Economic landscape

In 2010, NIB operated in a financial environment that was behaving like a global roller coaster. The Nordic and Baltic economies fared relatively well in this environment, with economic growth recovering steadily, albeit at different paces.

Economic growth made a strong comeback across the globe and the Nordic and Baltic economies followed suit, fuelled mainly by stronger foreign demand. Conditions in the global financial markets were marked by the transition from a banking crisis to a sovereign debt crisis with risk aversion rising dramatically, a trend reflected in rising interest rate spreads in several European economies throughout the year.

While the year clearly was dominated by the sovereign debt crisis in Europe, all major economies managed a steady recovery in activity. Emerging market economies, some of which were relatively mildly hit by the downturn, showed the most vigour. While the recovery in advanced economies was fuelled by continued government stimulus such as public spending and record low interest rates, several emerging market economies had to tighten economic policies in order to avoid overheating. Most prominently, China and India—both markets where NIB is active—raised their interest rates.

In the Nordic-Baltic region, GDP growth also picked up speed sooner than most had predicted. Economic activity in Norway surpassed pre-crisis levels while the other Nordic economies still have some way to go. The Baltic economies, which were particularly severely hit by the recession, have also recovered firmly, mainly driven by healthy export demand. Although the Icelandic economy has, in many respects, stabilised, it continued to contract last year.

Demand for exports

As in the Baltic countries, the export-dependent Nordic countries benefitted from strong demand abroad, not least from emerging markets. The focus of much of the Nordic countries' exports on investment goods enabled them to profit from the investment boom in these fast growing economies. At the same time, most NIB member countries witnessed continued decline in corporate investments, despite a recovery in earnings, as ample spare capacity depressed the need for any expansion. In Sweden and Finland, however, where the initial decline in investment activity had been severe, investment activity rose last year.

Investment levels across the membership area still remain considerably lower than before the crisis. Household spending, on the other hand, generally picked up compared to the previous year despite being held back by meagre income growth and persistently high unemployment.

Sovereign debt crisis

In several European countries the recovery in real economic activity was muted by the sovereign debt crisis. Triggered by Greece's public debt problems early in the year, concerns about fiscal sustainability spread to other Southern European countries and then more widely. Risk aversion rose dramatically, which was reflected in higher interest rate spreads. Interbank markets in the euro area seized up and only reverted to some normality after far reaching interventions from governments. In the second half of the year, the risk appetite returned to markets, although interest rate spreads on southern European government bonds continued to rise.

Firms in several European economies continued to face difficult financing conditions. Many banking systems remained undercapitalised and private lenders' already tight credit standards were tightened further. Nonetheless, credit expansion to firms and households picked up pace in the latter half of the year.

Reflecting the increased economic activity, prices across NIB's membership area rose from very low levels during the year, with Iceland being an important exception. The Baltic economies which had previously experienced rapidly falling prices ended the year with inflation rates well into positive territory. The Nordic economies witnessed a steady rise and convergence in inflation rates to around 2.5% by the end of the year.