and Danske Bank
Current account surplus up again
Note: Data is seasonally adjusted.
Source: Statistics Denmark.
Shipping has contributed to larger surpluses on
services balance lately
2.0 % of GDP
% of GDP 2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1
2014
Shipping
2015
Others
2016
2017
Total service exports
Note: Shipping surplus calculation includes bunkering. Data is not
seasonally corrected
Source: Statistics Denmark.
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Denmark: forecasts at a glance
Forecast
National account
2016
2016
DKK bn (current prices)
2017
2018
% y/y
Private consumption
948.6
1.9
2.2
2.1
Government consumption
525.6
-0.1
0.9
0.8
Gross fixed investment
412.5
5.2
0.2
4.1
- Business investment
247.1
4.1
-0.4
3.8
- Housing investment
91.5
11.0
5.9
7.0
- Government investment
73.9
2.2
-4.8
1.4
-0.4
-0.4
0.3
-0.2
1094.3
1.7
3.7
2.4
- Goods exports
699.2
1.5
3.4
2.4
- Service exports
395.1
2.1
4.1
2.3
952.6
2.4
2.4
3.0
- Goods imports
595.5
1.9
3.2
2.9
- Service imports
357.1
3.3
1.1
3.1
2060.9
1.3
1.9
1.7
Economic indicators
2016
2017
2018
Current account, DKK bn
168.5
176.4
177.8
8.2
8.3
8.1
-18.3
-22.5
-6.6
-0.9
-1.1
-0.3
778.2
772.7
766.7
37.8
36.4
35.0
2876.9
2920.2
2952.4
112.7
114.5
113.0
Growth contribution from inventories
Exports
Imports
GDP
- % of GDP
General government balance, DKK bn
- % of GDP
General government debt, DKK bn
- % of GDP
Employment (annual average, thousands)
Gross unemployment (annual average, thousands)
4.2
4.3
4.3
Oil price - USD/barrel (annual average)
- % of total work force (DST definition)
44
55
60
House prices, % y/y
3.9
3.5
3.5
Private sector wage level, % y/y
1.7
1.8
2.2
Consumer prices, % y/y
0.3
1.1
1.4
Financial figures
14/06/2017
+3 mths
+6 mths +12 mths
Lending rate, % p.a.
0.05
0.05
0.05
0.05
Certificates of deposit rate, % p.a.
-0.65
-0.65
-0.65
-0.65
2-yr swap yield, % p.a.
0.01
0.05
0.15
0.20
10-yr swap yield, % p.a.
1.00
1.10
1.20
1.55
EUR/DKK
7.44
7.44
7.44
7.44
USD/DKK
6.64
6.83
6.70
6.41
Source: Statistics Denmark, Danske Bank
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Nordic Outlook
Sweden
Was that it?



We have long conveyed a message of ‘normalisation’ regarding
S wedish economic developments, pointing to a slowdown in domestic
demand, mainly household consumption, and an acceleration in
external demand, citing on trend rising industrial orders and buoyant
survey data.
To that end, recently released GDP data from S tatistics Sweden (SCB)
pertaining to Q1 17 is a case in point, with average household
consumption growth and decent exports growth.
However, the international outlook, while still strong, has darkened
somewhat with signals from many emerging markets and a few
developed markets, notably the US , not all positive. To some extent,
this is also visible in a few recent indicators of export orders.

Despite becoming less certain of our optimistic call for a gradual
rebalancing of the S wedish economy, we retain our overall GDP
growth forecasts of 2% y/y in both 2017 and 2018. Put in another way;
we retain our forecasts even though the balance of risks is tilting
slightly to the downside.

As such, this also means that the labour market outlook by and large
remains intact, with continued decent growth in employment, whereas
the unemployment rate takes its cue from the inflow of migrants into
the labour force and is thus more volatile.

With the centralised wage negotiations now behind us, we can confirm
that wage pressures are almost certain to remain below the c.4% y/y
that is necessary to make inflation sustainably reach the inflation
target of 2% y/y.

Indeed, our forecasts for inflation are only expected to slowly approach
the inflation target over the coming years. To be clear, it is only beyond
the forecast horizon, in 2019, that we expect the Riksbank to reach the
inflation target, at the earliest.

