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Swedbank Economic Outlook April 2012

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Swedbank Economic Outlook April 2012

Swedbank Economic Outlook April 2012

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  • 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies April 24, 2012Continuing on the road to recovery G Global development Table of Content:  Global economic data have been mixed since January. We have maintained our forecast of global GDP growth at 3.1% this year, but have revised it up- Introduction: A shaky wards to 3.4% from 3.1% for 2013,as the muddling-through scenario in the euro area seems to be more clearly in place. surrounding – but a  Our main scenario has a probability of 60%, while the probabilities for a turnaround is near 2 worse and a better scenario are 30% and 10%, respectively. The main nega- tive risks include a higher oil price, a new crisis in the euro area if Spain and Global: Lacklustre global Italy need rescue, a hard landing in China, and a slower recovery in the US. Sweden S growth at best 4  Economic growth contracted sharply in the last quarter of 2011, pulled down by falling exports but partly offset by resilient household consumption. This Sweden: Recovering after led to an annual growth rate of 4.0%. Economic data for the first months of the hit last year 7 2012 suggest that the downturn has hit bottom and that growth will resume.  The economy will start recovering in 2012, but unemployment will remain Estonia: Growth prospects high. Monetary policy will not provide additional support, and fiscal policy is in a wait-and-see position. With external demand dampened by Europe’s improve 12 crisis, the growth outlook for 2012 and 2013 is 0.5% and 2.2%, respectively. Estonia E Latvia: Better outlook, but  After three quarters of nearly 9% year-on-year growth, GDP growth slowed caution still necessary 16 in the last quarter and annual growth in 2011 reached 7.6%. Exports grew by a solid 24.9% despite a slowdown at the end of the year. Employment grew by 6.7%, supporting households’ confidence and willingness to spend. Lithuania: Rosy developments  We keep our GDP growth forecast at 2.7% for this year and revise it slightly stained with oil 20 upwards for 2013, from 4.0% to 4.2%, due to a better outlook for foreign demand growth. Inflation will decelerate from 5% in 2011 to 3.8% in 2012 and further to 3.2% in 2013. Despite the resumption of budget deficits, public finances will remain solid. Latvia L  The economy expanded by a robust 5.5% in 2011. Investments contributed most to growth, but private consumption supported it as well. Growth, albeit slowing, has remained strong in early 2012, owing to the surprisingly robust confidence and resilience of Latvian exporters in response to the slowdown in external demand.  We are raising the growth forecast to 2.5% in 2012 and 3.5% in 2013, owing to the stronger economy in recent months and somewhat better outlook for Latvia’s main trading partners. Inflation is to retreat from 2.8% this year to 2.5% in 2013. Euro adoption in 2014 is feasible, but has become more chal- lenging. Lithuania L  The economy grew more slowly at the end of last year, mainly because companies slashed their inventories. Despite falling confidence, growth of household consumption and investments remained strong in the final quarter of 2011. At the end of the year, unemployment dropped below 14%, and real wage growth has accelerated.  We expect GDP growth to accelerate to 4.3% next year after a more mod- est 3.3% growth in 2012. Inflation will be somewhat higher than previously forecast and, at 2.8%, is likely to be above the Maastricht inflation criterion. Inflation will ease to 2.5% and unemployment will drop to 11% in 2013. April 24, 2012 1
  • 2. Introduction Swedbank Economic OutlookA shaky surrounding – but a turnaround is nearThe economic situation in Sweden and holds could change if labour markets Emerging markets are reducing theirthe Baltic countries slowed markedly at improved or worsened more than ex- problems with overheating and canthe end of last year and has continued pected. In addition, internal risks deal counteract some of the slowdown withits hesitating pace since our forecast with statistical uncertainties because stimulus; still, growth will abate some-in January. Economic data have been revisions of national accounts and em- what in oil-importing countries and pickmixed, leading us to keep the global ployment have blurred the picture both up in commodity-based Russia andforecast in aggregate terms unchanged backwards and forwards. Brazil. China’s growth falls towards 8%for this year; meanwhile, the prospects this year and next, as its property sec- Our main scenario comes with a prob-for a pickup in growth in 2013 have tor cools and the export sector loses ability of 60% and has a global growthimproved as the muddling-through speed. Also, Japan is affected by Chi- rate of 3.1% in 2012, with a mild upturnscenario in the euro area seems to be na’s slowdown, but investments are in- in 2013 to 3.4%. This is still lower thanmore clearly in place. creasing after the tsunami and nuclear in 2011, when GDP growth reachedThe outlook for 2012 in Sweden and the 3.5%. Stronger manufacturing activ- plant accident last year, and next yearBaltic countries is not much changed ity and investments are driving the US Japan’s growth will also benefit from afrom the one in January; for 2013, it economy. Although growth has picked weaker yen against the US dollar.has been revised upwards slightly. In up, the higher oil price and the slower Commodity prices will increase duringSweden, GDP is set to grow by 0.5% employment creation is counteracting the forecast period, contrary to our as-in 2012, before reaching 2.1% in 2013. this development, leaving GDP growth sumptions in January. The oil price isIn the Baltic countries, GDP growth will with a marginal revision upwards, to assumed to reach US$119 per barrelvary between 2.5% and 3.3% this year, 2.1% this year and 2.3% next year. this year on average, meaning that itand between 3.5% and 4.3% next year, will fall back in the second half of this The recession in the euro area is ex-with Latvia at the lower and Lithuania at year as concern about a conflict in the pected to become deeper in the crisis-the higher ends of the interval. Middle East alleviates. The oil price will struck economies, while it will go awayThe main risks to the Swedish and in Germany and France in the second reach an average of US$113 per bar-Baltic outlook are international, such half of this year. The worst of the crisis rel next year, and the consumer priceas new instability in the euro area. in terms of management is assumed pressure from commodity markets willThis could result if Spain and also Italy to be over, as member countries avoid abate, which, will cause inflation to fallneeded rescue funding, and if this were new rescue packages. Liquidity support during 2012 and 2013. Monetary policyfollowed by a deeper-than-expected from the European Central Bank (ECB) will remain expansionary in advancedrecession. Also, a higher (or lower) oil could be provided if the situation war- economies (interest rates will stayprice, a more pronounced slowdown rants. The UK and the Nordic countries close to zero while quantitative easingin China and other emerging markets, will grow below potential, especially the will be forthcoming mainly in Japan andand a slower (or faster) recovery in the UK and Denmark, where the financial the UK). In emerging markets, mon-US are other external risks. Internal crisis is still felt. etary policy will become less restrictive.risks are geared towards private con- Fiscal policy in most of Europe will besumption, as the sentiment of house- restrictive. The effects of monetary pol- icy, and also of a weaker euro againstMacro economic indicators, 2010- 2013 the US dollar, cannot counteract the 2010 2011 2012f 2013f negative growth effects from less gov-Real GDP growth, annual change in % ernment spending and higher taxation. Sweden (calender adjusted) 5.8 4.0 0.5 2.2 Estonia 2.3 7.6 2.7 4.2 More budget consolidation could be Latvia -0.3 5.5 2.5 3.5 needed if growth slows. Unemployment Lithuania 1.4 5.9 3.3 4.3 is already above 10% and increasing inUnemployment rate, % of labour force the euro area, where it has reached its Sweden 8.4 7.5 7.8 7.9 Estonia 16.9 12.5 10.5 8.6 highest level for 15 years, while the op- Latvia 18.7 15.4 13.6 11.9 posite is true for Germany, where the Lithuania 17.8 15.4 13.0 11.0 rate of 6.7% is the lowest in 20 years.Consumer price index, annual change in % Sweden 1.2 3.0 1.5 1.9 In our worse scenario, to which we Estonia 3.0 5.0 3.8 3.2 Latvia -1.1 4.4 2.8 2.5 give 30% probability, the crisis in the Lithuania 1.3 4.1 2.8 2.5 euro area worsens further, with SpainCurrent account, % of GDP requesting rescue funding to avoid a Sweden 6.8 7.2 6.9 7.1 collapse, and with risks therefore also Estonia (incl. capital account) 7.2 6.7 5.9 5.5 Latvia 3.0 -1.2 -1.8 -2.6 increasing for Italy. The recession Lithuania 1.5 -1.6 -2.5 -2.7 deepens, and political and social un-Sources: National statistics authorities and Swedbank. April 24, 2012 2
  • 3. Introduction Swedbank Economic Outlookrest worsens. Financial market senti- government budget is cautious, leav- larger market share and export growthment becomes volatile, with new wealth ing room for expansion next year when in an overall weak export market. Inlosses weakening confidence. Also, the the economy will have already started addition, Latvia’s main export partnersoil price could rise higher, and China to improve. are still rather strong, compared withcould land harder, with growth below the crisis-struck countries in southern Estonia’s economy expanded by a6-7% this year and next. In the US, if Europe. In 2013, economic growth will strong 7.6% last year; and our GDPthe Bush tax cuts would not be extend- increase to 3.5% as the global outlook forecast for 2012 remains at January’sed, restrictive fiscal policy would slow improves and the inventories give a 2.7%. Global demand lost steam con-growth. As global growth would fall un- positive contribution to growth. Unem- tributing to negative quarterly growth atder 2% and trend towards stagnation, ployment is set to fall under 12% next the end of last year. In 2013, GDP isthe world economy would move into a year. As the budget deficit shrinks in expected to increase by 4.2%, a slightrecession. line with EU rules, the EMU entry is upward revision from January in light of made possible, although the inflationA better growth case is also made pos- the somewhat stronger global outlook. outlook is challenging (2.5 % next year)sible, with a low probability of 10%, if Inflation will also be higher due to higher not least as other euro nations’ inflationthe oil price falls, the euro area reces- global commodity prices, thus reducing outcome is uncertain. Also, the eurosion turns out to be shallow, and the re- real wages, sentiment, and consumer area’s willingness to accept new mem-covery in the US picks up, while growth spending. The main domestic risk is the bers still constitute major uncertainties.in emerging markets reaches sustain- labour market, where the lack of quali-able high levels. fied labour in some sectors is increas- Lithuania’s GDP growth has slowed ingly becoming a problem; meanwhile, markedly, but the rate was still posi-Sweden’s economic data were re- long-term unemployment remains high. tive in quarterly terms at the end of lastcently revised. In 2011, GDP grew by Also, emigration may pose a threat to year, thus leading to a high but lower-4%, compared with expected 4.5%, competitiveness, going forward. While than-expected growth of 5.9% for 2011.while growth in 2010 was revised up having the lowest government debt ra- The inventory cycle contributed to theto almost 6%. A sharp drop in exports tio in Europe, Estonia’s loan payments weaker outcome, while exports and do-pulled down growth in the last quarter by the European Financial Stability Fa- mestic demand held up relatively well.of 2011, but private consumption was cility (EFSF), help to raise the gross Going forward, GDP is set to weakenresilient. Since then, the purchasing debt ratio from 6% to 10% of GDP in to 3.3% this year, before reaching 4.3%managers’ index indicates a marginal 2013. Even so, the overall public fi- next year as export and investmentimprovement only, and the rebound in nances remain solid, and the budget demand improves. In 2013, unemploy-new orders is still weak. GDP is set to deficits are temporary. ment is expected to fall to 11% on av-increase by 0.5% this year (with fourth erage, and the inflation outlook dropsquarter last year markedly negative, Latvia’s GDP grew by 5.5% in 2011, the to 2.5%. Public finances have becomeand first quarter showing a minor drop first full year of growth after the reces- less strained, but risks remain becausebefore activity picks up in the second sion. The drivers for the recovery were politicians’ propositions could lead tohalf of this year). Unemployment will al- exports and EU funding, which boosted a more expansionary fiscal policy asmost reach 8% early next year before investments. Better confidence among this year’s election approaches. Thefalling back slowly in line with the higher households also led to higher consump- outlook for membership in the EMU is,GDP growth in 2013 of 2.1%; as house- tion. In 2012, we forecast GDP to slow therefore, cautiously positive with re-hold spending will increase more than to 2.5% as the global climate weakens gard to domestic risks with the inflationwe assumed in January. The Riksbank (up from January’s 2.0% on the basis outlook especially challenging; and, it iswill keep the repo rate at 1.5% this year, of stronger demand). External com- still uncertain with regard to actions bybefore hiking it twice next year. The petitiveness has improved, leading to a the policymakers of the euro area. Unit labour cost (annual change in %), 2000 - 2011 The outlook for Sweden and the Baltic 28 countries has marginally improved for 24 the next year, but the risks are skewed 20 and remain high for a weaker outcome. 16 Estonia Therefore, it is still important to manage 12 Lithuania risks, and to continue the reform proc- 8 Latvia ess to strengthen competitiveness in all 4 Sweden four countries, thereby increasing resil- 0 Euro area ience if worse comes to worst. -4 -8 -12 Cecilia Hermansson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat. April 24, 2012 3
