Economic and financial trends - Danske Bank7 January 2016 Nordic Outlook Economic and financial trends Denmark: fragile recovery stumbles - GDP growth disappointed in 2015 but the

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Investment Research

7 January 2016

Nordic OutlookEconomic and financial trends

� Denmark: fragile recovery stumbles - GDP growth disappointed in 2015 but the outlook for the coming years is slightly brighter

� Sweden: it’s all about the money - Despite strong GDP growth, low inflation is likely to prompt further monetary easing

� Norway: government demand propping up growth - Slowdown in the oil industry has been offset by public and consumer spending

� Finland: economic melancholy to continue - Economy to stop contracting but not likely to recover much in 2016

2 | 7 January 2016 www.danskeresearch.com

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Analysts

Editorial deadline 6 January 2016 Investment Research

Editor-in-Chief:

Las Olsen

Chief Economist

+45 45 12 85 36

[email protected]

Macro economics:

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

Mark Thybo Naur Denmark +45 45 12 85 26 [email protected]

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

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

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

Henna Mikkonen Finland +358 (0) 10 546 6619 [email protected]

Minna Emilia Kuusisto

Finland +358 (0) 10 546 7955 [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

Nordic Outlook At a glance 4

Denmark Fragile recovery stumbles 6

Forecast at a glance 11

Sweden It’s all about the money 12


Norway Government demand propping up growth 18


Finland Economic melancholy to continue 22


Global overview Bottom in global manufacturing cycle 28

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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Nordic Outlook

At a glance

Mixed outlook

The Nordic countries have many things in common but the current state of

their economies is not one of them. Growth in Denmark is tracking the broad

European mid-field, with the recovery looking set to continue, albeit at a

modest pace. Finland is also benefitting from European growth, with 2016 on

track to be better than 2015, but from a considerably worse starting point than

Denmark. Unemployment in Finland will probably not fall until 2017.

Sweden, too, is definitely benefitting from global growth, but soaring

consumption and housing investment at home are unlikely to continue, so the

economy appears set to slow. Norway, meanwhile, is following its own path,

which is largely determined by the price of oil.

Oil price again in focus

The oil price is once again dominating the economic agenda here at the start

of 2016. Another round of price falls is of course good news for consumption

and investment in oil-importing countries, but oil-producers face mounting

pressure. The split is clearly visible even in a small region of the world like

the Nordic area. In Norway, the tumbling oil price puts additional pressure on

the economy and increases the risk of a more serious slowdown. High levels

of government consumption and investment growth have so far kept the

economy relatively buoyant, with consumers also lending a helping hand

despite a pronounced fall in consumer confidence. Both the government and

households set funds aside during the good times and that is helping the

economy now. Nevertheless, the oil price remaining – contrary to

expectations – very low for an extended period would spell tough times for

Norway.

In contrast, cheaper energy is a boon to Finland’s economy, where a further

pick-up in demand is still needed. Denmark is in a similar position, as Danish

energy production has declined significantly in recent years to make the

country a net energy importer. Nevertheless, production remains an important

source of revenue for the government, which is feeling the squeeze from the

low oil price, as are many Danish companies, even though a lower oil price is

generally positive for Denmark as a whole.

Sweden does not at first glance look like a country that needs further

stimulation from the lower oil price. Annual GDP growth hit 3.9% in Q3 –

double the EU average. Nor does cheaper energy help Sweden’s Riksbank

(central bank) achieve its goal of higher consumer price inflation, thus

increasing the probability of a further rate cut in the spring. That said,

Sweden’s economy does look set to slow slightly this year and a reduced

energy bill is of course positive for the country in the longer term.

Mixed growth outlook for Nordic region

Source: National statistics offices, Danske Bank

The European recovery is positive for the Nordic

countries

Source: Eurostat and Danske Bank

The oil price is once again dominating the

economic agenda

Source: EIA, Danske Bank

Investment growth in Finland and Denmark is

lagging behind Sweden and Norway

Source: EIA, Danske Bank


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Refugees also having an impact

While commodity prices have occupied much of the economic agenda, the

political debate has been dominated by the past year’s flood of refugees into

Europe, many of whom have been taken in by Sweden. The initial economic

impact will be increased government spending, which will contribute to

stimulating overall demand in the short term. In Norway that fits well with its

need to expand fiscal policy, whereas the Danish government is sticking to its

(appropriate) tightening of fiscal policy despite the increased expenses –

mainly by limiting public investment. Sweden faces a difficult balancing act,

but a slightly more expansive fiscal policy looks more or less unavoidable.

The influx of refugees will also have a more long-term impact. An increased

population clearly raises the potential level of production in the economy and

the potential rate of growth will be higher for a number of years. How much

higher depends on how well the new residents are integrated into the labour

market and the experience of the Nordic countries with this has unfortunately

not been great. Hence, the Nordic countries will likely not become wealthier

in GDP-per-capita terms, even if GDP rises. There has long been a tradition

of easy and bureaucratic-free travel between the Nordic countries. However,

the refugee situation has prompted Sweden to tighten its border with

Denmark, making travel more complicated. While less than half a percent of

the Danish workforce is made up of commuters from Sweden and few travel

to work in the other direction, the consequences for both countries would be

negative if these, so far temporary, restrictions remain in place for an

extended period of time.

Low interest rates to continue

Just as there are differences in their economic outlooks, interest-rate

projections also vary across the Nordic countries. Denmark appears to be on

track for a minor unilateral rate hike from its central bank (Danmarks

Nationalbank) to slow the fall in the currency reserve, which has dropped

back to the level prior to the major currency inflow in the opening months of

2015. Sweden’s Riksbank is fighting to prevent inflation expectations

becoming fixed at too low a level. Given the prospect of further falls in

inflation, this suggests yet another rate cut in 2016 – hardly something to

calm concerns about sharply rising Swedish house prices. A downturn in

house prices is a clear risk to the economy in the coming years, but it is

difficult to see what might prompt this in the short term if rates remain low.

Lower interest rates are one of the tools Norway still has available to

stimulate the economy if the slowdown in the oil sector makes that necessary

– and while rate cuts may not be needed, Norges Bank is ready to act. This

will help offset the risk of the low oil price triggering a crisis that includes

sharply falling house prices – though falling house prices still constitute a

risk to the Norwegian economy.

Policy rates will stay extremely low

Source: National central banks

Low interest rates support house prices

Source: National statistics offices and Danske Bank Markets

Hot housing market in Sweden

Source: National statistics offices


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Denmark

Fragile recovery stumbles

Denmark’s recovery is strong enough to create more jobs and is likely

to continue to do so in the coming years.

However, the recovery was again weaker than expected in 2015, with

exports a particular disappointment over the summer and autumn.

Private consumption is up on the back of solid income growth,

although higher house prices have not prompted a credit-financed

boom.

Further falls in the oil price will mean very low inflation again in

2016 and thus scope for consumption growth of more than 2%.

Now two years into the recovery, the government should begin to

tighten fiscal policy. However, developments need to be monitored

closely, as there are both upside and downside risks to the economy in

the coming years.

House prices are continuing to appreciate but do not currently pose a

risk to the overall economy.

Denmark’s current account surplus looks set to remain very high, so

interest rates should stay below those in the euro area.

Recovery stumbles but still in place

After eight consecutive quarters of growth – a rarity in Denmark – GDP fell

in Q3 15, which was a major disappointment. Ignoring stock building, GDP

actually contracted a full 1% over the quarter, with exports performing

particularly poorly. In our view, however, this is a temporary bump in the

road for a still ongoing recovery that will receive a further boost from the

declining oil price. Our view is underpinned by employment continuing to

rise at a fair pace month by month. However, the contraction serves to

remind us that the recovery is not particularly robust – especially considering

the length and depth of the crisis – and that Denmark is very dependent on

the global economy expanding.

Despite the recent weakness, we agree with the majority of forecasters that

now is the time to begin tightening fiscal policy in Denmark, just as the

government has announced. Employment is up by just over 60,000 since

bottoming out and our forecast projects another 60,000 or so new jobs being

created by the end of 2017. This requires more people joining the labour

market, which we expect to happen, but it is not certain, so a less loose

economic policy makes sense. Monetary policy is unlikely to be tightened

significantly before late 2017, hence the need to use fiscal policy – and also

to monitor whether the announced tightening is actually implemented and

whether there might be a need for further tightening or indeed easing, as there

are both upside and downside risks to the economy in the coming years.

Global growth could easily disappoint, while, on the other hand, domestic

consumption and investment could suddenly take off if sentiment undergoes

a significant shift.

Changes from previous forecast

Source: Statistics Denmark, Danske Bank

Negative growth in Q3 a mere bump in the road


% y/y 2016 2017 2016 2017

GDP 1.5 1.8 1.9 -

Private consumption 2.3 2.2 2.1 -

Public consumption 0.6 0.1 0.2 -

Gross fixed investment 2.1 2.7 2.6 -

Exports 1.7 4.2 3.0 -

Imports 2.8 4.2 2.9 -

Gross unemployment (thousands) 116.1 109.8 116.8 -

Inflation 0.9 1.8 1.6 -

Government balance, % of GDP -2.2 -1.4 -2.4 -

Current account, % of GDP 7.2 7.2 6.6 -

Current forecast Previous forecast


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The recent crisis was very much linked to developments in the housing

market and there is an understandable worry that the same might happen

again. House prices rose quite strongly in 2015 but the increase has not been

driven by higher levels of debt and does not appear to have spurred any

noticeable jump in consumption or housing investment, which was the case

last time. Hence, the risk posed by the housing market to the economy is not

particularly significant at present, though there is every reason to caution that

sharply appreciating house prices can also fall fast. Dampening price

fluctuations via the tax system would be no bad thing. Moreover, greater

clarity is needed on forthcoming property taxes, which may be significantly

affected by new principles for assessing land values – principles that have not

yet been revealed by the authorities.

Exports disappointed in 2015

There is no question that exports disappointed in 2015. At the start of the

year we were expecting annual export growth of 3.6% but the latest national

accounts figures suggest that forecast is well wide of the mark. Exports in

Q3 15 were running at more than 2% below the end-of-2014 level, with

service exports worst hit, though goods exports also underperformed.

Exports declining throughout 2015 surprised us, as Denmark’s key export

markets have generally seen positive and rising growth and Danish exporters

have also enjoyed a weaker effective DKK exchange rate due to the decline

in the EUR. Looking ahead, though, we expect to see both goods and service

exports pick up despite this year’s poor performance. Europe’s recovery is set

to accelerate, which should provide some tailwind for Danish exporters, and

wage growth in Denmark has been lower in recent years than in competitor

nations, so Denmark has recouped a fair share of the competitiveness it lost

in the years prior to the crisis. That said, a tighter labour market could push

Danish wage growth higher in the coming years and narrow the gap to its

trading partners, so we cannot rule out Denmark’s wage competitiveness

being eroded again in 2017, which would be modestly negative for exports.