Hence, the Riksbank is set to keep the interest rate at current or
perhaps even lower levels throughout 2017 and 2018. We still expect
the Riksbank to end its new purchases of government bonds when the
current QE programme expires at the beginning of 2018. This should
not be considered a ‘tapering’ but rather a necessity, as the Riksbank
is already having problems finding eligible material.
Changes vs previous forecast
Sweden
Current forecast
% y/y
Previous forecast
2017
2018
2017
2018
GDP, calendar adjusted
2.0
2.0
2.0
2.0
Private consumption
1.5
1.4
1.3
1.4
Public consumption
0.3
1.6
1.3
2.0
Gross fixed investment
4.6
3.1
2.2
2.1
Exports
3.2
3.3
3.7
3.6
Imports
2.8
3.3
2.0
3.6
Unemployment rate
6.7
6.6
7.0
6.9
Inflation
1.7
1.4
1.3
1.2
Government balance, % of GDP
0.3
0.0
0.2
0.0
Current account, % of GDP
5.3
5.2
5.0
5.0
Source: Danske Bank
Swedish forecast at a glance
Source: Statistics Sweden (SCB), National Institute for Economic
Research (KI) and Riksbank. Danske calculations
On top of the Riksbank’s mind
Less buoyant exports outlook
In line with previous forecasts, Danske Bank expects international demand to
increase over coming years. That said, we have made a slight downgrade to our
global GDP forecasts: in 2017 from 3.4% y/y (vol) to 3.2% y/y (vol) and in
2018 from 3.7% y/y (vol) to 3.1% y/y (vol). These revisions are made on the
back of less buoyant economic policies in the US and China than exp ected
previously.
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15 June 2017
Source: SCB, Eurostat, Prospera, Riksbank. Danske Bank calculations
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Global GDP growth is one measure of international demand but when gauging
Swedish exports, we need to take into consideration that Swedish export
markets have a different composition than global GDP (in addition to relative
prices, currency effects etc.). Hence, we try to construct some crude measure
of trade-weighted imports growth on Swedish export markets: Swedish world
market growth. Danske Bank’s forecasts for import growth on typical Swedish
export markets suggests a decrease from 4.5% y/y (vol) this year to c.4% (vol)
in 2018.
When balancing the Swedish exports outlook, we also need to take into account
the international demand for input and investment goods, which make up the
lion’s share of Swedish exports. Here, Danske Bank’s forecasts are actually
less sombre and global investments growth should reach 1.5% y/y (vol) this
year and exceed 4.5% y/y in 2018.
A final consideration in estimating the outlook for Swedish exports is of course
how competitive the Swedish exp orts sector is, in which the often discussed
weakness of the SEK is a fundamental element. However, we must also take
into account other important developments affecting competitiveness, such as
labour costs. In the wake of the financial crisis, Swedish labour costs developed
in line with historical cyclical patterns whereas many of our harder-hit
competitors posted only modest, even negative, labour cost growth. In
conjunction with rather weak post-crisis Swedish productivity growth, the
relative cost base of Swedish exporters deteriorated dramatically, helping to
explain why the Swedish exports sector has experienced a protracted slump in
sales. Despite low wage agreements, we have yet to see a meaningful
improvement in competitiveness. However, as we expect the SEK to stay on
the weak side for the remainder of the forecast horizon, this should alleviate
some of the difficulties the Swedish exports sector is facing.
Imports (IMP) and investments (GFCF) on Swedish
export markets (KIX)
Note: KIX is a trade weighted index of Swedish manufactured goods
and commodities compiled by the Riksbank.
Source: Organisation for Economic Cooperation and Development
(OECD), SCB, KI, Riksbank. Danske Bank calculations
World market growth (KIX, IMP) and Swedish
exports growth
Altogether, the outlook for Swedish exports remains optimistic. Alas, the case
for increasing international demand has weakened somewhat on the back of a
less buoyant outlook for economic policy. This is particularly true for two of
Sweden’s largest export markets: the US and China. In quantitative terms, we
have therefore been forced to lower our exports growth estimate somewhat:
down to 3.6% y/y (vol, wda) in 2017 and to 3.2% y/y (vol, wda) in 2018.
The contribution to GDP growth from net exports is thus lowered to 0.3pp (vol,
wda) in 2017 and 0.1 (vol, wda) in 2018. This revision is first and foremost a
result of weaker exports growth, but the foreseen stronger growth in housing
investments also pushes up imports to some extent, decreasing the net
contribution from external trade further.
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15 June 2017
Source: OECD, SCB, KI, Riksbank. Danske Bank calculations
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Financial conditions set to tighten
When balancing Swedish growth prospects, the external demand situation is of
course vital. Another important area to ponder is the financial outlook.
Fiscal policy stance remains supportive
Low foreseen inflation should keep short-term interest rates depressed, but
longer-term yields are expected to fluctuate in a wide range as the international
and domestic outlooks go through phases. As for equity markets, the Danske
Bank view is that valuations are starting to look rich after impressive rises over
the past 12 months and as we do not expect hard data to measure up fully to
expectations on equity markets.
The Swedish housing market is continuing its ascent and the tentative signs of
moderation in prices seen in conjunction with the introduction of the forced
amortisation rule are no longer visible. The Danske Bank view continues to be
that Swedish house price valuations are strained fundamentally, but that the
lack of supply, little speculative demand and strong buffers in both the banking
and household sector are paving the way for an orderly correction via
decelerating house price growth and accelerating income growth. As
authorities seem earnest in their ambition to rein in the risks attached to
increasing household indebtedness, we expect further measures – such as the
sharpened amortisation requirement recently discussed – to be introduced
already perhaps early next year.
Turning to fiscal policy, there is little to suggest any major changes in the near
term. The public debt ratio is low and our previous deficit projections have
proven far too pessimistic from both a cyclical and a structural perspective, due
to surprisingly strong growth in hours worked. The upcoming budget bill will
not improve the structures of the economy nor cause any harm, in our view. By
and large, we believe the government will utilise what little wriggle room it has
to stimulate the economy in a prelude to the general elections (September
2018), pushing the structural balance lower over coming years.
Source: SCB, KI, Danske Bank calculations
Still benign financial conditions
Note: FCI is calculated as the deviation from a filtered trend of short
and long-term interest rates, exchange rates, stock market and house
prices (all variables are normalised and adjusted for inflation)
Source: Macrobond Financial, Danske Bank calculations
A transparent, albeit incomplete, way of sketching the financial backdrop to
our forecasts for the Swedish economy is with a financial conditions index
(FCI). Supposedly, it illustrates the effect on demand from financial variables.
As the graph shows, financial conditions have been expansionary for some time
and are expected to remain so for much of the forecast period.
Decent investments growth
Overall gross fixed capital formation (‘investments’) growth has been stronger
than we expected over the past couple of quarters. Alas, the exuberance is
almost entirely due to booming housing investments. Other business sector
investments are also showing tentative signs of improving but from very
depressed levels, reflecting a still fragile confidence in corporate Sweden.
Financial Conditions are, nonetheless, expected to remain supportive and as
external demand improves somewhat, we have well-founded hopes that a
broader-based investment upturn is on the way. Overall investment growth is
expected to be 5.0% y/y (vol, wda) in 2017, mainly as a result of strong housing
investment. In 2018, as housing investment suffers from bottlenecks, we expect
other business sector investments to keep investment growth at a decent 3.1%
y/y (vol, wda). From recent history, these numbers might come across as weak,
but to us, it would constitute a welcome change of direction for underlying
investment demand.
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15 June 2017
Investment growth on a tightrope
Source: SCB, KI, Danske Bank calculations
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Employment is benign from all perspectives
Swedish labour market developments have been nothing short of impressive
over the past few years. Employment growth has averaged 1.5% y/y since 2010
and the unemployment rate has fallen from 9.5% to the current range of 6.57%. However, the large cohorts of young people currently entering the labour
force and the strong influx of immigrants make it hard to appraise the
fundamentals of the Swedish labour market. Intriguingly, despite very high
employment growth, the unemployment rate has remained still or even
increased somewhat recently, as labour force growth is keeping pace. Judging
by demographical projections, this situation will probably continue during the
forecast horizon. In our forecast, we have therefore opted to keep the labour
intensity of production virtually unchanged, which implies that the
unemployment rate will continue to fluctuate at current levels throughout the
forecast period. Ultimately, this will probably prove to be wrong, but for want
of better knowledge regarding the quantity and quality of incoming production
factors, we use this ratio to anchor our labour market forecasts.
Labour markets an unabashed boon for the Swedish
economy
Source: SCB, KI, Danske Bank calculations
Under any circumstances, demand for labour is quite strong, especially within
construction and public sectors, implying that employers will need to dig
increasingly deeper into the pool of unused labour. Given the challenges with
both many young inexperienced workers and immigrants needing to familiarise
themselves with the Swedish labour market, the tight labour markets will
undoubtedly provide a helping hand.
To summarise, as the Swedish economy continues to grow above trend, we
expect employment growth to remain buoyant, growing around 2% y/y during
both 2017 and 2018. However, for a host of reasons, the labour force is
expanding simultaneously at a neck-break pace, which makes it hard to
measure the amount of free resources. We have simply assumed a stable labour
input to production, which means that the unemployment rate will probably
remain at current levels for some time. It is only towards the very end of the
forecast period that a more pronounced improvement becomes visible and the
labour market approaches our highly uncertain estimate of ‘non-acceleratinginflation-rate-of-unemployment’ (NAIRU), i.e. circa 6.5%.
Income and consumption growth remain subdued
Depressing disposable incomes
An apparent abundance of free resources on labour markets, together with
disappointing sales and profit developments among corporates, has fed through
slowly into lower nominal wage growth in the wake of the financial crisis. In
our book, this is explained best by poor productivity growth and a corporate
sector consisting of price takers in a low-growth world.
Domestic demand has nonetheless been very strong, absorbing much of
available labour market resources. For example, in construction and public
services there are even some signs of strain and wages are indeed increasing at
a slightly faster rate than in other sectors. Overall, though, wage growth
remains muted and despite a longer period of low centralised wage agreements,
Sweden is experiencing negative wage drift frequently.
Source: SCB, KI, Danske Bank calculations
Unfortunately, we believe the conditions cited above will persist, as
productivity continues to be sub-par. As very few sectors express a want of
qualified labour, and even fewer suggest that lack of qualified labour is a major
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15 June 2017
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obstacle to growth, we believe that the Riksbank’s and many other forecasters
wage growth projections continue to be overly optimistic, in particular
regarding strong wage drift. The recently concluded centralised wage
negotiation resulted in wage increases below 2.5% y/y for another three years.
We have consequently revised down our hourly wage growth forecast to 2.8%
y/y for 2017 and to 3.0% y/y for 2018.
Low hourly wage growth but decent employment growth means that the wage
sum will continue to expand, albeit only slowly . Add to this (municipal) tax
hikes and rising real interest rates and it should stand clear that disposable
income growth will be modest over the forecast horizon. Taken in conjunction
with our assumption of an almost stable savings ratio, this means that
household consumption growth will remain uninspiring. This year, we expect
household consumption to be 1.6% y/y (vol) and even a tad lower, 1.4% y/y
(vol), next year. Admittedly, this is a notch below historical averages, but given
the headwinds to consumption cited above, it should be unsurprising.
Consumption growth to moderate
Source: SCB, KI, Danske Bank calculations
GDP, hours worked and productivity
Riksbank has its eyes on the direction of inflation
Summing up the various GDP components discussed above, Danske Bank’s
view on a ‘normalising’ Swedish economy remains intact, as do our
expectations of GDP growth of 2.0% y/y (vol, wda) in both 2017 and 2018.
Beneath the modest growth numbers fundamental improvements are at long
last taking place as exports and business sector investments are again on the
rise. Simultaneously, the unsustainably strong domestic demand growth over
the past few years is expected to subside, producing a more balanced and,
importantly, sustainable Swedish economy. In time, with rising exports and
investments, we expect to see higher productivity growth, a harbinger of both
higher profits, higher wages and, eventually, rising inflation. However, as this
is a gradual process, a rapprochement to the inflation target is set to linger past
the forecast horizon.
For the Riksbank, the developments sketched above of course denote a very
challenging environment, especially as interest rates are already negative and
the purchases of government bonds (the Riksbank’s QE programme) are
reaching sizes that affect the functioning of the bond market adversely. Taking
into account that the ECB will continue its purchases of interest bearing
instruments for quite some time, the situation becomes even more troublesome.
To avoid among other things an excessive strengthening of the SEK, we expect
the Riksbank Executive Board to adopt the ‘Jansson rule’ fully, implying no
monetary tightening will take place until underlying inflation and inflation
expectations are sustainably at or above the inflation target. In other words, at
upcoming monetary policy meetings, we expect the Riksbank to use its interest
rate forecasts to perform gradual postponements of the first repo rate hike and
paint lower repo rate trajectories. This process, we believe, will play out as long
as the general direction of inflation is towards the inflation target.
However, should further stimuli be necessary, we suspect additional cuts –
preferably in a two-tier framework in order to control the SEK more directly –
are first on the menu. M ore aggressive measures, such as direct FX
interventions and ‘helicopter money’ should be reserved for a situation where
the economic outlook worsens substantially.
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15 June 2017
Source: SCB, KI, Danske Bank calculations
Inflation gives the Riksbank no respite
Source: SCB, Riksbank, Danske Bank calculations
No hike in our time
Source: Riksbank, Macrobond Financial, Danske Bank calculations
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Sweden: forecasts at a glance
Forecast
National account
2015
2016
SEK bn (current prices)
2017
2018
% y/y
Private consumption
1884.2
2.4
1.5
1.4
Government consumption
1086.4
2.9
0.3
1.6
988.7
5.3
4.6
3.1
23.4
0.0
-0.4
0.0
Domestic demand
3982.6
3.3
1.9
1.9
Exports
1906.2
3.5
3.2
3.3
Aggregate demand
5888.8
3.3
1.5
1.9
Imports
1707.7
3.8
2.8
3.3
198.5
0.0
0.3
0.1
4181.1
Gross fixed investment
Growth contribution from inventories
Growth contribution from net exports
GDP
3.2
1.8
1.9
GDP, calendar adjusted
2.9
2.0
2.0
Economic indicators
2016
2017
2018
Trade balance, SEK bn
111.7
149.1
155.2
2.6
3.3
3.3
221.5
243.3
244.9
5.1
5.3
5.2
39.4
13.6
0.0
0.9
0.3
0.0
41.3
39.5
39.3
Unemployment, % of labour force
6.9
6.7
6.6
Hourly wages, % y/y
2.8
2.8
3.0
Consumer prices, % y/y
1.0
1.7
1.4
House prices, % y/y
8.4
4.1
0.0
- % of GDP
Current Account, SEK bn
- % of GDP
Public sector savings, SEK bn
- % of GDP
Public debt ratio, % of GDP*
* Maastricht definition
Financial figures
14/06/2017 +3 mths
+6 mths +12 mths
Repo rate, % p.a.
-0.50
-0.50
-0.50
-0.50
2-yr swap yield, % p.a.
-0.35
-0.40
-0.40
-0.35
10-yr swap yield, % p.a.
1.00
1.15
1.10
1.40
EUR/SEK
9.73
9.50
9.50
9.30
USD/SEK
8.69
8.72
8.56
8.02
Source: Statistics Sweden, Danske Bank
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15 June 2017
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Norway
Returning to normal

