■ Content                                                                     ECONOMIC                                    ...
■ ContentData overview                                    OVERVIEW                                                  Slow s...
■ OverviewSlow speed ahead                                                                 cy and liquidity requirements, ...
■ Overviewstruggling with a weak monsoon. Moreover, with India’s          Even so, the Danish economy is characterised by ...
■ OverviewGrowth, %                                                                                             Inflation,...
■ OverviewMonetary policy rates                                             Monetary policy rate spreads vs Euro area     ...
■ SwedenHouseholds prop up the economy• GDP growth edging higher in coming years …               Households keep the wheel...
■ Swedenmains weak, and growth in many key export markets is            Rising incomes and consumptionlow. Accordingly, go...
■ NorwayRisk of overheating may be the biggest challenge• Strong domestic demand growth                              feare...
■ Norwaycould, however, result in much tighter credit standards,      Norwegian manufacturing production risesand this is ...
■ DenmarkLanguishing economic growth• Rising activity towards 2014                                Despite the prospect of ...
■ DenmarkNegative central bank rates a success                           Stagnant consumptionDuring the debt crisis the Da...
■ Finland Finnish economy has cooled down across the board• Exports will not recover until 2013                           ...
■ Finlandsavings rate continues to decline which means that an in-       Cooling of world trade brings problems to exports...
■ USAMoving slowly forward• If a perfect storm of fiscal chaos is avoided …             After all, the economy’s fundament...
■ USAA perfect storm of fiscal chaos hopefully avoided              Moving slowly forwardThree US fiscal issues pose a thr...
■ Euro areaRestore confidence to end the recession• Gradual recovery from year-end                                  Restor...
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
Economic Outlook, September 2012 EN
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Economic Outlook, September 2012 EN

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The Economic Outlook is an internationally respected report on the state of the global economies with an extra focus on the Nordic markets, as well as the Baltic, Polish, Russian and key emerging markets plus the global oil and commodity markets. It is published twice a year by the renowned team of analysts and economists at Nordea Markets and supplemented with an additional two global and Nordic updates. It is published in English as well as the four Nordic languages.

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Economic Outlook, September 2012 EN

  1. 1. ■ Content ECONOMIC OUTLOOK SEPTEMBER 2012 Slow speed ahead Fragile recovery ■ The global economy is still advancing, albeit at a slow pace on a muddy road. The Euro area is again on the brink of recession, while activity in the US and the rest of the global economy slowed over the summer. However, better times are ahead, but the uncer- tainty is high. Safe havens may also be hit ■ The Nordics have status as safe havens in financial markets. But while the Norwegian economy shines, darker clouds are gathering over Sweden while Finland and Denmark are on the brink of a new recession. . OVERVIEW 04 SLOW SPEED AHEAD SWEDEN 08 HOUSEHOLDS PROP UP THE ECONOMY USA 16 MOVING SLOWLY FORWARD EURO AREA 18 RESTORE CONFIDENCE TO END THE RECESSION RUSSIA 24 INFLATION DÉJÀ VU CHINA 29 STABILITY, STABILITY AND … STABILITY OIL AND COMMODITIES 33 OIL PRICES STAY HIGH BUT SPARE CAPACITY BUFFER SHOULD BUILD TWO ALTERNATIVES 35 RISK SCENARIOS2 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  2. 2. ■ ContentData overview OVERVIEW Slow speed ahead......................................................................................... 4Key figures ............................. 6Interest rates ......................... 7 Nordic economiesExchange rates ..................... 7 SWEDEN Households prop up the economy ................................................................. 8Editor NORWAY Risk of overheating may be the biggest challenge ........................................ 10Helge J. Pedersen,Global Chief Economist DENMARKhelge.pedersen@nordea.com Languishing economic growth ..................................................................... 12Tel +45 3333 3126 FINLAND Finnish economy has cooled down across the board .................................... 14Editorial deadline Major economies30 August 2012 USA Moving slowly forward ................................................................................. 16 EURO AREA Restore confidence to end the recession ...................................................... 18Visit us at: UKwww.nordeamarkets.com UK growth stalling – awaiting outside help ................................................... 20 JAPAN The challenges remain in the long term ........................................................ 21Data sources:Data sources are Reuters EcoWin, Emerging Marketsnational statistical bureaus andown calculations unless otherwise POLANDnoted. Slowdown under control .............................................................................. 22 RUSSIA Inflation déjà vu ........................................................................................... 24 ESTONIA Economy remains in a soft patch ................................................................. 26 LATVIA Economy keeps delivering positive surprises ............................................... 27 LITHUANIA Showing resilience ...................................................................................... 28 CHINA Stability, stability and … stability.................................................................. 29 INDIA A drought of growth..................................................................................... 31 BRAZIL Slow BRIC healing ....................................................................................... 32 Commodities OIL Oil prices stay high but spare capacity buffer should build ........................... 33 METALS Metal prices scratching the bottom for now .................................................. 34 Two alternatives Risk scenario 1: Back on track..................................................................... 35 Risk scenario 2: That sinking feeling............................................................ 363 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  3. 3. ■ OverviewSlow speed ahead cy and liquidity requirements, banks and credit institu-The global economy is still advancing, albeit at a low tions have scaled back their lending activities. This im-pace on a muddy road. The Euro area is again on the pairment to the monetary policy transmission mechanismbrink of recession, while activity in the US and the rest of may be very difficult for the ECB to correct even if a Eu-the global economy slowed over the summer. However, ropean banking union sees the light of day in early 2013we believe that better times are ahead, but the uncertain- as expected.ty is high. Monetary policy will remain very accommoda-tive over the forecast period, and fiscal tightening in the Global interdependenceEuro area will gradually fade. Deleveraging will remain With domestic demand at low levels – albeit with largea key theme in both the public and private sectors, result- regional differences between south and north – the Euroing in weak credit growth. We see global economic area will remain highly dependent on exports as a keygrowth at a moderate 3.1% this year, rising to 3.5% in driver of economic growth. The problem is that the Euro-2013 and 3.8% in 2014. area crisis has spread to other countries and regions worldwide. For instance, US and Chinese economic indi-Over the summer the European sovereign debt crisis was cators