Tighter Monetary Policy has not only Weakened Domestic demand in Nordic’s biggest Economies, but has also put a Brake on Region’s overall Growth Momentum. Is Nordic slipping back into recession?
While the central bank of Sweden didn’t respond to the queries sent by B&E (till the time this magazine went to print), Øystein Sjølie, Communication Advisor at Norges Bank, parried our queries: “We are not authorised to comment on the economic situation of the country.” However, central banks of Finland and Denmark were at least brave enough to accept the fact. “Public finances have weakened substantially as a result of the recession, from a surplus of more than 3% of GDP in 2008 to a deficit of 2.8% in 2009 and just over 5.5% in 2010. The deterioration is not only caused by the automatic effects on both the revenue and expenditure sides, but also by considerable fiscal easing and public investments. In view of the prospects of dampened growth and continued deterioration of the labour market, the government deficit is expected to remain large with the public sector’s debt too rising sharply,” agrees Merete Lucie Trojahn, spokesperson, Danmarks Nationalbank to B&E.
Even Tuomas Saarenheimo, Head of Monetary Policy and Research Department, Bank of Finland accepts the fact to B&E that the Finnish economy has been hard hit by the global financial crisis. And why not? The share of exports, which was more than 40 % of GDP (in volume terms) before the crisis burst out, has declined by nearly 25% in volume terms in 2009. But he also gives the other point of view, “Although the current state of the Finnish economy is much less gloomier than it looked like about half a year ago, one should remember that Finland is still highly dependent on the overall development of the world economy and world trade. If the world economy continues to recover, the Finnish firms are in a good position to benefit from increasing demand in the export markets or vice versa.”
Though Denmark and Norway saw their real GDP rising during the first quarter of 2010, the scenario here too looks bleak as high-frequency data by Moody’s Economy.com points towards a slowdown in these economies in the near future. In fact, manufacturing purchasing managers’ indices for Denmark and Norway have been trending weaker since March 2010. Further, rising levels of household debt too posses a threat to the region’s recovery in the long term. While household debt is 167% of disposable income in Sweden (compared to 104% a decade earlier), the ratio has almost doubled in Finland to 107% in 2009 from 65% in 2000. Even in Norway, the debt ratio is expected to reach 197% of disposable incomes by 2010 end, up 14.5% from 2005 level.
No doubt, one way out of the chaos is to ease the monetary policy; but then, it might fall back on the policy makers as it could further bloat the new housing bubble which is in the making in most of the Nordic countries. A closer look at the numbers and one can clearly assess the real threat. While existing home prices in Norway and Sweden have risen substantially by 10.8% and 10.7%, respectively, in Q1 2010 from year-ago levels, they have gone up by 10% in Finland, after surging a record 11.4% in Q1 2010.
All this clearly points towards a real estate bubble that could further undermine the region’s recovery and weaken consumption, if and when it bursts. If experts are to believed, then the houses are expected to lose a fifth of their value in the next 3-5 years. And if that happens, chances are that Nordic region might slip back into recession and this time a prolonged one. “A 20% drop would probably be instrumental in bringing on, or deepening, a double-dip recession,” Par Magnusson, the chief Nordic economist at RBS in Stockholm tells B&E. Certainly, it seems that winter has already started in Nordic, though this time a little early!
Even Tuomas Saarenheimo, Head of Monetary Policy and Research Department, Bank of Finland accepts the fact to B&E that the Finnish economy has been hard hit by the global financial crisis. And why not? The share of exports, which was more than 40 % of GDP (in volume terms) before the crisis burst out, has declined by nearly 25% in volume terms in 2009. But he also gives the other point of view, “Although the current state of the Finnish economy is much less gloomier than it looked like about half a year ago, one should remember that Finland is still highly dependent on the overall development of the world economy and world trade. If the world economy continues to recover, the Finnish firms are in a good position to benefit from increasing demand in the export markets or vice versa.”
Though Denmark and Norway saw their real GDP rising during the first quarter of 2010, the scenario here too looks bleak as high-frequency data by Moody’s Economy.com points towards a slowdown in these economies in the near future. In fact, manufacturing purchasing managers’ indices for Denmark and Norway have been trending weaker since March 2010. Further, rising levels of household debt too posses a threat to the region’s recovery in the long term. While household debt is 167% of disposable income in Sweden (compared to 104% a decade earlier), the ratio has almost doubled in Finland to 107% in 2009 from 65% in 2000. Even in Norway, the debt ratio is expected to reach 197% of disposable incomes by 2010 end, up 14.5% from 2005 level.
No doubt, one way out of the chaos is to ease the monetary policy; but then, it might fall back on the policy makers as it could further bloat the new housing bubble which is in the making in most of the Nordic countries. A closer look at the numbers and one can clearly assess the real threat. While existing home prices in Norway and Sweden have risen substantially by 10.8% and 10.7%, respectively, in Q1 2010 from year-ago levels, they have gone up by 10% in Finland, after surging a record 11.4% in Q1 2010.
All this clearly points towards a real estate bubble that could further undermine the region’s recovery and weaken consumption, if and when it bursts. If experts are to believed, then the houses are expected to lose a fifth of their value in the next 3-5 years. And if that happens, chances are that Nordic region might slip back into recession and this time a prolonged one. “A 20% drop would probably be instrumental in bringing on, or deepening, a double-dip recession,” Par Magnusson, the chief Nordic economist at RBS in Stockholm tells B&E. Certainly, it seems that winter has already started in Nordic, though this time a little early!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