Growth in the Norwegian economy has been stronger than expected.

There are signs that capacity utilisation is a year ahead of schedule,
and activity is expected to be back to normal in 2019.



Unemployment is set to fall further and wage growth will pick up.
Inflation is set to bottom out in July and then push up towards 2% at
the end of the year. The inflation target could also be lowered to 2%
this summer.
Higher capacity utilisation and inflation will necessitate an increase in
interest rates next summer. The chances of further rate reductions, on
the other hand, will probably be eliminated at the rate -setting meeting
on 22 June.

The dip in housing prices is a correction brought on by tighter credit
practices and an increase in supply. There is little risk of a crash as
long as unemployment is falling and interest rates remain low.

The weaker krone is due mainly to external factors. In the slightly
longer run, higher oil prices and stronger growth will help the krone
to strengthen.
Changes vs previous forecast
Norway
Current forecast
% y/y
Previous forecast
2017
2018
2017
2018
GDP (mainland)
2.0
2.3
1.8
2.2
Private consumption
2.0
2.3
2.1
2.3
Public consumption
2.0
2.0
1.7
1.6
Gross fixed investment
2.6
2.8
1.3
2.0
Exports
3.5
3.5
1.4
1.6
Imports
0.9
2.5
1.2
2.2
Unemployment (NAV)
2.7
2.6
2.8
2.7
Inflation
2.2
2.0
2.3
1.5
Source: Danske Bank
Capacity utilisation on the up
Growth in the Norwegian economy is gaining real momentum. M ainland GDP
climbed 0.6% q/q in Q1. Together with an upward revision of the figures for
Q4 last year, this pushed the annual rate up to 1.6%, its highest for two years.
Growth was broad-based, with solid increases in private consumption and
housing investment, further brisk government demand and very strong export
growth. Although business investment fell, this came on the back of two very
strong quarters, and the investment rate is close to the historical average. On
the other hand, oil investment increased for the first time since Q4 13. This was
probably something of a fluke, but we cannot rule out the possibility of
investment activity in the Norwegian sector actually having bottomed out. The
oil investment survey points to a substantial decrease again this year but is
measured in nominal terms, so the decrease could be a result of lower costs.
The results of Norges Bank’s regional network survey for Q2 were also very
strong. The aggregated output index for the next six months climbed from 1.02
in Q1 to 1.29, indicating growth in mainland GDP of 0.64% q/q in Q2 and Q3.
The underlying data was also very positive, with the employment index hitting
its best level since November 2012 and clearly signalling that unemployment
is falling as a result of stronger employment rather than a weaker labour supply.
The capacity index, normally a good indicator of developments in the output
gap, climbed to 28.97, which is its highest since August 2013 and largely
confirms our view that we are 18 months ‘ahead of schedule’ when it comes to
capacity utilisation. Firms’ profitability expectations are also stronger than at
any time since January 2012, which bodes well for employment and
investment.
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15 June 2017
Stronger GDP growth
Source: Macrobond Financial, Danske Bank
Brighter growth outlook
Source: Macrobond Financial, Danske Bank
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The sector data reveals that the domestically -oriented oil service industry now
expects positive growth for the first time since the oil downturn began. Growth
expectations in retail and construction are also much improved. All in all, it
was a very strong report that clearly indicates that growth is well above trend
and that capacity utilisation is rising and unemployment falling on account of
higher employment.
A number of leading indicators suggest that growth is set to accelerate further.
The manufacturing PM I at its highest since early 2012. The Confederation of
Norwegian Enterprise (NHO) tendency survey, which covers most sectors of
the Norwegian economy, confirms this picture. Firms’ assessment of the
market outlook is at its most positive since Q3 2011, their expectations for
profitability are at their strongest since 2010, and they also foresee a substantial
increase in employee numbers.
Faster normalisation
Source: Macrobond Financial, Danske Bank
We have therefore revised up our growth forecast for the Norwegian economy
for 2017 from 1.8% in our M arch report to 2.0%. A slightly faster recovery has
also led us to adjust our growth forecast for 2018 up marginally to 2.3%. This
is above the trend rate and means that capacity utilisation will rise further and
unemployment will fall further.
Normal activity levels in 2019
Continued expansionary monetary policy in the form of low interest rates and
a weak krone, expansionary fiscal policy and a turnaround in oil-related
industries will keep growth above the trend rate for the next two years. Because
capacity utilisation is currently higher than anticipated, this means that we now
expect activity in the Norwegian economy to return to normal during the course
of 2019.
Unemployment falling…
Unemployment set to fall further
Unemployment has fallen further than expected since our M arch report. Both
the Norwegian Welfare and Labour Administration (NAV) figures for
registered unemployment and the jobless data in Statistics Norway’s Labour
Force Survey paint the same picture. However, the LFS data suggests that the
decline in unemployment is due to a reduced supply of labour, because they
show that employment is falling. The quarterly national accounts (QNA), on
the other hand, show solid job creation.
The divergence is striking, with the LFS showing a decrease in employment of
15,000 people over the past year, and the QNA an increase of almost 16,000
over the same period. We have therefore reviewed all available labour market
data to ascertain which version is right.
Source: Macrobond Financial
..as employment grows
First, economic growth has been strong, which suggests that employment
should have increased. If the LFS data is correct, it would translate into
productivity growth of 2.2% in Q2. This is, of course, unrealistic, and
particularly improbable in a world where everyone is struggling to account for
why productivity growth is so low. It would, however, be very good news for
the Norwegian economy.
Second, we have seen a big increase in absolutely every leading employment
indicator. Norges Bank’s regional network, the NHO tendency survey, the
PM I, M anpower and Epinion’s expectations survey for Norges Bank all show
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15 June 2017
Source: Macrobond Financial, Danske Bank
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a clear increase in the number of people in work and they tie in well with the
employment data in the QNA.
Third, new vacancies have been holding at around 19-20,000 per month since
they began to climb in autumn 2015 and are now around the same level as seen
in 2011-12. This indicates that the gross inflow of new employees is high. At
the same time, the number of redundancies and layoffs reported by NAV has
more than halved over the past year, which suggests in turn that the gross
outflow from the labour stock is falling fast.
Structurally, there is no doubt that participation rates are on the way down,
mainly for demographic reasons, but there is also reason to expect a slight
increase right now for cyclical reasons. Either way, there is little to suggest that
demographics can explain the sharp drop in the labour force currently being
shown by the LFS.
Because we set most store by the QNA employment data, we also believe that
the NAV jobless figures paint the most accurate picture of unemployment at
present. So far this year, this measure has fallen further than expected, which
ties in well with our expectation of rising capacity utilisation. As we expect
growth to remain above the trend rate in 2018 and 2019, we predict that
unemployment will fall further and approach the equilibrium rate in just over
two years.
Inflation to climb towards target – and target to be
lowered?
Inflation has fallen further than we expected in our M arch report. After strong
disinflation since summer 2016, we have seen a degree of stabilisation in core
inflation over the past two months. M uch of the drop in inflation is due to the
Norwegian krone strengthening considerably during the course of last year,
resulting in prices for imported goods rising less quickly this year. At the same
time, inflation has been pulled down by significant base effects, having climbed
strongly in H1 16 due to the krone’s depreciation in 2015 pushing up prices for
imported goods.
There has also been particular pressure on food prices and airfares in the first
few months of 2017. These base effects will, in isolation, pull down the annual
increase in consumer prices through to July. During the autumn, they will
gradually push inflation up. The krone’s depreciation since February will also
gradually start to push import prices up again during the autumn.
Import prices set to pick up in H2 17
Source: Macrobond Financial, Danske Bank
In addition, it seems that both food prices and especially airfares have been
dragging down inflation so far this year. Now, though, we are seeing the
supermarkets and airlines struggling to maintain profitability, so we expect the
