nordic outlook - september 2014 - danske bank€¦ · data underlines that progress is slow and...

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Investment Research

September 2014

Nordic OutlookEconomic and financial trends

� Denmark: Fragile recovery - the Danish economy has disappointed but we remain cautiously optimistic

� Sweden: Move along, nothing to see here - slow growth primarily due to weak growth in the export markets

� Norway: Stable growth despite dwindling oil investment - oil investments are dragging down growth but activity remains high due to strong domestic demand and higher exports

� Finland: Painful road to growth - the Russian recession and austerity measures are weighing on the Finnish economy

2 | 25 September 2014 www.danskeresearch.com

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Analysts

Editorial deadline 24 September 2014 Investment Research

Editor-in-Chief:

Steen Bocian

Chief Economist

+ 45 45 12 85 31

[email protected]

Macro economics:

Las Olsen Denmark +45 45 12 85 36 [email protected]

Mikael Olai Milhøj Denmark +45 45 12 76 07 [email protected]

Mikkel Rud Bjørndal Denmark +45 45 12 81 57 [email protected]

Roger Josefsson Sweden +46 (0)8-568 805 58 [email protected]

Frank Jullum Norway +47 85 40 65 40 [email protected]

Juhana Brotherus Finland +358 (0)10 546 7159 [email protected]

Pasi Petteri Kuoppamäki Finland +358 (0)10 546 7715 [email protected]

This publication can be viewed at www.danskebank.com/danskeresearch

Statistical sources: Datastream, Macrobond Financial, OECD, IMF, National Institute of Social and Economic Research,

Statistics Denmark and other national statistical institutes as well as proprietary calculations.

Important disclosures and certifications are contained from page 35 of this report.

http://www.danskebank.dk/analyse

http://www.danskebank.dk/analyse


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Contents

Denmark Fragile recovery 4

Forecast at a glance 11

Sweden Move along, nothing to see here 12


Norway Stable growth despite dwindling oil investment 18


Finland Painful road to growth 24


Global overview A multi-speed recovery 32

Economic forecast 33

Financial forecast 34

The Nordic Outlook is a quarterly publication that presents Danske Bank’s view on the economic outlook for

the Nordic countries. The semi-annual publication The Big Picture sets out our global economic outlook.

http://danskeresearch.danskebank.com/link/GlobalScenarios/$file/GlobalScenarios.pdf


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Denmark

Fragile recovery

Denmark is on the threshold of a recovery although recent economic

data underlines that progress is slow and fragile and could be easily

derailed. However, while the numbers have been disappointing

recently, we still view the recovery as being more or less intact.

However, we have revised down our growth forecast in light of the

disappointing data. We now forecast GDP growth of 0.8% in 2014

and 1.8% in 2015.

Hence, growth is unlikely to be impressive in the coming years, but

we still expect Denmark to meet the EU budget-deficit requirements

in 2015.

Even though the recovery is weak and fragile, there is reason to

expect progress in perhaps the two most important parameters for

ordinary Danes; hence, we expect unemployment to fall and house

prices to pick up. This is good news for private consumption, which is

slowly beginning to pick up.

Exports are currently subdued as Europe takes a breather, but we

expect to see growth here too during the forecast period.

Disappointing H1but we look for renewed growth

The Danish economy was hit hard by the financial crisis and a recovery has

been long in coming. Nevertheless, the economic data turned more positive at

the start of this year and we dared to conclude just before the summer

holidays that the recovery had finally taken hold. Since then the numbers

have generally been disappointing; therefore, our conclusion is open to

question. However, we do not see the numbers as sufficiently weak to change

our pre-summer view. After all, this year looks set to be the first since 2011

with real growth in the Danish economy. Therefore, while growth in the

coming years looks set to be less than previously forecast, the economy is

nevertheless progressing and as employment, the housing market and private

consumption are all continuing to rise, we still venture to call this a recovery.

Even though the Danish economy has disappointed and we have revised

down our growth forecast, we still remain cautiously optimistic. It is true that

economic performance was lacklustre in Q2, but much of that was due to

temporary factors that will not continue into H2. Most important perhaps is

that Europe’s economic stagnation is unlikely to carry on much longer and

remember that Denmark is a small, open economy where growth is

inextricably bound up with the prevailing economic situation in Europe,

which constitutes Denmark’s largest export market. However, that is not the

only reason for our optimism. Consumption is also showing signs of

underlying growth, meaning Denmark’s economy could soon be firing on

more than one cylinder.

Changes relative to previous forecast

Source: Statistics Denmark and Danske Bank

H1 disappointed but we expect a rebound

Source: Statistics Denmark, Danske Bank Markets

Chief Economist

Steen Bocian +45 45 12 85 31 [email protected]

Personal Finance Economist Las Olsen +45 45 12 85 36 [email protected]

Analyst Mikael Olai Milhøj +45 45 12 76 07 [email protected]

Assistant Analyst Mikkel Rud Bjørndal [email protected]

% y/y 2014 2015 2014 2015

GDP 0.8 1.8 1.5 2.0

Private consumption 0.8 1.8 1.6 1.7

Public consumption 0.8 0.8 0.7 0.8

Gross fixed investment 2.7 2.3 2.3 3.2

Exports 2.7 3.2 3.2 3.8

Imports 4.3 2.9 3.1 3.4

Gross unemployment (thousands) 135 127 132 123

Inflation 0.6 1.0 0.7 1.4

Government balance, % of GDP -0.4 -3.0 -1.2 -2.9

Current account, % of GDP 6.6 5.9 6.6 5.8

Current forecast Previous forecast

mailto:[email protected]





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The mix of higher employment, higher real wages – due to the low level of

inflation – and a more stable housing market has finally helped breathe some

life into private consumption after lying moribund for several years.

We expect the budget deficit to be close to the EU’s 3%-of-GDP limit in

2015. Public finances are very dependent on both the economy and

movements in the financial markets. Therefore, while we estimate that

growth in 2015 will be less than the government’s forecast, we do not

necessarily believe that the 3% limit will be exceeded. In part, this is because

the government has tended to overestimate the scale of the deficit in recent

years, as several factors have helped strengthen public finances and it is

perfectly conceivable that this will again be the case in 2015. For example,

the government is reckoning on a 50% drop in tax revenue from pension

returns between 2014 and 2015, i.e. from DKK32bn to DKK16bn. However,

the proceeds from the tax on pension returns (‘PAL skat’) is very difficult to

forecast, so a surprise in one direction or the other could easily overshadow

the impact of any forecasting error made about the economy.

An important caveat to our growth estimate in this forecast is that Statistics

Denmark has not yet published its quarterly National Accounts figures taking

into account the ESA 2010 comprehensive revision. Hence, we cannot be

certain of how the Danish economy performed in 2013 and into 2014. Not

knowing the past makes it harder to say something about the future.

Private consumption starting to take off

Private consumption grew by 0.3% in each of the first two quarters of 2014 –

according to the ‘old’ method – excluding the effects of the 2013 storms on

insurance consumption. This is in line with our expectations and marks a

clear shift relative to 2013, when consumption essentially did not move at all.

Furthermore, the overall consumption figure was actually pulled lower by a

number of unusual factors. The mild winter meant lower energy consumption

than normal and there was a sharp fall of 9.3% in new car sales in Q2. Part of

the explanation is that more cars were leased than bought by households.

When a car is purchased the entire cost is counted as private consumption

right away, while leasing is viewed as an investment in the leasing company

and only the regular leasing fee is counted as private consumption.

Consumption is being lifted by rising real incomes, as both real wages and

employment are increasing. Indeed, consumption probably rose slightly less

than income in H1, albeit partly due to technical reasons, so we are counting

on slightly higher consumption growth in the coming quarters and into 2015.

The ratio of consumption to income is still relatively low compared with

earlier periods and this could indicate that a more robust consumption

recovery is on its way, especially given that consumer confidence is very

high and house prices are again rising. However, a solid recovery in

consumption would require households to again raise their levels of gross

debt, as even at current levels, household savings are not quite large enough

to cover net pension contributions. Though gross debt has fallen as a

percentage of income, it remains high following the increases in the years

prior to 2007 and our view is that households will remain reluctant to

increase debt and so consumption growth will roughly match income growth.

Danish economy tracking the eurozone

Source: Statistics Denmark, Eurostat, Danske Bank Markets

Recovery in consumer spending underway

Source: Statistics Denmark

Note: Based on the old national accounts standard but net of the

effect on insurance services consumption of the 2013 storms.

Household savings still relatively modest

Source: Statistics Denmark. Adjusted for taxes on converted lump

sum pensions in 2013.


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Inflation again below expectations

Inflation continues to surprise on the downside, though for varying reasons.

Energy prices pulled inflation lower in 2013, while food prices did the same

in H1 this year and, most recently, major price falls on milk and child day

care sent the annual inflation rate down to just 0.5% again in August. We still

expect inflation to rise as these temporary effects fall out of the equation, but

the increase will be very modest. Further reductions in energy-related taxes

are planned for 2015 and these will probably cut inflation by around 0.2

percentage points. We estimate that prices will rise by 1.0% overall in 2015.

For households, the lower energy taxes will partly be offset by higher basic

tax rates and a reduced ‘green check’ (lump-sum benefit to offset increases in

energy prices), though the outlook is still for a decent rise in real incomes.

Seasonally-adjusted wage growth for private sector employees rose to 0.4%

q/q in Q2 and will probably accelerate slightly as employment increases. We

expect wage growth of 1.8% in 2015, which even after tax works out at an

increase in real income of just under 1.0%. On top of this comes the effect of

increased employment and rising incomes in other parts of the economy.

Housing market sentiment still buoyant

The housing market is one of the positive stories in the Danish economy and

it has continued to perform well since our previous forecast. House prices at a

national level have now been appreciating since Q2 12 and grew a further

2.8% in Q2 this year, according to Statistics Denmark. We expect the

housing market to continue to perform well, with prices rising 3.2% both this

year and next year. Growth is mainly being supported by two factors. First,

interest rates have been at a record low this year, with Danes able to take out

a fixed-rate mortgage of just 2.5% for the first time ever. Given the recent

aggressive easing of monetary policy by the ECB, low interest rates should

continue to support the housing market for some time yet, as low interest

rates tend to increase demand and therefore prices. A second contributing

factor to higher house prices is labour market growth, as the recent increase

in employment means that Danish households now feel more secure about

their personal finances. Greater job security means that people are more

daring with their personal finances and so the inclination to buy a new home

increases. The increasing propensity to buy can already be seen in the

statistics, as more than 8,000 homes were sold in Q2 – the highest number in

almost four years.

House price growth has also spread to more areas of Denmark since our

previous forecast, with the latest numbers from Housing Market Statistics

(‘Boligmarkedsstatistikken’) showing that prices appreciated across all

regions of the country in Q2. Perhaps even more interesting, the data this

time also showed that the greatest price increases occurred in the more

outlying areas. Thus, prices in Northern Jutland, Western and Southern

Zealand and on Bornholm rose by 4-5% over the quarter, whereas prices in

Copenhagen ‘only’ rose by 2.5%. Nevertheless, Greater Copenhagen house

prices have still risen most on an annualised basis. House price growth

spreading to more areas of the country is, in part, due to house prices rising

so rapidly in and around the main cities that people are choosing to buy

homes slightly further out, where they can get more for their money. House

price growth no longer being confined to particular areas of Denmark is

positive for the Danish economy, as this can help support the recovery

Inflation set to rise only a little, and at a slow pace


Housing market clearly improving


Housing recovery has spread across Denmark

Source: Danish Mortgage Bankers’ Federation and others, Danske

Bank Markets


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throughout the country. That said, we still expect house prices to deliver the

strongest performance in and around the major cities over our forecast period.

The owner-occupier apartment market is also worth watching, as activity

levels here have been even higher and prices have been soaring, particularly

in Copenhagen. Apartment prices in Copenhagen have been rising

continuously since Q1 2012 – and are up 25% overall since then.