We also expect the EUR and hence the DKK to firm next year, so all in all a

further slight loss of competitiveness is likely. Overall, we expect exports to

grow by around 1% per quarter in the coming years. However, that only adds

up to an annual growth figure of 1.7% in 2016 due to the decline in 2015.

Recent export weakness has not, however, noticeably shifted Denmark’s very

solid trade surplus. Over the past year, the surplus from the trade of goods

has totalled more than DKK70bn, while the surplus on the service side is

more than DKK50bn. Add to this a significant net income from abroad and

the result is a very large current account surplus. That translates into steady

upward pressure on the DKK, which the central bank (Danmarks

Nationalbank) counters by keeping interest rates below those in the eurozone.

We expect this will continue, though perhaps with some minor adjustments.

Decent employment growth since spring 2013


Exports a major disappointment last year


Danish economy tracking Europe

Source: Statistics Denmark, Eurostat

Large current account surplus means Danish

interest rates lower than in eurozone

Source: Danmarks Nationalbank, Statistics Denmark


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Inflation again below 1% in 2016

Contrary to our expectations, inflation has shown no sign of picking up over

the past few months. Headline inflation, in fact, slowed to 0.3% y/y in

November and does not look likely to pick up much in December. While

prices are being dragged down by exceptional declines in the prices of food

and furniture, the large drop in the oil price is the main reason why inflation

probably stayed put in December. We had expected the base effects of a

sharp fall in the oil price from December 2014 to drive inflation up this

month. To top it all, registration taxes on large cars were reduced effective

from the December inflation figures. This could perhaps shave another 0.1 of

a percentage point off the inflation rate, although this estimate is subject to

substantial uncertainty.

We continue to expect inflation to increase in January, driven by further base

effects, not least from a reduction in heating taxes that took effect in January

2014. However, due to the fall in the oil price, the overall increase looks set

to be modest. While the oil price is likely to increase gradually in 2016, this

will probably not be enough to lift Danish inflation above 1% until in the last

few months of 2016.

Even excluding energy prices, inflationary pressures have slowed a little in

the final months of 2015, though this seems mainly due to temporary factors.

Underlying inflationary pressures in Denmark are running somewhat above

inflation and are likely to grow further in 2016 and 2017. As such, in the

absence of further significant falls in the oil price, inflation is set to be

considerably higher in 2017.

The change in the way Statistics Denmark compiles food and beverage prices

effective from 2016 is a joker, though. Going forward, most prices will be

collected directly from shop IT systems in the form of barcode data.

Applying the new method to data from the past four years does not suggest it

will change annual inflation numbers, though it could change the seasonal

patterns a little, for example, because the statistic will better capture the

increased use of special offers ahead of Christmas. The new methodology

appears to raise month-on-month inflation in July and November and lower it

in August and December, though by less than 0.1 percentage point.

Wage growth remains slow

Seasonally adjusted private sector wage growth was just 0.3% q/q in Q3 15.

So far, the recovery has only driven wage growth marginally up and we have

lowered our outlook for wage growth in 2016 a little. Nevertheless, we still

expect growing employment to trigger slightly higher pay rises, particularly

in 2017, when many wage agreements are due to be renegotiated. Coupled

with the modest inflation outlook, this means we now expect real wages to

grow faster in 2016 than previously expected, with real wage growth set to be

almost as high next year as in 2015. Consequently, real income gains should

continue to support consumer spending and thus GDP growth.

Inflation to rise in late 2016


Oil price fell below USD40/bl at end of 2015

Source: Energy Information Administration (EIA)

Energy a major drag on inflation


Wage growth set to pick up



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Private consumption helping drive growth

One of the drivers of growth in 2015 has been private consumption, which

looks set to show a slightly higher increase than we had projected. The main

reason is the fall in the oil price and low inflation generally, which coupled

with rising employment has boosted household disposable income.

Household debt, in contrast, shows no sign of increasing. In fact, household

savings rose slightly despite very high consumer confidence and appreciating

house prices. Our outlook for the coming years assumes these trends will

continue. That means more scope for consumption to rise on the back of

higher real incomes, particularly in 2016, though we have not counted on

households increasing their already high level of gross debt. Consumption

could therefore rise faster than we forecast, as still rising house prices and

very low interest rates mean we cannot rule out debt levels rising again

Housing market slows

House prices appreciated sharply in early 2015, in part pushed higher by the

decline in long rates. House prices have actually fallen in the second half of

the year but by no more than can be explained by seasonal shifts – as sales

prices are normally slightly lower in the latter half of the year. We expect

long rates to rise rather than fall, which should dampen house price growth,

though we still forecast housing prices to outstrip general inflation due to

further income growth. A clear trend emerged in 2015 of housing market

growth spreading to the entire country and no longer being concentrated in

the larger cities. Some of the largest price rises in 2015 were in the otherwise

sluggish Zealand region. Urban apartment prices continue to rise much faster

than single dwelling prices. Copenhagen apartment prices were up 12.7% y/y

in Q3 15 and there is little sign of them slowing. Overall house price growth

can readily be explained by economic fundamentals and there is no indication

of prices being driven higher by rising debt levels. That said, homebuyers

should be cautious at the local level, particularly in the apartment market.

Sharply appreciating prices can quickly be replaced by rapid price falls,

especially if interest rates rise again. Housing construction has not reacted to

the higher prices – in fact, statistics show declining housing investment

throughout 2015 from an already low level. We expect this will change in the

coming years.

Parliament has suspended the increase in land tax scheduled for 2016, which

would tend to support higher house prices, particularly in the Copenhagen

area. The significance for apartment prices, however, is minimal. A more

important issue is the new land valuation system. New valuations are due to

be announced in 2018 and they could potentially trigger very significant tax

increases for certain properties in the years to come.

Private consumption to keep growing


House prices will continue to appreciate but at

slower pace


Apartment prices sharply higher

Source: Statistics Denmark, Danish Mortgage Banks’ Federation

and others, Danske Bank

Housing market growth extends to more of the

country

Note: Bornholm not included.



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Investment set to rise

Still missing from the recovery picture is a clear turnaround in business

investment. Investment in machinery, transport and buildings fell

substantially at the start of the crisis and is still languishing below earlier

levels, especially in the case of buildings. In contrast, investment in

intellectual property, such as research and trademarks, is above pre-crisis

levels. Based on the traditional relationship between employment and the size

of the capital stock, we can probably look forward to a relatively strong

increase in investment. This is further supported by companies now being

considerably better consolidated overall and interest rates looking set to

remain very low in the coming years. However, we are only assuming modest

investment growth. Future expectations remain low in many sectors and there

are still signs of spare capacity in much of the commercial property market,

especially office space.

Public sector not yet normalised

Economic policy has been actively used to influence economic development

in recent years. Policy was loosened at the start of the crisis. Modest fiscal

policy tightening seems a sensible move in 2016 and fits well with the

current economic climate, in our view. Public finances in themselves provide

no real reason to tighten but given the outlook for an extremely easy

monetary policy and a firming labour market, a little fiscal tightening makes

sense. Structurally speaking, the public sector is much larger than the

historical norm for the Danish economy. Public investment plus public

consumption currently accounts for just over 30% of GDP – a level that has

been constant since 2011. Between 1995 and 2007 the figure was 3-4

percentage points lower. The public sector accounting for a higher share of

GDP than normal is a result of both the private sector continuing to

underperform and the public sector expanding rapidly at the start of the crisis.

Hence, the number of public sector employees falling in recent years has not

been due to an overall contraction in the public sector. Nevertheless, the 2016

outlook is for declining public investment and as the government is planning

for public consumption growth of less than projected GDP growth, the public

sector will likely contract slightly in GDP terms. That said, we doubt public

investment will be curtailed to the extent planned, as movement here seems

subject to considerable inertia, so there will probably be no particular decline

in the overall economic importance of the public sector. We expect only very

modest growth in public sector employment over the forecast period.

A tax reform on the cards for 2016 could potentially have a slightly positive

effect on growth in 2017, but as we do not yet know the details, estimating

the scale of the impact is difficult, though we assume it will be limited.

Like the government, we expect the budget deficit will be kept within the

EU’s 3% limit during the forecast period. Recent falls in the oil price would

tend to increase the deficit, but on the other hand there has been a clear

tendency to overestimate the budget deficit over the past many years.

Moderate investment growth


Public sector larger than historical norm for Danish

economy


Public sector employment growth very modest


Budget deficit close to but below EU limit



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Denmark: Forecast at a glance

Sources: Statistics Denmark, Danish central bank (Danmarks Nationalbank), Macrobond Financial, Danske Bank

National account 2014 2014 2015 2016 2017

DKK bn (current prices)

Private consumption 898.6 0.6 2.2 2.3 2.2

Government consumption 511.7 0.2 1.0 0.6 0.1

Gross fixed investment 370.7 3.4 0.2 2.1 2.7

- Business investment 216.6 2.1 1.7 3.7 4.1

- Housing investment 79.9 3.1 -1.9 2.0 4.1

- Government investment 74.2 7.4 -1.9 -2.9 -3.5

Growth contribution from inventories 0.3 0.3 -0.4 0.3 0.0

Exports 1037.0 3.1 -0.7 1.7 4.2

- Goods exports 627.8 0.5 2.0 1.1 4.1

- Service exports 409.2 7.0 -4.8 2.7 4.5

Imports 919.2 3.3 -1.2 2.8 4.2

- Goods imports 584.4 2.4 0.4 2.8 4.1

- Service imports 334.8 4.9 -4.0 2.8 4.5

Growth contribution from net exports 0.0 0.1 0.2 -0.4 0.2

GDP 1942.6 1.3 1.2 1.5 1.8

Economic indicators 2014 2015 2016 2017

Current account, DKK bn 149.9 143.0 147.0 151.0

- % of GDP 7.7 7.2 7.2 7.2

General government balance, DKK bn 28.5 -39.8 -45.8 -30.2

- % of GDP 1.5 -2.0 -2.2 -1.4

General government debt, DKK bn 847.4 794.0 765.4 803.7

- % of GDP 43.6 40.0 37.6 38.1

Employment (annual average, thousands) 2765.1 2794.2 2825.6 2858.1

Gross unemployment (annual average, thousands) 133.9 123.7 116.1 107.3

- % of total work force (DST definition) 5.0 4.7 4.4 4.1

Oil price - USD/barrel (annual average) 99 52 50 58

House prices, % y/y 3.4 5.9 3.4 2.8

Private sector wage level, % y/y 1.3 1.5 1.9 2.2

Consumer prices, % y/y 0.6 0.4 0.9 1.8

Financial figures 06/01/2016 +3 mths +6 mths +12 mths

Lending rate, % p.a. 0.05 0.05 0.05 0.05

Certificates of deposit rate, % p.a. -0.75 -0.65 -0.65 -0.65

2-yr swap yield, % p.a. 0.18 0.15 0.20 0.20

10-yr swap yield, % p.a. 1.22 1.30 1.35 1.60

EUR/DKK 7.461 7.460 7.460 7.460

USD/DKK 6.95 7.04 6.78 6.43

% y/y

Forecast


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Sweden

It’s all about the money

The Swedish economy has improved beyond our expectations,

delivering almost 3.5% y/y GDP growth in the first three quarters of

2015. Indicators for the immediate future, including new orders,

PMI, BCI and so on, are mostly at or near cyclically high levels.

