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Swedbank Economic Outlook April 2011


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Swedbank analyses theSwedish and Baltic Economies.

Swedbank analyses theSwedish and Baltic Economies.

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  • 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies April 7, 2011A more balanced growth going forward Global development Table of Content:  The global recovery is on despite Japan’s disaster, the Middle East’s political turmoil, and the euro zone’s debt crisis. Global GDP increased by 4.7% last year and will settle in at 4% this year and next as economic Introduction: The recovery policies tighten. takes hold – but headwinds  A backlash can still happen. Important challenges are rising commodity prices, overheated emerging markets, unsustainable sovereign debts, are picking up 2 and fragile banks in many advanced countries, causing financial instability and new recessions. Global: Inflation and sovereign Sweden debt endanger the global  The Swedish economy responded vigorously to the stabilising global recovery 4 conditions and growth reached 5.3% last year, amongst the highest in the advanced economies. In particular, employment picked up strongly but a large number of unemployed are having difficulties finding jobs. Sweden: Households shift to a  We expect investments to be the main driver of growth in 2011 and 2012, lower gear 6 while household consumption is set to fall back as prices and interest rates are rising. Real economic growth is projected at 4% in 2011 and 2.6% in 2012. Monetary and fiscal policy will continue to provide support, Estonia: Recovering domestic although the Riksbank is gradually reversing its stance. The main economic policy challenge remains the labour market. demand supports economic growth 11 Estonia  In 2010, the Estonian economy grew by 3.1%, driven mainly by exports. Towards the end of the year, domestic demand started contributing, and Latvia: Stronger recovery, but both investments and private consumption showed positive annual growth lack of reforms cuts into future rates in the fourth quarter. The successful euro adoption and strong fiscal position added to the positive picture. growth 15  In 2011 and 2012, we expect the Estonian economy to grow by 4.5%. Domestic demand will gradually replace exports as the main source of Lithuania: Growth accelerates growth, with investments as the main factor. Private consumption will recover only slowly due to modest wage developments, increasing prices, and it’s more balanced 19 and lingering unemployment. Latvia  The recovery in Latvia has continued to strengthen and widen. By the end of 2010, GDP had grown by 3.7% since the trough in the autumn of 2009. Economic growth and a more stable fiscal situation have helped raise Latvia’s sovereign credit ratings.  Somewhat disappointing post-election fiscal and structural policies will weigh down on growth, as higher taxes are undermining private spending. We still expect 4% economic growth in 2011 but are lowering the forecast for 2012 to 3.9% (4.2% before). Export growth is expected to slow due to capacity constraints, but investments will pick up. Lithuania  Recovery accelerated in the final quarter of 2010, when GDP grew annually by 4.6% and boosted last year’s growth to 1.3%. Overall in 2010, only inventories had a positive impact on growth, but in the last quarter both investments and household consumption gave support.  We expect this pace to continue this year and in 2012, and raise our GDP forecast to 4.2% and 4.7%, respectively. Recovery will be much more balanced as investments and household consumption will continue to contribute to growth. Due to global developments, inflation will be higher, jeopardising EMU entry. Budget consolidation is also a challenge. April 7, 2011 1
  • 2. Introduction Swedbank Economic OutlookThe recovery takes hold – but headwinds arepicking upSweden and the Baltic countries US$8 to US$98 for next year. This supportive of growth in Sweden andbenefited from strong global tailwinds means higher inflation and interest the Baltics, the headwinds facingduring last year, and the recovery rates in many countries. While the the global economy are building up.has gained momentum, resulting in democratization process in the Middle The higher commodity prices riskGDP growth of some 4-4.5% in all East has recently contributed to the creating both higher inflation andfour countries this year. As stimuli higher oil price, the global recovery negative growth prospects. In thefrom economic policy worldwide are and the expansionary monetary policy emerging markets, overheating risksabating, growth in external demand is are other important factors explaining will increase, and, in certain advancedslowing. Still, exports remain important the upturn. economies, policy rates may befor growth, not least as it spurs raised earlier than expected, despite In 2011 and 2012, the “two-speedinvestments and employment. the negative growth impact from the world economy” continues, with fiscal side. The sovereign debt crisisHeadwinds, however, are picking global growth of 4% both years. This in the advanced countries is causingup due to higher commodity prices, is a slight upward revision due to the uncertainties with regard to growth, thewhich increase inflation and interest faster recovery last year. Emerging banking sector, and political stability.rates. While households will become markets will continue to make up the Portugal is the third euro countrymore supportive of growth in the Baltic major share of global growth, while requesting a rescue package, whilecountries although inflation holds advanced countries still struggle with Spain is likely to make it through theback developments somewhat, their structural problems involving labour, crisis without external support. Theimportance will decline in Sweden as credits, and housing. Fiscal austerity risk of an unorderly restructuringhigher costs for energy and mortgages will slow demand growth, especially in of Greek and Irish sovereign debtwill slow consumption. GDP growth in Europe, while the US and Japanese should also not be neglected. Thethe Baltic countries will stay at around consolidation plans have been euro zone is, despite problems with4-4.5 % or rise slightly in 2012, while postponed. In Japan, the combined crisis management, struggling toSweden’s growth declines to 2.6%, effect of the earthquake, the tsunami, improve the debt situation, while thewhich is still above trend growth. and nuclear power accident explains US is not. If the US postpones its more the change in the government’sSince our January forecast, global ambitious plans for medium-term fiscal fiscal position. The disaster will slowrecovery has continued. Last year’s consolidation much longer, there would growth this year, but increase it nextglobal GDP is seen to have been be risks for worldwide financial market year as reconstruction speeds up.somewhat stronger than expected turbulence and new recessions. Although Japan will be severely hit byat 4.7% (4.6% in January). Most the disaster, the effects on the global We have assumed that the Europeanimportant, commodity prices have outlook will most likely be only mildly Central Bank (ECB) will start hikingrisen further, and our assumption negative. policy interest rates this spring, whileregarding the oil price has been raised the Bank of England (BOE) will waitUS$20 to US$105 for 2011, and by Even if external demand is still until autumn. These actions are sooner than in our previous forecast.Macro economic indicators, 2009- 2012 The US Federal Reserve is still 2009 2010 2011f 2012f Real GDP growth, annual change in % expected to wait to make monetary Sweden (calender adjusted) -5.3 5.3 4.0 2.6 policy less expansionary until next Estonia -13.9 3.1 4.5 4.5 Latvia -18.0 -0.3 4.0 3.9 year, but already this summer it will Lithuania -14.7 1.3 4.2 4.7 end quantitative easing (QE2) without Unemployment rate, % of labour force putting in place any new easing. The Sweden 8.3 8.4 7.3 7.0 dollar will strengthen vis-à-vis the Estonia 13.8 16.9 13.5 12.7 Latvia 16.9 18.7 15.5 13.9 euro. The Bank of Japan (BOJ) will Lithuania 13.7 17.8 15.5 13.5 not change its policy rates during the Consumer price index, annual change in % forecast period, and will try to weaken Sweden -0.3 1.3 3.4 2.0 the yen. Estonia -0.1 3.0 3.8 3.2 Latvia 3.5 -1.1 4.2 2.6 Lithuania 4.5 1.3 3.2 2.5 The risks facing Sweden and the Baltic Current account, % of GDP countries are mainly related to global Sweden 6.9 5.9 6.0 5.7 developments. Domestic risks include Estonia 7.3 6.8 5.7 4.9 political developments, the reform Latvia 8.6 3.6 0.0 -2.5 Lithuania 4.3 1.8 -1.0 -1.7 process, the labour markets, and Sources: National statistics authorities and Swedbank. April 7, 2011 2
  • 3. Introduction Swedbank Economic Outlookcapacity constraints. Households face compared with this year. expected to grow by 4.0 % and 3.9%,headwinds as their expenditures for respectively. This is a slight downward Estonia’s economy picked up moreenergy, food, and mortgages rise. Debt revision for next year as higher markedly at the end of last year, withlevels in the public sector, especially inflation and taxes are putting pressure business investment as the mainin Estonia, are lower than elsewhere, on households, and the government driving force. Last year’s growth ratewhile the private sector deleveraging has slowed in its progress with reached 3.1% (2.8% in our Januaryhas further to go. The Nordic-Baltic structural reforms. There is a great forecast), and the economy is set toeconomic climate is positive, following need for reforms, as the labour market grow by 4.5% both in 2011 and 2012,a more resolute management of the is still struggling with sluggish job which is an upward revision of 0.3crisis than in many other countries, creation. The opportunity to introduce percentage point for this year. Exportsand there is a commitment to build the euro in 2014 remains, but a support growth, and, increasingly,institutions that can make these growing risk is the inflation outlook, domestic demand will take over,economies – as small, open, and which requires government action to although household consumption willvulnerable to outside risks – more contain price growth. An upside risk in remain modest. Higher inflation – ofresilient to global turbulence. our forecast is that investments may 3.8% this year and 3.2% next year increase faster than expected, as theAfter an increase of 5.3% last year, – may also dampen the outlook for capacity ceiling in many sectors hasSweden’s GDP is now set to grow private consumption, although falling more or less been 4 % in 2011 (3.3% in our January unemployment will counteract thisforecast) and 2.6% in 2012 (2.5 %). trend somewhat. Already last year, the GDP growth in Lithuania for 2010The stronger outlook is mainly due government attained a fiscal surplus exceeded our expectations andto an upward revision of investments due to the higher economic growth. reached 1.3 %. Hence, and asand exports; household consumption The successful adoption of the euro domestic demand is strengthening, ouris expected to grow slower due to is also contributing to the positive forecast for 2011 has been revised tohigher inflation and, this year, a faster sentiment towards the Estonian 4.2 (3.0%). In 2012, we expect GDPrise in interest rates. The Riksbank is economy. Apart from global risks, to grow by 4.7 % (4.5 %). Our inflationseen as hiking policy rates to 2.50 % the main risk is the labour market, forecast has been revised upwards as(2.25%) at the end of 2011, but we still especially the combination of high international commodity prices haveexpect the rate at the end of 2012 to unemployment and increasing labour increased, adding to growth 3%. As the ECB will start raising shortages in certain sectors. An internal risk is the parliamentaryits policy rates earlier than expected, elections in 2012, which may generate The Latvian economy hasthe Swedish krona is no longer more growth-restricting propositions. strengthened, and the recoveryexpected to strengthen. Fiscal policy At the forefront is still the goal of is broadening. By the end of lastwill continue to support growth as the introducing the euro in 2014, and there year, GDP had grown by 3.7%government plans new tax reductions. is a policy dilemma of balancing lower since the trough in the third quarterWith the help of privatisations and inflation with budget consolidation. The of 2009. Exports have increased,economic growth, the debt ratio will Lithuanian economy is moving in the and inventories have been rebuilt.fall to some 35 % of GDP. The main right direction, as the fiscal position is Recently, private consumptionchallenge for the government is the strengthening and growth is becoming and investments have started tolingering high unemployment. Despite more balanced. However, challenges support growth. The recovery andthe positive growth outlook, we foresee remain, and the reform agenda will the stabilising fiscal situation havethat unemployment will average 7.0% need to be kept alive. also raised Latvia’s sovereign creditnext year – only a minor reduction rating. During 2011 and 2012, GDP is Global developments create opportunities for, and challenges to, Sweden and the Baltic countries. Inflation (annual growth in %) 20.0 Export sectors are benefiting from higher growth, but, at the same 15.0 time, competition is increasing. It Estonia is therefore important to continue Lithuania 10.0 Latvia supporting adaptation to the changing Sweden environment, and to enhance the 5.0 employability and competence of the labour force, in order to strengthen 0.0 competitiveness. Cecilia Hermansson -5.0 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Source: Reuters Ecowin April 7, 2011 3
