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Swedbank Economic Outlook - August 2012
 

Swedbank Economic Outlook - August 2012

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Swedbank Economic Outlook - August 2012: Dancing in the egde of danger

Swedbank Economic Outlook - August 2012: Dancing in the egde of danger

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    Swedbank Economic Outlook - August 2012 Swedbank Economic Outlook - August 2012 Document Transcript

    • Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies August 21, 2012Dancing on the edge of danger G Global development Table of Content:  The world economy is cooling, and the euro area is near recession. We have revised downwards global GDP growth to 3% in 2012 and 3.1% in 2013, Introduction: Laudable from 3.1% and 3.4% in our April forecast. Given that our “muddling-through” scenario holds, growth will increase to 3.4% in 2014. upswing – but watch out for  The main negative forecast risk is a worsening of the crisis in the euro area, global tumble 2 but the US’s falling off the “fiscal cliff,” a hard landing in China, and higher commodity prices could also generate a weaker outcome. On the contrary, Global: Imbalances hold faster crisis resolution could lead to higher growth. Sweden S down global growth 4  Real growth rates picked up significantly in the first half of 2012, driven mainly by net exports. Domestic demand was also robust on the back of a Sweden: External conditions better-than-expected labour market. The external slowdown, however, indi- strain growth 7 cates that the rate of expansion will slow significantly the rest of the year.  The sharp rise in the krona poses significant challenges for export-oriented Estonia: Domestic economy companies and for economic policymaking. We expect the repo rate to be kept too high, while fiscal policy will not be able to make up for the slack in safeguards growth 12 demand in the short term. Although growth will pick up to 2.4% in 2014, fol- lowing the 1.6% gain in 2013, unemployment will remain high, at 7.6%. Latvia: Decent growth despite Estonia E the global headwinds 16  Economic growth slowed in the first half of 2012, and growth is increasingly being generated by the domestic economy, while export growth has slowed. Unemployment continued to decrease in the first half of 2012, to 10.8% on Lithuania: Stronger growth average. after a stutter step 20  We are raising our GDP forecast for this year from 2.7% to 3.0% due to the better outcome for both foreign and domestic demand, and are revising growth for 2013 downwards from 4.2% to 4.0%. Growth is expected to reach 4.3% in 2014 as global growth accelerates. Inflation will slow from 3.9% in 2012 to 2.7% in 2014. Public finances will remain solid. Latvia L  The economy expanded by a remarkable 6% in the first half of 2012. Quar- terly growth has remained at solid 1% over the last three quarters. Both exports and domestic demand are contributing to growth, owing to robust confidence, gains in competitiveness, and EU fund support.  We are raising the growth forecast to 4% (2.5% before) in 2012, while keep- ing it at 3.5% in 2013. Growth is expected to pick up to 5.2% in 2014, as global conditions improve and local labour tax cuts support consumption. Inflation will remain at 2.5% in 2012-2013, but rise to 3.5% in 2014 due to rising global energy prices and strengthening domestic demand. Lithuania L  In line with expectations, GDP growth has slowed this year and probably bottomed out in the second quarter. Budget revenues continue to exceed the plan, indicating that the goal of cutting the deficit to 3% of GDP this year will be met. Inflation has kept declining but is likely to pick up somewhat next year.  Although uncertainties remain, we expect growth to reach 4.1% in 2013 (slightly lower than previously forecast) and accelerate to 4.5% in 2014. Unemployment was volatile in the first half of this year, but is expected to decline and reach 9.3% in 2014. August 21, 2012 1
    • Introduction Swedbank Economic OutlookLaudable upswing – but watch out for global tumbleDespite difficulties in the global envi- sion. In the advanced economies, pol- Germany. In addition, the credibilityronment, Sweden and the Baltic econo- icy tools are more restricted, since poli- of the euro as a currency is at stake,mies have so far performed better than cy interest rates cannot go much further thereby putting at risk global financialexpected in our April forecast. Distant down, the effects of quantitative easing markets and the real economy. Greecefrom the epicentre of the European cri- are most likely small and temporary, may have to leave the euro area if thesis, these countries have seen strong and the political – and, for some coun- country lacks the ability to reform and,growth, but, in the rest of this year, ac- tries, economic – room for fiscal expan- subsequently, loses external supporttivity is expected to slow as the trade sion is lacking. We