However, in some cases, there is also a notable loss of momentum.

Domestic financial conditions should nonetheless remain supportive

in our view, with a weak SEK, low rates and a fiscal policy expected

to deviate officially from the long-honoured krona-for-krona

principle (i.e. each krona of expenditure is matched exactly by a

krona of revenue).

In short, we expect GDP to continue to be strong over coming years,

with 3.4% y/y growth in 2015, 3.0% y/y in 2016 and 2.5% y/y in 2017.

This is far above our estimate of potential GDP growth of 1.5% y/y

and should imply stronger cost pressure in the business sector.

However, in our view, inflation is a long way off, as there is

considerable imbalance in the Swedish economy and the export

industry has clearly suffered from historically low, but internationally

high, rates of wage growth. We expect extreme and increasing

competition to keep focus on costs very high and, as wage and

inflation expectations remain very low, we cannot see how the

Riksbank’s very optimistic forecast will materialise without another

public expenditure induced cost push way past both Swedish and EU

basic law.

Instead, we believe the Riksbank will be forced to act again, as

inflation is already lower than it previously expected and is likely to

diminish further in the spring. Specifically, we expect the Riksbank

to cut rates by another 10bp in April (to -0.45%) and to extend its

current QE programme in government bonds.

Weak export markets but decent Swedish exports

Economic developments in some advanced economies, the lion’s share of

Swedish export markets, are finally heating up. However, notably, emerging

markets simultaneously seem to be cooling off. On average then, and

statistically speaking, Swedish export markets seem to be fine. With a keen

eye, this can be discerned in survey data as well as global trade and

production data, which seems to have stabilised after a weak start to 2015,

albeit perhaps not as unambiguously as we would have liked.

That said, speaking from a sector perspective, it is obvious to us that input

goods industries in general and energy and metals in particular have done

poorly, whereas consumer-related and intermediate goods have done

considerably better. Of the awaited upturn in global investment activity, we

have seen very little thus far, which is restraining a Swedish exports industry

heavily focused on input and investment goods.



GDP and investments growth on Swedish export

markets

Sources: National Institute for Economic and Social Research

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

Statistics Sweden (SCB). Danske Bank calculations.

Exports aligning to world market growth



Statistics Sweden (SCB). Danske Bank calculations

% y/y 2016 2017 2016 2017

GDP, calendar adjusted 3.0 2.5 2.3 -




Exports 5.5 4.6 4.9 -

Imports 5.2 4.0 4.7 -

Unemployment rate 7.2 7.1 7.4 -

Inflation 0.8 0.9 1.2 -




Sweden


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Danske Bank Market’s forecasts for the global economy, as well as indicators

of global activity, nonetheless indicate a brighter outlook for Swedish export

markets and all in all we calculate Sweden’s world market growth will

increase to 4.0% y/y in 2015 and rise by a further 4.5% y/y in both 2016 and

2017.

Thus, from a historical perspective, international demand growth is still low

and this proposition also holds true for international investment growth,

which is the relevant measure for most Swedish exporters. Thankfully,

services exports leave a significant contribution to our exports growth

forecasts throughout the forecast horizon. In 2015, we expect export growth

to be 4.6% (working day adjusted [wda]) and, as goods exports leap in 2016,

we expect exports to grow by 5.2% y/y (wda). In 2017, we expect export

growth to settle at a still-benign 4.6% y/y (wda).

Financial conditions benign, owing to inflation

Financial conditions have been unusually expansionary for several years. The

Riksbank and other central banks have cut rates to (and even below) zero and

forced down longer rates via quantitative easing programmes, keeping asset

prices elevated and exchange rates attractive in the process.

Short-term interest rates were pushed lower throughout last year, due mainly

to a steady stream of increase in Riksbank policy stimuli and we see little that

will change this situation near term. However, longer rates are higher today

than a year ago and could increase further in response to Fed tightening and a

more robust outlook for both the US and Swedish economies. This is further

underlined by an expected increase in auction volumes of dated government

bonds as demographic costs (due, inter alia, to increased migration) weigh on

Swedish public finances for a number of years.

To be fair, public finances have gradually deteriorated over a number of

years. Nonetheless, this has lent support to the economy and helped to

improve economic conditions for households and companies alike. The

structural general government deficit has therefore increased and is currently

above 1% of GDP and we expect it to stay there for the remainder of our

forecast horizon, despite strong growth.

The SEK moved sideways in KIX terms (a broad trade-weighted currency

index with variable weights) over the autumn, albeit under high volatility. As

it stands, this implies that the inflation impetus coming from a previously

weak SEK is past the peak and our FX forecasts give the Riksbank no relief.

In relation to most other major currencies, the SEK is, on trend, expected to

strengthen over coming years.

Due to a weak SEK and continued international demand growth, we expect

domestic equity markets to perform well over coming years. We estimate a

further 10-15% upside potential in stock markets short term and an alignment

to trend growth thereafter. On the housing market, a highly contested issue in

Sweden, we keep a cautious stance, as our fundamental indicators point to a

still-rich valuation of the domestic housing stock. After a visible loss of

momentum towards the end of 2015, we expect prices to stabilise and

eventually fall back somewhat, particularly in relation to incomes.

All in all, financial conditions have been stimulatory for a long period and we

expect them to remain supportive throughout most of the forecast period.

Fiscal policy veering further from target




House prices past the peak?

Sources: Nasdag OMX – KTH and Macrobond. Danske Bank

calculations

Economic 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


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GDP growth is set to decelerate after a strong 2015

At 0.8% q/q (seasonally and wda), Q3 15 GDP numbers came in somewhat

better than we expected and, together with a slight upward revision to H1,

imply that GDP growth in 2015 is almost certain to surpass 3% y/y, with our

estimate at an internationally high 3.4% y/y (wda). Looking at the details,

public consumption and services exports – in particular tourism – have

developed more strongly than we previously forecast for 2015. While the

arguably higher-than-expected public consumption is due to migration- and

integration-related costs, strong tourism revenues have confounded us for

some time. However, it seems this too could have something to do with the

large influx of migrants, as currencies and foreign account transactions

explain most of the strong increase in tourism.

In 2016, we forecast a small deceleration in GDP growth, to 3.0% y/y (wda), as

housing investments settle into a more sustainable trajectory. Underlying

conditions are still comforting, with strong population and labour force growth

and decent productivity growth, even if not at the high levels seen pre-crisis. In

2017, as we expect still-higher taxes and low income growth to take their toll

on private consumption expenditure and housing investments continue to

moderate, we estimate GDP growth will decelerate to 2.5% y/y (wda).

Investment growth should become better balanced

We estimate gross fixed capital formation – investments – has grown by circa

7% y/y (wda) in 2015. Unfortunately, the impressive numbers rest almost

exclusively with strong housing demand. Thankfully, at least from a

stabilisation policy perspective, we expect housing investments to moderate

and as our housing market outlook is probably more pessimistic than that of

most others, we expect a relatively pronounced drop in housing investment.

The investment survey produced by Statistics Sweden indicates that business

sector investments; mainly machinery and R&D investments, are increasing.

Public investments have been relatively strong over the past few years and,

while this is partly a result of fiscal stabilisation policy efforts, we expect this

to endure even beyond our forecast horizon as the need to replenish depleted

capital (infrastructure, schools, hospitals, etc.) should continue for some time

and the rapid urbanisation of the Swedish population calls for expanded

investment in public capital in metropolitan areas.

All in all, we expect investments to grow by 4.0% y/y (wda) in 2016 and to

decelerate slightly to 3.1% y/y (wda) in 2017.

Consumption is the main contributor to GDP-growth

As stated in each and every issue of our Nordic Outlook publication for the

past couple years, economic policy has been extremely expansionary. Rough

calculations suggest that economic policy (rate and tax cuts, etc.) has

increased purchasing power for the median household by far more than

SEK5,000 per month. We believe this is the main culprit for both the strong

consumption and the high savings in recent years. However, in our view, the

impetus provided by these to consumption growth has largely ended.

GDP, hours worked and productivity

Sources: National Institute for Economic Research (KI) and


Investments growth by sector (and type)

Sources: National Institute for Economic Research (KI) and

Statistics Sweden (SCB). Danske Bank calculations

Orders, industrial production and capacity

utilization

Sources: Macrobond, National Institute for Economic Research

(KI) and Statistics Sweden (SCB). Danske Bank calculations


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Sweden must rely on stronger income growth. While employment is indeed

improving, the historically low but internationally ‘too high’ hourly wage

growth over the past years has hampered competitiveness in the export

industry. As the price-taking exporting industries are paramount to the small

open economy of Sweden, we believe continued cost-cutting focus will

ensue, resulting in low wage growth over the forecast period. To summarise,

employment and hours worked will continue to expand but hourly wage

growth will be low. On balance, this should mean decent disposable income

growth over the forecast horizon but maybe not quite as strong as previously.

Simultaneously, we assume the high savings ratio over the past few years,

which we have attributed partly to demographics and partly to households

wanting to compensate for an expected lower yield, will remain high.

Hence, and in conclusion, we expect households to keep consumption growth

roughly in line with historical experiences. Nevertheless, this constitutes a

deceleration in consumption growth, from an estimated 2.3% y/y in 2015 to

2.0% y/y in 2016 and 1.6% y/y in 2017 (all adjusted for the number of

working days).

Due mainly to demographics, we expect public consumption to continue its

strong growth over the forecast horizon and beyond. Not only will the burden

of an ageing population gradually seep into the fiscal outcomes over the near

future but the current high level of immigration is also causing public

expenditure to increase, remaining high even beyond our forecast horizon.

All in all, we expect public consumption to increase by 3.3% y/y in 2016 and

2.5% y/y in 2017.

Strong productivity growth in 2015

After growing strongly for a couple of years, growth in hours worked seems

certain to recede somewhat in 2015. As we calculate GDP growth is

simultaneously strong, this implies high productivity growth in 2015, around

2.5% y/y (wda). When looking ahead, we expect the capital-intensive export

industry to continue on a stronger path of growth as the international outlook

stabilises and improves over our forecast horizon. We also expect domestic,

labour-intensive sectors to tag along, albeit at a slower pace than the neck-

breaking speed that we have seen over the past few years.

In line with international developments, Swedish productivity growth has,

nonetheless, been weak – weaker than expected – over the past few years.