Nevertheless, prices remain 13.1% below their peak in Q4 2006, and that is

without factoring in that income growth in the major cities has been decent

despite the crisis. Copenhagen apartment prices look set to continue

appreciating in the coming years. While there has been a heavy influx of

newcomers into Copenhagen, the high rate of price growth is mainly due to

the record-low level of interest rates, which makes the cost of financing a

home purchase cheap.

There has been some discussion about whether Copenhagen apartment prices

are experiencing a new price bubble. In our view, this is not the case at the

moment. However, close to double-digit rates of growth are not sustainable

over the longer term, so market developments should be monitored closely.

Here, we can note that some of the air already went out of the balloon during

the first half of this year, which is positive overall.

Exports disappoint

Exports have proved to be the biggest disappointment in the Danish economy

since our previous forecast, with the 0.3% fall in Q2 GDP largely driven by a

1.6% decline in exports that pulled growth 0.9 percentage points lower.

Weaker-than-expected economic activity in our export markets and hence

lower demand for Danish goods was the reason exports disappointed.

Europe’s economy stagnated in Q2 following the global growth slowdown in

Q1, which was caused by the severe winter weather in the US. The slowdown

caused European inventories to swell, as companies could not sell their goods

as quickly as they produced them at this time. A strengthening euro in early

2014 added to the bad news for exports, as this caused European goods to

become relatively more expensive. Both phenomena contributed to reduced

activity in Q2, but we nevertheless remain cautiously optimistic on Danish

exports going forward.

For one thing, economic growth in our export markets looks set to be

reasonable, even if slightly weaker than previously forecast, for while

European growth is forecast to be weak in the short term, the outlook is for

the economy to pick up towards the end of the year. This is based on the

assumption that Europe will benefit from higher growth rates in the US and

still low interest rates. Moreover, the euro area will also benefit from a

weaker euro following the ECB’s pronounced easing of monetary policy. As

Denmark pursues a fixed exchange rate policy against the euro, this will

naturally mean a weaker Danish krone too. A weaker krone will help Danish

exporters when trading with important export markets outside the euro area,

particularly Sweden, Norway and the UK. Furthermore, Danske Bank’s

export barometer, which is a so-called soft indicator for current economic

activity in our export markets, is still at a fairly high level. Although our

export barometer has been falling since the start of the year, it has remained

above 50 every month since May 2013, which indicates increasing economic

activity in our export markets. When Danske Bank’s export barometer is

No bubble in Copenhagen apartment prices

Source: Danish Mortgage Bankers’ Federation and others,

Danske Bank Markets

Exports set to pick up


Export market growth likely to feed through to

Danish exports

Note: weighted average of GDP growth on Denmark’s five largest

export markets

Source: Macrobond, Danske Bank Markets


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above 50, it generally means that Danish goods exports are growing. Overall,

we expect exports to grow by 2.7% this year and 3.2% next year.

The geopolitical situation in Russia and Ukraine is still grabbing the

headlines and naturally still causing uncertainty. It is worth remembering,

however, that goods exports to Russia account for less than 2% of Denmark’s

total goods exports, so generally speaking the situation should not have any

great impact on either Danish exports or Danish industry as a whole, though

of course certain sectors or companies may be hard hit. That said, the Danish

economy could suffer more if the conflict escalates further and Denmark’s

export markets in Europe are significantly affected.

Current account surplus not a sign of health

Denmark has a solid current account surplus that stood at DKK130.3bn for

the 12-month period to July 2014. The current account is essentially the

difference between Denmark’s savings and its investment. Hence, the high

current account surplus indicates that activity in the Danish economy is low,

as much is being saved, while investment is limited. The surplus consists of

both a solid surplus on the balance of trade and a major contribution from net

wealth gains. This item consists of the positive net return on Danish-owned

assets held abroad. Denmark has been running a current account surplus

every year since 1990, with the exception of 1998 and thus has accumulated

assets abroad over time. In other words, Denmark is benefiting from now

having positive net foreign assets rather than a net foreign debt. Given the

positive net assets, Denmark’s gross national income currently exceeds its

gross domestic product, as we have a claim on production abroad. We

estimate the surplus to fall to 6.6% of GDP in 2014 and 5.9% of GDP in 2015

due to increasing economic activity.

The current account made up 7.3% of GDP in 2013, taking the average for

the past three years to 6.4% of GDP in 2013, which is above the upper limit

of 6% that the EU considers an instability factor, according to its procedure

for monitoring a country’s macroeconomic imbalances. Denmark therefore

risks a further recommendation from the EU to reduce its surplus. However,

it is difficult to see what measures the government should enact to tackle the

surplus. Because of the fixed exchange rate policy, Denmark cannot pursue a

more accommodative monetary policy in an attempt to boost consumption

and investment, just as Denmark cannot further ease fiscal policy as it is

already at the limit of what is permissible, according to the EU.

Labour market exceeds expectations

Increasing employment despite weak growth is still one of the positive stories

about the Danish economy. According to the ‘old’ National Account figures,

employment excluding various leave schemes has risen by around 27,000

since the start of 2013. This year, jobs have mainly been created in Industry,

Trade & Transport and Business Services, while public sector employment

has fallen. One incongruity is that the number of hours worked has not

increased by quite as much as employment, which indicates that part-time

employment is rising and that employment growth is overestimating the

actual demand for labour. One of the reasons for this is that the number of

part-time employees is increasing, for example, in the Retail sector, where

shop opening hours have been extended, but the work is being shared by

more employees.

Export barometer indicating stronger exports

Note: goods exports are tangible exports as shown in Statistics

Denmark’s monthly foreign trade statistic

Source: Statistics Denmark, Macrobond, Danske Bank Markets

Danish current account reflects instability

Source: EU, Statistics Denmark, Danske Bank Markets

Employment set to rise over the next couple of

years



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Overall though, the labour market is improving and we expect employment to

continue to rise over the forecast period. Our forecast is supported by Job

Index (Denmark’s largest online job market), which notes that the number of

new job ads is rising, while consumers, too, expect that unemployment will

fall over the coming year. However, it is uncertain whether employment

growth can continue at the same pace as previously, as firms have already

taken on a substantial share of the labour needed to cover the expected higher

levels of production going forward. We forecast that around 23,500 new jobs

will be created this year and a little over 14,000 next year – mainly driven by

the private sector, where we expect employment will rise by just over 20,000

this year and 13,000 next year. Naturally, it is positive news for the Danish

economy that employment can continue to grow at a decent pace despite

modest levels of growth. Higher levels of employment may, moreover, help

trigger increased private consumption and thus contribute to a new, self-

supporting recovery.

Gross unemployment has declined by 13,600 since the start of the year. The

fall coincides with the implementation of the social benefits reform, which

among other things replaces social assistance (kontanthjælp) with educational

assistance (uddannelseshjælp) for young people aged below 30. Around

47,300 people received educational assistance in Q2 this year, of which only

around 10% have been declared fit to study and are therefore included in the

gross unemployment figures. We expect the jobless numbers to fall further in

the coming years, though not at the same pace as employment rises, as we

estimate that more people will return to the labour force as job prospects

improve. While still low, an increasing number of firms is starting to report

labour shortages as a limiting factor for production and, as the recovery takes

hold, the lack of qualified labour may indeed become a challenge. However,

a labour shortage is not expected to be a major obstacle to growth within our

forecast period.

Companies to increase investment

We forecast investment to increase going forward given the prospect of

enhanced corporate sales and earnings on the back of the expected economic

recovery in Denmark and abroad. Moreover, very low interest rates coupled

with more stable bank lending will help increase the potential for investment

growth in the coming years. We expect private investment to be the main

contributor to growth, with business investment in particular helping to boost

investment growth in 2015. Overall, we expect fixed gross investment to

increase by 2.7% this year and 2.3% next year. Business investment should

grow 1.9% this year and 3.5% next year. We also expect housing investment

to rise this year in connection with the damage repair activities prompted by

hurricanes Allan and Bodil. The expiry of the tax deduction scheme for home

improvement costs (‘BoligJobOrdningen’) will probably cause some housing

investment to be brought forward from early 2015 to late 2014, but we still

expect housing investment to continue growing in 2015 on the back of higher

house prices. Accelerated public investment will also contribute to GDP

growth this year, but will negatively affect growth in 2015.

Gross employment likely to fall further


Investment drought has probably come to an end



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Budget deficit set to touch limit

We expect public consumption to grow by 0.8% this year and 0.8% next

year, which for this year is slightly below the government’s own estimate.

Public consumption growth is on a scale that essentially rules out any

prospect of a major increase in public sector employment.

The budget deficit will probably come in at DKK7bn, or 0.4% of GDP, for

2014. The reason the deficit will not be greater is one-off income generated

from pension conversions and more income from the tax on pension returns

as a result of rising equity prices and falling yields. Pension companies

estimate that PAL will generate tax revenue of between DKK40-50bn this

year.

The budget bill makes it clear that the government plans to make full use of

any scope for fiscal policy flexibility next year by allowing the deficit to go

right to the limit of 3% of GDP in 2015. Naturally, one might question the

wisdom of going to the limit, but even if you plan for a deficit of just 2.9% of

GDP there will be a significant risk of breaching the 3% limit, as public

finances are very sensitive to both the state of the economy and movements

in the financial markets. We expect the deficit to indeed be 3% although in

reality, the deficit could just as easily be 2.5% or 3.5%.

Government consumption set to grow over the

coming years


Budget deficit likely to touch the 3% Maastricht

treaty limit



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Denmark: Forecast at a glance

Source: Statistics Denmark, Danmarks Nationalbank, Macrobond, Danske Bank

National account 2012 2012 2013 2014 2015

DKK bn (current prices)

Private consumption incl. NPISH 912.1 0.2 0.1 0.8 1.8

Government consumption 502.1 0.0 0.1 0.8 0.8

Gross fixed investment 345.0 0.5 0.6 2.7 2.3

- Business investment 1.9 3.5

- Housing investment -8.0 -4.9 4.2 1.9

- Government investment 3.7 -3.0

Growth contribution from inventories -0.6 0.1 0.0 -0.1

Exports 1004.9 -0.1 1.2 2.7 3.2

- Goods exports 620.8 -1.3 1.6 0.2 3.9

- Service exports 384.1 1.9 0.7 6.5 2.2

Imports 905.9 0.7 2.2 4.3 2.9

- Goods imports 571.0 0.6 3.6 2.6 3.1

- Service imports 334.9 0.8 -0.1 7.3 2.5

Growth contribution from net exports -0.4 -0.4 -0.7 0.3

GDP 1863.4 -0.8 -0.1 0.8 1.8

Economic indicators 2012 2013 2014 2015

Current account, DKK bn 109.2 136.0 125.0 115.0

- % of GDP 6.0 7.3 6.6 5.9

General government balance, DKK bn -71.9 -17.2 -7.0 -58.0

- % of GDP -3.9 -0.9 -0.4 -3.0

General government debt, DKK bn 828.8 826.9 826.4 837.7

- % of GDP 45.4 44.5 43.9 43.3

Employment, ex. leave (thousands) 2728.2 2729.7 2753.2 2767.3

Gross unemployment (thousands) 161.7 153.0 134.9 127.1

- % of total work force (DST definition) 6.1 5.8 5.1 4.8

Oil price - USD/barrel 112 109 104 98

House prices, % y/y -3.3 2.7 3.2 3.2

Private sector wage level, % y/y 1.5 1.2 1.4 1.8

Consumer prices, % y/y 2.4 0.8 0.6 1.0

Financial figures 24/09/2014 +3 mths +6 mths +12 mths

Repo rate, % p.a. 0.20 0.20 0.20 0.20

2-yr swap yield, % p.a. 0.49 0.35 0.35 0.35

10-yr swap yield, % p.a. 1.50 1.42 1.47 1.57

EUR/DKK 7.444 7.45 7.45 7.45

USD/DKK 5.79 5.86 5.91 5.96

% y/y

Forecast


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Sweden

Move along, nothing to see here

Sweden continues to be mired in slow growth, primarily due to weak

developments in our export markets.

