Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Hello, and welcome. My name is Terry Baynes. And today, I am very happy to have with me in our studio, Nordea's Group Chief Economist, Helge Pedersen. He's going to present our brand-new economic outlook. The webinar will last roughly 30 minutes. Helge will give his presentation first, and then we will have a brief Q&A session at the end. After the webinar, you will receive a survey and we would really appreciate it if you would take a couple of minutes to provide your feedback. Without more from me, I will hand it over to Helge.

Thanks a lot, Terry, and it's welcome for me once again to walk you through our new economic outlook past the peak. And actually, the title is a reference to interest rates, which we believe now have peaked. And that we will see central banks beginning cutting phase of rates throughout the year. But let's start with the big picture. And actually, the global economy performed somewhat better than could have been feared last year. We have seen a slowdown in the global economic activity, no doubt about that. But the U.S. economy have -- has actually been doing much better than what could have been expected. The Chinese economy recovered throughout 2023. The problem is related to Europe, which now is in a kind of a technical recession. But we still believe that the outlook for this year and next seems to be rather benign, because monetary policy is going to be easier over the course and that also because of inflation which have started to fall quite significantly. I would also mention, however, that the uncertainty is high, which is not least due to the very tense geopolitical situation, both in Ukraine, but also in the Middle East -- and we are also facing a number of important elections throughout the year, which can also change the overall picture quite dramatically. First and foremost, we have to mention the U.S. presidential election in November, which can lead to a new kind of a regime shift in U.S. politics. The Nordics are also cooling down as monetary policy begins to bite, not least the residential construction sector and housing markets have been hit hard, but also private consumption have had a fairly difficult year. However, the good news is that commodity prices, energy prices, and also transportation costs fall significantly over the past year, which has been the major drivers behind the very sharp drop, which we have seen in inflation. And it is the sharp drop in inflation, which paves the way for an easing of monetary policy throughout the year. Our expectation is actually that U.S. FIT is going to start cutting rates already by March this year and that the European Central Bank will follow suit in June. I will return in more details with our outlook for monetary policy rates and financial markets outlook as such later in the presentation. Fiscal policy will continue to support the important green and digital transformation and also defense expenditures are going to be increased quite significantly in most countries throughout the coming years because of the new and serious security situation. Geopolitics, as mentioned as well as the fact that monetary policy works with a certain lag post the biggest risks to the forecast, which I will be a little more in detail with in a moment. Also expect volatility to remain high, both in financial markets and the real economy. And as mentioned, bear in mind that we have these very important elections going on, which can lead to turmoil in markets when they are happening. And again, November, the U.S. presidential election is going to be followed with lots of interest from financial markets. But let's take a look at our forecast for the global economy and for the Nordic countries. And as you can see, we expect that the global economy will grow with close to 3% this year and next, which is quite similar to what we saw in 2023. So this is a soft landing for the global economy, which we are actually anticipating coming through. The U.S. economy, I mentioned, has been performing much better than what could have been expected growth ended at around 2% last year. And this year and next, we will see growth just below 2%. So also a soft landing in the U.S. economy. The more problematic situation can be found in the Eurozone where monetary policy has hit harder than, in say, the U.S. And this year, we will probably see a stagnating European economy. And it's also very likely that there will be 2 or more consecutive quarters with a fall in GDP, i.e., the Eurozone will end in a technical recession. China, as mentioned, has been picking up after the reopening of the society. We expect growth to be around 5% this year and next and then a little slow down to 4% and 25%. When it comes to the Nordics, both Denmark and Sweden are in technical recessions now, labor markets are still strong. I will return to that later on. But it's also very likely that the Finnish economy will enter technical recession. The Norwegian economy seems to be doing better. We expect Mainland Norway to see positive growth rates in the range of 1% to 1.5% over the