Bearing in mind that post-crisis productivity has been about 1pp lower than

pre-crisis, our forecasts for productivity growth of 1.9% y/y (wda) in 2016

and 1.5% y/y (wda) in 2017 come across as strong.

Labour markets, resource utilisation and inflation

Over the past few months, the unemployment rate has decreased from almost

8% to 7%. While we still believe this to be mostly a statistical quirk related to

the participation rate, the longevity of this move has forced us to assimilate

some of these developments into our forecasts for the unemployment rate.

Thanks also to continued strong employment growth showing no signs of

abating, we expect the unemployment rate to push down below 7% towards

the end of the forecast horizon.

Disposable incomes and savings ratio

Source: SCB and NIER. Danske Bank calculations

Consumption outlook stable

Sources: KI and SCB. Danske Bank calculations

Employment plans and vacancies are improving

Sources: Macrobond, SCB and KI. Danske Bank calculations

And, albeit slowly, labour markets will ameliorate

Sources: KI and SCB. Danske Bank calculations


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Inflation has been on a very gradual upward trend over the past year.

However, as the Riksbank recently admitted, this is almost exclusively the

result of a previously weak krona. When filtering out the direct – and indirect

– effects of the weak SEK, inflation becomes much lower. This is why we

see inflation on a renewed downward trend come spring 2016.

This is also where our main analytical divergence from the Riksbank arises.

The Riksbank assumes that the current increase in inflation will be sufficient

to keep the next centralised wage round in line with the historical experience

and stoke increased wage drift (i.e. what we now refer to as the ‘rest post’ as

it contains all the non-numerical wage agreements as well) towards the

historical average. We are sceptical about this proposition, to say the least.

‘Wage drift’ has been declining for more than 15 years and is currently flat.

In our view, this is due to Swedish companies being price takers to a far

higher degree than the Riksbank has assumed and the previous two wage

rounds were concluded at levels inconsistent with Swedish companies

preserving their competitiveness. This, in turn, pushed down the profit share

and led us and both trade unions and employers to the conclusion that wage

pressure will be very moderate over coming years. We believe that the

Riksbank will soon come to this view too.

Put bluntly, we expect the three main inflation measures – CPI, CPIF and

CPIF excluding energy (the ‘F’ relating to the assumption of fixed interest

rate costs in the inflation calculations) – to increase for only a couple months

more, due to the lagged effects of the SEK and second-round effects of last

year’s low energy prices. Inflation is thenceforth set to fall anew, as we fail to

see how either wages or margins can be hiked to any extent given the

expected high competition, low resource utilisation, environment.

Riksbank action is delayed, not reversed

For months (years even) we have called for further Riksbank stimuli. To be

fair, we too have been forced to revise our inflation outlook downwards over

much of the past few years. Since the previous monetary policy expansion in

July, we have had a case of the Riksbank becoming trapped between a

fundamentally warranted strengthening of the SEK, which would put a

dampener on the economy, and, hence, lower inflation. From a Riksbank

perspective, the situation is all the more troublesome as the extensive

centralised wage negotiation round, comprising some four million workers, is

just around the corner.

A soft, but not as soft as previously thought, monetary policy stance from

major central banks has temporarily diminished the pressure on the Riksbank

to act – especially as most economic variables are currently developing in the

desired direction. However, to us, the case for further Riksbank policy action

is as strong as ever and we believe that by April, when the inflation trend is

again negative, the Riksbank will be forced to act, cutting rates by another

10bp (to -0.45%) and expanding the QE programme, or perhaps something

even more thought provoking.

Profit share remains repressed

Source: KI and SCB. Danske Bank calculations.

And inflation is entrenched below target

Sources: SCB, Riksbank and Macrobond. Danske Bank

calculations

No hike in our time

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: Statistics Sweden, Danske Bank


SEK bn (current prices)


Government consumption 1031.2 1.3 2.1 3.6 2.5

Gross fixed investment 922.0 7.5 7.3 4.3 3.1

Growth contribution from inventories 9.8 0.1 0.0 0.0 0.0

Domestic demand 3774.9 3.2 3.5 3.1 2.2

Exports 1743.7 3.5 5.0 5.5 4.6

Aggregate demand 5518.7 3.4 3.5 3.1 2.2

Imports 1600.5 6.3 4.6 5.2 4.0

Growth contribution from net exports 143.3 -1.0 0.3 0.3 0.0

GDP 3918.2 2.3 3.7 3.3 2.5

GDP, calendar adjusted 2.4 3.4 3.0 2.5


Trade balance, SEK bn 114.7 113.8 121.6 130.0

- % of GDP 2.9 2.8 2.8 2.9

Current Account, SEK bn 192.7 289.5 315.2 314.7

- % of GDP 4.9 7.0 7.3 6.9

Public sector savings, SEK bn -54.9 -43.5 -55.4 -47.6

- % of GDP -1.4 -1.1 -1.3 -1.1

Public debt ratio, % of GDP* 44.8 44.5 44.8 45.0

Unemployment, % of labour force 7.9 7.4 7.2 7.1

Hourly wages, % y/y 2.8 2.5 2.5 2.7

Consumer prices, % y/y -0.2 0.0 0.8 0.9

House prices, % y/y 6.9 11.0 -2.5 -2.5

* Maastricht definition

Financial figures +3 mths +6 mths +12 mths

Repo rate, % p.a. -0.35 -0.35 -0.45 -0.45

2-yr swap yield, % p.a. -0.16 -0.35 -0.40 -0.30

10-yr swap yield, % p.a. 1.53 1.45 1.50 1.60

EUR/SEK 9.2 9.2 9.1 8.9

USD/SEK 8.6 8.7 8.3 7.7

% y/y

Forecast

06/01/2016


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Norway

Government demand propping up growth

The short-term outlook has worsened, driven by oil-related industries

and some second-round effects.

Private demand is expected to remain weak but aggregate demand is

set to be rescued by government demand.

With oil expected to move towards USD 60/bbl in 2016, the negative

impact from lower oil investment should fade.

Some bright spots are emerging in oil-related industries.

As a result, unemployment should peak in mid-2016.

We expect Norges Bank to keep its key rate at 0.75% throughout

2016 but there is a risk of lower rates.

Together with higher oil prices and improved global risk sentiment,

we expect this to support the NOK in 2016.

Weaker short-term outlook

Growth in the Norwegian economy is holding up surprisingly well despite

dwindling activity in oil-related industries. Although growth slowed to 0.2%

q/q in Q3 due to a drop in investment at mainland firms and weak private

consumption, there was strong growth in government demand, net exports

and homebuilding. Taken together with the revision of previous data, this

means that mainland GDP now looks likely to have grown by 1.4% in 2015

as a whole, which is slightly more than we forecast in September.

The outlook is for further deterioration, with Norges Bank’s regional network

survey now pointing to roughly zero output growth over the next two

quarters. But if we include government demand, which is poorly covered by

the regional network, there is the prospect of growth in the region of 0.1-

0.2% during the period.

The survey confirms that the downturn in oil-related industries is continuing

and suggests that the disease is spreading, with retail, construction and export

firms all reporting weaker growth prospects in November. On the bright side,

the outlook for business services is better than in the August survey. This is a

relatively large sector (35% of GDP) and so the stabilisation of expectations

here may mean that the worst of the second-round effects are behind us.

Despite the somewhat weaker outlook, households are holding firm. This is

likely to relate to the four rate cuts over the past year propping up purchasing

power despite lower wage growth and higher unemployment. Household real

disposable income increased by almost 3.5% y/y in 2015. This robustness

may also be because the downturn has so far been concentrated both

sectorally and geographically.



A slowdown, not a recession

Source: Statistics Norway, Danske Bank

Moving towards zero growth

Source: Norges Bank

% y/y 2016 2017 2016 2017

GDP (mainland) 1.5 2.0 1.5 -



Gross fixed investment -1.4 1.0 -1.8 -

Exports 2.5 1.0 1.6 -

Imports 1.6 2.2 3.4 -

Unemployment (LFS) 3.3 3.3 4.0 -

Inflation 2.7 2.4 2.1 -


Norway


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Oil price key

Since the September edition of Nordic Outlook, the oil price has dropped by

almost another USD15/bbl, pushing up uncertainty and the downside risk

with regard to both oil investment and the Norwegian economy We have

therefore revised down our forecast for oil investment in 2016 from -9% to -

-12% y/y. This means that the decline in investment will continue for the rest

of the year at least, putting a damper on growth in the remainder of the

economy.

We therefore expect weak growth in private consumption. Lower real wage

growth in 2016 and a slightly smaller contribution from interest rate

reductions should limit growth in household income. Rising unemployment,

the uncertain outlook and higher homebuilding activity will also put a

damper on housing prices and, in time, housing investment. In addition, we

expect the continued uncertainty on growth prospects, coupled with trickier

funding markets, to hold back growth in private investment. We do see one

ray of light, however, in the form of manufacturing orders, which saw only a

negligible decline from Q2 to Q3 15. This goes to show that the decline has

begun to come to an end in some oil-related industries, which is likely to

relate to the awarding of contracts for the major new Johan Sverdrup oilfield.

Either way, it means that things are not all doom and gloom and may actually

turn out slightly better than the general outlook might suggest.

A weaker NOK, coupled with slightly stronger global growth, should also

boost growth in traditional exports. We therefore expect manufacturing

investment to rise in 2016. On the other hand, oil-related mainland exports

are largely in freefall, which is likely to pull in the other direction.

The main reason why the economy may yet avoid an actual recession can be

found in government demand. Based on the budget for 2016 and additional

allocations related to the influx of asylum seekers, we now expect

consumption and investment in the government sector to grow by 3.1% and

3.2%, respectively, in 2016. Not least, government investment in

infrastructure should support activity in the construction sector.

Looking further ahead, we still expect a gradual tightening of the oil market

to push oil prices back up towards USD60/bbl in early 2017, and higher still

a little further ahead. Aside from the Johan Sverdrup field, which looks set to

generate annual investment of around NOK50bn through to 2019, a number

of other relatively large projects will become profitable if oil prices improve

the way we anticipate. We therefore expect the fall in oil investment to be

short-lived rather than mark the start of a long-term decline in the Norwegian

oil sector. Internal cost cutting and lower costs for rig hire have also pulled

down breakeven levels for all projects. This means that the need for

economic reorganisation will be limited, which should decrease the downside

risk for now.

If, on the other hand, oil prices hold at current levels or lower for a number of

years, the need for change will be more dramatic. The negative consequences

would probably be offset, to some extent, by even lower interest rates and an

even weaker NOK and there is still plenty of fiscal leeway. However, if the

downturn in oil-related industries continues into 2017, there would be reason

to expect unemployment to climb much higher than in our main scenario.

Negative oil shock

Source: Norges Bank

Oil price takes another tumble

Source: Macrobond Financial

Higher inflation hurting real income growth


Fiscal policy supporting growth

Source: Statistics Norway


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Inflation higher than expected

Core inflation has surprised on the upside in recent months, with the annual

rate up at 3.1% in November due to faster growth in prices for imported

goods. It appears that the pass-through from the depreciation of the NOK to

import prices has been both stronger and quicker than before. The stronger

pass-through may be because the global deflationary pressures of the past 15

years are now fading or even reversing.