In particular, it is a global lack of confidence in future demand and a

thus continued low investments / capex cycle that impede growth for

a Swedish goods exports industry laden with investment goods.

Domestic demand, public and private consumption, housing

investments are all demonstrating robust growth and growth rates

are well in line with, or even above, historical patterns.

Risks to our forecasts are legion, especially from a less benign

development in the euro area but other risks, such as a bust in the

domestic housing market, are also in play.

All in all, albeit still stuttering, GDP does not seem to be entering a

renewed deceleration phase or recession. In 2014, we estimate growth

to reach 2.3% y/y and increase somewhat to 2.4% y/y in 2015.

This is a downward revision by 0.2 percentage points (pp) for the

current year and 0.1 pp for 2015. Nota Bene, that due to new

methodology when compiling GDP (ENS 2010), the performance of

forecast models, etc, that we use might be affected in ways we

currently have not anticipated, which is why technical risks to our

forecasts have also arisen.

Labour markets have performed well, especially considering the

weak developments in the exports industry. Employment has steadily

increased and the unemployment rate has slowly dropped back

despite strong growth of the labour force. For 2014, the

unemployment rate should average around currently observed levels,

id est, 8%, but we expect it to approach 7½% towards the end of the

forecast horizon.

Continued slack on labour markets and a lack of external demand

will keep resource utilisation and inflationary pressures low for the

foreseeable future. Inflation, after a near-term rise due mainly to

statistical base effects, is actually expected to stay below the

Riksbank’s inflation target of 2% y/y throughout the forecast

horizon. In 2014 we expect inflation to be virtually flat, at -0.1 % y/y

but rise, modestly, to 1.0% y/y in 2015.

Thus, it is only past the forecast horizon we can see a clear-cut case

for the Riksbank to raise the repo rate.

Export markets on an excruciatingly low trajectory

The surprisingly weak development of Swedish GDP during the first half of

this year had all to do with soft external demand, id est, weak Swedish

exports. This mirrors developments in our main export markets, and even

though the weakness was widespread, the euro area has undoubtedly been the

main impetus behind weak growth in Swedish export markets.


Note: The national account figures relates to actual growth rates

(i.e. not calendar adjusted or wda)

Source: Riksbank, Macrobond, Danske Bank calculations

The loss of market share continues

Sources: National Institute for Economic and Social Research

(NIESR), National Institute for Economic Research (KI) and

Statistics Sweden (SCB). Danske Bank calculations

Monetary conditions broadly balanced

Note: MCI is calculated as the deviation from a filtered trend of

different interest rates and an exchange rate index (all variables

are normalized and adjusted for inflation).

Source: Macrobond. Danske Bank calculations

% y/y 2014 2015 2014 2015

GDP 2.2 2.6 2.3 2.8



Gross fixed investment 4.9 7.3 7.7 6.9

Exports 2.1 3.0 3.8 5.5

Imports 4.5 4.0 5.6 6.4

Unemployment rate 8.0 7.7 8.0 7.9

Inflation -0.1 1.0 -0.2 1.2

Government balance, % of GDP -2.0 -1.2 -1.6 -1.3

Current account, % of GDP 2.9 2.6 6.0 5.5



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The anemic start to 2014 has led many forecasters to revise their growth

estimates down and, inter alia, the OECD has recently revised its global

growth forecast down, citing tepid growth in the first half of 2014, in

particular in the euro area. The OECD furthermore highlights lukewarm

developments in international trade and in the global capex cycle, helping to

paint an even bleaker back-drop to Swedish export growth, which remains

heavily dependent on an input and investment goods laden industry.

Looking ahead, the OECD’s leading indicators and other variables with

leading properties, as well as survey based indicators, nonetheless point to

stronger growth over the coming months and quarters. This is very much in

line with Danske Bank’s international forecasts and in line with our Swedish

trade weighted forecasts for both GDP-, investments and imports growth.

Importantly, the improved short-term outlook is not merely due to good hope

but is also the result of less restrictive fiscal policy and newly announced

monetary policy measures from the European Central Bank (ECB).

In the wake of the “great recession” the global capex cycle has failed to pick

up as normal, due both to high uncertainty surrounding future demand and to

excessively restrictive credit conditions. The need to restore productive

capital and a necessary restructuring of the capital stock should sooner or

later lead to an improvement of the global investment outlook and push

Swedish export growth ahead of Swedish world market growth, regaining at

least some of the market shares lost during the last few years. However, this

is now expected to take place past the current forecast horizon.

All in all, Swedish export markets are calculated to grow by 3.5% y/y in 2014

and 4.3% y/y in 2015. Alas, mainly because of lackluster global investment

growth, Swedish export growth is not expected to keep pace with Swedish

world market growth but nevertheless improve over the next couple of years.

In 2014 export growth is expected to be 2.3% y/y. In 2015, export growth

accelerates somewhat and should reach 2.6% y/y.

That said, risks to global growth and Swedish export growth remain very

large and are skewed almost exclusively to the downside. In particular, geo-

political risks stemming from, inter alia, the situation in Ukraine and Syria

warrant further attention. The European situation is already fragile and might

deteriorate if there is a worsening of the Ukraine crisis. From the financial

side we should remain wary on how markets react to tapering from the

American central Bank, Federal Reserve (FED) and, thenceforth, the

inception of FED hikes.

Domestic demand atypically strong

A fragile international recovery, especially in terms of trade and investments

growth, implies another year of weak industrial production. Going forward,

as global demand and hence Swedish goods exports recuperate, industrial

production is expected to rise again, albeit slowly. A low production suggests

that capacity utilisation is muted, indicating, in turn, subdued business sector

investments. Indeed, business sector (ex housing) investments fell by almost

½% y/y in H1 14 compared to the same period the previous year. In spite of

this, total investments are estimated to grow by 5.1% this year and increase

further, to 6.9% y/y in 2015. Behind these seemingly contradictory

developments lie continued large investment needs in the public sector and

Domestic demand stronger than external

Sources: KI and SCB. Danske Bank calculations

Public investments and housing drive gross fixed

capital formation



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nothing short of staggering growth in housing investments. Housing

investments, exempli gratia, grew 26% y/y in H1 14.

We expect private consumption to increase 2.8% y/y this year, while real

disposable incomes are also estimated to grow 3.0% y/y. Considering, in

addition, a very expansionary monetary policy stance, strong wealth growth

and an already high savings ratio, our consumption growth forecast may

come across as overly pessimistic. However, a plethora of uncertainties not

only related to the external outlook, but also to an unusually high

unemployment rate and an extensive public debate on the frothy housing

market and a number of from-the-hip suggestions (of unclear status in a

future macro prudential framework) to dampen household credit growth,

serve to keep household consumption urges at bay. As a result of robust

income but meagre consumption, the savings ratio might rise even further

this year.

Next year, fiscal policy should become contractionary and real disposable

income growth therefore less vigorous. Simultaneously, we expect

households to try to keep the savings ratio intact, implying that consumption

grows in line with incomes. Hence, consumption growth should moderate to

1.6% y/y in 2015.

GDP and labour markets

Above, we have browsed through the main components when computing

GDP. Summing up, Danske Bank expects Swedish GDP-growth to remain in

the doldrums throughout the forecast years, growing a meagre 2.3% y/y this

year, and a still disappointing 2.4% y/y next year. It is only in the medium

and longer term that we foresee some acceleration of GDP-growth, but this

has more to do with an increased use of assumption-based econometric

models when performing longer-term forecasts, rather than a thorough

economic analysis or deus-ex-machina economic policy stimuli and

responses.

After a slow start to 2014, labour markets have demonstrated increased

momentum. Thus far in 2014, employment has grown by almost 60 thousand

persons compared to the same period last year, while the unemployment rate

has virtually remained flat, due to strong growth of the labour force.

Forward-looking labour market indicators point to continued robust

employment growth in the coming months, albeit perhaps at a slower pace

than what we currently see. For the full year 2014, employment growth is

estimated to reach 1.2% y/y. Looking past the immediate outcomes and into

2015 (and beyond), our views on GDP-growth should imply that employment

growth continues at a healthy clip. We expect employment growth to be 1.1%

y/y in 2015. This implies that productivity growth returns to a more normal

rate after several years of below-average growth rates. That said, we must

bear in mind that the egregious cyclical productivity booms in the early

phases of all previous upswings has failed to materialise this time, keeping

the productivity level abnormally subdued and raising some questions marks

on our outlook for productivity.

Nonetheless, the labour force has grown rapidly, outpacing most forecasts,

over the past few years and we expect it to keep up with employment growth

this year also. This produces an almost unchanged unemployment rate for the

current year, but for 2015 (and beyond) we expect the labour force to resume

Consumption outlook stables

Sources: KI and SCB. Danske Bank calculations:

Fiscal policy is too expansionary

Sources: KI and SCB. Danske Bank calculations:

Bleak productivity growth…



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a lower trajectory, inter alia, because of waning effects from the earned

income tax credits and other fiscal measures, but also from a reduction in the

number of immigrants seeking employment. The unemployment rate

therefore should start to improve more distinctly from 2015. By the end of

2015, we expect the unemployment rate to reach 7.5% and continue to

improve thenceforth towards our estimate of equilibrium unemployment rate

around 7%.

Inflation and economic policy

Weak demand in Sweden and abroad has pushed inflation to very low levels.

During the last year, Swedish inflation has mostly been below zero, and the

operative monetary policy target, CPIF-inflation (which excludes interest rate

costs), has appeared fixed around 0.5%. The low inflation and an apparent

but marginal downward shift in surveyed inflation expectations together with

an obvious rejection of the inflation target on financial markets (break-even

inflation has been negative even on quite long maturities) eventually forced

the Riksbank to cut rates by 50bp, to 0.25%, at the July monetary policy

meeting this year. Interest rates on most horizons fell on the decision, but the

main effect was a further and pronounced weakening of the krona against

almost all other currencies. Indeed, as the inflation outlook has deteriorated

over the last year, and the case for Riksbank hikes petered out, the krona has

been on a weakening trend. From a G10-perspective so far this year, the

krona is even the worst-performing currency.

Though we have been constantly over-estimating inflation during the past

few years, we have again come to the conclusion that inflation is on the rise.

Many of the inflation components that explained the very low inflation

outcomes during the past year have now reversed and/or will shortly fall out

of the inflation calculations, id est, statistical base effects. Among the more

apparent shifts are prices on services and food stuffs. In addition, the weaker

krona has also served to push prices on imported goods and services higher,

and we believe these developments still have some way to go, given the

additional SEK-weakness during the summer, when the Riksbank cut rates

surprisingly much.

Furthermore, the weak productivity growth touched upon (above), in

conjunction with a rather stable wage growth – id est, Unit Labour Costs

(ULC) increase – imply strains on corporate profits that can only be managed

via higher prices and/or lower profits. Given a seemingly more robust, albeit

still slow, growth of demand and anecdotal evidence from, inter alia, the

Riksbank’s business survey, we believe that companies have now regained

sufficient pricing power to pass some of the increased (Unit Labour Costs,

ULC) costs onto their customers.

All-in-all, this means that inflation is finally set to strengthen again, and

foreseen consecutive increases during autumn means that for the full year

2014 inflation should come in at 0.0% y/y, and CPIF-inflation (the

Riksbank’s operative target variable) at 0.6% y/y. In 2015, as ULC-pressures

mount, inflation is calculated to reach 1.0% y/y and CPIF-inflation 1.4% y/y.

Even so, the below target inflation is expected to keep the Riksbank’s

monetary policy stance unchanged and it is only past the forecast horizon –

come summer 2016 – that our inflation forecast warrants a hike. Needless to

say, should we again be exaggerating the rise in inflation, the Riksbank might

very well need to consider unconventional monetary policy measures,

.. why labour markets are improving


Resource utilization remains low…



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especially if important central banks, such as the European Central Bank

(ECB), ordain policies that in any way thwart the Riksbank’s ability to reach

its inflation target. What, under any circumstances, should be obvious is that

the Riksbank has at long last shifted the responsibilities for containing a

potential housing and credit bubble into the hands of the politicians.