have shown weakness during the summer andreignited by the parliamentary elections in Greece and there is still a risk that the situation may deteriorate fur-the banking sector crisis in Spain. However, the fire bri- ther. The risk is especially high in the US ahead of thegade responded promptly. At the end-June summit in presidential election in November as the country is tee-Brussels the European leaders decided to take further in- tering on a fiscal cliff. Among other things, US policy-stitutional steps towards the formation of a real economic makers still have not decided on a possible extension ofand monetary union and to make EUR 100bn available to the Bush-era tax breaks. If they do not find a solution, thethe struggling Spanish banking sector through the expiry of the tax breaks would imply fiscal policy tight-EFSF/ESM, the European bailout fund. In July the ECB ening to such an extent that the US is bound to slide intocut rates again by 0.25% point and most recently, ECB a new recession. At the same time Congress has to raisePresident Draghi (“Super Mario”) verbally guaranteed the debt ceiling once again to prevent the US from de-that there would be no disintegration of the euro. faulting on its payments early next year. These issues will likely be left unresolved until after the presidentialIt is still unclear exactly how the ECB will ensure the ex- election and consequently the political risk to sustainedistence of the euro, but there are indications that it will be progress in the US should not be underestimated.through large-scale intervention in the government bondmarket. However, the ECB will make it a condition for Our baseline scenario factors in another increase in thethe governments whose bonds it is to buy that they apply debt ceiling and the extension of at least some of the taxfor assistance from the EFSF/ESM and in that connection breaks by the new president, be it Barack Obama or Mittagree to a financial stability programme. Especially the Romney. Finally, it should be kept in mind that the Fed-latter should make it a less bitter pill for the Bundesbank eral Reserve with Ben Bernanke at the helm to a muchand German politicians to swallow – again. Germany greater extent than the ECB is prepared to support eco-remains concerned that the rescue plans would only en- nomic growth. Consequently, policy rates will remaincourage more profligacy among the decision-makers of record-low until 2014, and the door to further quantita-the crisis-afflicted countries and trigger long-term infla- tive easing measures will remain open in case the eco-tionary risks. Large debt-ridden countries such as Spain nomic situation deteriorates further.and Italy will be the first in line to make use of the newfacility, should interest rates rise again to unsustainable China eases its economic policylevels. However, in principle this option will be available The political situation in China is more predictable alt-to all countries. hough a leadership change is to take place here also this year. However, when it comes to doing something toECB proactivity – including further rate cuts – is vital if support growth, the one-party system appears unrivalled.financial markets’ confidence in the Euro area is to be re- While export growth is hampered by the internationalstored. slowdown, economic policy will most likely be eased sufficiently to maintain economic growth around the 8%Ultimately, it may also be pivotal to returning growth to level required to prevent unemployment from rising.the private sector. Despite the current record-low interestrates, consumption and investment appetite is still close The outlook for growth in Brazil and Russia remains rel-to zero. No doubt, the reason is a lack of confidence in atively bright, underpinned by high commodity pricesthe future among households and businesses, as reflected and new reform initiatives. But the situation in India ap-in the current weak credit demand, coupled with the new pears more problematic. Indian exports are affected byfinancial regulations. To meet the tighter capital adequa- the international slowdown, and Indian farmers are4 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  4. 4. ■ Overviewstruggling with a weak monsoon. Moreover, with India’s Even so, the Danish economy is characterised by lowhuge public budget deficit it is difficult for the govern- growth and high uncertainty, stuck as it is in stagnationment to alleviate the situation by increasing public ex- with a largely unchanged level of activity since the au-penditure. tumn of 2010. Over the coming quarters Denmark is ex- pected to gradually return to the growth track driven byHigher prices, but no wage-price spiral in sight substantial pent-up demand among households that willAlso the US is subject to the vagaries of the weather. The gradually show through in rising consumption. Mean-worst drought in history has resulted in record-high pric- while, growth will also be underpinned by a delayed pos-es on for instance corn and soya beans. The rising food itive contribution from public sector consumption andprices – and now again rising oil prices – will send con- investment.sumer prices higher, not only in the US but also in therest of the world. Even so, at this juncture there is no rea- Clear skies over Norwayson to worry much about inflation over the forecast hori- Only few signs of weakness are evident in the Norwegianzon. The situation in developed countries is too weak for economy, which continues to benefit from the high levelthat, considering the vast amount of idle resources. Con- of oil prices. Growth will remain high going forward. Butsequently, the risk of rising consumer prices setting an thanks to the large immigration of labour, the countryinflationary wage-price spiral in motion is very small. will most likely avoid overheating of the labour marketMoreover, global competition and the persistent crisis and a sharp acceleration in cost pressures. Althoughlimit the extent to which businesses can expand profit wage growth will be markedly above the levels seen inmargins. the other Nordic countries, it will not be so high as to threaten Norges Bank’s inflation target. Nevertheless,Easy monetary policy for a long while yet with strong economic growth and somewhat higher ca-Against this backdrop, leading market rates will pick up pacity utilisation, interest rates should rise somewhat inonly slightly in the period up to 2014 when the ECB and the years ahead. But the dilemma for Norges Bank is thatthe Fed will start tightening monetary policy again. By the NOK in that case could appreciate too much.end-2014 we expect the ECB to have hiked its policy rateto 1% and the Fed to have hiked its key rate to 2%. The Also the Swedish economy has been a positive story somassive amount of liquidity that the major central banks far. Both GDP and employment rose in H1 2012 despitehave pumped into the system in recent years still poses a the slowing international economy. Much suggests thatlatent risk of inflation. If it is not withdrawn as the will- growth will decline over the coming quarters, but house-ingness of commercial banks to lend money again grows, holds are still in good shape. In combination with ait could lead to higher interest rates than our forecast slightly more expansionary economic policy and the an-suggests. ticipated improvement in international economic activity, this will underpin growth over the forecast horizon. TheMonetary policy is very important for the direction of slowdown over the rest of 2012 will make its mark on theexchange rates. Accordingly, we expect the USD to labour market. Unemployment will rise during the win-strengthen versus the EUR over the forecast period, alt- ter, reducing domestic cost pressures. In combinationhough other issues such as the current account and debt with continued SEK appreciation, inflation will stay sig-levels may pop up as market themes. As a result of the nificantly below the 2% target. Against this background,peg between the USD and the GBP our baseline scenario the Riksbank will be able to cut its