negative contributions from these product groups to gradually fade and
possibly even reverse slightly during the course of this year.
On balance, therefore, we expect core inflation to bottom out at just over 1%
in July before gradually moving up towards the target during the rest of the
year, hitting 1.8% y/y in December. Next year, base effects indicate that
inflation will rise further in H1 before stabilising towards the end of the year.
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15 June 2017
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We also believe that the inflation target could soon be lowered. A variety of
processes under way at both Norges Bank and the M inistry of Finance to
evaluate monetary policy are nearing completion. Now that it is accepted that
spending of oil money through the government budget will be relatively stable
as a share of GDP in the years ahead, there is no longer any reason for Norway
to have a higher inflation target than its neighbours. We therefore expect the
target to be lowered from 2.5% to 2% before long, probably in connection with
the publication of the Gjedrem committee’s report (due by 30 June).
Falling unemployment and a return to normal levels of economic activity
probably mean that wage growth will be somewhat higher over the next couple
of years than in 2017. This is supported by firms in NHO’s tendency survey
anticipating a substantial improvement in profitability as early as next year. As
in many other countries, there has probably been a structural shift in wage
formation in recent years, but wage growth in Norway is still largely
determined by central pay settlements. We expect the restraint shown in this
year’s pay talks to be greatly reduced next year and therefore predict wage
growth of 3-3.5% in 2018 and 2019.
Airfares and food prices set to normalise
Source: Macrobond Financial, Danske Bank
Housing market – correction, not crash
Housing prices fell 0.7% m/m in M ay, reigniting the debate about a possible
housing bubble in Norway. We think these fears are exaggerated. Drilling down
into the data, Oslo was the only big city to see a drop in prices in seasonally adjusted terms, which clearly suggests that the correction was due mainly to
tighter credit practices. The market – including in Oslo – is also much better
balanced than just a year ago, with a growing supply of homes. The change is
far from dramatic in any case. The number of properties on the market is still
small in relation to sales activity. The stock-to-sales ratio, which shows how
many months it would take to sell the entire stock of unsold homes at the
current rate, is just 1.3. This is higher than last autumn, but much lower than in
2013 (2.4) and, of course, 2009 (5.6). With further low interest rates and
unemployment, debt-servicing capacity will continue to be good, so the risk of
a more severe correction is limited.
House prices are falling only in Oslo
Source: Macrobond Financial, Danske Bank
Norges Bank to raise rates faster than expected
At its meeting in M arch, Norges Bank retained its easing bias, with the interest
rate path in the monetary policy report showing a roughly 40% chance of a
further rate cut. The message was the same in M ay, although no new interest
rate projections were published at that meeting.
Norges Bank set to remove easing bias
As discussed above, our assessment of developments in the Norwegian
economy indicates that capacity utilisation is rising more quickly than
expected. Other things being equal, this means that Norges Bank will need to
raise interest rates more quickly than previously signalled.
By our reckoning, we seem to be 12-18 months ahead of schedule in terms of
closing the output gap. A simple calculation using the Taylor rule suggests that
this will push the interest rate path up 15-30 basis points over the next two
years. Based on Norges Bank’s projections in the M arch monetary policy
report, we therefore need to begin to price in a growing chance of a rate increase
over the course of 2018, pricing it in fully for Q1 19. As we also expect growth
to accelerate somewhat next year, and inflation to rise more quickly than
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15 June 2017
Source: Macrobond Financial, Danske Bank
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Norges Bank has projected, this means that we are now forecasting a first rate
hike in June 2018, which is much earlier than currently priced into the market.
As inflation is likely to remain well below 2.5% throughout the forecast period,
we do not expect a reduction in the inflation target to 2% to have a significant
impact on future monetary policy. We would expect slightly higher interest
rates in the short and medium term due to Norges Bank not needing to stimulate
the economy as much to meet the inflation target, while long-term rates could
end up a little lower due to slightly lower inflation in the long run.
We do not expect any change to interest rates at Norges Bank’s meeting on 22
June. We do, however, expect a review of the determinants of the interest rate
path in the monetary policy report to result in an upward revision of the central
bank’s projections. We expect this upward revision to be sufficient to eliminate
any remaining chance of a further rate reduction, and to bring forward the
timing of the first hike. We do not, however, expect Norges Bank to fully
incorporate our expectations for the output gap and inflation.
Krone under pressure
The krone has fallen relatively far since mid-February despite growth in the
Norwegian economy surprising to the upside. Slightly lower inflation than
anticipated may have fuelled expectations of Norges Bank having to cut interest
rates further, but otherwise it seems that the krone has fallen mainly as a result
of external factors.
Naturally the drop in oil prices has been one important factor in the krone’s
depreciation. Ever higher production and rig counts in the US shale oil industry
have prevented oil stocks from falling as far as many had predicted. A glut of
oil has therefore put pressure on prices despite OPEC extending its production
cuts through to Q1 next year. A weaker growth outlook in China has also sown
the seeds of doubt about the future strength of demand for oil. The combination
of the two has pushed the price of oil below USD 48/bbl. There has also been
general pressure on all commodity -based currencies, including the Canadian,
Australian and New Zealand dollars, which have fallen more or less as far as
the krone in recent months.
Oil price likely to trigger NOK strengthening in late
2017
Source: Macrobond Financial, Danske Bank
Given these external factors, we do not anticipate any immediate rally in the
krone despite being more optimistic about the domestic economy. In the
slightly longer term, though, we expect the combination of slightly higher oil
prices and growing expectations of rate increases in Norway to be positive for
the krone. We therefore expect the krone to gain against the euro, for example,
with the EUR/DKK rate falling to 9.00 in a year’s time.
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15 June 2017
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Nordic Outlook
Norway: forecasts at a glance
Forecast
National account
2016
2016
2017
2018
% y/y
NOK bn (current prices)
Private consumption
1407.0
1.6
2.0
2.3
Public consumption
761.0
2.3
2.0
2.0
Gross fixed investment
746.9
0.3
2.6
2.8
Petroleum activities
159.7
-16.4
-5.0
2.8
Mainland Norway
586.0
6.2
4.7
2.8
Dwellings
182.2
9.9
9.4
1.8
Enterprises
238.3
3.1
2.4
3.6
General government
165.6
6.9
2.8
2.8
2754.0
2.7
2.2
2.2
0.3
-0.2
-0.1
1051.7
3.5
3.5
3.5
371.0
-0.5
1.4
1.2
Mainland demand
Growth contribution from stockbuilding
Exports
Crude oil and natural gas
Traditional goods
355.8
4.1
0.3
0.4
1013.1
-8.2
0.9
2.5
584.7
0.8
2.6
2.0
-1.1
3.1
2.2
3111.8
1.1
1.6
2.0
2715.4
0.9
2.0
2.3
2016
2017
2018
Employment, % y/y
0.2
0.8
1.0
Unemployment (NAV), %
3.0
2.7
2.6
Annual wages, % y/y
1.7
2.4
3.0
Consumer prices, % y/y
3.6
2.2
2.0
House prices, % y/y
8.3
6.5
0.0
Core inflation
3.0
1.7
2.0
14/06/2017
+3 mths
Repo rate, % p.a.
0.50
0.50
0.50
0.50
2-yr swap yield, % p.a.
1.11
1.20
1.30
1.35
10-yr swap yield, % p.a.
1.84
1.90
1.90
2.30
EUR/NOK
9.42
9.30
9.10
9.00
USD/NOK
8.41
8.53
8.20
7.76
Imports
Traditional goods
GDP
GDP Mainland Norway
Economic indicators
Financial figures
+6 mths +12 mths
Source: Statistics Norway, Danske Bank
23 |
15 June 2017
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Nordic Outlook
Finland
Full speed towards potential



Finnish economy steamed ahead stronger than expected in Q1 2017.
GDP rose 2.7% y/y after rising 1.4% in FY2016. Leading indicators
remain elevated. We have raised our forecast for this year so now
expect GDP to grow by 2.8% in 2017 and slow down to 1.5% in 2018.
Finnish GDP is still well below its previous peak and the economy is
cruising towards potential output, which is limited by the ageing
population and weak productivity growth. Improving growth potential
depends partly on structural policies and the labour participation rate,
which is well below other Nordic countries.
Private consumption was set to slow down in 2017 due to low wage rises
and inflation, but better employment, low interest rates and an income
tax cut seem to have kept consumers going. Consumer confidence is
unusually high. We forecast a slowdown in 2018.