Fiscal policy has been expansionary ever since the onset of the financial

crisis, the “great recession”, in 2008. Considering the depth and longevity of

the recession, the expansionary stance has thus far been warranted. This year,

public sector savings as a share of GDP are expected to be -2.0% and

improve to -1.2% in 2015. However, looking ahead, we see a glaring need to

consolidate public finances. The National Institute for Economic Research

recently estimated the financing gap (to reach the legally binding surplus

target of 1% over the business cycle) at SEK120bn, but using our own

estimates of long-term growth and unemployment we believe that the true

number is actually in excess of SEK200bn. Thus, from a fiscal perspective,

dire fiscal straits lie ahead. – the question is whether a fragmented parliament

will be able to respond in sufficient force?

…and inflation becoming entrenched below target

Sources: SCB, Riksbank and Macrobond. Danske Bank calculations

A hike is a long way hence

Sources: Riksbank and Macrobond. Danske Bank calculations


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Sweden: Forecast at a glance

Note: The national account figures relates to actual growth rates (i.e. not calendar adjusted or wda)

Source: Danske Bank

National account 2012 2012 2013 2014 2015

SEK bn (current prices)

Private consumption 1718.2 0.8 2.1 2.7 1.7

Government consumption 955.7 1.1 1.6 1.3 1.6

Gross fixed investment 674.2 -0.2 -0.1 4.9 7.3

Growth contribution from inventories -4.4 0.0 0.0 0.0 0.0

Domestic demand 3348.1 0.6 1.4 2.9 3.0

Exports 1722.4 1.0 -0.5 2.1 3.0

Aggregate demand 3343.7 -0.6 1.5 3.1 3.0

Imports 1516.4 0.5 -0.8 4.5 4.0

Growth contribution from net exports 206.1 0.0 0.0 0.0 0.0

GDP 3549.7 -0.3 1.5 2.2 2.6

GDP, calender adjusted 0.1 1.5 2.3 2.4


Trade balance, SEK bn 137.5 138.1 111.7 104.2

in % of GDP 0.1 1.5 2.3 2.4

Current Account, SEK bn 233.2 245.3 198.2 192.1

in % of GDP 3.7 3.7 2.9 2.6

Public sector savings, SEK bn -26.0 -44.0 -77.0 -50.0

in % of GDP -0.7 -1.2 -2.0 -1.2

Public debt ratio, % of GDP* 36.5 38.7 39.2 38.8

Unemployment, % of labour force 8.0 8.0 8.0 7.7

Hourly wages, % y/y 2.8 1.9 2.3 2.5

Consumer prices, % y/y 0.9 0.0 -0.1 1.0

House prices, % y/y -1.3 3.6 5.0 -4.0

* Maastricht definition

Financial figures +3 mths +6 mths +12 mths

Repo rate, % p.a. 0.25 0.25 0.25 0.25

2-yr swap yield, % p.a. 0.57 0.50 0.55 0.70

10-yr swap yield, % p.a. 1.79 1.65 1.80 1.95

EUR/SEK 9.18 9.10 9.00 8.80

USD/SEK 7.15 7.17 7.14 7.04

% y/y

24/09/2014

Forecast


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Norway

Stable growth despite dwindling oil investment

Oil investment is set to fall in 2015, putting a damper on economic

growth in Norway.

Growth looks likely to stabilise nonetheless, thanks to stronger export

growth, public sector demand, higher housing investment and more

relaxed bank lending standards.

The risk of a serious setback is still limited, and we expect oil

investment to pick up again from 2016.

Inflation will hold just below the target and unemployment will rise

marginally. Housing prices will climb around 2% this year and 3-4%

next year.

The krone will appreciate, especially against the euro.

The chances of a rate cut remain low and interest rates will probably

go up towards the end of next year.

Slower growth but still high levels of activity

After a long period of strong growth, the Norwegian economy decelerated

towards the end of 2013. The slowdown was due to lower growth in both oil

and housing investment. Growth this year now looks set to be somewhat

higher than we anticipated last time around. Next year, we know the drop in

oil investment will put a damper on growth, but this will be offset at least in

part by stronger export growth, burgeoning public sector demand, the easing

of banks’ lending standards and a fresh upturn in housing investment. We

therefore anticipate only a moderate rise in unemployment, which, together

with wage growth of around 3.5%, will keep growth in private consumption

at sensible levels. Combined with further low interest rates, this will bolster

housing prices, which we now expect to climb 2% this year and 3-4% next

year. The growth pause will nevertheless give Norges Bank space to keep its

policy rate unchanged for the next year. Although the krone has rallied

somewhat since the last Nordic Outlook, we see potential for further

appreciation, especially against the euro. On the other hand, accelerating

housing prices and household debt will make Norges Bank reluctant to cut

interest rates.

Growth picking up

Oil investment has been slowing since the end of last year and will continue

to decline through to the end of next year. This has put a damper on

economic growth. Housing investment has also been weak due to increased

uncertainty in the housing market. Growth in the Norwegian economy has

nevertheless been stronger than many had expected. Mainland (non-oil) GDP

climbed almost 1% q/q in Q2 even allowing for high power production.

Norges Bank’s regional network survey also points to a slightly brighter

growth outlook than earlier this year. This has to be put down to stronger


Source: Macrobond

Growth accelerating


% y/y 2014 2015 2014 2015

GDP (main land) 2.4 2.2 2.2 2.2



Gross fixed investment 0.2 -1.0 0.6 -1.3

Exports 1.2 1.0 0.7 1.0

Imports 1.5 3.5 1.9 4.5

Unemployment (LFS) 3.4 3.5 3.5 3.6

Inflation 2.2 2.0 2.2 2.2



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growth in other components, such as private consumption, public sector

demand and exports.

We now expect oil investment to make a negative contribution to growth in

2014. Based on the national accounts, investment looks likely to decrease by

2% this year, and Statistics Norway’s oil investment survey suggests a further

fall of around 10% next year. Oil prices have also dipped below USD100/bbl

for the first time in a long time. Parts of the supply sector have begun to feel

a drop-off in orders and some have announced redundancies.

However, with several relatively large projects due to start up from late 2015,

we expect the decline in oil investment to be short-lived. Unless anything

fairly dramatic happens to oil prices over the next couple of years, we

therefore expect investment in the sector to pick up again from 2016.

We are also seeing signs of global oil investment not falling to the same

extent as in Norway. Continued competitiveness across much of the value

chain in the global offshore sector has enabled some Norwegian supply

companies to expand their operations elsewhere, which is also helping to

alleviate the effects of the downturn in investment in Norway.

As expected, the deterioration in the housing market in 2013 led to a

relatively sharp drop in housing investment in H1 this year. There is now no

doubt that the market for existing homes has tightened: prices are rising,

turnover has returned to previous highs, and time to sell is falling. Sales of

new homes have also increased and are now 15-20% higher than this time

last year. This prompted housing starts to pick up over the summer. We

therefore expect housing investment to improve gradually in H2 this year and

heading into next year and we have revised up our forecast for growth in

housing investment next year to around 5%.

This is supported by the fundamentals in the housing market. Low mortgage

rates, low unemployment, further strong wage growth and a growing shortage

of new housing means that the risk to our price and investment forecasts is to

the upside.

A huge amount of public infrastructure investment is also planned, as can be

seen from the near 50% leap in civil engineering orders since the end of

2012. This has been enough to bring about an increase in overall construction

orders over the past year despite the downturn in building activity. It has also

kept the jobless rate in the construction sector at low levels, and employment

in the sector has increased by 2.4% in the past year.

Private consumption has picked up so far this year. The annual rate of

increase in retail sales is now above 2.5% after strong growth in H1. There

are probably several reasons for this, including a reaction to the weak

consumption towards the end of last year. However, we also suspect that

consumers have been spending more money back home in Norway than in

previous years due to the weaker krone and the weather. If so, there could be

surprisingly strong growth in private consumption in 2014. Either way, we

see no real danger of a serious downturn in private consumption unless

household finances deteriorate sharply.

Oil investment has been falling for some time


Housing investment on the up again

Source: Macrobond


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Global economic growth has accelerated and, together with a substantial fall

in the krone, given exporters a real lift. We have been seeing this for a while

in leading indicators such as the PMI and Statistics Norway’s business

tendency survey, and hard data from Statistics Norway also show an increase

in export orders of more than 1% y/y in H1. The upturn in the export industry

also helped overall industrial production to climb more than 4% annualised in

H1 despite the slowdown in oil-related industries. Given the projected drop in

oil investment next year, we reckon that industrial production will grow

somewhat more slowly going forward. On the other hand, there has been

substantial growth in the number of rigs and production vessels in recent

years, and the market for maintenance and repairs has almost doubled since

2007. This will help offset the impact of lower investment in parts of the oil-

related sector.

Norwegian banks are continuing to deliver healthy results. Capital ratios are

therefore rising, and banks seem to be aiming higher in terms of growth. As a

result of this and a substantial increase in margins in recent years, it appears

that credit is now more readily available. This is being supported by global

capital markets continuing to rally, resulting in large volumes and lower

credit premiums. Interest margins also seem to be on the way down for both

households and businesses. Norges Bank’s latest lending survey confirms this

picture.

Housing market looking healthy

After several years of strong growth, the housing market turned downwards

in summer 2013. House prices rose more slowly, time to sell increased,

turnover fell, and stocks of unsold homes grew. The risk of a serious

downturn in the housing market therefore seemed to be mounting, but we still

did not consider it likely. The most important reason for this was that

households’ ability to service their mortgage debt was still very good.

All experience suggests that as long as there is no dramatic deterioration in

households’ debt-servicing capacity, the housing market will not collapse. At

the end of 2013, Norwegian households were spending just over 6% of

disposable income on interest payments. This is considerably lower than in

the 1980s and is also lower than in 2002 and 2008 (see chart).

A decline in household debt-servicing capacity can come about via two main

channels: a drop in incomes or a sharp increase in interest rates. Neither of

these seems particularly likely in the coming years, which is why we still see

the risk of a crash as limited.

Developments since the last Nordic Outlook have further reduced the risk of

a housing crash in Norway. Prices are still rising, turnover is high, and time

to sell is falling. We now expect housing prices to climb around 2% this year

and 3-4% next year. This means that real housing prices deflated by wage

growth will be 2% lower at the end of next year than at the end of last year.

This is a very welcome correction, as it reduces the risk of a serious

downturn in the housing market further ahead. At the same time, household

debt is continuing to grow more quickly than household income, with the

result that indebtedness is rising from already high levels.

Global growth boosts exports

Source: Macrobond

Housing prices rising



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Unemployment stabilising

With economic data painting a somewhat mixed picture, developments in the

labour market serve as a useful cross-check for whether growth is above or

below trend. Gross unemployment, which includes those on job creation

schemes and is our preferred jobless measure, rose gradually in 2013. So far

this year, however, there have been clear signs of unemployment falling,

which is consistent with increased economic growth.

Statistics Norway’s LFS data also shows that employment has picked up. The

LFS data may, however, be overestimating employment at the moment, as

there is a large element of foreign labour in industries that are now

downsizing, such as shipbuilding, and these people will not show up in the

LFS data.

We are now seeing more and more companies in oil-related industries

resorting to downsizing. We therefore see a slight risk of joblessness in

industry, and subsequently joblessness as a whole, rising slightly over the

autumn. Given our expectation of strong growth in other parts of the

Norwegian economy, however, we expect the increase to be only temporary,

with the number of jobless falling again over the course of next year.

Based on our forecast that economic growth will gradually pick up, we

expect employment growth to hold above 1%, with the result that

unemployment stabilises around current levels. One reason is that growth in

the labour supply is slowing as a result of lower net immigration. This is

probably due to the deterioration in the labour market, which goes to show

that the Norwegian labour market has become more flexible since the

enlargement of the EU in the 2000s.