policy rate further thisalso factors in GBP strengthening versus the EUR. Late year. Towards the end of 2013 when the economy re-in the forecast period we expect the CHF to weaken gains strength, the bank will embark on a new tighteningagainst the EUR, while the JPY should weaken against cycle.the USD in step with a gradual normalisation of financialmarket conditions. Finland is also feeling the effects of the global economic slowdown and is probably heading into recession. Ex-Safe havens may also be hit ports and investment activity are slowing in line with theDenmark, Finland, Norway and Sweden all belong to the trend in world trade, while weaker imports reflect prob-exclusive club of countries with top ratings from the ma- lems in domestic demand. Consumer spending has lostjor credit rating agencies. These countries have status as most of its steam and will lose further momentum oncesafe havens in financial markets. As a result, the NOK the slowdown also hits the labour market. A new recov-and the SEK have strengthened markedly, while interest ery driven by a stronger international economic environ-rates in Denmark, with its fixed exchange rate policy ment will only emerge later in the forecast period.versus the EUR, plummeted to new record lows. Actual- Against this backdrop, we have revised down our growthly, the Danish central bank has had to bring its CD rate forecast for 2013, which is still markedly above the Eu-into negative territory to reduce the capital inflows that ro-area average.caused Denmark’s foreign currency reserves to swell torecord-high levels. Helge J. Pedersen, Global Chief Economist helge.pedersen@nordea.com +45 3333 31265 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  5. 5. ■ OverviewGrowth, % Inflation, % 2010 2011 2012E 2013E 2014E 2010 2011 2012E 2013E 2014EWorld1) 4.6 3.8 3.1 3.5 3.8 World1) 2.8 4.1 2.9 2.9 2.9USA 2.4 1.8 2.2 2.0 2.2 USA 1.6 3.1 2.1 2.2 2.2Euro area 1.9 1.5 -0.4 0.6 1.7 Euro area 1.6 2.7 2.2 1.6 1.6China 9.2 10.5 8.0 8.3 8.5 China 3.3 5.4 3.1 4.0 3.8Japan 4.6 -0.7 2.5 1.6 1.1 Japan -0.7 -0.3 0.2 -0.1 -0.1Denmark 1.3 0.8 0.7 1.9 2.1 Denmark 2.3 2.8 2.4 2.0 2.2Norw ay 1.9 2.4 3.7 3.0 2.8 Norw ay 2.5 1.2 0.8 1.8 2.1Sw eden 6.2 3.9 1.2 1.8 2.3 Sw eden 1.2 3.0 1.2 1.2 2.0UK 1.8 0.8 -0.4 1.0 1.7 UK 3.3 4.5 3.0 2.2 1.4Sw itzerland 2.7 2.1 1.5 1.9 2.4 Sw itzerland 0.7 0.2 -0.7 0.6 1.6Germany 4.0 3.1 0.9 1.4 2.1 Germany 0.2 1.2 1.9 1.7 2.1France 1.6 1.7 0.1 0.8 1.7 France 0.1 1.7 2.1 1.8 1.9Italy 1.8 0.5 -2.3 -0.5 1.0 Italy 1.6 2.9 3.1 2.1 1.5Spain -0.3 0.4 -1.2 -0.9 1.1 Spain 2.0 3.1 2.4 2.2 0.5Netherlands 1.6 1.1 -0.2 1.2 1.7 Netherlands 0.9 2.5 2.4 1.7 1.8Austria 2.3 2.7 0.9 0.8 1.7 Austria 1.7 3.6 2.2 1.8 1.9Belgium 2.4 1.8 -0.4 0.6 1.8 Belgium 2.3 3.5 2.2 1.5 1.7Portugal 1.4 -1.6 -2.7 0.0 1.2 Portugal 1.4 3.6 2.9 1.5 1.3Greece -3.5 -6.9 -6.6 -0.9 1.2 Greece 4.7 3.1 0.5 -0.5 0.0Finland 3.3 2.7 0.8 1.2 2.8 Finland 1.2 3.4 3.0 2.5 2.3Ireland -0.8 1.4 -0.2 1.5 2.1 Ireland -1.6 1.2 1.8 1.5 1.5Estonia 2.3 7.6 2.3 3.5 3.8 Estonia 3.0 5.0 3.7 3.0 2.9Poland 3.9 4.3 2.8 2.3 3.1 Poland 2.6 4.3 3.9 2.7 2.2Russia 4.0 4.4 4.2 4.8 5.0 Russia 6.9 8.5 6.3 6.8 7.0Latvia -0.3 5.5 4.2 2.5 3.9 Latvia -1.1 4.4 2.3 2.5 2.8Lithuania 1.4 5.9 2.7 3.3 3.5 Lithuania 1.3 4.1 3.0 2.8 3.0India 9.6 6.9 6.0 6.7 7.2 India 9.6 9.5 7.5 6.8 7.0Brazil 7.6 2.8 2.6 4.6 4.8 Brazil 5.0 6.4 5.2 5.4 5.8Public finances, % of GDP Current account, % of GDP 2010 2011 2012E 2013E 2014E 2010 2011 2012E 2013E 2014EUSA -8.9 -8.6 -7.0 -5.5 -4.1 USA -3.0 -3.1 -3.0 -3.5 -3.0Euro area -6.2 -4.1 -3.7 -3.0 -2.5 Euro area 0.0 0.0 0.3 0.7 1.0China -1.7 -1.1 -1.5 -2.3 -1.9 China 5.1 2.8 2.5 2.2 1.5Japan -9.0 -9.7 -9.9 -9.6 -9.0 Japan 3.6 2.0 2.1 2.5 2.4Denmark -2.7 -1.9 -3.9 -2.1 -0.5 Denmark 5.5 6.7 5.8 5.1 4.4Norw ay 11.3 13.8 13.7 13.9 13.6 Norw ay 12.4 14.5 14.9 15.4 15.1Sw eden -0.1 0.1 -0.3 -1.0 -0.5 Sw eden 6.8 7.0 7.2 7.6 7.5UK -10.4 -8.3 -7.6 -6.4 -4.7 UK -2.5 -1.9 -2.3 -2.1 -1.3Sw itzerland 0.7 0.8 0.1 0.1 0.2 Sw itzerland 14.3 10.4 9.3 8.7 9.9Germany -4.3 -1.0 -0.8 -0.6 -0.5 Germany 5.8 5.3 4.6 4.4 4.0France -7.1 -5.2 -4.7 -3.9 -3.5 France -2.2 -2.7 -2.4 -2.1 -2.0Italy -4.6 -3.9 -2.0 -1.8 -1.0 Italy -3.5 -3.1 -2.0 -1.0 -0.5Finland -2.5 -0.6 -0.5 -0.1 0.5 Finland 1.6 -1.1 -0.2 0.2 0.6Estonia 0.2 1.0 -1.5 -0.5 -0.3 Estonia 3.8 2.1 -2.3 -1.5 -1.3Poland -7.8 -5.1 -3.3 -3.3 -2.9 Poland -4.7 -4.3 -3.6 -3.0 -3.0Russia -4.0 0.5 0.2 0.5 0.7 Russia 4.8 4.5 4.2 3.0 2.5Latvia -8.2 -3.5 -2.2 -2.0 -2.0 Latvia 3.0 -1.2 -3.2 -3.5 -3.6Lithuania -7.2 -5.5 -2.7 -3.0 -3.0 Lithuania 1.1 -1.6 -2.7 -3.0 -3.0India -3.6 -6.6 -7.0 -7.5 -8.0 India -3.3 -2.8 -4.0 -3.0 -2.2Brazil -2.7 -2.4 -2.0 -2.1 -2.2 Brazil -2.3 -2.1 -2.5 -2.7 -2.81) Weighted average of countries in t his table. Accounts for 76.5%of world GDP. Weights calculat ed using PPP adjust ed GDP levels f or 2008 according to t he IM Fs World Economic Out look6 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  6. 6. ■ OverviewMonetary policy rates Monetary policy rate spreads vs Euro area 30.8.12 3M 30.06.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14US 0.25 0.25 0.25 0.25 2.00 US -0.50 -0.25 -0.25 -0.25 1.00Japan 0.10 0.10 0.10 0.10 0.10 Japan1 -0.15 -0.15 -0.15 -0.15 -1.90Euro area 0.75 0.50 0.50 0.50 1.00 Euro area - - - - -Denmark 0.20 0.05 0.15 0.25 1.00 Denmark -0.55 -0.45 -0.35 -0.25 0.00Sw eden 1.50 1.25 1.00 1.50 2.00 Sw eden 0.75 0.75 0.50 1.00 1.00Norw ay 1.50 1.50 1.75 2.00 2.75 Norw ay 0.75 1.00 1.25 1.50 1.75UK 0.50 0.50 0.50 0.50 1.00 UK -0.25 0.00 0.00 0.00 0.00Sw itzerland 0.00 0.00 0.00 0.50 1.00 Sw itzerland -0.75 -0.50 -0.50 0.00 0.00Poland 4.75 4.50 4.00 4.00 4.50 Poland 4.00 4.00 3.50 3.50 3.50Russia 8.00 8.00 8.25 8.25 8.25 Russia 7.25 7.50 7.75 7.75 7.25China 6.00 5.75 5.75 6.00 6.00 China 5.25 5.25 5.25 5.50 5.00India 8.00 8.00 7.75 7.75 7.50 India 7.25 7.50 7.25 7.25 6.50Brazil 7.50 7.50 7.50 8.00 10.50 Brazil 6.75 7.00 7.00 7.50 9.503-month rates 3-month spreads vs Euro area 30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14US 0.42 0.45 0.50 0.60 2.50 US 0.13 0.20 0.25 0.10 1.30Euro area 0.29 0.25 0.25 0.50 1.20 Euro area - - - - -Denmark 0.31 0.35 0.40 0.70 1.45 Denmark 0.03 0.10 0.15 0.20 0.25Sw eden 1.95 1.55 1.50 2.00 2.50 Sw eden 1.66 1.30 1.25 1.50 1.30Norw ay 2.05 2.02 2.27 2.43 3.16 Norw ay 1.76 1.77 2.02 1.93 1.96UK 0.68 0.60 0.60 0.60 1.25 UK 0.40 0.35 0.35 0.10 0.05Poland 5.04 4.85 4.35 4.30 4.80 Poland 4.75 4.60 4.10 3.80 3.60Russia 7.17 7.40 7.50 7.50 8.00 Russia 6.88 7.15 7.25 7.00 6.80Latvia 0.61 0.55 0.50 0.50 1.20 Latvia 0.32 0.30 0.25 0.00 0.00Lithuania 0.89 0.75 0.80 1.10 1.70 Lithuania 0.60 0.50 0.55 0.60 0.5010-year government benchmark yields 10-year yield spreads vs Euro area 30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14US 1.64 2.00 2.50 3.00 4.00 US 0.30 0.25 0.60 0.80 1.35Euro area 1.35 1.75 1.90 2.20 2.65 Euro area - - - - -Denmark 1.08 1.55 1.75 2.05 2.55 Denmark -0.26 -0.20 -0.15 -0.15 -0.10Sw eden 1.38 1.80 2.00 2.60 3.00 Sw eden 0.04 0.05 0.10 0.40 0.35Norw ay 1.97 2.58 2.86 2.96 3.14 Norw ay 0.62 0.83 0.96 0.76 0.49UK 1.48 1.75 2.00 2.25 2.75 UK 0.14 0.00 0.10 0.05 0.10Poland 4.92 4.80 4.90 5.00 5.50 Poland 3.58 3.05 3.00 2.80 2.85Exchange rates vs EUR Exchange rates vs USD 30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14EUR/USD 1.26 1.30 1.20 1.15 1.10 -EUR/JPY 98.8 104.0 98.4 97.8 99.0 USD/JPY 78.6 80.0 82.0 85.0 90.0EUR/DKK 7.45 7.45 7.46 7.46 7.46 USD/DKK 5.93 5.73 6.21 6.48 6.78EUR/SEK 8.36 8.35 8.50 8.60 8.60 USD/SEK 6.66 6.42 7.08 7.48 7.82EUR/NOK 7.31 7.50 7.50 7.40 7.50 USD/NOK 5.81 5.77 6.25 6.43 6.82EUR/GBP 0.79 0.81 0.78 0.77 0.75 GBP/USD 1.58 1.61 1.55 1.50 1.47EUR/CHF 1.20 1.20 1.20 1.25 1.30 USD/CHF 0.96 0.92 1.00 1.09 1.18EUR/PLN 4.19 4.00 3.92 3.80 3.70 USD/PLN 3.33 3.1 3.3 3.3 3.4EUR/RUB 40.6 40.3 36.0 32.8 31.9 USD/RUB 32.3 31.0 30.0 28.5 29.0EUR/LVL 0.70 0.70 0.70 0.70 0.70 USD/LVL 0.55 0.54 0.58 0.61 0.64EUR/LTL 3.45 3.45 3.45 3.45 3.45 USD/LTL 2.75 2.66 2.88 3.00 3.14EUR/CNY 7.98 8.27 7.61 7.19 6.71 USD/CNY 6.35 6.36 6.34 6.25 6.10EUR/INR 69.8 71.5 63.6 55.2 49.5 USD/INR 55.6 55.0 53.0 48.0 45.0EUR/BRL 2.58 2.54 2.22 2.01 1.87 USD/BRL 2.05 1.95 1.85 1.75 1.707 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  7. 