SEB Nordic Outlook: The economy and financial markets weather the tests
As security policy becomes increasingly unpredictable, the rules-based international order and established systems of cooperation continue to erode. However, economic growth in the United States and globally in 2025 proved stronger than expected, according to SEB banka’s Nordic Outlook, a global and Baltic economic review. The global economy expanded despite ongoing wars and conflicts, as well as the policies of U.S. President Donald Trump and repeated assaults on the independence of the Federal Reserve System. Growth was underpinned by a strong labour market (although it weakened in the United States), rising household incomes, and increased investment in defence, infrastructure, and security in Europe, alongside technology investment in the United States. More expansionary economic policies and easier financial conditions also provided support. In addition, the U.S. economy benefited from deregulation measures introduced by the White House.
According to Nordic Outlook forecasts, global GDP is expected to continue growing at slightly above 3% annually in the years 2026–2027. However, the drivers of growth differ significantly across regions, and the post-pandemic recovery has been fairly uneven. According to the World Bank data, GDP per capita in 90% of advanced economies has now exceeded pre-pandemic levels (75% in low-income countries).
Growth in the U.S. will hover around 2%
One of the most pressing questions today is how a new international order, i.e., one that is increasingly less based on jointly agreed rules, will evolve, and how it will affect economic development. Many countries face mounting challenges related to security and trade policy. U.S. policy is placing additional strain on the already unbalanced trade relationship between Europe and China. Meanwhile, Beijing continues to pursue an export-led growth model and greater self-sufficiency, putting downward pressure on prices and profitability for European companies. By contrast, the European Union is grappling with structural weaknesses in its industrial base and persistently low productivity growth. Therefore, the decisions that strengthen the EU’s internal market could help reduce vulnerabilities and support stronger long-term growth.
How governments manage security policy, trade relations, and investment in artificial intelligence will have both positive and negative implications for growth and financial markets over the long term. Despite last year’s tariff shocks, the U.S. recession was milder than expected, largely due to unexpectedly strong investment in technology. Growth was further supported by robust household consumption and a sharp rise in equity prices. U.S. GDP growth is projected at 2.3% this year and around 2% next year.
Growth in the Eurozone – the role of household consumption and investment will increase
Economic growth in the Eurozone is expected to be 1.2% in 2026. Various indicators, including the Purchasing Managers’ Index (PMI), point to moderate economic activity. However, the composition of growth remains unbalanced. PMI data reveal a widening gap between the services and manufacturing sectors, with manufacturing activity indicating stagnation. For example, German industry is struggling with both structural and cyclical challenges and is facing intensifying international competition, particularly from China. Industrial activity in France is experiencing similar problems.
The Eurozone’s previous growth model, which is largely driven by exports, is expected to be increasingly replaced by household consumption and investments. The German economy, and the Eurozone growth more broadly, is receiving support from rising defence spending and infrastructure investment. At the same time, heightened uncertainty is making companies reluctant to carry out development and investment plans. Households also remain cautious and continue to save more, despite rising incomes and lower interest rates. Tight public finances and the need for greater fiscal consolidation in France, Italy, and Spain are limiting fiscal space. Fiscal policy in the Eurozone is expected to remain broadly neutral in the coming years.
Wage growth is slowing, but the fight against inflation is not over
Wage growth has slowed in several major economies, including the United States and the Eurozone. Deflation persists in China, with prices for many raw materials and food products declining. Additional disinflationary pressures are emerging in countries where currencies are strengthening against the U.S. dollar. Some economists remain optimistic about productivity gains driven by artificial intelligence, although the broader economic impact has yet to materialise. An increasingly relevant question is who will benefit most in the long term from AI and technological advances: companies that build infrastructure, or those that primarily use the services.
Inflation in the Eurozone is already close to 2%. In the United States and the United Kingdom, inflation remains too high but continues to decline. Core inflation across these economies is still slightly above the targets. Service prices continue to rise faster than historical norms, although in the U.S., they are approaching the historic average level. In Europe, high wage growth, driven by a tight labour market, continues to drive services inflation. Even if wage growth moderates, service inflation in the Eurozone is expected to remain high by historical standards.
Energy prices face weak growth; the role of rare metals increases
Energy prices are being restrained by weak economic growth, increased investment in renewable energy, and ample supply. Chinese export prices are also falling. Food prices are easing, reducing their contribution to overall inflation. Energy was the weakest-performing commodity segment last year, with oil prices down 18% and gas prices down 40%. Fossil fuel generation capacity continues to expand, while solar and wind power generation are projected to increase by nearly 80% in 2025. At the same time, the cost of energy storage is declining.
