Nordea: Brighter outlook for Nordic exports

01.09.2009

An improved outlook for the global economy will brighten the outlook for Nordic exports in the coming months. Still, a turn for the better in unemployment in the Nordic countries is not to be expected until 2010. This is what the Nordea economists conclude in Economic Outlook.

- We can now see that the spring optimism in financial markets was justified. Many economies around the world have now emerged from the recession, supported by a highly expansionary and to a large extent coordinated economic policy implemented by governments around the world, says Helge J. Pedersen, Global Chief Economist in Nordea.
 
The next big challenge for governments and central banks around the world is to define the appropriate exit strategy away from their current expansionary economic policies. It is crucial to avoid another financial market collapse and a new global economic recession.

The Estonian economy plunged into an ever deeper recession with GDP falling by 16.6% in Q2, as expected. For instance, domestic demand and exports continued to drop sharply in Q2. Despite the steepening contraction the pace of decline accelerated less than in previous quarters. Nevertheless, GDP is likely to decrease by as much as 14% y/y in 2009. We expect GDP to contract further in 2010, but the recession will ease when for instance export demand recovers.
Even if the global upturn proves more rapid than anticipated, domestic demand and investment will remain subdued in the next few years. The economy is expected to turn to growth in 2011, but at a notably weaker pace than in the past few years.
Consumer confidence has risen from its lows, but it still remains at a weak level, which demonstrates the still long and bumpy road to recovery for consumption. Even though the fall in wages dampens consumption, the correction to recent years’ brisk wage growth has been necessary. Rising unemployment and the difficulties on the credit markets will also slow down the recovery in consumption. After the quick deceleration inflation will continue to moderate, with the drop in consumer prices strengthening purchasing power.

Uncertainty about the Latvian economy, its financial conditions and especially the currency has also cast a shadow over Estonia during the summer. Although the risk of devaluation in Latvia has subsided, the neighbouring countries will continue to monitor the situation as devaluation could prove disastrous to the currencies of the
other Baltic countries as well.

The government’s support measures, such as the VAT hike and cuts in public sector wages, are aimed at keeping the budget deficit below 3% of GDP, which would enable EMU membership in 2011. However, after the gloomy H1 this goal is becoming increasingly hard to reach, and thus the plans of euro adoption seem to be
postponed at least until 2013.

The storm that has ravaged the Danish economy for about 18 months finally seems to peter out. The improved outlook for the global economy will also brighten the outlook for Danish exports, and the gradual improvement of the financial market situation has also filtered through to Denmark, resulting in lower interest rates. Moreover, during the remainder of 2009 and in 2010 the effect of the government’s rescue packages will also start to show through. Still, a further sharp increase in unemployment cannot be avoided.

With its large export sector the Swedish economy was hard hit by last year’s collapse in world trade. There are now signs that Sweden may emerge relatively quickly from the crisis thanks to the international recovery coupled with highly expansionary conditions at home. Indicators reflect an upswing in the manufacturing industry in the rest of 2009. At the same time households’ growing consumption plans are supported by a fairly high savings ratio. Swedish government finances are adversely affected by a sustained rise in unemployment as well as continued fiscal policy measures.

The recession is over in Norway. After two quarters of declining activity in the mainland economy, growth slipped slightly into positive territory again in the second quarter of 2009. Consumption growth is rising sharply driven by substantial rate cuts. Higher export market growth, a sustained high level of investment in the oil sector and strong growth in public sector demand will also contribute to strong GDP growth. Unemployment will follow an uptrend that looks set to flatten in 2010, though.

 The Finnish economy contracted sharply during the winter, especially due to the heavy drop in exports. With the advent of spring, there were increasing signs of the economy stabilising, though. In the second half of 2009 we are set to witness quite a marked turn for the better in the Finnish economy thanks to the pick-up in global trade. However, the brisk rise will not last very long unless final demand in the export markets recovers. Economic growth will be reasonable in the next few years. A turn for the better in employment is not to be expected until well into 2010.

View an interview with Helge J. Pedersen and download the report at www.nordea.com/eo/uk.