The coming year is full of uncertainties globally. The outlook for global economic growth is weighed down by rising energy prices, which are hitting Europe in particular. In the US, growth is expected to decelerate into moderate recession by early next year at the latest. China’s economy is still floundering. With inflation remaining high, central banks will have to continue tightening their monetary policies for a while longer.
The risk of geopolitical miscalculations persists, mistakes in economic policy remain a possibility and volatility continues on the financial markets. The continued threat of risks sustains economic uncertainty and caution.
What are the key factors to follow in the Nordic markets?
- Swedish real estate market. Rising interest rates and inflation have started to bite households, companies and the real estate sector. Housing prices have fallen roughly 7-8 percent in a year and are now at end 2020 levels. This poses challenges to real estate companies and banks. Mortgage loan losses have historically been minimal but are on the rise. Swedish banks have strong balance sheets and high capital ratios, but risks are weighing in.
- Electricity prices. Electricity futures are indicating lower prices in the Nordics compared to the rest of Europe. Nuclear power maintenances in Sweden and runup in Finland could lead to lower supply, and an unusually cold winter could cause demand to exceed domestic production. However, the Nordic energy mix is not dependent on Russian gas.
- Oil prices. Price developments are key for the Norwegian economy. Fuel prices and transportation costs impact both import and export prices. High energy prices may increase the risk of new taxes, like the introduction of Norway’s salmon tax or price subventions. According to Bruegel the level of governments earmarked and allocated funding to shield households and businesses from the energy crisis is clearly lower in the Nordic countries than in the rest of Europe relative to GDP.
- Wages. Wage pressures are piling up as the labor markets have remained relatively tight and in some sectors the demand for skilled workers causes bottlenecks. The inflation rates in Denmark, Finland and Norway are below the Euro Area. In 2022 Denmark and Finland improved their competitiveness ranking in the IMD review whereas Norway and Sweden slipped.
- Central banks. The Swedish Riksbank has indicated a slower path in tightening of its monetary policy and the terminal rate settling below 3 percent. The Swedish inflation is higher than in the neighboring countries, the trend is still up and a more dovish policy could weaken the Krona. The Norges Bank is also signaling a moderation in its policy and leaving its key rate close to 3 percent.
- Currency movements. Relatively weak Euro and Swedish Krona benefit exports. Sweden seems to enter a recession, or even stagflation, before peer countries and the central bank turns to a wait-and-see mode. This suggests a continuation of the weak trend. Much stronger currencies would bring headwinds to the economies.
- Corporate health. 2023 Nordic companies’ earnings estimates are still solid. Key developments are revenues and operating margins. New investments would indicate confidence in business outlooks. Rising interest expenses and leverage ratios can weigh on some sectors, but overall, the corporate health is sound. Nordic companies enjoy a comparable advantage over continental European peers due the favorable energy mix and lower electricity prices. Export driven Nordic companies benefits from the weaker currencies.
The risks in the Nordic markets aren’t after all very different from other places. The underlying corporate health is sound, and the economies are in relatively good shape. The Nordic markets could see substantial strength should the global inflation pressures ease or the war in Ukraine pause.
The upcoming year will offer opportunities, but timing and adjusting a suitable risk level are key. Patience and a long investment horizon will bear fruit as the uncertainties abate.
Tomas Hildebrandt