The faster pass-through from exchange rates to prices in the stores could be

down to many factors. For one, the NOK has now been in decline for so long

(two years) that both importers and retailers no longer expect it to be only

temporary and rapidly reverse as seen in the past. We have also seen margins

in the retail trade come under pressure in recent years.

Either way, a faster pass-through from exchange rates to retail prices only

means that imported inflation will arrive earlier than expected, and that more

of the NOK depreciation has already been built into prices.

To date, there are no signs of the weaker NOK leading to broader inflationary

pressures. Domestic inflation actually slowed somewhat during the course of

2015 and we expect the underlying price drivers – lower wage growth and

higher productivity growth – to dampen domestic inflation further. We

therefore expect core inflation to peak around current levels over the summer

before gradually receding as the exchange rate effects fade and eventually

reverse.

Low interest rates

As expected, Norges Bank cut its key rate by 0.25pp in September but left it

alone in December. The December monetary policy report did, however,

signal that there will most likely be another cut before the summer, perhaps

as early as March. There is also a chance of a further reduction in H2 16.

However, we can see that Norges Bank is now gradually shifting its position

on the exchange rate and inflation. While a weakening NOK was previously

part of the solution, now a weak NOK will do. Meanwhile, the increase in

import prices has surprised the central bank, which may be increasingly

concerned about the effect on real wages this year. Given our slightly less

pessimistic view of developments, we do not expect interest rates to be

lowered at the next crossroads in March, although there is, of course, still a

chance of this happening.

Since the price of oil collapsed in autumn 2015, there has been a close

correlation between oil prices and the NOK. This is, of course, a result of

lower oil prices undermining Norway's terms of trade (export prices relative

to import prices), which implies a depreciation of the (real) exchange rate. At

the same time, the decline in oil prices has had an impact on short-term

interest rate expectations through the negative effect on oil investment and, as

a result, the economy.

Given our expectation of stronger global growth, and so an increased appetite

for risk, higher oil prices and a slightly more aggressive central bank, we

expect to see a much stronger NOK in 2016. This is supported by our long-

term model, which suggests that the NOK is currently more than weak

enough to compensate for the stronger growth in costs in Norway since 2003.

Imported prices pushing up core inflation…


..with more in the pipeline


Interest rates close to bottom

Source: Norges Bank, Danske Bank

Close correlation between NOK and oil price



Nordic Outlook

Norway: Forecast at a glance



NOK bn (current prices)


Public consumption 691.5 2.9 2.5 3.1 2.6

Gross fixed investment 734.0 -2.7 -3.2 -1.4 1.0

Petroleum activities 215.3 -2.8 -14.0 -12.0 -2.5

Mainland Norway 518.7 1.6 1.2 1.9 1.4

Dwellings 151.4 -1.5 3.0 3.0 -1.0

Enterprises 223.6 -0.4 -2.0 0.4 2.8

General government 143.7 7.3 4.3 3.2 2.3

Mainland demand 2490.7 2.0 2.0 2.3 2.3

Growth contribution from stockbuilding 0.5 0.1 -0.3 0.0

Exports 1219.2 2.2 4.1 2.5 1.0

Crude oil and natural gas 551.0 1.9 2.2 1.0 1.0

Traditional goods 342.9 2.5 5.5 2.5 2.4

Imports 929.6 1.5 1.1 1.6 2.2

Traditional goods 544.0 1.0 1.8 2.2 2.2

GDP 3154.1 2.2 1.8 1.3 1.5

GDP Mainland Norway 2524.9 2.3 1.4 1.5 2.0


Employment, % y/y 1.1 0.6 0.7 1.0

Unemployment (NAV), % 2.8 3.0 3.3 3.3

Annual wages, % y/y 3.1 2.7 2.8 3.0

Consumer prices, % y/y 2.0 2.2 2.7 2.4

House prices, % y/y - 7.0 2.0 2.0

Core inflation 2.4 2.7 2.9 2.5

Financial figures 06/01/2016 +3 mths +6 mths +12 mths

Repo rate, % p.a. 0.75 0.75 0.75 0.75

2-yr swap yield, % p.a. 0.87 1.05 1.10 1.10

10-yr swap yield, % p.a. 1.78 1.90 2.00 2.30

EUR/NOK 9.60 9.40 9.25 8.80

USD/NOK 8.95 8.87 8.41 7.59

Forecast

% y/y


Nordic Outlook

Finland Economic melancholy to continue We expect Finnish GDP to stop contracting in 2015 but there is

unlikely to be any growth either. Fuelled by exports and a modest

investment recovery, we forecast GDP will rise by 0.6% in 2016 and

1.1% in 2017. We believe the impact of Russia will wane and we

continue to expect modest growth in exports to western markets on

the back of pent-up investment activity.

The outlook for domestic demand continues to be dull. Household

purchasing power remains weak due to high unemployment and

moderate wage agreements. A fall in consumer prices boosted private

consumption in early 2015 but the impact is unlikely to last into 2016.

Investment activity is showing the first signs of bottoming, especially

in construction. The housing market outlook is weak but stable.

Prime Minister Juha Sipilä’s government is reform oriented and

aims to adjust public finances by EUR10bn (5% of GDP) in four

years. The government has also announced wide-reaching labour

market reforms, which should produce an internal devaluation by

lowering unit labour costs by 5%. These measures have been met

with strong opposition from labour unions. There is a risk of a strike

wave, which could make the situation even worse.

Finland has already lost its status as a triple-AAA country and

further downgrades are possible. In our main scenario, the debt-to-

GDP ratio will reach nearly 70% before peaking. The new budget

and reform plans may boost confidence in Finnish creditworthiness

but reforms will take time to implement.

Economic melancholy in Finland to continue

The Finnish economy contracted for three consecutive years in 2012-14. The

level of GDP is still over 7% lower than before the recession in 2008. Finland is

the third worst economic performer in the EU after Greece and Cyprus. In 2015,

GDP should stop contracting but there is unlikely to be any growth either.

Since the summer, the economic situation has become murkier again. According

to preliminary data, GDP contracted by 0.5% q/q and 0.2% y/y in Q3 15. The

reported figure was once again among the slowest in the EU. The economy is

crawling well below the potential output level and the recovery in the euro area

has not reached Finland yet. Private consumption surprised positively and grew

by 1.4% y/y. Exports and investments are still lagging.

The most recent data does not indicate that the situation will change soon.

Industrial production fell by 0.8% y/y and new orders fell by almost 10% y/y in

October. Exports have continued to decrease, even if Finland’s main trading

partners are growing decently. The situation in the labour market has stabilised

at least temporarily and the trend in unemployment has stopped increasing.

We believe GDP in 2015 is likely to be flat but we expect net exports and

investment to lead GDP to a modest positive trend in 2016. The development in

exports has been very disappointing and Finland has lost its market shares in the


Source: Danske Bank

Lost decade in Finland�s GDP

Source: BEA, Eurostat, Statistics Finland

% y/y 2016 2017 2016 2017

GDP 0.6 1.1 0.8 -


Public consumption -0.2 -0.5 -0.5 -


Exports 2.0 4.0 3.0 -

Imports 2.0 3.5 2.5 -

Unemployment rate 9.8 9.5 10.0 -

Inflation 1.0 1.2 1.0 -



Finland



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global trade. However, in 2016, we expect the European recovery to be more

investment oriented, which should benefit Finland’s exports. Lower energy

prices, a weaker euro and central bank stimulus also support the Finnish

economy and even the situation in Russia is stabilising. The strength seen in

private consumption is not sustainable and we expect it to grow only very

modestly in 2016 and 2017. Investments should recover a bit led by

construction. All in all, we expect Finnish GDP to grow by 0.6% in 2016 and

1.1% in 2017.

Chances for consumption growth in short supply

The ability and willingness of households to consume is constricted by

several factors. Unemployment is high and real wage growth has been weak.

Consumer confidence has started to decline again after the surprising increase

seen in the spring. Taking into account these factors, private consumption

was surprisingly strong in Q3 and grew by 0.8 % q/q and 1.4 % y/y.

However, we do not expect consumption to grow that fast in the future.

Unemployment is growing and we forecast it to reach 9.8 % next year. Real

wage and pension growth will also be subdued. The government is trying to

boost Finland’s competitiveness by cutting unit labour costs. This has created

a quarrelsome situation in the labour market and, worst case, this could

induce a strike wave, which would make the situation even worse.

On the positive side, low interest rates and negative inflation have been

supporting consumers. In February 2015, Finnish banks started to grant

housing loan holders one year free of amortisation, which has also had a

small positive effect on consumption.

The Russian slowdown has had several implications for Finland. Russians are

by far the largest group of foreign citizens visiting Finland. In particular, the

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

Russian consumers. Most recent statistics show that overnight stays by

Russian tourists have collapsed by almost 50% from the peak level of 2013.

However, the economic situation in Russia is bottoming, the negative effect

is probably behind us and should turn positive in 2016.

The outlook for private consumption in 2015 and 2016 is weak but stable.

Growth in retail trade has been more or less flat recently. The registration of

new cars has picked up but this could be because of the 1,500 euro wrecking

fee introduced this July. Household purchasing power is likely to remain flat

at best due to unemployment and moderate wage agreements. In our view,

the planned budget cuts will also hit purchasing power. However, low

interest rates and moderate inflation will help to sustain activity. We expect

private consumption to increase modestly by 0.4% in 2015 and 0.5% 2016.

Could exports become the economy’s engine again?

Among euro area economies, Finland is a rare example of a country that has

not seen much real growth in exports over the past three years. The volume

of exports is about 20% below its 2008 level, even if the global economy has

been recovering nicely. The export of goods has suffered from the descent of

Nokia but the development has been weak even without this factor. Falling

demand for newsprint is a chronic issue but the forest industry strives to

restructure and invent. Exports have also suffered from a high share of

investment goods, which have been in short demand globally during this

recovery. Finland’s worsened cost competitiveness also plays a role here.

Consumer confidence below long-term average

Source: Statistics Finland, European Commission (DG ECFIN)

Earnings growth very moderate

Source: Statistics Finland


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Finland has seen its price competitiveness weaken compared with Germany

and Sweden over the past 10 years. Unit labour costs rose because of large

wage increases between 2008 and 2012. Finland’s relative position is slowly

improving due to wage moderation in Finland: higher wage rises in Germany

and ‘creative destruction’ making output more efficient.

Also, the most recent data on exports is murky. In Q3 15, exports of goods

and services decreased by 3.4% y/y and 0.7% q/q. Exports to Germany and

the US have held up quite well but exports to Sweden, the UK and, in

particular, Russia have decreased. The relative share of Russia has decreased

dramatically due to the recession in Russia and the US has taken the position

as the third-largest export market.