Inflation stabilising around the target

Core inflation is on the rise and the period of disinflation definitely seems to

be over. This is due primarily to the weakening of the krone exerting upward

pressure on import prices. At the same time, productivity growth is still

moderate, and this, coupled with wage growth close to 4% last year, has

contributed to domestic prices rising at 2.75-3.00% y/y.

Given the normal time lag of six to nine months between movements in the

krone and prices of imported goods in the stores, higher import prices will

probably continue to push up core inflation for a few months yet. Prices for

consumer goods at importer level (‘at the border’) were still more than 7% up

y/y in Q2, which supports our view that imported inflation could remain high

for a few months yet even though the krone strengthened somewhat over the

summer.

There are also signs that some of the factors behind recent years’ low

inflation, such as food prices and airfares, have now bottomed out. Both

import and producer prices for food are rising, and the airlines have

announced the closure of a number of routes, which points to higher prices

ahead.

There is also the prospect of wage growth of around 3.5% this year and next,

which is slightly lower than last year. Together with signs that productivity

growth has bottomed out, this means that domestic inflation will stabilise.

Gross unemployment on the way down

Source: Macrobond

Inflation stabilising

Source: Macrobond


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We therefore expect core inflation to hold around 2.25-2.50% over the

coming year.

No more rate cuts

The krone has gained more than 3% since Norges Bank’s rate-setting

meeting in June, and we predict further appreciation over the coming year,

especially against the euro.

We expect the relative economic situation to continue to support a certain

interest rate differential between Norway and its trading partners over the

next couple of years. With expectations of relatively big movements in the

major currency crosses during the same period, we can see the krone gaining

a fair bit against the euro, but being more stable against the dollar and

improving only moderately against the Swedish krona.

As expected, Norges Bank left interest rates unchanged at its September

meeting. To the surprise of many, however, the bank decided to scrub the

possibility of a rate cut that it introduced in June. Despite lower interest rates

abroad, weaker global growth and dwindling oil investment, the risk of a rate

cut has therefore decreased. Stronger growth in the Norwegian economy

(despite weaker global growth and lower oil investment) and a weaker krone

(despite lower interest rates abroad) are the reasons for this.

Based on our forecasts in this report for growth, inflation, the krone and so

on, we now expect interest rates to start to rise again at the end of next year,

which is somewhat earlier than both Norges Bank and the market anticipate.

This also supports our conviction that the krone will strengthen and that long

yields will climb further than the market is pricing in.

Krone to strengthen

Source: Macrobond


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Norway: Forecast at a glance

Source: Danske Bank

National account 2012 2013 2014 2015

NOK bn (2011 prices)



Gross fixed investment 583.8 8.4 0.2 -1.0

Petroleum activities 166.1 17.1 -2.0 -10.0

Mainland Norway 391.3 4.4 0.1 3.2

Dwellings 129.4 6.4 -3.2 2.2

Enterprises 175.8 0.2 -2.4 1.0

General government 86.1 9.9 9.7 4.7

Mainland demand 2157.6 2.5 2.0 1.8

Growth contribution from stockbuilding -0.2 0.0 -0.1

Exports 1165.8 -3.3 1.2 1.0

Crude oil and natural gas 572.4 -7.7 0.0 1.0

Traditional goods 482.5 0.4 2.7 2.6

Imports 796.2 2.9 1.5 3.5

Traditional goods 482.5 2.5 0.8 2.0

GDP 2830.5 0.6 1.9 1.8

GDP Mainland Norway 2146.1 2.0 2.4 2.2

Economic indicators 2013 2014 2015

Employment, % y/y 1.2 1.1 1.0

Labour force, % y/y 1.1 1.0 1.1

Unemployment (LFS), % 3.5 3.4 3.5

Annual wages, % y/y 3.9 3.5 3.5

Consumer prices, % y/y 2.1 2.2 2.0

Core inflation 1.6 2.5 2.2


Repo rate, % p.a. 1.50 1.50 1.50 1.50

2-yr swap yield, % p.a. 1.81 1.95 2.05 2.20

10-yr swap yield, % p.a. 2.68 3.00 3.05 3.35

EUR/NOK 8.17 7.95 7.85 7.75

USD/NOK 6.36 6.26 6.23 6.20

% y/y

24/09/2014

Forecast


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Finland

Painful road to growth

We have revised down our forecasts and expect Finnish GDP to

shrink 0.4% in 2014 and grow only 0.8% in 2015. Falling exports to

Russia due to the Russian recession weigh on exports and domestic

demand has been on the weak side of earlier expectations. On a

positive note, new manufacturing orders have increased in February-

July. We expect a modest export-led recovery in 2015 on the back of

growth in the western markets, although the weakness in Russia and

the trade sanctions limit the potential.

The outlook for domestic demand is fragile. Household purchasing

power is falling due to tax hikes, unemployment and moderate wage

agreements. Surveys point to weak expectations in retail trade and

especially construction. Manufacturing capex is also weak. The forest

industry has announced new investments plans but these will not be

realised until after 2015.

The unemployment and housing market outlook is weak but no

severe deterioration is in sight. Household and corporate balance

sheets continue to be healthy and very low interest rates support

activity, as nearly all housing loans are linked to variable Euribor

rates.

The government is trying to implement structural changes and carry

out fiscal austerity measures to cut the deficit - with mixed results.

Public finances are in distress as falling GDP is leading to lower tax

revenues and higher spending. Despite rising debt levels, Finland

continues to enjoy one of the lowest risk premiums compared with

Germany and has a triple-A rating from all major credit agencies.

Relative to other advanced or euro countries Finnish public finances

are still among the best, even if they are now lagging other Nordic

countries.

Negative news continues to dominate

Finland may have technically pulled out of a recession, because GDP rose

0.2% q/q in the second quarter, but in reality the economy is crawling well

below potential output. The situation has not improved much during Q3 14,

because production and export figures remained downbeat. Retail trade is

weak, unemployment is on the rise, exports to Russia and flow of tourists

from Russia fell. The figures give a poor starting point for 2015. The few

positive signs consist of slowly growing new manufacturing orders and

growing exports to the EU countries. We expect net exports to other EU

countries to pull GDP towards a positive trend in 2015 but domestic demand

will remain stagnant.



2014 2015 2014 2015

GDP (%) -0.4 0.8 -0.2 1.5

Unemployment rate (%) 8.6 8.6 8.5 8.4

Inflation (%) 1.0 1.0 1.0 1.2

Earnings (%) 1.2 1.0 1.2 1.2

Housing prices (%) -0.5 -0.5 -0.5 0.5

Current account (% of

GDP)

-1.2 -1.0 -0.7 -0.5

Public debt (% of GDP) 59.0 61.0 59.0 61.0

Source: Danske Bank

GDP declines for third year in a row

Source: Macrobond Financial


No

rdic O

utlo

ok

Nordic Outlook

Private consumption weakened in Q2, as also illustrated by weak retail sales

and sluggish car sales. Private consumption fell 0.3% q/q and 0.2% y/y.

Statistics Finland also revised Q1 figures down. Investments were 3.5%

lower y/y. Construction fell deeper and industrial capex sunk already in 2013.

Public consumption fell 1.1% y/y but this number is often revised up. In total,

the figures for domestic demand paint a bleak picture of falling purchasing

power and austere fiscal policy. Exports grew 0.6% y/y despite weakness in

Russia and other emerging markets. Exports to the EU have started to rise,

while exports outside EU were further down in July. Manufacturing output

figures were also downbeat in July.

We expect the export markets in the EU to gain strength in 2015, especially if

pent-up demand for investment goods continues to transform into new orders.

Exports outside the euro area could gain from the weaker EUR but the export

outlook to Russia continues to be poor because of a looming recession and

sanctions placed by the EU and Russia.

Leading indicators have stayed flat or have weakened lately. Consumer

confidence is relatively stable but consumers are pessimistic about their

current situation. Retail trade and construction confidence are well below

normal. Manufacturing confidence has improved slightly in recent months.

The OECD leading indicator, which has been fairly robust in recent years,

has continued to improve. The best sign of recovery in manufacturing comes

from new orders, which have been rising from February to July, except for

June. The rise seems to be widespread, not just a few large orders, which

supports our view that exports are set to pull Finland out of the recession.

Assuming that the US leads the global recovery and that the euro area is also

gaining strength, we expect output to resume slow growth in 2015. We have

revised our growth estimate downwards for both 2014 and 2015, because the

Russian recession weighs on exports and domestic demand has been on the

weak side of earlier expectations. We forecast GDP will fall 0.4%

(previously down 0.2%) in 2014 and grow only 0.8% (previously 1.5%) in

2015.

Consumers hit by unemployment and fiscal austerity

Consumer buying power has been roughly flat since 2012, while

consumption grew substantially in 2010 and 2011 on the back of low interest

rates and rising real wages. Private consumption fell in 2013 and the outlook

for 2014-2015 is dull as consumers are hit by low real wage growth and

rising unemployment. They also have to bear the burden of tough fiscal

measures aimed at balancing the budget.

Private consumption fell 0.3% q/q and 0.2% y/y. In July the sales volume in

retail trade decreased 0.5% and in motor vehicle trade 1.2% y/y. In retail

trade, nominal revenue decreased more than sales volume in May to July, due

to falling prices. Prices of food, clothes and entertainment electronics fell in

the three months. Car sales are still recovering from a tax shock in 2012 but

there does not seem to be much growth potential. Small services

entrepreneurs, such as hairdressers, complain that people spend less money.

Yet, services businesses have been stable and very few entrepreneurs have

been forced out of business.

New orders are rising

Source: Macrobond

Inflation and wage growth continue to decline

Source: Macrobond


No

rdic O

utlo

ok

Nordic Outlook

The crisis in Ukraine and weaker Russian purchasing power have several

implications for Finland. Russians are by far the largest group of foreign citizens

visiting Finland, as nearly 50% of foreign tourists come from Russia. Russian

citizens spend almost EUR1bn on a yearly basis in Finland. In particular, the

retail trade, hotels and local services businesses in south-east Finland rely on

Russian consumers. Most recent statistics indicate overnight stays by Russian

tourists are down more than 10% y/y in January to June. The weak rouble has

cut purchasing power and an escalation of the crisis spells trouble for industries

relying on travellers from the east. Tourism income can also be harder to replace

than export of goods, where companies are searching for new markets in other

countries. Russians crossing the border to buy food may help retail sales.

The outlook for the rest of the year is weak, as consumer confidence remains at

low levels and purchasing power is likely to decrease in 2014-2015. In the

forecasting period wage growth will be roughly in line with inflation at a time

when tax increases take their share as well. As a part of the austerity measures,

the pension index rises only 0.4% in 2015. We also expect consumer confidence

to remain at mediocre levels at best, as employment figures continue to weaken

in the next few months. Low interest rates will help to sustain private activity but

the savings rate is already low with little additional room to boost spending. We

expect private consumption to shrink by 0.2% in 2014 and to be flat in 2015.

Inflationary pressures are modest because of the existing output gap (roughly

2-4% of the GDP), no pressure from global food and energy prices and as

moderate wage increases limit cost pressures. Tax hikes pushed consumer

prices by approximately 0.5% higher at the beginning of the year and some

new hikes are forthcoming at the beginning of 2015. Inflation was only 0.8%

in July but without tax hikes it would have been close to zero. HICP inflation

was 1.0%, still higher than in the euro-zone. We expect the national inflation

index to average 1.0% both in 2014 and 2015.

Divided outlook for exports

The volume of exports rose 0.9% y/y and 2.2% q/q in April-June of 2014.

The growth was based only on goods exports, while services exports fell.

Services exports is a surprisingly volatile and hard to analyse item but the fall

could partly be related to Nokia’s mobile phone sale to Microsoft. Among

euro-area economies, Finland is a rare example of a country that has not seen

much real growth in exports in three years. Exports of goods have suffered

long-term damage from the descent of Nokia and forest industries.

