Long winter ahead – What if the Nordic economic recovery is sidetracked by a new global COVID-19 shock?
|Spring looks promising but next comes winter
Vaccines are coming and normal life can be spotted on the horizon. In the short term, COVID-19 will, however, be present among us and the threat of a severe second global economic dip in case of new economy-wide lockdowns remains elevated (we put 15% on a downside scenario in our recent Big Picture - Darkest before dawn). The repercussions for the following economic rebound could be significant. In this research piece, we will look at what such a scenario could look like and what it would entail for the Nordic economies. Overall, the Nordics look more robust than most, with fewer infections and solid public finances to counter a setback in economic activity via investments and support for companies through another rough patch in the global pandemic. New cases are rising in Sweden and Denmark, though, and the Danish government recently introduced a partial lockdown of about half the country. The Nordics are all small, open economies, highly dependent on global demand and there is only so much public support can do.
The crisis is caused by weak foreign demand and domestic restrictions
COVID-19 is weighing heavily on the global economy, restrictions are weighing on the Danish, Swedish and Norwegian economies and tougher restrictions across Europe are threatening to derail the pickup in demand for Nordic goods and services once again. We know coronavirus survives better in cold temperatures, people are indoors more and see more people in the holidays. The virus is also spreading fast in the US and could trigger quite substantial lockdown measures. We have created a scenario for the Nordics using input from Oxford's global economic model and risk scenarios to derive a consistent view of a potential crisis across the Nordics. We attach a likelihood of 15% to a scenario of this severity.
The increase in infections and the restrictions in the Nordics and rest of Europe that we are already seeing now limits the pickup in economic activity in the Nordics in Q4. In our whatif- scenario, we imagine a global second wave of virus infections peaks in Q1. A hard Brexit or US-China tensions may also weigh on sentiment. Global economic activity declines by about 5% (half of the size of the shock in H1 20). Exports decline in the Nordics, reflecting lockdowns in key export markets and a decline in world trade. Danish exports have shown some robustness through the first wave in the spring due particularly to pharmaceutical exports which are not affected much by a global pandemic. On the other hand, a large shipping sector is very sensitive to a crisis like this and the currency peg forces DKK, currently close to a 10-year high, to appreciate even further, worsening competitiveness significantly in a situation where demand is already declining. Swedish exports are notoriously more sensitive to the global business cycle with significant machinery production but on the other hand Swedish exporters can enjoy some relief from a weaker SEK.
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