have revised the oil to finance its debt and perhaps also toand investment climate is weakening. price in dollars per barrel downwards to obtain more debt forgiveness. Spain’sIf developments in the euro area fol- $110 and $104 for 2012 and 2013, from and Italy’s sovereign bond rates are stilllow our “muddling-through scenario”, a $119 and $113 in our April forecast. In higher than what is bearable in the me-pickup in activity is likely during 2013 2014, the oil price is seen at $111 per dium term, thus increasing the probabil-and 2014. GDP growth is expected to barrel. The decline should support con- ity of a bailout, in addition to the alreadyincrease from 3-4% 2012 and 2013 to sumption in oil-importing economies, existing support for Spanish banks. The4.5-5.2% in 2014 in the Baltic countries; and disinflation should push up real permanent bailout fund, the Europeangrowth in Sweden, meanwhile, will fall purchasing power amongst house- Stability Mechanism (ESM), is await-from 1.8% to 1.6% next year, before holds. However, increasing food prices ing clearance from the German Con-reaching 2.4% in 2014. is an upward inflation risk. The euro will stitutional Court, and credit ratings areCompared with our April forecast for weaken further, thus supporting the ex- being slashed in the meantime. Eventhese countries, GDP growth with few port sector, while making imports more so, working groups with their task ofexceptions has been revised up for expensive in the euro area. designing better institutions, composed2012, while the reverse applies for of both politicians and central bankers There are great drags on the advanced2013. Growth will gradually pick up from in the European Central Bank (ECB), economies from credit and fiscal aus-2013 onwards. Sweden and the Baltic will slowly make progress during the terity, unclear crisis management in thecountries are highly dependent on the autumn; meanwhile, financial volatility euro area associated with increasedglobal economy, which, compared with remains high. financial market fragmentation, and, inour previous forecast, will grow slower the US, the threat of falling off a “fis- As we assign a 60% probability thatin 2012, at 3.0% (3.1%), and in 2013, at cal cliff” if expenditures have to be cut our main muddling-through-scenario3.1% (3.4%), before reaching 3.4% in and taxes increased. Business and will be realised, there are great risks2014. This means that the global econ- consumer confidence has already been that could change the outcome sub-omy will underperform throughout the hurt, and the willingness to invest, re- stantially. These are biased more to-forecast horizon, increasing the output cruit, and consume is faltering. wards the negative side (35%), whilegap and also unemployment. positive risks are small (5%). Although The euro area crisis is the main ob-The main driving forces for the mod- still coping, the world economy is living stacle to global growth as not onlyest global growth are stimulus policies dangerously, maintaining imbalances southern Europe, but also the UK arein the emerging markets through lower that hold down growth. The euro area in recession with the risk of spreadingpolicy interest rates and fiscal expan- crisis could become aggravated if po- to core countries such as France and litical consensus on how to go forwardMacro economic indicators, 2011- 2014 were not to emerge, Spain and Italy 2011 2012f 2013f 2014fReal GDP growth, annual change in % had to seek support simultaneously, Sweden (calender adjusted) 4.0 1.8 1.6 2.4 and/or Greece had to leave the euro Estonia 7.6 3.0 4.0 4.3 Latvia 5.5 4.0 3.5 5.2 area. On the other hand, confidence Lithuania 5.9 3.3 4.1 4.5 could strengthen if the euro crisis man-Unemployment rate, % of labour force agement improved, moving towards a Sweden 7.5 7.5 7.7 7.6 banking union, stronger fiscal coopera- Estonia 12.5 10.5 9.8 8.7 Latvia 16.2 15.5 13.7 11.5 tion with Eurobonds, as well as accept- Lithuania 15.4 13.2 11.5 9.3 ing that the ECB would fully becomeConsumer price index, annual change in % the lender of last resort. In the US, the Sweden 3.0 1.2 1.8 1.9 Estonia 5.0 3.9 3.1 2.7 political gridlock related to fiscal policy Latvia 4.4 2.5 2.5 3.5 is the greatest risk, since the above- Lithuania 4.1 2.8 3.0 3.4 mentioned threat of falling off a fis-Current account, % of GDP cal cliff would, if fully realised, reduce Sweden 7.0 6.9 6.4 6.3 Estonia 2.1 -0.1 0 -0.5 GDP growth by 3-4 percentage points Latvia -1.2 -1.6 -2.7 -3.8 in 2013. Growth in emerging markets, Lithuania -1.6 -2.5 -3.0 -3.6 not least China, could slow more thanSources: National statistics authorities and Swedbank. August 21, 2012 2