Fortunately, one can lose Nokia only once. Exports have also suffered from a

high share of investment goods, which are in short demand at the moment,

and poor price competitiveness caused by wage increases between 2008-

2012. If pent-up investment demand is released in Europe and Finland

regains competitiveness through wage moderation, exports could grow

relatively fast in the medium term. There exists a widespread drive to

improve competitiveness in order to preserve the strong manufacturing base

in Finland. Exports are seen as the best and only way out the slump. Labour

unions have agreed to a very moderate wage rise in the medium run. Wages

will rise only EUR20 per month in 2014 and 0.4% in 2015, plus some wage

drift. In addition, the corporate tax rate fell to 20% at the beginning of 2014.

Thus, all bets are on exports and not on domestic demand.

Exports to Russia are volatile

Source: Macrobond


No

rdic O

utlo

ok

Nordic Outlook

The outlook for main Finnish export markets Germany and Sweden has

remained relatively good and also other EU-countries have performed well.

The biggest risk to the export outlook is Russia. Exports to Russia failed to

rise already in 2013 because the Russian economy showed a poor

development. The crisis in Ukraine has caused increasing tension in EU-

Russian commercial relations and the weaker rouble hits the Finnish export

competitiveness in Russia. We expect Russian GDP to fall in 2014-2015,

which keeps the export outlook poor. EU trade sanctions have weakened the

Russian outlook further and the Russian counter-sanctions hamper Finnish

exports in certain goods. The value of Finnish exports to Russia fell 12% y/y

in January-June and the worst is not behind.

Russia counted for c.9.5% of Finnish goods exports in 2013 and 18% of goods

imports (oil and gas count a lot). Thus, Russia is Finland’s largest trading partner

calculated by the value of total cross-border trade and an important partner in

many key sectors. The main export goods to Russia are machinery and

equipment, forestry and chemical products and milk and dairy products. Imports

consist especially of energy but also wood, iron and steel are significant. Russian

trade has been volatile in the past too. The collapse of the trade with the Soviet

Union was a major reason behind the Finnish depression in the early 1990s. The

Russian crisis in 1998 nearly halved Finnish exports to Russia but at that time

Finland did not suffer a recession, because other exports performed well.

Trade sanctions between EU and Russia hurt Finnish exports. The embargo

on imports of agricultural products has already led to closing of product lines

in Finland. Although the amount of exports under the current sanctions only

adds up to below 0.5% of Finland’s goods exports and 0.1% of GDP, the

possibility of further escalation is having an effect on confidence. The impact

on confidence is a larger issue than direct impacts.

Poor manufacturing confidence and low order book levels suggest that

exports continue to perform modestly at best in H2 14. Assuming a continued

recovery in the euro area and a brighter global outlook, we expect exports to

rise by 0.5% in 2014 and by 3.0% in 2015.

Finland had a current account surplus from 1994 to 2010 but fell with trade

balance into a small deficit in 2011. Recent statistics revisions have revealed

a deficit of 1.4% per GDP in 2013. We expect a current account deficit also

in 2014-2015, driven by large net transfers. Trade balance has actually been

balanced, thanks to falling imports. The CA deficit is forecast to narrow to

1.2% per GDP in 2014 and to 1.0% per GDP in 2015.

Sanctions affecting investment decisions

Investments fell by nearly 5% y/y in H1. Construction investments fell by

3%, while the volatile machinery, equipment and transport equipment

investments sunk by over 12% y/y. In the new national account system (ESA

2010) a new sub-section was added to investments: cultivated biological

resources and intellectual property products, which includes especially R&D

activities. These expenditures are significant – around the size of machinery,

equipment and transport equipment investments combined. R&D activities

tend to be more stable over business cycles and in H1 14 the section declined

by 1% y/y.

Exports are down due to Russia

Source: Macrobond


No

rdic O

utlo

ok

Nordic Outlook

Construction sector weakness was expected as building permits have slipped. In

Q2, building permits and building starts declined, implying a harsh winter ahead.

Construction confidence is unsurprisingly low and output expectations for the

next six months are in decline. Low demand in manufacturing does not bode

well for investments until exports distinctly pick up from current levels.

Sentiment first improved in H1 14 as few major investment decisions were

released – Metsä Group plans to invest EUR1.1bn in a bio-product mill and

Stora Enso to spend EUR110m on its Varkaus factory, signalling a positive turn

in the forest industry and in the economy in general. However, these investments

are not likely to have a direct effect until after 2015. The latest turns in the crisis

in Ukraine have severely hit confidence, as businesses are wary of the sanctions

and countersanctions between Russia and western Europe.

We forecast that investments will continue to decline 3.5% in 2014, which

would mark a third consecutive year that fixed investments have declined. The

last time investments contracted for three successive years was in the early

1990s recession. In 2015 increasing external demand and a recovery in the

construction sector are expected to turn investments into a mild 1% growth.

Weakness spreads to the housing market

Prices for old dwellings in blocks of flats and terraced houses have been stuck

around current level since early 2013. In Q2 14 prices increased by 0.8% q/q

but declined 0.3% y/y. According to the preliminary figures July gave a poor

start to H2 as prices came down 1.6% m/m. Housing prices have been broadly

flat for the past three years in most cities and increased primarily in Helsinki.

In 2013 prices increased by 1.6%, driven by the development in the Helsinki

Metropolitan Area. The number of property transactions has come down

significantly, in H1 activity was down over 10% y/y, and selling times have

increased accordingly. Due to the poor economic environment, intentions to

buy a dwelling were meagre in H1 14. One headwind has eased as average

housing loan margins have stabilised. Competition for an ever smaller number

of good banking customers is fierce. Housing loan stock growth has dipped

below 2% y/y during the summer, well below the 6% figures seen in 2009-

2012 or the over 10% levels in 1998-2008.

Housing market conditions remain uncertain for 2014. The demand side is

being squeezed due to unemployment increases and real wages stagnating.

The economic outlook is murky and the incentive to buy is falling as the

share of deductibility of housing loan interests in taxation is declining

gradually to 50% in the next four years.

Despite some of the above-mentioned headwinds, there are also factors

pushing in the other direction. The interest rate burden has stayed at record

low levels despite previous increases in bank lending margins. The debt-to-

income ratio of Finnish households, although it has been increasing, is still

well below that of other Nordic countries. Finnish households are still able to

amortise debt as the exceptionally low interest rate transmits effectively in

the Finnish housing market due to the high percentage of variable rate loans.

Also, the chronic lack of supply in growth centres, especially in the Helsinki

Metropolitan Area, supports the price level. As mentioned in the previous

segment, the outlook for newbuilding is subdued.

In order to prevent future housing market bubbles, in February the

government proposed a new loan-to-value limit in housing loans. The law is

Indicators suggest weak construction activity

Source: Macrobond

Housing prices in the Nordic countries

Source: Macrobond


No

rdic O

utlo

ok

Nordic Outlook

set to come into force from H2 16. The law will limit the housing loan

amount to 90% (95% for first-time buyers) of the collateral, which is usually

the dwelling in question. As the definition of the collateral includes other

assets, this should not significantly affect the housing market as it currently

lies. The main benefit is for the FSA to limit the collateral conditions in

exceptional circumstances. The banking industry has also taken a positive

stand on the law.

We expect nominal prices to decline 0.5% in 2014 and 2015. Despite the past

price increases, we do not see a major risk of a bubble, as prices have

generally risen in line with earnings. The price-to-rent ratio is signalling a

similar picture. A major decline in housing prices could be initiated only by

much higher long-term unemployment or surging interest rates, which both

look unlikely despite the lacklustre economic outlook.

Challenges ahead for the government

The five party coalition government now run by Alexander Stubb, after Jyrki

Katainen chose to seek a position within the European Commission, is facing

multiple challenges. Although legislation is based upon previously agreed

issues, major obstacles are ahead. Firstly, the retirement reform currently

negotiated by the labour market organisations has not reached a compromise

despite promises to find a solution by the beginning of the fall. Raising the

retirement age and modifying the system is paramount to face the surge in

aging population. Secondly, the Green party, a junior member of the

government, jumped into the opposition when the government gave a positive

decision-in-principle on a nuclear power plant application by Fennovoima. This

will leave the government with the slimmest majority for the remaining seven

months. Lastly, the government is struggling to meet its main goal of turning

the debt-to-GDP ratio into a decline. The deficit is decreasing markedly thanks

to tax hikes and spending cuts but the lack of growth keeps moving the goal

post ever further. The austerity measures are dampening the domestic market

outlook at a time when exports are not picking up due to the situation in Russia,

one of Finland’s main export partners.

Central government spending levels in the budget for 2015 are slightly below

2014 figures, a second consecutive decline. According to the budget, the net

loan amount will increase by EUR4.5bn in 2015 compared to over EUR7bn

in 2014. All in all, the debt continues to grow in the absence of growth. This

is to be expected as cyclical expenditures increase and the tax base shrinks.

In our opinion the main challenge in public finances lies in the long-term

sustainability gap, as the ageing population begins to burden the healthcare

system and limit the growth potential. Thus, the structural reforms initiated in

the autumn of 2013 are crucial to increase the labour force participation rate

and labour productivity (see Research Finnish economy: Focus on structural

reforms, 30 August 2013). How these reforms will be enacted is still unclear.

Expectation is that details will be published and concrete legislation will be

passed before the next elections. These measures, if properly implemented,

could turn the debt ratio into a decline after 2015.

The EU-wide revision of national accounts (ESA 2010) lifted reported GDP

and thus kept the debt ratio lower than otherwise from July 2014 onwards,

when the new statistical method was first adopted in Finland. The revision

will count R&D expenditure as investment, which raised GDP by 3.5% in

Debt level inching up in the absence of growth

Source: Macrobond

http://danskeanalyse.danskebank.dk/abo/ResearchFinland300813/$file/Research_Finland_300813.pdf

http://danskeanalyse.danskebank.dk/abo/ResearchFinland300813/$file/Research_Finland_300813.pdf


No

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Nordic Outlook

Finland and as a side effect lowered the debt ratio by one percentage point.

We forecast the debt ratio to be 59% in 2014 and to reach 61% by the end of

2015, even with the new method.

Public consumption increased 1.5% in 2013 but this was partly due to

changes in the calculation of expenses in the public broadcasting. As this

one-time effect vanishes and tight budgets continue, public spending is

expected to stay nearly flat in the next years. Even though Finland is one of

the least indebted euro-area countries, the likelihood of expansionary public

finances continues to be low.

Within the euro area, the Republic of Finland continues to enjoy one of the

lowest risk premiums compared to Germany. The 10-year bond yield is only

1.2%. The triple-A rating from all three major credit rating agencies

underlines the strength and confidence in the public finances. We expect the

fairly low level of public debt, excellent track record and policy decisions to

continue to keep the Finnish risk premium low, interest rates low and credit

ratings high.

Official unemployment rate stable

The official unemployment figures remained surprisingly stable in H1 14.

According to Statistics Finland, the seasonally adjusted unemployment rate

was 8.3% in July. However, the official figure understates the poor labour

market conditions, as people give up looking for work, which can be seen in

the shrinking labour force and the increasing share of inactive population.

Also, the number of registered unemployed at the employment and economic

development offices has continued to increase. In addition, news of new lay-

offs has been persistent and according to surveys, intentions to hire new

workers are sluggish in almost all industries. At the same time new vacancies

are decreasing, which will not lure discouraged workers back to the labour

force. Declining employment numbers, scarcity of new vacancies and limited

wage pressures indicate that the weakness is due to inadequate demand and

not structural.

We forecast the unemployment rate to stay around 8.6% in 2014-2015. As

the economic and labour market conditions improve, part of the population

now outside the labour force will return to seek jobs keeping the

unemployment rate over 8% for longer. The retirement wave, which started

in 2010, will continue and the working age population will decrease until the

2020s. This trend will put a ceiling on the number of employed persons and

dampen the growth potential markedly.