Exports of goods and services rose by 8.8% in Q1 and business surveys
imply growing order books. The outlook is better thanks to growth in
export markets (especially Russia) improving price competitiveness,
several large ship orders and new production facilities in the forest and
automotive industries. Growing demand, higher confidence and low
interest rates have boosted manufacturing investment too.

Housing market is divided geographically and by type of housing. A
demographic shift towards smaller families and migration to growth
centres has increased demand for small apartments. S trong demand
has raised prices and fuelled a construction boom in Helsinki and a few
other towns, while dwelling prices are falling in some parts of the
country. Construction is set to stay high in 2018, but not grow much.

Government budget for 2017 does not include major cuts to
expenditure and income tax was lowered, which implies a bigger deficit
while the economy grows. Cyclically adjusted, the budget could be
characterised as expansionary. Higher GDP growth improves public
finances, but structural reforms are still needed to manage the needs
of an ageing population and boost potential growth.
Changes relative to previous forecasts
Finland
Current forecast
Previous forecast
% y/y
2017
2018
2017
2018
GDP
2.8
1.5
1.5
1.5
Private consumption
2.0
1.0
1.0
1.0
Public consumption
-0.2
0.2
-0.1
0.2
Gross fixed investment
6.0
2.5
3.5
2.5
Exports
7.0
3.0
3.0
4.0
Imports
5.0
2.5
2.5
3.0
Unemployment rate
8.4
7.9
8.3
8.0
Inflation
0.9
1.0
1.2
1.4
Government balance, % of GDP
-2.1
-1.8
-2.3
-2.0
Current account, % of GDP
-1.1
-0.9
-1.1
-0.9
Source: Danske Bank
Thaw is melting in Finnish economy
According to the latest quarterly national account figures, GDP increased by
2.7% in Q1 2017. Leading indicators are also elevated and growth looks much
faster than the 1.4% achieved in 2016. Growth was driven roughly equally by
consumption, investment and net exports. Despite improving growth figures,
GDP is still nearly 4% lower than at the peak before the recession in 2008. The
economy is now cruising fast towards potential output, which is limited by the
ageing population and weak productivity growth. Improving growth potential
depends partly on structural policies and the labour participation rate, which is
well below other Nordic countries. Reforms in the labour market could increase
participation rates and boost growth, yet the long run growth potential is likely
to stay below 2% p.a. Therefore, the current speed is above the long run
potential, but there still exists a gap to be narrowed. We expect GDP growth to
reach 2.8% in 2017 and slow to 1.5% in 2018, partly due to a weaker global
outlook weighing on export possibilities.
24 |
15 June 2017
GDP approaching potential
Source: Macrobond Financial, Statistics Finland
www.da ns ke re se arc h.c om
Nordic Outlook
After a disappointing 2016 for foreign trade, exports have had a great start in
2017. Exports of goods and services rose 8.8% in Q1 and business surveys
imply growing order books. The outlook is better thanks to growth in export
markets (especially Russia), improving price competitiveness, several large
ship orders and new production facilities in forest and automotive industries.
Growing demand, higher confidence and low interest rates have boosted
manufacturing investment too. Preliminary figures for April were not as good,
but the timing of Easter may have distorted foreign trade flows. A ship delivery
in M ay should keep Q2 export figures elevated, before more modest growth in
H2. We expect slower global growth in 2018 to create some headwinds and
export growth is likely to moderate. One large ship delivery and more forest
export shipping from the new Äänekoski bioproduct mill should help to keep
exports on a modest growth track.
In addition to global risks, there exists moderate domestic political risk. The
Finns Party, one of the coalition government parties, elected a new leadership
with strong anti-immigration and anti-EU views in June. Other parties in the
government stated that cooperation had become impossible, their values are too
different and Prime M inister Juha Sipilä planned to break the government. The
situation was salvaged by a split of the Finns party; more than half of their
members of parliament left the party and chose to stick with the government.
Thus, Finland averted a government crisis but the government still has a weaker
mandate to rule. Structural reforms may slow down, even if the government
now seems to be holding together until the next parliamentary elections in
2019.
Happy consumers
Taking into account the prolonged weakness of the Finnish economy, private
consumption has been surprisingly resilient. Finnish consumers have proven us
overly pessimistic in recent quarters. Private consumption grew by 2.0% yoy
in 2016 and this rose to 3.3% in Q1 2017. We expected very slow earnings
growth (0.3% in Q1) and higher inflation (1.0% in Q1) to weigh on
consumption, but the income tax cut in January, low interest rates and better
employment have supported consumers. Consumer confidence is extremely
high in Finland – the highest in the whole EU. We forecast consumption to
grow by 2% in 2017, which is as fast as in 2016. Starting from 2018, it's hard
to believe that consumption could grow as strongly in the coming years without
a pick-up in potential growth. Inflation has risen somewhat, but given less
pressure from energy prices and very low labour cost growth, we forecast
inflation to stay around 1% in 2017-2018.
Part of the consumption has been financed by debt, and this is likely to continue
for some time. Indebtedness of households has continued to grow, reaching alltime highs. Despite the growing indebtedness, the interest-rate burden paid by
households is at an all-time low due to the low interest rates. The household
indebtedness ratio in Finland is a bit higher than the euro area average, but
lower than in other Nordic countries. Risks in the household sector finances
seem to be moderate, although an exposure to rising rates exists. M ost Finnish
housing loans are linked to variable euribor rates.
25 |
15 June 2017
Consumer confidence is very high
Source: Marcobond Financial, Statistics Finland
Weak real earnings growth
Source: Marcobond Financial
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Nordic Outlook
Export orders are growing
Exports of goods and services rose 8.8% in Q1. Goods exports rose in all main
industries and a large ship delivery (Tallink M egastar) helped to boost
numbers. Exports have risen to most main markets, while exports to Russia and
China have been growing faster than average. Services exports, on the other
hand, were more or less flat. Tourism flows increased significantly last winter,
but this seems to have been cancelled out by weakness in some other items.
Business surveys imply growing order books. The outlook remains good thanks
to growth in export markets (especially Russia) improving price
competitiveness, several large ship orders in the pipeline, and new production
facilities in forest and automotive industries. Preliminary figures for April were
not as good, but the timing of Easter may have distorted foreign trade flows. A
ship delivery in M ay should keep Q2 export figures elevated, before more
modest growth in H2. We expect slower global growth in 2018 to create some
headwinds and export growth is likely to moderate. One large ship delivery and
more forest export shipping from the new Äänekoski bioproduct mill should
help to keep exports on a modest growth track.
Export price competitiveness has been a core issue in the government’s plan to
boost growth. Because Finland cannot devalue its currency, the government
pursued an ‘internal devaluation’. After a year of intensive negotiations, a new
competitiveness pact was signed in June 2016. The pact froze wages for a year
(mainly 2017), made employees liable for a larger share of social security
payments, increased annual working hours by 24 without any increase in
wages, cut public sector holiday bonuses and added a little more flexibility to
local agreements. The competitiveness pact is estimated by the M inistry of
Finance to cut unit labour costs by 3.7%, which together with higher wage
increases in other countries like Germany should boost price competitiveness
by a fair amount by the end of 2017. This has contributed positively to the
export performance, but most of the improvement has come from stronger
global demand. The downside of the pact was that any possibility of more local
agreement, which would increase flexibility in the face of global competition,
was largely excluded. Wage negotiations will resume in late 2017 and labour
unions are likely to demand more pay, because inflation is higher and the
economy is growing. Higher wage growth is likely, but industries will probably
seek a solution that would not exceed pay increases in Germany or Sweden.
M eanwhile, the export outlook depends largely on demand from main markets.
The outlook for the main Finnish export markets has remained relatively good
(Germany, Sweden, the US) and Russia is expected to stage a modest recovery
