Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Hello, and welcome to this webinar marking the release of our brand new Nordea economic outlook. My name is Terry Baynes. And today, I'm very happy to have in the studio with me. Nordea's Group Chief Economist, Helge Pedersen to walk us through the report. Just a few logistics to get started. The webinar will last roughly 30 minutes. Helly will give his presentation first, and then we'll take some questions at the end in the Q&A. And so without more for me, I will hand it over to Helge.

Thank you, Terry, for the kind introduction. It's a pleasure for me to walked you through our new economic outlook, the inflation stand up, which is reference to the ongoing fight between market forces and central banks over inflation. Let's start with the big picture and the global economy actually got off to a really good beginning in 2023 driven by the sharp fall in energy prices, strong labor markets and the reopening of the Chinese economy. That has been reflected in a much better confidence indicators from both business and households this year than what we saw by the end of last year. A large drop in commodity and energy prices as well as transportation costs means that inflation this year will nose dive. Actually we do expect that by the end of this year, seeing inflation rates, which are not very far from the targets set up by Central Bank. So headline inflation is falling off the cliff now. However, co-inflation, which is inflation, the headline inflation minus the development in energy prices and on processed foods seems to be much more sticky. And that's actually what the central bankers they are focusing on right now. It's also to get core position down. And that's also the reason that we will continue to see interest rate hikes from the central banks, although we are getting closer to the end of the monetary policy tightening cycle. We should, however, also bear in mind that the monetary policy works in the economy with a certain cycle in 2 to 3 quarters, which means that we are only now seeing actually the effect from the hikes in monetary policy last summer. We also are of the opinion that the risk of a new financial crisis is very small, and that's not at least due to the much better regulation of banks, not least in Europe than before the great financial crisis in 2008. When looking at fiscal policy, it's our opinion that it's going to continue to support economic activity. We have seen all the crisis packages being rolled out, and then there is the acceleration of the green and digital transformation and a hugely increasing defense expenditures. So in the future, we will expect to see that it will be public or semipublic demand, which will drive economic growth, maybe on behalf of some private demand in form of personal consumption and private investment activities. If we look at the Nordics, and they are facing some headwind now also from the high inflation rates and increasing monetary policy rates. Real estate markets are having a difficult time. But we should bear in mind that labor markets are still very strong. They seem to be really resilient also to the monetary policy hikes. And that will eventually prevent a hard landing in the economies. Volatility has been high, both in the real economy and also in financial markets over the last 1, 2 years, and we do expect to see a high degree of volatility also in the forecast horizon, which covers this year and next. To the exact forecast numbers, which you can see on the left and the table, geopolitics inflation and the rising interest rates pose the biggest risks. We see risk as quite balanced, if anything, then may be a bit tilted to the downside. As you can see from the table, then our expectation is that the global economy will grow by 3% this year and 2.7% next year. That's almost the same as in our January forecast. As you can see, it's a slight downgrade of the forecast for this year of around 0.2 percentage points. However, 2022 ended on a better note than what we expected in January. So over the forecast horizon, it is almost the same profile as we had in January. The reason that we expect lower growth in the global economy next year is due to the late impact of the monetary policy hikes. Just to underpin our forecast and we can look at the global PMIs at the Purchasing Managers Index as of April this year. What can be seen from the graph is that we are on the so-called composite index which is a weighted average of the service and the manufacturing indices. We are well above 50 and 50. This is threshold between increasing and decreasing economic activity. But also can be seen from the graph in that it is this recovery in the global economy is almost entirely driven by the service sector. The manufacturing sector is still having problems. And that can be seen also in the development in world trade, which after a solid recovery last year, which was not least due to the sharp buildup of inventories. Then we have, this year, seen a drop in activity. And that's a drop which also will affect negatively the Nordic countries, which are all small open economies heavily dependent on trade. We expect a pickup again in activity and will trade later this year. But for now, there are some maybe difficult months ahead of us. I've already mentioned that we expect inflation to nose dive this year. But if we look at the latest numbers, as of April, we can see that we are well below the peak, which was reached by October. Last year with almost 11% in the Eurozone and a little earlier with around 9% in the U.S. The latest numbers tells us that inflation has dropped to 7% in the Euro area and 5% in the U.S., still high rates and high since the early [ 90s ] and way above the Central Bank's target of 2%. The reason behind this drop in headline inflation -- and this transportation cost, they have really nosedived. Freight rates, both when it comes to bulk and to continue raised freight are back on the pre-pandemic levels. So all the problems we had with a huge price pressure from transportation and all the supply side bottlenecks, they now seem to be solved. And also commodity prices have nosedived. The natural gas price in Europe is down by close to 85% since the peak last autumn. And if we look at the total index for commodities, which in this slide includes energy and we see that it's down by close to 60% since when Russia invaded Ukraine and the commodity prices peaked around the first of March last year. Monitory policy is now fully focused on fighting the very high inflation rates. As we have seen, then input prices are declining somewhat now. But there is still a lag from when