Unemployment rate to stay above 8%

Source: Macrobond


No

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utlo

ok

Nordic Outlook

Finland: Forecast at a glance

Source: Danske Bank

National account 2012 2013 2014 2015

GDP -1.5 -1.2 -0.4 0.8

Imports -1.3 -2.5 -0.5 1.5

Exports 1.2 -1.7 0.5 3.0

Consumption 0.3 0.0 -0.1 0.0

- Private 0.1 -0.7 -0.2 0.0

- Public 0.7 1.5 0.3 0.0

Investments -2.5 -4.9 -3.5 1.0


Unemployment rate, % 7.7 8.2 8.6 8.6

Earnings, % 3.2 2.1 1.2 1.0

Inflation, % 2.8 1.5 1.0 1.0

Housing prices, % 1.7 1.6 -0.5 -0.5

Current account, Bn, EUR -3.9 -2.9 -2.5 -2.0

Current account/GDP, % -1.9 -1.4 -1.2 -1.0

Public deficit/GDP, % -1.8 -2.0 -2.0 -1.8

Public debt/GDP, % 52.9 55.8 59.0 61.0


Repo rate, % p.a. 0.05 0.05 0.05 0.05

2-yr swap yield, % p.a. 0.22 0.15 0.15 0.15

10-yr swap yield, % p.a. 1.18 1.15 1.20 1.30

EUR/USD 1.29 1.27 1.26 1.25

Forecast

% y/y

24/09/2014


No

rdic O

utlo

ok

Nordic Outlook

Global overview

A multi-speed recovery

The bumpy road to recovery of the global economy has continued in

2014 with wide divergence across regions.

The euro area and Japan met new headwinds in 2014 while the US

economy gathered more steam. China continues to grow around

7.5%.

Looking ahead, we expect more convergence again in 2015 as we look

for a rebound in the euro area and Japan as the headwinds fade. The

US should continue to be the strong pillar of the global economy with

3-3.5% growth. China is expected to continue with growth close to

7.5%.

Global growth has continued to bump along in 2014 but has generally

disappointed somewhat. In the euro area, new uncertainty surfaced as the

Ukraine crisis has weighed on sentiment and lingering effects from euro

strength took a toll on activity in Q2 and Q3. China had a weak start but

recovered again over the summer driven by policy stimulus adding to

investment growth. The US economy had a tough start due to an unusually

cold winter but has otherwise been the bright spot over the past quarters as

activity has picked up in most sectors.

Looking ahead, we expect the euro area to recover towards the end of the year

and into 2015. The negative effect from the Ukraine crisis should fade and the

sharp depreciation of the euro will give a lift to the manufacturing sector as

competitiveness is getting a lift. New stimulus from the ECB and a stronger

banking sector following the Asset Quality Review this year is expected to

provide more tailwinds to the economy. Although very low inflation has

sparked some deflation fears, for now, the low inflation is giving a boost to

purchasing power with robust real wage gains to consumers. This has led to

an increase in consumer sentiment and stronger retail sales. Overall, we look

for just below 2% growth in the euro area next year. It will not be a strong

recovery and means that unemployment will only come down very slowly

from the high levels reached during the euro debt crisis.

The US economy is expected to grow around 3.5% in 2015 as consumers

experience stronger job growth, decent real wage gains and solid wealth

gains. The rise in consumer demand is finally fuelling higher investment

growth and housing is getting support from this year’s decline in mortgage

rates. We look for the Fed to have lift-off on rates in Q2 15 but only to

increase rates very gradually thereafter.

Global GDP outlook versus consensus

Source: Bloomberg, IMF, Danske Bank Markets

The Chinese cycle is very policy-driven and after

the pick-up in activity over the summer, growth is

easing a bit again towards the end of the year.

However, overall we continue to look for annual

growth just below the government’s growth target

of 7.5% in 2015. Global recovery taking hold

Source: Macrobond Financial, Danske Bank Markets

Divergence

Source: Macrobond Financial, Danske Bank Markets

% y/yD anske

B ank C o nsensus

D anske

B ank C o nsensus

USA 2,2 2,1 3,4 3,0

Euro area 1,0 0,8 1,8 1,4

Japan 1,1 1,1 0,6 1,2

China 7,5 7,4 7,3 7,2

Global 3,5 3,4 3,9 3,8

2014 2015


No

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ok

Nordic Outlook

Economic forecast

Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

Makroprognose, Skandinavien

Danmark 2013 -0.1 0.1 0.1 0.6 0.1 1.2 2.2 0.8 5.8 -0.9 44.5 7.32014 0.8 0.8 0.8 2.7 0.0 2.7 4.3 0.6 5.1 -0.4 43.9 6.62015 1.8 1.8 0.8 2.3 -0.1 3.2 2.9 1.0 4.8 -3.0 43.3 5.9

Sverige 2013 1.5 2.1 1.6 -0.1 0.0 -0.5 -0.8 0.0 8.0 -1.2 38.7 3.72014 2.2 2.7 1.3 4.9 0.0 2.1 4.5 -0.1 8.0 -2.0 39.2 2.92015 2.6 1.7 1.6 7.3 0.0 3.0 4.0 1.0 7.7 -1.2 38.8 2.6

Norge 2013 2.0 2.1 1.8 8.4 -0.2 -3.3 2.9 2.1 3.5 - - -2014 2.4 2.1 2.1 0.2 0.0 1.2 1.5 2.2 3.4 - - -2015 2.2 2.1 2.1 -1.0 -0.1 1.0 3.5 2.0 3.5 - - -

Makroprognose, Euroland

Euroland 2013 -0.4 -0.6 0.1 -2.8 -0.1 1.5 0.4 1.4 11.9 -3.0 95.4 2.62014 1.0 1.0 0.8 1.5 0.1 3.2 3.5 0.6 11.6 -2.5 95.9 2.92015 1.8 1.5 0.1 3.3 0.0 4.6 4.3 1.0 11.2 -2.2 95.2 2.9

Tyskland 2013 0.5 1.0 0.4 -0.7 0.2 1.1 1.6 1.6 5.3 0.0 78.4 7.42014 1.9 1.4 0.6 5.0 -0.1 4.1 5.5 1.0 5.1 0.0 76.0 7.32015 2.8 1.8 0.6 6.2 0.0 5.2 4.8 1.3 5.1 -0.1 73.6 7.0

Frankrig 2013 0.4 0.4 1.9 -0.8 0.0 2.4 1.9 1.0 10.3 -4.3 93.5 -1.92014 0.6 0.4 1.4 -1.4 0.0 2.9 3.5 0.7 10.4 -3.9 95.6 -1.82015 1.5 1.4 0.0 3.5 0.0 4.5 4.3 1.0 10.2 -3.4 96.6 -2.0

Italien 2013 -1.8 -2.6 -0.8 -4.6 -0.6 0.0 -2.9 1.3 12.2 -3.0 132.6 0.92014 0.0 0.1 0.6 -1.1 0.3 3.3 1.9 0.2 12.6 -2.6 135.2 1.52015 1.6 1.1 0.3 3.0 0.0 4.4 3.7 0.8 12.1 -2.2 133.9 1.5

Spanien 2013 -1.2 -2.1 -2.3 -5.1 0.0 4.9 0.4 1.5 26.1 -7.1 93.9 0.82014 1.2 1.6 1.9 1.0 0.0 3.8 5.0 0.0 25.2 -5.6 100.2 1.42015 2.0 1.6 -0.1 3.8 0.0 4.8 4.2 0.6 24.0 -6.1 103.3 1.5

Finland 2013 -1.2 -0.7 1.5 -4.9 - -1.7 -2.5 1.5 8.2 -2.0 55.8 -1.42014 -0.4 -0.2 0.3 -3.5 - 0.5 -0.5 1.0 8.6 -2.0 59.0 -1.22015 0.8 0.0 0.0 1.0 - 3.0 1.5 1.0 8.6 -1.8 61.0 -1.0

Makroprognose, Global

USA 2013 1.9 2.0 -0.6 4.5 -0.4 2.7 1.4 1.1 7.4 -4.1 72.0 -2.32014 2.2 3.0 0.0 3.7 -0.3 3.8 4.2 1.5 6.3 -2.9 74.0 -2.22015 3.4 3.5 1.0 7.3 0.0 7.8 8.6 1.9 5.9 -2.6 73.0 -2.9

Japan 2013 1.5 2.0 2.0 0.2 -0.3 1.6 3.4 0.2 4.0 -8.4 243.0 0.72014 1.1 -0.3 0.7 5.6 -0.4 7.3 6.8 2.7 3.6 -7.2 244.0 1.22015 0.6 -1.1 0.8 2.0 0.4 5.5 2.2 2.1 3.4 -6.4 245.0 1.3

Kina 2013 7.7 - - - - - - 2.6 4.3 -1.9 22.8 2.02014 7.5 - - - - - - 2.6 4.3 -2.2 21.3 2.22015 7.3 - - - - - - 3.1 4.2 -2.0 30.0 2.6

UK 2013 1.7 2.2 0.7 -0.8 0.3 0.5 0.2 2.6 7.6 -4.5 89.7 -3.32014 3.1 2.5 0.6 8.9 -0.2 0.5 -0.5 1.7 6.5 -3.5 94.9 -2.7

2015 2.7 2.4 -0.5 8.7 0.0 4.7 4.4 1.8 6.0 -1.9 96.6 -2.2

år

Betal.

bal4

BNP 1

Privat-

forb.1

Off.

forb.1

Faste

inv.1

Lager-

inv.2

Eks-

port1

Import1

Infla-

tion1

Ledig-

hed3

Off.

budget4

Off.

gæld4

Import1

Import1

Infla-

tion1

Ledig-

hed3

Off.

gæld4

Off.

budget4

år BNP 1

Privat-

forb.1

Off.

forb.1

Faste

inv.1

Lager-

inv.2

år BNP 1

Privat-

forb.1

Off.

forb.1

Faste

inv.1

Lager-

inv.2

Eks-

port1

Eks-

port1

Betal.

bal4

Betal.

bal4

Infla-

tion1

Ledig-

hed3

Off.

budget4

Off.

gæld4


No

rdic O

utlo

ok

Nordic Outlook

Financial forecast

Source: Danske Bank

Bond and money markets

Currencyvs USD

Currencyvs DKK

USD 24-Sep - 579.2

+3m - 586.4

+6m - 590.9+12m - 595.6

EUR 24-Sep 128.5 744.4

+3m 127.0 744.8

+6m 126.0 744.5+12m 125.0 744.5

JPY 24-Sep 108.5 5.34

+3m 110.0 53.20

+6m 112.0 52.80+12m 114.0 52.06

GBP 24-Sep 163.9 949.1

+3m 163.0 954.8

+6m 164.0 966.9+12m 164.0 979.6

CHF 24-Sep 94.0 616.3

+3m 95.3 615.5

+6m 96.8 610.2+12m 99.2 600.4

DKK 24-Sep 579.2 -

+3m 586.4 -

+6m 590.9 -+12m 595.6 -

SEK 24-Sep 714.6 81.1

+3m 716.5 818.4

+6m 714.3 827.2+12m 704.0 846.0

NOK 24-Sep 635.8 91.1

+3m 626.0 936.8

+6m 623.0 948.4+12m 620.0 960.6

Equity Markets

Regional

Price trend12 mth.

Regional recommen-dations

USA (USD) Strong growth & earnings, expensive 5-8% Neutral

Emerging markets (local curr) Commodity-related equities are pressured 0-5% Underweight

Europe (ex. Nordics) Recovering economy, fair valuation 5-10% OverweightNordics Strong cyclical profile 5-10% Overweight

Commodities

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015

NYMEX WTI 99 103 96 93 93 94 94 95 98 94

ICE Brent 108 110 102 98 97 98 98 99 104 98

Copper 6,996 6,768 6,850 6,850 7,000 7,150 7,300 7,450 6,866 7,225

Zinc 2,024 2,080 2,300 2,350 2,400 2,450 2,500 2,550 2,189 2,475

Nickel 14,723 18,529 18,500 18,500 18,750 19,000 19,250 19,500 17,563 19,125

Aluminium 1,754 1,839 2,000 2,000 2,050 2,100 2,150 2,200 1,898 2,125

Gold 1,292 1,291 1,275 1,250 1,240 1,230 1,220 1,210 1,277 1,225

Matif Mill Wheat (€/t) 201 200 170 167 173 177 178 180 185 177

Rapeseed (€/t) 383 372 325 304 315 321 324 326 346 321

CBOT Wheat (USd/bushel) 618 651 530 520 530 540 545 550 580 541

CBOT Corn (USd/bushel) 453 478 360 360 370 380 385 390 413 381CBOT Soybeans (USd/bushel) 1,358 1,470 1,140 1,050 1,070 1,090 1,100 1,110 1,254 1,093936

476

1.18

1.801.95

2.68

3.00

3.05

2.953.30

0.83

0.95

1.051.25

3.35

1.471.57

1.42

1.79

1.65

1.50

1.15

1.201.30

0.75

0.800.85

2.55

2.75

0.64

326

24-Sep

0-3%

0-3%

92

17,125

6,720

2,255

1,223

150

97

1,966

20152014

Medium 0-3%

Currencyvs EUR

2-yr swap yield

Risk profile3 mth.

