Nordic outlook: We have lift-off

The recovery is happening

The Nordic countries have oscillated between restrictions and easing over the last 15 months as COVID-19 numbers have ebbed and flowed, but by now the direction is clearly towards reopening. The four countries are at slightly different stages but the economic results are clear. Consumer spending is fast approaching or even exceeding normal levels, and exports are benefitting from the very strong global demand for manufacturing goods. This is not surprising and we have only made small adjustments to our forecasts, but it is still positive to see it confirmed. In particular, we are seeing the labour markets improving much faster than in previous crises. There are of course still risks related to COVID-19, but with vaccinations progressing, we expect the recovery to continue and to have the economies back to their potential output and pre-crisis unemployment in 2022.

The very rapid recovery has led to clear signs of overheating, in particular rising input prices and a lack of materials and transportation. We expect these problems to be significantly eased as the world economy normalises and global demand shifts from goods to services, and we do not expect an inflation surge in the Nordics. However, given the uncertainty and pace of the recovery, it is well worth keeping an eye on also domestic sigs of heating.

House price surge to end

Like in many other parts of the world, house prices have surged in the Nordics during the COVID-19 crisis. We ascribe that in large part to consumers substituting from other kinds of spending and hence expect prices to level out now, also because some of the relevant interest rates are starting to move higher. It should be noted though that the uncertainty is significant, also since new regulation is being considered, see also our Research Nordic – Housing boom coming to an end, June 18 2021.

Monetary policy on different paths

Norway is firmly on a path towards higher interest rates, and we expect the first rate hike in September, followed by four more before the end of 2022. Norway has not seen inflation and “natural” interest rates decline to the same extend as most other European countries, and a positive policy interest rate remains appropriate in a normal situation. In the other countries, however, we see little reason to expect a move away from current zero or negative rates. In fact, we expect a small rate cut in Denmark as a normalisation after the small hike to protect the exchange rate during the financial turmoil in March 2020. But also outside Norway, longer-term rates are edging up as the global and local economies improve.

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