- This summer’s financial market turmoil will have repercussions on the global economy, although a global recession is not very likely. The risk is too small for that at present, says Helge J. Pedersen, Head of Economic Research at Nordea.
He believes that particularly the major central banks’ willingness to support the financial sector ensures that there is still a chance of a soft landing. Globally, the biggest risk is that the US economy embarks on a prolonged downturn as a result of the US housing market woes, while the prospects for the rest of the world and the Nordic region are more benign.
The Danish economy keeps up the pace, but dark clouds are looming on the horizon. The steady decline in unemployment boosts private consumption, while the slowdown in the housing market will dampen activity.
- Significant pay rises for instance in the public sector are on the cards, and this could seriously erode Danish competitiveness. Also the export industry seems to be having problems although growth in some of Denmark’s most important export markets remains high, says Helge J. Pedersen.
The supply side of the Norwegian economy continues to surprise on the upside, it says in the report. But high growth in production capacity has not eased pressures in the economy as demand is also growing strongly. And the strong labour supply growth has not been sufficient to solve the problem of labour shortages.
- Very high pay rises in Norway are one sign of the keen competition for labour. In order to prevent the economy from overheating Norges Bank will probably have to hike its policy rate to as much as 5.75%. That would cause Norwegian interest rates to increase more than their European equivalents, which would trigger a stronger NOK, explains Helge J. Pedersen.
Turning to the Swedish economy, a number of major surprises have been uncorked this year, some of which have obvious monetary policy implications. According to Nordea’s economists the key reasons are that productivity has been much lower than expected and that the labour market reforms so far have had limited effects.
- Unemployment in Sweden has dropped markedly. With a tighter labour market there is a clear risk of rising wage growth. We expect the Riksbank to hike rates twice during the remainder of the year. With decelerating growth due to weak exports and low investment growth the Riksbank will likely settle with one rate hike early next year and halt at 4.25%, says Helge J. Pedersen.
The Finnish economy remains in a high gear, but Nordea’s economists expect growth to slow to a more normal level during the autumn. A slowdown would be welcome as the economy is already operating above its short-term capacity. The strong economy has resulted in inflation pressures, and both this year and the next inflation will remain above target. Also the economic balances are solid, and Finnish government finances are heading for another positive surprise.
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