Bank of America (BofA) released its “Nordics Year Ahead” report, outlining expectations for a domestic recovery and gradual monetary policy adjustments in the region for 2025.
BofA anticipates Sweden to experience a shift from trade-driven to domestic-driven growth, projecting an increase in growth to 1.6%, a figure that outpaces the Euro area’s forecasted 0.9%. The improvement is attributed to healthier consumer balances and a positive fiscal stance.
Despite balanced risks, with potential upside from household spending and downside from international trade, particularly with Germany and the US, Sweden’s inflation is expected to remain below the target, with core inflation at 1.9%.
Consequently, BofA predicts the Riksbank will implement rate cuts to 2% in the first quarter of 2025 and then hold steady, with the possibility of another cut in the fourth quarter due to persistent below-target inflation.
Norway has shown economic resilience in 2024 and is poised for a gradual acceleration in growth in 2025, supported by consumer balances and domestic investment. BofA forecasts a mainland growth rate of 1.2% for Norway, with the potential for higher performance driven by fiscal factors.
Even with relatively sticky core inflation at 2.6%, the report suggests that continued productivity growth should aid in the normalization process. In response, the Norges Bank is expected to reduce its rate to 3.50% by the end of 2025 through quarterly cuts.
The currency outlook for the first half of 2025 is bearish for the Scandinavian currencies (Scandies), influenced by trade uncertainties, a challenging risk environment, and a comparatively hawkish Federal Reserve.
However, the outlook shifts to a more positive stance in the second half of the year, with expectations of a softer US dollar, Nordic growth outperforming the Euro area, and a hawkish pivot against the European Central Bank (ECB).
The report notes light positioning for the Norwegian krone (NOK) following significant selling this year and a modestly short position for the Swedish krona (SEK). While BofA maintains a modestly constructive view on the NOK-SEK exchange rate, it acknowledges low conviction in this outlook.
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