Swedbank Economic Outlook August 2011


Published on

Swedbank analyses theSwedish and Baltic Economies.

Published in: Economy & Finance, Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Swedbank Economic Outlook August 2011

  1. 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies August 23, 2011Global headwinds pose policy challenges Global development • Since our spring forecast, economic growth in the US and the Eurozone has Table of Content: slowed. Financial turbulence has increased, and confidence is falling. We have revised global GDP-growth for 2011 to 3.8% from 4.1%, and foresee it to remain just below 4% 2012-2013. Introduction: Global instability • As uncertainties are high, our main scenario has 60% probability, while the – our main forecast risk 2 risk for a worse scenario with a new global recession is 30%. For growth to return to 5%, we need stronger political confidence, thus the probability of a Global: The global recovery better scenario is just 10%. slows 4 Sweden • Economic growth continued to be strong in the first half of 2011, but we are seeing a significant slowdown for the remainder of the year. Exports will be Sweden: Focus on economic affected by a slowing of global growth, and falling confidence of households policy 7 and companies will limit consumption and investment growth. • We revise the growth rate downwards for 2012 to 2.2%, and, for 2013, we Estonia: Domestic demand expect growth to reach 2.3%. The current economic situation presents a supports growth 12 policy challenge, and we expect monetary policy to scale back rate increas- es, but fiscal policy to become too tight. Thus, targeted, timely, and tempo- rary actions will be required to push unemployment down. Latvia: Growth to continue Estonia amidst global slowdown 16 • The Estonian economy grew strongly in the first half of this year due to a stronger-than-expected recovery of domestic demand and solid export Lithuania: A more balanced growth. Export growth is expected to slow during the second half of this year, while domestic demand strengthens further. economy meets headwinds 20 • Despite slowing global economic growth, Estonia is estimated to grow by 4.2% in 2012 and by 4.0% in 2013, fostered by domestic demand. Invest- ment growth is supported by growth in industry, EU funds, and environment- related investments. Increasing employment and growing wages will sup- port private consumption. Latvia • Economic growth picked up strongly in the second quarter of 2011, and was broad based. On the back of good data for the first half of the year, we are raising the annual GDP growth forecast to 4.2%. • With the global outlook now weaker, we are cutting the 2012 growth fore- cast to 3.5% and anticipate 3.9% growth in 2013. Growth will remain export and investment driven. Euro entry in 2014 remains part of our main sce- nario, but policy action is needed. Lithuania • The Lithuanian economy grew by a healthy 6.5% in the first half of this year, but growth is likely to decelerate in the second half of 2011 and 2012. Investments and household consumption both were important factors of growth. Consumer prices increased faster than we forecast. • We still expect the economy to grow by 4.7% next year and by 4.5% in 2013. Export and investment growth will fall back, but household spending is set to increase more rapidly. Slower global growth poses challenges in meeting the Maastricht criteria next year, but euro adoption is still part of our main scenario. August 23, 2011 1
  2. 2. Introduction Swedbank Economic OutlookGlobal instability – our main forecast riskThe economic situation in Sweden and are already low and fiscal stimulus is sees global growth returning to lastthe Baltic countries has been more turning into austerity. The recipe for year’s rate of 5%. This scenario ispositive than in most other advanced politicians is to create more confidence made possible as greater trust in theeconomies over the last year. The by agreeing on medium-term fiscal political process spurs investment andBaltic countries have successfully plans, and to carry out structural recruitment, which, in turn, reducesmanaged to return to growth after a reforms to boost the growth potential. uncertainties about the future.severe recession, and confidence As many of the important forecast In our main scenario, the US keepsis improving. Sweden is back to the parameters change daily, we realise its Fed funds rate at 0.25% until theGDP level seen before the financial that uncertainties are high at the second half of 2013. The ECB raisescrisis and, after a forceful bounceback, moment. We therefore need to rates at a slower pace beginning inis heading for trend growth. describe the world economy by setting the second half of 2012 after a pause,Government debt levels are low, up a main, a worse, and a better while the Bank of England holds offbudgets are already balanced or on scenario. on its first hike until 2013. The inflationtheir way to becoming balanced, and outlook becomes friendlier, keepingunemployment is falling, albeit slowly. Our main scenario has a global annual monetary policy more expansionary asAfter higher-than-expected growth was growth rate of 3.5-4% 2011-2013 and fiscal retraction starts to kick in. Theseen during the first half of the year, can best be described as a “muddling- US dollar is assumed to appreciateGDP forecasts have been revised through scenario,” both in terms of the against the euro, but slower than weupwards for 2011, to 4.3% and 4.2% economy and the political process. assumed in the spring. Commodityin Sweden and in Latvia, and to 6.3% This scenario comes with a probability prices will start to fall, with an averageand 6.7% in Lithuania and in Estonia, of 60% and growth has been revised oil price for the second half of 2011 atrespectively. downwards from our spring forecast $107 per barrel and a continued drop by 0.3 percentage point per year, dueHowever, global risks could markedly to $97 and $94 in 2012 and 2013. to slower demand in the US and in theworsen the Swedish and Baltic outlook Also, industrial materials and food euro zone. A worse scenario, wherefor 2012 and 2013. Already in the prices are set to fall from their high global growth falls below 2%, comesspring we warned that headwinds levels, in line with a