The government is seeking ways to achieve a faster internal devaluation by

reducing unit labour costs, but the process has been painful. The government

failed to push through a social contract in which annual working hours would

have been extended. A new plan has been announced including wide-

reaching labour market reforms, which would produce an internal

devaluation by lowering unit labour costs by 5%. The measures include

capping paid holidays, no pay on the first day of sick leave and lower

employer social security contributions. These measures have met with strong

opposition from labour unions and strikes are likely. If the plan is

successfully implemented, the impact will be felt into 2017 and beyond.

Meanwhile, the outlook depends largely on demand from main markets.

The outlook for the main Finnish export markets has remained relatively

good (Germany, Sweden, the US) and even in Russia the worst seems to be

over. The weakening of the euro should help exports to the US. If investment

activity expands in the euro area –as we expect - Finland should benefit.

Assuming a continued recovery in the euro area and boosting pent-up

investment activity, we expect exports to rise by 2% in 2016 and 4% in 2017.

If Finland regains competitiveness through lower labour costs, exports could

grow faster in the medium term. Therefore, exports could still be the

economy’s engine but unfortunately a very inefficient one.

Investment slump erodes future growth potential

Due to the prolonged recession, investments have been subdued in Finland

for some time. The year 2015 will be the third consecutive one for

investments to decrease. The volume of investments in Q3 stood at the same

level as in 2000. This slump in investments is eroding future growth

potential.

In Q3 15, investments fell by 4% y/y. Both private and public investments

diminished. All the subcomponents, construction investments, machinery,

equipment and transport equipment investments and R&D declined. One can

thus easily conclude that the slump in investments is very wide-ranging in the

economy.

However, even if the overall picture in investments is bleak, there are some

early signs of recovery, especially in construction. The investment enquiry

conducted by the Confederation of Finnish Industries showed some positive

signals in the investment intensions of Finnish companies. The downfall in

construction seems to have bottomed and confidence among construction

companies has increased, already being above its long-term average.

Export expectations are high

Source: Statistics Finland, European Commission (DG ECFIN)

Finland’s exports are lagging

Source: Netherlands Bureau for Economic Policy Analysis (CPB),

Statistics Finland

Investments in a slump

Source: Statistics Sweden, German Federal Statistical Office,

Eurostat, Statistics Finland, Italian National Institute of Statistics

(Istat)


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Looking ahead, we expect investments to recover modestly by 2% in 2016

and 3.5% in 2017. Europe’s recovery is likely to be more investment driven,

which should benefit Finland’s exports and create productive investment

needs. Government intentions to ease the business climate for companies

could gradually stimulate investments.

Early signs of stabilisation in the labour market

In the early stage of the recession, the unemployment rate increased quite

slowly but in 2015 the increase in unemployment accelerated. The latest

figures, however, show some stabilisation and the trend in unemployment

rate has stopped increasing. The seasonally-adjusted unemployment rate

declined to 9.3% in November. During the Finnish depression in the early

1990s, the unemployment rate rose to almost 20%, so those figures are still

far away. Compared with the euro area, unemployment in Finland is lower

than the euro area’s average even though economic development in Finland

has been poor.

The official figure understates poor labour market conditions, as many

jobseekers have become discouraged and stopped looking for work. This can

be seen in the increasing share of inactive population over the past few years.

Declining employment numbers, the scarcity of new vacancies and limited

wage pressure indicate that the weakness is due to inadequate demand.

What is worrying is that the number of long-term unemployed has increased,

indicating that an increasing number of those unemployed have been without

a job for at least 12 months. The number of long-term unemployed is the

highest since 1998. For them it is harder to find a new job and we believe

many of them will stay out of the workforce forever.

We estimate the average unemployment rate has been 9.4% in 2015 and will

increase to 9.8% in 2016. After that, the unemployment rate could start to

decline slowly, assuming that the economy starts to recover.

Housing market: weak but stable

The overall situation in the housing market in Finland has been weak for a

couple of years and housing prices have remained more or less at the same

level during that period. This development is new for many as prices have

been increasing relatively evenly since the 1990s. High unemployment, a

slowing economy and weak purchasing power are the main factors behind the

weakness. On the other hand, record-low interest rates and declining margins

have supported the housing market.

However, there are signs that the situation is picking up a little. In Q3 15,

prices for old dwellings were flat q/q. Preliminary figures from October show

that prices rose by 1.1% m/m. Also, the number of building permits have

been increasing. On average, we estimate housing prices declined by 0.5% in

2015 before starting to increase modestly by 0.5% this year. The

development in different parts of Finland continues to be very fragmented.

There will be no permanent improvement in the housing market as long as

unemployment is rising. Overall, the situation in the housing market is quite

weak but stable.

Unemployment below euro area average

Source: Eurostat, Statistics Finland

Housing market weak but stable



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Although it has been slowly increasing, the debt-to-income ratio of Finnish

households 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. The incentives to buy a house are falling as the share of deductibility

of housing loan interests in taxation will fall gradually over the next four years.

Credit ratings under threat

Finland’s public debt has grown rapidly over the past few years. General

government debt (EDP debt) was around EUR128bn at the end of Q3. The debt

is set to exceed the 60% limit in 2015 – for the first time during Finland’s EU

membership. We expect debt to continue accumulating and to reach 67% in

2017. Even if the level of debt-to-GDP ratio is moderate by international

comparisons, the growth in it is worrisome. The debt ratio has almost doubled

during the recession since 2008. The government’s aim to stop the debt ratio

from growing is a very challenging task.

Also, the budget balance has deteriorated during the recession and 2015 will be

the seventh consecutive year for the budget to be in deficit. The EU’s 3%

budget deficit limit looks set to be broken in 2015 and 2016.

The conservative three-party government, led by Prime Minister Juha Sipilä, is

reform oriented and fiscal policy will be tightened significantly. The

government aims to adjust public finances by a total of EUR10bn with a

combination of short-term and long-term measures: expenditure cuts

(EUR4bn), structural reforms (EUR4bn) and growth-enhancing investments

(EUR2bn). An investment package worth EUR1.6bn should soften the negative

blow from frontloaded expenditure cuts. Reforms in the production of public

services and the labour market are essential for sustainability of public finances

and for raising the long-term growth potential. Bank of Finland economists

have recently estimated that without reforms potential growth could get stuck

close to 1% per annum.

The government also aims to achieve a leap in competitiveness. It has

announced wide-reaching labour market reforms, which would produce an

internal devaluation by lowering unit labour costs by 5%. The measures

include capping paid holidays, no pay on the first day of sick leave and lower

employer social security contributions. These measures have met with strong

opposition from labour unions. At worst, labour disputes could derail a

nascent recovery. At best, the Finnish economy could regain competitiveness

and potential growth rises.

S&P has already downgraded Finland’s sovereign rating to AA+. Moody’s

and Fitch still rate Finland AAA but have placed it on a negative outlook. As

growth will be slow and the debt-to-GDP ratio is set to rise, we expect ratings

to be cut further and it is possible that Finland will lose its AAA ratings.

Despite a potential rating downgrade, we do not see a significant increase in

government borrowing costs. Finland still has a good reputation and the spreads

to German government bond yield are still low – even if there has been a small

increase in the spread since the summer.

Debt level inching up in the absence of growth


Government bond yields



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Finland: Forecast at a glance

Source: Statistics Finland, Danske Bank


EUR bn (current prices)

GDP 205.2 -0.4 0.0 0.6 1.1

Imports 79.4 0.0 -1.5 2.0 3.5

Exports 77.8 -0.7 -1.0 2.0 4.0

Consumption 164.5 0.3 0.8 0.2 0.2

- Private 113.6 0.5 1.1 0.4 0.5

- Public 50.9 -0.2 0.0 -0.2 -0.5

Investments 41.6 -3.3 -2.5 2.0 3.5


Unemployment rate, % 8.7 9.4 9.8 9.5

Earnings, % y/y 1.4 1.1 1.1 0.8

Inflation, % y/y 1.0 -0.2 1.0 1.2

Housing prices, % y/y -0.6 -0.5 0.5 1.0

Current account, EUR bn -1.8 0.5 0.5 1.0

- % of GDP -0.9 0.2 0.2 0.5

Public deficit, % of GDP -3.1 -3.4 -3.1 -2.8

Public debt/GDP, % of GDP 59.0 62.7 65.0 67.0

Financial figures +3 mths +6 mths +12 mths

Repo rate, % p.a. 0.05 0.05 0.05 0.05

2-yr swap yield, % p.a. -0.08 -0.05 0.00 0.00

10-yr swap yield, % p.a. 0.88 0.95 1.05 1.35

EUR/USD 1.07 1.06 1.10 1.16

% y/y

06/01/2016

Forecast


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Global overview

Bottom in global manufacturing cycle

We look for global growth to recover in early 2016 as the

manufacturing cycle is expected to turn higher. A turn in the global

inventory cycle, a moderate recovery in Chinese manufacturing and

robust consumption growth in the US and Europe are likely to

underpin higher manufacturing activity.

We see the US recovery continuing at a cruising speed of around

2½% growth in the coming years whereas we look for the euro area

to move a notch higher to just below 2% growth. Chinese growth is

projected to hover just above 6.5%.

Inflation rates in both the US and the euro area should move higher

over the coming quarters as base effects from last year’s sharp

decline in oil prices kick in.

We expect the ECB monetary easing cycle to be over, while the Fed is

expected to surprise markets and raise rates three times over the next

12 months. We see more monetary easing coming in China with the

PBoC cutting rates further to ease the burden from high debt levels.

The main risk to our scenario is a further decline in oil prices that

could trigger a new round of EM turmoil and potentially tip EM into

a full blown crisis due to high corporate debt levels and bankruptcies

in the commodity sector.

US: growth to stay around 2.25-2.50% in the coming

years

We expect GDP growth to continue in the range 2.25%-2.50% the

coming years mainly driven by domestic demand as net exports continue to

be a drag on the economy due to the strong USD. While we expect growth in

private consumption to slow a bit, we expect this to be partly offset by higher

private investments. The reason we believe that investments will increase is

that the labour supply is becoming increasingly scarce and expensive over the

forecast horizon and thus we anticipate that investments and productivity will

begin to pick up. As we expect the housing market to resume its recovery due

to a combination of still low interest rates and higher employment, we also

anticipate more residential investments.