  • 4. Global Swedbank Economic OutlookInflation and sovereign debt endanger the globalrecoveryThe global recovery continues at good The euro zone and the UK face property markets and higher consumerspeed, and last year’s developments slower growth, at around 1½ %. The prices. The goal is to make growthsurprised on the upside with GDP sovereign debt crisis and the need more coordinated, stable, sustainable,growth of 4.7%. Compared with our to cut the budget deficits are in the and balanced. During 2011-2015,forecast one year ago, Germany, forefront of economic policy. The growth should average 7%, but thisJapan, Brazil, China, and India policy mix is complicated by the fact goal may be hard to achieve, given theperformed better than expected, while that higher inflation also pushes up high growth rates during 2011-2012 ofthe US, the euro zone (excluding policy interest rates, with hikes starting 8.8% and 8.4%, respectively. Anyhow,Germany), the UK, and Russia were already this spring (the European policy measures will try to restrictbasically in line with our expectations. Central Bank) and later in the autumn credit growth, in order to slow domestic (the Bank of England). demand, and, compared with last year,Going forward, the world can be growth is slowing.characterised as a “two-speed Germany will continue to drive growth,economy,” with emerging markets and the more negative outlook for After the earthquake, the tsunami, andas the main growth engine and the Portugal, Ireland, Greece, and Spain the nuclear plant accidents, Japan isadvanced economies lagging behind. remains. facing major challenges. We expectAll in all, GDP will be growing by the economy to grow slower this year, Portugal is the third euro zone country4% both in 2011 and 2012 – a small but faster next year when the damaged requesting a rescue package, whileupward revision compared to our region will be reconstructed. Fiscal a similar package for Spain is treatedJanuary forecast. policy will become more expansionary as a risk in our forecast which would as some US$300 billion will be neededThe US has postponed fiscal potentially cause financial turbulence according to preliminary estimations.consolidation and has agreed on a as the current rescue fund would Monetary policy will also remainstimulus during 2011, pushing up be insufficient. Another risk is the supportive, with a focus on weakeningthe budget deficit and worsening the unorderly restructuring of sovereign the yen.sovereign debt outlook. Next year’s debt, causing increased strain onpresidential election is in focus. The the banking system in the euro zone, As in China, also in India, domesticrecovery continues, but will be slow with potential effects also on the real demand is growing faster than whatdue to structural problems with labour, economy. is sustainable with regard to supplyhousing, and credits. Households are constraints. Higher international China is struggling with overheating instruggling, and, with higher energy commodity prices are also drivingprices, growth will stay at 3%. up domestic consumer prices and interest rates; thus, growth is slowingGDP forecast 2010 - 2012 (annual percentage change) 1/ somewhat. April 2011 January 2011 In Russia and Brazil, inflation 2010 2011 2012 2010 2011 2012 pressures are similarly increasing,US 2.9 3.0 3.0 2.8 2.6 2.7 but, as resource-based economies,EMU countries 1.7 1.5 1.5 1.8 1.6 1.5 they will prosper from the upbeatOf which: Germany 3.6 2.4 1.9 3.6 2.5 2.0 commodity markets. France 1.5 1.5 1.6 1.6 1.6 1.5 Italy 1.1 0.9 1.0 1.1 1.0 1.1 Our assumption regarding commodity Spain -0.1 0.3 1.0 -0.4 0.3 1.0 and energy prices is that the BrentUK 1.4 1.5 2.0 1.7 1.8 2.0 oil price will average US$105 thisJapan 4.0 0.6 3.0 3.2 1.5 1.3 year, and US$98 next year, up fromChina 10.3 8.8 8.4 10.1 8.5 8.1 US$79 in 2010. This is a major upwardIndia 9.1 8.0 7.5 8.8 8.2 7.5 revision from January, when ourBrazil 7.5 4.3 4.0 7.5 4.8 4.5 forecasts for 2011 and 2012 amountedRussia 4.0 4.6 4.5 4.0 4.3 4.5 to US$85 and US$90, respectively. Also, metal prices will rise, by 12%Global GDP in PPP 4.7 4.0 4.0 4.6 3.9 3.8 and 5% respectively, which is lowerGlobal GDP in US$ 3.8 3.1 3.3 3.7 3.1 3.0 than last year’s 42% increase. TheSources: National statistics authorities and Swedbank. escalation of food prices that started in1/ Countries representing around 70 % of the global economy. The World Bank weights from2009 (purchasing power parity, PPP) have been used. April 7, 2011 4
  • 5. Global Swedbank Economic Outlooksecond half of last year will accelerate Interest and exchange rate assumptionsannual growth to 30% this year, and for Outcome Forecast2012 we foresee an 8% increase. 5 Apr 30 Jun 31 Dec 30 jun 31 Dec 2011 2011 2011 2012 2012All in all, headline inflation is therefore Policy ratesincreasing in most parts of the world, Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50but most noticeably in the emerging European Central Bank 1.00 1.25 1.75 2.25 2.50markets. Bank of England 0.50 0.50 1.00 1.50 2.00 Bank of Japan 0.10 0.10 0.10 0.10 0.10In advanced countries, one effect of Exchange rateshigher inflation is that central banks will EUR/USD 1.42 1.45 1.30 1.25 1.25start hiking policy interest rates earlier RMB/USD 6.54 6.40 6.25 6.10 5.95than we expected in our January USD/JPY 85 87 90 95 100forecast. Second-hand effects from Sources: Reuters Ecowin and Swedbank projections.higher inflation and wage expectationsare creating uncertainties and demand dollar will increase.for hikes despite a low underlying price probability of 15%, and (2) a worsened We expect that China will allowpressure. sovereign debt crisis has a probability the yuan to strengthen some 5%In Europe, policy rates will be raised per year vis-à-vis the US dollar in of 15%; and two stronger ones, wherethis year, while the US Federal nominal terms, but in real terms the (3) a rebalancing of growth betweenReserve waits till next year, and appreciation will be greater as labour China and the US speeds growthJapan postpones hikes till after the costs increase faster in China going (5% probability) and (4) the risks offorecast period. In addition, longer- forward. overheating are ignored, and moreterm market rates will show an upward stimulus in both emerging markets and In an uncertain world, our main advanced economies creates higher,trend due to continued growth, higher scenario presented above may not but more unsustainable growth (15%inflation, and the sovereign debt be realized due to certain risks for the probability).crisis; the increasing competition for world economy, such as the Japanesecapital arising from the Basel III bank At this juncture, it is important for disaster, the democratization processregulation is another contributing policymakers to search for the optimal in the Middle East, and the debt crisesfactor. economic policy. We emphasise the in the euro zone and the US.A stronger US and a weaker Europe importance of consolidating budgets Therefore, we have created four and carrying out more ambitious stressand Japan are creating a stronger US alternative scenarios: two weaker tests in banks in order to break thedollar over the forecast horizon, while ones, where (1) stagflation with low vicious circle between the sovereignthe euro and the yen will weaken. Over growth, high unemployment, and debt crisis and the continuing fragilitytime, if passivity still permeates fiscal high inflation comes through with a of the financial sector.policy, the risk for a larger fall in the US At the same time, central bankers should not rush to hike interest rates, as domestic demand will slow due to Public gross debt 2012 (% of GDP) fiscal austerity. Growth risks will most Japan likely outweigh inflation risks in Europe, Greece US, and Japan in the years to come. Italy Emerging markets, on the other hand, Ireland must put in more effort to restrain US Portugal overheating. France That is the name of the game in a Euro zone “two-speed world economy”! UK Germany Cecilia Hermansson Spain Latvia Finland Denmark Lithuania Sweden Estonia 0 50 100 150 200 250 Source: EU commission. April 7, 2011 5
  • 6. Swedbank Economic OutlookSweden: Households shift to a lower gearWith an economic growth rate of public consumption made up the rest, factored into our growth projections,5.3%, Sweden experienced one of the 0.6 percentage points. Despite the but continued turmoil in the Middlefastest recoveries among comparable sharp increase in exports, the net East could raise prices even further,developed economies last year. Partly contribution from external demand to with negative effects on prices andthis was the effect of the sharp drop in growth was neutral due to the strong profits in Sweden. The probability foreconomic activity during the crisis (i.e., import demand. renewed financial sector turbulencea rebound), but the Swedish economy due to the sovereign debt crisis in We revise upwards our economicalso surprised in terms of its flexible Europe remains and is not negligible. growth forecasts for 2011 and 2012response to the changing economic Domestically, there is a risk that rapid to 4.0% and 2.6%, respectively. Inconditions. Not least was this evident expansion in some sectors could particular, investments are expectedin the labour market. Following a large have economy-wide spill-over effects to drive growth, while the contributionincrease in the number of unemployed through wage demands and increased from household consumption will fall.when external demand collapsed in inflation expectations, forcing the We expect the Riksbank to swiftlylate 2008, the rebound in employment Riksbank to raise policy rates even raise the monetary policy rate, withcame much earlier than expected, faster. Furthermore, shortage of an additional four hikes this year,in particular compared with previous qualified personnel is growing while before slowing down in 2012 to reachcrises experienced in Sweden. at the same time the unemployment 3.0% at end-year. Public financesAlso, economic policy was fast on rate is high. The key will be an remain sound and except for theits feet, with the quick enactment of increased focus on structural reforms already announced reductions of taxfiscal stimulus and rapid slashing of that encourage and prepare the rates, we expect that the main fiscalmonetary policy rates. Adding to the unemployed to find employment. initiatives will be directed at the laboursupport for the recovery was the boost market. Despite the rapid growth in Rebound in exports despite ain exports following the falling value of employment, reducing the still-high stronger kronathe krona. unemployment rate remains the largest The recovery in Swedish exportsThe economic recovery in 2010 policy challenge. continued at the end of 2010 and totalwas broad based, and mainly The external environment for the export volume increased by 10.7%domestically sourced. Private Swedish economy is stabilising, and despite a significant appreciation ofconsumption contributed to overall we expect global growth to reach the krona. Strengthened global trade,growth by 1.7 percentage points and 4.0% in both 2011 and 2012. The particularly in the emerging marketsinvestments by 1.1 percentage points. main risks relate to higher volatility in but also in the OECD countries, hasThe buildup in inventories, reversing commodity markets, with increasing been favourable for Swedish exportersthe sharp fall during 2009, added prices for, in particular, energy-related as the demand for investment andanother 2 percentage points, while products. The already-high oil price is intermediate goods has been restoredKey Economic Indicators, 2009 - 2012 1/ after the deep decline during the global 2009 2010 2011f 2012f financial crisis. The export increaseReal GDP (calendar adjusted) -5.3 5.3 4.0 2.6 was mainly driven by a strong reboundIndustrial production -17.9 15.0 10.5 5.0 in goods like vehicles and machinery.CPI index, average -0.3 1.3 3.4 2.0 Exports of services have alsoCPI, end of period 0.9 2.3 3.2 2.2 improved and are more or less at theCPIF, average 2/ 1.9 2.1 1.8 1.5 same level as two years ago, whichCPIF, end of period 2.7 2.3 1.4 1.6 is not yet the case for manufacturingLabour force (15-74) 0.2 1.1 0.9 0.6 goods.Unemployment rate (15-74), % of labor force 8.3 8.4 7.3 7.0Employment (15-74) -2.1 1.0 2.1 1.0 World market growth for SwedishNominal hourly wage whole economy, average 3.4 2.5 2.8 3.3 exporters is expected to slowNominal hourly wage industry, average 3.0 2.8 3.0 3.5 somewhat in 2011. We assume,Savings ratio (households), % 12.9 10.8 10.0 9.8 however, that demand for investmentReal disposable income (households) 3/ 1.6 1.3 2.0 1.6 goods will be relatively strong duringCurrent account balance, % of GDP 6.9 5.9 6.0 5.7 the period, particularly in the emergingGeneral government budget balance, % of GDP 4/ -0.7 0.0 0.4 0.5 markets but also in OECD countries,General government debt, % of GDP 5/ 42.8 40.3 37.4 35.2 when utilisation rates increase andSources: Statistics Sweden and Swedbank. old production facilities need to be1/ Annual percentage growth, unless otherwise indicated. renewed.2/ CPI with fixed interest rates.3/ Based on short-term earnings statistics4/ As measured by general government net lending. We revise up our export growth5/ According to the Maastricht criterion. April 7, 2011 6