lower growth in with a probability of 30%. This scenariowere picking up. Since then, risks demand and a better supply than last envisages a new global recession andfor a new global recession, financial year. more financial turbulence as debt ininstability, and more severe effects of Italy, Spain, and even France cause Lower commodity prices meanthe debt crises in the US and Europe instability on financial markets. We lower inflation especially in thehave increased. On the other hand, believe emerging markets will be able Baltic countries, where food andinflationary risks through escalating to counteract such a global slowdown energy make up a larger share ofcommodity prices have decreased. somewhat, albeit not to the extent the consumer price index (CPI). AtThere is – for economic and, not as during 2008-2009 because of the same time, slower growth in theleast, political reasons – less leeway their overheating problems. A better advanced economies will reduceto counteract a new recession if it scenario, with a probability of 10%, export demand, with the risk of awere to occur, as policy interest rates weaker domestic demand. GDPMacro economic indicators, 2010- 2013 growth in all four economies has been 2010 2011f 2012f 2013f revised downwards for 2012 in terms Real GDP growth, annual change in % Sweden (calender adjusted) 5.4 4.3 2.2 2.3 of quarterly growth, but, as 2011 Estonia 3.1 6.7 4.2 4.0 growth has been revised upwards, Latvia -0.3 4.2 3.5 3.9 the annual rates will stay about the Lithuania 1.3 6.3 4.7 4.5 Unemployment rate, % of labour force same, or be just mildly reduced. In Sweden 8.4 7.5 7.2 6.9 2012, GDP growth will fall to 2.2% in Estonia 16.9 13.2 12.4 11.6 Sweden, and to 4.4% in Estonia, 3.5% Latvia 18.7 15.9 13.9 11.8 Lithuania 17.8 15.5 13.0 10.5 in Latvia, and 4.7% in Lithuania. With Consumer price index, annual change in % low external demand lingering in 2013, Sweden 1.2 3.1 2.3 2.4 the outlook for that year will not be Estonia 3.0 4.8 2.7 2.5 very different from that for 2012. Latvia -1.1 4.5 2.4 2.5 Lithuania 1.3 4.0 2.5 3.0 Sweden’s GDP increased by 5.4% last Current account, % of GDP year. The bounceback was strong and Sweden 6.1 7.3 7.2 6.7 Estonia (incl. capital account) 6.3 6.8 3.0 2.2 continued into the first half of 2011, Latvia 3.6 1.5 -0.1 -2.1 leading to a projected GDP growth of Lithuania 1.8 -1.6 -2.5 -2.7 Sources: National statistics authorities and Swedbank. August 23, 2011 2
  3. 3. Introduction Swedbank Economic Outlook4.3% this year. The economy is now bounceback, in line with weaker global there are considerable risks for thecoming back to more normal growth demand. As imports pick up even euro introduction, such as holdingrates of some 2-2.5% during 2012 further, the trade surplus will decrease. back inflation while cutting the deficit.and 2013. The discussion of Sweden Unemployment will fall to 11.6% in In a worse global scenario, it mayas a “tiger economy” is thus fading. 2013, but, as activity rates are also become more difficult to cut the deficitStill, economic policy supports growth, higher, the speed of improvement but easier to fulfil the inflation criterionand, in a worse scenario, stimulus will slow. The problem of long-term due to lower commodity prices. Even ifcould be enhanced. In our main unemployment will remain, and the there is a political determination to fulfilscenario, export growth falls below 5% shortage of skilled workers in certain the criteria, challenges will increase.in 2012 due to slower demand and sectors will tend to increase wage The general elections in Septembera stronger krona, while investment growth. With inflation this year close raise uncertainties with regard to thegrowth stays rather high, although to 5%, households’ real incomes budget and the structural reforms. Thelosing speed as global growth slows. have grown slower, but as inflation unemployment rate is falling, and weThe labour market will improve, but falls to 2.5-3% real wage growth foresee it at 11.8% in 2013, thus slowlynot as fast as previously envisaged increases, households are in for better improving the situation of households.due to weaker demand and structural times. Thus, private consumption It is important that the wage bill notunemployment. The Riksbank will growth will remain on the high side. increase too fast at this early stage ofpause in its hiking of the policy rate in One risk is that wage growth will be the recovery, as this would endangerthe autumn and will revise downwards higher than productivity growth, and competitiveness going forward.its interest path, which will stay at 2% that inflation will stay higher than in Lithuania’s growth also exceeded ourat the end of 2011, before rising to competing markets, thus reducing expectations in the first half of the2.75% and 3% at the end of 2012 and competitiveness. The government will year, mainly due to a better investment2013, respectively. The government continue with its prudent fiscal policy, performance. Households havewill postpone implementation of the and Estonia’s debt-to-GDP ratio will picked up their demand faster thanfifth earned income tax credit, as it remain among the lowest in the world. envisaged. Thus, we are revising GDPlacks a majority in the parliament Although Latvia has grown slower growth for 2011 upwards from 4.2%and concerns about the economy is than Estonia and Lithuania during to 6.3%. Together with better lendinggrowing. It will thus avoid making a the recovery, in the second quarter conditions and lower unemploymentpermanent tax reduction in uncertain growth accelerated. We are revising – a 10.5% rate is foreseen for 2013times and maintain focus on political GDP growth for 2011 upwards from – the lower inflation forecast willstability. 