SEB Nordic Outlook: Interest rates are expected to decrease
The outlook for economic growth continues to improve, while the global economy is still recovering from the COVID-19 pandemic and the shocks caused by energy prices and inflation, according to the assessment of SEB banka’s economists published in the Nordic Outlook. Companies and private individuals continue to expect interest rate cuts. Inflation is continuing to fall, but this trend is not stable, so interest rate cuts will be slower than expected. The European Central Bank (ECB) and the Federal Reserve of the United States may make the corresponding decisions in June and September, respectively.
Lower inflation, lower interest rates and high employment create the conditions for growth in consumption and investment. Conversely, the deterioration in the geopolitical situation with the increasing risks of military, political and economic conflicts in turn creates an environment of high uncertainty.
Global economic growth is expected to be within the range of 3%
However, the predictability of the economy has improved recently. Global uncertainty will continue to have a moderate real and financial impact, provided energy prices are not significantly affected. Despite surprisingly strong growth in the US (accompanied by high inflation), we expect moderate global growth: just over 3% per year from 2022 to 2025. Historically, such an increase is appropriate given the events of recent years - the pandemic as well as the climate and energy crises and the wars in Europe and the Middle East. Tariffs on freight transport have fallen in recent weeks and sentiment among manufacturers has improved. While risk appetite has waned, global asset prices have proved unexpectedly resilient. After a strong first quarter of this year, the trend in stock markets reversed in April due to reduced risk appetite. It is worth remembering that geopolitical risks rarely have a lasting negative impact on stock markets.
Europe still sluggish, and US growth may slow down
The US economy continues to grow despite high real interest rates and inflation. Growth is expected to slow in 2025 when the labour market finally “cools” in the coming autumn. The US presidential election is not seen as a decisive factor for the development of the economy. We do expect somewhat lower GDP growth, a stronger US dollar, more geopolitical uncertainty and trade wars in the event of Donald Trump’s victory. The strength of the US economy and labour market as well as persistent inflation are forcing us to change our forecast regarding the number of rate cuts this year. Overall, US economic growth means higher nominal and real interest rates and a stronger US dollar. This has an impact on growth and monetary policy in Europe and Asia causing certain tension between the United States and the rest of the world.
Growth in the eurozone will be sluggish in the first half of 2024, primarily due to weak economic growth in Germany. Due to fiscal stimulus, China is expected to reach its growth target of 5% by the end of this year. If this trend continues, India could soon become the world's third-largest economy. Denmark can look forward to economic growth thanks to the pharmaceutical sector, and Norway owing to the oil sector. Economic growth in Sweden will remain sluggish, mainly due to weak consumption and the sharp decline in residential construction. Growth prospects will improve next year, both in Sweden and in other economies that are sensitive to interest rate fluctuations.
Consumer confidence improved, consumption growth expected
There have been improvements in the assessment of the development of consumer confidence, even if it remains at a low level overall. The indicators for global industrial activity have risen to a neutral level. Lower inflation, wage growth and high employment levels are paving the way for more active private consumption. Lower interest rates will help to ease the pressure on household finances and support investment in housing. The crisis policy should now be replaced by policies and decisions that promote investment in the defence and security sector, energy and the implementation of the green transition. In many countries, private capital needs to be mobilised through various types of incentives, such as environmental taxes or the possibility of public-private partnerships. One of the risks of fiscal policy is that the US, the EU and China could end up competing for state aid and subsidies.
Globally, inflation has been successfully suppressed. Prices have eased according to business surveys and entrepreneur sentiment indicators. Consumer goods prices are also expected to decline according to producer price indices. Commodity prices have fallen significantly (compared to the peak of 2022), although in some cases they are still significantly higher than before the pandemic. Wage increases are contributing to inflation in the services sector, where demand has been strong. In the United States, however, wage growth has slowed significantly, and similar signs may also be observed in Europe.
At the beginning of 2024, the market predicted a total of six interest rate cuts by the US Federal Reserve this year. At the moment, the market doubts that the Federal Reserve can make more than one cut by the end of the year. At the ECB, we expect a total of four rate cuts this year and four more in 2025, while the Federal Reserve will wait until September for its first rate cut and proceed more slowly with only two rate cuts this year and four in 2025.
The decisive energy price factor
Oil prices have risen to USD 90 per barrel (Brent) this year. Concerns about escalating hostilities in the Middle East are at the forefront of market concerns. We believe that oil prices will be largely driven by economic activity, inflation and central bank actions as well as OPEC+ production plans. The new sanctions against Iran in May and the repeated US sanctions against Venezuela will reduce the amount of oil on the market, but other countries, such as Saudi Arabia, have spare capacity to make up the shortfall. We believe the oil price will average USD 85-90 per barrel in 2024 and 2025. Although energy prices remain higher than before the pandemic, they have been falling since the beginning of 2023. But for households, energy prices remain high by historical standards, even though oil and gas prices have stabilised. With the sharp rise in taxes on energy consumption, energy prices are also influenced by other costs, which is one explanation for this phenomenon. This applies to everything from the price of emissions to energy transmission fees and taxes. In Europe, they are often higher than in the USA, which affects competitiveness.
Moderate growth expected in the Baltics
Despite the ongoing uncertainty, Latvia's economic outlook is improving, which will lead to accelerated GDP growth. Private household consumption and public investment will drive the recovery. We expect GDP growth of 1.9% this year. The “driver” of growth will continue to be private household consumption, which will be further fuelled by the recovery in purchasing power. There are also signs of stabilisation in exports. Economic growth is expected to strengthen in the second half of this year. However, this recovery will take place at a moderate pace due to geopolitical risks and events as well as the continuation of interest rate cuts. Private investors are expected to remain cautious, meaning that public investment will have a decisive influence on the economy.
Speaking of the other Baltic countries, public investment in Lithuania will partially compensate for the decline in construction activity. Property prices have stabilised and household consumption is gradually recovering. The budget deficit is expected to rise this year due to the increase in defence spending. We expect GDP growth of 1.5% this year. Conversely, Estonia has shown signs of stabilisation after two years of GDP decline, including improved performance indicators in retail and industry. GDP is expected to fall by 0.5% this year. The recovery in 2025 will be driven by growth in exports and household consumption.