  • 4. Global Swedbank Economic OutlookLacklustre global growth at bestSince our January forecast, economic faltered in the euro area, the UK, and increased funding, with the additiondevelopments have been mildly positive Japan, while losing speed in the emerg- with increased funds from the IMF, thusalthough increasingly mixed over time, ing markets. lowering the still-present risks of con-as the impact on sentiment from central tagion. Recently, the focus has shiftedbanks’ liquidity injections abates. The In the euro area, the European Central to Italy and especially Spain, where therecovery in the US economy has picked Bank (ECB) has once again injected risk premium for sovereign bonds againup but is still cautious; the recession in liquidity (through long-term refinanc- is increasing despite the ECB’s meas-the crisis-struck euro area economies ing operations, or LTROs). In Febru- ures, and where market actors doubtis more evident while core countries ary, the ECB’s loans amounted to EUR that the Spanish government’s effortshave stagnated. For now, the worst is 530 billion, thus adding to Decem- will be sufficient to cut the budget deficitlikely to be over in terms of crisis man- ber’s amount of EUR 489 billion. Al- to reach the agreed 5.3% of GDP thisagement; the region has returned to the though financial stress is abating, it is year, and 3% next year.“muddling-through-mode.” GDP growth still high, as banks are shrinking theirin emerging markets has slowed. Also, balance sheets and credit austerity is Even so, sentiment among investors,with higher energy costs for oil-import- weakening growth in the region. The companies, and households has im-ing countries, the global economy will agreement made in March to support proved, as a response to both the in-grow modestly, just above 3% this year, Greece with a second loan conditional creased liquidity in the euro area andbefore returning in 2013 to last year’s on reforms, while forcing private banks the somewhat stronger recovery in thegrowth of near 3.5% – a modest up- to write down their claims, has given US economy in terms of growth andward revision since January. Greece more time. However, political, lower unemployment. In the US, pur- economic, and social stress is building chasing managers are signalling higherSince the beginning of the year, the up in the country before the election manufacturing activity. The stock mar-world economy has been characterised in May, driving expectations of either kets have continued to strengthen, al-by a continuation of the recovery, albeit calls for more support or, but less likely, though remaining volatile and fragile.with some mixed signals. Commodity a decision to leave the euro area and However, there are new disappoint-and share prices have risen, and the reintroduce the drachma. To strengthen ments, as employment growth againpurchasing managers’ index and con- crisis management, the two rescue is slowing and the oil price – since thefidence indicators have strengthened facilities, the European Financial Sta- geopolitical stress has raised supplyslightly. GDP growth in the last quarter bility Fund (EFSF) and the European concerns - has returned to the high lev-of 2011 indicates that the recovery has Stability Mechanism (ESM), now have els last seen during the Japanese ca-picked up in the US; meanwhile, it has the possibility of running parallel with tastrophe a year ago.Swedbank’s GDP forecast - Global1/ The winding down of growth in emerg-(annual percentage change) ing markets also explains why the world Outcome April 2012 January 2012 recovery has over the last two quarters 2011 2012 2013 2011 2012 2013 been losing speed. After policymakers reduced overheating by removing stim- US 1.7 2.1 2.3 1.8 2.0 2.2 ulus, domestic activity is slowing while EMU countries 1.4 -0.5 0.4 1.6 -0.3 0.2 global demand is growing less briskly. Of which: Germany 3.1 0.5 1.3 3.0 0.4 0.9 Especially in China, the property mar- France 1.7 0.3 0.6 1.6 0.2 0.5 ket and car consumption have cooled, Italy 0.4 -1.8 -0.3 0.5 -1.3 -0.8 driving expectations of a hard landing. Spain 0.7 -2.0 -0.8 0.6 -1.0 -0.5 Manufacturing growth has slowed and Finland 2.9 0.8 1.7 2.9 0.4 1.5 export orders’ growth is much weaker UK 0.7 0.5 1.0 0.9 0.5 0.5 than a year ago. Inflation has de- Denmark 1.0 0.5 1.0 1.0 0.7 1.3 Norway 1.7 2.0 2.5 1.7 2.0 2.3 creased, but, since it is still a concern, the room for new stimulus – although Japan -0.7 1.5 1.2 -0.5 1.7 0.9 China 9.2 8.1 8.0 9.3 8.2 7.8 building up – is somewhat limited. India 7.2 6.7 7.3 7.3 6.7 7.0 Expectations of modest growth Brazil 2.7 3.1 3.5 3.0 2.7 2.2 in our main scenario Russia 4.3 4.1 3.9 4.2 3.9 3.7 Global GDP in PPP 3.5 3.1 3.4 3.6 3.1 3.1 In our main scenario, to which we give Global GDP in US$ 2.5 2.2 2.6 2.7 2.3 2.3 60% probability, global output growth will be lacklustre at best. The world Sources: National statistics and Swedbank. economy is now expanding at a rate 1/ Countries representing around 70 % of the global economy. The World Bank weights from 2010 have been used. of just below 3% in purchasing power April 24, 2012 4
  • 5. Global Swedbank Economic Outlookterms; this will increase towards the Global PMI, S&P 500 (indeces) and Brent oil price, Jan 2007 - Apr 2012second half of this year before reaching 80 140an average of 3.1% in 2012 and 3.4% 75 130in 2013. For more details of the outlook 70 120see Swedbank’s Global Economic Out- 65 110 PMI Outputlook, published April 24th. 60 100 global Oil price Brent inCompared with our January forecast, 55 90 USDgrowth in the US has been revised 50 80 S & P 500upwards only slightly, as the stronger 45 70momentum will be negatively affected 40 60by higher energy prices. Growth in the 35 50euro area has been revised downwards 30 40 Source: Ecowinfor 2012; however, in 2013 we see pos- Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12sibilities for stronger activity in the corecountries such as Germany, as export In the advanced part of the world, fis- For oil-importing countries, responsibleand investment demand picks up in the cal austerity is putting on the brakes for some 80% of global output, the highsecond half of this year. Germany is ex- to growth; meanwhile, households are oil price is applying another brake, low-pected to have a recession in technical busy deleveraging, which means in- ering growth while increasing inflation.terms, but the underlying strength of the creased savings and cautious spend- However, over the forecast horizon,economy is still good. The recession in ing. Monetary policy will stay expan- global inflation in terms of consumersouthern Europe will deepen this year, sionary, but will not be sufficiently effec- and commodity prices will not be a ma-and we still cannot see growth coming tive in counteracting the adverse effects jor problem. Capacity utilisation is stillback until after the forecast horizon. arising from the restrictive fiscal policy. low, and the output gap (assuming po-Investments are growing in Japan as Still, policy interest rates will remain tential global growth of some 4%), al-a response to the tsunami shock, al- close to zero in most advanced econo- though shrinking, will close only a fewthough the strong yen, high energy mies, and we foresee more initiatives years’ from now. Labour costs will stag-costs, and slower demand from China from central banks to provide liquidity nate or grow weakly, as the bargainingwill reduce growth expectations some- in various forms, especially in the UK power of the labour force remains low.what this year before they strengthen in and Japan – and to lesser extent in the Global growth is also too weak to sup-2013 as the yen weakens. US and the euro area, where criticism is port a new boom in the commodity mar- arising and calls for exit strategies areOur forecast is not much altered in kets. Even so, commodity price inflation growing louder (e.g., from the Bundes-emerging markets, as we maintain our will stay high for some time, before the bank).view, expressed in January that growth oil price falls as expectations of a warwill slow in 2012 before picking up The US dollar will continue appreciat- between Iran and Israel cool down.slightly in 2013. Growth in oil-exporting ing, as the economic recovery there Most commodity prices will remain highcountries like Russia and Brazil looks is expected to remain stronger than in as they are supported by the global re-stronger than in our January forecast, the euro area or Japan, which will be covery, high liquidity, and low interestwhile India and China will try to limit the relieved to see the yen weakening. The rates. Our assumptions for the oil pricelarger negative growth effects by using appreciation of the renminbi will be kept have been revised upwards to $119more expansionary economic policies. at close to 4% per year. Tensions re- and $113 per barrel for 2012 and 2013,A hard landing in China will thus be garding exchange rates are building up, respectively (up from $102 and $96 peravoided. not least as Brazil and other emerging barrel in January). Metal and food pric- markets try to keep their industries from es – already high – will continue their losing competitiveness. slow ascent during 2012 and 2013.Interest and exchange rate assumptions The fundamental driver for commodity Outcome Forecast prices is the emerging markets, where 20 Apr 30 Jun 31 Dec 30 Jun 31 Dec catching up to richer countries’ living 2012 2012 2012 2013 2013 standards and improving productivity Policy rates are increasing the demand for com- Federal Reserve, USA 0.25 0.25 0.25 0.25 0.25 modities. Emerging markets, although European Central Bank 1.00 1.00 1.00 1.00 1.00 experiencing a slowdown, have less Bank of England 0.50 0.50 0.50 0.50 0.50 need to deleverage and tighten their fis- Bank of Japan 0.10 0.10 0.10 0.10 0.10 cal belts. High commodity prices have Exchange rates so far been met by more restrictive eco- EUR/USD 1.32 1.28 1.26 1.23 1.20 nomic policies, and, over the forecast EUR/GBP 0.82 0.81 0.81 0.81 0.80 horizon, most of the overheating prob- RMB/USD 6.30 6.18 6.05 5.94 5.82 USD/JPY 82 85 87 90 95 lems will have been overcome. April 24, 2012 5
  • 6. Global Swedbank Economic Outlook Interest rate differences to German 10 year government bond, Jan 2008 - Apr 2012 (percentage points) leaving the currency union. In the US, 40 the main risk, except for that of energy Greece 35 prices eating a big hole in consumers’ Portugal wallets, is the continuation of a con- 30 Ireland gressional gridlock beyond this fall’s Spain 25 presidential election. If tax exemptions Italy 20 are removed, fiscal policy could be- Belgium come restrictive, thus slowing growth. 15 France The problems involved in deciding on 10 UK debt ceilings, tax and expenditure poli- 5 Sweden cies, and health reform could escalate 0 during the rest of the forecast period, Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 breaking the momentum of the US re- -5 Source: Ecowin covery and increasing tensions on the global financial markets. Another nega-In January, we limited our discussion because the probability of a worse sce- tive risk is, of course, of a hard land-on scenarios to the euro area. Then, nario, which we put at 30%, is higher ing in China, as falling property pricesthe main scenario was characterised than the probability of a better scenario, could reduce local and regional activityas one in which small, but important which we assess to be only 10%. and weaken the financial sector.steps were taken to alleviate the crisis. The factors driving the better scenario –With almost as high a probability, we In the longer term, there are many towards potential growth of around 4%envisaged a weaker scenario – resem- challenges for the world economy. For – are greater-than-expected stimulus inbling the crablike movement seen dur- those interested in this discussion, see emerging markets, supporting growth;ing 2011 – and also a crisis scenario in Swedbank’s Global Economic Outlook. either a lower oil price or less negativewhich a euro area collapse had a small In this we discuss a number of long- effects from the current price level; andbut not negligent probability. In April, we term issues: how to exit an expansion- stronger confidence arising from theinclude our main euro area scenario in ary monetary policy; how to safeguard crisis management in the advancedthe overall global main scenario, see- financial and consumer price stability; economies, mainly the US and the euroing a continuation of the muddling- how to create growth in Europe de- area, which would generate higher con-through policies. Fiscal cooperation is spite an environment of austerity; how sumer and investment spending.slowly being strengthened; the rescue to avoid global imbalances; how to putfunds are being made larger – although A worse scenario – with global growth the environment back on the globalperhaps not sufficiently. The policy still of 2% or less – could materialise if the policy agenda; and how to reduce un-includes balancing crisis support and oil price continues to rise along with employment, which most likely has be-avoidance of moral hazard, thus forcing geopolitical tensions, while the supply come more structural in the advancedcrisis-struck countries to speed up their of oil is reduced. In the euro area, po- economies. A modest recovery in thereform efforts. Even though sentiments litical and social unrest could pick up, short term is one thing; the build-up ofon financial markets improved after the increasing uncertainty before the elec- challenges for the world economy in theECB’s LTRO support, a credit crunch is tions this spring in Greece and France, medium and long term is quite another.in the making; because of this, together and next year in Italy and Germany. Cecilia Hermanssonwith fiscal austerity, the region is in a There could also be backlashes fromrecession. the crisis management in the euro area, with the risk of one of more countriesIn our main scenario, the recession inthe euro area levels off towards the sec-ond half of this year, driven by stronger The Japanese yen, the Chinese yuan, the euro and Brazilian real against the US dollar, Jan 2007 - Apr 2012 (Aug 2008=100)growth in the core countries. Some 160relief will come from a weaker euro, 150mainly in relation to the US dollar. Over 140the forecast horizon, and well beyond, 130unemployment will remain high in the 120 Eurocrisis-struck countries in southern Eu- 110 Realrope, resulting in an inevitable severe 100 Yuansocial, economic, and political crisis. 90 YenAsymmetric risks – a worse sce- 80nario is more likely than a better 70There are plenty of negative risks to this 60forecast. The risk view is asymmetric Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Ecowin April 24, 2012 6
