World Economy

Scandinavian economies face triple threat

Falling oil prices and deflation are weighing on the once-rock solid economies of Norway and Sweden, while Finland has been hit by the recession in Russia, Danske Bank has warned.

"The Nordic countries have been looking strong in recent years, with economic and financial crisis in much of Europe… However, after years of robust growth, the shine seems to be wearing a bit off," said economists led by Steen Bocian in a report from the Scandinavian bank out Thursday.

Kristian Helgesen | Bloomberg via Getty Images

Norway and Sweden outperformed the rest of Europe in 2013, posting economic growth of 0.7 percent and 1.3 percent respectively, versus a European Union (EU) average of no growth.

The two countries' relative strength has waned in recent months, however. Norway (which is not part of the EU) posted growth of 0.5 percent quarter-on-quarter between July and September 2014, just above the EU average of 0.3 percent, which Sweden matched.

"This does not mean that there are signs of economic crisis in the two otherwise very strong economies, but growth rates are heading towards the European average and downside risks have increased," said Bocian.

Norway's oil risk

As Europe's biggest oil exporter, falling oil prices are weighing on Norway, although its reserves are bolstered by a sizeable sovereign wealth fund.

The Norwegian krone, whose performance is strongly tied to oil prices, has steadily weakened against the U.S. dollar since mid-August last year, and is down around 2.5 percent since the start of 2015—providing a possible spur to exports.

In December, Norway's central bank cut interest rates in an attempt to deflect the hit from falling offshore investments, lower oil prices and weak growth in Europe.

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"Activity in the petroleum industry is softening and the sharp fall in oil prices is likely to amplify this tendency," the bank said in a statement. "This will have spillover effects on the wider economy and unemployment may edge up ahead."

Sweden is less susceptible to oil price movements, but growth slowed in 2014 as the country struggled with deflation—CPI inflation fell by 0.2 percent in November on the corresponding period the year before—and an overpriced housing market.

Bocian and colleagues forecast that growth would remain a challenge for the country in 2015.

"To reduce the risks linked to the increasing household debt, Sweden has introduced stricter rules for amortisation, which will increase savings and thereby reduce the strength of domestic demand – the main engine in the Swedish economy in recent years," he said.

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Russia counter-sanctions hit Finland

Although Finland managed to emerge from recession in the second quarter of 2014, exports to neighboring Russia continued to fall, as did the number of visitors from Russia.

This is problematic given that Russia is Finland's largest trading partner, with major exports to the country including machinery, forest and chemical products and dairy foodstuffs.

After Russia banned food imports from the European Union (of which Finland is a member) and other Western countries in August, the Finish Ministry of Finance forecast that Finland's food exports would fall to less than a quarter of normal, with its important dairy sector likely to be worst hit.

"The biggest risk to (Finland's) export outlook continues to be Russia," said Bocian on Wednesday.

"We expect Russian GDP (gross domestic product) to fall significantly in 2015, which would keep the export outlook poor. The value of Finnish exports to Russia fell 12 percent year-on-year in January-October and the worst is not over, in our view."

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