7. ■ SwedenHouseholds prop up the economy• GDP growth edging higher in coming years … Households keep the wheels turning Household finances are generally stable. A low inflation• … but near term, the labour market will weaken level and pay rises jack up households’ purchasing pow-• Long period of low inflation er. Real disposable incomes will rise by about 2% annu- ally in 2012-2014. The improved household finances• Riksbank to cut rates this year, and the SEK weakens have fed through to the housing market. House prices have started to rise again after having shown a slightlyGood growth weak trend over the past year. Share prices are also im-The Swedish economy has been surprisingly resilient to portant for households’ propensity to spend, and sincethe global turbulence. GDP growth did drop towards the the turn of the year stock markets have recovered some-end of 2011, but both the GDP and employment rose what. The conditions for households are therefore benignagain during H1 2012. The domestic economy was the so we expect consumer spending to rise noticeably inkey driver of growth, but also foreign trade improved. coming years.Growth in H1 2012 was fairly high, we think, despite thepossibility of a downward revision to Q2 GDP growth. Investment activity lost pace in Q2 2012 after rising sharply at the beginning of the year. There are indicationsAlthough the economy has been able to tackle the global that capacity utilisation in several sectors has declined,obstacles better than expected, GDP growth is still not which reduces the need for new investment. In addition,sufficiently high to prevent a decline in the demand for investment appetite seems suppressed by the dark cloudslabour. We expect unemployment to rise above 8% dur- still hanging over Europe. The number of housing startsing the winter. has already dropped sharply, and total investment will show a weak trend in coming quarters. We expect theProspects for H2 2012 are mixed. We will likely see sub- general need for investments to be modest during most ofdued growth. However, longer out there are factors sug- next year and then increase in 2014 in tandem with thegesting a pick-up in activity. A benign situation for overall pick-up in activity. An expansionary fiscal policyhouseholds, a slightly more expansionary economic poli- partly based on infrastructure investment will contributecy and a global economy that gradually recovers are the to underpinning investment growth over the forecastfactors that will underpin higher GDP growth in coming horizon.years. However, due to global weakness growth will onlyaccelerate slowly and unemployment will not decline un- Tough times for the export industrytil the latter part of the forecast period Despite some improvement recently, exports of goods have stagnated over the past year. The order intake re-Sweden: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009 (SEKbn) 2010 2011 2012E 2013E 2014EPrivate consumption 1,533 3.7 2.0 1.7 2.0 2.1Government consumption 860 1.9 1.8 0.8 0.5 1.5Fixed investment 559 7.7 6.2 2.5 1.0 3.5 - industry 74 1.0 7.9 -2.2 2.2 4.4 - residential investment 92 17.2 15.1 -8.7 -2.2 4.5Stockbuilding* -46 2.1 0.6 -1.1 0.1 0.0Exports 1,489 11.7 6.9 1.2 4.2 4.9Imports 1,288 12.7 6.3 -0.4 3.8 5.1GDP 6.2 3.9 1.2 1.8 2.3GDP, calendar adjusted 5.9 3.9 1.5 1.8 2.4Nominal GDP (SEKbn) 3,106 3,331 3,492 3,580 3,703 3,836Unemployment rate, % 8.4 7.5 7.7 8.0 7.7Employment grow th 1.0 2.1 0.3 -0.2 0.8Consumer prices, % y/y 1.2 3.0 1.2 1.2 2.0Underlying inflation (CPIF), % y/y 2.0 1.4 1.1 1.5 1.5Hourly earnings, % y/y 0.4 2.9 3.3 3.2 2.8Current account (SEKbn) 225 243 259 280 288- % of GDP 6.8 7.0 7.2 7.6 7.5Trade balance, % of GDP 2.6 2.7 2.9 3.0 2.7General govt budget balance (SEKbn) -2 5 -12 -38 -18- % of GDP -0.1 0.1 -0.3 -1.0 -0.5Gross public debt, % of GDP 39.4 38.4 38.1 39.1 39.6* Contribution to GDP growth (% points)8 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  8. 8. ■ Swedenmains weak, and growth in many key export markets is Rising incomes and consumptionlow. Accordingly, goods exports will likely remain sub-dued during the remainder of 2012. Also the strong SEKis a problem for exporters. However, it probably affectsprofitability rather than volumes. The situation will im-prove longer out as the SEK will likely weaken and de-mand gradually rise.Sweden’s trade in services, which has increased sharplyso far this year, is gaining significance. Exports of ser-vices have risen from 6% of GDP in 1980 to currently15% of GDP. The export markets for services are largelyidentical to those for goods – where demand is weak.This suggests that the pick-up in H1 was temporary andwill lose momentum going forward. Weak global demand a drag on Swedish exportsLow inflation puts pressure on the RiksbankDespite an increase in the number of employed this yearthe labour market still shows signs of weakness. The de-mand for labour has not been sufficiently strong to keepunemployment in check. Labour market indicators arestill at benign levels, but have started to soften. We lookfor a decline in employment and accelerating growth inunemployment during autumn and winter.Labour market weakness is usually accompanied by re-duced domestic inflation. Also, the SEK strengtheninghelps putting a lid on costs. Inflation pressures thus lookset to moderate even further in future, extending the peri-od of core inflation markedly below the 2% target. This Reduced pressure on domestic marketmay cause some concern for the Riksbank as it couldcontribute to further accelerating the decline in inflationexpectations.The door is thus open for monetary easing. With low in-flation, a weaker labour market, low policy rates interna-tionally and a risk of further SEK appreciation, the Riks-bank should cut rates this year. But when the economystarts to recover in the latter part of 2013, the bank willembark on a hiking cycle.A paradigm shift for the SEKThe SEK has become a safe-haven currency in 2012. Thereasons are the modest exposure of the Swedish economyto troubled areas, solid public finances and a highly com- Paradigm shift for SEKpetitive business sector that generates surprisingly stronggrowth and increased interest rate differentials. Goingforward, we expect the SEK to weaken versus the EURin step with a gradual stabilisation of the situation inter-nationally and a narrowing of interest rate differentials.However, EUR/SEK will remain at levels below 9throughout the forecast period. The USD will continue tostrengthen against most currencies, including the SEK.Torbjörn Isakssontorbjorn.isaksson@nordea.com +46 8 614 88599 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  9. 9. ■ NorwayRisk of overheating may be the biggest challenge• Strong domestic demand growth feared. Some export industries are facing difficulties, but for instance strong growth in electricity exports has put a• High immigration prevents overheating floor under total export growth. However, while this• And Norges Bank may proceed with caution trend is probably only temporary, the strong growth in exports within the engineering industry should continue.The Norwegian economy is showing few signs of weak- It reflects the increasing significance of the oil servicesness and we see no reason to change our optimistic view industry for Norwegian exports. With sustained high oilof the economy going forward. Growth looks set to be prices, prospects are good for this type of exports in thehigh, but with increased labour immigration an overheat- years ahead. Over the forecast period we also see growthing of the economy and sharply rising costs will probably in traditional exports rising, driven by stronger traditionalbe avoided. Wage growth will be much higher than in export market growth.neighbouring countries, but not so high as to push infla-tion above target. However, strong economic growth and The exceptionally strong growth in Norwegian oil in-higher capacity utilisation point to higher interest rates vestment has been vital