Inflation and rising interest rates continue to cast a dark shadow across the Nordic economies. But just how dark those shadows are varies from country to country. For, while growth has surprised positively in Denmark and Norway, both Finland and Sweden have experienced challenges, especially with their housing markets.

With respect to Denmark, the situation looks surprisingly positive at first glance, with GDP growth higher than expected. The expectation now is for GDP to rise by 0.5% in 2023, whereas the expectation in January 2023 was -1.0%. However, the uptick is due, in particular, to marked growth in the pharmaceutical industry, which appears to be giving GDP a boost. Take this away, and the outlook for the Danish economy is still a recession.

Yet, while a recession may be threatening, Danish consumers and companies remain well prepared, points out Las Olsen, chief economist at Danske Bank.

“Danish households and companies are well cushioned, but they have also experienced better growth rates than many other European countries in recent years, leaving Denmark with less catch-up potential. However, we continue to see a clear risk of both an actual crisis materialising and an insufficient slowdown in the coming years,” he says.

 
Sweden’s housing market challenged
Turning to Sweden, the outlook remains one of negative growth in 2023, with the expectation now running at -1.0% compared to January’s expectation of -1.2%. Inflation is, unsurprisingly, continuing to cause problems, and is far above the Riksbank’s projections. This will likely prompt further interest rate hikes that could hit the Swedish housing market, which had otherwise begun to pick up a little.

“The housing market has proved surprisingly robust in recent months after a sharp fall in spring 2022. To date, prices are down around 12% from last February’s peak, and our view is that the slide will not stop here. Keeping in mind that previous rate hikes have not yet fully fed through, and that we at the same time expect a further increase in interest rates of 125bp from the Riksbank, we have revised our forecast for house price growth down to -25% from previously -20%, from peak to trough,” says Las Olsen.

Norwegian economy at a crossroads
Looking at Norway, the Norwegian economy is at a crossroads. For, while growth has been stronger than expected and in our forecast for 2023 has now been revised up to 1.0% compared to 0.6% earlier, activity levels are flattening and there are signs that unemployment is beginning to increase.

“Growth has been better than expected, driven especially by stronger private consumption growth. As a result, the labour market has remained tight, and wage and price growth have continued to tick up. We are now seeing signs of growth fading, and the economy is very likely at a crossroads, with inflation falling while unemployment increases somewhat,” says Las Olsen.

Finnish recession
While the other Nordic countries remained in positive growth territory in 2022, the Finnish economy slid into a modest recession at the end of 2022. And while our latest forecast pencils in better growth than previously, we are still looking for negative growth of -0.2%. Nevertheless, that still represents progress compared to our previous forecast of -0.7%.

“The economy is still being buffeted by several issues that slow growth. Persistent inflation continues to erode consumer purchasing power, the increase in interest rates will have a long-delayed impact on the economy, housing construction is weakening, and the flow of export orders remains sluggish in the short term. We have raised our forecast for the Finnish economy due to a slightly improved operating environment, but we still expect GDP to decline in 2023,” says Las Olsen.