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Swedbank Economic Outlook August 2011

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Swedbank analyses theSwedish and Baltic Economies.

Swedbank analyses theSwedish and Baltic Economies.

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  • 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  • 12. Estonia Swedbank Economic OutlookEstonia: Domestic demand supports growthEconomic developments during the contributor. households. A further pickup in globalfirst half of this year were very strong, food and energy prices from their cur- The main risks for the Estonian econo-overshooting our expectations in most rent high levels would dampen the my continue to be external. In additionareas – economic growth reached private consumption recovery, which, to a bigger-than-expected slowdown inabove 8% on average during the first despite being above expectations, the economic growth of the main ex-half of the year. The economic recov- continues to remain fragile. port partners, possible setbacks to theery continued to be based on export global economic recovery introduce The biggest internal risks are connect-growth, which amounted to 54% dur- another set of risks. The negative glob- ed with labour market developments.ing the first half-year. Manufacturing al developments of 2008-2009 notably Although job creation has been able toproduction, as the main source for affected the Estonian economy, which match employment growth so far, thereexports, grew by 36% during the same was then already in the beginning of are signs of an uneven recovery. Manyperiod. Higher-than-expected domes- internally launched recession; how- sectors (e.g., ICT, construction, andtic demand growth was supported by ever, the consequences for the local health care) are affected by a lack ofrecovering investments (37% growth economy of a possible global downturn qualified workers, which, in turn, putsin the first quarter), fuelled by growing of the same magnitude would be much additional pressure on wage growth.investments in machinery and equip- weaker now because the economy A wage rally that outpaced productiv-ment, as well as construction. In addi- is more balanced. Even though less ity gains would lead to a loss in com-tion, an earlier-than-expected pickup in liquidity in financial markets, together petitiveness, which has so far beenprivate consumption (5% growth in the with decelerating export growth, will a significant factor in the economicfirst quarter) added positively to eco- have an impact on domestic demand, recovery.nomic growth. Also, government con- the effect will not be as huge as itsumption has resumed positive growth Export growth about to was during the previous crisis. Nev-after two years of decline. decelerate ertheless, a widespread slowdown ofWe have raised our economic growth global economy could reduce export So far, Estonia’s economic growth hasforecast for this year from 4.5% to volumes; lower investments (especially been mainly export driven, and the6.7%, due to better-than-expected de- those of foreign-owned companies) growth in the first half of this year wasvelopments during the first half of the which in turn could dampen job cre- considerably stronger than we expect-year and, consequently, an improved ation and consumption and thus have ed (38.9% in real terms). Therefore,outlook for the second half. Exports re- a negative effect on domestic demand we have revised our forecast upwards,main the biggest contributor to growth, as well. also because export growth was morealthough their impact will weaken dur- broad based – during the second half Another set of external risks involvesing the second half of the year as the of 2010, the main contributor to export developments in the global commodityglobal headwinds build up. Economic growth was machinery and equipment, markets. Inflation during the first half ofgrowth in 2012 and 2013 is estimated but this year other sectors have been the year was driven by growing food,to reach 4.2% and 4%, respectively, picking up as well (e.g. wood, food, transport and housing costs, whichwith domestic demand (especially in- and metal production). This growth have had the biggest negative impactvestments) taking over as the biggest has been supported by stronger-than- on the already budget-constrained expected growth in foreign demand,Key Economic Indicators, 2009 - 2013 1/ especially in non-euro area countries 2010 2011f 2012f 2013f like Sweden, Latvia, and Lithuania.Real GDP 3.1 6.7 4.2 4.0 Trade with Sweden is mainly relatedNominal GDP, billion euro 14.5 16.2 17.5 18.8 to subcontracting (in machinery andConsumer prices (average) 3.0 4.8 2.7 2.5 equipment production), while Latvia’sUnemployment rate, % 2/ 16.9 13.2 12.4 11.6 and Lithuania’s importance to EstoniaReal gross monthly wage -2.0 2.0 3.5 3.4 is growing in energy-related exports. InExports of goods and services (nominal) 25.5 27.3 5.0 6.1 addition, Russia is gaining importanceImports of goods and services (nominal) 24.8 28.0 8.5 7.8Balance of goods and services, % of GDP 7.3 7.9 4.8 3.4 (mainly, machinery, with about 20%Current account balance, % of GDP 6.3 6.8 3.0 2.2 of total exports to Russia; chemicals,FDI inflow, % of GDP 8.0 9.1 8.6 8.5 14%; and food products, 12%).Gross external debt, % of GDP 114.2 102.0 95.0 92.0 The assumption behind our exportGeneral government budget balance, % of GDP 3/ 0.1 0.1 -0.8 0.0 growth forecast is that the volumesGeneral government debt, % of GDP 6.6 5.4 5.4 5.2 of machinery and equipment will re-Sources: Statistics Estonia, Bank of Estonia and Swedbank projections.1/ Annual percentage change unless otherwise indicated. main large (and that export sales of2/ According to labour force survey. electronics will grow more strongly),3/ According to Maastricht criterion. August 23, 2011 12
  • 13. Estonia Swedbank Economic Outlookalthough the growth rates will wane Contributions to GDP growth 20%due to the base effect. Export growthfor this year is expected to reach 15%21.9%; in coming years, the growth 10%rate will be considerably lower (4.9% 5% Net exportsin 2012 and 4.1% in 2013). We expect 0% Investmentsthe growth rate to decrease somewhat -5% Governmentin 2013 as the global economy slowsdown. Nevertheless, there is a posi- -10% Householdstive risk related to the export growth -15% GDPas Estonia’s main export partners are -20%doing relatively well. This is especially -25% Sources: SE,true of Latvia, Lithuania, Finland, and Swedbank forecast. 2006 2007 2008 2009 2010 2011f 2012f 2013fSweden, where Estonian firms haveconsistently been increasing their were already present by end-2010. We funds will also contribute to invest-market shares. Competitiveness gains have revised our forecast upwards due ment growth throughout the forecastwill play a role, too, as wage growth is to stronger developments in manufac- period (so far, only approximately 20%expected to be subdued, and current turing. of available funds have been used forinvestments will make future produc- the 2007-2013 program period). And, Strong growth in industrial productiontion more effective and less labour as discussed in our April forecast, we has been supporting the growth inintensive. assume that the legal problems affect- investments – many ill-stayed produc- ing the public procurements needed toExports of services will grow more tion technologies have been or are implement these funds will be solvedslowly than exports of goods, but the about to be renewed. In addition, there this year.growth rate will be less volatile. is an increasing need for greater ef- ficiency in the production process; in Because the net cash flows of enter-Despite strong external