for the oil services industry.during the next couple of years. But fears of excessive Growth will likely slow in coming years, but it will stillNOK strengthening limit Norges Bank’s room for ma- remain very high. In our view, capacity limitations innoeuvre in monetary policy. many areas will prove the key obstacle to growth in this industry. Pressures in this part of the economy seem to beStrong consumption growth one of main reasons why the wage negotiations, despiteStrong wage and employment growth and very low infla- all the talk of competitiveness and the so-calledtion currently boost consumer purchasing power. It is “frontfagmodell” (meaning that the negotiations start intherefore no surprise that consumption growth in H1 the industries particularly exposed to competition), result2012 was very high after last year’s weaker-than- in pay rises in manufacturing way beyond those in rivalexpected trend. And with an initial high level of savings countries.and a sustained strong labour market we see consumptiongrowth continuing unabated during the remainder of the We also see fairly strong growth in mainland investmentyear and into 2013. In 2013 and 2014 consumption going forward, although the pace is not likely to matchgrowth should slow down as a result of higher interest that of oil investment growth. The propensity to investrates and more moderate employment growth. should be high with strong production gains in large parts of the corporate sector. Higher credit margins and tighterHigher exports, but lower mainland investment bank credit standards could slightly dampen investmentDespite weak growth in export markets, a strong NOK growth, but this effect will likely be largely offset by theand wage growth well above levels in other countries, overall very low interest rate level. A possible sharp es-mainland exports have remained at a higher level than calation of the euro crisis and a new financial crisisNorway: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009(NOKbn) 2010 2011 2012E 2013E 2014EPrivate consumption 1,028 3.7 2.4 3.7 3.5 3.0Government consumption 531 1.7 1.5 2.0 2.5 2.5Fixed investment 516 -5.2 6.4 7.2 4.9 3.7 - gross investment, mainland 349 -2.5 8.0 3.2 3.7 3.7 - gross investment, oil 144 -14.3 9.1 20.0 8.0 4.0Stockbuilding* 14 1.9 0.3 0.0 0.0 0.0Exports 929 1.8 -1.4 1.6 1.1 1.3 - crude oil and natural gas 416 -4.8 -6.2 2.5 0.0 0.0 - other goods 277 2.5 -0.4 0.0 2.0 2.5Imports 660 9.9 3.5 3.0 3.9 3.0GDP 2,357 0.7 1.4 3.4 2.4 2.3GDP, mainland 1,876 1.9 2.4 3.7 3.0 2.8Unemployment rate, % 3.6 3.3 3.0 2.9 2.9Consumer prices, % y/y 2.5 1.2 0.8 1.8 2.1Core inflation, % y/y 1.4 0.9 1.2 1.5 2.1Annual w ages, % y/y 3.6 4.3 4.2 4.3 4.3Current account (NOKbn) 313.6 393.9 437.1 482.9 497.5- % of GDP 12.4 14.5 14.9 15.4 15.1Trade balance, % of GDP 12.4 13.8 14.6 15.1 14.8General govt budget balance (NOKbn) 284.5 375.1 400.0 435.0 450.0- % of GDP 11.3 13.8 13.7 13.9 13.6* Contribution to GDP growth (% points)10 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  10. 10. ■ Norwaycould, however, result in much tighter credit standards, Norwegian manufacturing production risesand this is probably one of the key risks to the Norwe-gian economy.Inflation to edge higherStrong domestic demand growth will contribute to strongproduction growth in the years ahead. However, thanksto high immigration we do not expect labour shortages tobecome a major problem. Nor do we expect major bot-tlenecks in the labour market despite shortages in someskilled areas. Consequently, wage growth should not pickup sharply, but still remain relatively high at just above4% in the years ahead.Wage growth just above 4%, strong domestic demand Higher income growth -> higher consumption growthgrowth and a relatively stable NOK suggest that inflationwill edge higher in coming years. Core inflation may riseto 2% over the forecast period, up from 1% at present,but to drive inflation above the 2½% target, cost growthwould have to be higher.Gradually higher interest ratesAgainst the background of strong growth, a relativelytight labour market, somewhat higher inflation andslightly improved prospects globally, Norges Bank willwant to hike interest rates during the forecast period. Al-so the steady increases in house prices and credit growthfrom high levels suggest higher interest rates. However,with below-target inflation and domestic economicgrowth largely matching capacity growth, Norges Bank Supply and demand growth almost identicalwill not be in a hurry. In the absence of rate hikes inneighbouring countries, an aggressive monetary policyline would only strengthen the NOK to levels that wouldcause inflation to drop further below target.At the time of writing the NOK has strengthened quitesignificantly against the EUR, but measured in terms ofthe trade-weighted exchange rate, the NOK strengtheningis far more modest. We expect Norges Bank to hike itspolicy rate twice next year, but these moves should notresult in a long-lasting period of NOK strengthening. In2014 the pace of monetary tightening may be increasedfurther, but as interest rates in other countries are alsolikely to go up, Norges Bank can hike its policy rateswithout risking excessive NOK strengthening. NOK not so strong in trade-weighted termsThere is a clear risk that the high domestic demandgrowth could result in increased capacity problems, high-er wage growth and consequently gradually higher infla-tion than we project. If so, Norges Bank will act moreaggressively, accepting the effect on the NOK. And theNOK strengthening would contribute to preventing infla-tion from rising above target. If Norges Bank chooses tofocus less on meeting the inflation target and more onpreventing surging house prices and household creditgrowth, the result may be a combination of higher inter-est rates and a stronger NOK. However, judging from thebank’s rhetoric it is not about to change its priorities.Erik Bruceerik.bruce@nordea.com +47 2248 444911 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  11. 11. ■ DenmarkLanguishing economic growth• Rising activity towards 2014 Despite the prospect of a historically high savings ratio our forecast assumes that consumer spending will gradu-• Housing market improvement ally increase towards the end of 2014. The accelerating• Delayed effect from public money flow consumer spending growth will partly be driven by a pent-up consumption need and partly by generally im-• Negative central bank rates work proved sentiment about the Danish economy. Not least the prospect of increasing employment and a pick-up inLow growth and significant uncertainty characterise the the housing market will boost Danish households’ pro-Danish economy; activity has been stuck at largely the pensity to consume over the forecast period.same level since the autumn of 2010. Over coming quar-ters, we expect the Danish economy to gradually return Housing market shows signs of healingto the growth track this year, expanding at a rate of 0.7% Since mid-2008 the ailing housing market has been athis year, accelerating to 1.9% in 2013 and 2.1% in 2014. millstone around the neck of the Danish economy. The contracting housing wealth, slower credit growth and his-On the domestic front the expected reversal of economic torically low activity in the construction sector are sometrends will be driven by households’ large pent-up poten- of the main reasons why consumer spending has stagnat-tial, which will gradually turn into growing consumer ed. However, the latest monthly property price data fromspending. At the same time, growth is underpinned by a Statistics Denmark suggest that housing prices have sta-delayed effect from the public sector, with expected posi- bilised since the start of the year. We believe this devel-tive contributions from consumer spending and invest- opment marks the beginning of a new regime in the Dan-ment. ish housing market where the historically low funding costs and substantial pent-up demand over time will leadConsumers hang on to their money to market consolidation.Although the payout of saved-up early retirement moneyis close to DKK 20bn (already surpassing official fore- But prices will be kept in check by a still large supply ofcasts), the effect on retail sales and consumer spending unsold homes, low turnover and high youth unemploy-has so far not materialised. Instead many have chosen up ment, which limits the number of first-time buyers.save up more; total household bank deposits have Trapped between these two opposing trends, housingswelled to an all-time high. The Danish economy there- prices are likely to remain more or less unchanged duringfore lacks the boost to activity that normally results from the rest of the year. Into 2013 we expect housing pricesconsumer spending. Moreover, the government’s scope to slowly edge higher, surpassing expected inflationfor stimulating economic activity through its tax policy is again in 2014. The moderately rising housing prices willlimited. first and foremost be concentrated in the large cities where demographics suggest growing upward pressure on demand.Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009 (DKKbn) 2010 2011 2012E 2013E 2014EPrivate consumption 815 1.9 -0.8 0.6 1.8 1.9Government consumption 497 0.3 -1.3 0.4 0.8 0.8Fixed investment 314 -3.7 0.2 2.8 4.0 4.7 - government investment 33 8.5 5.2 8.5 -12.0 2.5 - residential investment 80 -7.4 8.8 -5.8 4.7 5.0 - business fixed investment 201 -4.4 -3.8 5.0 7.1 4.9Stockbuilding* -20 0.1 0.0 0.0Exports 794 3.2 7.0 2.0 2.9 3.5Imports 731 3.5 5.2 2.6 3.6 3.6GDP 1.3 0.8 0.7 1.9 2.1Nominal GDP (DKKbn) 1,668 1,772 1,783 1,818 1,879 1,949Unemployment rate, % 6.3 6.2 6.3 6.4 6.2Gross unemployment level, 000 persons 164.5 162.1 165.0 168.7 163.2Consumer prices, % y/y 2.3 2.8 2.4 2.0 2.2Hourly earnings, % y/y 2.3 1.8 1.8 1.9 2.1Nominal house prices, one-family, % y/y 2.8 -2.8 -4.3 1.2 1.9Current account (DKKbn) 96.9 119.1 105.0 95.0 85.0- % of GDP 5.5 6.7 5.8 5.1 4.4General govt. budget balance (DKKbn) -47.4 -34.5 -71.0 -40.0 -10.0- % of GDP -2.7 -1.9 -3.9 -2.1 -0.5Gross public debt, % of GDP 42.9 46.6 45.5 44.5 43.0* Contribution to GDP growth (% points)12 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  12. 12. ■ DenmarkNegative central bank rates a success Stagnant consumptionDuring the debt crisis the Danish central bank has beenforced to pursue a very proactive monetary policy tokeep the DKK stable versus the EUR. As a vital part ofthis defence, the central bank cut its CD rate to -0.20% inearly July. It is the first time in Denmark’s history thatthe CO rate is in negative territory. So far this move hashad the desired effect. The DKK has stabilised at a solidlevel against the EUR without the central bank needingto intervene in the market. This contrasts sharply with thesituation in May and June when more than DKK 36bnwas sold to defend the Danish fixed exchange rate re-gime.Public money flow drying outIn a bid to break the current economic deadlock the gov- The central bank’s CD rate is negativeernment has decided to bring forward public investmentprojects to the tune of DKK 19bn. At the same time pub-lic spending is budgeted to grow by DKK 18bn this yearand an additional DKK 8bn in 2013 – corresponding toreal growth of 1.5% and 0.1%, respectively. Despite the-se intentions public spending decreased by 1.0% in H1,while public investment only increased very modestly.So the Danish economy has so far not received the origi-nally planned boost from fiscal policy. The explanationto this sluggishness should be found in the long imple-mentation period for public investment and in the factthat public-sector spending historically has been very dif-ficult to fine-tune. Against this background, there is alikelihood of a strong ketchup effect in coming quarters, Improved competitivenesswhich will help pull the Danish economy out of the dol-drums provided that the government fulfils its own plans.Improved competitiveness drive exports forwardAfter a brief dip at the beginning of the year, exports aregrowing again – partly driven by sustained growth in keyexport markets, partly by improved competitiveness.This is chiefly a result of a weakening of the trade-weighted DKK, which has made Danish products com-paratively cheaper in international markets.But also the past year’s sharp drop in the pace of wagegrowth combined with productivity gains means that unitlabour costs now increase more slowly than in Den-mark’s key export markets. And although the effect of Decoupling between employment and house pricesthe lower unit labour costs will not feed though untilslightly longer out, it is a vital precondition for maintain-ing the necessary momentum in exports.Helge J. Pedersenhelge.pedersen@nordea.com +45 33333126Jan Størup Nielsenjan.storup.nielsen@nordea.com +45 3333317113 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  13. 13. ■ Finland Finnish economy has cooled down across the board• Exports will not recover until 2013 for instance, turned down again in the first half of the year. In our forecast, we assume export volumes to con-• Growth in private consumption will slow down tinue declining in the latter part of the year. The decreas-• Employment will fall less than previously forecast ing world trade growth will weaken production expecta- tions globally and decrease investment needs. This is bad• Public sector deficit will decrease news to the Finnish export industry, as its main products are raw materials, production supplies and investmentAs expected, economic activity has decreased in Finland goods. We expect international demand to strengthenacross the board after the first quarter of this year. Ex- moderately in 2013. Export volumes will increase butports have contracted, investment has continued to de- growth will still remain modest.cline and the growth in private consumption has sloweddown. Imports have decreased more than exports, which Growth in private consumption to slow downis, in particular, a sign of weakening in domestic demand. Private consumption increased at a brisk pace in Q1 thisWhat is positive, is that employment has not yet weak- year compared to Q4 2011. This was a result of the one-ened. However, it is probably only a question of time be- off additional salary items based on collective agree-fore it does. ments, which boosted retail sales, and the car tax hike that entered into force at the beginning of April, whichBased on preliminary data, the economy contracted in Q2 made people purchase new cars earlier than they other-compared to the previous quarter. Our forecast assumes wise would have. The growth in retail sales volumesthat the decline continues in Q3. This means that we be- slowed down markedly in Q2 and in July it stopped alto-lieve the Finnish economy is in recession, just like many gether. Car sales, too, have decreased sharply. Thanks toother European countries. As in our previous forecast, the strong beginning of the year, private consumptionhowever, we believe the recession will not last long and will significantly boost the economic growth this yearthere is no need to change the previous GDP growth despite the recent cooling.forecast of 0.8% for this year. On the other hand, interna-tional trade has cooled down more than expected, which For the remaining part of the year and for 2013, the out-indicates that an export-led recovery from the recession look for private consumption will remain weak. The in-will be much slower than previously estimated. That is crease in salaries and pensions as well as the decrease inwhy we have lowered our forecast for economic growth mortgage interest rates will support households purchas-in Finland in 2013 to 1.2% (previously 1.6%). In 2014, ing power. The growth in purchase power will, however,we expect growth to speed up to 2.8% as especially the be restrained by tax increases and the expected weaken-North-European economies will recover. ing in employment. Taxes will increase as the value add- ed tax will be raised and no inflation adjustments of in-Exports will not recover until 2013 come limits will be made in the income tax brackets. InFinnish goods exports have varied widely over the past addition, the rather