“SEB Nordic Outlook”: Entrepreneurs and citizens still live in anticipation of interest rate cuts

Entrepreneurs and citizens still live in anticipation of a reduction in interest rates, the economists of “SEB banka” state in the “Nordic Outlook” review of the world and Baltic economies.

Economic growth prospects continue to improve, however, the world economy is still in the process of recovery from the covid pandemic, as well as from energy price and inflation shocks, the review says.

Inflation continues to decrease, however, this trend is not stable, so the rate reduction is slower than previously predicted, the review explains. It is predicted that the European Central Bank (ECB) could make a relevant decision in June, and the US Federal Reserve System – in September.

Lower inflation and interest rates, as well as high employment create conditions for growth in consumption and investment. On the other hand, the deterioration of the geopolitical situation with ever new risks of military, political and economic conflicts, maintains an environment of high uncertainty.

However, the predictability of the economy has recently improved, according to “SEB banka” economists. Global uncertainty will have a moderate real and financial impact going forward if energy prices are not significantly affected. Despite the surprisingly strong growth shown in the USA (at the same time maintaining high inflation), “SEB banka” predicts moderate global growth – a little over 3% per year from 2022 to 2025.

The review explains that from a historical perspective, such an increase is appropriate, taking into account the events of recent years – the pandemic, as well as the climate and energy crises and wars in Europe and the Middle East. Freight rates have fallen in recent weeks, and sentiment among manufacturers has improved. Although risk appetite has moderated, global asset prices have shown unexpectedly good resilience. After a strong first quarter of the year, trends in the equity markets reversed in April due to reduced risk appetite. It should be noted that geopolitical risks rarely have long-term adverse effects on stock markets.

The US economy continues to grow despite high real interest rates and inflation. “SEB banka” predicts that growth will slow down in 2025, as the labor market will finally “cool down” this fall. The US presidential election is not considered a decisive factor for economic development. It is true that if Donald Trump wins, “SEB Bank” expects slightly lower gross domestic product (GDP) growth, a stronger US dollar, greater geopolitical uncertainty and trade wars.

The strength of the US economy and the labor market, as well as persistent inflation, forces SEB bank economists to change their forecast for the number of rate cuts this year. In general, US economic growth means higher nominal and real interest rates, as well as a stronger US dollar. This affects growth and monetary policy in both Europe and Asia, creating some tension between the US and the rest of the world.

Eurozone growth will be sluggish in the first half of 2024, mainly due to weak economic growth in Germany, the review predicts. Aided by fiscal stimulus, China will reach its growth target of 5% this year. India’s GDP will grow by 6.5%. If this trend continues, India could soon become the third largest economy in the world.

The review says that Denmark can enjoy economic growth thanks to the pharmaceutical sector, while Norway can enjoy the growth thanks to the oil sector. Economic growth in Sweden will remain slow – the main reasons are the weak consumption and the sharply reduced activity in housing construction. Growth prospects will improve next year both in Sweden and in other economies that are sensitive to interest rate fluctuations.

Evaluating changes in consumer confidence, there is an improvement, although overall it remains at a low level, explains the “Nordic Outlook” review. Indicators of global industrial activity have risen to a neutral level. Lower inflation, wage growth, as well as a high level of employment pave the way for more active private consumption. Lower interest rates will help ease the pressure on household finances and support housing investment.

According to SEB Bank’s economists, the crisis policy should now be replaced by policies and decisions that will promote investments in the defense and security sectors, as well as in energy and the implementation of the green transition. Many countries need to mobilize private capital through different types of incentives, such as environmental taxes or public-private partnership opportunities. One of the risks of fiscal policy is that the US, the EU and China may end up in a competition for state support and subsidies.

The world has successfully managed to suppress inflation. According to business surveys and business sentiment indicators, price pressures have eased. Producer price indices also point to lower prices of consumer goods. There has been a significant decrease in raw material prices (compared to the 2022 peak), although in some cases they are still significantly higher than before the pandemic. Wage growth is fueling inflation in the services sector, where demand has been robust. However, wage growth has slowed significantly in the US, with similar signs in Europe.

