The operating environment in 2016

  • Neutral global macroeconomic environment
  • Regional growth engine Sweden is slowing down, while the Finnish economy is improving
  • Unprecedented global economic policy uncertainty
  • Reflation: higher commodity prices, equity markets, and long-term government bond yields
  • No increase in European short-term rates in 2017, but credit spreads to widen slightly
  • Demand for long-term credit is soft in the corporate segment while strong in the public sector

The global and Nordic-Baltic economies are estimated to have grown at a very similar pace in 2016, at 3% and 2% respectively, as in the previous year. While the Swedish economy—the region’s economic locomotive in recent years—slowed down somewhat, in Finland the economy showed signs of improvement.

The decline in oil-related investments is still damping activity in Norway, but its drag on economic growth is fading and the already relatively low unemployment rate has been declining.

Developments in global financial markets were still dominated by the unprecedented expansive monetary policies, despite some modest tightening by the US Federal Reserve. The year also witnessed some major political surprises, most notably in the United Kingdom and the United States.

While initially sharp, market reactions were mixed and fairly short-lived; equity and commodity markets rallied on a reflation theme towards the end of the year. Long-term government bond yields climbed from historical lows, also in the Nordic-Baltic region.

Government bond yields

Benchmark 10 years

Government bond yields

Despite favourable financing conditions, corporate investment activity and related demand for long-term loans remained subdued. However, the demand from the public sector for loans to finance infrastructure investments remained strong.

Looking forward

Entering 2017, economic indicators pointed to a global cyclical upswing in industrial activity. In the midst of unprecedented global policy uncertainty, forecasts for economic growth globally of 3.4% and for the Nordic–Baltic region of 1.7% call for positive, but still historically sub-par, performance.

Economic policy uncertainty indices

Economic policy uncertainty indices

Inflation and commodity prices are forecast to rise, while short-term interest rates should increase slightly in the United States, but remain unchanged in the euro area and most of Europe.

In this context, corporate investment is also expected to remain subdued. On the other hand, infrastructure investments by local and regional governments in the Nordic–Baltic countries should continue to generate strong demand for long-term capital.

While the downward pressure exerted by monetary policy on credit spreads remains, it appears to be fading somewhat. Lining up key factors affecting the euro and regional credit spreads, after falling for most of 2016, they appear on balance more likely to increase in 2017—albeit only slightly.

Euro area corporates index

BBB-rated, asset swap spread (bps)

Euro area corporates index