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Investment Research 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 . www.danskeresearch.com 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. 3| 15 June 2017 www.da ns ke re se arc h.c om 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. 4| 15 June 2017 www.da ns ke re se arc h.c om Nordic Outlook 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 5| 15 June 2017 www.da ns ke re se arc h.c om 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. 6| Previous forecast % y/y 15 June 2017 www.da ns ke re se arc h.c om 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. 7| 15 June 2017 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 www.da ns ke re se arc h.c om 8 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. 8| 15 June 2017 Source: Finance Denmark, own seasonal adjustment www.da ns ke re se arc h.c om Nordic Outlook 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 9| 15 June 2017 www.da ns ke re se arc h.c om 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. 10 | 15 June 2017 www.da ns ke re se arc h.c om Nordic Outlook 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 11 | 15 June 2017 www.da ns ke re se arc h.c om 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. 12 | 15 June 2017 Source: SCB, Eurostat, Prospera, Riksbank. Danske Bank calculations www.da ns ke re se arc h.c om Nordic Outlook 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. 13 | 15 June 2017 Source: OECD, SCB, KI, Riksbank. Danske Bank calculations www.da ns ke re se arc h.c om Nordic Outlook 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. 14 | 15 June 2017 Investment growth on a tightrope Source: SCB, KI, Danske Bank calculations www.da ns ke re se arc h.c om Nordic Outlook 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 15 | 15 June 2017 www.da ns ke re se arc h.c om Nordic Outlook 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. 16 | 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 www.da ns ke re se arc h.c om Nordic Outlook 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 17 | 15 June 2017 www.da ns ke re se arc h.c om Nordic Outlook 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. 18 | 15 June 2017 Stronger GDP growth Source: Macrobond Financial, Danske Bank Brighter growth outlook Source: Macrobond Financial, Danske Bank www.da ns ke re se arc h.c om Nordic Outlook 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 19 | 15 June 2017 Source: Macrobond Financial, Danske Bank www.da ns ke re se arc h.c om Nordic Outlook 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. 20 | 15 June 2017 www.da ns ke re se arc h.c om Nordic Outlook 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 21 | 15 June 2017 Source: Macrobond Financial, Danske Bank www.da ns ke re se arc h.c om Nordic Outlook 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. 22 | 15 June 2017 www.da ns ke re se arc h.c om 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 www.da ns ke re se arc h.c om 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 www.da ns ke re se arc h.c om 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 www.da ns ke re se arc h.c om 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 www.da ns ke re se arc h.c om 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 36 | 15 June 2017 www.da ns ke re se arc h.c om Global Danske Research I n t e r n at i o n a l M a c r o Fixed Income Research F X & C o mm o d i t i e s S t r at e g y DC M R e s e a r c h C h ie f Ana ly st & H e a d of J akob Ek ho ld t C hr is