Nordic Mosaic: Riches, Realities, and the Ripples of Change

The quintet of Nordic nations all epitomize diminutive yet robust economies, characterized by their exalted welfare systems, elevated taxation, and affluence. Sweden, Norway, Denmark, Finland, and Iceland are sequentially arranged according to their economic advancement. Nonetheless, recent years have witnessed the disparate impacts of phenomena such as the COVID-19 pandemic and the Ukrainian crisis upon the Nordic economies. As per the prognostications of the International Monetary Fund, Iceland anticipates a 3.34% annual growth in GDP in 2023, with Norway and Denmark following suit with 2.28% and 1.7% growth, respectively. Conversely, Finland and Sweden are slated to experience negative growth, registering at -0.13% and -0.69%, respectively. In the fiscal realm of 2023, Iceland and Finland anticipate deficits, while Norway, Sweden, and Denmark project surpluses. The considerable oil riches of Norway bolster macroeconomic stability, facilitating the vigorous implementation of fiscal stimulus measures by the government.

The longitudinal and latitudinal facets of the Nordic economy…

In the aftermath of World War II, the rehabilitation and construction of economies became paramount for Western nations, with Northern Europe being no exception. The 1960s heralded the zenith of Nordic development. Post-war, the Nordic nations capitalized on their natural endowments and fostered innovation to cultivate sophisticated manufacturing sectors. Their economic landscapes exhibited a mosaic of diversity. However, these economies, albeit robust, remained relatively diminutive and were highly contingent on external factors, rendering them particularly susceptible to global geopolitical and economic vicissitudes. The 1970s witnessed the recurrence of economic turmoil in the capitalist world, placing the Nordic economies under the crucible of myriad internal and external pressures. Subsequently, amidst the accelerated pace of economic globalization, the global economic and political milieu witnessed a metamorphosis in the 21st century. The Nordic countries found themselves increasingly enmeshed within the global economic fabric, intricately entwined with the ebbs and flows of the global economic landscape. During the 2008 financial debacle, barring Norway, the Nordic countries bore the brunt of the crisis more acutely than other OECD nations. Nevertheless, buoyed by the inherent resilience of their economies and external assistance, they managed to extricate themselves from the nadir of the financial maelstrom.

From a panoramic viewpoint, energy, innovation, ecological sustainability, and regional collaboration emerge as pivotal dimensions for comprehending the Nordic economy. On the energy front, Sweden’s renewable energy sector not only ensures self-sufficiency but also generates revenue through exports. Norway’s mammoth oil industry constitutes a significant chunk of its GDP, rendering its economy susceptible to fluctuations in global oil prices. Following the escalation of the Ukrainian crisis, Russia curtailed gas supplies to Europe, underscoring the indispensability of Norwegian gas exports for European energy security. Endowed with abundant hydro and geothermal resources, Iceland finds itself deficient in other natural reserves, necessitating the importation of commodities like oil. Finland, conversely, operates as a net energy importer. Prior to the escalation of the Ukrainian crisis, Finland’s fossil fuel procurement was heavily reliant on Russia. However, in the wake of EU sanctions against Russia, Finland has gradually reduced its dependence on Russian oil. Additionally, Finland boasts a burgeoning biofuel industry, abundant peat reserves, extensive timber resources, and a burgeoning nuclear energy sector. Denmark’s domestic oil production satiates local demands, with imports constituting a mere 12% of its total energy requirements.

The administrations of the quintet of Nordic nations evince a collective concern for low-carbon sustainability, innovation, and economic diversification. The Nordic region emerges as one of the most appealing business landscapes globally, courtesy of its highly skilled workforce, impeccable infrastructure, and robust foreign direct investment. The Nordic countries boast elevated labor force participation rates, with substantial investments in education and research and development buttressing the cultivation of a proficient workforce. Well-developed infrastructure and ubiquitous utilization of communication and information technology serve as catalysts for enhanced productivity. Northern Europe finds itself strategically positioned to foster capital-intensive industries.