4% to 4.2% on the back of stronger- strengthen the position of households.Estonia’s recovery surprised on the than-expected data for the first half Also, government policy will becomeupside in the first half of 2011; thus, of the year, even though weaker expansionary approaching thewe are revising GDP-growth upwards growth is now expected in the second parliamentary elections at the end offrom 4.5% in our spring forecast to half. We are reducing the forecast 2012. During 2012- 2013, GDP will6.7%. Exports remain the biggest for 2012 to 3.5% (3.9% before), as grow by 4.5% or just above. In a worsecontributor to growth, but investments export and investment growth will global scenario, it would be harderwill complement exports as a growth decelerate, owing to slowing global to fulfil the Maastricht criteria. Evenengine. Households have picked up demand. The euro introduction in 2014 under the main scenario, the upcomingtheir demand more than expected is still included in our main scenario, elections may prevent fulfilment ofso far this year. Going forward, therefore lifting growth for 2013 (3.9%) the criterion of a deficit of 3% of GDP.export growth is set to slow after the due to confidence effects. However, There is thus a risk that the euro adoption will have to be postponed, and in order to fulfil the goal, budgetUnemployment rates (% of labour force) 22.5 consolidation needs to stay on track. 20.0 The world economy may be off track in its efforts to reach sustainable growth. 17.5 This means negative risks for our Estonia 15.0 open and export-dependent countries. Lithuania 12.5 Now is the time to ensure that we can Sweden Latvia face global instability, by remaining 10.0 prudent on fiscal policy, continuing 7.5 with structural reforms, and striving 5.0 for political responsibility across party lines. 2.5 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Cecilia Hermansson Source: Ecowin. August 23, 2011 3
  4. 4. Global Swedbank Economic OutlookThe global recovery slowsSince our spring forecast, economic Uncertain times – three tools are almost exhausted, as policydevelopments have disappointed. The scenarios are needed interest rates already are low, newrecovery has slowed in the US, Japan, The timing of our autumn forecast is quantitative easing – if used – areand crisis-struck countries in Europe, by no means optimal, as forecasting not as effective as before, and fiscalsuch as the UK and Portugal, Italy, parameters such as asset prices, policy moves into a period of austerity.Ireland, Greece, and Spain (PIIGS). currencies, commodity prices, and Volatility on the financial marketsEmerging markets and Northern interest rates are changing daily will continue on the high side. TheEurope have kept up relatively well. without a clear trend. In addition, politicians’ response to the debt crisesHowever, purchasing managers’ the world economy is dependent will be in a muddling-through mode asindices (PMIs) show that industrial on politicians’ and central bankers’ well. A full-blown collapse of the europroduction no longer is expanding in decisions, and, as these also change is avoided, however, as the larger euromost parts of the world. daily, mainly in reaction to financial zone economies speed up reforms to market actions, the uncertainties calm financial markets.Above all, sentiment has worsened, asshown by the nervous developments in surrounding the forecast are larger We give a 30% probability to a worsethe financial markets and by business than ever. Compared with our spring scenario, where the world economyand household confidence surveys. forecast, however, inflationary risks enters a new recession, and withShare prices fell sharply as growth have decreased and sovereign debt global GDP growth again falling belowpessimism rose and fear increased risks have increased. 2% next year. Already now, Japan –when the debt crises in the advanced In our main scenario, to which we due to the earthquake, tsunami, andeconomies worsened. The difficulties give 60% probability, global growth nuclear power plant accident in Marchfor US politicians in raising the debt increases by 3.5-4 % per year over – is experiencing a recession, and,ceiling and agreeing on a medium- the forecast horizon, i.e. in 2011-2013. if other advanced economies shrink,term budget consolidation plan, This is a muddling-through scenario, there is a risk that Japan will continuecaused a downgrade of the triple-A where annual growth in the advanced its subpar performance despite theUS credit rating. Together with the economies on average falls just below rebuilding in the crisis-struck region.spreading of the euro zone debt crisis 2% but stays positive, and where up Although emerging markets will beto larger countries such as Spain, Italy to two-thirds of the world economy’s negatively affected, they have roomand even France, this has caused growth is driven by emerging markets. for stimulus and thus will counteractpanic in the global financial markets. Commodity prices fall, and interest part of the slowdown. Many emergingIf continued – and with the underlying rates are kept at extremely low levels markets still have problems ofnegative fundamentals – there is a risk for an extended period of time in the overheating, though, making it difficultthat the worsened sentiment in itself US, Japan, and, although to a lesser for them to create the same amount ofcan lead to a new global recession. extent, Europe. Economic policy stimulus as during the last recession in 2008-2009. In this scenario, theGDP forecast, 2010 - 2013 (annual percentage change) 1/ social unrest that follows a period of August 2011 April 2011 slow growth and high unemployment 2010 2011 2012 2013 2010 2011 2012 increases, causing both economic andUS 3.0 2.1 2.3 2.7 2.9 3.0 3.0 political instability. The PIIGS countriesEMU countries 1.8 1.7 1.3 1.3 1.7 1.5 1.5 and the UK are particularly vulnerable,Of which: Germany 3.6 2.9 1.8 1.6 3.6 2.4 1.9 especially with austerity picking up and France 1.4 1.5 1.5 1.4 1.5 1.5 1.6 the risk of riots escalating. Italy 1.3 0.8 0.7 1.0 1.3 0.9 1.0 Spain -0.1 0.6 0.8 1.2 -0.1 0.3 1.0 The forecast risk profile is skewed, asUK 1.3 1.3 1.6 1.8 1.4 1.5 1.8 the probability for a better scenario, i.e., reaching a global growth rateJapan 4.0 -0.2 2.8 1.4 4.0 0.6 3.0 close to or above 5% next year, isChina 10.3 9.0 8.4 8.0 10.3 8.8 8.4India 10.4 7.8 7.5 7.5 9.1 8.0 7.5 seen at only 10%. The factors drivingBrazil 7.5 3.8 4.1 4.5 7.5 4.3 4.0 this scenario are the financial marketsRussia 4.0 4.5 4.4 4.2 4.0 4.6 4.5 currently and only briefly holding an overly pessimistic view, growth slowingGlobal GDP in PPP 5.0 3.8 3.9 3.8 4.9 4.1 4.2 only temporarily, and companiesGlobal GDP in US$ 4.1 2.9 3.1 3.1 4.0 3.2 3.4 facing lower costs due to recent lower commodity prices and an easing ofSources: National statistics and Swedbank. price and wage pressures, enabling1/ Countries representing around 70 % of the global economy. The World Bank weights from 2010 havebeen used, which raises total figures by 0.1. to 0.2 percentage points compared with our Spring forecastwhen 2009 weights were used August 23, 2011 4
