The global economy slowed to 3.1% growth in 2015, compared to a growth of 3.4% in 2014. Depressed commodity prices, combined with other domestic factors, prompted severe recessions in Brazil and Russia. Meanwhile China, as it adapts its growth model, is gearing down and therefore unable to pick up the slack. While the expansion of the U.S. economy and the European recovery are not derailed, the latter remains slow and performance is mixed. This is well reflected across the Nordic-Baltic region.
The Baltic and Icelandic economies have so far proved fairly resilient to negative shocks emanating from Russia and commodity markets. On the other hand, the Finnish economy—faced with both cyclical and structural issues—is struggling to avoid contracting further.
The Norwegian economy is contending with lower oil prices, and the resulting slump in business investment, by deploying fiscal stimulus. Secondary knock-on effects are expected to become more evident in 2016.
The Danish economy is on a positive track, but growth remains underwhelming as households continue to deleverage. Sweden has fared substantially better, but growth has largely been tilted towards the household sector and accompanied by rising indebtedness.
In 2016, the global economy is forecast to grow by 3.3%, the US by 2.5% and the euro area by 1.5%. Our expectation for economic growth in the Nordic–Baltic area is around 1.7%, with the Baltic, Icelandic and Swedish economies performing best. Real GDP in Denmark and Norway is predicted to advance at the euro area pace of 1.5%, while Finland would lag behind at a slower pace of 0.5%.
Expected impact on credit demand
Despite the seemingly benign macroeconomic outlook, financial market volatility spiked entering into 2016, with equity markets correcting and commodity prices continuing to plunge. The geopolitical and event-driven risks appear to be at their highest since 9/11.
The familiar pair of issues—weak global demand and uncertainty—continues to plague the operating environment, the prospects for business investment and associated credit demand. Partially mitigating such headwinds in developed economies are low interest rates, which could decline further in inflation-adjusted terms. That could, in turn, support credit demand and rotation towards longer maturities.
Estimated impact on credit prices
Price-wise, the downward pressure exerted on credit spreads by monetary policy has faded. Due to unprecedented structural disruptions accompanying central bank and regulatory activity, the signal-to-noise ratio emanating from credit markets is weaker than usual. Nonetheless, barring material positive surprises (from e.g. economic data, corporate earnings, or monetary authorities), the uptrend in credit spreads seen since spring 2015 appears unlikely to abate.