demand, the an environment of rising input prices, prises have increased, and this is usu-effect of net exports on economic a lack of efficiency will harm the com- ally followed by growth in investmentgrowth will be only slightly positive, petitiveness of exporting enterprises. and the number of jobs, we estimateas import growth is also picking up. Accordingly, many firms are already that gross fixed capital formation willImports of goods and services are trying to replace and/or renew their grow by 23% this year and 12.8% theexpected to grow by 21.5% in real outdated production technology and next. In 2013, this growth will deceler-terms this year, mainly influenced by rebuild their production to become less ate to 8.9%, due to the base effect andstrengthening domestic consumption labour intensive, as one of the restric- rising uncertainty (see global develop-and the increasing need for inputs for tions on the further growth of firms is ments).exports. Within the next two years, the shortage of labour. At the sameimports will grow faster than exports, In addition, investments will be sup- time, the growth in investments inreducing the trade surplus during the ported by stronger foreign direct in- transport equipment, which was strongforecast period. vestment (FDI) inflows because the already at the end of last year (up al- profits of foreign-owned enterprises willInvestment growth picking up most fivefold from the previous year) have risen. Additionally, this expectedInvestments decreased considerably and continued to increase rapidly in increase in inflows of FDI is supportedduring the recession years, showing the first quarter of this year (up almost by the relatively good outlook for thelarge negative growth rates in 2008- threefold), will gradually decrease due development of small-scale produc-2010, but strong positive growth rates to the base effect. The inflow of EU tion, together with low asset price and wage levels.Swedbank’s GDP Forecast – EstoniaChanges in volume, % 2010 2011f1/ 2012f1/ 2013f Residential investments are about to rise as well – even though the numberHousehold consumption -1.9 4.9 (3.2) 4.7 (4.0) 4.7 of transactions in the real estate mar-General government consumption -2.1 1.4 (0.5) 1.6 (2.0) 1.3 ket will stay modest this year, we pre-Gross fixed capital formation -9.1 23.0 (15.4) 12.8 (13.6) 8.9 dict that interest in rebuilding currentInventories 2/ 1.3 2.5 (-3.1) 1.3 (0.9) 1.3 housing to be more energy efficient willExports of goods and services 21.7 21.9 (13.5) 4.9 (8.7) 4.1 increase. This interest is affected byImports of goods and services 21.0 21.5 (10.7) 5.0 (11.7) 5.3GDP 3.1 6.7 (4.5) 4.2 (4.5) 4.0 the expected increase in energy pricesDomestic demand (excl. inventories) 2/ 0.9 6.6 (5.1) 5.0 (6.3) 5.6 (the electricity market will be open inNet export 2/ 0.3 0.2 (2.4) -0.1 (-2.6) -1.3 20131) and by weather conditions – theSources: Statistics Estonia and Swedbank. 1 Since April 1, 2010, 35% of the Estonian1/ The figures from our forecast in April are given in brackets. market has been open for large consumers,2/ Contribution to GDP growth August 23, 2011 13
  • 14. Estonia Swedbank Economic Outlooklast two winters have been extremely Contributions to annual export growth 60%cold. The harsh weather conditions Other 50%have boosted energy-related costs Wood, paper, furnand, in light of the expected increase 40% iture etcin electricity prices in the autumn of 30% Food, other agric. products2011, together with the higher price 20% Mineral productsfor heating oil (in June 2011), there 10%is a need to improve the energy ef- Metals and - 0%ficiency of dwellings. products -10% Machinery andHousing sales will rise next year, equipment -20%along with a rise in incomes and a Total -30%slowdown in price increases, be- Sources: SE, Swedbank 2005 2006 2007 2008 2009 2010 2011 1Hcause there is still a demand forhigh-quality dwellings. This demand Employment growing while ac- etc.). And as those who were previ-is driven by the relatively small floor tivity rate remains high ously inactive are entering the labourarea size (30.1 square meters per in- market as unemployed, the share of During the recession, both employ-habitant in 2011) and the increase in those looking for jobs is increasing ment and working hours decreased.the number of graduates who entered faster than is the total labour force. Developments in the labour marketthe labour market a couple of years We forecast unemployment to reach tend to lag economic developments,ago and are now eligible for loans. 13.2% this year and 12.4% and 11.6% and we observed an increase in em-Moreover, we expect heightened in 2012 and 2013, respectively. The ployment and working hours alreadyinterest from nonresident buyers. assumption behind such high unem- at the end of last year. Even thoughIn addition, the next couple of years the unemployment rate was slightly ployment rates is the high activitywill be affected by the government’s up in the first quarter of this year rate – because of this, even thoughobligation to make several infra- (14.4%), developments have since employment is growing, the unemploy-structure- and environment-related been encouraging – employment ment rate will not decrease as fast. Ininvestments, to be financed by the grew by a strong 7.8% in the second addition, even though the number ofrevenues from the CO2 (carbon) quarter while the unemployment rate unemployed is decreasing, the prob-quota trade. Those investments are fell to 13.3%; at the same, however, lem of long-term unemployed will con-planned to increase energy efficiency registered unemployment declined tinue to pose a problem for the socialof state owned institutions’ buildings from 10.2% to 8.8%. This shows that system in the long run.(like kindergartens, schools etc). one should be especially careful in The Estonian labour market of the last comparing Estonia’s unemployment few years could be partially character- rates with other countries’ – in Estonia, ised by the increase of pendulum mi-or open consumers (an open consumer is the activity rate has been sustainably gration: individuals remain residents ofa company that uses more than 2 GWh of high, reaching 67.5% in the second Estonia, but are working in neighbour-electricity a year through one connection quarter, which might be influenced bypoint, which gives it the right and the obli- ing countries. This is especially true ingation to choose its own electricity seller). demographics, as well as by changes the case of construction and transpor-The choice can be realised through bilat- in retirement laws (the retirement age tation workers. Whether those workerseral contracts, direct purchase, or a bro- for women is gradually raised). This will stay abroad permanently (increaseker in the Estonia price area of the Nordic means that there are more people inpower exchange, Nord Pool Spot. The law in emigration) or become re-engagedforesees that the electricity market will be the labour market (either looking for a in the local labour market is not yetopened fully to all customers in 2013. job or employed) and fewer inactive clear. With the recovery of the domes- (e.g., students, pensioners, caretakers, tic construction sector there will comeLabour market indicators an increased demand for construction 25% 70% workers; these workers might not find 20% the local wage levels attractive enough Unemp- to return (or this increase in demand 15% loyment rate 65% might induce another wage-cost push). 10% Employment, annual growth In addition, the mismatch of supplied 5% and demanded skills will continue to be Gross 0% 60% wage, annual one of the major risks for further eco- -5% real growth nomic development. The structural un- Activity rate (rs) employment might influence the wage-10% level in certain sectors or groups of-15% 55% occupations that have a more severe 2004 2005 2006 2007 2008 2009 2010 2011 Source: SE August 23, 2011 14