  5. 5. Global Swedbank Economic Outlookthem to perform better, with higher Interest and exchange rate assumptionsprofits leading to higher investments Outcome Forecastand more recruitments. Confidence 19 Aug 31 Dec 30 Jun 31 Dec 30 Jun 31 Dec 2011 2011 2012 2012 2013 2013in politicians must also strengthen inorder for this higher growth scenario to Policy rates Federal Reserve, USA 0.25 0.25 0.25 0.25 0.25 0.75be realised. European Central Bank 1.00 1.50 1.50 1.75 2.00 2.00Deleveraging means slower Bank of England 0.50 0.50 0.50 0.50 1.00 1.50growth Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.10Compared to our spring forecast, Exchange rates EUR/USD 1.44 1.42 1.38 1.35 1.35 1.30global growth has been revised RMB/USD 6.40 6.16 6.00 5.79 5.64 5.44downwards by 0.3 percentage points USD/JPY 77 80 83 85 87 90for each of the years 2011 and 2012. EUR/GBP 0.87 0.88 0.85 0.83 0.80 0.77During 2011, while growth in theUS and Japan has been revised Sources: Reuters Ecowin and Swedbank projections.downwards, Germany’s and China’shave been revised upwards due to expecting some improvement in the German growth slowing from 2.9% thisdevelopments at the beginning of the second half of 2011 – and to 2.3% in year to 1.8% in 2012 and to 1.6% inyear. Next year, deleveraging in both 2012 and 2.7% in 2013. The Federal 2013. Developments have been muchthe private and public sectors will Reserve will keep the policy rate at more negative in the PIIGS countries,reduce growth further, especially in the 0.25 % until mid-2013 at least, but where deleveraging and highercrisis-struck economies, although other fiscal austerity will then kick in, and, unemployment are slowing demand.countries will also be affected. We also without the extension of earlier tax All in all, GDP growth in the euro zoneforesee stronger growth in the US, cuts, could begin already next year. is expected to slow from 1.7% this yearJapan, and – not least – the emerging Although the US needs more fiscal to 1.3 % in 2012 and 2013.markets than in most parts of Europe. stimulus in the short term, it should cut We foresee that the pressures the ECB expenditures and increase taxes moreThe structural problems with regard to is putting on the larger economies, than envisaged in the medium term.US labour, housing, and credit markets such as Italy and Spain, in orderare lingering, and, together with the GDP growth in the euro zone will be for purchases of these countries’mistrust in politicians, are slowing revised upwards this year, mainly due government bonds to continue, willthe recovery. GDP grew by 1.8% in to stronger developments in Germany speed up the reform process. Inannual terms in the first half of this in the first quarter, where growth was addition, support mechanisms suchyear, and much slower in annualized spurred by demand from emerging as the European Financial Stabilityterms at 0.8%. We have revised 2011 markets, the euro depreciation, Facility (EFSF) and the Europeangrowth downwards from 3% in our and lower unemployment. After the Stability Mechanism (ESM) will bespring forecast to 2.1% – and are still bounceback effects, we foresee adjusted in terms of mandates and size. The coordination of fiscal policy will improve, as this crisis has provedPurchasing managers indices for manufacturing such coordination is necessary in order 65 to sustain the monetary union. Japan’s GDP fell during the first half 60 of this year, and we now foresee GDP shrinking by 0.2% in 2011 China 55 before increasing by 2.8% next year, Eurozone as reconstruction will take off later Global 50 India this year. In 2013, we expect growth Japan coming back to around the trend of 45 USA 1.5%. Prime Minister Naoto Kan is foreseen to leave office this month 40 after a less-than-successful handling of the crisis. Also, Japan needs to speed 35 up reforms to increase growth and reduce public debt in the medium term. 30 China has continued to surprise on the upside, thus prompting us to revise 25 Sources: Ecowin growth this year upwards to 9%. Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 and Swedbank August 23 2011 5
  6. 6. Global Swedbank Economic Outlook depreciated extensively, we foreseeUnemployment rates (%, sa) 20 some appreciation against the euro, although not immediately. The yen 18 will depreciate and the renminbi will appreciate against the dollar, and the 16 Spain pound will appreciate against the euro 14 France as UK growth outperforms euro zone Germany growth. 12 UK USA In our main scenario, the recovery, 10 Euroland although still on, will be slower than Greece we expected in the spring, and the 8 Ireland sentiment will be much more negative. Portugal The risk for a worse scenario is 6 large and, going forward, should not 4 be neglected. On the other hand, if confidence in the political process 2 improves, the recovery could speed up Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Source: Ecowin. again. Cecilia HermanssonHowever, there are signs, albeit mild, In advanced economies, the slowof slower growth going forward, and recovery of labour markets will easegrowth is expected to slow to 8.4% wage pressures, and, together within 2012 and 8% in 2013. China will weak demand, price pressures will becontinue to appreciate the renminbi held back.by some 6% against the US dollar As the Federal Reserve explicitlyannually; this is also in line with its indicated policy interest rates wouldgoal of stronger domestic demand and stay exceptionally low until at leasta drop in inflationary pressures from mid-2013, the large advancedthe current rate of 6.5%. economies will keep policy interestIndia and Brazil are also fighting rates at zero or just above for a longoverheating tendencies, as in both time. This means that inflationarycountries demand exceeds capacity expectations can start to rise,and credit growth has been too high. thereby pressing down real interestFor both, fiscal policy should be rates. As the US is expected torestrictive, and more investments have higher growth going