Nordic Outlook: Forecasts for economic growth are becoming more optimistic, but uncertainty remains
Unpredictable global politics and conflicts remain at the centre of attention, and growing uncertainty continues to be one of the key factors affecting economic development. US President Donald Trump’s rapid policy changes have not been favourable to growth. Trade uncertainty, which has eased over the summer, remains at a historically high level. The good news is that this has not caused increased stress in global supply chains, according to the Federal Reserve System's (Fed) Financial Stress Index and the reaction of financial markets. Risk appetite has increased over the summer, and many equity markets have reached new highs. The real test for equity markets is expected in the autumn when we will see the impact of tariffs on the economy and corporate earnings around the world. Uncertainty is likely to continue to restrict growth in the near future. However, the stock market hike might continue until the end of 2025.
Uncertainty grows amid unclear effects of tariffs
This summer has been marked by geopolitical uncertainty, with new so-called ‘trade agreements’ and volatile economic developments. Now we have to prepare for a tense autumn and the year 2026. The US has already imposed import tariffs on several countries, but it is not yet clear how the new agreements will work in practice. Trade relations between the US and China are also unclear. All we know is that negotiations are still ongoing. The tariffs, which are the highest since the 1930s, will have an impact on the economy, but it is not known how this impact will manifest itself. It is estimated that they could generate around USD 400 billion annually for the US Treasury, but who will ultimately pay those billions? Although tariff revenues in the US are increasing, they do not cover all the costs related to the tax cuts introduced by Donald Trump.
The economy will continue to be influenced by geopolitical developments. Conditions can change quickly, so high volatility on the financial markets is likely. The global growth risk scenario remains on the downside, with growth slowing (albeit less than previously forecast). Tariffs are impeding growth prospects, especially in countries that impose tariffs, although the consequences and impact are difficult to assess. Currently, the average effective US tariff rate is between 15% and 20%. This figure varies depending on the source of the data, reflecting a lack of detailed and accurate information. Nevertheless, we are raising our global growth forecast slightly to 3% this year and 2.9% next year.
Economic growth will be supported by the adaptability of businesses and households as well as expansionary fiscal conditions, rising stock markets and favourable conditions for corporate borrowing. At the same time, the question arises as to whether the tariffs will affect investment and consumption in the longer term. Tariff-induced inflation in the US will limit consumer capacity, albeit with a time lag. Even if the direct impact of tariffs proves to be smaller, the indirect impact will manifest itself in the form of trade, real and financial risks. The impact of tariffs also varies as relative tariffs are important, for example for Europe and China. If US imports from China decline, other countries with lower tariffs could benefit from that.
“Although the main scenario for development has improved, the negative risks still outweigh the positive ones. We are in a complex and unstable environment: policy mistakes or a drastic revaluation of asset prices could undermine the underlying resilience and growth momentum of the economy. There is a risk that macro data and financial market interpretations have been too positive this spring and that the negative impact of tariffs will be stronger than expected. Tariffs could have a stronger and broader impact on inflation, causing real incomes to fall and interest rates to rise. Fiscal and monetary policy faces complex challenges under uncertain circumstances – it provides support but also creates risks in China, the US and Europe,” SEB banka’s economist Dainis Gašpuitis points out.
Recession risks have diminished; U.S. growth momentum is weakening
The labour market and consumer data clearly show a slowdown in the US economy, although this is more moderate than expected and has reduced the risk of a recession. The employment figures have not been encouraging – the economy and labour market did not look that strong this summer. In the longer term, uncertainty will have a negative impact on consumption and investment. The slowdown in the labour market has put additional pressure on the Fed to lower interest rates. Trump would like to see several sharp rate cuts. Fed Chairman Jerome H. Powell indicated at the meeting in Jackson Hole that a rate cut in September is very likely. A combination of a weaker dollar, lower real interest rates and lower energy prices could lead to a partial success of Trump’s growth strategy. However, growth in the US will slow for both cyclical and structural reasons. US growth will fall from 2.8% in 2024 to 1.6% this year and 1.7% next year as the labour market and household consumption weaken. While growth remains unimpressive on both the continents, U.S. economic growth will continue to outpace Europe’s.
