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Nordic outlook after Brexit
Las Olsen
Chief Economist, Denmark
Follow us on Twitter @Danske_Research
Important disclosures and certifications are contained from page 13 of this report.
Roger Josefsson
Chief Economist, Sweden
Frank Jullum
Chief Economist, Norway
Pasi Petteri Kuoppamäki
Chief Economist, Finland
Thomas Harr
Global Head of FICC [email protected]
1 July 2016
Investment Researchwww.danskebank.com/CI
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• The British leave vote is likely to considerably increase political uncertainty in the near term, causing lower investment activity and thus lower growth in GDP and employment (see Research: Global growth revised
down following Brexit, 28 June 2016).
• As stated in our recent Nordic
Outlook, 22 June 2016, this will also influence the growth forecasts for the Nordic countries.
• In this overview, we specify our Nordic economic forecasts following Brexit. Of course, it is important to underline that there is a high degree of uncertainty about these effects.
Global growth revised down following Brexit
% y/yN ew P revio us N ew P revio us
USA 1.7 1.9 1.9 2.3
Euro area 1.2 1.6 0.7 1.7
UK 1.0 1.8 -0.4 2.1
China 6.5 6.7 6.6 6.6
Global 2.9 3.1 3.1 3.5
2016 2017
New global GDP forecast
Source: Danske Bank Markets estimates
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Denmark: growth outlook lowered
Source: Statistics Denmark, Danske Bank Markets forecasts
% y/y 2016 2017 2016 2017
GDP 0,7 1,0 1,1 1,6
Private consumption 1,9 1,9 1,9 2,1
Public consumption 0,5 0,5 0,5 0,5
Gross fixed investment 1,1 0,9 1,4 2,5
Exports 0,7 2,6 0,5 3,3
Imports 1,7 3,5 1,0 3,9
Gross unemployment (thousands) 113,9 112,6 113,8 109,2
Inflation 0,5 1,3 0,5 1,4
Government balance, % of GDP -1,7 -1,4 -1,7 -1,2
Current account, % of GDP 6,8 6,9 6,9 7,1
Current forecast Previous forecast
• We have updated our economic forecasts in light of the Brexit vote, but also in light of revised national accounts figures, which dampen the expected growth rate for 2016.
• We no longer expect a clear acceleration in GDP growth, and we have lowered our job growth projection.
• However, we still see a continued recovery and rising employment in Denmark.
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Outlook for Danish economy deteriorates in the wake of Brexit
• The Danish economy could fall into technical recession in H2 16. We expect GDP to be broadly flat for the remainder of 2016 and to start growing at a moderate pace next year.
• The large uncertainty about the UK’s future relationship with the EU will make companies more hesitant to invest. As such, we expect private investment growth to remain very moderate throughout 2016-17, although housing investment will continue to be supported by the housing market recovery and very low financing costs.
Denmark set for moderate GDP growth
Uncertainty postpones investment
Sources: Statistics Denmark, and Danske Bank Markets forecast
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Denmark: slower growth in exports and jobs
• We expect the European recovery to shift into a lower gear given the general uncertainty. As such, demand for Danish goods and services is set to weaken. The slowdown is likely to feed through to global trade, which is vital for Denmark’s large sea transportation exports. This would further dampen services exports. Consequently, we expect a relatively modest improvement in exports.
• A scenario of hesitant investment and slow foreign demand growth would also weaken the outlook for job growth. However, employment improved significantly early this year. We expect the job recovery to continue at a more moderate pace next year.
Sources both charts: Statistics Denmark, Danske Bank Markets forecasts
Modest foreign demand dampens export recovery
Job growth set to slow
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Denmark: consumer spending should still underpin growth
• We expect inflation to pick up in H2 16 as the effects of the oil price decline fade but we still expect inflation for 2016 as a whole to be a modest 0.5%. Next year, inflation is set to increase to 1.3%. The current modest inflation in Denmark is due in large part to low imported inflation. Danish wages and the prices that depend on wage levels have continued to increase by close to 2% per year and we still expect real wages to improve in 2017.
• The increased uncertainty and limited job growth could feed through to consumer spending. However, we continue to expect consumer spending to improve at a healthy rate following the recent significant real wage gains.
Sources both charts: Statistics Denmark, Danske Bank Markets forecasts
Solid real wage growth
Consumer spending driving modest GDP growth
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Sweden: lower growth outlook
For Sweden, the overall effects on GDP from a Brexit are strong but manageable. Ourscenarios are developed using the work-horse global econometric model NIGEM andcalibrated on Danske Bank’s post-Brexit international forecasts for the UK, Euroland, the USand China.
In short, the effects on GDP range from -¼ to -1 percentage points on growth in 2016 and2017. From that point, the effects on GDP wear off and in five years the GDP level is back tobase.
The effect on inflation is quite small but this is due to a flexible stabilisation policy responsewith both monetary policy actions and an exchange rate reaction that balances the negativeimpact from Brexit.
In the base scenario, GDP is still expected to post stable increases and even more so in theoptimistic scenario. In the pessimistic scenario, GDP growth falls well below potential, withapparent negative effects on inflation.
The numerical exercise might shed some light on how the UK’s Brexit vote affects theSwedish economy via international spill-overs and linkages. However, the results should notbe interpreted either as a new forecast or as a confidence interval, where we have weightedall possible outcomes. Uncertainties, for example, political and financial, are still significant.
77Source all charts: SCB, Macrobond Financial, Danske Bank Markets
Swedish financial markets post Brexit
• It is pointless to look at real data in the immediateaftermath of the Brexit shock. In August, when westart to receive real data collected after the vote, we can start to form an opinion on the effects.
• Financial markets, nonetheless, have reactedaccording to plan and this will help mitigate anynegative shocks to demand.