  • 7. Sweden Swedbank Economic Outlookprojection from 6.8% to 7.6% for 2011, Export development and the Swedish krona 20 150still above the long-term trend of about6.5%. This is due mainly to the better 15 145outlook for the composition of Swedish 10 140exports. According to the latest short- 5 135term statistics and business surveys, Export volume, ann. 0 130 change (ls)export performance is still improving. SEK, TCW-index (rs)In January 2011, exports of goods -5 125from Sweden increased by 23% in -10 120nominal terms, and confidence in the -15 115manufacturing sector was strong. -20 110We foresee the export volume growth 1994 1995 1997 1999 2001 2002 2004 2006 2008 2009to drop below trend next year, when Sources: SCB and Swedbank projections.the competitiveness of Swedishexporters is expected to fall as tax reductions for renovation, higher are expected to trigger an increase inproductivity growth weakens and unit housing prices, and better labour business investments. Total investmentlabour costs increase. There will, thus, market conditions. However, the volume in Sweden is projected tobe a loss of market shares in 2012 recovery is starting from low levels, increase by 9.7% in 2011 and 8.3%after two consecutive years of gain. and housing investment in Sweden, in 2012. This means that total realThe trend of diminishing surpluses in at 3.0% of GDP, is still among the investment will be higher than the peakthe trade balance, which started in lowest in the EU. In the private sector, in 2008.the middle of the 2000s, is expected excluding housing, investment activity The strong rebound in real estateto continue during 2011-2012 when went up by nearly 7%, driven mainly investment in 2010 will also havedomestic demand expands. On the by service companies; meanwhile, spillover effects in 2011. We foreseeother hand, the increasing importance development in manufacturing that, coupled with an improvingof the exports of services in the was more subdued despite strong labour market and tax reductionsSwedish export structure, with more production growth and an increasing for rebuilding, investment in realvalue added and relatively smaller utilisation rate. Public investments estate will grow strongly during 2011.import content, will lead to a growing continued to grow for the seventh For 2012, we anticipate a gradualsurplus in the services balance. This consecutive year and reached 18% of slowdown as interest rates will bemeans the surplus in the current gross fixed investment in 2010, which higher. Although investment in housingaccount will remain large during the is the highest level since 1998. is rising, there will still be an underlyingnext two years. With output continuing upwards in need for new houses, particularlyInvestments become the main the private sector, there will be a in regions with high growth andgrowth engine growing need for investment to expand increasing population. capacity. In the fourth quarter of 2010,Gross fixed investment increased by Labour shortages despite high the utilisation rate in industry was6.3% in volume terms during 2010 unemployment 89.0%, which is above the averageafter the sharp fall in 2009. The largest since 1990. In combination with strong The strong recovery of the labourinvestment growth was concentrated confidence, relatively favourable market has continued during earlyin real estate, which was stimulated by financing terms , and rising profits 2011. Employment is now back toSwedbank’s GDP Forecast – Sweden the same level as prior to the crisis,Changes in volume, % 2009 20101/ 2011f1/ 2012f although this conceals a shift fromHouseholds consumption expenditure -0.4 3.5 (3.6) 2.8 (2.9) 1.9 (2.0) manufacturing to the services sector.Government consumption expenditure 1.7 2.6 (2.0) 1.3 (0.9) 0.4 (0.4) At the same time, the growth of theGross fixed capital formation -16.4 6.3 (4.7) 9.7 (8.2) 8.3 (8.0) labour force has been strong due private, excl. housing -19.1 4.5 (1.4) 11.3 (9.4) 11.2 (10.9) to underlying demographic factors public 4.2 4.3 (3.5) 2.6 (0.5) -0.1 (-0.5) and reforms of the sickness benefit housing -23.3 16.0 (19.7) 11.4 (11.7) 5.3 (5.5) system. Thus, the unemployment rateChange in inventories 2/ -1.7 2.1 (2.3) 0.0 (0.0) -0.3 (-0.3) has fallen at a slower rate, droppingExports, goods and services -13.4 10.7 (11.1) 7.6 (6.8) 5.6 (5.5) from 7.8% in December to 7.6% inImports, goods and services -13.6 12.7 (12.5) 7.5 (7.3) 6.6 (6.4) February, seasonally adjusted.GDP -5.6 5.5 (5.6) 4.0 (3.3) 2.2 (2.1)GDP, calendar adjusted -5.3 5.3 (5.3) 4.0 (3.3) 2.6 (2.5) We expect a faster reduction ofDomestic demand (excl. inventories) 2/ -3.1 3.6 (3.1) 3.5 (3.1) 2.6 (2.5) the unemployment rate than in ourNet exports 2/ -0.8 -0.1 (0.1) 0.5 (0.2) -0.1 (-0.1) January forecast, to averages ofSources: Statistics Sweden and Swedbank. 7.3% in 2011 and 7.0% in 2012. In1/ The figures from our forecast in January 2011 are given in brackets.2/ Contribution to GDP growth. April 7, 2011 7
  • 8. Sweden Swedbank Economic Outlookparticular, employment has picked up Real investment growth, 1993=100more rapidly than expected, but also 500the number of hours worked points 450towards a growing demand for labour. 400As employers become more confident 350in the economic recovery and as many 300 Industryof those who reduced their work hours 250 Services excl realnow have returned to fulltime, the estate 200 Public investmentsunemployment rate is set to fall. 150 Real estate 100 TotalDespite the still-high unemployment 50rate, reports of labour shortages are 0becoming more widespread. This is 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011particularly prevalent in construction, Source: SCB.where 40% of companies surveyed bargaining agreements for more than the economic downturn, and thusclaim to have difficulties in finding 1.5 million employees, in retail and were not counted as unemployed, willqualified personnel. Furthermore, the local governments that will run out increase the need for job creation.number of new vacancies and unfilled before May of next year. Also, the reduction in the numberpositions increased throughout 2010 of people covered by the sicknessand is now back to the levels that We expect nominal wages to increase benefit system will add to the numberprevailed prior to the crisis. However, somewhat faster in both 2011 and of job seekers in the economy, asthe labour market gap, as measured 2012, by 2.8% and 3.3%, respectively. will the reduction in the number ofby the number of employees in relation Productivity picked up in 2010 as early retirees, in contrast to the earlyto the long-term trend, still remains companies were able to increase 2000s, when approximately 65,000substantial, in particular for the production by utilising idle labour. As people per year (2003-06) enteredmanufacturing sector. This reflects the new employees are hired, productivity early retirement schemes. Finally, aproblem of matching jobs with qualified growth is set to slow in the coming 3 percentage point reduction of thepersonnel in the Swedish labour years and be exceeded by nominal unemployment rate from 8% to 5%,market. wage growth, thus raising unit labour excluding the underlying change to costs. While productivity variesFollowing the relatively low the labour force, will require in itself significantly with the business cycle,wage increases during the crisis, an additional 165,000 jobs. Thus, the we do not expect the growth rate toexpectations are now building for main challenge for the government reach previous years’ trend levels.upward revisions during the coming will be to enhance the skills of those For the medium term, investmentsyears. Many trade unions agreed currently unemployed, while providing in technology and education will beduring the crisis to restrain wage the conditions for dynamic labour necessary to provide a sustainabledevelopment and, in the case of market development, which includes a source of productivity and growth.manufacturing, to reduce the number strengthening of the matching process.of hours worked. This helped preserve Reducing the unemployment rate Increasing vulnerabilities inthe competitiveness of production in in the medium term will also be a household budgetsSweden. However, starting this spring, significant challenge. We estimate thatboth blue-collar and white-collar 335,000 new jobs must be created Although household consumptionworkers in manufacturing will initiate between now and 2015 to bring the continued to grow at the end of lastwage negotiations. This will also set unemployment rate down to 5 %. In year, there were signs of a slowingthe benchmark for the collective- particular, the return of about 60,000 rate with real consumption growing by people who left the labour force during 1 % in the fourth quarter, compared with the 1.3% growth seen in the Labour market indicators third quarter. Consumer durables 90 20 sales remained strong, while overall 80 18 16 turnover in the retail sector became 70 14 more subdued. It was, in particular, 60 12 cars sales that proved resilient, with 50 10 a growth rate of almost 40% in the 40 Lay-off 8 notifications (rs) fourth quarter of 2010. The pent-up 30 6 New vacancies demand from the sharp drop during 20 the financial crisis last year is being 4 Unfilled positions 10 2 saturated . Consumption of retail 0 0 goods continued to expand in the Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 fourth quarter, but growth turned Sources: Riksbank and Public Employment Service.April 7, 2011 8
  • 9. Sweden Swedbank Economic Outlooknegative in the December- February employment and wage growth gives and commodities are temporary, theseperiod. a positive impulse, compared with our impulses could lead to a general January forecast. However, growing increase in inflation if they lead toHousehold nominal payroll picked cost-of-living expenses for households, compensation both from companies,up in 2010, but disposable income in particular from debt servicing and in terms of maintained profit margins,was held back by growing interest higher inflation, together with a slowing and from employees, in the form ofcosts, increasing tax payments and momentum in purchases of consumer real wage adjustments. In March, theflat transfers. As disposable income durables, are dampening consumption 12-month inflation expectations ofgrew by less than consumption, growth compared with 2010. The households reached 3.1%.households continued to draw down growth of real disposable income ison their savings, which fell to 10.8% The tightening of monetary policy by expected to continue to rise in 2011,of disposable income in 2010 from the Riksbank has contributed to a before the growth rate dampens in12.9% in 2009. In the first months of further appreciation of the Swedish 2012 to 1.6%. However, due to the2011, inflation has exceeded wage krona. At the end of the first quarter faster growth of consumption, theincreases, leading to falling real of 2011, the krona has reached the household savings ratio will continuewages, further straining household strongest level in trade-weighted terms to decline.budgets. In addition, mortgage rates at 120 since the year 2000. Besides(three months) rose to almost 4% at Reducing inflation expectations higher Swedish short-term interestthe end of last year from 1.5% at the without curtailing growth rates, the appreciation of the kronaend of 2009. is also driven by strong economic The Riksbank raised in its February growth and solid public finances. WeThe household debt level has meeting, as expected, the main policy anticipate a further strengthening ofcontinued to rise, and the share of rate to 1.50 %. Also, the policy path the krona in the first half of 2011 asincome spent on debt service has was revised upwards, according to the Riksbank raises interest rates.likely reached its low point. Debt as which the Riksbank expects the policy In second half of 2011 and in 2012,a share of disposable income rose to rate to marginally exceed 3% by the when we foresee a tightening of171% at end-2010, a record level and end of 2012.The main arguments monetary policy in Europe and thealso high in international comparisons. for tightening monetary policy are US, we expect the Swedish krona toWe expect household debt to continue the growing underlying inflationary weaken somewhat in trade-weightedto increase, although at a slower rate. pressures and increased resource terms. The US dollar is expected toHowever, as interest rates rise, interest utilisation. Indeed, headline inflation strengthen more significantly againstpayments as a share of disposable increased to 2.5% in February, the euro as the US economy improves,income will continue to grow, and the exceeding the Riksbank’s and most while the krona is expected to beliquidity situation of households will others’ expectations. It was mainly stable against the euro during 2012become more strained. Increasing energy and food prices that lead as the Swedish economy continuesdebt-service costs, compounded to the increase, but a revision of to outperform the Eurozone, while theby rising energy costs and elevated the methodology also contributed. European Central Bank raises policyinflation rates, are thus likely to Underlying inflationary pressures rates faster than the Riksbank.dampen consumer spending. (CPIF) grew by 1.3%. We expect monetary policy rates toWe expect growth in private Rising inflation expectations are be raised more rapidly during 2011consumption to slow in real terms in emerging as a growing risk to than we forecast in January, but also2011 and 2012 to 2.8% and 1.9%, maintaining price stability. Although it that the rate of policy rate hikes willrespectively. An improved labour can be argued that largely externally slow in 2012. For the remainder of themarket outlook with continued strong induced price increases for energy current year, we foresee an additional four hikes, while in 2012 we expect the Household savings and consumption (real change in %) Riksbank to raise rates only twice. The 8.0 14.0 immediate task of the Riksbank will 6.0 12.0 be to dampen inflation expectations, Disposable which would serve not only to reduce 10.0 4.0 income nominal demands in the upcoming Consumption 8.0 wage negotiations, but also to limit 2.0 Savings ratio (% pressures to increase prices in retail. 6.0 of disp. income) However, as the demand pressure 0.0 4.0 will ease and unemployment rates -2.0 2.0 remain relatively high, we expect that the Riksbank will slow down the -4.0 0.0 rate increases in 2012, and that the 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Sources: SCB and Swedbank projections. April 7, 2011 9
