In the early 2000s, the economy of the Scandinavia and Baltic region (made up of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden) was on the rise before suffering a steep decline in 2009 in the wake of the global financial crisis. In the years that followed, regional GDP continued to fluctuate before experiencing year-on-year growth from 2016 to 2018. Regional GDP fell by 3.9% in 2019 and by 1.7% in 2020 as a result of the impact of the Covid-19 pandemic.
Despite this, four of the eight countries across the region experienced an increase in GDP in 2020.
Sweden is Scandinavia and Baltics’ largest economy
Sweden is the largest economy in the Scandinavia and Baltics region, representing 32.4% of the GDP in 2020. Following a period of severe financial crisis in the early 1990s, the Swedish economy has grown steadily. The country is known for its business openness and liberal trade policy as well as its export-oriented manufacturing sector.
Sweden was one of the few countries globally to experience economic growth in 2020 in the wake of Covid-19. The country’s GDP grew by 1.4% in comparison with 2019. The Swedish government notably opted against lockdowns throughout the pandemic in favour of a voluntary approach. The controversial response has been heavily criticised for leading to thousands of unnecessary infections and deaths.
According to government forecasts, the economy is expected to have grown by 4.9% in 2021. In 2022, GDP is predicted to grow by 3.4%.
In 2021, Sweden placed second in the IMD’s World Competitiveness ranking. The study assesses the economic well-being of countries worldwide and their ability to promote business competitiveness.
Key economic sectors include automotive, telecommunications, pharmaceuticals, industrial machinery and consumer goods. In addition, Stockholm has produced more tech unicorns per capita than any other location outside of Silicon Valley. Notable companies include music streaming giant Spotify, fintech company Klarna and Mojang, the video game developer behind Minecraft.
Norway is the second-largest economy analysed. It accounted for 21.7% of the region’s GDP in 2020 and has the highest GDP per capita at $67,390. Despite this, the country was one of those hardest hit by the fallout of Covid-19. Its GDP contracted by 10.6% in 2020 compared with the previous year.
Norway is one of two Nordic countries (the other being Iceland) that is not an EU member state. However, as a member of the European Economic Area, the country has access to the EU’s single market and benefits from the free movement of goods, persons, services and capital.
Norway’s petroleum sector accounts for roughly 40% of its exports and 14% of its GDP. Other important sectors include hydropower, fishing, forestry and minerals.
State revenues from petroleum are deposited in the Government Pension Fund of Norway, the world’s largest sovereign wealth fund. The fund was established to invest government revenues from fossil fuel industries into more sustainable industries.
Denmark is the third-largest economy in the region and has the second-highest GDP per capita. The country’s GDP represented 21.3% of the overall regional total in 2020.
The economy is led by the service sector, which accounts for 80% of all jobs. In comparison, the manufacturing sector employs approximately 11% of the Danish population and roughly 2% works in agriculture.
Despite Covid-19, Denmark’s economy grew by 2.5% between 2019 and 2020. According to figures from the OECD, this trend is set to continue in 2021 and beyond. The country’s GDP is expected to grow by 4.7% in 2021, by 2.4% in 2022 and by 1.7% in 2023.
Iceland is the smallest nation of all the countries analysed. Its economy suffered the steepest decline across the region in 2020, with GDP contracting by 12.6% compared with 2019.
Iceland had the highest population growth of all countries analysed at 1.6% in 2020. It also recorded the highest inflation rate (2.8%), reaching a level not seen since 2012. Experts have attributed this increase to the booming housing market.
At the end of 2008, Iceland suffered a major financial crisis. In the wake of the global recession, three of Iceland’s largest private banks went into administration, effectively collapsing the country’s banking sector overnight.
Iceland’s thriving tourism sector has played a large part in its economic recovery. Other key sectors include aluminium and fishing.
Lithuania is the largest of the Baltic economies. The country saw the largest percentage increase in GDP in 2020, growing by 3.4% compared with 2019.
As of February 2022, China has stopped buying beef, dairy products and beer from Lithuania amid a row over its ties with Taiwan. In November 2021, Lithuania allowed Taiwan to open a de facto embassy in Vilnius, angering the Chinese government, which considers Taiwan as part of its territory.
Finland leads for foreign investment
Foreign direct investment (FDI) project numbers in Scandinavia and the Baltics were significantly impacted by the Covid-19 pandemic. Overall, the number of FDI projects across the region fell from 460 in 2019 to 327 in 2020. However, the value of FDI projects increased by 3.7% from $9.5bn to $9.9bn.
Finland was the region’s leading FDI destination in 2020, accounting for 38.9% of its FDI projects. It is also the region’s top location by FDI projects per capita.
Key sectors for investment include ICT and digitalisation, business services, cleantech and the bioeconomy. The country’s main FDI partners include Sweden, Norway and the UK.
In July 2020, Germany’s DB Schenker opened a €26m ($29.5m) transport terminal in Turku, creating 600 new jobs. In September 2020, Microsoft opened a new development centre in Tampere focused on camera, imaging, wireless and electronics design.
Denmark attracted $2.1bn in foreign investment in 2020, the largest amount out of all the countries analysed. Its key FDI sectors include technology, life sciences, food and the maritime industry.
The country is also becoming a hub for international data centres. In October 2020, Facebook announced plans to invest $1.5bn in its data centre campus in Odense. In November 2020, Google opened a $686m data centre in Taulov.