Growth in the eurozone is supported by investments in security and infrastructure
Growth in the eurozone, on the other hand, is improving. Economic activity is expected to rise from 0.9% last year to 1.2% this year and 1.3% in 2026. Growth prospects vary across the eurozone countries, but the differences are narrowing. Growth will be driven by European investments in defence and infrastructure, which also have the potential to boost productivity. Investment in infrastructure and defence is boosting the German economy, for example, as the so-called “debt brake” is being eased. Fiscal policy is supporting demand in the eurozone and China, and, from next year, also in the USA. However, the already high government budget deficit and debt increase the risk of fiscal instability. The data shows that households remain cautious despite interest rate cuts and real wage growth, and are restricting consumption due to high price levels.
In the long term, growth potential could be boosted by investment, a larger labour supply and higher productivity, even if the implementation and impact of such reforms will take time. Economic growth is hampered by structural problems such as low productivity growth, record low unemployment and demographic constraints. The key to positive productivity improvements will lie in the simplification of regulations, investment and artificial intelligence. In the US, investment related to artificial intelligence contributed more to growth than household consumption in the first half of the year. Meanwhile, household confidence in the future is quite low in many countries, which is confirmed by various surveys and sentiment measurements.
The impact of tariffs on inflation
Inflation is generally moving in the right direction, but price inflation for services remains quite high. Wages are rising more slowly in both the US and the eurozone. Higher tariffs will lead to a temporary rise in inflation in the US. Assuming that the tariffs are at least partially passed on to households, goods price inflation in the US will clearly increase. So far, this has only had a minor impact on inflation in the USA. Weaker demand from US households, on the other hand, will dampen the rise in prices. It is likely that the costs of the increased tariffs will be shared between households and importers.
“Deflationary forces prevail in most other countries, exacerbated by the expected further weakening of the US dollar and surplus production capacity in China and Southeast Asia, which will need to find new markets. This will have an impact on the global commodities market. Commodity prices, especially electricity prices, also limit inflation. A more favourable inflation scenario and stable inflation expectations will allow the European Central Bank (ECB) to lower monetary policy rates further. We assume that the ECB will cut interest rates again this year, and that the interest rate for the euro will most likely not be much lower than today’s level. After eight rate cuts (since June 2024), the ECB is nearing the end of its rate-cutting cycle,” points out Dainis Gašpuitis.
Conversely, the Fed faces the dilemma of tariff-induced inflation and a weaker labour market. The view that the impact of tariffs will be short-lived and that overall inflation forecasts are stable will make the Fed to cut rates at its remaining three meetings this year. The ECB and the Fed are expected to start raising their monetary policy rates again in 2027, although very cautiously and to a small extent.
Favourable electricity price outlook
Last year, the oil price averaged USD 70 per barrel, with normal fluctuations of +/- USD 12. Despite the geopolitical developments, the oil price fluctuated within the range of historical volatility. We expect the oil price (Brent) to be USD 65 per barrel in 2026. To prevent a further fall in oil prices, OPEC+ would need to make new production cuts. Before that, the oil price could fall significantly below USD 65. The price of natural gas (measured in oil equivalents) has closely tracked the price of oil since 2023. European natural gas storage facilities are on track to reach their capacity target of 90% by mid-October. The global market for liquefied natural gas is well balanced, and the price is expected to remain close to the oil price until early 2027. After that, due to the increased capacity, the price of liquefied natural gas is likely to fall below the oil price.
Economic growth in the Baltic States will gain pace
Economic growth in the Baltic countries will remain uneven, with Lithuania continuing to show the highest growth rate, while Latvia and Estonia will experience a gradual recovery. Private household consumption in Latvia has been weaker than expected. Global uncertainty and inflation continue to affect consumer sentiment; therefore, rising real wages and lower interest rates have not led to a strong increase in consumption. The manufacturing industry and exports are showing a moderate recovery. The inflow of EU funds has boosted investment, which will be an important factor for economic activity in the coming years. The labour market remains relatively stable. As growth in the manufacturing and construction sectors increases, unemployment will fall faster. Inflation has almost reached its peak and will gradually slow down in the future. Wage growth will also weaken slightly, but real wage growth will remain strong. We expect Latvian GDP to grow by 1.3% this year and accelerate to 1.9% next year.
The recovery in Estonia has been weaker than expected, so the GDP growth forecast for this year has been lowered to 1.2%. Owing to exports, the Estonian economy will gradually accelerate to 2.5% and 2.8% in 2026 and 2027, respectively. Conversely, Lithuania’s growth is stronger and should improve to 3.1% next year as consumption picks up. In 2027, growth will converge with the other two Baltic countries and slow to 2.1%. Owing to strong domestic demand, inflation will remain above 3% in 2026.
