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.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800, as traders lack directional impetus amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days.
US core PCE inflation set to ease in February on month as Federal Reserve rate cut bets for June mount
The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February. The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.