forecast horizon. If we look at the changes since our September outlook, then you can see that we have actually increased the forecast for this year by close to 0.5 percentage points because of the better ending situation of 2023. So there is a kind of a carryover, which is positive for this year's growth and then also the expectation that monetary policy is going to be eased throughout the year and next year. And also for '25, we have actually upgraded our forecast for the global economy. So it's also visible that it's in particular the U.S. economy and also the Chinese economy which we have upgraded our forecast for this year, while in the Eurozone, the situation is definitely more dire. When it comes to the Nordics, then we have a similar forecast for the Danish economy for this year and next year, we have downgraded 2024 for the Finnish economy upgraded slightly for '25. Norway, we have upgraded for both of the years. And when it comes to Sweden, then we have made a slight downgrade of the forecast for this year and kept 2025 unchanged. Now if we look a little more in detail into the European economy, which matters the most for also the Nordics, then it's visible from the so-called PMIs, the Purchasing Managers Index that the situation is quite dire. On the PMI index, then 50 is an important number. That is a threshold between increasing and decreasing economic activity seen from businesses perspective. And as you can seen -- be seen from the graph, then the manufacturing sector has been below 50 for more than 1.5 years. So the manufacturing sector is actually in recession in Europe. Also the new export orders index has been in the negative territory for almost 2 years. So it's not a wonder that the European economy is right now facing problems as it is quite dependent actually not least the German economy is very dependent on the situation in the manufacturing sector. But it can also be seen that recently the service sector has dropped below 50, the service sector, which held up economic activity in the Eurozone in the beginning of 2023. So this is an indication that the Eurozone will enter a technical recession as Q3 showed negative growth in the Eurozone. The problems with the new export orders index can also be seen in this graph for world merchandise trade. It is right now running below its long-term trends. So also, the shipping sector are facing problem right now because of the low amount of the volume of goods which are being traded globally. There are some slight hopes that we will see a recovery in global trade. Right now, it seems like that there is progress going on in the Asian region of the world. Hopefully, we will also see a pickup in growth in the Eurozone in 2024. So we will return to our longer-term trend. Now let's take a look at the inflation outlook. Consumer prices have fallen sharply, almost as sharply as they increased in 2022 when energy prices skyrocketed, when commodity prices increased sharply, and also when transportation costs went up sharply. So the fact that headline inflation is falling almost as sharply as it increased is a very good indication that we actually were facing a supply side shock in 2022. It was not that much a demand side shock to the world economy. Right now, headline inflation stands at 3.4% in the U.S. and just a bit above 3% in the Eurozone. So well on its way to the 2% target, which is the objective for most central banks around the world. Central banks are still, however, a bit worried about the development in core inflation. Core inflation is headline inflation, exclusive energy prices and prices of unprocessed foods. And we can see that it is around 4% right now. So the underlying inflation is still a bit stronger which is caused by the fact that wage costs have increased quite sharply and that the service sector is also facing higher prices with a light effect from good prices. So it's right now is service prices, which are keeping up inflation that is being reflected in core inflation. The good news is, however, that there are actually no supply shortages any longer. And also the price pressure on corporates have fallen significantly as can be seen from this graph actually, suppliers delivery times is back below 50. So no issues at all and also input prices are just hovering around 50. So there's not a huge cost pressure on corporations around the globe. The only worry we can have right now is maybe the situation in and around the Red Sea, which has led to an increase in freight rates as shippers have redirected the trade on sea from the Red Sea and the Suez Canal when shipping from Asia to Europe and then south of Cape of the Good Hope. That has meant many more days on the sea. The average days spent on the sea has increased by close to 10 from 25 to 34. It is 5,000 kilometers or more, and longer route. So it has become much more costful to get goods transported from Asia to Europe, because of the tense situation around the Red Sea. Freight rates have doubled, but remark also, if you look at the slide to the left that they start to flatten out. And the increase is not as dramatic by any means as