Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to this webinar marking the release of our brand-new Nordea economic outlook, Under Pressure. My name is Terry Baynes. And today, I'm very happy to be joined by Nordea's Group Chief Economist, Helge Pedersen, who's going to be walking us through some of the highlights from the report. First, a few housekeeping details to get started. This session will last roughly 30 minutes. We'll have Helge's presentation first, and followed by a brief Q&A at the end. You are more than welcome to submit your questions via the question box in the webinar platform throughout Helge's presentation. And then finally, we will be sending out the recording after today's webinar. So without more for me, let me hand it over to Helge.

Thank you for the kind introduction, Terry, and it's a pleasure for me once again to walk you through our new economic outlook this time with the title Under Pressure. That title is a reference to the new and dramatic situation, which the world economy is facing after Russia's invasion of Ukraine and also the fact that there are these huge COVID-19-related lockdowns going on still in China. The consequence has been elevated, prices, commodity prices, energy prices and also transportation costs. And as a consequence of that, we have downgraded our forecast for the world economy for this year from more than 4% in our January forecast to now 3.3%, as can be seen from the screen. And also you see that we, next year, expect growth to be around the same level, i.e., 3.2%. You can also see from the table that our forecast for the Nordic economies, they are still relatively benign. I will come more back to the Nordic economies later in my presentation. You can also see that we have downgraded our forecast for China quite significantly to just a 4% growth this year, which is, of course, also having an importance for the world economy. So last year 2021 was indeed a very strong year, but we are facing huge challenges this year. What we also face now is central bankers around the world, which are entering a phase where they are going to normalize monetary policy. We have already seen a number of central banks starting to hike interest rates, and our expectation is that also the European Central Bank will follow suit relatively soon. Still, nobody really knows how high rates can go, and this has caused a lot of uncertainty in financial markets. And that's, of course, a consequence of the skyrocketing inflation rates, which I'm also going back to later in the presentation. But we are in a situation now where we have inflation rates, which haven't been seen for the past almost 40 years in the world economy. The good news when it comes to the growth prospects are that the fiscal policy will continue to support growth. The decision in the European Union to get rid of the dependency of Russian energy implies an acceleration of the green transformation. And we also know that defense expenditures are going to be increased significantly over the years to come. So also the EU countries can reach the 2% of GDP target. And also, as a very important buffer for the growth prospects, we find that the very high savings rates in the advanced economies, they will help us. For a number of years, we have seen increasing savings rate. So the buffer is quite significant, and that can hold up prior to consumption in times which are indeed difficult because of the high inflation rates. As mentioned, the Nordic economies, they are super strong before the invasion of Ukraine with very, very tight labor markets and also strong households in general. And that means that we expect the Nordic countries to show a high degree of resilience amid all the uncertainties, which are surrounding us. It should also be mentioned that the direct dependency on Russia is quite small, as it's only Finland which is having still a relatively significant trade with Russia. But even in the case of Finland, the dependency is much, much smaller today than it was around the time of the collapse of the Soviet Union way back in the early 1990s. The biggest risk to our forecast, they are in the order which I mentioned in now: geopolitics, inflation and new COVID strains. And when we did our forecast in January, I had the same 3 factors as the major risks, but in a different order. At that time, it was new COVID strains, inflation and then geopolitics. But for sure, geopolitics, security policy has become one of the major drivers for all economic activity going forward. Just here to show you a snapshot of where the world economy stands right now. This is a global PMI, so Purchasing Managers Index, which is being published each and every month. And the threshold here between increasing and decreasing economic activity is 50. So as we can see from the chart, then the world economy is still running in the positive territory. There's still growth in the world economy. However, it is at a slower speed than it was seen 1 year ago. And as can be seen from the graph, it's both the manufacturing and the service sector, which are above 50. We have now reopenings in a number of European countries, which has taken place here in March and April. And that means that the situation is probably somewhat better in that part of the economy now than in the manufacturing sector, which is likely to be hit more by the long delivery times, lag of materials and also the very high input prices as such. World trade recovered strongly since November last year. And as you can see from this chart, then it stands now at a record high level and also above its long-term trend. To my mind, however, these data are from February. We could expect to see a flattening of the curve or maybe even an outright decline as a consequence of both the lockdowns in China, but