  • 10. Sweden Swedbank Economic Outlookrepurchase rate will reach 3.0% at the Interest rate and currency outlookend of the year. Outcome Forecast 2011 2011 2011 2012 2012Still a role for active fiscal policy 5 Apr 30 Jun 31 Dec 30 Jun 31 DecGovernment finances are improving Interest rates (%)rapidly, and the budget deficit is Policy rate 1.50 1.75 2.50 2.75 3.00estimated to have been limited to 10-yr. gvt bond 3.28 3.30 3.30 3.40 3.500.3% of GDP in 2010. The actual Exchange ratesoutcome was better than budgeted EUR/SEK 9.00 8.85 8.90 8.90 8.90on the revenue and expenditures USD/SEK 6.32 6.10 6.85 7.12 7.12sides. Central government tax TCW (SEK) 1/ 120.6 118.7 122.1 122.5 122.9revenues exceeded the budget by Sources: Reuters Ecowin and Swedbank.SEK 58 billion, mainly on account 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).of value-added and capital gainstaxes. Spending came in lower by government coalition also intends in construction and in parts of thean amount of approximately SEK 20 to further reduce public sector debt services sector risk a spillover intobillion. The main source of saving is from the already low level of 40.3% of increasing wage drift, which, in turn,found in spending on labour market GDP in 2010. In early 2011, a stake could fuel rising inflation expectations.programmes, following the better-than- in Nordea was sold, generating about These developments could mean thatexpected labour market developments. SEK 20 billion. However, the recent monetary policy needs to be raised blocking by a parliamentary majority of faster than otherwise would haveThe relatively strong macroeconomic the privatisation of four mainly state- been the case, in effect applying thedevelopment expected over the next owned companies will limit the inflow brakes to an economy that is beingcouple of years provides room for of capital; as a result, we believe that accelerated by fiscal policy. In orderfurther fiscal policy initiatives. The overall privatisation revenues for 2011 to balance the structural reformsgovernment has indicated that, in and 2012 will amount to SEK 40 billion. implied by the general lowering ofaddition to the lowering of tax rates on tax rates, which essentially spurspensions and on restaurant meals that We expect that, following two years consumption, the government shouldis already in the budget, it intends to of deficits, the public sector will reach also consider lowering corporatecontinue to pursue reductions of the surpluses of 0.4% in 2011 and 0.5% in tax rates and capital gains taxes.income tax, although there have been 2012. This will put the public sector on This would stimulate an increasedisagreements within the government the track of meeting the medium-term in private sector savings andcoalition as to how much the top rates surplus target over the business cycle. provide financing for investments.should be lowered. We expect that the In addition, the margin of spending An additional benefit would be agovernment will in the spring budget under the expenditure ceilings would withdrawal of some stimulus throughbill propose additional spending of allow for further expenditure increases. a corresponding stepwise loweringabout SEK 10 billion in 2011, primarily We expect public debt to continue to of interest deductions on mortgages,to strengthen the labour market and decline, falling to 35.2% of GDP in which would also serve to reduceto support education. For 2012, we 2012. the pressure on the housing market.expect the government to implement The key challenge for fiscal policy However, the key role for fiscal policythe fifth step in the reduction of over the next two years will be in at this stage of the economic recoveryincome taxes, as pledged during the providing direct support in order to would be to improve the functioningelection campaign in 2010, at an alleviate bottlenecks and structural of the labour market. By alleviatingestimated cost of SEK 15 billion. The impediments. Labour shortages some of the structural impediments to increased employment, through Household debt burden improved matching and better skills 12.0 200 enhancement, the government would simultaneously contribute to lowering 10.0 180 unemployment while reducing inflation 8.0 160 pressures stemming from labour Debt (% of GDP, rs) shortages and the increasing potential 6.0 140 for growth. Interest expenditures (% of disp. inc.) 4.0 120 Magnus Alvesson 2.0 100 Jörgen Kennemar 0.0 80 Sources: SCB and Swedbank 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 projections. April 7, 2011 10
  • 11. Swedbank Economic OutlookEstonia: Recovering domestic demand supportseconomic growthIn 2010, the Estonian economy grew the economy to grow mainly because On the one hand, there is a risk ofby a strong 3.1%, mainly due to the of positive developments in the a further pickup in prices causedrapid growth of goods exports (35% exporting sector, the well-being of by political developments in theover 2009). Domestic demand was the main trade partners is a key Middle East (oil), and by food pricestill weak, but started to pick up in the assumption of our forecast. Slower movements in the world market.second half of the year and showed growth of the main foreign markets will On the other hand, weak domestic0.8% overall growth in 2010. At first, affect the exporting sector, which will demand will still be a constrainingthe growth of domestic demand nevertheless be the main contributor factor, dampening the overall pricestemmed from stockbuilding, but by the in 2011. increase. Strong growth in energyend of the year private consumption prices may affect domestic demand Another set of risks involves theand investment growth had picked considerably via both the longer-term labour market – rapid developmentsup as well. Overall, household recovery of consumer spending and are creating a need for certainconsumption declined in 2010 by 1.9% the higher prices of production inputs. qualifications in workers, but, as(in the fourth quarter of 2010, however, In addition, many consumers may feel changes in the education system toit reached a positive annual growth of uncomfortable operating with the new acquire these qualifications will take2.6%). Similarly, although the overall unit of exchange, the euro, and it may time, the lack of qualified workers maygrowth rate of gross capital formation take additional time to get used to the impede further growth. In addition,in 2010 was -9.1%, the fourth quarter new currency. The cost-push effect domestic demand is affected bysaw a strong recovery as the year- from the labour market (the lack of the number of wage earners. Theon-year growth rate reached 11.9%, qualified labour may induce another high level of unemployment, whichmainly due to companies’ investments wage rally) may be considered another is affected by the qualificationsin machinery and equipment. factor: this affects price developments mismatch, will therefore set boundaries and might occur, especially in 2012.We estimate economic growth will to consumer spending growth. Strong price growth will affect Estonia’sbe 4.5% for both 2011 and 2012. In People who have been unemployed competitiveness, which, in turn, meansthe beginning of 2011, the growth of for a longer time, however, may feel that there will be a continuing needexports will contribute the most to discouraged and leave the labour to renew the production process andeconomic growth, while in the second market; in times of diminishing labour products/services.half of the year domestic demand will force, this resultant lack of labour maybegin to pick up. In 2012, economic evolve into an even more serious Export outlook good, but growthgrowth will stem from investment problem if and when the smaller labour to slowgrowth; private consumption growth force becomes an issue. Estonia’s exports showed very strongwill remain modest (although positive). A third set of risks concerns price growth numbers in 2010 – in realThe main risks for the Estonian movements, which are affected by terms, exports of goods were up 35%economy are external. As we expect both external and domestic factors. and exports of services up 8%. While exports of goods have recovered toKey Economic Indicators, 2009 - 2012 1/ higher than boom-year levels, those of 2009 2010 2011f 2012f services still remain lower.Real GDP -13.9 3.1 4.5 4.5Nominal GDP, billion euro 13.9 14.5 15.9 17.2 Exports will continue to showConsumer prices (average) -0.1 3.0 3.8 3.2 strong results, but growth rates willUnemployment rate, % 2/ 13.8 16.9 13.5 12.7 eventually start to slow, especiallyReal gross monthly wage -4.6 -2.0 1.6 3.0 in the second half of 2011, dueExports of goods and services (nominal) -19.6 26.1 16.2 13.0 not only to the base effect but alsoImports of goods and services (nominal) -31.2 24.9 16.8 14.6 to an expected slowdown in mainBalance of goods and services, % of GDP 5.7 7.6 7.6 6.7 export partners’ economies. StrongCurrent account balance, % of GDP 7.3 6.8 5.7 4.9 export growth continues to stemFDI inflow, % of GDP 8.7 8.3 9.1 9.7 from the manufacturing sector andGross external debt, % of GDP 125.5 114.2 109.0 105.0 export demand, which, in turn, isGeneral government budget balance, % of GDP 3/ -1.8 0.1 -1.2 -0.3 related to the good prospects of theGeneral government debt, % of GDP 7.2 6.6 6.5 7.0 main export markets. In addition toSources: Statistics Estonia, Bank of Estonia and Swedbank projections.1/ Annual percentage change unless otherwise indicated. Sweden, Finland, and Germany,2/ According to labour force survey. Russia, Latvia, and Lithuania will3/ According to Maastricht criterion. April 7, 2011 11