forward,in infrastructure and education and the US dollar has alreadyare needed. Brazil and Russia willbe negatively affected by lower General government budget balance and debt in 2010 as % of GDPcommodity prices going forward, while -35India will benefit from a lower oil price. BUDGET BALANCE Ireland -30We expect the oil price to average$107 this year, which is, due to rapid -25increases in the beginning of theyear, somewhat higher than in our -20spring forecast. It is then foreseen tofall to $97 next year and $94 in 2013, -15all in line with slower demand from UK USadvanced economies. Industrial metals -10 Spain Portugal Greeceand food prices will fall from the high Latvia France PIIGS Japan Lithuanialevels seen so far this year due to -5 Cyprus EAhigher supply and lower demand. As Denmark Belgium Italy Finland Germanycommodity prices fall, the concerns 0 Estonia Swedenabout high inflation will decrease. GROSS GOVERNMENT DEBTThe inflation rate will abate in both 5advanced and emerging economies. 0 50 100 150 200 250 August 23, 2011 6
  7. 7. Swedbank Economic OutlookSweden: Focus on economic policyDespite volatile developments around to decline in 2012 and 2013 to 2.2% this time. Domestically, the main risksthe world, the Swedish economy and 2.3%, respectively, on the back of originate from a significant worseningcontinued to grow steadily in the first the slowdown in global growth. of the housing market, which couldtwo quarters of 2011, and the full have a sharp negative effect on Global economic volatility has flaredimpact of uncertainties surrounding domestic demand. The Riksbank has up recently, with large drops in stockdebt sustainability in the euro zone the capability of limiting the downturn exchange values and significant risesand the US is yet to be seen. The by easing monetary policy. In contrast in risks to future growth prospects.export sector benefited from higher to many other economies in the This greatly enhances the uncertaintydemand and was also supported industrialised world, Sweden still has that surrounds our main forecastby improving competitiveness from tools left in the toolbox. scenario. Although we have loweredstrong productivity growth and the overall global growth projections, Exports decelerate as globalmoderate wage developments. Private the possibility of another freeze- demand weakensconsumption, however, unexpectedly up of the kind we saw in 2008 has The Swedish export performanceslowed in the first half of the year as increased. This would severely affect in the first half of 2011 was strongermany households were struggling with the Swedish economy as it remains than expected. This was mostly duerising prices and interest rates, and very interconnected with the rest of to a sharp increase in the first quarter,a slow recovery of the labour market. the world, in terms of capital flows and while the growth rate decelerated inInvestments grew, but still remained export markets. the following quarter. Global tradebelow levels seen before 2008. However, in a worst-case scenario, continued to be advantageous forWe expect growth to slow in the Swedish exporters as the demand for we do not expect developments inremainder of 2011, and during 2012 investment and intermediate products Sweden to be as severe as in 2008,and 2013. Increased uncertainty continued to rebound after the deep but Sweden would not be spared. Theregarding future external and decline during the global financial main difference is that the financialdomestic demand is expected to lead crisis 2008. Lower unit labour costs sector today is less vulnerable toto a hesitation on the part of both due to high productivity growth and developments in the Baltic economies.households and companies, limiting limited wage increases strengthened Although banks today are betterconsumption and investment growth. the competitiveness. positioned than was the case inWe thus project the annual growth 2008, new liquidity constraints could Export of goods like vehicles andrate for 2011 at 4.3%, which, although arise. With the stability shown by machinery showed the highest growthhigher than our April forecast, reflects Swedish fiscal policy, there is room rates, while growth of services wasthe strong growth in early 2011 and for substantial measures to cushion a modest, due to weaker tourism andsignificant carryover effects from 2010. downturn, although it is not as likely merchanting. The importance of theGrowth rates are projected to continue that the krona would weaken as much Asian market for Swedish exportsKey Economic Indicators, 2010 - 2013 1/ continues to grow. However, although 2010 2011f 2012f 2013f the export share to the EuropeanReal GDP (calendar adjusted) 5.4 4.3 2.2 2.3 market is decreasing, it is still theIndustrial production 14.3 11.8 4.5 3.0 largest market and accounts for nearlyCPI index, average 1.2 3.1 2.3 2.4 70% of total Swedish exports. ExportCPI, end of period 2.3 2.8 2.1 2.1 deliveries to the US market showed aCPIF, average 2/ 2.0 1.6 1.7 2.0 surprisingly strong performance in theCPIF, end of period 2.3 1.3 1.5 1.9 first half of 2011, mainly of cars andLabour force (15-74) 1.1 1.2 0.6 0.4 telecom products, despite the largeUnemployment rate (15-74), % of labor force 8.4 7.5 7.2 6.9 domestic problems in the US. It is nowEmployment (15-74) 1.0 2.2 1.0 0.7Nominal hourly wage whole economy, average 2.5 2.4 3.1 3.3 the fourth-largest export market forNominal hourly wage industry, average 2.8 2.5 3.3 3.3 Sweden.Savings ratio (households), % 10.8 10.2 9.8 9.0 We foresee a further deceleration inReal disposable income (households) 3/ 1.4 1.8 1.3 1.3 Swedish exports in coming monthsCurrent account balance, % of GDP 6.1 7.3 7.2 6.7 due to weaker global demand. TheGeneral government budget balance, % of GDP 4/ -0.2 0.3 0.4 0.6 latest statistics suggests the growthGeneral government debt, % of GDP 5/ 39.7 35.0 34.0 31.5 peak in Swedish exports has passed.Sources: Statistics Sweden and Swedbank. In June, the value of exports fell by1/ Annual percentage growth, unless otherwise indicated.2/ CPI with fixed interest rates. 5%, and growth in new orders has3/ Based on short-term earnings statistics weakened. The Swedish purchasing4/ As measured by general government net lending.5/ According to the Maastricht criterion. August 23, 2011 7