commodity prices increased until we have seen the full pass through to consumers. Since labor markets are very strong all over in the world, there is clearly a risk that wage growth will be high also driven by the surge in the service sector which means that there is clearly a risk of so-called strong second-round effects, and that is why the central banks are so rough in their rhetorics as they have been. Now recently, we saw that take power, you can see here in the top right picture, has said that the U.S. is likely to have a pause now in the monetary policy rate hikes -- but still, we believe that the Fed is going to hike by another 25 basis points later this year. And that would be the terminal rate for [ FIT ] 5.50% while in the Eurozone, we expect ECB to continue to hike with the coming 2 meetings, which means that the terminal rate in Europe will stand at 3.75%. So our forecast for monetary policy rates can be seen here in the table. As mentioned, the terminal rate in the U.S. of 5.5%, 3.75% in the Eurozone. And when it comes to Denmark, then it's our expectation that the Danish National Bank is going to follow suit with the ECB and hike by another 50 basis points. There is now quite a stable environment around the Danish kroner. So no reason for the Danish Central Bank to widen the negative spread to the Eurozone. And in Norway, we now have a terminal rate of 4% in Sweden, 3.75% and for the U.K., we expect another 25 basis point hike. So we are approaching the end of the monetary policy rate hiking cycles, but there is still some way to go. When it comes to 10-year government bond yields, our expectation is that we are close to the peak already now, but that there will still be quite some volatility in the development, and we will see that also 10-year government branches are going to be higher by the end of the year than they are right now. When it comes to the U.S., we have a peak of around 4.2% in our forecast in the Eurozone around 2.17% also in the Nordic countries, you will see the peak close to the end of this year. So we expect that also 10-year government bond yields they can be quite volatile in the future and that we haven't reached the peak -- the peak yet. If we look at the FX markets, then after a period where we saw a significant strengthening of the U.S. dollar then it has changed somewhat the euro has taken the lead also because we now see that ECB is a little more aggressive than the Fed also in the rhetorics and we now stand at a level of around 110 for the euro against the dollar. Our expectation is that Euro can strengthen a bit further and we have a target of around 115 in our forecast. We have seen a quite dramatic weakening of the Nordic currencies both the second, the NOC close to historical lows against the euro we had the -- in economic outlook theme about the situation around the [ Norge, what has ] weakened that so much. But to a large extent, it is about monetary policy. And we would expect that over the forecast horizon that both the [ Nachi and the sake ] should strengthen against the -- and also against the dollar as the euro is strengthening against the dollar. So our exact forecast can be seen from this table. Now 115 is level for a euro-dollar to reach. And then [ASE and Nachi ] which are going to strengthen somewhat from here Danish krone is rock steady against the euro. So we keep 7.45% throughout the entire forecast horizon. Now when talking about the Nordics and also inflation has been way too high as can be seen from this slide, at least in Sweden. And here you see the headline inflation rate for Sweden and this headline inflation for all of the countries, which you're seeing, bearing in mind that both [ Riksbanken and spank ] are having more focus on some of the other inflation measures. But to make things comparable, we have the headline inflation rates in this slide. And you can see at least in Sweden, inflation has been really dramatic high, which, to a large extent, can be explained by the weakening of the Swedish kroner, which means that the import prices have risen somewhat faster in Sweden than in the other Nordic countries. In Norway, the thing is that the Norwegian government has supported households quite significantly when it comes to the electricity bill, which means that what you actually see is very low, but also kind of artificial no inflation rate in Norway. The important thing is that we are close to or that we already have passed the peak also in the Nordics. Still, the Nordic Central banks are going to continue hiking interest rates. And here, again, we should remember that there are different monetary policy regimes in the Nordics. Sweden and Norway have their independent monetary policy, their own currencies. They have an inflation target of 2%. Finland is a member of the euro area, and Denmark has a fixed exchange rate regime with the krona peg to the euro. I have already mentioned Norway, [ NordBank ] is going to high grade to 4% according to our forecast and we have a terminal rate for [ Regan 3.75%, ] i.e., on par with the rate we expect ECB to add. The high inflation rates and the much high interest rates makes up the kind of a toxic cocktail for the housing market and as we can see from this slide, the house prices have already fallen quite much in a country like Sweden. But also in Denmark here, we have only data for Denmark until the end of 2022, but we know that the fall has continued into the beginning of the year. And also in Finland, we do see that house prices are falling. In Norway, the situation is a bit different. There was a fall in house prices during the end of 2022. But already now, it seems to have flattened out and the latest data actually shows that prices have started to increase a bit again. And again, probably the fact that labor markets are so resilient. That means that we haven't seen really a sharp drop also in the Norwegian house prices. Also in Norway, wage growth is going to outperform wage growth in the other Nordic countries. This year, we expect wages to increase by around 5.5% in Norway. And as can be seen from this slide, the employment situation is really good in the Nordics, a record high employment, all over -- and not least in Denmark and in Sweden, we have seen a strong increase in the number of employed people since the pandemic. So unemployment rates are low, close to record low in the Nordic countries and the combination of the strong labor markets and the loss of purchasing power last year due to the high inflation rates, it actually means that there will be quite generous wage agreements for this year and next. I have already mentioned, 5.5% in Norway. Over the coming 