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Nordic Outlook January 2018

Economic and financial trends

Denmark: Still a little more to come
- Judging from the latest figures, the Danish recovery is slightly disappointing.

Sweden: Consumers next to feel the heat
- Drop in house prices will depress construction, and the risk is that it will lead to a drop in consumer spending.

Norway: Rate hike inching closer
- Growth is becoming more self-sustained, inflation is heading up and so are interest rates.

: Rising employment lifts spirits
- The strong recovery in 2017 looks set to continue, although at a slightly slower pace.

Falling house prices – so what?
An important factor to watch Probably the most talked-about event in the Nordic economies in recent months is the fact that house prices have been falling in Norway and Sweden. Historically, house price declines have often been triggered by higher interest rates, but that is not the case this time. Instead, it has a lot to do with issues of supply and demand. High prices, especially in central urban locations, have caused large increases in the supply of new housing and that is having an effect on prices. Tighter financial regulation also seems to have played a role, especially in Norway. In Sweden’s case, we have for a long time been concerned that house prices and especially apartment prices have grown too high relative to the economy, and there is a good chance that the declines will continue for a while yet. In Norway, house prices seem more aligned with the fundamentals of the economy, although prices in Oslo are something of an exception and can be expected to decline a bit more.

Economic growth has been very much driven by housing investment in Sweden in recent years and we think it is unlikely that Swedish housing investment will continue to expand, all the more so now that prices have turned around. In that sense, lower house prices will have a serious effect on the Swedish economy, but we do not expect a large impact on household spending, as the households are very robust in general. Norway is still in a recovery phase and it will take a good deal more to change that than we have seen so far in house prices.

What about Denmark and Finland? Both, especially Denmark, have experienced sharp price increases on small apartments in the most sought-after locations. Those prices can certainly turn around as supply increases. However, overall house price growth and valuations remain modest and there is little reason to fear a housing-induced shock to those economies.

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