  8. 8. Sweden Swedbank Economic Outlookmanagers’ index (PMI) fell in July to Export sector, annual growth rate (%) 2550.1, which is the lowest level sincethe spring of 2009. Strong export 20growth at the beginning of 2011 will, 15however, lift average export volume 10growth to nearly 9% this year, which is 5 Total exportsan upward revision from 7.6% in April. 0 Exports of goodsThe world economy is expected to -5 Exports of servicesgrow at a slower pace in 2012 than -10we foresaw in the spring. We assume -15the demand for investment goods will -20be relatively strong in the emerging -25market but more subdued in several 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 Source: Statistics Sweden.OECD countries, for which therestocking process is ending and fiscal Investments are losing speed previously forecast, growth in realpolicy is being tightened. Thus, world estate and public investment will Gross fixed investment has increasedmarket growth for Swedish exporters is become stronger. since the end of 2009 but is still belowexpected to decline over the next two its peak at the beginning of 2008. Next year, we expect investmentyears, and Swedish export volumes During the first six month of 2011, activity to decelerate further, and theare anticipated to grow at below the total investment volumes increased utilisation rate to fall as profit marginslong-term trend. We foresee a loss by 8.1% compared with same period in the private sector shrink. Althoughof market shares during the coming last year. The highest growth rate was the increase in nominal interest ratestwo years as competitiveness will be found in real estate, spurred by tax will be smaller than we forecast inless favourable due to higher unit reductions for renovation, relatively the spring, investment in real estatelabour costs and a stronger krona. low interest rates, and better labour will gradually slow. UncertaintyThe value of the krona is expected to market conditions. Investment in surrounding housing prices, and aappreciate from current levels in our manufacturing also picked up strongly, decreasing use of tax reductions formain scenario. In contrast to the crisis particularly in the mining and auto rebuilding after the strong growth inin 2008, the Swedish economy now industries, while private services 2010 and 2011, will have a limitingseems to be perceived as more stable. grew less quickly. Public investment effect on real estate investments. WeThe growth contribution of foreign continued to expand, partly due to are revising public investment upwardstrade to GDP is expected to vanish ongoing investments in infrastructure. in 2012 and expect continued growthin 2012 and 2013 from 0.8% in 2011; in 2013, as the government responds Since we published the Swedbankexternal demand will be weaker, while to a slowdown in economic growth. Economic Outlook in April, businessdomestic demand will be relatively In particular, investment in road and confidence has deteriorated andsolid. We therefore foresee a reduction railroad maintenance is expected to be the momentum in global growth hasin the current account surplus to 6.7% prioritised. weakened. Thus, we are lowering ourof GDP in 2013 from 7.3% this year. projected investment growth to 8.1% in Labour market recovery uneven 2011. While private sector investment The decline in the unemployment are expected to grow slower than rate continued during the first half ofSwedbank’s GDP Forecast – Sweden 2011, albeit at a slower-than-expectedChanges in volume, % 2010 2011f1/ 2012f1/ 2013f rate. The seasonally adjustedHouseholds consumption expenditure 3.4 2.5 (2.8) 1.8 (1.9) 2.2 unemployment rate reached 7.5% inGovernment consumption expenditure 2.5 1.3 (1.3) 0.7 (0.4) 0.8 June, down only marginally from 7.6%Gross fixed capital formation 7.1 8.1 (9.7) 6.7 (8.3) 4.8 in February. Mainly, this is a result of private, excl. housing 4.7 7.3 (11.3) 8.7 (11.2) 5.8 a growing participation in the labour public 4.4 4.7 (2.6) 1.1 (-0.1) 2.9 force. It suggests that the reforms of housing 20.0 14.3 (11.4) 5.3 (5.3) 3.2 the sickness benefit systems and,Change in inventories 2/ 2.1 0.4 (0.0) -0.5 (-0.3) 0.0 more generally, the improvement of theExports, goods and services 11.0 8.7 (7.6) 4.9 (5.6) 4.6Imports, goods and services 12.8 8.0 (7.5) 5.5 (6.6) 5.2 economy are drawing an increasing share of the population back into theGDP 5.7 4.3 (4.0) 1.8 (2.2) 2.3GDP, calendar adjusted 5.4 4.3 (4.0) 2.2 (2.6) 2.3 labour market. The strong growthDomestic demand (excl. inventories) 2/ 3.8 3.2 (3.5) 2.5 (2.6) 2.4 in employment during the first halfNet exports 2/ 0.0 0.8 (0.5) 0.0 (-0.1) 0.0 of the year has, thus, supported theSources: Statistics Sweden and Swedbank. recovery of the economy, but left the1/ The figures from our forecast in April 2011 are given in brackets.2/ Contribution to GDP growth. August 23, 2011 8
  9. 9. Sweden Swedbank Economic Outlookunemployment rate stubbornly high. Business confidence and investment growth in the private sector 20The expansion in employment has 10not, however, been equally distributedacross the population, and it is 0becoming harder for certain groups Confidence -10to find permanent jobs. Young people Manufacturinghave seen their unemployment rate -20 Annual investment growth, businessincrease at an alarming rate, and, sectorin particular, it is significantly more -30difficult for the foreign born to find jobs. -40Lack of recognized qualifications andlanguage skills, and few connections -50 Source: Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10to the regular labour market, Statistics Sweden.together with employer attitudes,explain the bulk of this outcome, markets and the risks to global growth Households are holding backbut the importance of the challenge would argue for a flexible shorter-term Despite an otherwise solid economicnevertheless remains huge. Prolonged agreement that could be adjusted as recovery in the first half of 2011,absences from the labour market have the global demand situation becomes households showed a weak inclinationlife-long effects on employability and clearer. to scale up consumption. Higherincome, and the benefit of increasing We expect that the unemployment energy prices, together with growingthe employment rate amongst all rate will continue to