The OPEC+ is expected to cut oil production this year to stabilise the price of Brent crude at around USD 65 per barrel. Liquefied natural gas (LNG) prices are expected to fall as global export capacity expands next year, although prices have recently risen due to cold weather and low European inventories.
Rising prices for metals such as gold and silver are being driven by both geopolitical uncertainty and industrial demand. Around 15–20% of global silver demand, for example, comes from solar technology manufacturers. These factors are expected to remain dominant this year. U.S. tariffs on various metals, and concerns about additional trade measures, have weighed on global prices as importers have built up inventories. The supply and control of critical metals have become an increasingly important element of security policy. Competition for strategic global leadership (primarily between the United States and China) is influencing demand for rare earths and other critical materials.
Rates have stabilised, risks of instability remain
In 2025, several central banks reached their lowest policy rate levels, including the European Central Bank, the Swedish Riksbank, the Swiss National Bank, and the Bank of Canada. In 2026, the Federal Reserve is expected to gradually reduce its policy rate, reaching 3.00% by the autumn—broadly in line with estimates of the neutral rate. The ECB’s policy rate is forecast to remain at its current level of 2.00% throughout both 2026 and 2027. Although current indications suggest that policy rates set by the ECB and the Federal Reserve will remain unchanged in 2027, historical experience show that central banks rarely wait that long before changing rates again.
GDP growth in 2025 surprised us positively, but downside risks remain. These risks are related to political decisions and their impact on growth and financial markets. A possible ceasefire between Moscow and Kiiv could have a certain positive impact. Although the impact of the US tariff war in 2025 was smaller than expected, political decisions can quickly lead to a growing negative impact. In addition to the direct impact of US tariffs, conflicts can also create a reinforcing domino effect, for example, in financial markets. At the same time, the rise in government bond yields could threaten the high stock market valuations associated with factors such as artificial intelligence.
Latvia's economic growth is expected at 2.3% this year
Latvia’s GDP grew by 2.5% year on year in the third quarter of last year, confirming an acceleration in the economic recovery and strengthening growth prospects for 2026 and 2027. The economy is increasingly supported by a strengthening investment cycle, driven by inflows of EU funds, rapid growth in lending, and a higher appetite for risk. At the same time, increased construction activity is having positive spillover effects on other sectors. Growth is also supported by strengthening exports, primarily in services. Private consumption is showing signs of recovery, underpinned by real wage growth.
Inflation is expected to continue declining, although service prices will remain relatively elevated. The labour market is set to remain dynamic, and while wage growth will gradually moderate, it will continue to put pressure on competitiveness and profit margins. GDP growth is forecast at 2.3% this year and 2.4% next year. The main risks remain geopolitical developments, which could affect both growth and inflation dynamics.
Strong growth will continue in Lithuania; Estonia is also gradually recovering
After strong and broad-based growth last year, Lithuania’s economy is expected to accelerate further this year. Growth will be driven mainly by a temporary boost to private consumption related to pension fund withdrawals, as well as a sharp increase in investment in defence infrastructure and residential construction. While manufacturing activity remains subdued, service exports continue to expand strongly.Inflation is expected to slow only marginally. Wage growth will also moderate, but house prices will continue to rise faster than incomes. Fiscal policy will remain expansionary, with defence spending exceeding 5% of GDP in 2026. Economic growth in Lithuania is forecast at 3.2% this year, slowing to 2.1% next year.
After several years of high inflation and tax increases, conditions for Estonian households are gradually improving. The introduction of a universal tax-free minimum of EUR 700 per month will significantly boost net incomes, particularly for middle- and upper-income households. This is likely to support a recovery in consumption and benefit sectors such as hospitality, car sales, and the housing market.
Inflation, which was driven higher last year by tax hikes and rising food prices, is expected to gradually ease to around 3%, while the labour market remains strong. Real wage growth will be among the fastest seen in recent years. Export prospects are set to improve as order volumes increase and construction activity recovers in the Nordic countries. As the 2027 parliamentary elections approach, political uncertainty surrounding fiscal policy and budget deficit consolidation is expected to increase. Estonia’s economic growth is forecast to recover to 2.7% this year and rise further to 2.8% in 2027.
Dainis Gašpuitis
Economist at SEB Bank