  • 15. Estonia Swedbank Economic Outlookneed for specific skills (e.g., the ICT, decreasing a bit during the summer as well as the construction sector. Theelectronics manufacturing, and energy months). This might appear as an latter is mainly influenced by develop-sectors), if the immigration policy is not obstacle to the further recovery of ments in the construction sector inchanged and/or the re-education of the private consumption. In other words, Finland – many Estonian constructionunemployed is not encouraged more households’ propensity to save is workers found jobs there during theby the local authorities. staying high and savings are mainly recession and are not keen to return precautionary – many households are home because the wage level in Esto-Consumption is supported by saving to face possible future hard- nia is considerably lower.nonresidential spending ships stemming from higher pricesThe uncertainty that was affecting pri- Government to continue with of necessities. Many households arevate consumption in the past few years conservative fiscal policy already struggling to make ends meet,is gradually fading away – households and a further increase in food and en- In 2010, the general governmentare less afraid of losing their jobs and ergy prices will lessen the share of the budget reached surplus (0.1% ofmore optimistic about future economic budget left to spend on other items. GDP); this was mainly due to nontaxdevelopments. The greater confidence We expect prices to increase by 4.8% revenues (mainly from the successfulhas made consumers more willing to in 2011, as inflationary pressures from trade in the carbon quota market andspend, which can be observed in the global markets should ease at year’s the dividends of state-owned compa-strong growth in private consumption end. Similarly, in 2012 and 2013, nies) and the tight control kept overin the first quarter of this year (5.4% prices will grow by between 2% and expenditures. This year, we expectannually). More specifically, the main 3%, as the prices of food products and government expenditure to grow be-contributor has been the growth of energy in global markets are expected cause payments into pension fundsconsumption expenditures on durable to decrease. have been restored, pension outlaysgoods (23.3% annual growth), which are slightly higher, and payments tomight be considered as the indicator During the recession, household in- the Health Insurance Fund have in-of recovering private consumption. come decreased due to job losses creased. In addition, the governmentWe estimate the growth of private and/or falling wages. Average real is obligated to invest revenues earnedconsumption for this year to be 4.9% wage growth was already negative by from the CO2 quota sales into environ-– much higher than we expected in 2009 (-4.5%) and decreased further ment-related projects.April (3.2%). The main factors driving in 2010 (-2%) – household income accordingly fell considerably. Prices, Currently, no major tax changes areprivate consumption are the stronger meanwhile, fell, but for shorter period planned for the forecast period, exceptconfidence; the higher income aris- of time – from May 2009 to February the lowering of the unemployment in-ing from bonuses paid for the year 2010. This short fall in prices was af- surance tax in 2013; the amount of the2010, which boosted consumption fected by unfavourable developments decrease, however, has not yet beenat the beginning of the year; and the in global food and energy prices and set. The tobacco excise increased thisincreasing employment. Similarly, the local tax policy (several taxes were year by 10% and will be increased bygrowing number of tourists visiting increased in 2009). Recent develop- the same amount each year of ourEstonia has boosted retail sales. In the ments, however, support our esti- forecast period. The tax burden willnext two years, private consumption mation of faster wage growth – we be further eased through a loweringwill continue to grow at strong rates expect real wages to grow by 2% this of labour taxes – the income tax will(4.7% in each years), supported by the year and by 3.5% and 3.4% in 2012 decline from its current rate of 21%high confidence level and wage and and 2013. As pointed out in the April to 20%, in January 2015 or couple ofemployment growth, together with the forecast, the growth in wages will be months before the next parliamentaryslowing rate of price increases. uneven across sectors; it will be led elections.At the same time, inflation expec- by the manufacturing and IT sectors, Government debt will remain very low.tations are still high (even though The transfers into the European Stabil-Consumer confidence, s.a. ity Mechanism are planned to start in 80 Confidence 2013, totalling EUR 150 million over 60 the following five years—an amount Financial that will not increase the debt level 40 situation considerably. General 20 economic situation 0 Unemp- Annika Paabut loyment Elina Allikalt -20 Savings -40 2006 2007 2008 2009 2010 2011 Source: DG ECFIN. August 23, 2011 15
  • 16. Swedbank Economic OutlookLatvia: Growth to continue amidst global slowdownIn the second quarter of 2011, the Locally, the referendum and dissolu- new jobs. Although the job-seekers’Latvian GDP grew by 5.3% in an- tion of the parliament in July, as well rate will continue to come down, owingnual terms. Seasonally adjusted as the general elections scheduled to timid job creation and emigration, itquarterly growth picked up to 2.2% for September, on the one hand, raise is still expected to be at about 11.8%after a somewhat disappointing first uncertainty about the 2012 budget in 2013. We are revising upwards ourquarter (0.5%). The second-quarter (i.e., size and composition of consoli- average inflation forecast slightly forresults were somewhat better than dation, timing); on the other, however, this year, to 4.5% (4.2% before), butanticipated. Details are not yet avail- they provide an opportunity to speed expect it to go down to about 2.5% inable, but most likely growth was broad up growth if the new government ac- 2012-2013. We are revising upwardsbased, with exports, investments, and celerates implementation of structural both exports and imports for 2011 toconsumption all contributing. The first- reforms. account for stronger growth in the firstquarter growth was impaired by an half of the year. Consumption and We are raising our GDP forecast forunusually strong increase in imports, investment growth will spill over to 2011 to 4.2% (4% before), due to bet-which most likely was boosted by one- imports, and the goods’ and services’ ter growth in the first half of the yearoff purchases. Import growth thus most trade deficit will widen slowly in 2012- and historical data revisions. With thelikely decelerated in the second quar- 2013. weaker global environment, we nowter, thereby improving the contribution foresee weaker quarterly growth in the Global risks increaseof net exports to GDP growth. second half of 2011 than envisaged in The main set of downside risks to ourThe global environment has changed the April forecast. We are also lowering base forecast comes from the globalconsiderably since the April 2011 our GDP growth forecast for 2012 to situation. Financial market volatilityforecast. The growth of Latvia’s main 3.5% (3.9% before), as slower global has risen, and the probability of a glo-trading partners was stronger than growth will cut into Latvian exports and bal