Nordic Economies: Covid-19 Impairs 2020 Growth but Rising Public Debt Levels Still Manageable

The economic cost of the Covid-19 crisis will be significant across the Nordic region. Economies have been impaired by disruptions to production and supply chains alongside significant declines in internal as well as in foreign demand. Labour market dynamics, the speed of 2021 economic recoveries and fiscal and monetary interventions will vary across the region.

“Finland will see public finances deteriorate materially, with debt reaching around 70% of its GDP, presenting challenges in terms of required future fiscal consolidation,” said Dennis Shen, a director in the sovereign ratings team of Scope Ratings and co-author of a new report on the Nordic region.

“Denmark and Norway, having managed the crisis commendably to date and now re-opening, will nonetheless see significant economic contraction in 2020. Sweden has shown signs of greater resilience and is set to experience a comparatively moderate 2020 GDP contraction, due to less restrictive virus containment but this has come at the cost of higher loss of life alongside an impeded recovery as the health crisis remains unresolved. In general, the 2020 contraction in the Nordic region is expected to be somewhat more moderate, however, than that in the euro area aggregate.”

Denmark: significant 2020 recession but public finances remain robust

The extensive and speedy lockdown implemented by Denmark will weigh on 2020 economic performance. Scope expects a gradual, uneven recovery but with public finances still in a comparatively strong position. “Denmark’s strong fiscal fundamentals entering this crisis enable the government to run a wide 2020 public sector deficit of around 8.1% of GDP, its widest deficit since the early 1980s, without endangering debt sustainability. The government debt-to-GDP ratio is expected to increase from 33.2% in 2019 to a still moderate 42.5% in 2020.”

Norway: pandemic and oil price crisis bring material recession, but gradual rebound expected

The Covid-19 economic shock and turbulence in global oil markets will push the Norwegian economy into significant recession. “After -3.75% growth in 2020, we anticipate 2.5% in 2021, supported by an uneven recovery in global aggregate demand and a gradual increase in external demand for Norwegian oil and gas exports – the latter accounting for 15% of Norwegian GDP and 35% of exports of goods and services in 2019. This is even though effects of the crisis will still be wearing on wage growth, and, as such, on domestic consumption patterns,” Shen said.

Sweden: moderate 2020 economic contraction but at significant cost to lives in a health crisis

A comparatively moderate economic contraction in Sweden in 2020 is foreseen, due to less stringent economic restrictions. However, with the virus having reached peak case counts in June, recovery will be impeded so long as the virus is not brought under control. “We expect a fiscal deficit of 6.2% of GDP, after five consecutive years of general government budgets in balance or in surplus entering 2020,” said Shen. The debt-to-GDP ratio is expected to rise from 35% in 2019 to a still moderate 42% in 2020.

Finland: rising debt during 2020 crisis requires fiscal consolidation steps after the crisis

Economic contraction, government stimulus and economic weaknesses that pre-date the pandemic have pushed up government debt in Finland significantly and this could present risks to longer-run debt sustainability if a swift response to stabilise the debt trajectory is not acted upon. “We expect a general government deficit of 8.5% of GDP in 2020. As a result, debt-to-GDP is seen increasing to about 70% in 2020 (from 59% in 2019) – rising back above an EU 60% threshold – requiring fiscal consolidation steps after the crisis to re-strengthen Finnish debt sustainability,” Shen said.

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Dennis Shen is a Director in Public Finance at Scope Ratings GmbH.