decrease, but, interest costs, weakened growth in realgroups will also be substantial in an given that structural unemployment is disposable income. Wage increasesaging society like Sweden’s. growing as a share of the remaining have been muted, and disposable unemployment, each additional point income has not provided sufficientWage pressures were until end-May of decline will become harder to room for consumers to maintain thefar lower than anticipated. Annual achieve. Following the slower rate of expansion seen in 2010. In particular,rates resumed their declining trend in decline in unemployment observed so households cut back on durablesearly 2011 after stabilising at around far during 2011, we are revising our following the significant bounceback2% in mid-2010. However, the impact unemployment projection upwards seen late last year. In addition, lendingon total earnings and, thus, domestic for 2011 and 2012 to 7.5% and 7.3%, to households increased at a slowerdemand, is partly offset by growing respectively. While we expect that the rate. In the summer months, however,employment and a steady increase in government will continue its reforms consumption of both consumables andhours worked, both of which continued over the next two years, aimed mainly durables were again mildly picking up.to grow in the first two quarters of2011. Growing labour supply and at increasing the labour supply, our Households’ sentiment is rapidlya still-high unemployment rate are assessment is that unemployment will becoming less optimistic and thelikely to limit wage drift, but pressures only gradually decline to reach 6.5% recent turmoil in the global marketsare building up in anticipation of the at the end of 2013. Nominal wage and on the stock exchange is likely tobroad wage negotiations that will start growth will pick up slightly, and with further increase consumer anxieties.in early autumn. The limited wage inflationary pressures easing, real We, thus, expect overall consumptionincreases so far, will allow real wages wages will turn positive. Productivity growth for 2011 to be more moderateto increase without threatening the developments will remain supportive of than in our April forecast. Althoughcompetitiveness of the private sector. a continued real, but stable, expansion the renewed worries about globalHowever, the recent turmoil in global of the Swedish economy in our main economic developments could lead scenario. to falling short-term interest rates, Unemployment rate (% of labour force, MA (4Q)) such an outcome would also lower 40 consumer confidence, reducing the 35 willingness to spend. In particular, 30 consumers have already lowered their assessment of the overall 25 Natural born (15-24 years) macroeconomic conditions in Sweden, Natural born (15-74 20 years) while so far maintaining a steady 15 Foreign born (15-24 years) view of their own financial situation, Foreign born (15-74 including employment. This suggests 10 years) that, while personal finances remain 5 stable in our main scenario, external 0 conditions will continue to weigh down Source: 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 Statistics Sweden.August 23, 2011 9
  10. 10. Sweden Swedbank Economic Outlookon consumption in 2011. Monetary policy actions headed calculation ranged from 2.5% to 3.6%Looking forward, we expect that the for a pause of potential GDP. The gap was even The Riksbank has continued to tighten larger, according to the Nationalhouseholds’ financial situation will monetary policy since our April report, Institute for Economic Policy Researchimprove moderately in 2012 and and by the end of July the policy (NIER) (4.3%) and OECD (4.5%),2013, when real disposable income rate had been raised twice to reach while the IMF estimated it to be aroundincreases by 1.3% in both years. In our 2%. This follows the preannounced 3%. The estimate of the output gapmain scenario, real disposable income policy path and is in line with the guides the rate at which monetarygrowth falls back in 2012 due to stated intention to gradually normalise policy should be tightened, and theweaker labour market developments. monetary policy. Headline inflation wide range of estimates illustratesIn addition, and in contrast to our April (CPI) has exceeded 3% at an annual the uncertainty that surrounds futureprojections, we do not expect the fifth rate, but, excluding the effects of policy rate increases. In our view, thestep of the earned income tax credit to interest costs (CPIF), inflationary recent slowdown in global growth andbe implemented in 2012, and also not pressures have decreased. our downward revision of Swedishin 2013. This implies that household growth for 2012 suggest that monetaryconsumption growth is to increase The recent large swings in global policy tightening will enter a slowermodestly in 2012, and that the savings markets, together with the downward phase; we expect the policy rate toratio will fall but by less than in our revision of global growth projections, reach 2.75% by the end of next year,previous projections. This is consistent calls into question future policy rate compared with 3% in our April forecast.with growing uncertainties among increases. Although the Swedishhouseholds and in financial markets. In economy has recovered relatively At the forefront of the Riksbank’s2013, we expect consumption growth rapidly, the experience from the 2008 considerations is, however, theto pick up moderately as labour market crisis illustrates how vulnerable it inflation outlook. Lower inflationconditions improve and uncertainties is to shifts in external demand. We expectations, together with projectedare reduced. Consequently, the therefore believe that the Riksbank, as slower growth in commodity priceshousehold savings ratio should drop to a precaution, will put on hold further and a modest increase in wages implytowards 9% of disposable income. increases during 2011. that CPIF inflation is expected to drop to around 2.0% at end-2013. Mainly,Households’ balance sheets are Besides inflation expectations, a underlying inflation is driven by foodstill vulnerable, in particular, against key question for monetary policy is and transport related expenses, whileswings in the housing market. A the extent to which the economy CPI is also affected by