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Nordic Outlook: Time to get inflation down

2023 will be shaped by efforts to bring down inflation, and if all goes well, a mild recession should be enough to rebalance the economy. However, it is a difficult task for central banks to achieve, and there is a risk of a deep recession or inflation to become more ingrained, writes Danske Bank’s macroeconomists in a new Nordic Outlook analysis.

2022 was the year of inflation.

2023 will to a large extend be influenced by central bank efforts to bring inflation down.

But as last year’s experience has clearly shown, inflation can be very difficult to predict and also in the coming time, it will be necessary to continually monitor economic data very closely to see where we are heading, says chief economist at Danske Bank, Las Olsen, whose team has just released an analysis of the status quo and the economic outlooks across the Nordic countries.

If all goes well, a mild recession should be enough to rebalance the economy.

Las Olsen

Chief Economist, Danske Bank

“As we see it, we are approaching or already in a recession in both the Nordic countries and the wider euro area, as real incomes are being eroded by higher prices, and higher interest rates are dampening demand. If all goes well, a mild recession should be enough to rebalance the economy and we can move on afterwards with somewhat higher unemployment but economies that have not been seriously damaged,” says Las Olsen.

But there is risks looming in the horizon: 
“It is a very difficult task for central banks to achieve just the right amount of tightening, and there is a large risk that the recession will be either unnecessarily deep or that inflation will be drawn out and become more ingrained,” says Las Olsen.

Denmark: ready to face the recession

Darkening outlook from a bright starting point.

Sweden: economy feels the freeze

A bad situation for households to be felt throughout the economy.

Norway: clear slowdown underway

2022 went better than expected, but the outlook has worsened.

Finland: pushing through the winter

Price increases have worsened the outlook.

Strong Nordic starting point
Heading into a recession, the Nordic countries have a strong starting point. Compared to most other European countries, the Nordic countries have been less damaged during the Covid crisis, and have recovered more quickly. Government finances are generally in good shape, and measures to help households and businesses cope with inflation are comparatively modest.
“Exploding natural gas prices have not been a big negative terms of trade chock for the Nordics, as it has for much of Europe. Gas is the heating source in 13% of Danish households and in very few households in the other Nordic countries. However, higher interest rates are a chock also to Nordic households and businesses, both directly through higher costs on existing loans especially in Sweden and Norway, and indirectly through the effect on asset prices, not least housing,” says Las Olsen.