    • Introduction Swedbank Economic Outlookexpected in response to the crisis in ad- 10-year government bonds at 1.4%, an to 5.2% in 2014. The risks are relatedvanced economies, thus lowering glo- increase of investment spending on in- to external developments, including for-bal growth substantially. Other upside frastructure and education would make eign demand, commodity prices, andand downside risks include commodity economic sense. EU funds. Latvia is likely to fulfil theprices, exchange rates, and political Maastricht criteria and adopt the euro Estonia’s GDP expanded by 0.4% quar-developments, including elections. in 2014. The main challenge seems to terly and 2.0% annually in the second be government long-term interest rates,After contracting at the end of last year, quarter. Exports has contributed largely while budget deficit and inflation are ex-GDP in Sweden expanded by 0.8% and to growth, but domestically oriented pected to be in line with the criteria.1.4% in quarterly terms in the first two sectors are now increasingly support-quarters of this year. Net exports ac- ing the expansion. GDP is expected After having expanded rapidly in 2011,counted for the largest contribution to to grow by 3.0% this year, before ac- GDP in Lithuania grew by 0.4% ingrowth. Going forward, growth will slow, celerating to 4.0% in 2013 and 4.3% quarterly terms and by 2.1% in annualbecoming more dependent on private in 2014. Export growth is slowing this terms the second quarter of this year.consumption and investments. GDP is year but will benefit from a weaker euro The outcome, although weaker thanexpected to grow by 1.8% this year in and relatively dynamic export markets expected, can be explained by the clos-calendar-adjusted terms, before slow- in northern Europe – which are more ing of the oil refinery for maintenanceing to 1.6% next year; however, quar- important to Estonia than the struggling reasons, which makes up one-fourthterly growth in 2013 will be higher than markets of southern Europe. Inflation of Lithuanian industry output, for fivein the second half of this year. In 2014, will decelerate due to a higher base weeks. The uncertainty in the euro areaGDP growth will be above potential and lower commodity prices, which, has reduced business inventories andgrowth, reaching 2.4%. Unemployment together with an improving labour mar- is having temporary negative effects onwill remain at an elevated level, reach- ket, are supporting household spend- growth. Growth is therefore expecteding 7.6% in 2014, which is still high and ing. Public finances remain solid, with a to pick up. This year’s GDP growth ofmost troublesome for the long-term un- low debt ratio of around 10%, and, after 3.3% will rise to 4.1% next year and toemployed. There is room for economic this year’s and next year’s small budget 4.5% in 2014. In line with the deeperpolicy to be more expansionary, e.g., by deficits, the budget again is expected to recession in the euro area, the down-lowering the repo rate and taxes while show a surplus in 2014. ward revision of growth from our Aprilincreasing expenditures, but both the forecast will slow the improvements in Latvia’s economy continued to ex-Riksbank and the government will re- the labour market; nevertheless, unem- pand by a brisk 1% in quarterly termsmain cautious. Thus, the repo rate will ployment is set to decrease to 9.3% in in the second quarter. As, in annualbottom out at the current level at 1.5% 2014 (from 15.4% last year). Inflation terms, GDP grew by 5.1%, the continu-before rising to 2.5% at the middle of is expected to have an upward trend, ing recovery is also supporting a fall2014. The Swedish krona will therefore as regulated prices are increased. in unemployment and strengtheningremain strong and constitute a chal- Too-high inflation and long-term inter- confidence. Both exports and domes-lenge for export companies. Inflation est rates could postpone Lithuania’s tic demand have so far contributed towill remain below the target of 2%, and entry into the Economic and Monetary growth. However, the slowing activ-unemployment will be unnecessar- Union (EMU); another negative factor ity of the main trading partners – andily high. With an eye on the election in could be the government’s reluctance negative calendar effects – will causeSeptember 2014, the government will to make this an official national target. growth to decelerate from 4% this yearexpand fiscal policies, but with the im- Public finances are strengthening as to 3.5% in 2013. Gradually, a betterplicit goal of continuing to lower the gov- the budget deficit is declining rapidly global climate, labour tax cuts, andernment debt ratio towards 35%. With and debt will start falling next year. catching-up effects will drive growth up The external climate has worsened,Manufacturing growth (index Jan 2008=100, seasonally adjusted and and the many negative risks point tothree months moving average)1/ a fragile world economy, which could 110 have an impact also on Sweden and 105 the Baltic countries. One of the great- 100 est challenges for these four countries 95 Estonia is to avoid becoming complacent, and Lithuania 90 instead to improve the fundamentals for Latvia 85 Sweden growth – not least since the countries 80 Euroarea that now struggle in the euro area very 75 well could shape up and become more 70 competitive in a few years’ time! 65 Cecilia Hermansson Sources: National Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 statistics authorities1/ Refined petroleum products excluded from manufacturing in Lithuania August 21, 2012 3