  • 7. Swedbank Economic OutlookSweden: Recovering after the hit last yearA sharp drop in exports pulled down these numbers is a stronger recovery in according to our assessment, while thegrowth rates in the last quarter of 2011. the latter half of the year. Thus, we ex- upside risks have increased somewhat.Following a surprisingly strong perform- pect a turnaround of the declining trend The actions to resolve the Greek debtance during the first three quarters of in economic growth seen since mid- crisis, together with increased lending2011, economic growth contracted by 2011. In 2013, the recovery continues, by the European Central Bank (ECB)more than 1% (seasonally adjusted), but at a slower quarterly rate, and an- to banks, have calmed the Europeanreducing overall annual real growth to nual growth is forecast at 2.2%. Due to economies, but the debt dynamics in4.0%, compared with our previous esti- the weak external environment, growth Spain and Italy could again pull downmate of 4.5%. Among the positive signs is still below trend, and the main growth European growth rates. Also, emergingwas a surprising resiliency of private engine will be domestic demand, in par- markets and the US are facing someconsumption. Households increased ticular private consumption. headwinds, in particular from rising en-their spending at an annual rate of ergy prices. Domestically, risks have re- The quite substantial data revisions in2.1% and withstood the worsening risk ceded, in our view, with a lack of hous- connection with the 2011 GDP releasesentiments in the global markets. ing underpinning real estate markets have altered the path and dynam- and unemployment rates increasing atData in the first couple of months of ics of the Swedish economy following a slower rate.2012 give a mixed picture. Export the financial crisis in 2008-2009. GDPgrowth has recovered somewhat, la- growth for 2010 was revised upwards, Exports to recover after a sharpbour market developments are not as while the rate of expansion in the first declinebad as were previously expected, and three quarters of 2011 was lowered. After rebounding strongly in the previ-sentiments have strengthened. How- Thus, the recovery was faster in 2010, ous quarters, Swedish export volumeever, industrial production plummeted but the performance of the economy fell in the fourth quarter last year byin February – although one month’s has since been more modest. In addi- much more than we expected. The de-reading should be interpreted care- tion, the number of hours worked was cline was driven by weaker global de-fully – and the purchasing managers’ significantly higher than previously re- mand and growing uncertainty aboutindex (PMI) does not point to a rapid ported. This implies that productivity the sovereign debt crisis in the eurorebound in either manufacturing or growth in the Swedish economy was area and its impact on the global econ-services. Furthermore, uncertainty re- slower, and together with rising unit la- omy. In particular, Swedish exports ofgarding international developments bour costs, competitiveness was not as intermediate and investment goodshas increased, with weaker data com- strong. were affected when investment plansing in from both Europe and the US late globally were postponed, not least in The risks to the forecast, and to thein the first quarter. On an annual basis, Europe, which is the largest export Swedish economy, mainly derive, aswe are lowering our growth forecast for market for Swedish industry. On an an- before, from external sources. Howev-2012 from 0.6% to 0.5%, but underlying nual basis, however, total export vol- er, the downside risks have decreased, ume increased by 6.8% in 2011 due toKey Economic Indicators, 2010 - 2013 1/ the strong growth in the first three quar- 2010 2011 2012f 2013f ters. Goods exports increased by 8.5%, Real GDP (calendar adjusted) 5.8 4.0 0.5 2.2 while services picked up by 2.9%. Industrial production 19.8 6.7 -3.5 2.0 CPI index, average 1.2 3.0 1.5 1.9 The world market growth for Swedish CPI, end of period 2.3 2.3 1.3 2.0 exporters will be below the long-term CPIF, average 2/ 2.0 1.4 1.3 1.6 trend during the forecast period, mainly CPIF, end of period 2.3 0.5 1.7 1.6 due to a slow growth rate in the OECD Labour force (15-74) 1.1 1.2 0.2 0.3 region. Since 2000, the annual growth Unemployment rate (15-74), % of labor force 8.4 7.5 7.8 7.9 of world markets for Swedish firms has Employment (15-74) 1.0 2.1 -0.1 0.2 increased by 6-6.5%. For 2012, we ex- Nominal hourly wage whole economy, average 2.5 2.7 3.2 3.1 pect these markets to grow by 3.5-4%, Nominal hourly wage industry, average 2.8 2.4 3.1 3.0 which is more or less the same level Savings ratio (households), % 8.5 9.7 10.1 9,8 we forecast in January. The weakest Real disposable income (households) 3/ 1.2 3.3 2.0 2.1 growth performance will be seen in the Current account balance, % of GDP 6.8 7.2 6.9 7.1 euro area, while emerging markets’ General government budget balance, % of GDP 4/ -0.1 0.2 -0.3 0.2 growth will still be relatively high. For General government debt, % of GDP 5/ 39.4 36.5 35.8 33.5 next year, we foresee market growth as Sources: Statistics Sweden and Swedbank. somewhat stronger but still below the 1/ Annual percentage growth, unless otherwise indicated. 2/ CPI with fixed interest rates. long-term trend. A low utilisation rate 3/ Based on short-term earnings statistics in the business sector and budget con- 4/ As measured by general government net lending. 5/ According to the Maastricht criterion. solidations in several OECD countries April 24, 2012 7
  • 8. Sweden Swedbank Economic Outlookmean that global investment activity is Swedish export and order, Jan 2005 - Feb 2012 (annual change in %) 30expected to be modest in the comingyears. 20In the immediate term, there are signs 10of an improvement in the Swedish ex- Export value (nom.)port industry after the sharp slowdown 0 Export volumeat the end of 2011. New orders have -10started to pick up, although from low Export orderslevels, and the export value for the first -20two months shows only a minor de-crease from the last months of 2011. -30Swedbank’s PMI for the manufacturing -40sector also improved marginally in the Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 Source: Statistics Swedenfirst quarter of 2012. Although we as-sume a mild recovery in Swedish ex- Investments on hold Modest global demand and lower ca-ports during the second half of 2012, pacity utilisation will restrain private in- Gross fixed investment increased inthe average export volume will be 1.3% vestments during 2012. In Swedish in- volume terms by 5.8% in 2011. Thislower than in 2011. dustry, the utilisation rate fell to 82.8% was in line with our expectations. Al-Weak investment activity in the OECD though investment has trended up- in the first quarter of 2012 from 86% inwill limit Swedish export possibili- wards since 2010, with an accumulated the same period last year, in line withties. The global outlook for e.g. heavy investment growth of 16%, total invest- the decreasing production volume. Intrucks is expected to weaken in 2012, ment volume has not yet reached the the Statistics Sweden’s investmentmainly on mature markets; however, pre-crisis level of 2008. Furthermore, plan survey of February 2012, the in-demand is also expected to deceler- the investment trends differ across sec- dustry reports plans to increase invest-ate in emerging markets. In particular, tors. The largest shift has been in real ment volume by 5%, which seems opti-slower export demand from Germany estate. Investments in housing fell by mistic due to the modest export outlook– destination for nearly 10% of total 7.3% (seasonally adjusted) between and low utilisation rate. In the servicesSwedish exports - will have a dampen- the third and fourth quarters last year, sector, which accounts for more thaning impact on Swedish export perform- after two years of strong growth. De- one-third of total investment, we fore-ance. We foresee an export volume spite the large drop, real estate volume see a continued increase in investment,growth of 2.5-3% in 2013, when global was 12.8% higher in 2011 than in 2010. particularly in household-related indus-demand is improving. After two years In the private sector excluding housing, tries. Public investment, which startedof market gains, we foresee losses of investments continued to grow even to decrease at the end of 2011, is ex-market shares in 2012-2013 due to a while production growth was decelerat- pected to continue to shrink in 2012,less favourable demand composition ing and uncertainty about the business mainly due to declining infrastructureand worsening competitiveness. Unit outlook was growing. The strongest in- investments. This is the first time sincelabour costs are expected to increase vestment performance was recorded in 2003 that investment in the public sec-faster than we expected in January due the services sector, while the transport tor is expected to fall.to lower productivity growth and higher industry and energy sector showed the The main downward revision fromwage increases. largest slowdown. January concerns real estate invest- ment. The sharp drop in the numberSwedbank’s GDP Forecast – Sweden of building permits issued at the end of Changes in volume, % 2010 20111/ 2012f1/ 2013f1/ last year will have a negative impact on Households consumption expenditure 3.7 2.1 (1.4) 1.3 (0.2) 2.5 (2.1) investment growth this year. Although Government consumption expenditure 1.9 1.8 (1.7) 0.6 (0.7) 0.9 (0.9) house improvements will be stimulated Gross fixed capital formation 7.7 5.8 (5.8) 0.1 (1.5) 2.6 (2.5) by the continuing tax reductions for private, excl. housing 5.7 5.0 (2.9) 2.6 (2.7) 4.0 (4.3) renovation, the growth rate will decel- public 6.2 1.6 (6.6) -1.8 (-0.8) 0.4 (0.4) housing 17.2 12.8 (15.4) -6.2 (-0.5) -0.2 (-1.5) erate from a high level. Since Decem- Change in inventories 2/ 2.1 0.7 (0.6) -0.4 (-0.5) -0.1 (0.2) ber 2008, when these tax reductions Exports, goods and services 11.7 6.8 (8.4) -1.3 (-1.1) 2.6 (1.7) were introduced, investment in rebuild- Imports, goods and services 12.7 6.1 (5.9) -1.1 (-1.7) 2.0 (2.2) ing has increased by 50%. Overall, we GDP 6.1 3.9 (4.5) 0.2 (0.3) 2.2 (1.8) foresee a fall in housing investment of GDP, calendar adjusted 5.8 4.0 (4.5) 0.5 (0.6) 2.2 (1.8) 6% in 2012; this means that investment Domestic demand (excl. inventories) 2/ 3.7 2.6 (2.2) 0.8 (0.5) 1.9 (1.7) in real estate as a share of total invest- Net exports 2/ 0.3 0.7 (1.6) -0.2 (0.2) 0.4 (-0.1) ment will decrease. Fundamentally, Sources: Statistics Sweden and Swedbank. there is still a need for more invest- 1/ The figures from our forecast in January 2012 are given in brackets. 2/ Contribution to GDP growth. ment in housing. The growing popula- April 24, 2012 8
  • 9. Sweden Swedbank Economic Outlook Gross fixed investments in different branches, 2005 Q1 - 2011 Q4 (annualtion, particularly in the large cities, and change in %)the lack of housing in 60 percent of the 30Swedish municipalities imply a largeunderlying demand for new housing. 20Of the Nordic countries, Sweden has 10the lowest investment in housing per Total investmentscapita. 0 Real estateWe foresee investment growth in 2012 -10 Private sector exclto be weaker than envisaged in the out- housing -20 Public investementlook in January, and gross fixed capitalformation is expected to grow by only -300.1% this year. In 2013, we expect total 2005 2005 2006 2007 2008 2008 2009 2010 2011 2011investment volume to pick up by 2,6%, Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Source: Statistics Swedendriven by stronger investment activity inthe private sector and a recovery in the early 2012 from 2011, and new regis- rates and slow the reduction of the un-real estate market. trants as job seekers at the public em- employment rate. Furthermore, as real ployment service are also up. A positive growth is expected at 2,1%, below po-Unemployment to increase, sign is that the number of open posi- tential, we do not expect a significantcompetitiveness a challenge tions is increasing. Partly, this is a result dent to unemployment rates.Although the labour market is losing of employers bringing forward summer- The wage-bargaining process that wassteam, it is holding up somewhat bet- season temporary jobs. The “hours initiated last year is expected to in-ter than we expected earlier in the year. worked” statistic is also holding up bet- crease cost pressures for companies,The unemployment rate in February, ter than expected, and data do not yet which could further strain competitive-seasonally adjusted, was 7.5%, which show a decline. This suggests that em- ness in Sweden. Due to quite drasticis roughly unchanged from January and ployers are not seeing an urgent need revisions of data on hours worked inDecember. On average in the first two to reduce labour input. 2010, productivity was developing sig-months of 2012, 390 000 people were Against the background of a better- nificantly more slowly in the Swedishregistered as unemployed, compared than-expected outturn in the early economy in 2010 and 2011 than waswith the 400 000 registered in the same months of 2012, and a stronger pro- earlier believed. This also implies thatperiod of 2011. However, labour market jected economic turnaround, we are unit labour costs are increasing faster.participation is trending down, suggest- revising down our unemployment fore- Thus, we expect companies to struggleing that more people are discouraged cast for 2012 and 2013; however, we harder in the export markets while pro-from looking for jobs. Also, the reforms still expect the unemployment rate to ductivity growth continues to lag behindof the sickness benefit system imply increase well into next year. The av- wage costs over the next two years.that many that were previously regis- erage unemployment rate for 2012 istered as unemployed are now leaving Although the employment rate has forecast at 7.8%, unchanged from ourthe labour force and returning to the been trending downwards since the au- January forecast, and at 7.9% in 2013,health insurance, thereby reducing the tumn of 2011, a stronger-than-expect- compared with 8.0% in the Januaryunemployment rate. ed growth recovery in the second half forecast. We do not expect the unem- of 2012 will raise employment levels.Short-term indicators suggest that the ployment rate to exceed 8% in season- However, we expect that job growthunemployment rate is set to increase ally adjusted terms during the forecast will be unevenly distributed among dif-in the immediate term. The number of period. In 2013, we expect a pickup in ferent groups in the labour market. Anotifications has more than doubled in labour demand to raise participation long period of relatively high unemploy- ment has increased structural unem-Employment rates: difference between Swedish born and foreign born, Apr2005 - Feb 2012 (percentage points) ployment, i.e., long-term unemployed 25 who have had little or no job experi- ence in recent years find it increasingly 20 more difficult to find employment. This is particularly the case for young en- 25-54 year 15 trants and for foreign-born job seekers. 55-74 year For these groups, employment rates 15-24 year dropped last year, and, with their lack 10 of experience and labour market con- 5 nections, we believe that redoubled efforts will be needed to reduce the 0 unemployment rates in these groups. Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11 Source: Statistic s For the age cohort of 25-54-year-olds, SwedenApril 24, 2012 9