  • 12. Estonia Swedbank Economic Outlookbe of growing importance; the latter Contributions to GDP growthtwo are important in terms of energy 15%exports. Russia’s strengthening 10%economy makes Estonian food export 5% Changes in inventoriesprospects better as demand for those 0% Net exportsexports in Russia will continue to grow. InvestmentsOf course, when discussing trade -5% Governmentrelations with Russia, political risk is -10% Householdsalways a possibility. -15% GDPExports of services will still grow, but -20%more slowly than goods exports. While -25%transport services have reached quite Source: SE, Swedbank forecast. 2007 2008 2009 2010 2011f 2012fhigh levels, growth of other servicesshould be accelerating, boosted by accelerating for many months now. The upward revision is also supportedan increase in economic activity and This uplift in loan growth may also by several planned investments inthe opening of the European services indicate that improved economic the retail sector (these include bigmarket. Tourism-related services, confidence is allowing companies to projects to build hypermarkets inwhich have recovered healthily, execute those investments that were Tallinn). In addition, the governmentwill gain additionally from Tallinn’s put on hold during the recession. has obligations to make investmentsdesignation as this year’s European related to the carbon credit tradeCapital of Culture. Investment growth is forecast at 15.4% (AAU) contracts. Investments are also this year and 13.6% in 2012. WeInvestments supported by affected by foreign direct investment revised growth for this year upwardsinnovation and infrastructure (FDI) inflows, which, in turn, are even though many constructionprojects related to the growing profits of projects have been postponed due toBecause of the sharp fall in production enterprises, the comparatively low the harsh winter, as well as to someduring the recession was strong, level of asset prices, and the good legal disagreements (mainly relateda significant part of the production prospects for future profits. The impact to usage of EU funds). However,capabilities is now unused. Using of Estonia’s joining the European overall prospects are good becausethose poorly maintained capabilities Monetary Union (EMU) may also be available EU funds are mainly relatedmay thus be problematic, as visible in foreign investments. to infrastructure investments, most ofproduction technologies might be which are still not used (only about Residential investments will remain atoutdated or unusable. However, 15% of the funds available from the a low level. There are several reasonsdata indicate that companies are budgetary period of 2007-2013 are behind this. First, because households’probably ready and willing to renew currently used). Thus, we expect incomes are diminished, many whotheir production processes and/ this type of investment to increase, would like to finance their (new) realor machinery – investments, which assuming that the legal disagreements estate purchases with loans are notstarted growing again in the last will not linger and the weather will be eligible for (additional) credit. Second,quarter of 2010, were largely founded more favourable than in recent years. the level of unemployment is stillon purchases of equipment and At the same time, investments in the quite high. This high unemployment,machinery for renewing production; energy sector will grow during the which is also related to incomes asalso, the growth of new credit and forecast period, as Eesti Energia has well as to overall confidence aboutleasing for enterprises has been announced several planned projects. future developments, is dampening credit demand for those who canSwedbank’s GDP Forecast – Estonia actually afford it. Third, conditionsChanges in volume, % 2009 20101/ 2011f1/ 2012f1/ that households should meet to get loans from banks are somewhatHousehold consumption -18.4 -1.9 (-2.0) 3.2 (2.8) 4.0 (3.0) stricter; therefore, not many can meetGeneral government consumption 0.0 -2.1 (-2.0) 0.5 (0.2) 2.0 (0.3) these conditions. Fourth, during theGross fixed capital formation -33.0 -9.1 (-12.5) 15.4 (12.0) 13.6 (10.0) crisis, the value of assets has beenInventories 2/ -3.4 4.2 (2.0) -3.1 (-2.4) 0.9 (-1.0) decreasing – loans are already inExports of goods and services -18.7 21.7 (19.5) 13.5 (9.5) 8.7 (8.0)Imports of goods and services -32.6 21.0 (18.5) 10.7 (8.2) 11.7 (8.0) many cases larger than the values ofGDP -13.9 3.1 (2.8) 4.5 (4.2) 4.5 (4.5) assets purchased during the boomDomestic demand (excl. inventories) 2/ -21.8 -2.8 (0.3) 5.1 (5.2) 6.3 (5.0) and many households prefer not toNet export 2/ 11.4 1.7 (0.5) 2.4 (1.4) -2.6 (0.5) swap their current homes. AlthoughSources: Statistics Estonia and Swedbank. residential investments will remain1/ The figures from our forecast in January are given in brackets. low, nonresidents may find it more2/ Contribution to GDP growth April 7, 2011 12
  • 13. Estonia Swedbank Economic Outlookattractive to invest in real estate, like Export sector, annual growthland and/or summer houses on the 60%coast or apartments in Tallinn’s OldTown. 40%Unemployment falling, but Total 20%imbalances in the labour Goodsmarket remain Services 0%For the first time after the crisis,employment growth turned positive -20%at the end of last year (+2.1% annualrate in the fourth quarter), mostly -40%founded on the strong performance 2005 2006 2007 2008 2009 2010 Source: SE.of the export-led manufacturingsector. The growth in employment positions will grow as well. This this year. Growth of 1.6% is forecastshows that the economy is forecast is supported by the strong for 2011 on average, acceleratingrecovering – many firms are already demand growth in the manufacturing further to 3% in 2012. This growth,hiring new workers to meet increased sector and the steady improvement however, will be uneven betweendemand. The main problem, in domestic demand, especially sectors and occupations (skewed morehowever, remains unemployment. construction-related jobs. towards export-oriented sectors likeEven though employment and the manufacturing, and IT and business The second reason for decliningnumber of vacancies are growing, services); therefore, some sectors unemployment is that long-the supply of qualifications does not might even continue to experience a term unemployed are becomingmatch the demand, i.e. structural slight decrease in growth, while others discouraged from seekingunemployment will continue to be see stronger wage growth. In 2012, employment, or involved in thea problem for a longer period as other sectors (including the public shadow economy. The activity ratere-education will take time. The sector) will follow this upward trend. will decline as many who countedqualifications mismatch, together with themselves as actively looking for jobs Inflation mostly externally drivenpopulation aging, may induce another are now leaving the labour marketwage rally for some occupational Inflation picked up at the end of last and becoming inactive (students,groups in which the labour supply year, mostly on external factors, as caretakers, pensioners, etc). Inis the scarcest (e.g., ITC and skilled global food and oil prices continued addition, many long term unemployedworkers in electronics). to increase; these trends have may feel discouraged and leave the continued at the beginning of this year.Unemployment will decline to labour market (become inactive) Although price increases slowed in13.5% this year and further to or (re-)start their studies: those January, they accelerated again in12.7% in 2012. Despite imbalances, that started their studies during the February. Weak demand has so farunemployment will continue to recession are still studying and are kept core inflation low, although somedecrease for two reasons. First, counted as inactive. Also, those who acceleration has recently been seenthe growth in employment seen at left educational institutions during the there as well. We are of the opinionthe end of last year is expected to boom years may now return to their that the so-called rounding effect hascontinue. Employment growth will studies. also been a factor: because the eurobe stronger in the middle of this year Real wage growth, which has now cash changeover changed the nominalfor seasonal reasons, but, at the been negative for more than two years, values of prices, many entrepreneurssame time, the number of permanent will turn positive in the second half of preferred to round prices up instead of down. However, we believe that this Labour market indicators effect is temporary – consumers are 20% becoming more accustomed to the new currency and may choose to “vote with their feet”, i.e. do their purchases 10% in stores that have been less keen to Unemployment rate increase prices during the changeover Employment growth process. Gross wage real growth 0% So far, firms have been able to maintain production with competitive prices as Estonia went through an -10% internal devaluation – costs of labour 2004 2005 2006 2007 2008 2009 2010 2011f 2012f Source: SE, Swedbank forecast. April 7, 2011 13
  • 14. Estonia Swedbank Economic Outlookand other inputs have decreased. durables), as they were somewhat general government budget managedHowever, this process is about to end influenced by the widespread talk of a to reach a surplus in 2010 (0.1%(in 2009, labour costs did decrease post-euro price surge. of GDP). This above-expectationson average 16%, and total costs improvement was partly supported The currency changeover has haddecreased on average approximately by faster economic activity at the end different effects on spending. On19%, while in 2010 labour costs of the year, which, in turn, increased the one hand, the uncertainty of thedecreased on average 6.2% and total tax revenues. At the same time, tight changeover has reduced consumers’costs grew by 7.5%). control over expenditures remained in willingness to consume while they place throughout the year. In addition,We have raised slightly our inflation allow themselves to become more Estonia has been very successfulexpectations for this year as well comfortable with the new value in the carbon credit market (AAU),as for the next, to 3.8% and 3.2%, of exchange. On the other hand, thereby adding about 1% of GDP inaccordingly. The impact of tax since consumers tend to look at nontax revenues last year. However,increases on inflation diminished last nominal values of prices, they might it should be stressed that, as theseyear and will fade away in the first half be tempted to consume more as revenues will transfer into investmentof this year, thus leaving world price the prices on the price tags are expenditures mostly in 2011 but alsomovements as the main contributor considerably lower than they were in 2012, the deficit will rise during thisto inflation developments. However, before. We assume, however, that period; our forecasts point to deficits oflabour shortages risk becoming an households will cut back on their -1.2% and -0.3% of GDP, respectively.additional cost-push factor via wage consumption for several months at the In addition, the goal of balancing theincreases, as companies will tend beginning of this year, spending mostly budget will be constrained by theto transfer their costs into consumer on necessities, while they take time resumption of payments to pensionprices. to familiarise themselves with the new pillars, which were temporarily currency.Private consumption set to suspended during the crisis.increase, but remains weak Nevertheless, the continuing growth The parliamentary elections held on in prices will have a dampeningWe are of the opinion that private 6 March showed continuing support effect on the cautiously recovery inconsumption growth will stay at a low for the current coalition despite the consumption. Many households feellevel at the beginning of this year and austerity measures introduced during confident enough about the economy,then gradually accelerate to 3.2% on the recession. The new coalition as well as the labour market, toaverage in 2011 and 4% in 2012. The (formed by the same two parties as increase spending amidst risingreasons for this forecast lay mostly the previous one) agreement includes prices. At the same time, there arein price and income developments, strict rules on future fiscal policies as households (including the long-termbut also in deleveraging and the high the budget balance requirement will unemployed and the discouraged) thatsavings rate: accordingly, spending be added to the budget law.1 The tax are still suffering under the conditionswill remain modest as consumers’ burden will be reduced through lower brought on by the recession; these willpurchasing power grows at a slow labour taxes; however, major tax be even more budget constrained andpace. changes will not take effect until 2013 forced to cut their spending, especially or later.The growth in confidence, together because prices of most necessitieswith the more positive trends in the have grown, wage growth will belabour market, has encouraged modest, and inflation expectations Annika Paabutpeople to spend more. The currency continue to be high. Elina Allikaltchangeover definitely has had an effect Fiscal policy stability reachedas well – people used their remainingkroons for consumption (especially According to preliminary estimates, theConsumer confidence and expectations 80 60 40 Consumer confidence 20 Unemployment fears Savings 0 Inflation 1 The budget balances in 2011 and 2012-20 Major purchases will be exceptional as they are affected by higher investment expenditure due to AAU-40 trades. The new coalition agreement fore- sees a balance or surplus being reached-60 again in 2014 and beyond. 2007 2008 2009 2010 2011 Source: DG ECFIN. April 7, 2011 14