rapid growth in consumer prices willyear – and the variation has taken place around a decreas- continue and erode purchasing power. Consumer pricesing trend. New orders received by the industrial sector, are expected to rise by 2.5% next year. The householdFinland: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009 (EURbn) 2010 2011 2012E 2013E 2014EPrivate consumption 94 3.3 2.5 2.2 1.3 2.0Government consumption 43 -0.3 0.4 0.3 0.5 0.5Fixed investment 34 1.9 6.8 -3.2 0.6 3.8Stockbuilding* -2 0.5 1.1 -0.3 0.3 0.1Exports 64 7.5 2.6 -1.7 2.6 7.1Imports 62 6.9 5.7 -3.0 2.9 6.2GDP 3.3 2.7 0.8 1.2 2.8Nominal GDP (EURbn) 172.3 178.8 189.4 196.0 201.6 210.1Unemployment rate, % 8.4 7.8 7.7 8.0 7.9Industrial production, % y/y 8.3 0.9 -3.0 2.0 4.0Consumer prices, % y/y 1.2 3.4 3.0 2.5 2.3Hourly w ages, % y/y 2.6 2.7 3.5 3.0 3.0Current account (EURbn) 2.9 -2.2 -0.5 0.4 1.2 - % of GDP 1.6 -1.1 -0.2 0.2 0.6Trade balance (EURbn) 2.6 -1.2 -0.1 0.1 0.8 - % of GDP 1.4 -0.6 -0.1 0.0 0.4General govt budget balance (EURbn) -4.5 -1.2 -1.0 -0.1 1.0- % of GDP -2.5 -0.6 -0.5 -0.1 0.5Gross public debt (EURbn) 90.0 93.0 99.0 104.1 108.4- % of GDP 50.3 49.1 50.5 51.6 51.6* Contribution to GDP growth (% points)14 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  14. 14. ■ Finlandsavings rate continues to decline which means that an in- Cooling of world trade brings problems to exportscreasing part of income is used for consumption. The ac-commodating monetary policy is well timed as the con-sumption outlook would be much gloomier without it.Investment to decline, employment to weakenThe bleak short-term outlook for exports, production andconsumption as well as the major uncertainty over theEuro area developments will eat away economic agentsconfidence and thus decrease willingness to invest andweaken employment prerequisites. Machinery andequipment investment increased sharply last year butturned down again already in the beginning of this year.The decline is expected to continue at least for the rest ofthis year. Construction investment is also expected to de- Weak sentiment points to an outright fall in GDPcline. The decrease in the number of granted constructionpermits indicates that the decline in residential and otherconstruction will continue and even steepen during thelatter part of the year. Reconstruction will compensatefor the decline in new construction.We expect both the traditional machinery and equipmentinvestment and construction investment to increase againin 2013. A precondition for this, however, is that theglobal economy will grow as forecast, the Euro area debtcrisis will clear up and confidence will return.The labour market has provided very positive surprisesthis year. Employment measured with the number ofpeople has not weakened (although the number of work- A decline in GDP is bad news for employmenting hours has probably started to decrease) and the num-ber of unemployed people has not started to increase.Seasonally adjusted unemployment rate has stabilised at7.5% in recent months. The unemployment rate for 2012seems to remain at 7.7% (the previous forecast was8.0%), which is lower than in 2011. We still expect un-employment to increase, especially in 2013 with the un-employment rate rising to an average of 8%.Slower decrease in public sector deficitTax revenues will increase at a slower pace due to thesluggish economic growth, even though income taxationwill be tightened and value added tax will be raised. Thepublic sector deficit will, however, continue to decline.The deficit is estimated to decrease to 0.1% of GDP in Confidence + labour market = weak consumption2013 and turn into a small surplus in 2014. The govern-ments annual borrowing need will remain at EUR 4–6bnduring the forecast period, which will increase the publicdebt close to 52% of the value of total production alreadyin 2013.Pasi Sorjonenpasi.sorjonen@nordea.com +358 9 165 5994215 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  15. 15. ■ USAMoving slowly forward• If a perfect storm of fiscal chaos is avoided … After all, the economy’s fundamentals are much im- proved. Businesses are highly profitable, banks have re-• ... progress towards full employment in 2014 capitalised and the deleveraging process in the private• Stronger underlying inflation pressures set to emerge sector has come a long way. Still, households – especial- ly younger families – are likely to continue the process of• Fed to start tightening by mid-2014 balance sheet repair. Home prices seem to have bot- tomed, but the expected slow price increases provide lim-US economic growth is likely to remain moderate in the ited support to household net worth going forward.next few years through 2014, constrained by householddeleveraging, fiscal restraint, subpar global demand, In 2014 growth is expected to slow to a pace more in lineslower working-age population growth and a deteriora- with potential. Full employment, defined as an unem-tion of job skills. ployment rate of 7%, should be achieved in late 2014.The US economy clearly lost momentum during Q2 QE3 only in case of policy errors2012, but recent economic data paint a slightly brighter The effects of the drought in the Midwest on food com-picture, pointing towards GDP growth of 1½-2% in H2 modity prices and a rebound in oil prices are likely to2012. Stronger disposable income growth, easier finan- push headline inflation meaningfully higher by mid-cial conditions and bank lending standards, continued 2013.housing recovery, the end of the payback for the warmwinter weather and less drag from seasonal adjustment With the business cycle adjustment more or less com-distortions suggest that economic momentum will pick pleted in 2014, signs of stronger underlying inflationup slightly in the near term. pressures are projected to emerge in the latter part of the forecast horizon. As a result, we expect the Fed to startHowever, while the threat from the Euro-area crisis cur- raising policy rates and gradual unwind its securitiesrently appears less menacing, US fiscal challenges holdings around mid-2014.around the end of this year imply that risks to the US out-look over the next two to three quarters remain tilted to In the more immediate future, however, the Fed is likelythe downside. The probability of another US recession is later this month to postpone the expected first rate hikeuncomfortably high at 20-25%, in our view. from late 2014 to mid-2015. In our view, the central bank is currently overestimating the labour market slack andOn the other hand, an orderly resolution of the pending hence underestimating the longer-term risk of inflation.fiscal issues, as assumed in our baseline scenario, should Additional asset purchases (QE3) by the Fed are not ex-pave the way for stronger confidence and hence brighter pected unless the Euro-area crisis blows up again or ifeconomic prospects in 2013, when growth is projected to US policymakers fail to resolve the pending fiscal issuesexceed potential assumed at around 2% annually through in an orderly manner.most of the year.USA: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009 (USDbn) 2010 2011 2012E 2013E 2014EPrivate consumption 9,845.9 1.8 2.5 1.9 2.0 2.1Government consumption and investment 2,967.2 0.6 -3.1 -2.0 -0.9 -0.3Private fixed investment 1,703.5 -0.2 6.6 9.4 6.9 6.9 - residential investment 354.2 -3.7 -1.4 11.7 9.4 12.4 - equipment and softw are 898.3 8.9 11.0 8.3 6.9 6.0 - non-residential structures 451.1 -15.6 2.8 10.2 4.5 3.5Stockbuilding* -154.2 1.5 -0.2 0.2 0.1 0.0Exports 1,587.5 11.1 6.7 4.3 5.2 5.3Imports 1,976.2 12.5 4.8 4.2 5.7 5.4GDP 2.4 1.8 2.2 2.0 2.2Nominal GDP (USDbn) 13,973.7 14,498.9 15,075.7 15,716.1 16,276.1 16,885.0Unemployment rate, % 9.6 9.0 8.1 7.7 7.3Industrial production, % y/y 5.4 4.1 4.0 4.0 4.3Consumer prices, % y/y 1.6 3.1 2.1 2.2 2.2Consumer prices ex. energy and food, % y/y 1.0 1.7 2.1 2.2 2.2Hourly earnings, % y/y 1.8 2.0 2.2 2.1 2.2Current account (USDbn) -442.0 -465.9 -471.5 -569.7 -506.5 - % of GDP -3.0 -3.1 -3.0 -3.5 -3.0Federal budget balance (USDbn) -1,293.5 -1,300.0 -1,100.0 -900.0 -700.0- % of GDP -8.9 -8.6 -7.0 -5.5 -4.1Gross public debt, % of GDP 95.2 99.5 106.5 112.0 116.2* Contribution to GDP growth (% points)16 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  16. 