In July 2021, Denmark’s Investment Screening Act entered into force. Under the new system, foreign investors must obtain prior governmental approval when acquiring a share of 10% or more in a Danish company. Foreign investors also require approval before establishing companies in certain sectors, including defence, IT security, critical technology and critical infrastructure.
In Latvia, the value of FDI projects in 2020 represented 2.6% of the country’s overall GDP. This is the highest percentage of all countries analysed.
Foreign investors in Latvia benefit from the country’s strategic location between EU and Commonwealth of Independent State countries. In addition, Latvia has a stable monetary policy and well-developed infrastructure. It also operates five special economic zones that can offer tax incentives for tenant companies.
The majority of Latvia’s FDI comes from other EU member countries. At the end of 2020, more than three-quarters of Latvian FDI was from EU states. Its main investing countries include Sweden, Estonia, Russia and the Netherlands.
Estonia was the only country in the Baltics to experience an increase in FDI project numbers in 2020. Its FDI projects numbers have steadily increased in recent years from 25 in 2018 to 28 in 2019 and 30 in 2020.
In addition, Estonia is among the leading destinations for FDI per capita across central and eastern Europe. Key economic sectors include IT, biotechnology and green industries.
In 2020, Sweden and Finland were the country’s top source markets for FDI, followed by companies from Luxembourg, the Netherlands, Lithuania and Latvia.
Denmark and Finland are least corrupt countries in the world
Denmark and Finland topped Transparency International’s 2021 edition of the Corruption Perception Index. Both countries scored 88 out of 100, alongside New Zealand.
Finland’s trade openness and embracement of foreign investment make it an ideal location to do business. The country offers investors high levels of stability and government transparency as well as a talented workforce and world-class technology and innovation.
In addition, foreign companies are eligible for a wide range of government incentives in the areas of taxation, training and employment, land and infrastructure and R&D funding.
In Denmark it takes just three-and-a-half days on average to start a business. The country is known for its trust and openness. Denmark’s flexicurity model also makes it easy to hire staff and let them go if business needs change. The country’s taxation system, while higher than other countries across the region, is simple to understand.
Estonia ranks seventh in the Heritage Foundation’s 2022 Index of Economic Freedom, the highest of all countries analysed. The country is extremely open to foreign investment, particularly in sectors focused on exports, innovation or that support region development.
Estonia also offers a range of grants and incentives for foreign investors. For instance, there is no corporate income tax on retained and reinvested profits. Taxes can also be declared fully online.
In addition, Estonia is the first country to offer e-residency. The programme allows entrepreneurs to set up a business in Estonia remotely, and it provides access to the country’s e-services and business environment.
Finland tops World Happiness Report
Finland has the largest working age population out of all countries analysed, at 62% in 2020.
In 2021, Finland ranked first in the UN-sponsored World Happiness Report for the fourth consecutive year. The country has one of the world’s most comprehensive welfare systems as well as an advanced education system and universal healthcare.
Norway has the lowest unemployment rate across the region, at 4.6% in 2020. The country came out on top in the UN’s Human Development Report ranking for the 13th time in a row.
Norway performed very well across various indicators, including life expectancy at birth, expected years of schooling and gross national income per capita.
Latvia has the highest tertiary enrolment rate out of all the countries analysed, at 94.9% in 2020. Following the global recession of 2008, Latvia entered a period of financial crisis. The country has since rebounded and, until recently, was one of the fastest-growing EU economies. Despite this, Latvia lags many of its neighbouring countries across quality of life indicators. Its unemployment rate was one of the highest in 2020 (8.2%) and it has the lowest life expectancy on average at 75.2 years.
Norway leads the way in renewables
Norway sets a high standard when it comes to renewable energy, with renewables accounting for 98% of its energy mix in 2018. The country’s largest source of energy is hydroelectricity followed by wind power.
In July 2021, Norway started work on Project Longship, a €1.7bn ($1.9bn) carbon capture and storage project that involves burying vast amounts of captured carbon under the North Sea to cut CO2 emissions. It forms part of Norway’s commitment to become carbon-neutral by 2050.
More than 96% of electricity generated in Iceland in 2018 was derived from renewable energy sources.
Iceland updated its Climate Action Plan in 2020. The government added additional measures to help the country achieve its goal of carbon neutrality before 2040 and to cut greenhouse gas emissions by 40% by 2030.
Renewable energy sources represented more than 93% of Sweden’s energy mix in 2018. In 2017, Sweden adopted its most comprehensive climate framework of all time. The new measure set out how Sweden will meet the demands of the Paris Agreement, including its aim to have zero net emissions of greenhouse gases by 2045.
More than three-quarters of electricity generated in Estonia in 2018 was derived from fossil fuels. It is the only country in the world where oil shale is the primary source of energy. However, the use of renewable energy sources is on the rise, particularly wind power and wood fuel.
In January 2021, the Estonian Reform Party, under Kaja Kallas, assumed office. The new government has set out a serious of ambitious environmental goals, including plans to phase out oil shale electricity production by 2035 and shale oil production by 2040.
The Lithuanian energy sector is also dominated by fossil fuels. In 2018, fossil fuels accounted for 51% of the country's energy mix. According to a policy review by the International Energy Agency in April 2021, Lithuania has made significant progress in its transition to renewable energy sources in recent years. However, it must prioritise energy efficiency and implement a renewable energy strategy to achieve climate neutrality by 2050.