  • 15. Swedbank Economic OutlookLatvia: Stronger recovery, but lack of reforms cutinto future growthThe recovery has continued to in 2011, diminishing average quarterly base forecast for Latvia remains astrengthen and widen. Initially driven growth, these factors will reduce the muddle-through scenario, but withby exports and inventory rebuilding, annual 2012 growth rate because of a less immediate post-election progresseconomic growth in the second half of statistical overhang. We thus keep our regarding structural reforms than in2010 was supported also by private GDP growth forecast of 4% for 2011 our previous outlook. The positiveconsumption. Quarterly growth in and reduce the 2012 forecast to 3.9% risk to our forecast remains strongergross fixed capital also started in (4.2% before). investment activity due to, e.g., betterthe third quarter, although annual access to funding, which would also Owing to the stronger-than-expectedgrowth still was not present. By the raise GDP growth rates. fall in the job-seekers’ rate, weend of 2010, the Latvian GDP had are lowering our forecast for the Export growth will slowgrown by 3.7% since the trough in the coming years – from 18.7% in 2010,third quarter of 2009. Strengthening Despite an increase of uncertainty in the average job-seekers’ rate iseconomic growth and the gradually the global environment, the outlook expected to fall to about 14% in 2012,stabilising fiscal situation have also on demand growth in our main trading due to emigration and a shrinkinghelped to raise Latvia’s sovereign partners remains broadly the same. participation rate. We are not alteringcredit ratings. We thus keep our previous forecast our employment forecast and still regarding export volumes – averageAlthough economic developments expect sluggish job creation. We now quarterly growth will nearly halve inhave been broadly in line with our foresee 4.2% consumer price inflation 2011 compared with 2010, due mainlyJanuary forecast, two major factors for 2011 (3% before), due to stronger to the increasing influence of localhave brought changes to our outlook. global commodity price growth and constraining factors – the main oneFirst is the more rapid growth in planned tax hikes in the summer. being capacity utilisation – but alsoglobal commodity prices, which also The 2012 inflation forecast is nearly due to somewhat slower global growthraises Latvian inflation. Second is the unchanged at 2.6%. There is still an than last year. The high annual figuresomewhat disappointing post-election opportunity to introduce the euro in for export volumes will be a result offiscal and structural policy in Latvia 2014, but government action is needed statistical carryover effect. We expect– the government did not use the to reduce inflation expectations and export volumes to sustain a similaropportunity to carry out comprehensive contain price growth. Because of average quarterly growth rate in 2012.structural reforms, and, as last year, increasing import prices and somewhatthe consolidation was mostly based stronger import growth in late 2010, we The cost competitiveness of Latvianon tax increases. We expect this now forecast moderately larger trade exporters continued to improvepolicy to weigh on economic growth, deficits for 2011-2012. throughout 2010. For instance, unitmostly through weaker household labour costs fell by about 14% last Global developments remain theconsumption. While tax hikes and year. Rising commodity prices and main risk to our forecast, with theinflation due to global factors will energy tariffs are pushing companies largest uncertainty surroundingundermine private consumption mostly to continue rationalisation, and energy global commodity price growth. Our effectiveness issues are becomingKey Economic Indicators, 2009 - 2012 1/ more important. Many exporting 2009 2010 2011f 2012f companies are already working atReal GDP -18.0 -0.3 4.0 3.9 maximum capacity, which requiresNominal GDP, billion euro 18.539 18.047 19.604 21.189 investments in production facilities.Consumer prices (average) 3.5 -1.1 4.2 2.6 Among factors limiting production,Unemployment rate, % 2/ 16.9 18.7 15.5 13.9 demand and financing are becomingReal net monthly wage -5.6 -6.6 0.8 2.3 less binding, while equipment andExports of goods and services (nominal) -16.4 19.2 16.5 12.4 labour constraints are increasing.Imports of goods and services (nominal) -35.5 16.9 18.1 15.5Balance of goods and services, % of GDP -1.1 0.3 -1.1 -2.8 In line with our expectations, theCurrent account balance, % of GDP 8.6 3.6 0.0 -2.5 product structure and country mixCurrent and capital account balance, % of GDP 11.1 5.5 2.2 -0.6 of Latvian exporters are graduallyFDI inflow, % of GDP 0.3 1.5 4.0 3.9 changing. The growth driver inGross external debt, % of GDP 156 165 153 144 manufacturing is slowly shiftingGeneral government budget balance, % of GDP 3/ -10.2 -8.5 -5.2 -2.6 from the resource-constrained woodGeneral government debt, % of GDP 36.7 48.0 49.8 47.7 industry (where investments canSources: CSBL and Swedbank. help to increase value added, rather1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey.3/ According to Maastricht criterion. April 7, 2011 15
  • 16. Latvia Swedbank Economic Outlookthan physical volumes) to metal Contribution to annual GDP growth, ppproducts, machinery, equipment, and 30transport. The latter industries together 20constituted about one-third of goods Net exports 10exports in 2010. Moreover, companies Inventoriesin these industries continue to move 0 Gross fixed capital form.into new markets, e.g., Algeria, India, -10 Governmentand Turkey. Exports to those countries -20 Householdsrose from 0.5% of total goods exportsin 2008 to 5% in January 2011 (mostly -30 GDP growthdue to the metal industry). -40Developments of services exports 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBL.continue to disappoint, though.Services exports are expected to grow January forecast. about EUR 355 million), purchases of passenger trains are expected to lastmuch slower than goods exports in the Investments to gain strengthcoming years. Political infighting and until 2015 (total costs about EUR 215the lack of a consistent and common We are keeping our forecast that in million), purchases of air planes willstrategy, as well as increasing regional two years gross fixed capital formation continue until 2013 (about EUR 1.4competition, undermine freight flows will rise by about one- third. Somewhat billion, beginning already in 2010). Itthrough Latvian ports. However, disappointing developments of the is difficult to anticipate how much oftransport by road and rail is slowly last quarter of 2010, when recovery these investments will fall into 2011increasing – there is a tendency to stalled, can be partly explained and 2012, and the forecast error ischoose more expensive but faster by the relatively snowy and cold thus fairly wide.and more flexible road transport when weather – this might also have Companies (especially exporters)possible. Meanwhile, the favourable undermined investment growth in have good cash flows, and theirdevelopments in business travel early 2011. We expect growth to pick profit margins are rising; however,and passenger air transportation are up, partly corresponding to capacity uncertainty regarding fiscalexpected to continue. constraints in exporting sectors. Quite consolidation measures remains. a few investment projects have beenIn volume terms, the forecast for Confidence indicators have flattened announced (mostly private) in theimports remains broadly unchanged. out, signalling that companies are quite industry, transport, and energy sectors.Import growth is largely influenced by hesitant about future and intermediate goods and will The planned acceleration of acquisition The rapid increase in deposits ofcontinue to be so (see below). Imports of EU funds in 2011 (the Ministry of nonfinancial corporations (of LVL 250of consumption goods are expected Finance plans for about 8% of GDP million during the fourth quarter ofto accelerate somewhat in 2011-2012, in 2011 and 5% in 2012, together with 2010, 36% year on year) is thus quitebut, with household real incomes cofinancing) does not necessarily natural. Financing of investments isstill rising feebly, growth of imported mean that projects will actually be slowly becoming easier, as banksitems will remain sluggish. However, started and executed in the same increase their lending activity, but theas faster-growing global prices are year. Large projects last several years, expected rise in the euro interbankincreasing the value of imported which makes forecasting the timing of rate (EURIBOR) may hold back newgoods, nominal import growth is now investments tricky. For instance, the demand for loans.expected to be somewhat stronger, new power unit of the cogeneration Improved Latvian sovereign creditespecially in 2011, compared with our power plant TEC-2 is planned to be ratings (currently, the investment commissioned in 2013 (total costs grade is given by Moody’s and Fitch;Swedbank’s GDP Forecast – Latvia Standard and Poor’s is anticipatedChanges in volume, % 2009 2010 2011f1/ 2012f1/ to follow soon) provide moreHousehold consumption -24.1 -0.1 (-1.0) 2.5 (2.5) 3.5 (4.5) opportunities for foreign investors.General government consumption -9.2 -11.0 (-8.0) -3.0 (-1.8) -0.1 (0.1) Foreign direct investment inflows areGross fixed capital formation -37.3 -19.5 (-20.0) 12.0 (15.0) 16.5 (14.0) continuing to increase slowly, bothInventories 2/ -1.5 5.8 (5.9) -0.5 (-0.7) -0.1 (0.0) of new equity capital and reinvestedExports of goods and services -14.1 10.3 (9.5) 10.5 (10.0) 6.0 (6.0) earnings.Imports of goods and services -33.5 8.6 (8.0) 8.5 (9.0) 9.0 (9.0) Job creation to remain slowGDP -18.0 -0.3 (-0.5) 4.0 (4.0) 3.9 (4.2) The job-seekers’ rate shrunk rapidlyDomestic demand (excl. inventories) 2/ -30.7 -6.7 (-6.9) 3.6 (4.4) 5.8 (6.0)Net export 2/ 14.2 0.6 (0.5) 0.8 (0.3) -1.8 (-1.8) during 2010 – from 20.4% at theSources: CSBL and Swedbank. beginning of the year to 16.9% at the1/ The figures from our forecast in January are given in brackets.2/ Contribution to GDP growth April 7, 2011 16
  • 17. Latvia Swedbank Economic Outlookend. However, as expected, a rebound Despite an anticipated slowdown in have not yet incorporated the effectin employment in the middle of the productivity growth, real wage growth of such a plan on our outlook, as it isyear lost momentum in the fourth is still expected to be broadly in line still unclear what particular measuresquarter of 2010. We are lowering our with productivity gains. As a result, could be included in it. The current,job-seekers’ rate forecast for 2011- companies will avoid a deterioration in somewhat simplistic, suggestions2012 based on the better situation competitiveness. include agreements with socialin 2010, but we are not altering our partners to contain wage growth. Inflation driven by taxes andemployment forecast. Job creation We believe that there are two other commodity price growthwill remain slow, and the more rapid broad areas where action should bedecrease in unemployment will not Taking into account the stronger-than- economic growth more than expected global commodity price First, inflation inertia should bewas projected in our previous forecast, growth and the additional tax rises reduced, including improvementsas it will be due to emigration and a planned for July of this year1, we are in competition – for instance, bylower participation rate. raising our average consumer price strengthening the Competition Council, index (CPI) inflation forecast for 2011There are both positive and negative by making the price-setting mechanism to 4.2%. This is mostly supply-siderisks to our labour market forecast. On more transparent, by expanding the inflation, owing to increasing coststhe one hand, several large investment voucher system in the public sector of businesses. Producer prices forprojects may boost employment. to improve cost efficiency and quality, locally sold production were steadilyOn the other hand, there is a risk and by making public procurements rising during 2010, implying upwardof larger emigration (not least as more transparent. Second, energy pressures also for consumer prices.Germany, Austria, and Switzerland efficiency should be improved to hold The rising inflation aggravates socialwill open their labour markets in May back an increase in public utilities’ problems (as first-necessity items2011). The population census begun tariffs. Furthermore, taxes that become more expensive, hitting poorerin March 2011 is likely to reveal a directly hit CPI (like value added or households harder) and poses risks tosmaller population and labour supply excise tax) must not be raised before competitiveness.than current figures suggest, and thus the euro entry. Social agreementspossibly also a smaller number of With private consumption recovering between the government and socialemployed and unemployed. slowly and inflation expectations partners are possible, but for this clear strengthening, we do not expect communication is necessary aboutIncreased productivity provides a rapid decrease in inflation rates how the budget consolidation is done,grounds for wage growth, especially in 2012. We forecast average CPI about which reforms are pursued,in manufacturing, where productivity inflation of 2.6% in 2012, which as well as how and when they arenow exceeds the real wage level by implies a 12-month average inflation implemented. The government shouldover 10% (using 2005 as a reference rate exceeding 2% at the beginning then follow the agreement strictly toyear). Structural imbalances in the of 2013. Unless action to hold build trust in its policy.labour market (like skills mismatches) back inflation is undertaken bymake wage growth possible despite Sluggish household the government, there is a risk ofhigh unemployment. We forecast consumption growth exceeding the Maastricht inflationnominal wages to grow, mostly on the criterion for introducing the euro in The disappointing post-election fiscalresumption of bonus schemes in 2011, 2014. The Minister of Finance recently policy (see below) is forecast toas well as on an increase in the official announced a need to create a plan for undermine economic growth throughminimum wage at the beginning of this reducing inflation some time soon. We smaller household consumption.year. Inflation will nearly eliminate the Higher taxes in the middle of thisgain in purchasing power, however. 1 For example, higher value added tax for year and inflation due to global natural gas, excise for fuel and natural gas. factors are expected to reduce theEmployment, productivity and wages, % average quarterly growth of household30 60 consumption in 2011, although annual growth stays the same. Due to a20 40 Change in statistical overhang, the more modest employment, thsd (rs) quarterly growth of consumption in10 20 FTE* productivity, yoy 2011 will be reflected in a lower annual 0 0 figure for 2012, even though the same Real gross wage, yoy quarterly dynamics will be in play as in-10 -20 our January forecast.-20 -40 * FTE - employment in The increase in employment and full-time equivalent-30 -60 wages will support consumption; 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBL. however, improvements are expected April 7, 2011 17