recession has increased. If suchexpected in early 2011, thus lifting investments, while weaker confidence a risk scenario materializes, Latvia’sLatvian exports. Over the last month, will weigh on consumption. We include exports, access to financing, andhowever, global uncertainty has risen, a 2014 euro introduction in our base overall economic growth will be hurtand global growth is now expected to scenario, although accomplishing this substantially. A subsequent fall in taxslow down more sharply than previ- is challenging and calls for policy ac- revenues would worsen the fiscal situ-ously forecast. This will cut into Latvian tion (see below). We thus forecast ation. Domestic demand is still weak,growth from the third quarter of 2011 somewhat faster growth in 2013 and any problems with export-relatedonwards, compared with our previ- (3.9%), as a confidence boost through activities would directly hit all sectorsous outlook. Global commodity price the euro accession expectations would of the economy. In the worst casegrowth at the beginning of 2011 was promote investments and consumption (i.e., a global double dip), the Latvianhigher than anticipated, but food, oil, in the second half of the year. economy would again enter a reces-and metal prices are now expected to sion. However, this recession would This is still a muddling-through scenar-back down in 2012-2013, thus reduc- be significantly smaller than the one in io with subpar economic growth, whiching pressure on Latvian inflation. 2008-2009. does not create enough high-quality It should be emphasised that, sinceKey Economic Indicators, 2010 - 2013 1/ 2008, the capability of Latvia’s pub- 2010 2011f 2012f 2013f lic and private sectors to resist suchReal GDP -0.3 4.2 3.5 3.9 turmoil has increased. Latvia is nowNominal GDP, billion euro 18.0 19.9 21.4 23.2 considerably less vulnerable to aConsumer prices (average) -1.1 4.5 2.4 2.5Unemployment rate, % 2/ 18.7 15.9 13.9 11.8 sudden stop of capital inflows – as-Real net monthly wage -6.6 0.0 3.0 3.4 set bubbles have been deflated andExports of goods and services (nominal) 19.2 22.8 9.2 9.2 imbalances have by and large beenImports of goods and services (nominal) 16.9 25.0 9.9 11.9 corrected (e.g., the current accountBalance of goods and services, % of GDP 0.3 -1.4 -1.8 -3.3 is in surplus). Businesses (especiallyCurrent account balance, % of GDP 3.6 1.5 -0.1 -2.1 exporters) have accumulated reservesCurrent and capital account balance, % of GDP 5.5 2.5 1.2 -0.9 and are more competitive than previ-FDI inflow, % of GDP 1.5 3.7 3.0 4.0 ously. Capital adequacy and liquidity inGross external debt, % of GDP 165 150 140 133 the financial sector are high, althoughGeneral government budget balance, % of GDP 3/ -7.6 -4.9 -2.8 -2.1 a worse scenario would mean thatGeneral government debt, % of GDP 44.7 44.4 43.0 40.8 liquidity constraints would appear. TheSources: CSBL and Swedbank. government does not urgently need to1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey.3/ According to Maastricht criterion. August 23, 2011 16
  • 17. Latvia Swedbank Economic Outlookraise financing in international financial Contribution to annual GDP growth, ppmarkets – it has ample reserves (about 307% of GDP), while large debt rollovers 20 Net exportsare not due until 2014-2015. In June 102011, the Latvian Treasury success- Inventories 0fully issued 10-year bonds of $500 Gross fixed capital form.million, with a coupon rate of 5.25%, -10 Governmentthereby returning to the international -20 Householdsfinancial markets. The weakest link is -30 GDP growthhouseholds, as their still-low savingsand high unemployment would make -40it impossible for them to weather the 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Source: CSBL.crisis without reducing their consump-tion. to perform better than other European expected in the first half of the year.Locally, risks are more balanced. On countries. A slowdown in foreign de- However, the railway sector is experi-the downside, not fulfilling the Maas- mand in 2012-2013 will hinder Latvia’s encing physical capacity constraints,tricht criteria and not introducing the export growth. We are thus revising and, while changing the product mixeuro in 2014 will subtract from growth upwards our export forecast for 2011 and raising efficiency can createin 2013 by not boosting confidence. to account for higher growth in the first growth, investments are necessaryOn the upside, if a parliament more half of the year, but are reducing our to promote it. Tourism is on track toamenable to structural reforms is average quarterly growth forecast from expand, but uncertainty remains withelected on September 17, Latvia may the third quarter of 2011 onwards. respect to the investment plans of thebe pulled out of the current muddling- Riga airport and Airbaltic, the largest Not only foreign demand has con-through scenario and enjoy more solid, airline carrier based in Riga. tributed to export growth; Latvianfaster growth. exporters are continuing to increase The rise in imports at the beginningStronger export growth in 2011, their market shares and search for of this year was surprisingly rapid,but weaker further on new markets. However, unit labour even considering the stronger export, costs have started to rise, which may consumption, and investment growth.Export growth was stronger than antici- pose a risk to future growth. Capacity We believe it was partly due to one-pated in the first half of this year. For utilisation in manufacturing continues off purchases, particularly investmentgoods exports, this is partly attribut- to rise; constraints on qualified labour goods, and import growth should slowable to faster growth in the main trad- and resources (e.g., logging volumes going forward, aligning more closelying partners in early 2011, especially for wood manufacturing) are also be- with the dynamics of the fundamentals.Lithuania and Estonia (nearly one-third coming more apparent and thus slow- Nevertheless, with consumption andof Latvia’s goods exports go to these ing future growth. Falling commodity investments rising, import growth willcountries),1 as well as Germany, Swe- prices may undermine growth in some continue to exceed that of exports. Soden, and Russia (which together ac- industries, whereas a shift towards far, imports have followed exports quitecount for one-fourth of goods exports). higher-value-added products may closely, but the trade deficit is expect-The growth forecast for these countries counteract it. ed to widen slowly in 2012-2013.is now revised downwards for 2012-2013, although they are still expected Growth of services exports is much Strong investments driven by slower and will continue to be so. exporters and EU funds1 A part of these exports does not stay in Freight transportation via railways, The pickup in gross fixed capital for-Estonia and Lithuania, but it is hard to find roads, and ports developed better than mation at the beginning of this yearout their final destination. was stronger than expected, but, asSwedbank’s GDP Forecast – Latvia noted in our forecast, it is very difficultChanges in volume, % 2010 2011f 2012f1/ 2013f to forecast quarterly investment dy-Household consumption -0.1 4.2 (2.5) 2.9 (3.5) 3.6 namics, partly because large projectsGeneral government consumption -11.0 0.0 (-3.0) 0.0 (-0.1) 0.5 last several years.Gross fixed capital formation -19.5 22.0 (12.0) 13.0 (16.5) 15.0 Under the base scenario, investmentsInventories 2/ 5.8 -0.5 (-0.5) -0.1 (-0.1) 0.4 in fixed capital are expected to con-Exports of goods and services 10.3 12.0 (10.5) 5.0 (6.0) 5.0 tinue expanding quite rapidly (in totalImports of goods and services 8.6 16.0 (8.5) 7.0 (9.0) 9.0 by about 50% by the end of 2013); thisGDP -0.3 4.2 (4.0) 3.5 (3.9) 3.9 will correct for the investment shortfallDomestic demand (excl. inventories) 2/ -6.7 7.2 (3.6) 5.0 (5.8) 6.3 (predominantly in exporting sectors)Net export 2/ 0.6 -2.5 (0.8) -1.4 (-1.8) -2.8 of previous years. Activity in the realSources: CSBL and Swedbank.1/ The figures from our forecast in April are given in brackets.2/ Contribution to GDP growth August 23, 2011 17