Medium 0-3%

Price trend3 mth.

2.85

2.66

3.15

0.80

0.22

0.17

1.29

0.03

0.49

0.15

0.150.15

0.95

78.4

3.40

High

Medium

77.076.0

121.0

122.0124.0

127.0

126.0125.0

140.0

141.0143.0

128.5

-

-

--

139.5

744.8

744.5744.5

918.3

817.1

775.0

910.0

785.0

900.0880.0

795.0

120.8

744.4

78.0

0.35

0.350.35

0.05

0.050.05

0.57

0.50

1.452.10

1.50

1.702.20

0.20

0.200.25

1.95

2.05

0.55

2.20

0.70

1.811.68

0.24

0.08

0.12

0.57

0.01

0.30

0.581.07

0.05

0.05

0.20

0.15

0.20

0.45

1.50

0.25

0.250.25

1.50

1.50

1.75

1.75

0.00

0.20

0.05

0.75

0.911.42

0.000.00

0.05

0.75

0.50

0.25

0.10

0.28

0.05

1.25

0.050.05

0.20

0.21

0.20

0.45

311

Average

Key int.rate

0.25

0.25

0.250.75

1.50

0.00

0.05

0.05

0.100.10

0.50

10-yr swap yield

0.47

0.20

0.200.20

3m interest rate

1.75

0.05

0.10

0.50


No

rdic O

utlo

ok

Nordic Outlook

Disclosures

This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are listed on page 2.

Analyst certification

Each research analyst responsible for the content of this research report certifies that the views expressed in this research report accurately reflect the research analyst’s

personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation

of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.

Regulation

Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all

other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority

(UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request.

The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish

Securities Dealers Association.

Conflicts of interest

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence.

These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that

might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments

are organised independently from and do not report to other business areas within Danske Bank.

Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other

remuneration linked to specific corporate finance or debt capital transactions.

Financial models and/or methodology used in this research report

Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual

security, issuer and/or country. Documentation can be obtained from the authors on request.

Risk warning

Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text.

Expected updates

Nordic Outlook is a quarterly forecast but new statistical data may give rise to changes in our views on individual economies.

Date of first publication

See the front page of this research report for the date of first publication.

General disclaimer

This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part

of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial

instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such

financial instruments) (‘Relevant Financial Instruments’).

The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable

care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and

subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report.

The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions

are subject to change and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the

information provided in this research report.

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This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient

for any purpose without Danske Bank’s prior written consent.

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institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States

solely to ‘U.S. institutional investors’.

Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of

Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a

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Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc.

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U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.

N o r way

C h i e f A n a l y s t & H e a d of F r a n k J u l l u m+ 4 7 8 5 4 0 6 5 4 0f j u @ d a n s k e b a n k . n o

F i N l a N d

C h i e f A n a l y s t & H e a d of P a s i P e t te r i K u o p p a m ä k i+ 3 5 8 1 0 5 4 6 7 7 1 5p a k u @ d a n s k e b a n k . c o m

J u h a n a B r oth e r u s+ 3 5 8 1 0 5 4 6 7 1 5 9j b @ d a n s k e b a n k . c o m

i N t e r N at i o N a l M a c r o

C h i e f A n a l y s t & H e a d of A l l a n v o n M e h r e n + 4 5 4 5 1 2 8 0 5 5a l v o @ d a n s k e b a n k . d k

S i g n e P. R o e d - F r e d e r i k s e n ( o n l e a v e )+ 4 5 4 5 1 2 8 2 2 9s r o e @ d a n s k e b a n k . d k

F l e m m i n g J e g b j æ r g N i e l s e n + 4 5 4 5 1 2 8 5 3 5f l e m m @ d a n s k e b a n k . d k

P e r n i l l e B o m h o l d t N i e l s e n+ 4 5 4 5 1 3 2 0 2 1p e r n i @ d a n s k e b a n k . d k

F i x e d i N c o M e r e s e a r c h

C h i e f A n a l y s t & H e a d of A r n e L o h m a n n R a s m u s s e n + 4 5 4 5 1 2 8 5 3 2a r r @ d a n s k e b a n k . d k

J e n s P e te r S ø r e n s e n+ 4 5 4 5 1 2 8 5 1 7 j e n s s r @ d a n s k e b a n k . d k

C h r i s t i n a E . Fa l c h + 4 5 4 5 1 2 7 1 5 2c h f a @ d a n s k e b a n k . d k

J a n We b e r Ø s te r g a a r d+ 4 5 4 5 1 3 0 7 8 9j a s t @ d a n s k e b a n k . d k

P e te r P o s s i n g A n d e r s e n + 4 5 4 5 1 3 7 0 1 9p a @ d a n s k e b a n k . d k

L a r s Tr a n b e r g R a s m u s s e n+ 4 5 4 5 1 2 8 5 3 4 l a r a s @ d a n s k e b a n k . d k

A n d e r s M ø l l e r L u m h o l t z+ 4 5 4 5 1 2 8 4 9 8a n d j r g @ d a n s k e b a n k . d k

H a n s R o a g e r J e n s e n+ 4 5 4 5 1 3 0 7 8 9h r o a @ d a n s k e b a n k . d k

A n d e r s Ve s te r g å r d F i s c h e r+ 4 5 4 5 1 3 6 6 4 1a f i s @ d a n s k e b a n k . d k

F x & c o M M o d i t i e s s t r at e g y

C h i e f A n a l y s t & H e a d of T h o m a s H a r r+ 4 5 4 5 1 3 6 7 3 1th h a r @ d a n s k e b a n k . d k

C h r i s t i n K y r m e Tu x e n ( o n l e a v e )+ 4 5 4 5 1 3 7 8 6 7tu x @ d a n s k e b a n k . d k

M o r te n T h r a n e H e l t+ 4 5 4 5 1 2 8 5 1 8m o h e l @ d a n s k e b a n k . d k

J e n s N æ r v i g P e d e r s e n + 4 5 4 5 1 2 8 0 6 1j e n p e @ d a n s k e b a n k . d k

d c M r e s e a r c h

C h i e f A n a l y s t & H e a d of T h o m a s M a r t i n H o v a r d+ 4 5 4 5 1 2 8 5 0 5 h o v a @ d a n s k e b a n k . d k

L o u i s L a n d e m a n+ 4 6 8 5 6 8 8 0 5 2 4l l a n @ d a n s k e b a n k . s e

J a ko b M a g n u s s e n + 4 5 4 5 1 2 8 5 0 3j a k j a @ d a n s k e b a n k . d k

M a d s R o s e n d a l+ 4 5 4 5 1 4 8 8 7 9m a d r o @ d a n s k e b a n k . d k

G a b r i e l B e r g i n+ 4 6 8 5 6 8 8 0 6 0 2g a b e @ d a n s k e b a n k . s e

B r i a n B ø r s t i n g+ 4 5 4 5 1 2 8 5 1 9b r b r @ d a n s k e b a n k . d k

L a r s H o l m+ 4 5 4 5 1 2 8 0 4 1l a h o @ d a n s k e b a n k . d k

Å s e H a a g e n s e n + 4 7 2 2 8 6 1 3 2 2h a @ d a n s k e b a n k . c o m B j ø r n K r i s t i a n R ø e d+ 4 7 8 5 4 0 7 0 7 2b r e d @ d a n s k e b a n k . co m

Wi v e c a S w a r t i n g+ 4 6 8 5 6 8 8 0 6 1 7w s w @ d a n s k e b a n k . c o m

S v e r r e H o l b e k+ 4 5 4 5 1 4 8 8 8 2h o l b @ d a n s k e b a n k . d k

S ø r e n S ko v H a n s e n + 4 5 4 5 1 2 8 4 3 0s r h a @ d a n s k e b a n k . d k

N i k l a s R i p a+ 4 5 4 5 1 2 8 0 4 7n i r i @ d a n s k e b a n k . d k

O l a A a s n e s s H e l d a l+ 4 7 8 5 4 0 8 4 3 3 o l h @ d a n s k e b a n k . n o

H e n r i k R e n è A n d r e s e n + 4 5 4 5 1 3 3 3 2 7h e n a @ d a n s k e b a n k . d k

S o n d r e D a l e S to r m y r + 4 7 8 5 4 0 7 0 7 0s o s t @ d a n s k e b a n k . co m

Ø y v i n d M o s s i g e + 4 7 8 5 4 0 5 4 9 1O M S S @ d a n s k e b a n k . co m

K n u t - I v a r B a k k e n + 4 7 8 5 4 0 7 0 7 4k n b @ d a n s k e b a n k . co m

d e N M a r k

C h i e f E c o n o m i s t & H e a d of S te e n B o c i a n+ 4 5 4 5 1 2 8 5 3 1s tb o @ d a n s k e b a n k . d k

L a s O l s e n + 4 5 4 5 1 2 8 5 3 6l a s o @ d a n s k e b a n k . d k

M i k a e l O l a i M i l h ø j+ 4 5 4 5 1 2 7 6 0 7m i l h @ d a n s k e b a n k . d k

s w e d e N

C h i e f A n a l y s t & H e a d of M i c h a e l B o s tr ö m+ 4 6 8 5 6 8 8 0 5 8 7m b o s @ d a n s k e b a n k . s e

R o g e r J o s e f s s o n+ 4 6 8 5 6 8 8 0 5 5 8 r j o s @ d a n s k e b a n k . s e

M i c h a e l G r a h n + 4 6 8 5 6 8 8 0 7 0 0m i k a @ d a n s k e b a n k . s e

C a r l M i l to n+ 4 6 8 5 6 8 8 0 5 9 8c a r m i @ d a n s k e b a n k . s e

M a r c u s S ö d e r b e r g+ 4 6 8 5 6 8 8 0 5 6 4m a r s d @ d a n s k e b a n k . s e

S te f a n M e l l i n+ 4 6 8 5 6 8 8 0 5 9 2m e l l @ d a n s k e b a n k . s e

S u s a n n e P e r n e b y+ 4 6 8 5 6 8 8 0 5 8 5s u p e @ d a n s k e b a n k . s e

Global Danske ReseaRch

e M e r g i N g M a r k e t s

C h i e f A n a l y s t & H e a d of L a r s C h r i s te n s e n+ 4 5 4 5 1 2 8 5 3 0l a r c h @ d a n s k e b a n k . d k

S ta n i s l a v a P r a d o v a + 4 5 4 5 1 2 8 0 7 1s p r a @ d a n s k e b a n k . d k

Vi o l e ta K l y v i e n e+ 3 7 0 6 1 1 2 4 3 5 4v k l y @ d a n s k e b a n k . d k

V l a d i m i r M i k l a s h e v s k y + 3 5 8 ( 0 ) 1 0 5 4 6 7 5 2 2v l m i @ d a n s k e b a n k . co m

D a n s k e B a n k , D a n s k e R e s e a r c h , H o l m e n s K a n a l 2 - 1 2 , D K - 1 0 9 2 C o p e n h a g e n K . P h o n e + 4 5 4 5 1 2 0 0 0 0 w w w. d a n s k e r e s e a r c h . co m

nordic outlook - september 2014 - danske bank€¦ · data underlines that progress is slow and...

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