The review states that at the beginning of 2024, the market predicted a total of six rate cuts by the US Federal Reserve for this year. Currently, the market doubts whether the Federal Reserve can implement more than one reduction before the end of the year. Regarding the ECB, “SEB banka” economists expect a total of four rate cuts this year and four more in 2025. The Federal Reserve will delay the first rate cut until September and will continue to act more slowly – two rate cuts are expected this year and four in 2025.

Oil prices have risen to $90 per barrel (Brent) this year. The market is focused on concerns about the escalation of hostilities in the Middle East. “SEB Bank” economists believe that oil prices will largely be determined by economic activity, inflation and actions of central banks, as well as “OPEC+” production plans. New sanctions on Iran in May and renewed US sanctions on Venezuela will reduce the volume of oil on the market, but other countries such as Saudi Arabia have spare capacity to make up for the shortfall. Economists of “SEB banka” believe that in 2024 and 2025 the price of oil will average 85-90 US dollars per barrel.

Although energy prices are still higher than before the pandemic, they have been decreasing since the beginning of 2023. However, energy prices for households are still high from a historical perspective, even though oil and gas prices have stabilized. One explanation for this situation is that as taxes related to energy consumption have risen sharply, energy prices also affect other costs. This applies to everything from the emission price, energy transfer fees and taxes. In Europe, they are often higher than in the US, affecting competitiveness.

Economic prospects in Latvia are improving, so GDP growth will accelerate, despite prolonged uncertainty. The recovery will be driven by household consumption and public investment. This year, “SEB banka” expects GDP growth of 1.9%. The “pull” of development will further strengthen in household consumption, which will continue to be driven by the recovery of purchasing power. There are also signs of gradual stabilization in exports.

Economic growth could strengthen in the second half of this year, predicts the “Nordic Outlook” review. However, this recovery will proceed at a moderate pace – due to geopolitical risks and events, as well as delayed interest rate cuts. Private investors will remain cautious, so public investment will have a critical impact on economic activity.

As for the rest of the Baltic States, – in Lithuania, public investments will partially compensate for the decline in activity in construction. Housing prices have stabilized and household consumption is gradually recovering. It is expected that along with the increase in defense spending, the budget deficit will increase this year. This year, we expect GDP growth of 1.5%.

On the other hand, in Estonia, after two years of GDP reduction, signs of stabilization have appeared, including better indicators in the retail and industrial sectors. GDP is expected to fall by 0.5% this year. The recovery in 2025 will be driven by an increase in export volume and household consumption.

It has already been reported that SEB reduced Latvia’s GDP growth forecast for this year from 2% to 1.9%, while the GDP growth forecast for next year was maintained at 2.7%, according to the bank’s latest economic review “Nordic Outlook”.

Thus, SEB analysts still expect the fastest growth among the Baltic countries in Latvia this year, while the slowest growth among the Baltic countries is predicted for Latvia next year, slightly behind Lithuania.

At the same time, SEB has increased Latvia’s annual average inflation forecast for this year from 1.4% to 1.5% predicted in January, while the annual average inflation forecast for next year has been maintained at 2.4%.

In the Lithuanian economy, SEB still predicts an increase of 1.5% this year, and 2.8% in 2025.

At the same time, Lithuania’s annual average inflation forecast for this year was reduced from 2% to 1%, while the forecast for next year was maintained at 2.7%.

On the other hand, in the Estonian economy, SEB analysts are still predicting a fall of 0.5% this year, while in 2025, the growth of Estonian GDP is still estimated at 3.5%.

At the same time, Estonia’s annual average inflation forecast for this year was reduced from 3.8% to 3.5%, but in 2025, the average annual inflation in Estonia is still forecast at 2.5%.