  • 18. Latvia Swedbank Economic Outlookestate market has increased, not least equality, regional imbalances within the expectations will exert larger upwardthat of non-EU residents (particularly country, and a low participation rate price pressures.from Russia), who invest to obtain call for policy action. Consumers to gain from wageEU residence permits. The financial With the economic recovery widening, growth and retreating inflationsituation of businesses has improved, productivity growth is inevitably slow- In the first half of 2011, householdparticularly in export-related sectors, ing, as new efficiency gains become consumption grew faster than expect-and investments in machines and harder to achieve and less skilled/ ed. While raising our forecast for thisequipment (including in production trained persons become employed. year to account for this, we foreseecapacities) have increased notably. EU Average labour productivity grew by only marginally stronger consumptionFunds are more actively being used 2% in the second quarter (4.5% on growth than previously envisaged forfor infrastructure development. Banks average in 2010). It will be hard to the second half of the year. We areare gradually becoming more active accelerate this growth in the com- reducing our average quarterly growthin lending, while interest rates remain ing years without making structural forecast for next year due to lowerlow. These factors are also expected to changes. Real wage growth is ex- confidence and a possible increasesupport investments over the forecast pected to exceed that of productivity in savings, but expect consumption tohorizon. In the second half of 2013, as early as 2012. Although in our base pick up somewhat in 2013.investment activity is expected to be scenario the gap will remain small, andsupported by improving confidence A number of factors are supporting we do not foresee a major worseningdue to the introduction of the euro in consumption growth. Wage growth in of competitiveness, there is a risk that2014. the public sector picked up early this wages will grow faster. The produc-At the same time, uncertainty about tivity level exceeds that of wages in year. In previous years, the remunera-the 2012 budget remains. Although the manufacturing, thus giving grounds for tion for key positions was sharply cut,activity of current investors should not wage growth in this sector. However, bringing it significantly below the leveldiminish for this reason (because they taking into account skills mismatches for similar positions in the private sec-are used to political uncertainty), the and emigration risks, wage growth tor. There are thus objective reasonsuncertainty may delay the entrance of might spill over to nontradable sectors, to increase wages for these employ-new investors. Current foreign direct where productivity gains have been ees; however, taking into account theinvestment data show stable inflows of much smaller. necessity to continue to reduce thenew equity capital, but mostly into real budget deficit, we think it is too early to Consumer price (CPI) inflation acceler- increase the overall public sector wageestate, and not so much into manufac- ated in the first half of this year along bill. Wage growth in the private sectorturing. Worsening confidence globally with global commodity price increases is weak but likely to be understated byis expected to weigh on investment and local tax hikes. No tax hikes seem the official statistics due to tax evasion.growth in the second half of 2011 and to be planned for this or next year, and While these incomes cannot be picked2012. global commodity prices have stabi- up by official income statistics, they doProductivity growth slowing as lised or even decreased during the show up in consumption statistics.efficiency gains get exhausted summer. Therefore, we expect Latvia’s annual CPI inflation to stay close to Banks are becoming more active in is-The labour market situation continues 4.5% this year (due to base effects) suing credit. Transfers from emigrantsto improve. In the second quarter of and to decelerate next year. We fore- to their families in Latvia also seem tothis year, the job-seekers’ rate declined cast average inflation at 2.4-2.5% in have increased, as shown by the cur-to 16.2%, while employment grew by 2012-2013. However, if wage growth rent transfers account in the balance3.3%. However, such structural/social significantly exceeds that of productiv- of payments. At the same time, house-problems as demographic challenges, ity, household demand and inflation hold deposits did not grow in the firstskills mismatches, rising income in- half of 2011. It thus seems that, with Latvian export market shares (% of particular countrys imports) consumer confidence improving and0.6 12 Annual growth of wages growing slowly, households are 40% Latvian goods tending to spend rather than save. Tak- exports in 1H 20110.5 10 ing into account the still very low level 44% 36% 12% 48% of household savings (a recent survey0.4 8 54% by the Swedbank Institute of Private 20090.3 68% 6 Finances revealed that only 46% of 2010 inhabitants have any savings), this is0.2 4 1Q 11 (4 quarter not prudent. moving average) 32% The high unemployment rate, diminish-0.1 24% 2 * EE and LT on the right scale ing population, and inflation (particu-0.0 0 Source: CSBL, larly of the first necessities) continue RU DE SE PL DK UK FI LT* EE* Bank of Latvia. to be the main factors undermining August 23, 2011 18
  • 19. Latvia Swedbank Economic Outlookconsumption. In 2011, CPI inflation Labour market and inflation, %is expected to “eat” all the nominal 40 20wage growth and thus not improve the 30 15purchasing power of households. With Job-seekers rate (rs)inflation decelerating and wage growth 20 10 Average labourstrengthening in 2012-2013, purchas- productivity, yoy 10 5ing power is expected to get stronger. Nominal net wage, yoyFiscal discipline is of utmost 0 0 CPI growth, yoy (rs)importance -10 -5Tax revenues exceeded the plan by7% in the first seven months of this -20 -10year (9% annual growth). However, 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBL.overall revenues have by and large 2010 and 2009. ening would be needed to achieve thestayed on last year’s level, and the Maastricht criterion. Taking into ac-cumulative general government budget Despite the somewhat better than ex- count the already large consolidationdeficit was at 1.7% of our forecast pected economic development in the so far (above 15% of GDP in 2009-annual GDP in July 2011, nearly the first half of the year, one has to remain 2011) and increasing reform fatigue,same as a year ago. Overall revenues cautious with respect to the size of the this would be very challenging.in the first half of the year were artifi- 2012 fiscal consolidation, especiallycially smaller, as a part of the inflows given recent global developments. On the other hand, notably slowingof EU Funds was suspended, while Bank of Latvia recent estimates sug- global growth would ease pressure onexpenditures were made as planned. gest that consolidation of about LVL Latvian inflation through lower com-Inflows of EU Funds will increase in 100-130 million (0.8% of our forecast modity prices. In our base scenario,the second half