  • 10. Sweden Swedbank Economic Outlookthere has been a steady increase in the tion has continued to grow in line with proved conditions implies that the sav-difference between domestic born and developments at the end of last year. ings ratio will not increase to the sameforeign born, despite the improvement extent as in our January forecast, but The financial situation of householdsof the labour market since mid-2009. instead is estimated at around 10% of has been bolstered by solid earnings,For 15-24-year-olds, the employment disposable income. In 2013, the labour but increasing interest costs and highrate varies more by season, suggest- market will strengthen further and we indebtedness underscore their continu-ing that Swedish-born youth have eas- expect household sentiments to im- ing vulnerability to shifts in asset pricesier access to temporary seasonal jobs, prove as the European situation stabi- and employment. Real disposable in-something that improves their future lizes. Together with fiscal policy sup- come rose by 3.3% in 2011, more thanwork prospects. porting household incomes through tax double compared with 2010. At the rate reductions, private consumptionHouseholds - the backbone of same time, consumption grew by 2.1% will continue to increase and the sav-growth in real terms. Not only eroding senti- ing ratio will fall to 9,8% of disposableHousehold consumption picked up rap- ments but also a decrease in house- income. Thus, we expect that house-idly in the fourth quarter of last year af- hold assets can explain the difference. hold spending will provide the largestter declining sharply in the third quarter. Overall household net financial assets contribution to growth over the next twoSeen over the whole year, however, declined as a share of disposable in- years.consumption grew by 2.1%, compared come. In particular, households’ holdingwith 3.6% in 2010. Thus, despite a of equities fell in value by about 10%, The monetary easing cycle hasstrong growth in real disposable in- while housing assets was roughly un- endedcome, households prioritised savings, changed. Using estimates from Statis- The Riksbank kept the repo rate con-which is an indication of the persist- tics Sweden (2006), this would mean a stant on April 17 at 1.50% and gaveing elevated sense of economic un- decline in nominal consumption growth fairly strong signals that there would becertainty. The savings ratio increased of about 1 percentage point, which can no more reductions, barring a signifi-to 9.7% of disposable income in 2011 partly explain why consumption grew cantly worsening of the economy. Mar-from 8.5% in 2010. In addition, credit by less than incomes last year. The ket expectations of a rate cut have de-expansion continued to decline in early impact of a housing price decrease of clined recently and the new repo will be2012, slowing the growth of household the same magnitude would be about 3 higher than we forecast in our Januaryindebtedness. Note that the statistics percentage points. report. At the same time, the Riksbankwere revised significantly downwards Against the background of a better la- is presenting a slightly worse economicfollowing the exclusion of nonprofit in- bour market than in our January fore- outlook, which leads us to believe that itstitutions serving households (NPISH). cast, with higher employment and earn- is putting more weight on financial sta-This did not, however, cause a change ings, together with stable asset prices, bility and household indebtedness.in the pattern. we revise upwards our consumption Inflationary pressures have decreased,Overall consumption continued to de- growth forecast to 1.3% for 2012 and to but with higher oil prices we expect in-velop strongly in the first couple of 2.5% in 2013. The underlying quarterly flation to start picking up. However, ac-months in 2012. Both consumer dura- growth rate for 2012 is expected to be cording to our current forecast, pricebles and nondurables picked up, while significantly higher than in our Janu- increases with fixed mortgage ratesconsumer sentiment improved from low ary forecast. The reasons are a better (CPIF) will clearly undershoot the targetlevels. Some hesitation remains, how- labour market where employment is of 2% at the end of the forecast period.ever, as registration of cars dropped by gradually increasing and a higher real At the end of 2013, headline inflation isalmost 4% in the first quarter of 2012 disposable income in combination with expected to be 2.0%, while the CPIF iscompared with same quarter in 2011. In stable asset prices and a somewhat forecast at 1.6%. Thus there is clearlyall, we estimate that private consump- better global growth outlook. The im- room for a more expansionary mon- Household balance sheet, 2005 - 2011 (% of disposable income) etary policy in the short run.450 8,0 Despite falling exports at the end of last400 7,0 year, the Swedish krona has strength- Debt350 ened since the beginning of the year, 6,0 Net assets primarily against the euro. The rela-300 5,0 tively strong performance of the Swed-250 4,0 Interest ish economy, together with the coun-200 payments; try’s growing status as a safe haven 3,0 rhs150 following the demonstration of solid 2,0 fundamentals in internal and external100 balances (budget balance and current 50 1,0 Sources: Statistic account), is likely to lead to an appre- 0 0,0 Sweden and real ciation of the krona. Against the US dol- 2005 2006 2007 2008 2009 2010 2011 estate statistics. April 24, 2012 10
  • 11. Sweden Swedbank Economic Outlooklar, we do not expect much change, but Interest rate and currency outlookthe euro will lose in value. Together with Outcome Forecastincreasing wage costs and a slowing 2012 2012 2012 2013 2013 20 Apr 30 Jun 31 Dec 30 Jun 31 Decproductivity growth, a stronger kronawill put pressure on Swedish competi- Interest rates (%)tiveness and increase the challenge of Policy rate 1.50 1.50 1.50 1.75 2.00gaining export market shares. 10-yr. gvt bond 1.80 2.10 2.60 2.90 3.10We expect the Riksbank to maintain the Exchange ratesrepo rate at 1.50% for the remainder of EUR/SEK 8.84 8.70 8.65 8.60 8.60 USD/SEK 6.68 6.80 6.87 6.94 6.85the year, before raising it twice in 2013. TCW (SEK) 1/ 121.8 120.3 119.8 119.5 119.1However, in our view, the monetary Sources: Reuters Ecowin and Swedbank.stance will dampen the economic re- 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).covery and reduce the rate of decline ofunemployment. Thus, we would argue hold tax payments, but increased con- ever, the impact on the economy willfor a continued reduction in the mon- sumer spending will underpin revenues be offset by local governments’ strivingetary policy rate and would propose from value-added taxes. Furthermore, to consolidate their balances throughdealing with financial stability issues by as labour taxation will remain under spending restraint and tax hikes.other means, primarily banking supervi- pressure, we expect local governmentssion and fiscal policy. The room for expansionary fiscal policy to increase their deficits in 2012. In the is declining, but the biggest obstacleA return to fiscal deficit complementary budget for 2012, the to the implementation of the govern-The public sector, according to pre- government presented reforms aimed ment’s policy is the weak parliamentaryliminary estimates, ran a surplus corre- at improving housing market flexibility. situation that it faces. The downwardsponding to 0.2% of GDP in 2011, which This will have a small budgetary impact revision of productivity growth lowersis an improvement over the previous in 2012, and only a limited one over the potential GDP. Together with the fairlyyear by 0.3 percentage point. While the coming years (SEK 1.6 billion). rapid GDP growth seen in the last twosurplus in the pension system (0.5% of The public sector balance for 2013 is years, this will reduce the amount ofGDP) improved the bottom line, the lo- expected to improve as growth picks up business cycle-adjusted savings. Also,cal governments continued to run defi- and unemployment starts to decrease. the seven-year rolling budget deficitcits (0.3% of GDP). Furthermore, gov- Labour market-related taxes and profit indicator points toward reduced spaceernment consumption and investments taxes are expected to increase, and for increased deficits, and the expendi-both declined as a share of GDP. The we forecast the public sector to have a ture ceilings will restrict the expansionpublic sector debt decreased by almost small surplus corresponding to 0.2% of of permanent spending to about SEK3 percentage points of GDP (according GDP. Included in the budget is an addi- 18 billion (0.5 % of 2011 GDP). How-to the Maastricht criterion) as a result of tional fiscal stimulus amounting to SEK ever, we still believe that fiscal stimulusthe surplus, positive economic growth, 15 billion, the bulk of which will be on the would be appropriate, in particular dur-and from revenues of sale of govern- expenditure side. The government has ing the current year of slowing growth.ment assets (mainly Nordea shares). already signalled that it will increase its For next year, we would endorse notThe slowdown in growth, together with efforts to bring down unemployment, only a targeted spending initiative tounfinanced reforms corresponding to and we expect targeted measures ad- reduce unemployment, but also tax0.4% of GDP, is expected to move pub- dressing the situation of youth and reforms that support growth. The chal-lic finances into deficit during 2012. A foreign born. Additional spending is lenge for the government is to developweaker labour market reduces house- also expected on infrastructure. How- reforms that can be supported by a ma- jority in the parliament.Inflation, the repurchase rate and exchange rate (index) 6,0 150 However, with the possibility of tax cuts in 2013 and 2014, there is a risk that 5,0 145 a procyclical fiscal stance will force the 4,0 140 CPI yoy Riksbank to raise policy rates faster 3,0 than planned. 135 CPIF yoy 2,0 Magnus Alvesson 130 Jörgen Kennemar 1,0 Policy rate 125 0,0 Krona (TCW, rhs)-1,0 120-2,0 115 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sources: Riksbanken, Statistics Sweden and Swedbanks forecasts. April 24, 2012 11
  • 12. Estonia Swedbank Economic OutlookEstonia: Growth prospects improveDuring 2011, the Estonian economy than the one seen during 2009-2010. Internally, the biggest risk continues toshowed strong 7.6% growth in real All in all, a global recession or stagna- be structural unemployment and theterms (during the first three quarters, tion would affect the Estonian economy lack of qualified labour – many sectorsthe average growth was approxi- through foreign demand, which, in turn, are facing difficulties in hiring new em-mately 9% but slowed considerably would reduce the need for investments ployees as not enough qualified labourduring the last quarter). Strong export and lowers job creation. This lowering is available. This means that, in thegrowth, together with recovering do- would have its impact on private con- near future, another wage rally mightmestic demand, brought along employ- sumption as well. At the same time, develop for certain occupational groupsment growth, which, in turn, increased the risks in the global markets are also (e.g., ICT sector specialists, engineers,households’ willingness to spend. In upside, which might indicate that our health care workers, etc.), as was seenaddition, solid foreign demand, despite forecast is too conservative – the bet- in the mid-2000s. In addition to thehazy outlooks for many of Estonia’s ex- ter-than-expected growth in the export skills mismatch, emigration continuesport partners, encouraged investment markets might raise foreign demand, to pose a threat to competitiveness, asgrowth. This growth, however, slowed which, together with stronger confi- during the crisis years the trend of pen-in the last quarter of 2011 as uncertain- dence, would induce the growth of in- dulum migration was on the increase.ties, already elevated for a long time, vestments (the inflow of foreign as well Those residents who continue to workforced entrepreneurs to use a wait-and- as locally available funds). abroad might eventually emigrate,see strategy in making investments. which, in a country with a decreasing In addition, Estonia’s economic devel- and ageing population, will pose a long-Growth in 2011 was a bit slower than opment is affected by the perception term risk in the form of labour shortag-we expected in January, as export of market participants about not only es. This, in turn, might affect investmentgrowth in the fourth quarter was weaker the global outlook but that for the Baltic decisions of foreign investors (e.g., re-than envisaged and GDP fell in quar- states. If the global slowdown is not fol- garding small-scale production).terly terms. Nevertheless, domestic de- lowed by a rapid increase in investors’mand, especially private consumption, perception of uncertainty and nervous- Better outlook for trade partnersshowed solid growth rates. Slowing ex- ness, the overall negative effect might supports export growthport growth was mainly caused by the be even smaller than described above. In 2011, exports of goods and servic-slowing of export