    • Global Swedbank Economic OutlookImbalances hold down global growthDebt deleveraging, credit and fiscal continue to contribute to near stagna- confidence fell, while purchasing man-austerity, the difficulties with the insti- tion for the region as a whole in the agers noted a decline in industrial ac-tutional setup of the euro area, volatile coming years, but major differences will tivity. In Europe, especially, the signsfinancial markets, the rebalancing of remain between a stronger Germany of a recession became more visible;growth, the implementation of budget and the crisis-struck southern Euro- and euro area crisis management wasconsolidation and structural reforms pean countries. In the US, growth pros- complicated by the elections in Greece– the challenges the global economy pects will worsen in the second half of and escalating sovereign bond rates inis faced with have become more de- this year because of global weakness Spain and Italy. Spanish banking prob-manding for policymakers. Compared and the uncertainties surrounding fis- lems increased, and a bailout of bankswith our April forecast, the outlook for cal policy, including the threat of falling was agreed upon. In the US, the slow-global growth has become weaker. No- off the “fiscal cliff”, i.e. the simultaneous down intensified in the second quarter,tably, GDP growth for 2013 has been tax increases and expenditure cuts that and the labour market remained weak.revised downwards. The second half are slated to take place at the end of Emerging markets experienced a slow-of this year – and the beginning of next 2012. With lower inflation, emerging down as well, not least China, India andyear – is expected to show recession markets have room for more stimulus, Brazil, as demand from their importantor very weak growth in most advanced and economic growth will thus start to export markets fell.economies. Except for the euro area, pick up in the next couple of quarters. In line with weaker global economicthe global recovery is continuing, but at Developments since our April growth, commodity prices decreased,a slow speed, and with great risks at- forecast thus alleviating the situation in most ad-tached to the outlook. As we were publishing our April fore- vanced economies and worsening theGlobal growth will reach 3.0% this year, cast, sentiments started to turn nega- outlook for commodity-exporting coun-before increasing to 3.1% next year and tive since the optimism from central tries. More recently, agricultural prices3.4% in 2014. This means that growth banks’ liquidity injections that had per- increased due to, e.g., harsh weatherrates during our forecast horizon will re- meated the first quarter of this year be- conditions in the US and Russia, exert-main lower than last year’s 3.5%, and gan to fade. Japan and Germany, es- ing price pressures, mainly in emergingthat growth will stay below its potential, pecially, grew stronger than expected markets.which is around 4%. in the first quarter, while the recovery The muddling through scenarioIn the euro area, the recession will last in the US continued at a modest pace. still prevailsthe rest of this year. High unemploy- In the second quarter, economic growth Compared with our April forecast, thement, austerity and weak demand will weakened. Business and household global economy will recover at a some- what slower speed, especially duringSwedbank’s GDP forecast - Global1/ 2013. Our main scenario, a muddling(annual percentage change) through scenario, where global GDP Outcome August 2012 April 2012 growth increases from 3.0% this year to 3.1% in 2013 before reaching 3.4% 2011 2012 2013 2014 2012 2013 2014, is lower in total by 0.4 percent- US 1.8 2.1 1.7 2.3 2.1 2.3 age point than the April forecast. One EMU countries 1.5 -0.4 0.1 0.8 -0.5 0.4 of the main reasons for the downward Of which: Germany 3.1 1.1 1.1 1.6 0.5 1.3 revisions is the situation in the euro France 1.7 0.3 0.5 1.1 0.3 0.6 area, which is more troublesome than Italy 0.4 -2.2 -1.0 0.2 -1.8 -0.3 earlier expected; this is also contribut- Spain 0.7 -2.0 -1.2 0.3 -2.0 -0.8 ing to a weakening of activity in other Finland 2.8 0.7 1.1 1.8 0.8 1.7 advanced economies, such as the US, UK 0.7 0.2 1.0 1.7 0.5 1.0 UK, and Japan, as well as in most of Denmark 0.8 0.8 1.2 1.5 0.5 1.0 Norway 1.5 3.3 2.0 2.5 2.0 2.5 the emerging markets. Apart from im- porting European problems, the US Japan -0.7 2.2 1.3 1.2 1.5 1.2 economy has slowed more than ex- China 9.2 7.9 7.8 7.6 8.1 8.0 India 7.2 6.2 6.5 6.8 6.7 7.3 pected due to the fear of falling off the Brazil 2.7 2.0 3.9 4.1 3.1 3.5 “fiscal cliff” and the political gridlock in Russia 4.3 3.8 3.9 4.3 4.1 3.9 Congress. In India, domestic develop- Global GDP in PPP 3.5 3.0 3.1 3.4 3.1 3.4 ments, including inadequate structural Global GDP in US$ 2.6 2.2 2.3 2.7 2.2 2.3 reforms, have weakened the economy Sources: National statistics and Swedbank. more than previously thought. In China and Brazil, also, growth has weakened more than expected. August 21, 2012 4