The quintet of Nordic nations actively partakes in extensive regional collaborations. All five nations are signatories to the OECD, the European Economic Area, and the Nordic Council. The Nordic Council aspires to transform the Nordic region into the most sustainable and integrated realm globally by 2030. While Denmark, Sweden, and Finland are EU members, Norway and Iceland remain outside the EU fold. Despite Icelandic resistance to EU membership, the relationships between Norway, Iceland, and the EU remain cordial. As members of the European Economic Area, Iceland and Norway access the single market while adhering to pertinent EU regulations. The Nordic countries exhibit a pronounced dependence on international trade, with the EU constituting the largest export market. Nonetheless, the recent economic downturn within the EU has impinged upon Nordic trade prospects. Furthermore, the Nordic countries have aligned their monetary policies with the EU’s to ensure synchronicity. Among the EU member states, Finland is the sole participant in the euro area; Sweden and Denmark have refrained from joining, albeit with Sweden contemplating accession, while Denmark retains the prerogative of exemption from eurozone membership. Denmark, aligned with Austria, the Netherlands, and Sweden, constitutes the “Frugal Four” within the EU, advocating against fiscal integration.

The economies of the five countries each have their own characteristics

Sweden is the largest economy in Northern Europe and one of the countries with the highest per capita GDP in the EU. In 2022, per capita GDP will be close to US$56,000. Since 2012, Sweden’s economy has grown faster than the EU average. Before the COVID-19 epidemic, Sweden’s economic growth was better than that of the euro zone, and its per capita income was higher than that of France but lower than that of Germany. In fact, in the 1990s, the knowledge-intensive manufacturing industry and service industry became the engine of Sweden’s economic growth. Since 1990, the output value of Sweden’s labor-intensive industries has grown by 2% to 3% annually, while the output value of knowledge-intensive industries has grown by more than 4% annually. Automotive equipment and telecommunications are important industries in Sweden and attract large amounts of foreign investment, but the sectoral composition of foreign direct investment in Sweden is changing, moving away from manufacturing and towards information technology, electronics, software development, server hosting and online sales. Sweden’s highly skilled workforce and export-oriented economy will continue to be positive development features. In the new situation, good and improving transportation links with Northern and Eastern Europe are another positive factor for Sweden’s economic development. However, high personal tax burdens and labor costs, strict labor market regulations, and high living costs still affect Sweden’s economic growth potential. Sweden’s current government prioritizes public issues such as fighting inflation, assisting families and financing the welfare system. Despite a budget deficit, its public debt as a share of GDP is still the lowest among advanced economies.

Norway’s economy ranks second among the Nordic countries. Norway’s economic development has benefited from its abundant offshore oil and natural gas resources, and Norway’s GDP growth has outperformed its European neighbors over the past decade. Norway regularly runs large fiscal surpluses, supported by oil and gas revenues and the Norwegian Government Pension Fund Global, or GPFG, a $1.4 trillion sovereign wealth fund. The GPFG insulates Norway’s public finances from cyclical fluctuations in the economy. Norway also benefits from the European Economic Area agreement, which extends the EU’s single market to Norway. Because Norway is less integrated into global supply chains, it will be less affected by protectionist pressures from developed countries than other countries.

Denmark is the third largest economy in the Nordic region. The country’s economy is highly integrated with the rest of Europe and features manufacturing, the food industry and the pharmaceutical industry, and the agricultural sector is one of the most productive in the world. Due to its small land area and lack of raw materials and resources, the Danish economy relies heavily on foreign trade, with strong exports of pharmaceuticals, food and energy. In recent years, Danish service trade exports have increased dramatically, especially shipping and freight services. This is due to the large number of shipping companies headquartered in Denmark and the important role they play in aligning global supply chains. Denmark’s foreign trade has maintained an overall surplus for many years in a row, mainly due to the surplus achieved in service trade. Energy will remain one of Denmark’s most competitive industries, and Denmark is also a global pioneer in clean energy technology. Denmark has a developed insurance and asset management industry. The Copenhagen Stock Exchange is small but fully integrated into the Nasdaq Nordic system, which covers the entire region. Denmark is also a global leader in digital communications infrastructure.