also the war in Ukraine. I also mentioned before that commodity prices, they have skyrocketed, and that could be seen from this chart. It's actually indexed in February 2020 at the time when the pandemic hit the world economy. And just after that, commodity prices declined sharply, but then they started to recover. And if we look at the overall commodity price index, then it is almost 90% higher today than it was before the pandemic. So this is really a supply-side shock to the world economy. For some time, it was demand-driven. But right now, it is more of a supply side shock. You can also see that oil prices are up by around 100%. Textile prices are up by the same. Industrial and metals around 75%. And agricultural and livestock also around 75%. And that is going to be feeded into higher producer prices and then eventually also into higher consumer prices. Remark also the development in soybean oil. That's a renewable energy shocks, and that's the reason that it has exploded as much as it has here during the green transformation. Another cost factor is the development in natural gas prices. And here, you can see the development in prices in Germany. The last normal year we had was in 2019 before the pandemic, before war in Europe. And at that time, the average price for natural gas in Germany was EUR 15 per megawatt hour. Then last year, it increased to EUR 48 per megawatt hour, i.e., an increase of around 200% plus. And the average for this year is more than EUR 100 per megawatt hour, i.e. another doubling. And this is, of course, something which implies a huge cost burden for corporations and also for households. And as we can see then, inflation has skyrocketed. It stands at 8.5% in the U.S. in March. Today, we will have numbers from April, and they are likely to be very high as well. And in the euro area, inflation came up at 7.5% in April, the highest ever mentioned in the lifetime of the euro area. As the labor markets are strong all over, here, you see the unemployment rate in the euro area and the U.S. is record low now in the Euro area, and it is also in the U.S. as it was before the pandemic. So with strong labor markets and with a skyrocketing inflation rate, which now has turned out not to be transitory, but more permanent, then it is actually kind of a no-brainer for central bankers now to start to combat the high inflation rates and try to bring it back to the target of 2%. And the sequence of that is relatively clear. First is the tapering of the asset purchasing programs that is being started now in the euro area, and that is done in the U.S. Then it's rate hikes, and Jay Powell has already started to hike rates relatively aggressively. And then it's duty, which is also being implemented now in the U.S., i.e., a reduction of Central Bank's balance. We are not there yet in the euro area, probably we'll come there soon. As mentioned, we have already a tapering now going on. And to our mind, then ECB is ready to start hiking rates already in July, while Q2 is not in the agenda for a number of years still in the euro area. And here you see our new financial forecast. We expect the Fed fund target rate to be increased to 3.5% by the end of our forecast horizon. In the euro area, we expect ECB to hike to 1.25%. And that implies also that we will see the same kind of rate hikes in Denmark, which is shadowing the ECB. Also, Sweden has started to increase rates already, and we expect Stephen [indiscernible] and company to continue and to stand at 1.25% by the end of '23. And the Bank of Norway, we have already seen a number of increases of the interest rates, and that is going to continue. And we expect Bank of Norway to stand at 2.5% by the end of the forecast horizon or the same as Bank of England. Also, longer-term bond yields have increased sharply recently. As you can see from this chart, then in the U.S., we are at 4-year high now, and then we should even go maybe back until the years around 2011/'12 to find similar high levels. Also in the euro area, we have recently seen a sharp increase in longer-term bond yields. And that is going to continue. Our target is now 3.5% in the U.S. by the end of '23 and 2% in the euro area. And also in the Nordic countries, we will see the same process going on. So we expect higher interest rates over the forecast horizon. The new and much more hockey stains from the central banks have led to an increased volatility in financial markets, and that is, of course, being coupled with all the uncertainties related to the situation in Ukraine. And you can see here from the VIX, how much volatility actually has increased and remark that it has increased to now steadily higher level than it used to be before the pandemic. And we could expect that volatility to continue for a while, at least until we are more certain about where our central banks going to hike rates to. Monetary policy rates have been determining the development in FX markets. And here, you see the development in the euro-dollar. And we now have the strongest dollar for a number of years, and our target is now at parity, which will be reached already by the end of this year. And then next year, when ECB is going to be more aggressive as well, then we could see a renew strengthening of the euro by the only 2 levels, which we are seeing these days. We would also expect both the [ SEK ] and the [ Norge ] to strengthen over the forecast horizon against the euro. Then a few words about the situation in the Nordic countries and the war in Ukraine. As mentioned earlier on, the Nordic economies are super strong, or they were before the invasion of Ukraine. So they are, to our mind, in a very good position to withstand the conflict. On the chart to the right, you see the trade -- the Nordic countries' trade with