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Understanding the Macroeconomics of the Nordic Region in 2020

While other regions have been impacted by the uncertainties associated with Brexit, the ongoing trade war between the United States and China and economic volatility more generally, for some time the Nordic economies have appeared comparatively stable.

However, there are warning signs that growth could slow significantly across the region.

With political uncertainty across the world and many regions still struggling with supply-side constraints, it appears the Nordic region is finally starting to feel the effects of a difficult 2019.

The slump in manufacturing worldwide last year only now appears to be felt in Sweden, with sentiment indicators suggesting that GDP in the country could decline in the first quarter of 2020 (Q1 2020).

The Norwegian economy has also shown signs of a decline at the start of 2020, due to a deceleration in oil demand and investments.

Denmark does appear to be more resilient, with the Danish government anticipating faster economic growth than the eurozone, but while its impressive job growth and levels of private consumption may not last forever, the contrast with the other Nordic economies is clear.

Why is Sweden falling behind its Danish counterparts?

Despite retail and construction sectors showing signs of improvement domestically, Sweden's manufacturing sector remains somewhat flat, based on general sentiment indicators.

Sweden's poor manufacturing output is one of the main reasons behind a potential decline in Swedish GDP in Q1 2020.

As a result, adjustments have already been made to Sweden's overall GDP forecast for 2020, revising it down to 1.1% from 1.4% in September's budget.

One of the biggest issues for Sweden's economy is the increasing barriers to trade for its exporters.

The general consensus is that lacklustre economic growth in Germany, one of Sweden's biggest export markets, has hit exporters where it hurts.

The US has also continued to threaten the European car industry with new tariffs, which would hit the Swedish car market particularly hard. Consequently, Sweden's unemployment rate is expected to rise from 6.4% forecast in September towards 7% in 2020 and 2021.

To get an indicator of Sweden's economic performance it's always a good idea to look at OMXS30 index trading charts.

The OMXS30 is an index of 30 of the most actively traded shares on the Stockholm Stock Exchange. So far this year, the OMXS30 has experienced a little over 2% decline in its value which further cements the view that Sweden is tightening its purse strings.

Worryingly, despite the weak Swedish krona, inflation in Sweden is well below the Riksbank's 2% target. Inflation could fall to as low as 1% in the event of slashed energy prices and minimised electrical network charges.

Subsequently, several of the Executive Board members of the Riksbank have already agreed to leave key interest rates unchanged for the next two years, having voted to push the repo rate up from negative territory to 0% in December.

However, Stefan Ingves, governor of the Swedish central bank, warns that ultra-low interest rates over the next couple of years and beyond could create longer term damage to the Swedish economy.

Mr Ingves cites low rates as a major issue for "financial stability", causing overvalued assets and more indebted individuals. He was particularly concerned about household debt, which could hit unsustainable levels if low interest rates remain too low for too long, leaving millions in danger should rates rise even modest levels.

Despite the general feeling that 2020 will by no means be a sparkling year for the Swedish economy, the government has gone to great lengths to reiterate that its healthy finances, based on several years of operating at a budget surplus, means the country is stronger than most to weather the economic storm.

Sweden's finance minister, Magdalena Andersson said that the government's debt is at its lowest levels since 1977 and was "extremely low" when compared with "other EU countries".

Ms Andersson also confirmed a special Spring Budget had been scheduled in the coming weeks to utilise the government's so-called "welfare reserve" to maintain the performance of public services and provide fiscal stimulus to municipalities that are being hit by unemployment most.

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