in 2017-2018. Also tourism from Russia and Asia is growing fast. Finland is
perceived as a relatively safe destination with some exotic characteristics like
the northern lights. Brexit clouds the export outlook in the medium term but
the impact in 2017-18 is set to be less adverse than we initially expected. We
expect exports to rise by 7.0% in 2017 and 3% in 2018.
Exports to Russia stabilising
Source: Macrobond Financial
Finland’s exports are still lagging
Source: Macrobond Financial, Finnish Custom
Investment activity per GDP
Source: Macrobond Financial, Statistics Finland
Investments should follow
Investments contributed nearly one third of GDP growth in Q1. Gross fixed
capital formation as a whole grew by 3.9% q/q and by 9.1% y/y in Q1. Private
investment grew by 11.4% but public investment decreased by 1.5% from a
year ago. M unicipalities in particular would seem to have balanced their
budgets by cutting investment expenditure. Investments in residential buildings
26 |
15 June 2017
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Nordic Outlook
rose by 7.8% and investments in non-residential buildings by 11.1% y/y. The
volume of gross fixed capital formation in machinery, equipment and transport
equipment increased by 16.2% y/y. Thus, growing exports demand, strong
domestic demand, higher business confidence and low interest rates have
boosted manufacturing investment too.
Given higher growth expectations, improving cost competitiveness, the relative
ease of funding and ageing equipment, we expect industrial capex to maintain
growth in 2017-2018. R&D expenditure seems to have bottomed out in Q1, but
there is no boom to take expenditure back to its past peak when Nokia invested
heavily in R&D. Finland is still one of the top research countries measured by
R&D per GDP, but it has lost its position as the most innovative country in the
WEF rankings. The ability to turn innovations into major commercial success
seems to have been missing in recent years as well.
Housing construction boomed in 2016 and is set to be strong in 2017-2018 also,
but growth is set to peak. The number of completed apartments is still rising,
which helps to cool down housing prices and rents. Housing permits and new
starts continue to indicate robust apartment construction in growth centres,
especially the Helsinki region, while construction of detached houses is slow.
Demographic changes and financial limitations favour smaller apartments.
We expect investments as a whole to grow by 6% in 2017 and slow to 2.5% in
2018, when construction is past its peak.
Labour markets attract new job seekers
Despite strong economic growth, the official unemployment rate started to rise
in early 2017. The seasonally -adjusted unemployment rate stood at 8.9% in
April, which was 0.2 percentage point higher than in December 2016.
Unemployment rose because many people previously outside the labour force
decided to seek jobs. M ore people were employed and there were more jobs
available, so companies have become more willing to recruit new staff and
overtime work seems to have p eaked. Long-term unemployment has been
declining too, but is still high by historical standards. Unemployment in
Finland is lower than the euro area's average but above NAIRU estimates. The
employment rate was 69.2% in April, which is still well below the
government’s target of 72%. The employment rate in Finland is lower than in
other Nordic countries, so the target could be even higher in the long run.
Without significant additional policy measures and reforms, it will be hard to
reach the target during this government’s term which ends in 2019.
We forecast the average unemployment rate will fall to 8.4% in 2017 and
continue to fall to 7.9% in 2018, assuming that the economy recovers. Wage
growth is very slow in 2017 due to the competitiveness pact. High
unemployment would also keep wage inflation modest, but the growing
economy and rising inflation imply tough industrial wage negotiations in late
2017. Finland has a long history of centralised collective labour agreements,
but this time the negotiations will probably take place at an industry level. The
government would like to see a Swedish-style model where export industries
lead negotiations and domestic sectors follow. We expect earnings growth to
be a little higher in 2018.
27 |
15 June 2017
Unemployment decreasing
Source: Macrobond Financial, Statistics Finland
Employment rate still below target
Source: Macrobond Financial, Statistics Finland
www.da ns ke re se arc h.c om
Nordic Outlook
Divergence in housing market is here to stay
Diverging housing prices
House prices have stagnated in Finland in the last five years. This development
is new for many as prices used to increase relatively evenly after the big
depression in the 1990s. Currently the housing market is stable, but divided
geographically and by type of housing. M igration to growth centres has created
more demand for apartments. Smaller family sizes favour smaller apartments.
This phenomenon is here to stay in our opinion, as the demographic shift and
better employment opportunities are driving people into cities. Growth in
housing demand has raised prices and caused a construction boom in Helsinki
and a few other towns, while the real estate market in the rest of the country
remains more or less flat or even declining. In the first quarter of 2017, the
price of second-hand dwellings fell in the whole country by 0.3% qoq.
Compared with the corresponding period of 2016, prices rose by 0.4%. In
Greater Helsinki, prices went up by 2.5% yoy, while in the rest of Finland
prices went down by 1.4%. In addition to the demographic shift, low interest
rates and high consumer confidence are supporting the housing market. A surge
in supply of new housing should ease the price pressure in the market. On
average, we expect prices to increase by 1.0% in 2017 and 1.5% in 2018.
Source: Macrobond Financial, Statistics Finland
Public finances need to build buffers
Finnish governments have smoothed the impact from recession in recent years,
especially by letting automatic stabilisers to work. This has held domestic
demand up. As a consequence, public debt has grown fast in many years. The
current government has taken a more austere stance on fiscal policy, but the
general government deficit is still large. Surprisingly, the public debt to GDP
ratio fell from 63.7% in 2015 to 63.6% in 2016 according to the latest figures.
Tax revenues rose significantly; the government used cash funds instead of
issuing new debt and municipalities cut back on investment. The government
budget for 2017 does not include major cuts to expenditure and income taxation
was lowered, which implies a bigger deficit while the economy grows.
Therefore, cyclically adjusted, the budget could be characterised as
expansionary. Higher GDP growth improves public finances and we expect a
clear slowdown in the debt to GDP ratio. Given better cyclical growth and some
structural reforms, there is no imminent pressure to change Finland’s AA+/Aa1
sovereign credit ratings in either direction. Spreads to German government 10y
bond yields have narrowed a bit after the Finnish economy started to improve.
Even if the debt-to-GDP ratio is still moderate by international standards, its
growth has been worrisome given the economy has started to recover and
population ageing creates additional pressures (the so-called sustainability
gap). Economic growth does not seem fast enough to improve the debt ratio
alone. Without faster than expected potential growth, the government needs to
implement either new austerity measures or implement further structural
reforms, in our view, which would increase private employment and slow
public cost growth. Structural reforms are still needed to manage the needs of
an ageing population and boost potential growth. A lower debt to GDP ratio
would strengthen the buffers against another recession, which is certain to
come.
28 |
15 June 2017
Debt level inching up even if economy grows
Source Macrobond Financial, Statistics Finland
10Y government bond yields
Source Macrobond Financial
www.da ns ke re se arc h.c om
Nordic Outlook
Finland: forecasts at a glance
Forecast
National account
2016
2016
EUR bn (current prices)
GDP
2017
2018
% y/y
214,1
1.4
2.8
1.5
Imports
78,2
2.5
5.0
2.5
Exports
75,7
0.5
7.0
3.0
Consumption
170,7
1.5
1.3
0.8
- Private
118,8
2.0
2.0
1.0
- Public
51,9
0.5
-0.2
0.2
Investments
45,8
5.2
6.0
2.5
Economic indicators
2016
2017
2018
Unemployment rate, %
8.8
8.4
7.9
Earnings, % y/y
1.2
0.4
1.1
Inflation, % y/y
0.4
0.9
1.0
Housing prices, % y/y
1.0
1.0
1.5
Current account, EUR bn
-2.3
-2.5
-2.0
-1.1
-1.1
-0.9
- % of GDP
Public deficit, % of GDP
Public debt/GDP, % of GDP
Financial figures
Repo rate, % p.a.
-1.9
-2.1
-1.8
63.6
64.0
64.2
14/06/2017
+3 mths
0.00
0.00
0.00
0.00
+6 mths +12 mths
-0.18
-0.15
-0.05
0.00
10-yr swap yield, % p.a.
0.76
0.85
0.95
1.30
EUR/USD
1.12
1.09
1.11
1.16
2-yr swap yield, % p.a.
Source: Statistics Finland, Danske Bank
29 |
15 June 2017
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Nordic Outlook
Global overview
Easing tailwinds for the global economy



