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ECONOMY

Are the Nordic countries heading for an economic downturn?

The Nordic countries' economic boom is expected to come to a screeching halt because of the financial crisis caused by the coronavirus outbreak.

Are the Nordic countries heading for an economic downturn?
Norwegian kroner. Photo: Terje Pedersen/NTB scanpix /TT

“The boom in the Danish economy has come to an abrupt end in early 2020. The outbreak of the coronavirus and the measures implemented to contain its spread have led to a sharp contraction in economic activity,” the Danish central bank said in a statement.

The central bank said it expected Danish gross domestic product (GDP) could contract between 3.0 and 10 percent in 2020.

In neighbouring Sweden, the country's National Institute of Economic Research (NIER) said that “a particularly deep economic downturn looms”.

NIER expected Swedish GDP to contract by 6.0 percent in the second quarter alone, and by 3.2 percent for the full year of 2002.

Both countries have already announced a number of economic measures to mitigate the coronavirus impact, including support for businesses and subsidising temporary lay-off schemes.

NIER said it thought the measures adopted by Sweden were appropriate, but warned that more would be necessary “to stem the rise in unemployment”.

The Swedish government earlier this week forecast the jobless rate would rise from 7.0 percent currently to around 9.0 percent this year, which would be the highest level in 23 years.

The Danish central bank also noted that more measures could become necessary but this would also be dependent on developments abroad.

“We should not forget that we are also highly dependent on developments abroad. And once the economic restrictions are phased out, more conventional fiscal stimulus will probably be required to underpin demand,” Lars Rohde, the bank's governor, said in a statement.

On Friday, Norway's government announced that GDP could contract between 1.5 and 7.0 percent this year.

The economy of the Nordic country, the largest oil producer in Western Europe, is doubly affected by the effects of the pandemic and the rapid fall in oil prices.

Member comments

  1. Sweden was already having lower GDP than expected during pre-coronavirus. And economically they were supposed to be doing well better all things considered.

    They will most likely do the worst out of the Nordic countries in the future, especially considering how poorly they are responding to the Coronavirus (doing nothing, pretending it doesn’t exist)

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ECONOMY

What will Sweden’s interest rate hikes mean for foreigners in Sweden?

Sweden's Riksbank now expects its base interest rate to be close to two percent in three years' time. What will this mean for foreigners living in Sweden?

What will Sweden's interest rate hikes mean for foreigners in Sweden?

How high could interest rates go? 

The Riksbank on Thursday increased its key interest rate above zero for the first time since the autumn of 2014.

But it isn’t going to stop there, it expects to hike the rate in small increments over the next three years, to 1.18 in the middle of next year, to 1.57 in the middle of 2024, and to 1.81 in the middle of 2024. 

At a press conference on Thursday, the bank’s governor Stefan Ingves said that people should prepare for higher rates, but stressed that there would be “no extreme rate levels”. 

“We’re not slamming on the brakes, more taking our foot off the pedal,” he said. 

It’s worth remembering, though, that in the run-up to the Swedish banking crisis in the early 1990s, the key interest rate moved from 1 percent to 2 percent to as high as 10 percent, before the Riksbank finally upped it to 500 percent in a desperate attempt to defend the krona. 

As recently as February the Riksbank was not expecting to raise rates from zero until 2024, so if inflation proves more stubborn than expected, the key rate could possibly go higher. 

But Robert Boije, chief economist at Swedish state-owned mortgage lender SBAB, said that as inflation today is most likely the result of higher energy prices, and supply-side constraints, rather than because there’s too much money in the system, the risk of seeing higher rates than the Riksbank has outlined is relatively small.  

“There’s a higher probability of a lower repo interest rate [than expected] in 2024 than of a higher interest rate,” he said. 

How will higher interest rates affect mortgage rates? 

According to Claudia Wörmann, SBAB’s housing economist, interest rates on floating mortgages could nearly double over the next year from around 1.8 percent today to about 3 percent in January 2026.

She expects two-year fixed mortgages, which are now at around 2 percent to rise to 3.4 percent in January 2025, while five-year fixed-rate mortgages will rise from 2.5 percent today to 3 percent in 2023 and 4.1 percent in 2026. 

Many mortgage lenders had already anticipated Thursday’s rent rise, with Handelsbanken/Stadshypotek, Skandiabank, and SBAB all upping their mortgage rates by as much as 0.25 percentage points last week. 

Bigger monthly payments for those with loans

According to Wörmann, someone with a million kronor mortgage who currently has a two percent interest rate, would see their monthly payment double from about 1,160 to 2,330 if their mortgage rate rises to four percent. 

As most borrowers pay more than they need to simply to meet their interest payments, however, many have some flexibility, meaning they can slow down their repayments to make it easier to bear the increased cost, she said.  

“One aspect is the interest rate, but you need to bear in mind that a normal household amortises much more than they pay in interest rates,” she said. 

Lower buying power for those without a mortgage

For foreigners in Sweden looking to borrow to buy a house, higher mortgage rates will reduce the amount of money they can borrow to buy a house or apartment.  

Houses and flats in Sweden might get more affordable

Two years of rising house prices showed signs of coming to halt last month. 

The Swedish financial supervisory authority warned earlier this month that in its worst-case scenario, where rising interest rates are compounded by higher power costs for consumers, house prices could fall by as much as 30 percent. 

In its less dramatic scenario, the prices of apartments owned as part of a cooperative – so-called bostadsrätter – would fall only slightly, while the price of detached houses would fall 10 percent. 

“Our prognosis is that housing prices at the end of 2024 will be about ten percent lower than what they were on January 1st this year,” said Boije. 

The decline will start with a 1.3 percent drop this year, followed by a bigger 6.1 percent drop next year, and then a 3.8 percent drop in 2024. 

For most buyers the affordability of housing will not change very much, Boije points out, as higher interest rates will reduce the amount they can borrow. 

“If there’s a one-to-one correlation between the interest rate and housing prices, then the use cost of housing in economic terms will not change very much,” he said. 

Foreigners who are able to buy in Sweden without taking out a loan, will see a benefit, however.

It will also become easier for those taking out a mortgage to gather together the 15 percent of the value of the property they are required, under Swedish law, to pay in cash. 

READ ALSO: Will Swedish housing prices plummet as interest rates rise?

Wörmann said there was little doubt that the increase would start to pull down house prices, particularly when you looked at rising costs and post-pandemic effects. 

“It’s more expensive to buy food, you have to take into account that people are spending much more money on electricity and on fuel,” she said.

“We are leaving a pandemic where we were stuck in our homes, which might have meant that people didn’t mind paying a lot of money for their house as they spent so much time there. Now we are released from our home, and that might change how we look at our homes and our willingness to buy something expensive.” 

For foreigners who have yet to buy a house or flat in Sweden, a 30 percent fall in prices would of course be quite welcome, increasing the affordability of property in the country. 

Foreigners paid in local currency may benefit from a stronger krona

The hike in interest rates saw the value of the Swedish krona rise against both the dollar and the euro on Thursday.

If the Riksbank has now left behind the loose monetary policy which saw it keep the key interest rates negative between February 2015 and December 2019, the krona could strengthen against other currencies. 

“If markets now expect the Riksbank to be more hawkish relative to the Fed in the US and the ECB, this should increase the value of krona,” Boije said. 

This will mean foreigners paid in kronor will earn more once their salary is converted into another currency. Conversely, those paid in euros or dollars, but living in Sweden, could see an effective salary cut. 

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