Economic Outlook: After winter comes spring

For the first time since World War II all the major economies in the world have slid into recession at largely the same time. Though it has been discussed whether the current recession could evolve into a depression, Nordea's economists emphasise in their new Economic Outlook that this is not their baseline scenario.

– Actually, we see light at the end of the tunnel and expect a gradual recovery of the world economy in the second half of 2009. The main reason why we expect a reversal as early as this year is the fast political response in most countries to counter the effects of the crisis – eg, in the USA where the new president Barack Obama is inaugurated today, says Global Chief Economist Helge J. Pedersen.

– However, it should be noted that unemployment will continue to rise well into 2010 and that a turnaround in the beleaguered housing and property markets is not imminent. Also, the currently much tighter credit standards will dampen the strength of the upswing, says Helge J. Pedersen.

Nordea's economists expect Denmark to experience the steepest drop in economic activity since the oil crisis in the 1970s. In 2010 growth will gradually resume, but unemployment will continue to rise and likely reach almost 5 per cent over the next two years. On the other hand, inflation is projected to be considerably lower in the years ahead and the current account surplus will be somewhat higher. Public finances now look set to slide into deficit, but there will still be room for economic policy easing if the economic slowdown in Denmark turns out to be unexpectedly severe.

The steep downturn in the export markets will send the Finnish economy into recession. After several years of substantial growth, the economy will hardly grow at all over the next couple of years on average. Unemployment will increase quite markedly, even though the labour force will shrink exceptionally as a large number of people will retire. The actual contraction phase will probably be over in the summer, but the labour market will not rebound during the forecast period.

The Norwegian economy is facing lean years following a tremendous boom. Exports will be squeezed due to the international recession and at the same time Norges Bank's survey of banks' credit standards indicates that a relatively sharp tightening is underway. Pessimism among consumers and businesses has also grown noticeably. Sharp rate cuts, Norwegian krone weakness and a more expansionary fiscal policy will to some extent alleviate the adverse effects, but will not entirely offset these.

Uncertainties are rife for the Swedish economy. There is a risk that weak demand at home and abroad, tighter credit standards and declining employment will trigger a vicious spiral that will dramatically slow down Swedish economic activity. However, there are factors that will mitigate the downturn and eventually help break the negative trend. An expansionary fiscal and monetary policy, rapidly declining inflation and a weak Swedish krona will support the economy and create the foundation for a gradual recovery over time. Particularly the Riksbank's aggressive rate cuts have lowered mortgage rates and thus eased the interest burden for households.

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