Global GDP outlook

Source: Danske Bank

We look for a bottom in global manufacturing

Source: Bloomberg, Danske Bank

We expect GDP growth above trend in the coming

years

Source: BEA, Danske Bank

% y/yD anske

B ank C o nsensus

D anske

B ank C o nsensus

USA 2.5 2.5 2.4 2.5

Euro area 1.8 1.7 1.9 1.8

Japan 1.1 1.1 0.7 0.7

China 6.7 6.5 6.6 6.3

Global 3.6 3.5 3.6 3.8

2016 2017


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The base effects from the drop in commodity prices in H2 14 will begin to

drop out of the inflation figures now. From now and to January next year,

PCE inflation is expected to increase from 0.2% currently to 1.3%. We

expect PCE inflation to stay in the range 1.00%-1.30% in H1 16. In H2 16 we

expect PCE inflation to increase slightly as we expect a small rebound in oil

and food prices. PCE inflation is estimated to reach the Fed’s target of

2.0% in January 2017. With respect to PCE core inflation we estimate it

will increase slowly over the forecast horizon towards 2% as the effects from

the lower commodity prices and strong USD fade and increasing wage

inflation begins to feed into consumer prices.

The US labour market did well last year which was the key reason why Fed

at its December meeting increased the Fed funds target rate for the first time

since 2006 despite low inflation. Employment increased by more than

200,000 per month on average last year leading to a decline in the

unemployment rate from 5.7% in January to 5.0% in November. As we

expect the output gap to continue closing, we expect the labour market to

tighten further although probably at a slower pace as the slack in the labour

market has diminished significantly this year. We expect the unemployment

rate to hit 4.6% at year-end 2016 and 4.4% at year-end 2017 assuming

that the labour force grows by approximately 150,000 per month on average

both years (see also Research US: Don’t expect a rebound in the

participation rate, 27 November 2015). If it turns out that we are too

optimistic on the participation rate, the unemployment rate will fall more than

in our base case.

Wage growth has been subdued for a long time despite the tightening in

the labour market but now wage growth finally seems to have taken off.

The UK experience is that wage growth can be subdued for a long time and

suddenly increase very quickly when the unemployment rate reaches the

NAIRU. Wage growth in the US as measured by average hourly earnings has

begun to show the same signs as illustrated in the chart to the right. The

increasing wage inflation means that the underlying inflation pressure in the

US is also increasing and is the main reason why we think the markets

underestimate the number of further Fed hikes the next couple of years.

The Fed increased rates for the first time in 9 years in December and will

continue to attract attention in 2016 as we find out how gradually the Fed

moves on after the lift-off. We expect a ‘hockey stick’ hiking cycle over

the next two years with three hikes in 2016 and four hikes in 2017, i.e.

with an increasing hiking pace. The reason is that we believe the Fed would

like to monitor the effect of the first hike on the real economy and financial

conditions in general before hiking further, but at some point must begin to

move more quickly before the labour market gets too hot.

Core inflation to move slowly towards the Fed’s

2% target

Source: BEA, Danske Bank

Unemployment rate to fall below NAIRU in Q1

next year

Source: BLS, Danske Bank

Wage inflation is increasing

Source: BLS, Danske Bank

http://danskeresearch.danskebank.com/abo/ResearchUSparticipationrate271115/$file/ResearchUS_participationrate_271115.pdf

http://danskeresearch.danskebank.com/abo/ResearchUSparticipationrate271115/$file/ResearchUS_participationrate_271115.pdf


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Euro area: recovery strengthening again

We expect GDP growth to reaccelerate after the soft patch during mid-

2015. Investments in particular are set to have a larger positive contribution to

economic activity as they are supported by the lagged impact from higher

consumption and cheaper and more accessible bank lending. A longer period

of less uncertainty could also imply that pent-up demand for investments is

unleashed. Growth in private consumption remains solid and continues to be

supported by labour market progress, but we expect it to weaken going

forward, as the boost from the oil price decline fades. Export growth should

fade a bit as the demand from the Chinese manufacturing sector is weaker and

there is less tailwind from the euro which in 2016, in our view, will be under

appreciation pressure.

Based on this, we have revised our GDP growth forecast slightly higher to

1.5% in 2015, 1.8% in 2016 and 1.9% in 2017. We are 0.1pp above

consensus in both 2016 and 2017.

Unemployment rate approaching the structural level

The unemployment rate is continuing to fall quickly towards the high

structural level. The latest unemployment print for October showed an

unemployment rate of 10.7%, which is not far from the estimate of the

structural rate of 9.9%. The experience from the UK and the US is that when

the unemployment rate approaches its structural level, the upward pressure on

wages returns. We expect the unemployment rate to reach this level at end-

2016, but as seen in the US, the structural unemployment rate could be

lowered towards pre-crisis levels of 9.0% when the actual unemployment rate

approaches it.

Inflation to rise sharply – ECB is too optimistic on core

inflation

Inflation continues to balance around the deflation limit, but it is set to

rise sharply over the next two months. In January, we estimate it will reach

0.7% y/y, up from 0.2% y/y in December. The increase is mainly due to a

much smaller drag from energy price inflation as it is supported by positive

base effects due to the oil-price drop last year. Core inflation is also set to

rise somewhat in the near term, but we do not look for a significant

increase. The lagged impact from the euro appreciation in mid-2015 together

with the low commodity prices should remain a headwind to goods price

inflation. At the same time slack in the labour market should keep service

price inflation subdued during 2016 until higher wage pressure starts to

become supportive.

ECB disappointed in December, but delivered the end of

easing

The ECB delivered a ‘menu’ of monetary policy easing at the meeting in

December, but compared to markets (and our) expectations, the ‘menu’

was too ‘light’, see Draghi disappoints with a ‘light menu’ – but enough to

mark end of easing, 3 December 2015.

We believe the move from the ECB marked the end of easing, although the

ECB did not deliver as aggressive easing as we had looked for. First of all, the

bar for easing seems higher as Draghi expressed confidence that the ECB will

reach its inflation objective while he seemed satisfied about how the easing

Investments to support a stronger recovery going

forward

Source: Eurostat, Danske Bank

Unemployment approaches NAIRU

Source: BLS, ECB, European Commission, Eurostat, Danske Bank

Inflation to rise sharply near-term

Source: Eurostat, Danske Bank

http://danskeanalyse.danskebank.dk/abo/FlashCommentDraghi031215/$file/FlashComment_Draghi_031215.pdf

http://danskeanalyse.danskebank.dk/abo/FlashCommentDraghi031215/$file/FlashComment_Draghi_031215.pdf


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had supported growth and inflation. Secondly, our main scenario of higher

inflation, a stronger recovery and an unemployment rate close to its structural

level supports the view that the ECB will not ease again.

The risk to our expectation of the end of easing is that the ECB will

eventually be forced to lower its core inflation forecast, which, in our

view, is still too optimistic. Related to this, the ECB will be challenged by

euro appreciation pressure and the negative impact to inflation, while there is

also a risk that inflation expectations will decline and signal de-anchored

expectations accompanied by higher real rates.

China: moderate recovery but challenges remain

Following a sharp slowdown of Chinese manufacturing over the past

year we look for a moderate recovery over the coming quarters. PMI data

suggests that inventories have been cut significantly over the past months

which means production is running below actual demand. As inventories get

run down we look for production growth to rise moderately. Higher credit

growth should be reflected in a moderate upturn in infrastructure investments

over the coming quarters. A rise in home sales is also expected to lead to

higher construction activity once a high inventory of houses has been

depleted. We expect to see growth in real estate investment improve during

H1 16. Export data also suggests that the sharp slowdown seen over the past

year has come to a halt and foreign sales have improved somewhat in recent

months.

We look for Chinese growth to average 6.7% in 2016 followed by 6.6%

in 2017. This is broadly in line with the new growth target spelled out in the

five-year plan for 2016-2020 which states that growth should be at least 6.5%

over that time frame.

Rebalancing to continue

While China is expected to continue its soft landing in the overall

economy, it will continue to be felt as a hard landing for large parts of

the world. China is going through a rapid transition from investment- and

export-led growth to consumption-driven growth. This leads to a big change

in the composition of growth across sectors. Old industries such as the steel

industry and cement industry are suffering from severe overcapacity and

declining activity levels whereas high-tech industry and the service sector are

seeing robust growth rates. It means that countries that are exposed to the old

Chinese manufacturing sectors – such as Brazil and other exporters of

commodities to China – will continue to suffer. On the other hand countries

that are mostly selling to consumers, the service sector and sectors focused

on environmental protection will continue to see a market with decent growth

in China.

Moderate recovery in Chinese manufacturing to

support stocks

Source: Macrobond Financial, Bloomberg, Danske Bank

Money growth underpins expectation of soft

landing

Source: PBoC, China National Bureau of Statistics, Danske Bank

Bottom in China PMI

Source: Markit Economics, Danske Bank


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Nordic Outlook

China to continue easing, pressure mounting on CNY

Apart from overcapacity in many of the ‘old’ sectors, China also struggles

with a high debt level and a need for deleveraging. In order to ease the debt

burden, we believe the People’s Bank of China (PBoC) will reduce

interest rates by 75bp over the next couple of quarters. We also look for a

further decline in the reserve requirement ratio by 100bp over the next six

months. Chinese banks suffer from a rise in non-performing loans and we

believe further monetary easing is necessary to mitigate a tightening of credit

standards as a consequence of deteriorating asset quality in the banks.

The CNY has come under renewed pressure again lately stemming from

mainly two factors: First, speculation has increased that China will now

devalue the CNY after it kept it steady ahead of the inclusion in the SDR on

30 November this year. Second, with expectations of the Fed hiking rates

over the next year while the PBoC is expected to cut rates, relative monetary

policy speaks in favour of a higher USD/CNY.

However, while we look for a moderate weakening of the CNY over the

next year, we do not expect China to allow a big devaluation. The PBoC

will likely have to intervene quite significantly in the coming months to show

its hand once again and underline that it will not tolerate a big depreciation.

A devaluation of the CNY would be more likely to hurt the economy than

benefit it, as it would lead to sharp capital outflows and probably an even

bigger depreciation of other Asian currencies. This would be destabilising for

both China and the world economy.