  • 18. Latvia Swedbank Economic Outlookto be slow. New bank lending is to Harmonized consumer price inflation, %become more active as the economic 20situation and bank profitabilityimproves. On the other hand, 15 Maastricht criterion (12Mconsumer confidence continues to average)stagnate, implying cautious spending. 10 Annual inflation, LVA highly discussed topic in the media 5 12 month average, LVrecently has been the sustainabilityof the social budget. Its expenditures 0comprise about one-third of thegeneral government budget, and -5pensions are the largest part of it. The Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Source: Eurostat.current structure is unsustainable,taking into account emigration, weaken economic growth by hitting Previous consolidation to some extentdemographics, and larger pensions for households’ consumption, increasing has been achieved through measuresthe newly retired. Opinions on how to incentives for tax evasion, and that have temporary effects. Fordeal with this problem are conflicting, strengthening inflation inertia. instance, payments to the secondand it is hard to anticipate the outcome pension pillar (reduced to 2% of gross Reducing the shadow economy does(e.g., cutting pensions, or revising wage) are to be brought back to 6% in remain one of the government’s keythe social benefit mechanism). Our 2013. This will imply smaller revenues areas of focus. However, the raisingforecast does not include a decrease and will widen the budget deficit, going of taxes in fact has done the opposite,in pensions in any form – this remains forward. The recent suggestion of while appropriate actions to improveas a negative risk for the household the Ministry of Finance to postpone tax administration and collection so farconsumption outlook, but it might also increasing the second pension pillar have been weak and slow in coming.diminish inflation pressures in 2012. payments is a short-term measure and Despite the tax increases, the ratio of does not solve the problem in the longFiscal and structural policy tax revenues to GDP has decreased. term.disappointing This can partly be explained by the expansion of exporting sectors, which The size of consolidation for theFiscal consolidation so far has been are less tax intensive; however, tax 2012 government budget will dependrelying too much on tax increases and revenues as a percent of domestic on the success in reducing theacross-the-board expenditure cuts demand have declined as well. shadow economy, improving fiscalrather than on well-thought-through discipline, and implementing the 2011and balanced structural reforms. The If fiscal discipline is retained at supplementary budget consolidationpost-election opportunity to pursue any reasonable level, the deficit is measures. The 2012 governmentreforms in the 2011 budget was anticipated to be below 6% of GDP this budget should be planned with a deficitby and large wasted. Instead, the year, not least because we forecast well below 3% of GDP, considering theadditional consolidation of “high-quality stronger GDP and price growth than sustainability of public finances beyondmeasures” worth EUR 70 million does the Ministry of Finance. The 2012 (which is taken into account(about 0.4% of GDP) that the IMF and larger-than-usual deficit in the first two when evaluating compliance withthe EC demanded was again based months of 2011 is mostly explained Maastricht criteria).mostly on tax hikes (nearly two-thirds by the volatility in incoming flows ofof the total).2 These measures will the EU. Tax revenues have been The improvement in Latvia’s sovereign exceeding the plan at the beginning of ratings provides the opportunity to2 The supplementary budget was submit- the year. start issuing government bonds inted to the Parliament on April 5th 2011. international financial markets for a more acceptable price. However, thisTax revenues and budget deficit, % does not mean that the government35 60 no longer needs to reduce the budget 50 deficit – it is crucial to return public30 40 finances to a sustainable footing and deficit, % of GDP (rs) 30 be able to introduce the euro. % of GDP25 20 % of domestic demand 10 Lija Strašuna20 0 Mārtiņš Kazāks -10 Dainis Stikuts15 -20 Source: CSBL, State Revenue Service. 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 April 7, 2011 18
  • 19. Swedbank Economic OutlookLithuania: Growth accelerates and it’s more balancedGrowth in 2010 reached 1.3% and positive contribution from household Exports are still key, despiteexceeded our expectations – mainly consumption and a significant pickup many risksdue to a stellar performance in the in gross fixed capital formation – we After 16.3% real growth in exportsfourth quarter, when seasonally increased our forecast of investment last year, there is enough steam leftadjusted GDP grew by 1.8% growth from 8% to 16% in 2011 and for 2011 and 2012. Although growthcompared with the previous period. from 8.5% to 13% in 2012. Unlike in is expected to decelerate, recentThis rapid quarterly growth pace is 2010, this year and next all sectors will developments show no signs oflikely to decelerate, but the economy recover and will contribute positively to weakness; thus, we increased ouris expected to grow at a much faster economic growth. forecast to 12.5% in 2011 and 9.4%annual rate in 2011 – we increased We increased our forecast of inflation in 2012. Monthly exports of goods (atour GDP forecast from 3.0% to 4.2%. in 2011 from 2% to 3.2% – annual current prices) exceeded all time highsAfter eight quarters of decline, inflation picked up at the end of 2010 in the last months of 2010 and havehousehold consumption increased and is expected to stay around current continued growing in the first monthsin the last quarter of 2010, but the levels throughout this year. Factors of this year. Exports of goods producedannual growth was still negative. behind the faster price increases in Lithuania also recovered last yearMeanwhile, after a strong pickup in are mainly external – unfavourable and almost reached pre-crisis levels.gross fixed capital formation in the price developments for oil and food In 2010, refined petroleum productssecond half of last year, the annual in international markets are having a remained the main export productsresult was unchanged from year ago. direct and strong impact. We expect and made up 22.5% of all exports ofThe biggest impact on growth came that this will be temporary, and inflation goods. Furthermore, the export growthfrom stockbuilding, which accelerated should decelerate to 2.5% next year. of these products was the fastest,in the last quarter and reflected Despite the more positive outlook, exceeding 50% in nominal terms. Thehigher expectations for future many internal and external risks next-best performers were in a higher-consumption and investment. remain. The nonorderly restructuring value-added chain – exports of motorGrowth of mining and quarrying, of the sovereign debt of peripheral vehicles grew by 46%, machinery bymanufacturing, and electricity, gas euro zone countries may cause higher 43%, and computer, electronic, andand water supply accelerated at the interest rates and lower expectations, optical products by 42%. The biggestend of 2010, and the annual growth and could undermine Lithuanian export product groups behind refinedof industry reached a solid 5.6%. exports’ growth in EU markets. Unrest petroleum products – chemicals andMost other sectors, however, were in northern Africa and the Middle foodstuffs – grew slower, at 26.6%still declining in 2010 or showed only East could further raise oil prices and and 18.9%, respectively, but, duevery modest annual increases. cause higher inflation. The upcoming to increased competitiveness and parliamentary elections in 2012 growing foreign demand, they areThis year and in 2012, the growth may evoke many growth-restricting expected to contribute significantly towill be more balanced. We expect a propositions. growth this year. The economic recession did notKey Economic Indicators, 2009 - 2012 1/ change the direction of Lithuania’s 2009 2010 2011f 2012f exports – the biggest share still goesReal GDP -14.7 1.3 4.2 4.7 to its closest neighbours – Russia,Nominal GDP, billion euro 26.508 27.405 29.270 31.259 Germany, Latvia, and Poland. ThisConsumer prices (average) 4.5 1.3 3.2 2.5 year, the CIS – and especially Russia,Unemployment rate, % 2/ 13.7 17.8 15.5 13.5 which will receive a strong boost fromReal net monthly wage -7.2 -4.3 0.0 2.5Exports of goods and services (nominal) -25.2 30.3 17.0 12.0 increasing oil prices – is expectedImports of goods and services (nominal) -36.1 28.9 18.0 13.0 to be an important driver of exportBalance of goods and services, % of GDP -1.2 -0.7 -1.5 -2.2 growth.Current account balance, % of GDP 4.3 1.8 -1.0 -1.7 Despite the very strong performance ofCurrent and capital account balance, % of GDP 7.7 4.5 2.0 1.3 the transportation sector, which makesNet FDI, % of GDP 0.5 1.7 2.5 3.0 up almost two-thirds of all exportsGross external debt, % of GDP 87.2 86.1 83.0 80.0 of services, the growth of exportsGeneral government budget balance, % of GDP 3/ -9.2 -8.0 -5.5 -3.0 of services is still lagging behindGeneral government debt, % of GDP 29.5 38.7 40.0 42.0 exports of goods, and is expectedSources: LCD and Swedbank.1/ Annual percentage change unless otherwise indicated. to stay behind this year. Exports of2/ According to labour force survey.3/ According to Maastricht criterion. April 7, 2011 19
  • 20. Lithuania Swedbank Economic Outlookhigher-value-added services, such Export of goods and services, LTL millionsas construction, communications, 6000 1200financial, IT, and consulting, contributeonly around 10% of total exports of 5000 1000 Exports of goods (ls)services; hence, their faster growthwill have only a small effect on total 4000 800 Exports of goodsexports. produced in Lithuania (ls) 3000 600 Exports of services (rs)So far, the economic recoveryhas relied on foreign markets; any 2000 400significant dent in foreign demandcould tip the economy back into 1000 200 Sources: Statisticsrecession. However, despite the 2007 2008 2009 2010 2011 Lithuania, Bank ofhigh density of adverse globaldevelopments – the sovereign debt accelerated in the first months of 2011. 58% of the LTL 2.17 billion allocatedcrisis, upheavals in North Africa and to increasing business productivitythe Middle East, and the tsunami and Growth in investment in tangible fixed have already been paid out; however,nuclear crisis in Japan – we do not assets eased in the last quarter of the acquisition of funds allocated forexpect the current growth trend to 2010, mainly due to the early and cold R&D for competitiveness and growthchange direction. winter, which caused construction of business is lagging, as only slightly and repairs of buildings to decline byPrivate sector investments to more than 9% of LTL 2.08 billion has 10.6% after 14.3% growth in the thirdpick up been paid out. Nevertheless, we quarter. Acquisition of equipment, expect the acquisition of these funds toDespite strong annual growth of machinery and transport vehicles accelerate this year and next, thereby15% and 13.9% in the last two increased by 10.1% in 2010. positively affecting potential output inquarters of 2010, gross fixed capital However, the increase in total the future.formation ended up being flat in 2010. investment in tangible fixed assets wasNevertheless, the upward trend is Labour market remains mainly due to the public sector. Privatelikely to continue, and investments challenged companies were dominant only in theare projected to be the most important acquisition of equipment, machinery, Unemployment will remain highsource of growth this year and next. and transport vehicles, which is throughout 2011 and will start decliningGross fixed capital formation is the main source of productivity more rapidly only in the secondexpected to grow by 16% and 13% in and competitiveness. This trend is half of the year. Average annual2011 and 2012, respectively. expected to continue its strong growth unemployment is expected to declineExporting sectors are among the first this year and next. Unlike last year, the from 17.8% in 2010 to 15.5% in 2011that are approaching full capacity private sector in 2011 and 2012 will and to 13.5% in 2012.utilisation (e.g., the production of drive the growth of investments. From 2005 to 2009, competitivenessfurniture, wood, and wearing apparel); Acquisition of EU funds will be an was declining, as net real wagethus, future competitiveness and important driver of investments in growth exceeded the growth ofgrowth will depend on investments. the coming years. Of the total funds labour productivity. This adverseA positive sign is that imports of allocated for 2007-2013, which development was reversed in 2010,investment goods and industrial amount to LTL 25.6 billion, 31% have when productivity increased by 6.4%,transport equipment increased by already been paid out. More than while real net wages declined by37% last year and annual growth has -4.3%. Although his was not enoughSwedbank’s GDP Forecast – Lithuania to offset the loss of competitiveness during the past five years, we expectChanges in volume, % 2009 2010 2011f1/ 2012f1/ this recovery of competitivenessHousehold consumption -17.7 -4.1 (-5.0) 2.5 (1.0) 4.5 (3.0) to continue this year and in 2012;General government consumption -1.9 -3.0 (-3.0) 1.0 (-1.5) 1.0 (1.0) nevertheless, the positive gap betweenGross fixed capital formation -40.0 0.0 (-5.0) 16.0 (8.0) 13.0 (8.5) productivity growth and wage growthInventories 2/ -5.9 7.8 (6.4) -0.2 (0.6) -0.7 (-0.6) will narrow. The competitivenessExports of goods and services -12.7 16.3 (13.4) 12.5 (6.5) 9.4 (7.7) index, which measures the differenceImports of goods and services -28.4 17.6 (12.1) 11.8 (5.0) 9.1 (5.5) in real growth between productivityGDP -14.7 1.3 (0.5) 4.2 (3.0) 4.7 (4.5) and wages, is still 11% below the 2005Domestic demand (excl. inventories) 2/ -24.1 -4.7 (-6.1) 4.8 (1.6) 5.8 (3.7)Net export 2/ 15.3 -1.8 (0.2) -0.4 (0.8) -0.4 (1.4) level.Sources: CSBL and Swedbank. Employment is expected to grow by1/ The figures from our forecast in January are given in brackets.2/ Contribution to GDP growth April 7, 2011 20
