Nordea Economic Outlook: Forward into the Headwind

Today, on 27 March, Senior Economist at Nordea, Andris Strazds, presented the key conclusions drawn from the latest Nordea economic survey, Economic Outlook. Nordea economists say that there is new hope in the world’s economy after the dramatic summer and autumn of last year that threatened to send the financial markets back into a recession. The optimism is connected with sustainable recovery of the US economy, restricted expansion of the government debt crisis in the European countries and further growth of economic activities in developing markets.

Senior Economist of Nordea, Andris Strazds: “Despite the US economy failing to achieve its long-term growth targets and the economy of China being expected to grow slower than previously forecast, both of the world’s largest economies continue to be the driving force behind the world economy. At the same time, the extraordinary measures taken by the European Central Bank in February this year in the form of collateralised lending of more than one billion EUR to commercial banks for a period of three years have set the financial markets at rest and have indirectly helped a number of countries affected by the debt crisis to borrow at rates that they will be able to pay in the long term. Undoubtedly, stabilisation of the financial markets has a positive impact on the consumer confidence and demand. As a result, the economic fall in the euro zone this year may be lower than forecast. Similarly, the Nordic economies may experience modest growth instead of stagnation that was forecast previously.

Because the developments in the markets critical to Latvian exports have proven to be more favourable than forecast in early December when we prepared our previous economic outlook, we believe today that our forecasts of stagnation in Latvian exports have been too pessimistic, and that export is likely to show growth of several base points after all. As well, the local market has presented a number of positive surprises such as rapid growth in retail sales in January, which leads one to believe that the positive trend triggered by rapid growth last year is still using its momentum in the beginning of this year. Despite multiple critical risks in economic development still in sight this year, Nordea has increased its GDP growth forecast for 2012 to 2%.

Admittedly, the developments on the critical export markets for Latvia and the local market are still vulnerable to several factors. The most critical of such factors appears to be the prolonged high prices of oil and potential further growth of these prices. One must remember that the impact that the rapidly growing oil prices will have on inflation and demand is likely only fully to materialise during the second quarter of the year when Latvia may undergo stagnation or a slight drop compared to the first quarter. Another significant risk is presented by the potential obstruction of the reform process in several countries of the euro zone such as Spain, which has already announced its inability to reduce its budget deficit as quickly as promised. One must bear in mind that the European Central Bank has already used most of its ammunition for this year, which could mean that some countries losing delicate investor trust that they appear to have regained may trigger an economic crisis on a new scale.”

Video of Economic Outlook by Andris Strazds www.nordea.lv/nordealive.