Russia. And you can see that it's only around 1% when it comes to Sweden, Denmark and Norway. And then you see Finland having around 11% of Finland's imports stems from Russia, while around 5% of exports goes to Russia. So Finland is the most exposed country to Russia amongst the Nordic countries, for historic reasons. Then of course, there are also indirect consequences. The Nordic countries are trading with other countries, which might be more dependent on Russia, and that will also hamper economic growth, foreign trade. And then, of course, also the fact that a number of Nordic countries have been investing directly in Russia, greenfields or joint ventures in the Russian economy, and they are going to be hit as well. Some have already left, some have just closed their operations for a while. And then again, indirect impacts on the economies through the higher energy prices, material shortages, longer delivery times and then consequently, high inflation and lower growth from that. So the Nordics are, of course, not insulated islands in this one. But we should also bear in mind that Norway is actually kind of benefiting from the situation, as we have seen this elevated. Oil and natural gas prices, and our expectation is actually that the oil price will stay around $100 throughout the entire forecast horizon. So that benefits the Norwegian economy quite a lot and on contrary to the other Nordic countries. As mentioned, the Nordic countries seems to be better off than the euro area, at least as you can see from this manufacturing PMI chart. And this is a combined Nordic manufacturing PMI here I show you. And again, bear in mind that 50 is the threshold. Above 50, increasing activity. Below 50, decreasing economic activity. And you can see that the situation amongst the Nordic companies seems to be somewhat better than in the euro area. Also, labor markets are indeed really strong in the Nordics. In all of the countries, the employment levels are now exceeding the pre-pandemic levels. So we have very, very strong recovery. And the combination then of strong labor markets and high inflationary pressure paves the way also for higher wage costs going forward. So our expectation is that there will be kinds of wage drift and that also we will see higher wages as a consequence of the negotiations, which will take place at different times over the coming years in the Nordic countries. And that will also add another pressure, at least it can add another pressure, to the inflation. And as you can see in the chart, the inflation rates are now around 5% to almost 7% in the Nordic countries. It's the highest right now in Denmark, where numbers from April showed a 6.7% inflation rate in Denmark, and that was actually the highest since June 1984. And we can expect this price pressure to continue for a while because if we look at this chart, where I show the development in producer prices, then we see that they remain elevated. In both Sweden, Denmark and Finland, we see annual increases in the range from around 25% to more than 30% year-over-year. And then Norway, you see even higher, driven by the development in the oil price. So no doubt that we will also see more hawkish central banks in the Nordic region. I already have shown you our exact forecast. But here, you see where they stand. There are positive rates now, both in Norway and Sweden, while we still have negative rates in Finland and in Denmark. Finland as a euro area country, and Denmark having an independent monetary policy, but still shadowing the euro area. Consumer confidence has been plummeting since the outbreak of the war in Ukraine, as you can see from this slide. And consumer confidence tends to be a relatively good leading indicator also for the consumption behavior in general. However, so far, we haven't really seen a downturn in private consumption in the Nordic countries, at least not when we look into the card data transactions in Nordea. Here, you can see how Nordea clients are actually spending their money on goods, and it's still up by around 10%, 15% compared to the levels before or during the pandemic. That is when it comes to goods. And so it is when it comes to services, where the reopenings of the societies really have led to a new pickup in demand for services. We want to go to restaurants, we want to have cultural experiences back again and we want to travel again. So services are in high demand after the reopening. So, so far, really no signs that this immense drop in consumer confidence has also spilled over to an actual severe decline in private consumption. And that's, of course, good. It's also maybe because of the high savings buffers in the Nordic countries, which makes private consumption hopefully more resilient than the consumer confidence data indicates. And then finally, another test for the Nordic countries will be if the housing markets can withstand the new higher interest rate levels, which we will see in front of us for the coming many years. For many, many years, we have seen interest rates close to 0 and then on a declining trend even for a number of years. Now it is a completely new ball game. And we are not least a bit worried about the situation in Sweden and in Norway, where house prices have increased the most over the past many years. So that will be the test for these countries to see if housing markets can withstand the new situation with higher inflation rates and loss of purchasing power amongst households, at least this year, and where the financing burden of taking up a mortgage has increased quite sharply. And that was actually what I intended to say. We are now opening up for the Q&A. And I can see that we have already a number of questions, and we have around 5 minutes left. So I will try to answer as good as can.