it was during the pandemic. So as long as commodity prices are not increasing and so as long as energy prices are not increasing, then there is really no reason to fear that the situation in the Red Sea will lead to a new skyrocketing of inflation. Goods prices can increase somewhat, but headline inflation as such will not be affected that takes more. And as can be seen from this slide in commodity prices, they have been kept stable for a while. The overall index is now just around 40% above the pre-pandemic level. It was around 100% higher when it was worst. So there is no pressure as such from commodity prices. And also markets don't expect oil prices to increase going forward and also electricity prices and natural gas prices are kept quite stable on much lower levels than we saw during the energy crisis. So the peak of all this, for inflation actually stems from the labor market -- labor markets are still very strong all over. The unemployment rate is low, both in the Eurozone and in the U.S. and the cost pressure from wages have risen sharply. So it is -- when it comes to the wage cost pressure that we see the highest and the biggest risk, both in the Eurozone and in the U.S. for inflation to be sustained at relative high levels. So that is what central bankers are worried about now. That is the so-called second round effects when wages starts to increase sharply. And the increased wage cost could then be spilled over into higher consumer prices again. So there is still a risk for a so-called wage price spiral. However, it is our expectation that it will be a limited impact we will have. And that headline inflation will sustain on its path down to a relatively stable development around 2%. That's also the reason that we are relatively sure that monetary policy will be lower this year. This is a quotation from Christine Lagarde, who actually at the latest meeting in Frankfurt in December said that based on this current assessments, the Governing Council considers that the key ECB interest rates are levels that maintain for a sufficiently long duration will make a substantial contribution to this goal, i.e., to get inflation down to its 2% medium target. Our interpretation of this with sufficient and long duration is that, that is until this summer. So our expectation is that ECB is going to start cutting rates already in June. And as I mentioned earlier on, we expect FIT to start cutting rates from this present 5.5% already in March by 25 basis points. This is also what is expected by financial markets, which also expect that we are actually past the peak when it comes to monetary policy rates. This is market expectations for monetary policy rates in Sweden, in the U.K., in the Eurozone and in the U.S. So past the peak and also in the Nordics is our expectation that we have seen the peak of interest rates. This is our actual forecast for policy rates. As you can see, 5.5% now in the U.S. down to 4.5% by the end of 2025 in the Eurozone from 4% to 2.25% by the end of the forecast horizon. Denmark follows the European Central Bank. So Denmark will end up at 1.85. Norway will only by the end of the year, start cutting rates because inflation is still way too high. So we expect Norway's bank to cut by 75 basis points only over the forecast horizon in the 3.75. And our expectation is actually that Riksbank will start cutting rates already in May this year and we'll see a full 1.5 percentage point decline in monetary policy rates over the forecast horizon. Is that then likely also to have an impact on longer-term bond yields? Well, we don't think so, also because quantitative tightening is still in the cuts and we have seen a normalization as such of interest rates. So our forecast for longer-term bond yields is actually that they will hover around the present level, maybe fall slightly, but not to the same extent as monetary policy rates. So we will also see such a more normalization of the yield curve as such over the forecast horizon. It will not be inverted any longer. When it comes to FX markets, we have over the past many years, I would say, seen a kind of an appreciation of the U.S. dollar. However, our expectation is that, that is about being over now. We right now stand at close to 1.10. And our forecast is that by the end of '25, we'll have a euro-dollar close to 115. So a slight appreciation of the euro over the forecast horizon versus the dollar. The Danish krone is rock steady against the euro. And our expectation is that both the NOK and the SEK will gain strength over the forecast horizon is actually our opinion that both of the 2 scandi currencies are heavily undervalued right now when it comes to fundamentals at least. Because if we look at the situation in the Nordic economies, and it is a given that fundamentals as such are still quite strong, there has been -- in all of the countries are quite prudent fiscal policy. So the debt to GDP ratios are low, with one exception in Finland. Finland is above the 60% threshold set up by the Maastricht Treaty. But both Denmark and Norway and Sweden seem very, very low debt to GDP ratios, and these are