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Nordic countries running out of spare capacity – but economies continue to improve

Strong domestic and foreign demand for both labour and goods is aiding the recovery of the Nordic economies, writes Danske Bank’s macroeconomic team in the latest edition of Nordic Outlook – Danske Bank’s quarterly publication on the Nordic economies.


The economies of the Nordic countries are continuing to recover after the initial Covid-19 downturn in 2020, which was deep, but less deep than in many other parts of the world. New restrictions this winter will likely slow the recovery a little.

Labour shortages limiting growth 
Job growth has been very strong in 2021, and shortages of qualified labour increasingly appear to be a limiting factor for further economic growth – though of course there are considerable differences across industries and regions, with the Swedish labour market looking less tight, for example.

“The global increase in inflation is also clearly visible in the Nordics, though for now mainly because of rising energy prices and prices on a number of other products that had to catch up price-wise after the crisis. Whether the increase in inflation will persist or not largely depends on whether we begin to see more wage increases,” says Las Olsen, chief economist at Danske Bank.

Whether the increase in inflation will persist or not largely depends on whether we begin to see more wage increases.

Las Olsen

Chief economist, Danske Bank

Supply chain problems set to continue in 2022
Shortages of materials and equipment are currently limiting production in many Nordic companies. We expect this to change as global demand shifts back to services instead of goods. However, this process has been delayed by the emergence of the Omicron variant of Covid-19, so global supply chain problems will probably be an important issue throughout most of 2022.

Energy supplies from electricity and gas are also a problem right now in the Nordics and relate to geopolitical tensions and the transition of energy policies, which are not particularly predictable. Many companies are also running at full capacity in terms of machinery and premises. This capacity can only be expanded through investment, which is time-consuming and can only happen gradually.

Policy tightening underway
Fiscal policy is being tightened as a natural consequence of most countries ending the measures enacted to protect economies during the pandemic. Norway is also tightening monetary policy, as Norges Bank has to a greater extent than the other Nordic countries adjusted interest rates up to a normal level.

“The ECB and Sweden’s Riksbank have signalled considerable patience after struggling with unduly low inflation for most of the period since the financial crisis. The most important factor that could alter the outlook for both central banks is wage growth, which currently looks very modest in both Sweden and in the Eurozone,” says Las Olsen.

He emphasises that with Danish monetary policy pegged to the ECB, the prospect of high wage growth in Denmark does not mean the outlook is also for higher interest rates, but rather that wage growth could undermine Danish competitiveness if it really takes off.

House price appreciation has slowed
Nordic house prices accelerated during the pandemic, but have slowed again following the reopening. Given the outlook for growth and interest rates, we do not expect to see any widespread weakness in the housing market. That being said, prices have risen greatly in some urban areas, so careful monitoring is still required here.