of 2011 and raise GDP) will be needed, and we believe it global commodity prices fall very mod-budget revenues. is too early to talk about a smaller con- estly in 2012-2013, and Latvia’s12- solidation. It is very important that the month average annual CPI inflationStill, maintaining strict fiscal discipline measures undertaken be sustainable. is still expected to be in the range ofremains crucial to achieving this year’s 2-2.5% in early 2013, when the Maas-deficit target, especially taking into Euro 2014: last call for policy tricht criteria are assessed. This mayaccount traditionally large end-year action be insufficient to fulfil the price stabilityspending. The higher spending in De- While euro introduction is still included criterion, especially given that somecember is partly explained by objective in our main scenario, there are consid- EU countries struggling with austerityreasons (e.g., payment procedures), erable risks involved. Euro entry will measures may show very low inflationbut also by the willingness of civil serv- be particularly challenging, given the rates (unless they raise their tax ratesants to spend all the funds planned for trade-off between holding down infla- to reduce their budget deficits).this year, as they are not transferrable. tion and cutting the budget deficit (eg. by increasing VAT). Consequently, we see the rest of 2011If economic growth continues as fore- and early 2012 as the last chancecast, revenues this year will most likely If economic growth continues and con- for politicians to act to strengthen thebe in line with the plan. Tax evasion solidation of LVL 110-130 million is im- economy structurally and maximise theproblems, although recently addressed plemented, the 2012 budget deficit is likelihood of euro entry in 2014. Theremore actively, remain – despite tax likely to be below 3%. However, if the seems to be a political determinationhikes, the ratio of tax revenues to GDP global economy slides into the worse to achieve this goal. Yet, necessaryin the first quarter of this year was still scenario and significantly erodes measures take time to bring resultsbelow the level of the first quarter of Latvia’s growth, additional fiscal tight- (e.g., stronger competition to cut infla- tion), and the political cycle will make Accumulated general budget deficit, % of annual GDP* 4 it much harder to push through the needed decisions later on – municipal 2 2007 elections are planned for 2013 and 2008 general elections for 2014. 0 2009 -2 2010 Lija Strašuna 2011 -4 Mārtiņš Kazāks 2012 Dainis Stikuts -6 * cash-flow basis -8 Source: State Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec treasury, Swedbank forecasts. August 23, 2011 19
  • 20. Swedbank Economic OutlookLithuania: A more balanced economy meetsheadwindsIn the first half of 2011, growth ex- come important factors of growth. higher pensions and net wages. Thusceeded our expectations – annual we leave our forecast for 2012 inflation We are keeping our economic growthGDP grew by 6.5%. This was mainly unchanged, at 2.5%. Higher demand, forecast for 2012 at 4.7% – althoughdue to exceptionally strong GDP increasing net wages, and, to some exports and investment will probablygrowth in the first three months of the extent, capacity utilisation constraints increase slower than we forecast inyear, when seasonally adjusted quar- will drive inflation in 2013, for which we April, household consumption will in-terly growth reached 3.5%. In line forecast a 3% increase in consumer crease slightly faster than previouslywith our expectations, investments prices. anticipated because of an expansion-in the first quarter recovered rap- ary government policy, better lending External and internal risksidly – a 41% annual increase – and conditions, and lower inflation. Growth Despite improving fundamentals andcontributed to GDP growth the most. will slow further, along with that of the a better outlook, external risks seemAnother important growth factor was global economy in 2013, when Lithua- to be more acute than they were inhousehold consumption, which in- nia’s economy is expected to expand the spring. The global economy maycreased by 5.5%, compared with the by 4.5%. Insufficient structural reforms, grow much slower or even dip into asame period in 2010. Second-quarter dwindling population and labour force, new recession. Certainly, this wouldgrowth was somewhat disappoint- underinvestment in 2009 and 2010, negatively affect exports and invest-ing – seasonally adjusted quarterly and continued deleveraging across the ments, as companies would oncegrowth was a meagre 0.2%. Howev- developed economies will all weigh on again postpone their expansion plans.er, we expect that this was a tempo- growth in 2013. Global developments could also nega-rary slowdown, probably caused by areduction of inventories. Higher prices of oil, food, and other tively affect household expectations commodities have spurred consumer and their consumption, which would inWe are increasing our GDP forecast turn add further pressure on job crea- price growth above our forecast in thefor this year from 4.2% to 6.3%, due tion and investments. Nevertheless, April outlook. Although prices declinedto stronger-than-expected growth the Lithuanian economy is more resil- in June and July, average annual infla-in the first half of 2011. Improving ient and balanced than it was in 2008. tion is at 3.5%, and we forecast thatconsumer confidence and lending The private sector has lower financial it will be equal to 4.0% at the end ofconditions are likely to contribute to leverage, companies have significantly this year. As average prices of oil andgrowth, which will be only slightly reduced their costs and are more effi- food are expected to drop by 7.6% andslower in the second half of this cient, and the financial sector has bet- 0.3% (in euros) in 2012, external fac-year. Manufacturing will remain an ter capital adequacy ratios and liquid- tors will be behind the lower prices ofimportant source of growth, but, as ity, even if new liquidity constraints some consumer products. However,domestic demand recovers, retail and could occur. Even households are we think that demand-side factors willwholesale trade, financial intermedia- better prepared – with lower debt and become more important – especiallytion, and other services will also be- higher savings they would not need to due to upcoming elections, as well as reduce their consumption as they didKey Economic Indicators, 2010 - 2013 1/ in 2009. 2010 2011f 2012f 2013f As we forecast in the spring, the up-Real GDP 1.3 6.3 4.7 4.5 coming parliamentary elections inNominal GDP, billion euro 27.4 30.3 32.4 34.5 2012 may produce proposals that mayConsumer prices (average) 1.3 4.0 2.5 3.0 be growth restricting in the mediumUnemployment rate, % 2/ 17.8 15.5 13.0 10.5Real net monthly wage -4.3 0.5 3.0 3.0 term. It is also not clear how problemsExports of goods and services (nominal) 30.3 27.0 12.0 8.0 in the euro area will affect perceptionsImports of goods and services (nominal) 28.9 29.0 13.0 8.0 towards the euro – although we do notBalance of goods and services, % of GDP -0.7 -2.1 -3.0 -3.0 predict any changes in the strategicCurrent account balance, % of GDP 1.8 -1.6 -2.5 -2.7 objective of adopting it as soon as pos-Current and capital account balance, % of GDP 4.5 1.4 0.5 -0.7 sible, general scepticism will probablyNet FDI, % of GDP 1.7 3.5 4.0 4.0 be higher.Gross external debt, % of GDP 86.0 80.0 77.0 74.0 Export growth ebbs, foreignGeneral government budget balance, % of GDP 3/ -7.1 -5.2 -3.0 -2.0General government debt, % of GDP 38.2 39.0 38.0 37.0 trade deficit will widenSources: LCD and Swedbank. Exports exceeded pre-crisis highs in1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey.3/ According to Maastricht criterion. August 23, 2011 20