even gross numbers. So -- but also measured on the GDP growth after the pandemic current accounts, the Nordic countries are actually outperforming most of its peers. If you look here at the left-hand slide, you can see that the U.S. economy has grown by close to 7% since the pandemic, but it's been very closely followed by Denmark, which is also up with around 7%, then comes in Netherlands and then we find Sweden and Norway outperforming most other peer countries. Finland have had a more difficult time also because Finland is more reliant on Russia, has been more reliant on Russia as a trading partner in the past. If you look at the right-hand slide, you can see the concurrent GDP quarter-over-quarter numbers and from that, it's visible that Denmark right now, the dark blue one has seen 2 consecutive quarters with negative growth, i.e., a technical recession, the same holds for Sweden. Finland is on its way to a technical recession, while Mainland Norway seems to be able to skip that situation. There has been a lot of focus recently in Denmark and many other countries also on the strong performance of the pharmaceutical sector in Denmark. And this is just to exemplify it. This is the industrial production in the 4 Nordic countries. Take a look at this slide and see how Denmark has been outperforming the other Nordics. But if we exclude the performance of the pharmaceutical sector, then the picture is completely different. And this is just an indication that the medical pharmaceutical sector has actually gained a very, very big importance in the Danish economy now making up somewhere maybe between 5% and 10% of the entire economy. So the outperformance of the Danish manufacturing sector is due to the development and solely to development in the pharmaceutical sector. And the pharmaceutical sector is also one of the major reasons that we have seen a very, very strong performance in exports when it comes to Denmark. Sweden has also been outperforming when it comes to exports, but that is, to a very large extent, driven by a very, very solid development in the Swedish service export sector. Finland and Norway are having bigger problems, but the Norwegian increase is not least due to an increased exports of oil and natural gas as we are now sanctioning and trying to skip Russian gas in Europe. Inflation has also in the Nordic countries, come down quite significantly. Most in Denmark and Finland, least in Norway and Sweden, which is due to delayed effects from the weakening of the NOK and the SEK throughout 2023. So imported inflation has been much higher in Norway and Sweden than in Denmark and Finland, which is also why we have seen bigger reluctance from the central banks there to start cutting rates, not least in Norway, as you saw from our forecast. Now the situation has improved somewhat in Sweden. As you can see, inflation has recently started to fall quite sharply. That is the primary reason that we have now changed forecast for Riksbank. So we expect them to start cutting already in May. And also the Swedish krona has actually strengthened somewhat recently. Also, the Norwegian krona has strengthened. They tend to strengthen when there is a better risk appetite amongst investors. The Nordic countries have been hit. There is a slowdown. We have seen some countries and technical recession. They have, in particular, been hit on real estate. Real estate prices have come down quite significantly particularly in Sweden, but also Finland have seen drops. Denmark also sold by the end of the year, real estate prices started to increase again in Denmark, maybe because of a new taxation system for real estate coming in place by the beginning of the new year. In Norway, as you can see, the situation has also leveled out. House prices have flattened, but also that is, to a certain extent, due to an easier regulation of lending policy when it comes to house buyings. The real problem can be seen here, residential construction starters have no style in all of the Nordic countries that has happened throughout the entire world as a consequence of the much higher interest rates seen from around the middle of 2022 and with the last hikes as late as in September -- October last year. So there will be also lagged effects from the hiking cycle on the residential sector, no doubt about that, but things should start to ease by, say, the end of the year, at least throughout 2025, as we expect monetary policy rates to be cut. The labor markets are like we saw it in the U.S. and in the Eurozone, still very strong in the Nordics. We have seen an uptick in the unemployment rate both in Finland and Sweden, but not to levels which we've seen, say, before the pandemic. So the situation seems to be good still in labor markets in all of the Nordic countries, which is also why wage growth in the Nordic has accelerated like we saw it in the U.S. and in the Eurozone. So that's also you could call it a universal phenomenon when labor markets are strong and there has been a significant loss of purchasing power in households because of the energy crisis and the sharp rise in inflation over the