16. ■ USAA perfect storm of fiscal chaos hopefully avoided Moving slowly forwardThree US fiscal issues pose a threat to the economic out-look: the so-called fiscal cliff, another increase in theTreasury debt ceiling and the need for longer-term fiscalsustainability.As we approach the end of the year, attention will focuseven more sharply on the risk of the fiscal cliff – the un-fortunate coincidence of about USD 600bn in tax in-creases and spending cuts that will take effect next year,should Congress not act to change current law. Failure toscale back the fiscal cliff could knock as much as 4¼%off real GDP in 2013, enough to push the US economyback into recession. Moreover, the Treasury is likely tohit the debt ceiling again in December. Assuming it uses Slow progress towards full employment in late 2014the accounting strategies that have been employed in thepast, the Treasury seems likely to be able to finance gov-ernment operations under the current limit until some-time in February 2013, by which point Congress mustraise the debt ceiling. Failure to do so would imply de-fault on some of the US government’s obligations.With both political parties in full campaigning mode,none of these issues are likely to be resolved before thepresidential elections on 6 November. As seen too oftenduring the past two years, there will most likely be plentyof political brinkmanship and the accompanying uncer-tainty will probably come at a cost to the economy andthe financial markets later this year and in early 2013.The longer the uncertainty persists, the more likely it will Stronger underlying inflation pressures in 2014hurt confidence, hiring, investment and spending.However, our expectation is that when pressured by thethreat of another recession, policymakers will take actionto reduce the fiscal drag on growth (to around 0.5% ofGDP) either during the so-called lame duck session afterthe election or in January when the new governmenttakes office. Obviously, the outcome of the Novemberelections will be very crucial to how the fiscal debateplays out. In this context, the congressional election re-sults will be at least as important as who wins the WhiteHouse, Obama or Romney.Extending the otherwise expiring tax cuts and other eas-ing measures and repealing the automatic federal spend- Recession if economy is pushed off the fiscal cliffing cuts would significantly reduce the risk of recession, 1 1 % points Fiscal policy impact on GDP growth % pointsbut at the cost of a substantially larger budget deficit. 0 0Thus, with an extension of current policy federal debtheld by the public would rise from 70% of GDP today to -1 -1around 90% by 2022 compared to around 60% if current -2 -2law is not changed. In other words, apart from resolvingthe fiscal cliff issue and raising the debt ceiling policy- -3 -3makers will also soon have to address the need to restore -4 -4longer-term fiscal sustainability in order to shift the risk Current law Current policyto the economic outlook from negative to positive. -5 -5 2011 2012 2013 Source: Nordea Marktes, Congressional Budget Office and Office ofJohnny Bo Jakobsen Management and Budgetjohnny.jakobsen@nordea.com +45 3333 617817 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS
  17. 17. ■ Euro areaRestore confidence to end the recession• Gradual recovery from year-end Restoring confidence is key to recovery Why do we expect a recovery when numerous problems• Helped by smarter interventions remain unsolved and deleveraging has only just begun?• Significant downside risks to inflation Well, because we believe that decisions have been taken and will be taken in the coming months that are decisive• Spain heading for deeper recession and will help gradually restoring confidence in the Euro area. After all, monetary policy is extremely lenient, ex-The Euro area is in recession. The second quarter showed port markets are growing decently, the EUR is weaken-GDP contraction and the third quarter most likely will ing and even if more fiscal tightening will be needed intoo. We expect a recovery starting around year-end and a the years to come at least the pace of tightening will bevery gradual pick-up of momentum during 2013. In 2014 slower. Confidence is the missing ingredient that will al-growth will still be somewhat below the pre-crisis “nor- low these factors to work and pave the way for a verymal” level. gradual recovery.We have made a modest upward revision to growth this Restoring confidence takes more time than eroding it,year, but otherwise kept the Euro-area forecast roughly and we do not in any expect that the debt crisis is aboutunchanged compared with our May forecast revision. We to end. Solving the crisis requires massive deleveraginghave revised down our growth forecast for Spain in 2013 in the years to come, structural reforms, growth andafter the announcement of new austerity measures during building new credible institutions to prevent the samethe summer. kind of crisis from happening again. Restoring confi- dence also requires that Greece starts implementing theRecovery from year-end reforms agreed with the Troika.It is fair to say that signs of recovery have been scant upto this point. However, the most forward-looking indica- Interventions will work this timetors for growth in the Euro area as a whole have at least In terms of the decisive action, the ECB seems ready tostopped falling and stabilised at low levels. bring out Big Bertha – more or less the entire arsenal of instruments is being considered. We believe ECB inter-The contraction in Q2 was not as severe as one might ventions in the secondary market – done smarter thishave expected given the financial stress during that peri- time – combined with intervention in the primary marketod with Greek post-election chaos and a Spanish bank by the EFSF/ESM will reduce the level of stress in finan-bailout. Some lagged adverse impact on the economy is cial markets and help restore the confidence that is need-likely to be visible in the Q3 growth numbers, but we ex- ed to embark on a path to recovery.pect Q3 to mark the bottom of the current business cycle. When the ECB intervened through its old programme (the SMP) it did not work very well. Rather it reducedAnother reason that the Q2 numbers were not as bad as the incentive for eg Italy to do the right thing. Therefore,feared is Germany. German growth remained resilient interventions to reduce financial stress never becameduring the first half of the year driven to a large extent by credible. This time, the ECB will intervene with strictthe export sector and to some extent also the German conditionality – ie only in countries that have a bailoutconsumers. At present, the survey-based indicators point programme with promises to reduce budget deficits andto slightly negative growth in Germany in Q3.Euro area: Macroeconomic indicators (% annual real changes unless otherwise noted) 2009 (EURbn) 2010 2011 2012E 2013E 2014EPrivate consumption 5,128 0.9 0.2 -0.8 -0.4 0.3Government consumption 1,987 0.7 -0.3 0.2 -0.9 -0.8Fixed investments 1,735 -0.2 1.6 -3.0 1.1 2.4Stockbuilding* -48 0.7 0.3 -1.2 -0.1 0.5Exports 3,272 11.0 6.3 1.6 4.9 1.6Imports 3,155 9.4 4.1 -2.3 2.9 1.4Net exports* -0.8 0.7 1.0 1.6 1.0 0.2GDP 1.9 1.5 -0.4 0.6 1.7Nominal GDP, EUR bn 8,917 9,155 9,410 9,512 9,725 9,804Unemployment rate, % 10.1 10.2 11.3 11.6 10.6Industrial production, % y/y 4.3 2.7 -2.6 2.9 5.8Consumer prices, % y/y 1.6 2.7 2.2 1.6 1.6 - core inflation** 1.0 1.7 1.6 1.2 1.0Hourly earnings, % y/y 1.6 2.2 2.3 2.2 2.1Current account, bn EUR -3.2 -1.1 33.1 21.0 17.0Current account, % of GDP 0.0 0.0 0.3 0.7 1.0General government budget balance, % of GDP -6.2 -4.1 -3.7 -3.0 -2.5General government gross debt, % of GDP 85.3 87.2 90.9 93.9 96.4* Contribution to GDP growth (% points)18 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS

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