Finland is well developed in information and communication technology, mechanical and electronic manufacturing, and forestry. The country’s mobile communications market is one of the most advanced in the world. In terms of connectivity, Finland ranks eighth out of 27 EU countries, according to the EU Digital Economy and Society Index 2022. Finland’s 5G coverage is well above the EU average, according to data from Finland’s national telecommunications regulator Transport Communications. Finland’s financial industry is small but strong and highly integrated with the EU. In October 2018, Nordea moved its global headquarters from Stockholm, Sweden, to Helsinki, Finland, reshaping Finland’s financial landscape.

Iceland has no army and is a small economy that relies on a few industries. It once went from prosperity to the brink of bankruptcy. Iceland was one of the richest countries in Europe before the 2008 financial crisis, with per capita GDP ranking sixth in Europe. In 2008, due to the spread of the global financial crisis, Icelandic banks’ short-term financing sources dried up and capital fled in large quantities. The Icelandic krona depreciated rapidly and the inflation rate soared. Iceland’s three major systemic banks collapsed one after another, the stock market and real estate market collapsed, unemployment soared, debt exceeded seven times GDP, and the entire country was on the verge of bankruptcy. Since then, the Icelandic government has tightened monetary policy, nationalized banks, implemented capital controls and other measures, and received assistance from external financial institutions and some members of the Nordic Council. Iceland’s economic growth began to accelerate in 2015. After 2010, Iceland’s economy has been highly dependent on tourism, with tourism revenue accounting for more than one-third of total export revenue. Fishing and aluminum smelting are also the country’s leading industries (thanks to the abundance of cheap geothermal electricity for the energy-intensive smelting process), each accounting for more than a third of total goods exports. In recent years, Iceland has attracted more diversified foreign direct investment, including wholesale and retail trade, real estate, technological services, information and communications, and investment in the financial sector is also prominent. The Icelandic government is committed to diversifying its economy and attracting foreign investment. However, due to its small and open economy, the Icelandic krona is prone to large fluctuations.
Deeply affected by the Ukraine crisis

The impact of the Ukraine crisis on the Nordic economy is mainly reflected in the slowdown in economic growth, rising inflation, rising prices, and negative impacts on certain specific industries. Aid to Ukraine and its refugees has also strained Nordic countries’ budgets and increased military spending.

Direct Russian natural gas supplies to Denmark have been completely stopped. This has had a significant impact on the Danish economy, causing Denmark’s inflation rate in 2022 to reach its highest level in decades, around 10%. Rising prices for commodities such as food and energy are also pushing up inflation further. Sluggish growth in Sweden, one of Denmark’s largest trading markets, and a weak Swedish krona have affected Danish exports; in addition, Danish exports have also been affected by the economic downturn in Germany. The Ukraine crisis has had a significant impact on the Finnish economy. Exports of goods to Russia account for approximately 6% of Finland’s total exports, and imports account for 9% of total imports. Several Finnish companies have voluntarily replaced products originally imported from Russia with other sources. However, finding new suppliers takes time and is costly in the short to medium term. Finnish construction and manufacturing have been particularly affected as Russia is its main supplier of minerals, chemicals, nickel and timber. The European Union and the United States have expanded international sanctions against Russia, affecting Finnish companies that rely heavily on Russian orders. The continuation of the crisis in Ukraine is expected to place a heavier financial burden on Finnish businesses that mainly serve the Russian market, thereby increasing the likelihood of business failures and bankruptcies.

The Ukraine crisis has sent global oil and gas prices soaring, giving Norway an unexpected boost in oil revenue. Norway’s oil and gas sales revenue climbed to NOK 1.38 trillion (approximately US$131 billion) in 2023, an increase of nearly five times from 2021. At the end of January this year, the investment performance of the Norwegian Government Global Pension Fund, the world’s largest sovereign wealth fund, hit a record high in 2023, which is equivalent to more than 5.5 million people in Norway earning 270,000 yuan each. The biggest impact of the Ukraine crisis on the Icelandic economy is the rise in raw material prices, especially the rise in oil prices, which has led to rising prices in the country.

In the longer term, how to better fund growing public spending in areas such as health care, driven by an aging population, will be a major issue for Nordic governments. Nordic development has benefited from the continued liberalization of trade in the EU and other regions of the world. The current trend of decoupling and link breaking is obviously not in the interests of Nordic development. Nordic countries need technology and innovation to drive long-term sustainable growth.

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