Divergent outlook for monetary policy in Sweden and Norway

Underlying Swedish inflation is set to pick up further and means that the Riksbank’s ultra-loose policy is no longer justified. Conversely, the outlook for Norwegian inflation calls for an interest rate cut. Economic surveys for the largest two Nordic economies have improved in the last six months. In Sweden, the NIER’s Economic Tendency Indicator points to annual GDP growth accelerating from Q4’s 2.3% to as high as 6.0%. In Norway, firms’ output expectations are consistent with a pick-up in annual mainland GDP growth from Q4’s 1.2% to a little over 2.0%. While growth in both countries seems set to pick up, it will be from vastly different starting points. As growth in Norway has slowed in recent years, the economy is probably operating below its potential. In contrast, the Swedish economy is probably operating above its potential.