China expected to cut rates further over coming

quarters

Source: PBoC, Danske Bank


No

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Nordic Outlook

Economic forecast

Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

Macro forecast, Scandinavia

Denmark 2015 1.2 2.2 1.0 0.2 -0.4 -0.7 -1.2 0.4 4.7 -2.0 40.0 7.22016 1.5 2.3 0.6 2.1 0.3 1.7 2.8 0.9 4.4 -2.2 37.6 7.22017 1.8 2.2 0.1 2.7 0.0 4.2 4.2 1.8 4.1 -1.4 38.1 7.2

Sweden 2015 3.7 2.4 2.1 7.3 0.0 5.0 4.6 0.0 7.4 -1.1 44.5 7.02016 3.3 2.1 3.6 4.3 0.0 5.5 5.2 0.8 7.2 -1.3 44.8 7.32017 2.5 1.6 2.5 3.1 0.0 4.6 4.0 0.9 7.1 -1.1 45.0 6.9

Norway 2015 1.4 2.3 2.5 -3.2 0.1 4.1 1.1 2.2 3.0 - - -2016 1.5 1.6 3.1 -1.4 -0.3 2.5 1.6 2.7 3.3 - - -2017 2.0 2.0 2.6 1.0 0.0 1.0 2.2 2.4 3.3 - - -

Macro forecast, Euroland

Euroland 2015 1.5 1.7 1.5 2.1 - 4.9 5.2 0.0 10.9 -2.1 91.8 3.72016 1.8 1.3 1.5 2.3 - 4.2 4.2 0.7 10.2 -1.7 90.6 3.62017 1.9 1.2 1.1 4.3 - 4.3 4.5 1.4 9.4 -1.5 89.5 3.4

Germany 2015 1.5 1.9 2.5 1.7 - 5.2 5.6 0.1 4.6 0.9 71.5 8.72016 2.3 1.6 2.1 4.3 - 4.6 5.0 0.8 4.5 0.5 68.2 8.62017 2.3 1.6 1.0 6.1 - 4.5 5.3 1.7 4.5 0.4 65.0 8.4

France 2015 1.1 1.5 1.5 -0.2 - 5.6 5.7 0.1 10.6 -3.8 96.4 -1.32016 1.1 1.0 0.9 2.2 - 3.4 4.3 0.5 10.6 -3.4 97.1 -1.62017 1.4 1.0 0.8 4.0 - 3.5 4.1 1.3 10.3 -3.0 97.3 -2.2

Italy 2015 0.7 0.9 0.3 0.6 - 4.0 5.4 0.1 11.9 -2.6 133.1 2.22016 1.3 1.0 0.4 2.7 - 3.5 3.9 0.8 10.6 -2.2 132.0 1.92017 1.4 0.8 0.4 4.1 - 4.2 4.1 1.5 10.0 -1.5 129.5 1.9

Spain 2015 3.2 3.0 2.4 6.3 - 6.0 7.8 -0.6 22.2 -4.5 100.4 1.42016 2.8 2.5 0.9 6.2 - 5.4 6.4 0.0 20.5 -3.5 101.4 1.32017 2.4 1.8 0.4 6.1 - 4.2 4.9 1.3 19.0 -2.5 100.4 1.4

Finland 2015 0.0 1.1 0.0 -2.5 - -1.0 -1.5 -0.2 9.4 -3.4 62.7 0.22016 0.6 0.4 -0.2 2.0 - 2.0 2.0 1.0 9.8 -3.1 65.0 0.22017 1.1 0.5 -0.5 3.5 - 4.0 3.5 1.2 9.5 -2.8 67.0 0.5

Macro forecast, Global

USA 2015 2.5 3.1 0.8 4.3 0.2 1.4 5.2 0.2 5.3 -4.1 101.0 -2.32016 2.5 2.8 1.0 4.5 -0.2 3.9 4.2 1.6 4.8 -2.9 104.0 -2.52017 2.4 2.2 0.8 5.0 0.0 4.9 5.0 2.4 4.5 -2.6 103.0 -2.6

China 2015 6.8 - - - - - - 1.7 4.2 -0.8 41.8 2.42016 6.7 - - - - - - 2.3 4.2 -0.8 42.8 2.32017 6.6 - - - - - - 2.0 4.3 -1.0 43.5 2.5

UK 2015 2.2 2.9 1.6 4.5 -0.4 5.3 5.7 0.0 5.4 -3.9 87.1 -4.52016 2.4 3.1 0.8 4.4 -0.2 3.1 3.6 0.7 5.1 -2.5 86.5 -4.02017 2.3 2.6 0.1 4.3 0.0 4.1 4.2 1.9 4.8 -1.3 84.8 -3.5

Year GDP 1

Private

cons.1

Public

cons.1

Fixed

inv.1

Stock

build.2

Current

acc.4

Im-

ports1

Public

debt4

Public

budget4

Ex-

ports1

Infla-

tion1

Unem-

ploym.3

Ex-

ports1

Im-

ports1

Infla-

tion1

Unem-

ploym.3

Public

budget4

Current

acc.4

Public

debt4

Unem-

ploym.3

Public

budget4

Public

debt4

Year

Year GDP 1

Private

cons.1

Public

cons.1

Fixed

inv.1

Stock

build.2

Current

acc.4

GDP 1

Private

cons.1

Public

cons.1

Fixed

inv.1

Stock

build.2

Ex-

ports1

Im-

ports1

Infla-

tion1


No

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utlo

ok

Nordic Outlook

Financial forecast

Source: Danske Bank

Bond and money markets

Currencyvs USD

Currencyvs DKK

USD 06-Jan - 695.4

+3m - 703.8

+6m - 678.2+12m - 643.1

EUR 06-Jan 107.3 746.1

+3m 106.0 746.0

+6m 110.0 746.0+12m 116.0 746.0

JPY 06-Jan 118.5 5.87

+3m 124.0 5.68

+6m 125.0 5.43+12m 125.0 5.14

GBP 06-Jan 146.4 1017.8

+3m 151.0 1065.7

+6m 157.0 1065.7+12m 159.0 1021.9

CHF 06-Jan 101.0 688.2

+3m 101.9 690.7

+6m 100.9 672.1+12m 99.1 648.7

DKK 06-Jan 695.4 -

+3m 703.8 -

+6m 678.2 -+12m 643.1 -

SEK 06-Jan 859.2 80.9

+3m 867.9 81.1

+6m 827.3 82.0+12m 767.2 83.8

NOK 06-Jan 894.9 77.7

+3m 886.8 79.4

+6m 840.9 80.6+12m 758.6 84.8

Equity Markets

Regional

Price trend12 mth.

Regional recommen-dations

USA (USD) Strong USD, muted earnings growth, expensive valuation 5-8% Underweight

Emerging markets (local curr) EM under pressure from change in China's FX policy 0-5% Underweight

Japan (JPY) Reflation, corporate governance, earnings growth, fair value 10-15% Overweight

Europe (ex. Nordics) Reflation, earnings growth, cheap EUR, fair value 10-15% OverweightNordics Earnings growth, expensive valuation 5-10% Overweight

Commodities

Average

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016

NYMEX WTI 49 58 47 44 39 43 50 56 49 47

ICE Brent 55 63 52 47 42 46 52 58 54 50

Copper 5,808 6,043 5,380 5,000 5,300 5,500 5,700 5,900 5,558 5,600

Zinc 2,091 2,188 1,860 1,700 1,800 1,900 2,000 2,100 1,960 1,950

Nickel 14,410 13,065 10,650 9,800 10,000 11,000 12,000 13,000 11,981 11,500

Aluminium 1,813 1,787 1,625 1,525 1,600 1,700 1,800 1,900 1,688 1,750

Gold 1,219 1,193 1,125 1,075 1,075 1,100 1,115 1,130 1,153 1,105

Matif Mill Wheat (€/t) 190 182 176 185 180 180 180 180 183 180

Rapeseed (€/t) 360 370 374 380 370 370 380 390 371 378

CBOT Wheat (USd/bushel) 523 505 512 510 510 530 540 550 513 533

CBOT Corn (USd/bushel) 385 367 383 375 375 400 410 420 377 401CBOT Soybeans (USd/bushel) 990 966 950 875 875 900 925 950 945 913

High

Medium

Medium 0-8%

Medium 0-5%

0-3%

0-8%Medium 0-%

865

462

0.88

1.852.15

1.78

1.90

2.00

2.252.50

0.15

-

--

2.30

1.351.60

1.30

1.53

1.55

1.22

0.95

1.051.35

-

--

1.87

2.05

0.41

354

06-Jan

36

8,525

4,645

1,573

1,083

171

36

1,463

20162015

Currencyvs EUR

2-yr swap yield

Risk profile3 mth.

Price trend3 mth.

2.55

2.11

2.70

1.12

-0.08

0.11

1.00

-0.68

0.18

-0.05

0.000.00

1.25

73.3

2.90

70.073.0

108.0

111.0115.0

106.0

110.0116.0

131.4

137.5145.0

107.3

-

-

--

127.2

746.0

746.0746.0

921.7

960.0

880.0

920.0

925.0

910.0890.0

940.0

108.4

746.1

70.0

1.10

-0.35

0.871.13

1.00

-0.35

1.451.85

1.20

1.501.90

-

-

1.10

-0.40

-0.20

1.05

0.15

0.200.20

-

--

-0.16

-0.33

-0.40

10-yr swap yield

-0.31

0.05

0.050.05

3m interest rate

1.00

0.05

0.10

0.50

-0.75

0.05

-0.15

0.65

0.851.28

0.75

0.75

1.00

-0.75-0.75

-0.35

0.10

-0.07

Key int.rate

0.50

0.50

0.751.25

0.75

-0.75

0.05

0.05

0.100.10

0.50

0.75

-0.45

1.00

-0.45-0.45

0.05

0.75

0.61

-0.13

0.08

0.59

373

-0.40

-0.76

-

--

-0.01

-0.01

-0.01

0.74

0.911.45

-0.15

-0.15

0.20

0.15


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.

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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

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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.

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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

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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.

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

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

J o s te i n T v e d t+ 4 7 2 3 1 3 9 1 8 4j t v @ d a n s k e b a n k . c o m

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

H e n n a P ä i v i k k i M i k ko n e n + 3 5 8 1 0 5 4 6 6 6 1 9h m i @ d a n s k e b a n k . c o m

M i n n a E m i l i a K u u s i s to+ 3 5 8 1 0 5 4 6 7 9 5 5m k u u @ 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 + 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

P e r n i l l e B o m h o l d t H e n n e b e r g+ 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

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

G l o b a l H e a d of F I C C R e s e a r c hT 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+ 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

K r i s tof f e r K j æ r L o m h o l t+ 4 5 4 5 1 2 8 5 2 9 k l o m @ 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

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

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

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

E m i l H j a l m a r s s o n+ 4 6 8 5 6 8 8 0 6 3 4e m i h @ d a n s k e b a n k . s e

I v e r C h r i s t i a n B å t v i k+ 4 7 9 5 9 7 7 4 4 5i b t @ d a n s k e b a n k . co m

L u k a s P l a t z e r+ 4 5 4 5 1 2 8 4 3 0l p l a @ d a n s k e b a n k . d k

K a tr i n e J e n s e n+ 4 5 4 5 1 2 8 0 5 6k a tr i @ d a n s k e b a n k . co m

H a s e e b S y e d+ 4 7 8 5 4 0 5 4 1 9h s y @ d a n s k e b a n k . co m

P e g a h A h m a r i n e j a d+ 4 6 8 5 6 8 8 0 5 9 3p a h m @ 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 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 J a ko b E k h o l d t C h r i s te n s e n+ 4 5 4 5 1 2 8 5 3 0j a k c @ d a n s k e b a n . 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

R o k a s G r a j a u s k a s+ 3 7 0 5 2 1 5 6 2 3 1r g r a @ d a n s k e b a n k . l t

Documents

Economic and financial trends - Danske Bank7 January 2016 Nordic Outlook Economic and financial trends Denmark: fragile recovery stumbles - GDP growth disappointed in 2015 but the