past few years, then it's just natural to expect wage growth to be high to compensate for the loss of purchasing power. And the good news about this is actually that it can help private consumption having a relatively strong comeback during our forecast horizon, where we then expect, among other things, private consumption to be one of the key growth drivers in the Nordics, but also the situation for the export sector should improve as the overall picture improves in the Eurozone from the end of this year and into 2025. So our expectation is also for the Nordics that a soft landing will take place. There will not be a really significant increase in unemployment rates. And that is, I would say, maybe the best definition of a soft landing. So my conclusion is that the world economy is set for a soft landing and so are the Nordics risk seems to be more balanced than in September, whether they were more tilted to the downside, probably have to emphasize that the tensed geopolitical situation can disrupt also our forecast. We expect inflation to continue its downward trend. There are some risks related to second round effects from the labor market and now also to the situation in the Red Sea, but still our baseline scenario is that inflation will continue down and stabilize around the monetary policy target of around 2%, which opens up for rate cuts. Bear in mind, however, that the effect from the hiking cycle will still have a negative impact in many countries throughout the most of 2024. So only expect the easing of monetary policy really to support economic activity from the end of this year. And then again, what is so important is the green and the digital transformation. That is going to continue. That is going to be some of the major growth drivers for the global economy in the years to come. I can only recommend you all to take and read more in economic outlook, which we have just published also on our websites and e-markets. So read it closely there, there are many good stuff in it. Now it seems to be time for the Q&A section. And I do see that we have been receiving already a few questions. Time is running fast. So I will only have the time to answer a few of them.

But there's one here, given the unprecedented pace of the hiking cycle, should we expect the normalization row to be as quick? And I would say no, probably not as quick. Our expectation is a monetary policy raise will be cut only in steps of 25 basis points, not it's 75 basis point increases some as we saw when the hiking cycle began. So it will be at a slower speed, and we are not going to end at the same low levels as we started from as we probably remember then the hiking cycle started from minus 0.5% in the Eurozone. We are not going to get near to negative levers again. So it will not be as quick. Then there is a question on the development in exchange rates, in particular, the SEK and the NOK, how they are going to impact the construction sector. And actually, our expectation that we will see a strengthening of the NOK and the SEK in combination with the easing of monetary policy will, for sure, have a positive impact on the construction sector, but probably only from by the end of this year and into 2025. Then there is a question about the housing market, how that will look like in Denmark in 2024. And actually, our expectation is that prices will increase slightly in 2024 compared to 2023. However, we also need to emphasize that there is a risk that we will see another downward correction as financing costs have increased so sharply as they have over the last year and also that the taxation system has been changed. So that could cause some backdrops in house prices and not least owner-occupied prices in the more expensive parts of Denmark throughout this year. And then finally, there is a question about we have huge ongoing and planned EU national initiatives around energy digitization and infrastructure. Do we see European governments taking a more active permanent role in investment activities in Europe and will that create a crowding out situation at the cost expense of private sector initiatives? Well, I think that, first and foremost, there's no doubt that this process will be ongoing. And a lot will be initiated from the European Union and also from national governments. That will actually also since these -- many of these projects will be government backed. It will also taken a lot of private investors into the investments. So I think actually that we will see a relatively high leverage ratio also when it comes to these public initiated investments in the green transformation. However, there is no doubt that we don't have the resources to undertake all kind of investments and that the green and the digital ones, they will have such a high priority that it can be at the expense of other investment activities, which then you could say, will be crowded out. And by that, I think we should finish this webinar and I want to thank you all for attending, and thank you so much also for the very good questions. I'm sorry that I didn't get the time to answer all of them. So thank you.