  • 21. Lithuania Swedbank Economic Outlook1.6% this year and accelerate to 2.0% another, albeit not popular, alternative. higher housing costs), as well as bygrowth in 2012. The high structural higher food, gas, and fuel prices. Household consumption is Retail trade confidence was positiveunemployment implies slower job recovering beginning in the middle of last year,creation, but, due to increasinginvestments and labour productivity, We revised upwards the forecast but unexpectedly plunged in January.its impact on potential GDP growth of household consumption growth, The main reason behind this dropwill remain muted. Some sectors (e.g., which is expected to increase by 2.5% was the unfulfilled expectations oftransportation and manufacturing) are this year and 4.5% in 2012. The real retailers about holiday-season salesalready signalling their lack of labour growth of the wage bill this year is and possible overstocking. This willforce, some of which emigrated during expected to increase by only 1.6%, have some temporary negative effectsthe severe contraction of 2009. i.e., not enough to justify consumption on first quarter growth, but they growth. However, negative real interest are expected to be temporary. TheAnother reason behind the persistence planned increase of pensions in 2012 rates may discourage savings thisof unemployment is the high will additionally boost confidence and year and, together with decreasingunemployment trap,1 which, according partially offset the negative effects of unemployment, will prompt theto the latest available data, increased higher inflation. allocation of a larger fraction ofto 86% and is well above the EU disposable income to consumption. The main growth in householdaverage of around 75%. Due to low A shift in this perception is already consumption will be in nonnecessities,minimal and average net wages, evident in the changing structure of as well as durable and leisure goods.which sometimes are very close to household deposits – more than 45% This trend is already visible now –or below unemployment benefits, of all household deposits are held in in the first two months of 2011, thesome unemployed have opted their current accounts, compared with annual retail growth rate reachedout of official employment and are 36% during the height of the crisis, and 18.7% – the fastest growth rate sinceparticipating in the unofficial labour 55% during booming years. early 2008; even retail trade, except formarket. Liberalising the labour marketcould help solve at least some of In 2009, the gross household savings motor vehicles, was accelerating, andthese structural problems. Current rate (gross savings as a share of annual growth in February reachedpropositions to increase the minimum gross disposable income) spiked to 6.1%. Although annual householdwage from LTL 800 to LTL 900 would 7.9% after being negative in 2007 credit growth has remained negative,slightly reduce the unemployment trap and 2008, reaching the highest rate we expect slightly better lendingbut could further retard the creation since Statistics Lithuania started conditions this year, and especially inof workplaces, as a majority of the keeping records in 1995. It probably 2012.approximately 300,000 unemployed stayed around this level in 2010 but Inflation will weigh onare unskilled. Reducing social will decline somewhat this year and purchasing power…benefits to the long-term unemployed, next, thus supporting the recovery in household consumption. Average annual inflation last yearespecially to those who refuse to remained low (1.3%) but acceleratedparticipate in public works, would be Consumer confidence started in the last quarter. The current pace of increasing at the beginning of 2010 price growth will continue for the rest1 The unemployment trap measures the but has been stalling since last of 2011, and average annual inflationpercentage of gross earnings that are August. The slower improvement in will be 3.2% this year.„taxed away" through higher tax and socialsecurity contributions and the withdrawal of expectations may have been causedunemployment and other benefits when an by the longer and colder winter (and The current growth of prices wasunemployed person returns to employment. caused by only three groups of products in the Lithuanian consumer Labour market, % basket, which became dearer because 20 4 of the adverse developments in 15 17.8 2 international markets – prices of oil, 15.5 13.7 13.5 gas, wheat, sugar, and other food Unemployment rate (ls) 10 11.4 0 products are much more expensive Labour productivity (ls) 8.3 than they were a year ago. Of the 5 -2 Net real wage (ls) 5.6 4.3 5.8 three groups, food and non-alcoholic Employment, yoy (rs) 0 -4 beverages make up 26.6% of the CPI basket; housing, water, electricity, and -5 -6 gas account for 12.9%; and transport expenditures – 11.5%. The prices of -10 -8 2004 2005 2006 2007 2008 2009 2010 2011f 2012f Sources: Statistics other products had negative impact on CPI growth. April 7, 2011 21
  • 22. Lithuania Swedbank Economic OutlookIt is still hard to expect a quick Retail trade sales (% yoy), consumer and retail trade confidencerecovery in the real growth of 30 45household consumption because of 20 30the higher inflation, which will have anegative impact on purchasing power. 10 15It will have an especially strong impact 0 0 Retail trade (ls)on poorer households, since expenses Retail trade confidence (rs) -10 -15on transport, food, and housing have Consumer confidence (rs)much larger weights in their consumer -20 -30baskets – for many, these are the only -30 -45goods they consume. -40 -60The external price shock is unlikely 2007 2008 2009 2010 2011 Source: Statistics have a persistent effect on inflation– the impact on consumer prices is tax income from the reduction of the level, which will generate additionallikely to be one-off, and we expect shadow economy, amounting to LTL 1 spending of at least LTL 700 million ininflation to decrease to 2.5% in 2012. billion. This ambitious objective is not the general government budget. DueHigh unemployment and slow nominal likely to be achieved, since measures to the parliamentary elections in thewage growth are not likely to create for tackling the shadow economy are autumn of 2012, there will be moreinflationary expectations. However, still being discussed. Some of the pressure to increase other 2011, some internal factors – measures are being implemented Recent propositions to introduce aincreased pensions, improving labour (e.g., the installation of cashiers in food progressive personal income tax areand credit market conditions, and markets), but they are likely to bear popular but would have no practicalinsufficient capacity in underinvested fruit only next year. value, as only 2.5% of employed havesectors – may provide upward price gross wage exceeding LTL 5,500.pressure. Although inflation will Despite the very strong state budget Asset taxes would be more effectivedecelerate to 2.5% next year, it is likely revenue in January, the result for the but are not likely to be introducedto be above Maastricht criterion and first two months of 2011 is slightly before the elections, as they wouldobstruct adoption of euro. disappointing – it is 14% better than influence a large fraction of population in 2010, but 5.6% behind the plan…but will help government (which was admittedly very optimistic, (more than 90% of householdsfinances founded on hopes of reducing the own their homes). In general, as any news taxes would haveIncreasing prices may have a short- shadow economy). Expected annual negative impact on growth, furtherterm positive impact on government growth in nominal GDP of almost consolidation should focus on reducingfinances – higher prices and nominal 7% and consequent strong tax government spending (especiallyGDP growth will increase value-added revenue growth are likely to help via not transparent and inefficienttax (VAT) and, to some extent, excise the government meet its budget public procurements). Despite all thetax income. This may ease some of consolidation plans. risks and uncertainties, we expectthe tensions in public finance this year, A bigger challenge could be next this government to survive until theand the budget deficit is expected to year’s fiscal consolidation. As some elections and to pursue the targetdecline to 5.5% of GDP. of the measures implemented in budget deficit of 3% of GDP in 2012.One of the main consolidation 2009 and 2010 were temporary, themeasures this year was supposed government has the “obligation” toto be the generation of additional return the pensions to the pre-crisis Nerijus Mačiulis Lina VrubliauskienėContribution to annual CPI growth, pp14 7012 60 Others10 50 Housing 8 40 Transport Food 6 30 CPI growth 4 20 Av.deposit interest rate 2 10 Household credit, yoy (rs) 0 0 -2 -10 Source: Statistics 2007 2008 2009 2010 2011 Lithuania, Swedbank. April 7, 2011 22
  • 23. Swedbank Economic OutlookEconomic Research DepartmentSweden Cecilia Hermansson +46 8 5859 7720 Group Chief Economist Chief Economist, Sweden Magnus Alvesson +46 8 5859 3341 Senior Economist Jörgen Kennemar +46 8 5859 7730 Senior Economist Anna Ibegbulem +46 8 5859 7740 AssistentEstonia Annika Paabut +372 888 5440 Acting Chief Economist Elina Allikalt +372 888 1989 Senior EconomistLatvia Mārtiņš Kazāks +371 67 445 859 Deputy Group Chief Economist Chief Economist, Latvia Dainis Stikuts +371 67 445 844 Senior Economist Lija Strašuna +371 67 445 875 Senior EconomistLithuania Nerijus Mačiulis +370 5 258 2237 Chief Economist, Lithuania Lina Vrubliauskienė +370 5 258 2275 Senior EconomistApril 7, 2011 23
  • 24. Swedbank Economic OutlookDisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Department. The EconomicResearch Department consists of research units in Estonia, Latvia, Lithuania and Sweden, is independent of otherdepartments of Swedbank AB (publ) (“Swedbank”) and responsible for preparing reports on global and home marketeconomic developments. The activities of this research department differ from the activities of other departments ofSwedbank and therefore the opinions expressed in the reports are independent from interests and opinions that might beexpressed by other employees of Swedbank.This report is based on information available to the public, which is deemed to be reliable, and reflects the economists’personal and professional opinions of such information. It reflects the economists’ best understanding of the information atthe moment the research was prepared and due to change of circumstances such understanding might change accordingly.This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge thisreport is correct and accurate, however neither Swedbank or any enterprise belonging to Swedbank or Swedbanks directors,officers or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faultswithin this report.Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financialservices (issue loans, among others) to them. Aforementioned circumstances might influence the economic activities of suchcompanies and the prices of securities issued by them.The research presented to you is of informative nature. This report should in no way be interpreted as a promise orconfirmation of Swedbank or any of its directors, officers or employees that the events described in the report shall take placeor that the forecasts turn out to be accurate. This report is not a recommendation to invest into securities or in any other wayenter into any financial transactions based on the report. Swedbank and its directors, officers or employees shall not be liablefor any loss that you may suffer as a result of relying on this report.We stress that forecasting the developments of the economic environment is somewhat speculative of nature and the realsituation might turn out different from what this report presumes.IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT THEN YOU ACT SOLELY ON YOUR OWN RISK ANDARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTIONINDEPENDENTLY.April 7, 2011 24