sales in the machin- es grew by 24.9%, which were by and Adverse developments in the globalery and equipment sector.. large in line with our expectations. For commodity markets pose a risk forFor a small and very open economy, the the Estonian economy as well. High- 2012, we revised export growth mar-main risks continue to be external – the er-than-forecast inflation would harm ginally up to 3.1% (from 2.7%) as weslowdown of the main export partners’ the purchasing power of households, forecast a slightly better outlook for theeconomies will affect the further growth increasing the number of budget-con- main export markets. The year 2013of the Estonian economy. Neverthe- strained households; hence, private will be even better for exporting compa-less, as economic developments have consumption growth might be consider- nies, as economic activity will increaseso far been more balanced than during ably lower. even more, especially in Europe. In ad-the boom years, a recession – should it dition, in our previous outlook, we pro-occur – would be considerably smaller jected the economies of Estonia’s main export partners to slow this year, but,Key Economic Indicators, 2010 - 2013 1/ in our current view, the slowdown will 2010 2011 2012f 2013f be smaller. According to our main sce-Real GDP 2.3 7.6 2.7 4.2 nario, the economy will slow only mod-Nominal GDP, billion euro 14.3 16,0 16.9 18.1Consumer prices (average) 3.0 5.0 3.8 3.2 erately during the first half of this year.Unemployment rate, % 2/ 16.9 12.5 10.5 8.6 In 2011, the main contributor to exportReal gross monthly wage -2.0 0.5 1.6 2.0 growth was the electronics sector, viz.,Exports of goods and services (nominal) 25.5 27.4 9.2 10.3 machinery and equipment. Growth inImports of goods and services (nominal) 24.8 34.0 9.2 11.1 this sector will slow (growth rates mightBalance of goods and services, % of GDP 7.4 3.8 4.0 3.4 even turn negative in some quarters),Current account balance, % of GDP 7.2 6.7 5.9 5.5 but other sectors – e.g., the manufac-FDI inflow, % of GDP 8.1 8.0 9.9 10.8 ture of wood and wood products, theGross external debt, % of GDP 115.2 98,0 91.4 90.8General government budget balance, % of GDP 3/ 0.3 1.0 -1.8 -0.6 food industry and the metal industry –General government debt, % of GDP 6.7 6.0 7.7 10.0 will contribute more this year and theSources: Statistics Estonia, Bank of Estonia and Swedbank projections. next.1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey.3/ According to Maastricht criterion. April 24, 2012 12
  • 13. Estonia Swedbank Economic OutlookExports of goods and services will be Contributions to GDP growth 20%highly dependent on developments inthe neighbouring countries of Sweden, 15%Finland, Russia, Latvia, and Lithuania. 10%As 2011 showed, Estonian companies’ Net exportssales seemed to have been quite resil- 5% Investmentsient to the global slowdown, which might 0% Governmentindicate that their price competitiveness -5% Householdsallowed them to increase their market GDPshare in the destination markets, as -10%well as to find new markets and thus -15%avoid too high a level of concentration. -20% Source: SE,Exchange rate developments have also 2006 2007 2008 2009 2010 2011 2012f 2013f Swedbank forecastfavoured Estonian companies’ competi-tiveness. order to improve and/or enlarge their Import growth will be supported byThe share of machinery and equip- rising domestic demand, especially production processes. In addition, largement will be smaller in 2012 and going private consumption, as well as by ex- investment projects were observed inforward – overall manufacturing in the ports, because many production inputs the energy sector (renewable energy-machinery and electronics sector will are imported. Therefore, the import related projects).be growing at a modest rate. Other sec- growth rate will decelerate as well, but Compared with the January forecast,tors’ contributions will increase. The be- at a slower rate than exports, as the we revised the expectation of invest-ginning of 2012 has already witnessed share of consumer goods in imports ment growth upwards due to a morea strong development in the chemicals will increase. At the same time, we ex- favourable market, supported byand metal industry, as well as the food pect private consumption to grow less strengthening confidence as well as byindustry. Therefore, we expect exports than expected in January due to the the abolishment of local governments’to grow by 3.1% this year and 7.1% more rapid price increase; this, in turn, lending limits. We expect investmentthe next. In exports of wood and wood means that the increase in imports of to grow 11.5% this year and 7.4% theproducts, the change in selection in consumer goods might be smaller. We next. As mentioned in the previousproducts is also present – higher-value- expect imports to grow 4.6% this year outlook, the main contributor to the in-added products are being sold abroad and 8.4% the next (in real terms). All in creasing investment activity is the gov-(i.e., the share of unprocessed wood is all, this means that the trade balance ernment sector – there is an obligationdecreasing). will worsen. to invest revenues from the CO2 quotaThe growth in services exports will be The government spurs trade, as well as to use structural fundssupported by the growth in travel and investment growth as the programming period ends nextother business services. Transport In 2011, investment grew by 26.8%, year. In addition to the central govern-services (the most important branch in supported by investments in machin- ment, local authorities are expected toservices exports), on the other hand, ery and equipment. This rapid growth increase their investments, as therewill grow more slowly, as the need to rate was also supported by growing is a need to renovate publicly ownedensure trade flows is somewhat small- demand, causing many enterprises to houses like kindergartens, schools etc;er. The share of IT-related services in face their limits in capacity utilisation. the government abolished the tempo-services exports is quite small, but in- Many firms have been facing elevated rary limitations for local governments’creasing rapidly. demand already since 2010 and have on-lending this year – if their debt level incurred the need for investments in is less than 60% of their annual budget, they are not obliged to ask permissionSwedbank’s GDP Forecast – Estonia for additional lending from the MinistryChanges in volume, % 2010 20111/ 2012f1/ 2013f of Finance.Household consumption -1.7 4.2 (4.3) 2.7 (3.0) 4.2 (5.6) The contribution of the private sectorGeneral government consumption -1.1 1.6 (2.6) 1.8 (3.0) 1.7 (2.0) will increase in 2013 – we believe that,Gross fixed capital formation -9.1 26.8 (20.2) 11.5 (7.1) 7.4 (9.8) throughout most of this year, entrepre-Inventories 2/ 4.2 -0.7 (0.0) -0.8 (-1.0) 0.6 (-0.1) neurs will tend to be more cautious andExports of goods and services 22.5 24.9 (25..8) 3.1 (2.7) 7.1 (6.7) not resume their investment activityImports of goods and services 20.6 27.0 (27.0) 4.6 (2.9) 8.4 (8.9) until the end of 2012. Corporate sectorGDP 2.3 7.6 (8.0) 2.7 (2.7) 4.2 (4.0) investments will increase considerablyDomestic demand (excl. inventories) 2/ -3.4 8.1 (7.0) 4.5 (3.7) 4.4 (5.6) during the next year when the uncer-Net export 2/ 2.5 0.3 (1.0) -1.1 (0.0) -0.8 (-1.6) tainties will have substantially less-Sources: Statistics Estonia and Swedbank.1/ The figures from our forecast in January are given in brackets. ened. Public sector investments will be2/ Contribution to GDP growth more modest next year. April 24, 2012 13
  • 14. Estonia Swedbank Economic Outlook Contributions to export growth by product groupsWe expect activity in the residential 40%housing market to increase this year – otheractivity in the housing market started 30% machinery &to grow already at the end of 2011. equipment 20%At the same time, despite the rising metalsnumber of building permits, we are 10% wood productsof the opinion that the number of new chemicals & 0%construction works in 2012 will be plastics mineral productsmodest as construction prices are, ac- -10% food productscording to real estate developers, too -20%high due to the elevated investment totalactivity in the public sector. Neverthe- -30% Source: SE 2007 2008 2009 2010 2011less, we expect residential construc-tion works to increase more next year. nanced by households’ own funds; loan and cafes. The latter jobs tended to beResidential investment activity during demand will be modest, especially this more seasonal by nature – at the end ofthis year will be mainly directed to- year, as many households prefer to pay the year, employment decreased a bit.wards increasing the energy efficien- back their old loans and avoid taking on In addition to the above-mentioned sec-cy of dwellings – energy prices have new ones because they still remember tors, one of the largest increases in theincreased considerably and, accord- the hardships of the past crisis. Next number of employees was observeding to our main global scenario, we year, loan demand will grow modestly in the construction sector, where theexpect oil prices to remain elevated, as overall economic development will number of workers increased morewhich, in turn, will affect heating and encourage households to improve their than 20% on average.electricity prices. The latter will also living conditions; average square me- The unemployment rate fell to 12.5%be affected by the opening of the elec- ter per household member in Estonia in 2011 and is expected to fall furthertricity market in Estonia. The initiative is still below average in Europe (30.1 and reached 10.5% this year. Due toto increase the energy efficiency of in Estonia compared with 45.2 in Ger- the rise of job creation and somewhatapartment houses is also supported many and Austria). declining participation rate (see theby a state-owned institution (KredEx). Unemployment will continue to reasoning in previous Outlook), the un-In addition, the number of purchase- decline employment rate will fall even farthersales contracts has been increasing; Employment growth was remarkable next year, to 8.6%. Nevertheless, eventhis, however, depends on the loca- in 2011 – on average, 6.7% more peo- though developments in the labourtion and quality of the real estate. All ple were working in 2011 than in 2010 market continue to be encouraging, thein all, buyers are more demanding: (more than 38,000 people). On one problem of structural unemploymentreal estate that is still in the market hand, this rapid employment growth remains: if the young people (aged 15-but has poor infrastructure, together was supported by increasing foreign 24) remain in the labour market insteadwith a less-in-demand location, will demand, which induced an increase of studying, the skills mismatch willnot find buyers so easily and will re- in both investments and the number worsen in the medium to long run. It ismain on the market for a while. On the of employees. On the other, the large already a problem in certain sectors –other hand, there are cases in which inflow of tourists was feeding the serv- e.g., health care, ICT related, electron-apartment houses have found buyers ices sector and, therefore, created the ics, and energy. If immigration policieseven before construction has started. need for additional workers in the retail, do not change, shortages of qualifiedIt is worth noting, however, that many housing and accommodation, and rec- labour may be the main obstacle toof these purchases have been fi- reation sectors, as well as restaurants the sustainable growth of the Estonian economy.Construction sector The trend of pendulum migration con-50% 60 tinues to pose a risk to the Estonian volumes,40% 40 yoy (ls) economy, as there is a chance that30% 20 those residents employed abroad might price20% 0 index, yoy emigrate; in a country with an ageing (ls)10% confidenc and decreasing population and a lack -20 0% e, pts (rs) of qualified workers, this might be the -40-10% order main obstacle to further growth, togeth--20% -60 books, pts er with the additional pressure this mi- (rs)-30% -80 gration puts on the social system. This-40% -100 Source: SE, DG is especially true in the case of trans- 2007 2008 2009 2010 2011 2012 ECFIN portation and construction sector work- April 24, 2012 14
  • 15. Estonia Swedbank Economic Outlookers, as well as of medical staff (both uncertainty about maintaining jobs and reached 1.2% of GDP), but also by a 7%health care and veterinary). In addition, income ran high. For this year, we ex- increase in tax revenues as economicthe labour shortage might in the medi- pect consumer spending to increase growth and the labour market recov-um run spark another wage rally similar by 2.7% – a bit lower rate than was ered strongly. This year and the next,to that seen in 2006-2007; this, in turn, projected in January. The main reason however, budget deficits will resume. Inwould jeopardise the competitiveness behind such a downgrade is our expec- 2012, we forecast the deficit to reachof local producers/service providers. tation of faster inflation, due to oil price 1.8% of GDP due to several temporary developments in the world markets: factors – e.g., mandatory investmentsReal wage growth in 2011 turned the average consumer basket will be from the quota sales (total impact 1.5%positive only in the third quarter (we 3.8% more expensive in 2012 than in of GDP) and full restoration of the pen-expected an increase in purchasing 2011. Inflation will slow somewhat next sion pillar payment system. The tempo-power already by the second quarter) year, reaching a growth rate of 3.2%. rary factors’ disappearance will lessenafter almost three years of decrease; This faster inflation in 2012 will induce the deficit to 0.6% of GDP in 2013.on average, real wages grew by 0.5% households to spend less as budgetscompared with the previous year. We Major tax changes that will affect the will be even tighter and fixed costs willexpect wages to grow by 1.6% this year budget position, besides regular to- be higher. Households might even in-and 2% the next. Compared with the bacco and alcohol excise increases, crease their savings on a rational basisprevious forecast, we downgraded this include lowering the unemployment in- – expecting higher housing costs dur-year’s wage expectations as the price surance tax from 4.2% to 3% in 2013 ing the winter months, they might notincrease will not slow as much as was (which decreases the Social Security spend as freely during the spring andexpected