increasingworsening of international conditions is operating at full capacity. This interest rates. A projected appreciationwith a subsequent rapid increase is usually measured through of the krona will limit import prices,in unemployment could trigger a estimations of the output gap, i.e., and lessens the need for future ratecorrection in housing prices, and the difference between how much increases. Thus, we anticipate theput downward pressure on private is actually produced in an economy repurchase rate to be raised to 3.00%consumption. Household debt is still and what could be produced without by the end of 2013, following one ratehigh, but we expect a slower rate creating inflationary pressures. The hike that year.of increase in our base scenario, calculations of the output gap arereaching about 180% of disposable often imprecise and vary amongst Weak government – too-tightincome in 2013. The debt burden sources. For example, this spring fiscal policy?could, however, become onerous the Ministry of Finance estimated the The implementation of fiscal policyshould the economic situation worsen. output gap for 2010 to be 3.8% of in Sweden throughout the global potential GDP, while the Riksbank’s financial crisis has in large part been a success. Some critics, we included, argued for a larger and more rapidHousehold consumption patterns (annual change, 3m ma.) 10 fiscal stimulus during the nadir of the crisis, but, given the uncertainty of the 8 severity of the downturn at the time 6 and the lag of fiscal policy effects on the real economy, the hesitation of 4 Retail the government was understandable. Consumables 2 As concerns over global economic Durables developments are again rising and 0 their impact on the Swedish economy -2 is uncertain, policymakers are again faced with a difficult trade-off. On -4 the one hand, fiscal balances could Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Source: Statistics Sweden. August 23, 2011 10
  11. 11. Sweden Swedbank Economic Outlookworsen significantly should a global Interest rate and currency outlookslowdown hit the Swedish economy, Outcome Forecastand the government should therefore 2011 2011 2012 2012 2013 2013 19Aug 31 Dec 30 Jun 31 dec 30 Jun 31 Decbe careful in proposing reforms thatcould weaken the fiscal position. Interest rates (%)On the other hand, the Swedish Policy rate 2.00 2.00 2.25 2.75 3.00 3.00economy is still recovering from the 10-yr. gvt bond 2.00 2.55 2.65 3.15 3.40 3.352008 crisis, and, facing a renewed Exchange ratesslowdown, there is room and a need EUR/SEK 9.20 9.20 9.05 8.95 8.90 8.80for stimulus to speed up the reduction USD/SEK 6.39 6.48 6.55 6.62 6.60 6.76of unemployment. TCW (SEK) 1/ 124.0 124.0 123.0 122.0 121.5 121.0 Sources: Reuters Ecowin and Swedbank.Despite a slight downward revision of 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).the fiscal balance for 2010 to a deficitof 0.2% of GDP, the fiscal accounts that is not supportive enough and the forecast period, we project grosshave remained resilient, and the fiscal expect a fiscal surplus of 0.4% of GDP, public debt to correspond to aboutpolicy goals have largely been met. including the effects of a slowing real 31% of GDPThe solid development continued economy. There are, in our view, roomin the early parts of 2011, although Fiscal policy in the current for measures that support domesticsomewhat weaker than expected, circumstances has to strike a balance demand in Sweden next year. Thisprivate consumption limited growth between, on the one hand, supporting could include reductions of tax rates,in indirect taxes. We do not believe the recovery from the 2008 financial increased investments and morethat the recent turbulence in global crisis to accelerate the reduction of spending on programmes that aim atmarkets will have a major impact on unemployment, and, on the other, reducing long-term unemployment.the fiscal balances in 2011, and we making preparations for a significantexpect a surplus of 0.3% of GDP and a The budget process for 2013 will deterioration in real economiccontinuing fall in public debt to 35% of be equally difficult. The opposition development due to worseningGDP, partly aided by already realised parties are likely to continue to oppose external conditions. While we supportprivatisation revenues corresponding the government’s plans for a fifth the focus on employment, the marginalto approximately 0.6% of GDP. step of the earned income tax credit benefits of the proposed composition and raising the tax bracket for state of the tax rate reductions are likelyThe 2012 budget is likely to be income taxes. The conservatives, to be limited and are also difficult tocharacterised by belt and braces. The the largest party in the government, reverse. Instead, we would argueMinistry of Finance has announced has suggested that income tax rate for increasing spending on growth-that planned reductions in tax rates on reductions will be delayed towards enhancing public infrastructure whilelabour and pensions will be postponed the end of the government term. leaving sufficient room to support localciting concerns over the impact of That would raise the fiscal surplus in governments without jeopardising thethe global economic turbulence on 2013 to 0.6% of GDP. Furthermore, fiscal rules, should economic growththe Swedish fiscal balances. The the privatisations of state assets will turn out worse than expected. Fiscalweak parliamentary situation for the continue, but at a slower pace. In measures in times of uncertaintiesgovernment likely also plays a role. addition to the already realised sales should focus on being temporary,Instead, buffers are to be maintained generating SEK 20 billion in 2011, we targeted and timely, and aim atso that the fiscal policy goals are not expect another cumulative SEK 20 keeping down unemployment.threatened. We believe that this is billion in 2012 and 2013. At the end oflikely to lead to a fiscal policy in 2012Inflation, exchange rate and reporate, 2008 - 2013 Magnus Alvesson 6.0 160 Jörgen Kennemar 5.0 150 CPI yoy 4.0 3.0 140 CPIF yoy 2.0 130 1.0 Policy rate (Swedbank 0.0 120 forecast) Krona -1.0 (TCW, rhs) 110 -2.0 -3.0 100 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sources: Riksbank, Statistics Sweden and Swedbank. August 23, 2011 11