There is one easy question. Page 4, world trade increase in volume or in prices. That's in volume terms. And there's another question here. How important is the change in monetary quantity leasing in U.S. for the world stock market? For sure, there is no doubt that we will see a repricing of literally all asset classes. And also the fact that the U.S. will enter a phase with quantitative tightening that is going to increase rates quite significantly. Some part has already been discounted to the present prices, but we could see even more to come. So that is for sure something which would put at least some birth now on also global equities, no doubt about that. So there is one question here. As you are saying the higher price of energy and not least oil is impacting the Norwegian economy positively as opposed to most other countries, how do you see the extent of this, i.e., in percentage points added to GDP growth for the forecast period? Well, we do have penciled that in. And if there are any such really special questions on the details in our forecast with the Norwegian economy, then I will kindly ask you to take a call with our Norwegian economist, who have been doing the forecast. But we do have taken that into consideration. But like in all other countries, also the Norwegian economy will be hit from the high inflation rates on private consumption and also the fact that there are higher interest rates, which will take off most of the steam from the housing market. So we could also expect there that there will be a flattening or even maybe an outright fall in housing prices, which can also impact construction activity. So there are 2 counterbalancing factors going on in the Norwegian economy these days. Then there is another very good question. If it is a supply-side shock dollars increased interest rates dampen the economy. Well, you can say that it does, but it not necessarily dampens the inflation rate. And so when rates are going up, interest rates are going up, we will see lower demand in the society, lower economic activity, but the pressure from the higher commodity prices is not going to be done just by hiking interest rates. But still, for central bankers these days, it is also about saying to the public that we are doing something and we want to anchor inflation expectations at the level 2%. So by acting now, acting in due time, they can have an impact on inflation expectations longer out. So in that sense, it works. But of course, there is a risk that it could take so much out of private demand that the economy could come into a more difficult time, maybe even with a technical recession. That can clearly not be excluded. It could be that monetary policy will be too tight. And there are many also discussing the risk of a new period with deflation, like we saw it in the '70s. I don't believe that we are returning to the '70s in any ways, but I can see that we will have prolonged period where the growth will be structurally below the level, which we were used to before the pandemic and where inflation, on the contrary, will be higher than what we were used to for many years. So that, I think, also answered the question about the risk first deflation. It is a risk, and the risk has increased definitely after the Russian invasion of Ukraine, but it's still not our baseline scenario. And then I just have one question about my opinion about the raw materials and commodities. And I do believe that commodity prices, at least some of those being used the most in the green transformation, could face even higher prices in the years going forward. I could believe that we are in what we call a super cycle for commodities due to the green transformation. And the situation is, of course, being even tighter now with the decision to accelerate the green transformation in EU. So I wouldn't expect that many commodities, they would start to fall, fall in price any time soon. On the contrary, some of them being used the most in the green transformation, like aluminum, copper, nickel, et cetera, and also renewable fuels like soybean oil. They can definitely continue to increase in price. And that was actually the last question which I can find the time to answer right now. So I will thank you very much for your participation. It's highly appreciated. And I can tell you that we will be back again with a new economic outlook in the beginning of September. Have a good day.