Economic setback ahead

The outlook for the global economy has worsened over the past months. The international credit crisis seems far from over, the housing market is under serious pressure in many countries and global stock markets have experienced the most dramatic downfall since the IT bubble burst in 2000. Against this background, Nordea's economists markedly lower their forecasts of coming years' economic growth in the publication Economic Outlook.

- The US economy has probably already slid into a recession and the consequences will spread to the economies in the rest of the world, including the Nordic countries, says Global Chief Economist in Nordea, Helge J. Pedersen.

The main reason for the Danish economic slowdown is still the downturn in the housing market that has adversely affected private consumption growth and residential investment. The Danish economy is also facing challenges caused by the international credit crisis. Higher money market rates have made financial institutions announce rate hikes for certain loan products. The higher lending rates will eventually exacerbate the trend towards lower growth in investment and private consumption. But most importantly, the outlook for softer global growth and the weak US dollar and British pound point to a weak development in Danish exports in the coming years.

The Swedish economy started to slow down in 2007 and is expected to slow further this year and in 2009, where growth will be well below the potential level. Exports are well diversified, alleviating some of the negative effects of the US slowdown. Investment has increased sharply, but will now dampen as an effect of subdued demand. Private consumption is seen slowing despite a strong rise in disposable income, boosted by fiscal policy measures in 2009 worth 20bn Swedish kronor. Employment will fall and unemployment pick up next year as an effect of a weaker growth. Inflation has remained high, but is expected to drop as the effect of higher prices of energy and food drops out of the index during H2 2008. This paves the way for the Riksbank to start cutting the repo rate during the autumn reaching 3 per cent in 2009.

Finnish economic growth slowed markedly as early as in H2 2007. According to Nordea's earlier estimates, the downturn in the world economy would temporarily slow down growth in Finland, which would mainly ease the bottlenecks caused by robust growth. However, the downswing in export markets will inevitably be reflected in the outlook for the Finnish economy. Nordea expects economic growth to be around 2 per cent on average in 2008 and 2009. So, the downturn still looks set to be relatively mild. Yet, risks have surely increased that the economic downturn in 2008-09 will be more than just a welcome breather.

In Norway the rate hike will help curb growth in domestic demand over the next few years. A weaker global growth outlook will also curtail growth going forward, although high oil prices limit the effect on the Norwegian economy. Slow growth means that the policy rate can stay at a stable level of 5.5 per cent despite increased inflation this year. The financial turmoil will lead to a tighter monetary policy and Norges Bank will seek to stabilise inflation. The persistently high oil prices and higher interest rates in Norway compared to its trading partners will secure a strong currency over the next years although risk appetite among investors is currently declining, leading to a weaker Norwegian krone.

View interview with Helge J. Pedersen on Nordic economic trends at www.nordea.com/eo/uk - where the report is also available.

For further information:
Helge J. Pedersen, Global Chief Economist, +45 33 33 31 26

Press release (PDF)
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