in January. Real wage growth Fund’s surplus) and reducing the high- summer months.will be supported by an increase in la- est allowable deduction from taxablebour shortages. This is especially true In 2013, households will remain cau- income by 40% (which increases totalin the case of the construction sector – tious – we expect household spend- tax collection).real estate developers and construction ing to increase by 4.2%. In addition General government debt was meas-firms have to compete with firms in Fin- to the accelerating inflation, the other ured at a very low level – 6% of GDP – inland for construction workers, and, to factor affecting consumer spending is 2011; this will increase to 10% of GDPattract them, might have to raise wages wage growth – as mentioned above, by 2013. The main factor increasing thequite rapidly. real wage growth will be rather mod- debt level during our forecast period est during the forecast period, and notOil prices to lower households’ are the loan payments by the European all workers will be able to enjoy the in-willingness to spend Financial Stability Facility (EFSF) (3% crease in wages – wage growth will beHousehold spending showed strong of GDP), which are reflected as an in- uneven among sectors and will be ledgrowth rates already at the end of 2010, crease in the debt level; other factors by the occupations where the lack ofand, in 2011, consumer spending grew include down payments to the Europe- labour is more pronounced (e.g., ICT-by 4.2%. Strong employment growth, an Stability Mechanism (ESM), invest- related sectors, energy sector, and con-together with favourable developments ments to raise Eesti Energia’s equity struction).in the labour market, increased house- capital, the abolishment of temporaryholds’ disposable income which, in Public debt will increase from a debt ceilings for the local governments,turn, gave them more assurance about low level and partial coverage of current budgetfuture developments. This increase in The general government budget deficits. These factors will weigh on theconfidence resulted in an increase in reached a surplus for the second year public finances and might require addi-spending on durables and semi-dura- in a row in 2011, at 1% of GDP. This tional liquidity purchases, as net publicbles – purchases that had been post- was mainly supported by revenues debt is set to turn negative during theponed during the crisis years, when from CO2 quota sales (the total impact forecast period. Nevertheless, the situ- ation of the overall public finances is solid, the budget deficits are consid-Labour market indicators ered temporary (as the government is 25% 69% Employment, fully committed to restoring surpluses 20% annual growth as soon as possible), and the growth of 67% 15% Unemploym the debt is sustainable. 65% ent rate 10% 63% Gross wage, 5% annual real Annika Paabut 0% 61% growth Elina Allikalt Activity rate -5% 59% (rs) -10% 57% Source: SE, -15% 55% Swedbank 2006 2007 2008 2009 2010 2011 2012f 2013f forecast April 24, 2012 15
  • 16. Swedbank Economic OutlookLatvia: Better outlook, but caution still necessaryThe Latvian economy expanded by before). We are also raising the fore- both 2012 and 2013. At the same time,5.5% in 2011, with developments in cast for average consumer price growth if higher oil prices slow global growth,the fourth quarter a bit better than from 2.4% to 2.8% in 2012, in order to Latvia’s economic development will beexpected. The underlying drivers last account for higher-than-expected glo- more sluggish. A backlash in the euroyear remained exports and EU funds, bal oil prices in the beginning of the area is possible, especially if the situa-which boosted investments (both in year. The inflation outlook for 2013 tion worsen in Spain and Italy worsen.fixed assets and inventories) and stays unchanged for now, at 2.5%. This would hinder Latvian exports andconfidence, thereby also promoting investments, and spill over to slower The target of introducing the euro inconsumption. At the same time, since consumption growth. Lastly, while the 2014 remains on the agenda, and weexports and investments are import current EU sanctions against Bela- believe that it is still feasible. Still, ful-intensive, rapid import growth resulted rus will have only a marginal negative filling the inflation criterion has becomein a negative net exports’ contribution effect on Latvian trade, political risks more challenging.to GDP growth. The first months of remain. On the positive side, better-2012 have brought an anticipated slow- The outlook for the labour market is a than-expected global growth woulddown in industry and export growth, but tad brighter. The unemployment rate provide better opportunities for Latvianretail trade has been still surprisingly is forecast to continue retreating and exports.strong with positive sentiments. the participation rate to rise slowly. Local risks stem mainly from the labour Employment growth will be slower thanRising business and consumer con- market, where overheating pressures last year, though. The unemploymentfidence in the first quarter of this year in certain market segments may start to rate based on the current Labour Forceand, thus, a somewhat better external appear already in 2013 if policy action Survey data (to be revised accordingenvironment improve the growth pros- is not taken to reduce structural unem- to 2011 population census results) ispects for Latvia. Exporters have so far ployment and increase the participation expected to fall to under 12% in 2013been more resilient to the global slow- rate. Skills and regional mismatches, as from 15.4% in 2011.down then we presumed in our January well as emigration, could push wagesoutlook. Furthermore, we have slightly The current account deficit is antici- up more than productivity and fuel infla-revised upward the outlook for Latvia’s pated to widen gradually, but will remain tion pressures.main trading partners. Overall, we now under 3% of GDP and to be fully cov-see somewhat better opportunities for ered with EU funds and foreign direct Better export outlook, butLatvian exports and a friendlier invest- investment (FDI) inflows. growth to continue slowingment environment. Still, global growth We are revising the export outlook This is our base scenario. There are upwards for 2012 and 2013, owing tois expected to be slower this year than both positive and negative risks to it. somewhat better growth in Latvia’sin 2011 before picking up again next The main uncertainties come from main trading partners (e.g., Germanyyear. abroad. One is the global oil price, and Russia) and the increased flex-As a result, we are revising our GDP which may rise further if conflict in the ibility of Latvian exporters (e.g., in find-growth forecast to 2.5% in 2012 (2% Middle East intensifies. In such a case, ing new markets). The export marketbefore) and 3.5% in 2013 (3.2% inflation in Latvia is likely to be higher in shares of Latvian manufacturers con- tinue to rise – e.g., publishing compa-Key Economic Indicators, 2010 - 2013 1/ nies are outcompeting publishers in 2010 2011 2012f 2013f the Nordics. External competitivenessReal GDP -0.3 5.5 2.5 3.5Nominal GDP, billion euro 18.0 20.0 21.3 22.8 remains sound, even though wagesConsumer prices (average) -1.1 4.4 2.8 2.5 are rising – unit labour costs have risenUnemployment rate, % 2/ 18.7 15.4 13.6 11.9 marginally in manufacturing and con-Real net monthly wage -6.3 0.1 1.2 2.9 tinued to decline in transport and tour-Exports of goods and services (nominal) 20.3 22.5 9.5 10.9 ism in 2011. Research by the Bank ofImports of goods and services (nominal) 19.4 27.2 9.6 11.8 Latvia shows that, accounting also forBalance of goods and services, % of GDP -1.0 -3.4 -3.5 -4.2 nonprice factors (e.g., quality and com-Current account balance, % of GDP 3.0 -1.2 -1.8 -2.6 plexity of products), Latvia’s externalCurrent and capital account balance, % of GDP 4.9 0.9 -0.4 -1.1 competitiveness is stronger than theFDI inflow, % of GDP 1.6 5.5 3.5 3.9 unit labour costs suggest.Gross external debt, % of GDP 165 146 140 135General government budget balance, % of GDP 3/ -8.1 -3.5 -2.2 -1.0 Food exporters are continuing to pen-General government debt, % of GDP 44.7 42.6 41.3 38.9 etrate the Russian market, benefittingSources: CSBL, Bank of Latvia and Swedbank. also from the new Russian investors1/ Annual percentage change unless otherwise indicated. in Latvia’s industry. The political risks2/ According to labour force survey.3/ According to Maastricht criterion. April 24, 2012 16
  • 17. Latvia Swedbank Economic Outlookremain high, and the economic environ- Contribution to annual GDP growth, ppment in Russia is unpredictable (e.g., 40the ban it imposed on pigs’ imports from 30 Net exportsthe EU as of March 2012). Still, Latvian 20food manufacturers and farmers are Inventories 10taking advantage of this rapidly growing Gross fixed capital 0 form.market. Metal and machinery process- Governmenting-related companies are also expand- -10 Householdsing in the CIS. Investments made in this -20 GDP growthindustry last year are slowly starting to -30be transformed into higher output. -40At the same time, capacity constraints 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Source: CSBL.are acute in some sectors. For instance,capacity utilisation in wood manufac- drive imports. One of the large invest- revised upwards somewhat. Pessi-turing, the manufacturing of leather ment projects boosting imports is the mism in Europe has abated some-products, and base metals is already purchase of passenger trains (41 trains what and stress in financial markets ishigher than in the pre-crisis years. The costing LVL 144 million during next declining, with interbank interest ratesrailway sector is experiencing bottle- three years, which is 1% of 2012 GDP), diminishing. This could support foreignnecks of freight transit in the east-west most of which will be imports. In 2012, investments. The prospects of a betterdirection. Exporters are continuing to imports for this project are still likely situation in Germany and other impor-invest in production facilities (see the to be low, as the bulk of imports will tant export markets have improved thenext section for more details), but the be new machinery and equipment for confidence of Latvian exporters, whoeffect on output will not be immediate. Rīgas Vagonu Rūpnīca (RVR), the local plan to continue boosting their invest-The EU sanctions against Belarus will subcontractor of the Spanish supplier, ments in production facilities, takinghave a marginal negative effect on CAF. It is planned that the first trains advantage of EU funds.Latvian trade. However, risks for the fully made in Spain (6 in total) will start Contracts are still not signed for LVLfuture export outlook remain, especially arriving in the middle of 2013; in 2014- 430 million of EU funds (13% of thefor transportation by railway, which is 2015, parts of the trains and materials total for the planning period 2007-highly dependent on freight transit com- will be imported, since the production 2013), of which LVL 100 million is likelying to or from Belarus. will be gradually taken over by the RVR to be allocated for the train purchase locally. The largest boost to imports willOverall, external demand will rise project mentioned above. Only 45% of thus be in 2013-2014.slower in 2012 than in 2011, hindering total EU funds have been paid out so The goods and services trade deficit in far. The profit margins of companiesLatvian export growth. A quarter with 2012 is to remain close to that of 2011 were quite good in 2011, and, despitenegative quarterly growth of export (about 3.5% of GDP) and rise some- a strong investment rebound in 2011,volumes is possible this year, although what next year. The deficits will be fully deposits of nonfinancial institutionsoverall export volumes are anticipated covered with EU funds and FDI inflows. have continued to rise, while liabilitiesto rise by about 4.7% in the whole year. The current and capital account deficit have diminished notably. BusinessesDemand is expected to pick up in 2013, is forecast to stay close to zero in 2012 can actually start increasing leverageand, together with improved production and rise to 1.1% in 2013. to finance their investments, althoughcapacity locally, this will boost exportsby 5.6%. Better confidence supports they are still cautious about doing so.Investments, exports, and, to a smaller investments Among large public projects, the pur-extent, consumption will continue to The investment outlook has been chase of new passenger trains (see the previous section) would add onSwedbank’s GDP Forecast – Latvia average 1.5 percentage points to theChanges in volume, % 2010 2011 2012f1/ 2013f growth of gross fixed capital formationHousehold consumption 0.4 4.4 (4.4) 2.5 (1.7) 3.0 (2.7) each year in 2012-2014. There will beGeneral government consumption -9.7 1.3 (-0.9)) 2.0 (0.5) 2.3 (2.4) fewer investments in 2012 – mostlyGross fixed capital formation -12.2 24.6 (25.7) 7.8 (7.0) 8.0 (3.5) new machinery and equipment for theInventories 2/ 4.5 2.1 (0.9) -0.9 (-0.3) 0.8 (0.3) RVR (under LVL 12 million) – but thisExports of goods and services 11.5 12.6 (12.9) 4.7 (3.3) 5.6 (4.6) will pick up in 2013 when the first trainsImports of goods and services 11.5 20.7 (18.9) 4.9 (4.0) 7.5 (4.2) start arriving.GDP -0.3 5.5 (5.4) 2.5 (2.0) 3.5 (3.2) Still, investment growth in the comingDomestic demand (excl. inventories) 2/ -4.4 8.6 (8.5) 4.0 (3.0) 4.5 (3.1) years will be slower than during theNet export 2/ -0.5 -5.2 (-4.0) -0.5 (-0.7) -1.8 (-0.2) 2011 rebound. Investments in residen-Sources: CSBL and Swedbank.1/ The figures from our forecast in January are given in brackets.2/ Contribution to GDP growth April 24, 2012 17