  • 21. Lithuania Swedbank Economic Outlookthe autumn of 2010, and their strong GDP dynamics by expenditures, %growth continued into this year. This 40%is a consequence of internal devalu- Growth from trough to 1Q 2011ation, improved efficiency, and higher 20% 5.2% Contraction from peak to troughcompetitiveness. In the first half of this Current position from the peak 0%year, the nominal growth of exports of -20.3%goods was 41.2% higher than in the -20% -10.2% -5.2% -11.0%same period in 2010. Part of this rapidgrowth was due to strong re-exports -40% -36.1%of motor vehicles to Commonwealth ofIndependent States (CIS), which have -60% GDP Households Government Investment Exports Importsfaced higher import duties since July. consumption consumption (excl. Sources: Statistics inventories) Lithuania, Swedbank calculations.Export of goods produced in Lithuaniain the same period grew slower, by For example, in the first half of this machinery – its nominal annual growth31.7%. year, 15.9% of Lithuania’s total exports exceeded 58%.Despite the continued strong growth of goods were sold in Russia, but only Capacity utilisation is at 71%, belowof exports in the first half of 2011, the 4.9% of exports of goods produced in previous peaks of around 75%. Thus, ittimes of double-digit real growth are Lithuania were sold there. is likely that it was not current capacitylikely to be over. We revised upwards The difference between exports includ- constraints (scale), but rather the crea-our exports forecast for this year – they ing and excluding re-exports is even tion of altogether new capacity (scope)are expected to increase by 14.0%. starker in Belarus, where Lithuania that was the main cause of invest-However, we forecast that, next year, sells, respectively, 7.1% and 1.1% of ments. Due to greater uncertainty inexports will grow two times slower and its exports. In contrast, 12.3% of ex- the global economy, some companieswill decelerate further in 2013. ports of goods produced in Lithuania might be reconsidering expansion;Russia’s continuing strong economic are sold in Germany, which is by far thus, we are reducing slightly our fore-performance in 2011 is expected to the biggest market of these goods. cast of investment growth for 2012.be maintained next year (GDP grows Thus, a recession in EU countries Although foreign direct investmentsby 4.5% and 4.4%, respectively), but would be more dangerous for the (FDI) will pick up in 2011 and 2012,imbalances, which will be even more Lithuanian economy than one in CIS they will, as a percentage of GDP,pronounced as oil prices drop, cause countries. remain below the 2008 level. One rea-some concern. A possible devalua- Greenfield investments are more son for the slow growth in FDI is struc-tion of the rouble would definitely hurt important than EU funds tural – the business environment is stillLithuanian companies’ competitive- Gross fixed capital formation in the not favourable. Another reason is thatness in the region. Since the begin- first quarter of this year increased by the majority of foreign investments isning of 2010, exports to the CIS have 41% over the same period a year ago, concentrated in services, which arecontributed the most to overall export confirming our forecast that invest- less capital intensive.growth. ments will be the main force behind In line with our expectations, acquisi-However, a big part of Lithuania’s ex- GDP growth this year. Both the private tion of EU funds continued at a rapidports to this region are re-exports (mo- and public sectors increased their pace – of the total funds allocated fortor vehicles, machinery); thus, even investments significantly. The private 2007-2013, which amount to EUR 7.4a rapid slowdown would not cause a sector was the main contributor to the billion, 72% have already been allo-dramatic shock to the real economy. growth of investment in equipment and cated and 36% paid out. Through the Operational Programme for EconomicSwedbank’s GDP Forecast – Lithuania Growth more than 37% of the total ofChanges in volume, % 2010 2011f 2012f1/ 2013f EUR 3.3 billion has already been paidHousehold consumption -4.1 5.5 (2.5) 5.2 (4.5) 5.0 out. High bureaucratic hurdles wereGeneral government consumption -3.0 1.7 (1.0) 2.0 (1.0) 2.0 supposed to ensure the transparencyGross fixed capital formation 0.0 25.0 (16.0) 11.0 (13.0) 10.0 and fairness of fund allocation.Inventories 2/ 7.8 -0.1 (-0.2) -0.3 (-0.7) -0.3 However, the very rigid requirementsExports of goods and services 16.3 14.0 (12.5) 7.2 (9.4) 5.6 imposed may have discouraged someImports of goods and services 17.6 15.2 (11.8) 7.8 (9.1) 6.2 innovative companies from tappingGDP 1.3 6.3 (4.2) 4.7 (4.7) 4.5 into these resources, whereas oftenDomestic demand (excl. inventories) 2/ -4.7 8.2 (4.2) 6.1 (5.8) 5.8Net export 2/ -1.8 -1.8 (-0.4) -1.1 (-0.4) -1.0 doubtful projects have been initiated,Sources: CSBL and Swedbank. as companies have not been able to1/ The figures from our forecast in April are given in brackets. resist the temptation to take “free mon-2/ Contribution to GDP growth August 23, 2011 21
  • 22. Lithuania Swedbank Economic Outlookey.” The Ministry of the Economy has drivers, service centres of international reduced their savings rate, whichproposed changing the way the gov- companies are generating a very peaked at 7.9% in 2009 and probablyernment distributes EU funds in 2014- strong demand for IT specialists. declined a little in 2010. As we pre-2020 – instead of giving subsidies, the dicted in our April outlook, the fastest Recent data from the Labour Ex- increase was in consumption of dura-government would provide equity capi- change suggests, however, that un- bles, whereas the growth in consump-tal. Although this might slow the ac- employment will decline more rapidly tion of necessities was negligible.quisition of funds and raise questions in the near future. Average registeredabout the state’s role as a shareholder, For the first time since the second unemployment was around 14.5% init would also sift out the less justifiable quarter of 2007, household deposits 2010 and only slightly lower (14.1%) inprojects or at least increase their eco- exceeded household loans in the the first quarter of this year. However,nomic efficiency. second quarter of this year. Outstand- it has decelerated very rapidly in theSigns of lower unemployment past few months, reaching 11.1% at ing household loans have contractedand higher salaries the end of July. Admittedly, this could by 10.2% since their peak at the end have been the consequence of more of 2008. As banking balance sheetsThis year, Statistics Lithuania con- active efforts by the Labour Exchange improve, and as interest rates are wellducted a population and housing cen- to weed out “fake” unemployed, the below 2009 levels, it is likely that lend-sus; preliminary estimates somewhat ones who are more interested in social ing will increase.unexpectedly revealed that Lithuaniahas only 3.05 million inhabitants. This benefits than actual jobs. Second- Household consumption poses the big-is well below the estimate of 3.25 mil- quarter employment data, too, suggest gest upside risk to our GDP forecastslion inhabitants at the beginning of positive developments going forward for 2012 and 2013. Lithuanian house-this year and the 3.5 million estimated - employment increased by 3.3% com- holds are the least indebted in the EUduring the previous census at the be- pared with the first quarter. (when measured by debt as a percentginning of the last decade. Both emi- The increase in net real wages will be of disposable