• The Riksbank has both a will and a way (or two) to respond to negative developments.
The SEK has been hammered – thank you!
Stock markets are flattish – thank you (sort of)!Interest rates have dropped – thank you!
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Note that we have not developed a fully-fledged macro economic forecast as we believe the situation is still too fluid to make a detailed prognosis. Come August, when post-Brexit economic data is available, we will (hopefully) start developing a more coherent and complete forecast.
In the same manner, our international forecasts have at least been partially updated and feeding those estimates for post-Brexit GDP growth and policy responses into the NIESR’s global econometric model, NIGEM, we can solve the most important Swedish variables.
The effects on Sweden of a Brexit are severe but manageable. The Riksbank prolongs its QE programme and the SEK weakens; fiscal policy is also expanded.
Note: This scenario was developed in 2012, using a 20% permanent drop in house prices. Here we have assumed that the effects are linear to that, previous, scenarioSource: NIGEM, Danske Bank Markets
The new Swedish scenario
Sweden, baseline scenario
% y/y 2016E (previous forecast) 2017E (previous forecast)
GDP (calendar adjusted) 2.6 (3.0) 1.4 (2.0)
Private consumption 3.0 (3.2) 1.6 (1.9)
Public consumption 3.2 (3.2) 2.0 (1.9)
Gross fixed capital formation 4.6 (5.9) -0.3 (1.7)
Exports 1.4 (3.1) 2.0 (2.9)
Imports 4.1 (4.5) 2.3 (3.0)
Unemployment rate (% of LF) 7.1 (7.0) 7.2 (6.8)
Inflation (CPI) 0.8 (0.9) 0.6 (0.8)
Government bal, % of GDP -0.4 (-0.2) -1.5 (-0.8)
Current acc., % of GDP 5.0 (5.2) 5.2 (5.3)Source: Danske Bank Markets forecasts
99Source: Macrobond Financial, Danske Bank Markets (both charts)
Norway: weaker global growth affecting the export sector
• A recession in the euro area and the UK, including the overall effects on global trade, would hurt the export
sector. Based on our expected GDP growth rates, growth in mainland exports could drop from 2% in 2017 to 0.5 % as growth among our main trading partners (euro area, Sweden, the UK, Denmark) would take a hit. This would subtract 0.3pp from mainland GDP.
• We also expect the increasing uncertainty stemming from the Brexit to postpone our expected rise in confidence as oil prices have risen. As a result, the pick-up in private consumption and investments is expected to be postponed as well.
• However, if such a scenario materialises, NorgesBank could cut interest rates further to zero and the NOK would stay weaker than previously assumed, thereby supporting other areas of the economy and counteracting some of the negative effects.
• All in all, we expect mainland growth to end up at
0.9% (1.2%) in 2016 and 1.9 % (2.2%) in 2017.
New forecasts
46,0%
Norway
Current forecast Previous forecast
% y/y 2016E 2017E 2016E 2017E
GDP (mainland) 0.9 1.9 1.2 2.2Private consumption 1.5 2.2 1.7 2.2Public consumption 3.0 3.1 3.0 3.1Gross fixed investment -1.6 0.9 -1.2 1.2Exports 0.8 0.9 1.1 1.5Imports 0.9 2.2 1.0 2.3
Unemployment (LFS) 3.4 3.5 3.3 3.3Inflation 3.1 2.8 3.0 2.5
Source: Danske Bank Markets forecasts
1010Source: Rystad Energy, Ucube, Oljedirektoratet, Oslo Market Solutions, E24, MacrobondFinancial, Norges Bank, Danske Bank Markets
Oil prices ‘low for longer’ is the main risk for Norway
• The downside risk to the Brexit scenario is that oil prices take a hit from lower global demand. This could lead to a more severe fall in oil investments, as well as affecting the business and consumer confidence negatively.
Oil prices are the major risk for Norway
Falling oil investments would be a major drag on
growth
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1,000
2,000
3,000
4,000
5,000
6,000
7,000 USD/bblMillion barrels
in oil equivalentNorwegian oil field investment overview
Ressources (lhs)cumulativeB/E oil price (rhs)Current oil price (rhs)3Y Forward oil
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• The UK is the sixth largest export market (5% of value of goods exports).
• Exports to the UK have fallen over the past 10 years, reflecting the fall in electro-technical exports (Nokia) especially.
• Trade balance with the UK has been positive.
• However, Finnish exports are a bit less exposed to the UK than the EU average. Exports are mostly forest and chemical products.
• The biggest negative impact of Brexit on the Finnish economy is likely to come through uncertainty and a lower global growth trajectory, which are likely to reduce investment in Europe.
Finland: direct exposure to UK is limited…
Source all: Macrobond Financial, Danske Bank Markets
Other forest
products12%
Paper and cardboard
29%
Oils and chemicals
25%
Metals and machines
19%
Other15%
Finnish goods exports to UK
January-September 2015
Goods exports, 12M moving sum
1212
• Domestic demand was reasonably strong in Finland in H1 16. Unemployment has fallen more than expected and low rates support demand.
• The consumption outlook is unlikely to improve much further because earnings growth is slowing down. Brexit might add uncertainty.
• A new competitiveness pact leading to lower labour costs is expected to improve export price competitiveness from 2017.
• However, Brexit shadows the Finnish export outlook to other EU countries and Finland might experience a brief recession.
• Construction is expected to be a significant growth driver in 2016 even with Brexit.
• Assuming Brexit is implemented, uncertainty about future trade agreements continues and euro area growth slows down, we forecast Finnish GDP to grow less than 1% both in 2016 and 2017.
However, the uncertainty in Europe will hit Finland as well
Source: Statistics Finland, Danske Bank Markets
Source: Danske Bank Markets forecasts
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