  • 18. Latvia Swedbank Economic Outlooktial real estate will remain weak, as the half of this year (and only for part of Inflation recedes, but upwardexisting stock is large and local demand the employees). In the private sector, risks existfeeble. FDI inflows into real estate will companies are trying to balance wage Following the unexpected sharp risealso diminish (19% of total FDI inflows and productivity growth by motivating in global oil prices in the beginning ofin 2011), as the repossession of real employees with bonus systems and this year, we are revising our inflationestate through banks’ daughter asset- other benefits and are raising base outlook upwards for 2012. We expectmanagement companies will shrink. We wages only for selected employees. consumer prices to rise by 2.8% onforecast about an 8% growth of gross average (2.4% before). Elevated oil We forecast net average nominalfixed capital formation in 2012-2013. prices and a weaker euro have not wages to rise by 4% this year and 5.5%The share of gross fixed capital forma- only resulted in higher gasoline prices, next year, but there are upward riskstion will reach 25-26% of GDP in 2013, but will also feed into gas and heating to this forecast. Labour market pres-the same as in 2003-2004 (before the tariffs and later into the prices of other sures are mounting and could heat upreal estate boom started). goods and services. already in 2013. The registered unem-Labour market pressures may ployment rate in Riga is already below Still, if global oil prices do not rise higherintensify already in 2013 8% and is approaching the level where and start retreating slowly in the secondThe rebound in employment will slow wage pressure could arise. Unless half of the year (which is assumed inin 2012. Manufacturers are continuing policy action is undertaken to reduce our outlook), price pressures will recedeto optimise their production processes, structural unemployment and push dis- in the second half of 2012. Global foodand some of them are also shedding couraged persons back into the labour prices are anticipated to remain largelylabour. Not much new hiring is expected market (especially in the regions), skills stable this year. The average inflationfor the public sector. On the other hand, and regional mismatches will expand. forecast for 2013 remains unchanged,expanding production facilities requires This might again result in wage growth at 2.5%.more labour, as does a pickup in serv- exceeding productivity growth in the nearest future. Risks to the forecast come mainly fromices’ activities. abroad, i.e., oil prices. However, fromEmployment expectations in industry During the recession, labour taxes 2013 onwards, there are also localand services have grown in the begin- have been increased; the labour tax risks, as the strengthening labour mar-ning of this year. Our labour market out- wedge (the share of taxes in employ- ket may make it easier for companies tolook is a bit brighter now, with slightly ers’ labour costs) in Latvia is wider than raise prices for their products.more new job creation expected for in neighbouring countries and in the EU on average. Labour tax cuts are We consider fulfilling the Maastricht2012-2013, but it is still slower than being discussed. These would increase inflation criterion in early 2013 to belast year. Using the current Labour the purchasing power of house- feasible, but more challenging than itForce Survey data (still to be revised holds, allowing businesses to contain appeared before. First, Latvia’s infla-according to the 2011 population cen- increases in gross remuneration. How- tion outlook has worsened mainly duesus results), the unemployment rate is ever, taking into account that these cuts to higher global commodity prices, andexpected to fall gradually to under 12% could worsen the budget situation and possibly more so than in three coun-in 2013. increase inflation pressures, they are tries with the lowest inflation; thus mak-Businesses are cautious about rais- unlikely to occur in the forecast period ing it more difficult to fulfil the Maas-ing wages since they are still focusing – the earliest possible opportunity is the tricht inflation criterion. Second, due toon costs. Although wage pressures in second half of 2013, but 2014 is more the recession and the debt crisis in thethe public sector are starting to mount, likely. The size of the cuts is still uncer- euro area, the ability and willingness tothey are expected to result in actual tain as well. accept new members in the currencyincreases at the earliest in the second union is unclear. Irrespective of whether Latvia joins Manufacturing and exports (s.a.), 2007=100 the euro area, price stability must be130 60 maintained to safeguard consumer pur- Total chasing power and external competi-120 45 manufacturing tiveness. Such structural measures as110 30 strengthening competition and improv- Goods exports volumes ing energy efficiency to lessen the influ-100 15 ence of rising global oil prices are fun- 90 0 Production damental for sustainable growth. expectations for 80 -15 the months ahead, points (rs) 70 -30 60 -45 Source: CSBL, DG 2006 2007 2008 2009 2010 2011 2012 ECFIN. April 24, 2012 18
  • 19. Latvia Swedbank Economic OutlookHigher confidence fuels private Latvian HICP inflation and Maastricht criterion, %consumption 15 Maastricht criterion,We are raising the private consump- 12 Jan.2005-Mar.2012 Maastricht criteriontion forecast a bit for 2012-2013. This average (2.6%) 9year, the increase is largely due to thesurprisingly strong consumer optimism 6 Annual inflation (forecast fromand retail trade growth early in the year. 3 Apr.2012)Next year, stronger exports are antici- 0 12 month averagepated to spill over into higher confi- annual inflationdence and, thus, consumption. -3 (forecast from -6 Apr.2012)Household consumption in 2011 rose 2009 2010 2011 2012 2013swifter than the total wage and pension Source: Eurostat,bill, and the same is expected for 2012.Wealthier households, which contribute loans will not be able to compensate We anticipate government spendingsignificantly to overall private consump- for the amortisation of the boom-years’ to pick up next year, when the budgettion growth, often earn capital income. credit stock. situation allows for it. The budget defi-The good business profitability last cit is forecast to continue declining inyear encouraged wealthier consumers Be careful with budget line with the new fiscal rules adoptedto spend more. Net transfers by private spending! in the EU. We thus expect the authori-persons to Latvia (including also emi- The government budget situation is ties to comfortably meet the Maastrichtgrant remittances) amounted to about better than anticipated. Tax revenues budget deficit criterion.4% of GDP in 2010-2011 (about 6% of exceeded the plan by about 10% in theprivate consumption). Another factor first quarter; they were 17% higher than Although active discussions on reformsthat might have supported consumption a year ago, since economic activity in in education, health care, the socialis tax evasion. the beginning of the year was still quite security system, tax policy, and regional strong. In the first quarter, the central policy are continuing, so far little hasHousehold savings rates declined in been done. It is vital to keep going and government budget deficit was about2011, but there are indications that increase the speed of reform imple- 0.9% of annual forecast GDP (1.6% alower- and medium-income households mentation to exploit the current window year ago).started increasing their savings in early of opportunities (municipalities’ elec-2012. This behaviour is appreciated for Spending pressures are increasing, tions are scheduled for the summer ofreasons of prudence. Total household but the government should be very 2013 and parliamentary elections fordeposits remain largely stable, though, careful with increasing expenditures, the autumn of 2014).since wealthier households are shrink- especially taking into account the wideing their deposits, most likely shifting range of risks to the economic out- We urge the authorities to look at theseto more profitable asset classes (given look. We believe that this year it will reforms through the prism of the labourthe current historically low deposit inter- still be possible to contain spending market – to reduce overheating pres-est rates). pressures, and the budget deficit will sures, structural unemployment should be marginally above 2%. We revised be lowered, the participation rate raised,Households have reduced their debt and regional imbalances addressed. the government consumption forecastburden (credit stock has declined and for 2012 upwards, though, because ofinterest rates have fallen), and new the higher-than-expected outcome forlending is growing slowly. Still, the Lija Strašuna 2011.deleveraging of households will con- Mārtiņš Kazākstinue over the forecast horizon, as new Dainis Stikuts Annual growth of retail trade and wage bill, consumer confidence 60 0 Food sales, % 40 -15 20 Non-food sales (excl. fuel and motor 0 vehicles), % -30 -20 Real wage bill, % -40 -45 Consuner confidence, -60 points (rs) -80 -60 2007 2008 2009 2010 2011 2012 Source: Eurostat. April 24, 2012 19
  • 20. Swedbank Economic OutlookLithuania: Rosy developments stained with oilThe tension and concerns at the end of GDP) and made up almost one-fifth region were to be disrupted and causeof 2011 have taken their toll on the of household disposable income. a further increase in the oil price, thiseconomy, which expanded by 5.9%, Developments at the beginning of this would have painful direct and indirectslightly less than we forecast. Annual year were in line with our January fore- effects on the Lithuanian economy.growth in the final quarter of last year casts; thus, we keep our growth fore- The Lithuanian government nearly col-slowed sharply to 4.4%. However, cast for this year unchanged. However, lapsed (or so it seemed) at the begin-the only reason for this slowdown the economy is expected to grow faster ning of this year, and there were callswas a severe contraction in invento- in 2013 – at 4.3%. As the global econo- for early elections. However, despiteries – gross capital formation in the my and main Lithuanian export markets the real tensions between membersfinal quarter was 13.5% lower than are expected to grow faster next year, of the coalition, we believe that thisa year ago, although growth in gross so will Lithuanian exports. However, government will continue working un-fixed capital formation accelerated to the main drivers of growth will remain til parliamentary elections in October.10.4%. At current prices, inventories household consumption and invest- The number of politicians’ propositionsin the final quarter contracted by al- ments, which are expected to increase related to tax cuts and spending is in-most LTL 1.2 billion, or 4.2% of GDP somewhat faster than previous fore- creasing and will probably continue toin that quarter. Similar trends were ob- cast, by 3.7% and 10.0%, respectively. do so. However, the biggest risk is re-served at the onset of the global finan- We also raise our forecast for inflation lated not to the decisions taken beforecial crisis and deep recession at the this year to 2.8%, up from 2.5%. This the October elections, but to the com-end of 2008 – companies, wary of a is mainly due to frothy oil markets, but position of the incoming governmentpossible contraction in domestic and some domestic factors play a role as and its willingness to continue fiscalforeign demand, cut the production well. austerity and long-term economic poli-and stocks of final and intermediate Internal and external risks cy, especially related to energy projectsgoods. (the nuclear power plant and liquefied The external risk related to the euroHouseholds, however, shrugged off natural gas terminal). area debt crisis has subsided. Al-the negative sentiment, and, in the though Europe, especially the periph- Admittedly, there are tangible positivefourth quarter of 2011, annual con- ery, remains in the grips of recession, risks to our forecasts this year – con-sumption growth was 8.1%, almost the probability of chaotic defaults and sumers can become less cautious andtwo times faster than in the previ- break-up is lower. Admittedly, the risk lower their savings rate, whereas com-ous quarter. Consumer resilience related to worse developments in It- panies may emerge from a three-year-was supported by rapidly declining aly and, especially, Spain can further long lethargy and increase their invest-unemployment, which dropped to worsen European woes and, in turn, ments at a faster pace (as they have13.9%, and by healthy growth in real Lithuanian prospects for export-driven the means to do so).net wages, which were 2.1% higher growth. A more immediate risk is re-than in the previous quarter. Further- Exports are likely to shift lated to tensions in the Middle East andmore, emigrant remittances last year eastwards somewhat the dangerously high oil price. If sup-reached a record LTL 4.8 billion (4.6% Lithuanian export volumes of goods and ply from Iran and other countries in the services increased by 13.7% last yearKey Economic Indicators, 2010 - 2013 1/ and exceeded their previous peak by 2010 2011 2012f 2013f 13%. As imports started growing muchReal GDP 1.4 5.9 3.3 4.3 slower than exports in the second halfNominal GDP, billion euro 27.5 30.7 32.2 34.6 of last year, the foreign trade deficit wasConsumer prices (average) 1.3 4.1 2.8 2.5 only 1.3% of GDP in 2011, below ourUnemployment rate, % 2/ 17.8 15.4 13.0 11.0 forecast of 3.0%. This, at least partially,Real net monthly wage -4.3 -2.0 1.4 2.0 was caused by the above-mentionedExports of goods and services (nominal) 29.8 27.5 10.0 8.0 decision to cut inventories.Imports of goods and services (nominal) 28.9 27.6 10.8 8.0Balance of goods and services, % of GDP -1.1 -1.3 -2.0 -2.0 Although the recession in the euroCurrent account balance, % of GDP 1.5 -1.6 -2.5 -2.7 area is worsening Lithuanian exportCurrent and capital account balance, % of GDP 4.2 0.9 0.5 -0.7 perspectives in that region, the weakerNet FDI, % of GDP 2.1 2.8 4.0 4.0 euro has pushed the Lithuanian realGross external debt, % of GDP 87.4 80.8 79.5 76.5 effective exchange rate downwards inGeneral government budget balance, % of GDP 3/ -7.2 -5.5 -3.0 -2.0 recent months. Both the Polish zlotyGeneral government debt, % of GDP 38.0 38.5 40.0 39.0 and the Russian rouble have appreci-Sources: LCD, Bank of Lithuania and Swedbank.1/ Annual percentage change unless otherwise indicated. ated some 8 percent versus the euro2/ According to labour force survey. since the beginning of this year. As this3/ According to Maastricht criterion. April 24, 2012 20