te ns en + 45 4 5 1 2 8 5 3 0 j ak c @d a ns k e b a n. co m Chief Analyst & Head of Arne Lohmann Rasmusse n +45 45 12 85 32 [email protected] G l ob al He ad of FI CC R e se arch Th o mas Harr +45 45 13 67 31 th h ar@dan sk e ban k .co m Ch i e f A n al y st & He ad of Th o mas M art i n Hov ard +45 45 12 85 05 h ov a@dan sk e ban k .co m A l l an vo n Me hr e n + 45 4 5 1 2 8 0 5 5 al vo@ d a ns k e b a nk . d k Jens Peter Sørensen +45 45 12 85 17 [email protected] C h r i st i n Ky rme Tu xe n +45 45 13 78 67 tu x@dan sk e ban k .co m Lo u i s Lan de m an +46 8 568 80524 l l an @dan sk e ban k .se P e rn ille Bo mho ld t H e nne berg + 45 4 5 1 3 2 0 2 1 p e rn i @ d a ns k e b a nk . co m Chr ist ina E . Falch +45 45 12 71 52 [email protected] M o rte n Th ran e He l t +45 45 12 85 18 m o h e l @dan sk e ban k .co m J ako b M ag n u sse n +45 45 12 85 03 j ak j a@dan sk e ban k .co m Mi k ael Ola i Milhø j + 45 4 5 1 2 7 6 0 7 m i l h @d a ns k e b a nk . co m Jan Weber Østergaard +45 45 13 07 89 [email protected] J e n s N æ r v i g P e de rse n +45 45 12 80 61 j e n pe @dan sk e ban k .co m M ads R o se n dal +45 45 14 88 79 m adro @dan sk e ban k .co m A i l a E vche n Mihr + 45 4 5 1 3 7 8 6 7 am i h @d a ns k e b a nk . co m Hans Roager Jensen +45 45 13 07 89 [email protected] Kr i stof f e r Kj æ r Lo m h o l t +45 45 12 85 29 k l o m@dan sk e ban k .co m G abr i e l B e rg i n +46 8 568 806 02 g abe @dan sk e ban k .co m M athias Røn M ogensen + 45 45 14 72 26 [email protected] B r i an B ø rst i n g +45 45 12 85 19 brbr@dan sk e ban k .co m S v e rre Ho l be k +45 45 14 88 82 h o l b@dan sk e ban k .co m N i k l as R i pa +45 45 12 80 47 n i r i @dan sk e ban k .co m He n r i k R e n è An dre se n +45 45 13 33 27 h e n a@dan sk e ban k .co m Sweden D e nm a r k E m e r g in g M a r k e t s C h ie f Ana ly st & H e a d of Mi c h a e l Bo s trö m + 46 8 5 6 8 8 0 5 8 7 m b os @ d a ns k e b a nk . co m Ch ief Economist & Head of Las O lsen +45 45 12 85 36 [email protected] Ch i e f An al y st & He ad of J ako b E k h o l dt C h r i ste n se n +45 45 12 85 30 j ak c@dan sk e ban .co m Lu k as P l at z e r + 45 45 12 84 30 l pl a@dan sk e ban k .co m R og e r Jo s e f s s o n + 46 8 5 6 8 8 0 5 5 8 r j o s @d a ns k e b a nk . co m Louise Aggerstrøm Hansen + 45 45 12 85 31 [email protected] Vl adi mi r M i k l ash e v sk y +358 (0)10 546 7522 v l m i @dan sk e ban k .co m Katr i n e J e n se n +45 45 12 80 56 k atr i @dan sk e ban k .co m Mi c h a e l Gr a hn + 46 8 5 6 8 8 0 7 0 0 m i k a@d a ns k e b a nk . co m Bjørn Tangaa Sillemann + 45 45 12 82 29 [email protected] R o k as G raj au sk as +370 5 215 6231 Hase e b S y e d +47 85 40 54 19 h sy @dan sk e ban k .co m C arl M ilto n + 46 8 5 6 8 8 0 5 9 8 c arm i@ d a ns k e b a nk . co m Marc us Sö d e r b e r g + 46 8 5 6 8 8 0 5 6 4 m ars d @ d a ns k e b a nk . co m S te fan Me llin + 46 8 5 6 8 8 0 5 9 2 m e l l @ d a ns k e b a nk . co m S u s anne P e r ne b y + 46 8 5 6 8 8 0 5 8 5 s u p e @ d a ns k e b a nk . co m N o r way Ch ief An alyst & Head of Frank Jullum +47 85 40 65 40 f [email protected] Jostein Tvedt +47 23 13 91 84 jt [email protected] F in l a n d B e n di k E n g e bre tse n +47 85 40 69 14 be e @dan sk e ban k .co m Ch i e f An al y st & He ad of P asi P e t te r i Ku o ppam äk i +358 10 546 7715 pak u @dan sk e ban k .co m M i n n a E mi l i a Ku u si sto +358 10 546 7955 m k u u @dan sk e ban k .co m D a ns k e Ba nk , D a ns k e Research, Holmens Kanal 2-12, DK - 10 9 2 C o pe n h ag e n K. P h o n e + 4 5 4 5 1 2 0 0 0 0 w w w.dan sk e re se arch .co m