We recently revised our forecast for global growth lower due to
downward revisions in the US and China. We no longer look for a fiscal
boost in the US in 2018 and policy tightening in China has exceeded
our expectations. Our forecast for the euro area has remained fairly
stable
Our baseline scenario for the global economy is more of the same, with
the US growing around 2% and the euro area growing by just below
2%. Improving sentiment and less political uncertainty in Europe are
replaced by a bigger drag from China, where we look for the economy
to slow down in 2017 and into 2018.
More of the same - moderate global growth
2016
2017
D a ns k e
B a nk
2018
C o ns e ns us
D a ns k e
B a nk
USA
1.6
2.0
2.2
1.9
2.3
Euro area
1.7
1.7
1.7
1.6
1.6
Japan
1.0
1.2
1.3
0.8
1.0
China
6.7
6.3
6.6
6.0
6.3
Global
3.0
3.2
3.3
3.1
3.3
% y/y
C o ns e ns us
Source: Bloomberg, Danske Bank Markets
We believe inflation has peaked and expect it to decline over the next
year due to a turn lower in commodity prices. We look for the ECB to
keep an accommodative stance and continue asset purchases in 2018,
albeit at a reduced pace of EUR40bn per month. The Fed is on track
for three hikes in both 2017 and 2018, while dipping its toes in reducing
its balance sheet.
Synchronised recovery losing some tailwind
China, US and Japan starting to lose a bit of steam –
euro area to follow
Last year was the year of the first synchronised recovery since 2009. Following
elevated fears of a hard landing in China at the beginning of 2016, a pickup in
economic momentum across all regions led to renewed optimism in the second
half of the year. Policy uncertainty on the back of Brexit was not able to stop
this. When US President Donald Trump was elected in November, optimism
got an extra boost from an agenda of deregulation and expectations of a fiscal
expansion.
However, tailwinds are easing as witnessed by a moderate decline in business
confidence in the US, China and Japan in the early spring months (Chart 1).
Significant stimulus in China has turned into policy tightening to rein in runaway
house prices and rising financial leverage. In developed economies, lower real
wage growth (from higher inflation) has restrained consumer spending in early
2017. A moderate build-up of inventories has probably also taken place
(although the data in this area is not very good) and we believe an end to
inventory repletion will also work to dampen economic momentum a bit.
Source: Macrobond Financial, Danske Bank Markets
Decline in real wage growth from higher inflation
have reduced the tailwind for consumers
The euro area is bucking the trend currently when it comes to business
confidence, as PM I manufacturing has continued to rise. However, we do not
expect the euro area to be able to decouple from the overall global cycle and,
in our view, export and investment activity is likely to dampen when the
slowdown in China starts to feed into foreign sales.
Downward revision - but still a moderate recovery
While we have not been too optimistic on the scope for US fiscal easing, even
our moderate expectations are unlikely to be met. Despite having a majority in
both the Senate and the House of Representatives, Trump has found it very
hard to get support for his policy proposals.
30 |
15 June 2017
Source: Macrobond Financial, Danske Bank Markets
www.da ns ke re se arc h.c om
Nordic Outlook
Therefore, we remove our projection of a boost from US tax cuts and
infrastructure spending from our forecasts, resulting in a big downward
revision to our US growth forecast to 1.9% in 2018, from 2.8% previously.
S o, we look for more of the same for the US economy: a cruising speed
recovery with a further reduction of slack and gradual Fed hikes. As we
also expect the Fed to start dipping its toes and reducing its balance sheet, we
now look for only three rate hikes by the Fed next year (instead of four). In our
opinion, US private consumption will continue to be underpinned by decent
wealth gains from rising house prices and continued employment growth.
Investments should also continue the recent moderate growth, as profit gains
are decent and financing costs remain at a low level due to the low bond yields
and high valuation of the stock market.
China to weigh on the global cycle
Source: Macrobond Financial, Danske Bank Markets
For the second-largest economy in the world, China, we see a more decisive
turn lower in activity this year. Early in 2016, housing and infrastructure
received a big boost from lower rates, a reduction in down payments for
homebuyers and a pickup in infrastructure investment. However, China moved
its foot from the gas pedal to the brake in the middle of 2016 as house prices
moved sharply higher in the big cities (around 50% y/y in Beijing and
Shanghai) and credit growth boomed. Recently , China has also cracked down
on shadow banking, which squeezes credit for many property companies that
looked for credit in this part of the financial system, when the government
tightened conventional credit. The regulatory crackdown has led to a sharp rise
in bond yields and problems with rolling debt for some companies and it is
likely to lead to more caution in the corporate sector. As China drives onethirds of global growth, we expect this to be felt in the rest of the world as
well – not least for commodity exporters, as China consumes 50% of global
metals.
As the euro area is still a very export-dependent region, a slowdown in
China would also be felt in this region. It should have a spillover to
investments as well, as these tend to depend on exports because these affect
euro area manufacturing negatively. Hence, even though current business
surveys point to upward risks to euro area growth, we believe the euro area will
still have to settle for growth just below 2% in the coming years. Private
consumption is currently facing some headwinds from the decline in real wage
growth but a decline in inflation in 2017 would give some renewed support to
consumers.
The risks to our growth forecast are seen as broadly balanced. On the
downside, the main risks to growth come from a bigger-than-expected
slowdown in China, a potential trade war and a military conflict with
North Korea. On trade, the tensions have so far been fairly limited and the US
has taken no real protective action. However, following the recent G7 summit,
Donald Trump tweeted ‘we have a massive trade deficit with Germany ’ and
stated ‘this will change’. The US is also still running investigations into the US
trade deficit and the steel sector to identify whether other countries use unfair
trade practices. This work is due to be done by the end of June and we see a
risk that we could see Trump take protectionist steps in the second half of 2017,
which could trigger a tit-for-tat trade war.
Chinese policy tightening to drive slowdown
Source: Macrobond Financial, Danske Bank Markets
Half of total US trade deficit is with China
Source: Macrobond Financial, Danske Bank Markets
On North Korea, it is a very digital risk. If there is no military conflict, we believe
there will be no impact on the global economy. However, a military conflict could
be quite severe, as it could involve nuclear weapons (see also Research: The rising
31 |
15 June 2017
www.da ns ke re se arc h.c om
Nordic Outlook
risk from North Korea - and what it means for markets, 27 April). On the upside,
there is a possibility of a more upbeat investment outlook than we forecast due to
pent-up demand in Europe after many years of weak corporate spending.
Headline inflation has peaked in US and euro area
Reflation losing further steam
After rising sharply in 2016, we believe it is likely global inflation has peaked.
Oil prices drive most of the swings in inflation and with prices no longer
moving much higher from here, we expect the impact on inflation to come
down (see Chart 5).
At the same time, there are quite strong indications that inflation expectations
have come down over the past few years, which is likely to explain why wage
growth remains quite subdued – even in countries where little slack is left in
the economy. In the US, where the output gap is pretty much closed, wage
growth is still only around 2.5% and has stopped moving higher over the past
year, despite a continued decline in unemployment (Chart 6).