  • 21. Lithuania Swedbank Economic Outlookimproves Lithuanian manufacturers’ GDP dynamics by expenditures, %competitiveness in these countries, it is 50%likely that exports will grow, mainly to 40% Growth from trough 30% to 4Q 2011neighbouring and CIS countries. 20% 10% Contraction fromThe Belarusian rouble lost around two- 13% peak to trough 0%thirds of its value last year, but only -10% -5% -6% Current positionaround 1% of exports of Lithuanian -20% -7% from the peak to 4Q -30% -15%origin are sold in this country. Despite 2011 -40% -31%massive devaluations, exports of goods -50%of Lithuanian origin to Belarus were -60% GDP Households Government Investment Exports Imports Source: Statisticsstable throughout last year and trended consumption consumption (excl. Lithuania, inventories)downwards only during the first twomonths of this year. If the EU decided still below the 1997 level of 13.5% and EUR 3.4 billion has been paid out. Theto impose stricter sanctions on Bela- almost two times below the pre-crisis total allocated amount for the periodrus, the transport sector would sustain peak of 23.5% in 2007. Admittedly, in- from 2007 until 2013 amounts to EURa severe blow – last year, out of 36.6 vestments in pre-crisis years were driv- 7.4 billion. This means that the majoritymillion tonnes transported through the en by the real estate sector, but the ac- of the funds will be paid out this yearKlaipeda port, 11.5 million tonnes, or quisition of equipment, machinery, and and the next, and will remain important31.4%, were Belarus transit goods. The transport vehicles also stagnated dur- source of investments. Furthermore,Lithuanian Confederation of Industrial- ing the past three years and made up until the end of 2013, companies canists calculate that the shutdown of all on average only 4.0% of GDP. This is still benefit from investments in techno-trade with Belarus would cause LTL 2.5 an all-time low and more than two times logical renewal, which can lower tax-billion (2.3% of GDP) in losses to the lower than the 8.5% recorded in 2007. able profit by up to 50%.transport and storage sectors. Howev-er, we do not think that such a scenario We expect gross fixed capital formation Improvements in the labouris very likely. to continue growing rapidly in 2013 and market to continue increase by 10.0%, slightly faster than Unemployment declined slightly fast-Low investments to recover in our January forecast. The slowdown er than anticipated and, at the end ofstrongly in investments must have been tempo- last year, was below 14% for the firstAnnual growth of gross fixed capital rary and caused by jitters in the euro time since mid-2009. However, this isformation slowed to 9.2% in the second area. As we have argued before, com- still well above the comfort zone. Un-half of last year, but we expect it to ac- panies have multiple funding sources of employment is expected to declinecelerate somewhat and grow by 11.0% investments. Last year, corporate prof- to 12.5% at the end of this year andthis year. Although capacity utilisation its before tax reached LTL 12.7 billion, 10.1% at the end of 2013, slightly lowerhas been hovering around 70% for the 20.2% above the 2010 level, although than we forecast before.past year and remains below its optimal they remain below the pre-crisis highs.level and pre-crisis average of 75%, Outstanding loans to nonfinancial cor- Registered unemployment has edgeda more rapid growth in investments is porations stopped contracting and are up at the beginning of this year – thereoverdue. expected to start increasing again this were 244,000 unemployed registered year. at the Labour Exchange at the end ofInvestments in fixed assets picked up March. However, employers recentlyfrom the bottom last year, when they Currently, already-signed contracts became more active and registeredincreased by 21.6%. However, as a for funding from EU structural funds 19,300 new vacant jobs during March,percentage of GDP (13.2%) they are amount to EUR 6.0 billion, of which only 44.3% more than in February.Swedbank’s GDP Forecast – Lithuania A return to the natural level of unem- ployment of around 6% is still beyondChanges in volume, % 2010 2011 2012f 1/ 2013f our forecasting period. Before the cri-Household consumption -4.9 6.1 (5.5) 3.5 (3.0) 3.7 (3.5) sis, 30% of all the jobs were in the man-General government consumption -3.3 0.4 (1.7) -3.0 (-3.0) 1.0 (1.0) ufacturing and construction sectors; atGross fixed capital formation 1.0 17.1 (20.0) 11.0 (11.0) 10.0 (8.0) the end of last year, there were 142,600Inventories 2/ 4.9 -1.9 (0.4) 0.0 (-0.2) 0.0 (0.0) fewer jobs in these two sectors. If man-Exports of goods and services 17.4 13.7 (14.0) 4.0 (4.0) 5.0 (4.8) ufacturing and construction recoveredImports of goods and services 17.3 12.7 (15.2) 4.8 (4.2) 5.5 (5.0) all lost jobs, unemployment would dropGDP 1.4 5.9 (6.3) 3.3 (3.3) 4.3 (4.0)Domestic demand (excl. inventories) 2/ -3.7 8.5 (6.6) 3.4 (3.6) 4.5 (4.2) to some 5%. However, we forecast thatNet export 2/ 0.2 -0.7 (-0.7) -0.1 (-0.1) -0.2 (-0.2) only 29,000 jobs will be created in allSources: CSBL and Swedbank. the sectors this year.1/ The figures from our forecast in January are given in brackets.2/ Contribution to GDP growth April 24, 2012 21
  • 22. Lithuania Swedbank Economic OutlookNominal wages will increase by 4.3% Growth of capital goods import, production capacity utilization level and loans to non-financial corporationsthis year, considerably faster than last 120 80year’s 2.6% rate. Since nominal wage 100growth will outpace inflation this year 80 75 Capital goods, yoy (ls)and the next, real net wage growth will 60be positive for the first time since 2008 40 70 20 Loans to non-financialand will increase by 1.4% and 2.0% this corporations, yoy (ls) 0 65year and the next, respectively. Com- -20 Capacity utilization (rs)petitiveness will not be lost, as labour -40 60productivity during the same period -60is expected to increase by 1.2% and -80 55 2007 2008 2009 2010 2011 20122.5%. Source: Statistics Lithuania, Bank of LithuaniaHousehold consumption willgrow at a sustainable rate for savings. We do not expect the sav- and larger excise duties on tobacco allRetail trade has been relatively un- ings rate, which is already well below have contributed significantly towardsscathed by the falling consumer con- the EU average, to decline further, let higher inflation at the beginning of thisfidence – annual growth increased alone turn negative, like it did in 2007 year. In January, we were forecast-throughout last year and eased only in and 2008. ing the oil price to ease and averageFebruary this year, when it was 7.3% US$102 per barrel in 2012. However,higher than a year ago. Although con- As the real growth of wages and de- continued tensions and supply disrup-sumer confidence has recovered some- cline in unemployment are expected tions in the Middle East have pushedwhat, we expect annual retail trade to remain modest, there are few other the oil price towards US$125 early thisgrowth to trend down towards 5%. sources of household consumption year. We now forecast that the aver- growth. During the past three years,Brighter developments in the labour age annual price of Brent oil will be households have undergone a delever-market and ebbing concerns about the US$119.5 this year and US$113.5 in aging process and reduced their debteuro area breakup will have a positive 2013. Furthermore, we forecast a slow- from LTL 30 billion at the end of 2008 toimpact on consumer confidence and er decline in global food prices – they LTL 26 billion. At 23.4% of GDP, Lithua-domestic demand; thus, we increased are expected to fall by 8.4% this year, nian household debt is among theour household consumption growth compared with our previous forecast of lowest in the EU, and there is room toforecast this year and in 2013 to 3.5% a 12.2% decline. The weakening euro stimulate growth with credit. However,and 3.7%, respectively. Consumption is creating additional inflationary pres- as consumers remain wary and bankswill grow in line with the real wage bill, sure. are embracing a more sustainablewhich is expected to increase by 3.6% model of growth, one should not expect We are increasing our forecast of in-and 3.7%, respectively. The household that household credit will grow by 80% flation this year to 2.8%, up from ourconsumption growth is markedly lower a year, as it did, on average, between January forecast of 2.5%. Price growththan that in 2011, when it expanded 2004 and 2008. is still lower than last year’s 4.1%, butby 6.1%, despite the stagnating wage this may not be enough to meet thebill, which increased only by 0.5% (in Oil dampens the prospects of Maastricht criterion of the three lowestreal terms). But households were rela- euro adoption inflation rates in the EU plus 1.5 per-tively happy last year and put aside a The higher-than-anticipated price of oil, centage points. Currently, the thresholdmuch smaller fraction of their income more expensive electricity and heating, is at 3.1% but is likely to decline during the year. Consumer confidence index and consumption As the oil price is expected to ease 30 60 somewhat in 2013, so is inflation in 20 40 Lithuania – we have lowered our fore- Household consumption, yoy % cast of consumer price growth to 2.5% 10 20 next year. This means that Lithuania is Retail trade (excl. a lot less likely to meet the Maastricht 0 0 motor vehicles), yoy % inflation criterion this year; however it seems that, considering the lower in- -10 -20 Consumer confidence flation and smaller budget deficit, the (rs) -20 -40 odds are good of meeting the criteria next year and adopting the euro at the -30 -60 Source: Statistics beginning of 2015. However, uncertain- 2006 2007 2008 2009 2010 2011 2012 Lithuania ty related to price developments and Europe’s readiness remains. April 24, 2012 22
  • 23. Lithuania Swedbank Economic OutlookPublic finances are less Consumer and Producer Pricesstrained, but risks remain 15% 2.5% Monthly inflation (rs) 12% 2.0%This year’s government budget is 9% 1.5%based on an assumption of GDP 6% 1.0%growth of 2.5% and average annual Average annual inflation 3% 0.5% (ls)inflation of 2.7% – below our forecast 0% 0.0%of, respectively, 3.3% and 2.8%. Thus, -3% -0.5% Prices of industrialalthough fears were expressed during -6% -1.0% production for Lithuanianconfirmation of the budget, it is very market, yoy (ls) -9% -1.5%likely that there will be no need to revise -12% -2.0%the budget in the middle of this year. -15% -2.5% 2009 2010 2011 2012f 2013fThis is also confirmed by state budget Source: Statistics Lithuaniarevenues during the first quarter, whichwere well above the revenues duringthe same period last year and 3.6% government revenues by LTL 100 mil- and will enable the government to bal-above the plan. lion (about 0.1% GDP), whereas a re- ance the budget in 2014. However, we duction in the VAT on all food products think that the pre-election promises willHowever, we still forecast that the gov- could amount to government losses of prevent this dream from coming true.ernment budget deficit will be close to up to LTL 1 billion (about 0.9% of GDP).3% of GDP this year, not lower as sug- There is another risk that could sig-gested by the currently positive trends We think that this government will sur- nificantly spoil public finances in thein government revenues. The reason vive until the elections in October of coming years. After the bankruptcybeing is that, as parliamentary elec- this year and will be, despite its huge of the Snoras bank, the governmenttions approach, more and more propo- unpopularity, the longest-serving gov- gave a six-year loan of LTL 3.3 billionsitions related to tax cuts and additional ernment since Lithuania regained in- (EUR 0.96 billion, or 3% of this year’sgovernment spending will emerge. For dependence in 1990. As we forecast in GDP) to the Deposit and Investmentexample, as oil and fuel prices at gas our January Swedbank Economic Out- Insurance Fund to help meet its obli-stations reached all-time highs, some look, it is likely that the government will gations to the depositors (some of theparliament members proposed to cut decide to increase the minimum month- debt was already repaid, current out-the excise duty on fuel to the minimum ly wage this summer by 12.5%, to LTL standing Fund’s debt amounts to LTLlevel allowed by the EU (the duty is cur- 900 (EUR 261) and perhaps make 2.4 billion). In theory, this sum shouldrently some 20% above that level). other popular and demand-stimulating be recovered after Snoras’ assets are decisions. Thus, we think the economy liquidated; however, creditors of Sno-Other politicians are proposing to ap- will grow somewhat faster in the sec- ras are seeking to dispute the fund’sply a reduced value-added tax (VAT) ond half of this year. However, the gov- priority rights at the constitutional court.to food products. However, although ernment retains a strong determination If the court rules in their favour, Lithua-we think that lower taxes might stimu- to meet the Maastricht criteria this year nia may have to count this loan as anlate domestic demand and possibly and have a budget deficit at or below expenditure and face a one-off spike inreduce smuggling, we do not believe 3% of GDP. public deficit.that such propositions are timely, sincethe above-mentioned tax cuts would Public finances are set to improve nextundermine government revenues and year, when the budget deficit is expect- Nerijus Mačiulissignificantly worsen public finances. ed to decline to 2% of GDP. Overall, Lina VrubliauskienėA cut in the excise duty would lower current economic trends are favourable Vaiva ŠečkutėState budget revenues in 1Q 2012, m LTL 146.74200 1503600 140 2012 actual3000 130 2012 plan2400 120 106.1 2011 actual1800 103.6 102.8 110 97.0 Plan execution, % (rs)1200 100 600 90 0 80 Budget (EU VAT PIT Excise duties Profit tax support excluded) Source: Ministry of Finance April 24, 2012 23
  • 24. Swedbank Economic OutlookEconomic Research DepartmentSweden Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se Group Chief Economist Chief Economist, Sweden Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se Head of Economic Forecasting Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se Senior Economist Anna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.se AssistentEstonia Annika Paabut +372 888 5440 annika.paabut@swedbank.ee Chief Economist, Estonia Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee Senior EconomistLatvia Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv Deputy Group Chief Economist Chief Economist, Latvia Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv Senior Economist Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv Senior EconomistLithuania Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt Chief Economist, Lithuania Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt Senior Economist Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt Senior EconomistApril 24, 2012 24
  • 25. 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 24, 2012 25