Nordic Outlook: Nordics not the worst place to be in a corona crisis

The Nordic Outlook is a quarterly publication that presents Danske Bank’s view on the economic outlook for the Nordic countries. This Nordic Outlook has been written at the early stage of a severe economic crisis caused by the global spread of the new coronavirus and the measures taken against it.



Highlights

At a glance

It is clear that the crisis is deep and that there has been an unprecedented drop in economic activity. It is very unclear exactly how deep and what will happen once the health crisis is over. We simply do not have useful experience to draw from. We believe that the most likely outcome is a sharp recovery in the second half of 2020, which will still leave us with a large income loss, higher unemployment and a big increase in public debt. Most risk factors point to a worse outcome than that. 

Well equipped Nordics… 
Compared to the rest of Europe, we expect the Nordics to handle the crisis relatively well.

Healthy public finances allow for strong fiscal countermeasures, focused on helping businesses and jobs survive. Large public sectors mean that the decline in GDP and employment is likely to be smaller than elsewhere, at least if we do not include those on temporary public support while still attached to their employer. A high level of social benefits protects those that do become unemployed.

The Nordics are relatively less dependent on industries such as restaurants, hotels, recreation and culture, which will be particularly hard hit, and apart from Denmark, the Nordics have deficits on their tourism balance. Surveys rank Nordic governments high in terms of efficiency and trust, and that should be useful in a health crisis, although at this point, it is too early to say if the responses to the risk from the virus have in fact been successful. 

It is very unclear exactly how deep and what will happen once the health crisis is over. We simply do not have useful experience to draw from. We believe that the most likely outcome is a sharp recovery in the second half of 2020, which will still leave us with a large income loss, higher unemployment and a big increase in public debt. 

Las Olsen

Chief economist, Danske Bank



..with significant differences 

There are also significant differences between the Nordic countries, which will affect how the crisis plays out. 

The corona crisis has led to a sharp decline in the oil price, which will support domestic demand in most countries but which is clearly negative for Norway as it will lead to lower oil investments. On the other hand, Norway has been able to respond with a sizeable cut in interest rates, while Denmark has had to make a small rate hike to support the currency in a time of financial turmoil, and the fixed exchange rate against EUR means that there has been a currency appreciation in trade weighted terms, the opposite of what has happened in Sweden and especially Norway. However, Denmark has made the largest fiscal easing, and is also helped by the fact that industries such as pharma, windmills, food and agriculture are unlikely to be hard hit by the crisis. 

Finland is where we expect the largest drop in GDP this year, as the economy was already slowing on the back of weaker exports and investments, before the current hit to consumption