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How Are the Nordic Countries Doing After Two Years of Covid?

OpinionsHow Are the Nordic Countries Doing After Two Years of Covid?

After two years of fighting the Covid-19 pandemic, it appears that the Nordic countries have fared far better than the rest of Europe, according to an article by Johan Carlström, an economics reporter at Svenska Dagbladet (SvD), a leading Swedish daily newspaper, published on 10th February 2022.

It has been almost two years since the Covid crisis hit the world economy with full force. The International Monetary Fund (IMF) predicted that Western economies would shrink by around 8 percent in the first year of the pandemic. In Sweden, the Riksbank warned of an even bigger plunge, and similar doomsday prophecies were echoed from the other Nordic countries, the Eurozone and the United States.

With hindsight, however, the experts’ worst fears did not materialise. Western production fell only half as much as the IMF feared (just over 4 percent), and in the Nordic countries the drop was even smaller.

According to Andreas Wallström, Head of Forecasting at Swedbank in Stockholm, there are three factors that have determined the economic development in different countries: the spread of infection, how severe the restrictions have been and the countries’ different economic structures.

The latter becomes clear when comparing the broad Eurozone with the Nordic countries. The Eurozone has struggled because, among other things, several countries have a large service and tourism sector that has been struggling during the crisis. One example is Spain.

“Spain is far from back to the same GDP level as before the crisis. But Germany has also gone surprisingly weak,” says Wallström. Germany’s problems are partly due to the country’s large automotive industry, which has been hit hard by supply problems and accounts for a larger share of total industrial production than in Sweden, for example, he explains.

In general, however, the world economy has made a strong comeback after 2020. According to SvD’s calculations, eurozone production is already approaching the same levels as before the crisis, and in the United States, production is around 2 percent higher today than before the crisis.

The Nordic region does also have differences between its countries. Kjersti Haugland, chief economist at DNB, Norway’s largest financial services group, mentions several reasons. Unlike other Nordic countries, the central bank cut the country’s key interest rate sharply during the corona crisis: by as much as 1.5 percentage points. It gave Norway’s indebted households more money in their wallets, which has stimulated the economy.

“When the policy rate is lowered so much, households’ purchasing power is strengthened,” says Haugland. She also points out that the Norwegian economy has benefited from the reserves of country’s sovereign wealth fund. Also, a larger proportion than in the other Nordic countries work in the public sector – where job security is better. In addition, the levels of social security and benefits are higher in Norway than in Sweden, for example,” says Haugland.

All in all, she believes that these factors have kept up Norwegian households’ confidence in their own economy, supporting private sector consumption and the Norwegian economy as a whole. She also mentions the price of oil. Although it fell sharply during the initial phase of the pandemic, it has since recovered and is today well higher than before the crisis due to high demand.

“A significant part of Norwegian exports are raw materials and the demand for these goods has been going very well recently,” Haugland says.

Norway is, at least so far, the winner among the Nordic countries when it comes to economic development during the pandemic. The country also has the lowest unemployment rate and the lowest national debt among its neighbours. Sweden and Denmark are tied for the second position in terms of GDP growth, while Finland is somewhat behind.

Heidi Schauman is Head of Research at Danske Bank’s Finnish branch. She explains Finland’s position by saying that the economy has a lower potential growth rate, given its demographics and lower immigration. Finland also has an industrial sector that has been hit harder by the crisis, as well as a relatively smaller service sector than, for example, Sweden.

Denmark’s economy has benefited from its large shipping industry, which has been booming during the reopening of the world economy. The country’s pharmaceutical industry has also maintained its strength during the crisis. But Heidi Schauman does not think that the differences between the Nordic economies should be exaggerated. Everyone has done relatively well during the pandemic.

“In general, it can be said that the Nordic countries have done very well in the last two years. Those fearsome deep dives appear to be absent and we have also seen the same level of strength in the housing market in all the Nordic countries,” she says.

Schauman finds economic development astoundingly similar given how restrictions have differed between the countries. Sweden has had the softest restrictions throughout the crisis. She explains that Nordic societies and their cultures are similar in several ways: “The attitude in all the Nordic countries has been that all people should bear their own responsibility. It has not only been seen in health-related issues, but also in economic behavior”.

Despite the similarities, there are also things that distinguish Nordic countries and how they have developed during the crisis. In the Eurozone and several Nordic countries, for example, unemployment has fallen to around the same levels as before the crisis. But not in Sweden, which reports the highest unemployment in the Nordics.

Robert Bergqvist, Senior Economist at Skandinaviska Enskilda Banken, downplays the high figure, which he believes is partly due to the authorities changing their measurement methods for unemployment: “My view of the Swedish labour market is that it is stronger than the official statistics show,” he says, and points out that Sweden has had a significantly higher immigration rate than the rest of the Nordic countries and that many new arrivals came to Sweden just a few years ago.

“It takes time before they enter the labour market and when you have such an impact on the economy, it is people with a weaker position in the labour market who are often hit the hardest,” says Bergqvist.

He thinks it is important that politicians now invest in these people, including through investments in more education. “Sweden can afford that”, he says.

In addition to Norway, with its large oil fund, Sweden has the strongest public finances in the Nordic region. Despite large investments during the corona crisis, the debt has now fallen to around the same levels as before the crisis, as a share of GDP. Sweden’s 35 percent is compared to 100 percent in the eurozone and 130 percent in the United States.
Denmark and Finland also have significantly lower public debt than the EU average (40 per cent and 67 per cent respectively) and Bergqvist predicts a bright future for the Nordic economies. “We have dry public finance powder that we can use in the future,” he says.

According to him, the pandemic has elevated two megatrends in the world economy: digitalisation and the green transition. Here, Bergqvist believes that the Nordic region can be at the forefront, if the countries play their cards right. He points out that all Nordic countries are at the top of lists of the world’s most competitive, innovative and digitalised societies.

When asked which Nordic country he thinks is best equipped to benefit from the green transition, he says: “I might be slightly biased and you could get a different answer if you had asked a Dane or a Norwegian. But I still think that Sweden is very well equipped, even if the differences between the Nordic countries are significantly smaller than the difference between the Nordic countries and the rest of Europe and the world,” says Bergqvist.


 This post was created by Jauri Häkkä, LinkedIn

Jauri Häkkä, Principal, Widhaby Advisors. Jauri is the founder of Widhaby Advisors, a Stockholm-based firm focusing on investment strategy, asset allocation and portfolio construction, specialising on alternative investments, private markets and sustainability. Having 25 years+ experience in portfolio management and fund/manager selection, he has held senior positions at Nordic asset managers – including Executive Director and PM at Nordea Asset Management between 2006 and 2016. Jauri serves currently in several non-executive roles, including board memberships in APFI and Scandinavian Financial Research as well as senior advisor roles at C8 Technologies and Sijoittaja Group. He holds a MSc (Econ.) degree from Hanken School of Economics in Helsinki and is a Certified EFFAS Financial Analyst.