income). New consumergration and negative natural change negligible this year but will become loans started growing somewhat inhave contributed to the shrinkage of more tangible in 2012 and 2013, when recent months; in the first half of 2011,the population. The total fertility rate nominal net wages will increase by they were 5.4% higher than in theincreased from 1.39 in 2000 to 1.55 in 5.5% and 6%, respectively. First signif- same period a year ago.2010 but remains below 2.1, the fertil- icant increase since 2008 will be good A more impressive growth was enjoyedity rate needed to keep the population news for households from a consump- by “fast credit” companies – loansstable. This has major negative impli- tion perspective; at the same time, it newly issued by these companies grewcations for the labour force, and poten- causes some concern – net real wages by almost 40% during the same pe-tial GDP output, in the long term. will grow a bit faster than productivity. riod. The amount of these loans is noIn the short and medium term, the seri- Household demand picks up longer negligible. However, due to theous issue of structural unemployment very high annual interest rates, ranging Household consumption increased bypersists. Unemployment in the first from 100% to 250%, these loans are 5.5% in the first quarter of this yearquarter was still at 17.2% and declined boosting current purchasing power at over the same period a year ago andto 15.6% in the second. And, at the the expense of a much lower purchas- is likely to maintain a similar pacesame time the manufacturers are in- ing power later. throughout the rest of 2011. As realdicating that they cannot find skilled wage growth was negative in the first Inflation will be lower; there is aengineers and the transport sector quarter and social benefits were more chance for the eurodoes not have enough long-distance or less flat, it is likely that households In the first half of 2011, consumer pric- es increased more rapidly than we had Export partners contributions to export growth, % predicted in April, mainly due to higher 50 prices for oil and other commodities. 41.2 40 Annual inflation peaked already in May 32.7 28.5 Other (at 5%), and prices declined in both 30 CIS June and July. We forecast that aver- Other EU 20 11.1 age annual inflation will equal 4% at Germany 10 Latvia, Estonia the end of this year and will decelerate -26.6 Export growth rapidly to 2.5% in 2012. 0 -10 As prices of most commodities are expected to be lower in 2012, this -20 leaves little external pressure on -30 Sources: Statistics consumer price inflation in Lithuania. 2007 2008 2009 2010 1H2011 Lithuania, Swedbank August 23, 2011 22
  • 23. Lithuania Swedbank Economic OutlookDomestic factors, however, will start Labour market, %playing a more important role – a more 20expansive government economic 17.8 15policy (increasing minimum wages and 15.5 13.7pensions) will create more possibilities 10 11.4 13.0 Unemployment rate (ls) 10.5for manufacturers and retailers to raise Labour productivity (ls) 8.3prices of goods and services. 5 5.8 Net real wage (ls) 5.6 4.3Since the beginning of the recovery, 0 Employment, yoy (rs)producer prices for manufacturinggoods sold outside Lithuania have -5been increasing much more rapidlythan prices of goods sold in local mar- -10 Sources: Statistics 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f Lithuania, Eurostat, Swedbankkets. July was the first month when thistrend changed, as annual producer would be offset by additional tax in- 2012 and 2% in 2013.price inflation was higher for goods come – currently only 5.7% of full-timesold locally. The same domestic fac- Euro adoption 2014 still possible employees in the public sector earntors will be behind inflation in 2013, for It seems that international circum- the minimum wage, whereas in the pri-which we forecast price increases of stances are favourable for Lithuania’s vate sector 11.7% earn the minimum3%. meeting the Maastricht criteria in 2012 salary. Small businesses keep resist-Budget consolidation should ing this increase (naturally, given the and adopting the euro at the beginningnot end prematurely high structural unemployment), but the of 2014. As the global economy slows government is likely to play this card in and commodity prices recede, soEnd-2012 parliamentary elections are an election year. does inflation in Lithuania. It is likely,approaching and will be preceded by however, that, as there will be at leastpopular, but sometimes counterpro- State budget revenues have been three countries in the EU with averageductive and inadequate, promises and supported by strong nominal GDP annual inflation below 1%, the Maas-proposals. It has already been made growth and are close to meeting the tricht criterion for price stability will beclear by the government that pensions very ambitious plans set for this year. at around 2%. This means that ad-will be restored to their 2009 level In the first half of 2011, state budget ditional (or simply continued) austerity(they were reduced in 2010 and 2011, revenues were 10.9% higher than in in Lithuania could push inflation belowas a consolidation measure), which the same period a year ago, and only this threshold.means the average annual pension will 2.7% below the plan. Value-added taxincrease by around 5.5%, costing the (VAT) and personal income tax rev- Politicians have been lulled too muchgovernment around EUR 170 million. enues were above the plan, but excise by the good GDP numbers and dou- duties missed the target by 6.7%. ble-digit increase in tax revenues. Un-It is very likely that, next year, the This situation might improve some- fortunately, the phrase “further consoli-minimum monthly salary, currently at what in the second half of this year if dation” recently has been absent fromLTL 800 (EUR 232), will be increased the various anti-smuggling measures their minds and mouths. However, ato LTL 900. The Ministry of Finance taken have some effect and Belarus further deterioration in global condi-calculates that this will cost the gov- keeps limiting sales of fuel close to the tions could dent GDP growth and taxernment budget an additional EUR 29 Lithuanian border. Considering this, we revenues in 2012. In this case, evenmillion and has resisted this increase project this year’s deficit to be 5.2% of if Lithuania meets the price stabilityso far, despite a strong push from GDP, and to decline further to 3% in convergence criterion, it will not reachtrade unions. But additional expenses the threshold of a general government budget deficit of 3% of GDP. For the Household credit and deposits: outstanding amounts (m LTL) and interest rates for them (weighted, %) second time in a row, parliamentary 35000 7 elections are coming at the worst pos- sible time. 30000 6 Loans (l.s.) The policymakers can and should 25000 5 Deposits (l.s.) agree that the strategic objective of Interest rates for loans 20000 4 (r.s.) adopting the euro is essential and Interest rates for 15000 3 deposits (r.s.) abstain from increasing government spending before the election. 10000 2 Nerijus Mačiulis 5000 1 Lina Vrubliauskienė 0 0 Sources: Bank of Lithuania; Vaiva Šečkutė 2007 2008 2009 2010 2011 Swedbank calculations. August 23, 2011 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 Senior Economist Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se Senior Economist Anna Ibegbulem +46 8 5859 7740 anna.ext.ibegbulem@swedbank.se AssistentEstonia Annika Paabut +372 888 5440 annika.paabut@swedbank.ee Acting Chief Economist 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 EconomistAugust 23, 2011 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.August 23, 2011 25