With China becoming a deflationary force again through weaker commodity
prices and wage growth still low, the challenge for central banks to get core
inflation higher will stay with us for a long time (Chart 7). Lately, US core
inflation has actually started to move lower again after rising steadily over 2016.
We expect core inflation to move higher in 2018 but to remain below the Fed’s
2% target. Thus, we look only for gradual rate increases, with three hikes in both
2017 and 2018. We also expect the Fed to start reducing its balance sheet later in
2017 but to start at a very slow pace, as for it this is completely new territory.
We expect the ECB to continue its QE purchases going into next year and
keep policy rates unchanged at least until 2019, which is longer than is
currently priced in the market. We believe wage growth will stay low for a long
time and with no more help from commodity prices, we expect core inflation
to stay far from the 2% target over the next two years.
Source: Macrobond Financial, Danske Bank Markets
Wage growth still subdued
Source: Macrobond Financial, Danske Bank Markets
Political risks shifting from Europe to the US
While political risks have subsided for now in Europe, political uncertainty has
increased in the US. Both the Dutch parliamentary election and French
presidential election lent less support to anti-establishment parties than feared
by many observers. Looking forward, the German parliamentary election in
September is less of a risk event in our view, as another CDU/SPD grand
coalition seems the most likely outcome. This said, political risk still looms in
Italy, with upcoming elections amid large support for the Five Star M ovement
and a difficult cocktail of low growth and large public debt.
In the US, the Trump administration faces immense difficulties in pushing
through its reform agenda. Although we have been quite sceptical about the
size and timing of Trumponomics all along, we have become even more
cautious in the wake of significant split in the Republican Party on key fiscal
reforms. As highlighted above, there is a risk that Trump will choose trade
policy – an area where a US President has quite significant power – to push
through at least one part of his policy agenda.
32 |
15 June 2017
Core inflation expected to stay below 2% for long in
US and (especially) the euro area
Source: Macrobond Financial, Danske Bank Markets
www.da ns ke re se arc h.c om
Nordic Outlook
Economic forecasts
Macro forecast, Scandinavia
Year
GDP 1
Private
cons.1
Public
cons.1
Fixed
inv.1
Stock
build.2
Exports1
Imports1
Inflation1
Unemploym.3
Public
budget4
Public
debt4
Current
acc.4
Denmark
2016
2017
2018
1.3
1.9
1.7
1.9
2.2
2.1
-0.1
0.9
0.8
5.2
0.2
4.1
-0.4
0.3
-0.2
1.7
3.7
2.4
2.4
2.4
3.0
0.3
1.1
1.4
4.2
4.3
4.3
-0.9
-1.1
-0.3
37.8
36.4
35.0
8.2
8.3
8.1
Sweden
2016
2017
2018
3.2
1.8
1.9
2.4
1.5
1.4
2.9
0.3
1.6
5.3
4.6
3.1
0.0
-0.4
0.0
3.5
3.2
3.3
3.8
2.8
3.3
1.0
1.7
1.4
6.9
6.7
6.6
0.9
0.3
0.0
41.3
39.5
39.3
5.1
5.3
5.2
Norway
2016
2017
2018
0.9
2.0
2.3
1.6
2.0
2.3
2.3
2.0
2.0
0.3
2.6
2.8
0.3
-0.2
-0.1
3.5
3.5
3.5
-8.2
0.9
2.5
3.6
2.2
2.0
3.0
2.7
2.6
-
-
-
Macro forecast, Euroland
Year
GDP 1
Private
cons.1
Public
cons.1
Fixed
inv.1
Stock
build.2
Exports1
Imports1
Inflation1
Unemploym.3
Public
budget4
Public
debt4
Current
acc.4
Euroland
2016
2017
2018
1.7
1.7
1.6
1.9
1.4
1.2
1.8
1.2
1.1
3.5
4.3
3.6
-
2.9
4.0
3.6
4.0
5.5
4.0
0.2
1.6
1.1
10.0
9.3
8.7
-1.5
-1.4
-1.4
89.2
90.4
89.2
3.3
3.0
2.9
Germany
2016
2017
2018
1.8
1.9
1.9
1.8
1.2
1.4
4.0
2.4
1.9
2.1
2.7
4.4
-
2.4
4.1
4.0
3.6
5.0
4.8
0.4
1.7
1.5
4.2
3.8
3.8
0.8
0.5
0.3
68.3
65.8
63.3
8.5
8.0
7.6
France
2016
2017
2018
1.1
1.1
1.2
1.8
1.1
1.0
1.4
1.2
1.1
2.7
2.4
3.0
-
1.2
1.9
3.0
3.5
4.4
3.5
0.3
1.2
1.3
10.1
9.9
9.7
-3.4
-3.0
-3.2
96.0
96.4
96.7
-2.3
-2.4
-2.5
Italy
2016
2017
2018
1.0
1.0
1.3
1.3
0.8
0.8
0.6
0.7
0.7
3.1
3.3
3.6
-
2.6
4.3
3.5
3.1
4.8
3.5
-0.1
1.6
1.2
11.7
11.5
11.4
-2.4
-2.2
-2.3
132.6
133.1
132.5
2.6
1.9
1.7
Spain
2016
2017
2018
3.2
2.7
2.2
3.2
2.4
2.0
0.8
0.8
1.2
3.1
3.0
4.7
-
4.4
4.0
3.6
3.3
2.9
4.6
-0.3
2.0
1.0
19.6
17.7
16.1
-4.5
-3.2
-2.6
99.4
99.2
98.5
1.9
1.6
1.6
Finland
2016
2017
2018
1.4
2.8
1.5
2.0
2.0
1.0
0.5
-0.2
0.2
5.2
6.0
2.5
-
0.5
7.0
3.0
2.5
5.0
2.5
0.4
0.9
1.0
8.8
8.4
7.9
-1.9
-2.1
-1.8
63.6
64.0
64.2
-1.1
-1.1
-0.9
Macro forecast, Global
Year
GDP 1
Private
cons.1
Public
cons.1
Fixed
inv.1
Stock
build.2
Exports1
Imports1
Inflation1
Unemploym.3
Public
budget4
Public
debt4
Current
acc.4
USA
2016
2017
2018
1.6
2.0
1.9
2.7
2.2
1.7
0.8
0.1
1.0
0.7
5.0
4.5
-0.4
-0.1
0.0
0.4
2.8
2.4
1.1
4.0
3.0
1.3
2.2
1.9
4.9
4.5
4.3
-3.2
-2.9
-2.7
106
106
107
-2.6
-2.7
-3.3
China
2016
2017
2018
6.7
6.3
6.0
-
-
-
-
-
-
2.0
2.0
2.0
4.1
4.3
4.3
-3.0
-3.3
-3.0
46.3
49.9
53.3
2.4
2.1
1.5
UK
2016
2017
2018
2.0
1.2
1.0
2.8
1.7
1.0
0.8
0.2
0.4
0.9
0.3
0.7
0.5
0.3
0.0
1.0
1.7
2.8
2.7
2.4
2.0
0.7
2.3
2.6
4.9
5.0
5.3
-3.6
-2.9
-2.2
88.7
89.2
88.7
-5.0
-4.9
-3.3
1. % y/y
2. % contribution to GDP growth
3. % of labour force
4. % of GDP
Source: OECD, Danske Bank
33 |
15 June 2017
www.da ns ke re se arc h.c om
Nordic Outlook
Financial forecasts
Bond and money markets
USD
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
14-Jun
+3m
+6m
+12m
EUR
JPY
GBP
CHF
DKK
SEK
NOK
Key int.
rate
1.00
1.25
1.25
1.75
0.00
0.00
0.00
0.00
-0.10
-0.10
-0.10
-0.10
0.25
0.25
0.25
0.25
-0.75
-0.75
-0.75
-0.75
0.05
0.05
0.05
0.05
-0.50
-0.50
-0.50
-0.50
0.50
0.50
0.50
0.50
3m interest rate
2-yr swap yield
10-yr swap yield
Currency
vs EUR
1.24
1.58
1.74
2.07
-0.33
-0.35
-0.35
-0.35
-0.01
0.29
0.31
0.31
0.31
-0.73
-0.22
-0.25
-0.25
-0.25
-0.51
-0.48
-0.48
-0.48
0.90
0.90
0.90
0.90
1.57
1.60
1.75
2.05
-0.18
-0.15
-0.05
0.00
0.05
0.48
0.55
0.55
0.55
-0.63
0.01
0.05
0.15
0.20
-0.35
-0.40
-0.40
-0.35
1.11
1.20
1.30
1.35
2.19
2.35
2.45
3.00
0.76
0.85
0.95
1.30
0.25
1.08
1.25
1.35
1.75
0.12
1.00
1.10
1.20
1.55
1.00
1.15
1.10
1.40
1.84
1.90
1.90
2.30
112.0
109.0
111.0
116.0
123.6
124.3
128.8
134.6
88.0
84.0
83.0
83.0
108.7
110.0
112.0
115.0
743.6
744.0
744.0
744.0
973.4
950.0
950.0
930.0
941.6
930.0
910.0
900.0
Currency
vs USD
112.0
109.0
111.0
116.0
110.3
114.0
116.0
116.0
127.3
129.8
133.7
139.8
97.1
100.9
100.9
99.1
663.9
682.6
670.3
641.4
869.0
871.6
855.9
801.7
840.7
853.2
819.8
775.9
Currency
vs DKK
663.9
682.6
670.3
641.4
743.6
744.0
744.0
744.0
6.02
5.99
5.78
5.53
845.0
885.7
896.4
896.4
683.8
676.4
664.3
647.0
76.4
78.3
78.3
80.0
79.0
80.0
81.8
82.7
Risk profile
3 mth
Price trend
3 mth
Price trend
12 mth
Regional recommendations
Medium
Medium
Medium
Medium
Medium
Medium
5 -10%
-5 -0%
5 -10%
0 -5%
3 -8%
3-8%
10-15%
-5-+5%
10-15%
0-5%
5-10%
5-10%
Overweight
Underweight
Overweight
Underweight
Neutral
Neutral
Equity Markets
Regional
USA (USD)
Emerging markets (local ccy)
Japan (JPY)
Euro area (EUR)
UK (GBP)
Nordics (local ccy)
Gro wth bo o st: fisc. expansio n, tax cuts, infl./gro wth-impulse
Hurt by stro nger USD and increased pro tectio nism
Valuatio n and currency suppo rt
Stro nger EP S and GDP mo mentum
Currency suppo rt, stro nger infl. exp. o ff-set B rexit negativity
Currency suppo rt o n earnings, co ntinued do mestis demand
Commodities
2017
NYMEX WTI
ICE Brent
Copper
Zinc
Nickel
Aluminium
Gold
Matif Mill Wheat (€/t)
Rapeseed (€/t)
CBOT Wheat (USd/bushel)
CBOT Soybeans (USd/bushel)
14-Jun
46
48
5,717
2,473
8,800
1,889
1,266
171
360
450
937
Q1
52
55
5,855
2,789
10,321
1,858
1,219
170
415
429
1,021
Q2
53
54
5,700
2,600
10,000
1,800
1,200
165
400
425
1,000
Q3
54
54
5,900
2,500
11,000
1,800
1,150
164
435
475
1,050
2018
Q4
58
58
6,000
2,400
11,500
1,800
1,160
170
430
500
1,050
Q1
58
58
6,025
2,300
11,600
1,800
1,170
169
425
510
1,075
Q2
60
60
6,050
2,300
11,700
1,800
1,180
167
415
520
1,075
Q3
61
61
6,075
2,300
11,800
1,810
1,190
168
415
530
1,100
Average
Q4
61
61
6,100
2,300
11,900
1,820
1,200
168
410
540
1,100
2017
54
55
5,864
2,572
10,705
1,815
1,182
167
420
457
1,030
2018
60
60
6,063
2,300
11,750
1,808
1,185
168
416
525
1,088
Source: Danske Bank
34 |
15 June 2017
www.da ns ke re se arc h.c om
Nordic Outlook
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘ Danske Bank’).
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Report completed: 14 June 2017 15.30 CET
Report first disseminated: 15 June 2017 9.00 CET
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