2 years, we expect wages to grow by around 10% and in Denmark combined in Sweden, around 7.5% and then a little less in Finland. So in particular, in Denmark and Norway, we see a strong wage pressure. And that will also help private consumption, which has been hit. No doubt about that. In particular, demand for goods have declined in light of the sharply increasing prices last year. So each and every week, we are monitoring in Nordea, our clients card transactions. And the data shows us that if we are deflating the numbers and as can be seen here, then the demand for goods is actually right now below what they were in the same weeks or months in 2019, i.e., before depending so surge in demand for boots during the lockdowns when households and businesses were compensated by the government for the loss of income or profits during the pandemic, during the lockdowns. But this money couldn't be spent on traveling or dividends or other kind of experience. So the service demand was depressed, but then money was spent on good instead. But now it has reversed, services have been in high demand and we know from the data that people also in the Nordics say not at least want to travel a lot. So money are being spent on experiences rather than goods these days. But that's also private consumption. So just to sum up on our new economic outlook, the global economy has got off to a good start in 2023. Uncertainty for the rest of the year remains high and that is not least due to the impact, the net impact from this quite significant tightening of monetary policy. Inflation has peaked, at least when it comes to headline inflation, but seems to be quite stubborn not least when talking about the so-called core inflation, which, to a large extent, will be driven by the development in wages and they seem to grow by a higher rate this year and the extent we've seen for many, many years. We are getting close to the end of the monetary policy tightening cycle However, there are probably some way to go still. We expect, as mentioned earlier on, ECB to hike by another 50 basis points, and then it is most likely that Fed is going to continue it's hiking cycle and in -- with another 25 basis points hiking the risk of a new great financial crisis is to our mind very, very small. Banking regulation has improved a lot since the financial crisis and not the least, the European bank seems to be very well consolidated. Fiscal policy will continue to support growth seen the crisis packages, but also the acceleration of the green and the digital transformation and the increased defense expenditures are going to take up lots of resources from the economy and resources, which are not able and not available right now. So expect public -- semipublic demand to crowd out the private consumption, private investment activity during the coming years. The Nordics are facing some headwind these days from the high inflation and from the high interest rates. However, labor markets remain resilient and then that is likely to prevent a hard landing in the region. And if we look a bit longer out than the perspectives for the Nordic region is really good due to the comparative advantage, which the countries are having in the green and the digital sectors but also due to the really solid macroeconomic balances in the region with at least a number of the countries running huge surpluses both on the current account and also on public finances. So that's always a good starting point. When it comes to the risks to our forecast and the primary ones are geopolitics, inflation and then the effect from the monetary policy tightening, and we do see risks as quite balanced, but if anything, then may be a bit tilted to the downside. But with these words, it ends my presentation, and it's now time for a Q&A session, and we have already got a few questions.

One of them is related to the outlook for bonds. And I have mentioned that we do expect that yields will continue to rise in the early phase of our forecast to rise to over '23 and then we could see declining longer-term bond yields throughout 2024. We also think that it is premature to expect any kind of monetary policy rate cuts already this year. The first one will only be taken next year. Then there is a question on deglobalization and whether that will primarily take part in the physical world and not so much in data services. And I do believe that primary will mean that there will be less flow of goods in the years to come across the world or at least we will see this kind of what is saying, French showing that instead of outsourcing just to other low-cost countries, then companies who want to produce abroad in the future, will do that in political allied countries. So expect to see a kind of deglobalization going on in the future, but it's not that we will completely stop trading between countries. There could also, of course, be kind of trends and deep globalization of some digital services that could be in tail services, for instance, which also can have such a security dimension. But I think that when we talk deglobalization, it is primarily related to trade in goods rather than in services. And then there is another question whether we expect to see higher risk on corporate real estate market. And yes, there is definitely also risks related to the corporate real estate market. And in these days where we have seen interest rates being increased by 3%, 4% over the past year or so, it will eventually also have quite a significant impact also on corporate real estate and that both when it comes to prices, but also when it comes to activity in the coming years. And then finally, there is a question related to exchange rates and that is the euro-dollar forecast and how that is going to look for the coming years. And then I think I have already mentioned it, but it is our expectation that the strengthening of the euro is going to continue. We have a target of around EUR 115 million versus the dollar, but we also know that FX markets, they are characterized by a high degree of volatility. So, it can be both up and down from that, but that is based on the development in the economic growth and also a monetary policy that is our best forecast. And by that, I end the Q&A session. I would like to thank you all for joining this webinar and your feedback is, as always, very appreciated and important for us. So there will be survey coming up in a few minutes, and we would kindly ask you to answer the questions in that survey. And by that, I will again thank you for participating in the webinar and hope to see you again when we publish our next economic outlook in September this year. Thank you.