    • Global Swedbank Economic OutlookThis main scenario, almost 80% driven Purchasing Managers Index (PMI) for manufacturingby growth in the emerging markets, 65is given a probability of realisation of 6060%. Towards the end of the forecast 55horizon, the advanced economies’ con-tribution to global growth is expected 50 Chinato have increased only to almost 30%. 45 Euroarea JapanThis means that the world economy will US 40still be running at “two speeds,” with ahigh dependence on emerging markets’ 35maintaining vigorous growth. 30One of the driving forces for the recov- 25 Source: Ecowin Reutersery in the main scenario is more stimu- Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12lus from policymakers in the emerging the room for economic policy measures by large energy import bills and a slow-markets. Central banks have started is limited, and increasing food (and oil) down in export growth.to lower policy interest rates and will prices are still a risk. Besides quantita-continue to do so; however, the room GDP growth in the US slowed from 1% tive easing and lower policy rates, struc-for manoeuvre is limited as disinflation in quarterly terms at the end of last year tural reforms could increase medium-could come to a stop with the increase to 0.5% and 0.4%, respectively, in the term growth and in the short run at leastin food prices, and because of the ca- first and second quarters of this year. strengthen confidence. Reducing thepacity constraints resulting from the in- In line with the lacklustre growth seen euro area’s institutional deficit needsadequacy of reforms in the past. There in the first half of this year, investments, to be at the top of the agenda, in orderis also room for expansive fiscal policy, recruiting, and income growth have to create expectations that the euro wille.g. in China, but the large amount of slowed. Unemployment will remain ele- remain the region’s single currency. Instimulus seen in 2008-2009 will not be vated, and, with inflation falling, the de- the US, agreeing on fiscal policy is therepeated as the risk for a new inflation- mands on the Federal Reserve to ease most important, both from a short- andary pressures is by no means negligi- monetary policy further by introduc- a longer-term perspective.ble. ing a new round of quantitative easing The effects of a loose monetary policy has risen, and we foresee that such aIn the advanced economies, driving in the advanced economies are fad- measure will be taken in early autumn.forces for growth include a lower oil ing, and the changes to policy interest We do not foresee the US actually fall-price, as well as lower overall infla- rates will be marginal going forward. A ing off the “fiscal cliff”, but do foreseetion, which will support real growth in weaker euro supporting the export sec- some drag on growth, once decisionsconsumption. Even if the oil price has tor in the euro area is probable, while have been taken after the election hasagain started to rise, the concern about the dollar – in line with a stronger re- produced a new Congress. GDP growthIran has declined, while the recovery is covery – will continue to strengthen. is expected to fall from 2.1% this year toslowing and, thus, the demand for oil is China will be more wary of a too strong 1.7% the next, before recovering to adampening. Our price assumption has appreciation of the renminbi against the modest 2.3% in 2014.been revised down to $110 and $104 dollar, as exports and investments areper barrel for 2012 and 2013, from $119 In the euro area, GDP was unchanged still seen as the most important drivingand $113, respectively. In 2014, we in the first quarter, after contracting by forces for growth; however, the willing-see, although with great uncertainty, 0.3% in the fourth quarter of last year. ness to consume will play a larger role.the price coming back to $111 as de- In the second quarter, GDP fell by 0.2% In Japan, the yen will weaken, as themand picks up. Inflation is falling, but and will keep falling during 2012, before current account balance is challenged growth slowly comes back next year.Interest and exchange rate assumptions Inflation, at present at 2.4%, will fall Outcome Forecast below 2% next year, and the European 17 aug 31 Dec 30 Jun 31 Dec 30 Jun 31 dec Central Bank (ECB) will lower the policy 2012 2012 2013 2013 2014 2014 rate to 0.5% in the autumn. Other toolsPolicy rates are seen as workable only when politi- Federal Reserve, USA 0.25 0.25 0.25 0.25 0.25 0.50 cians begin taking their responsibilities European Central Bank 0.75 0.50 0.50 0.50 0.50 0.50 seriously, i.e., purchases of Spanish or Bank of England 0.50 0.50 0.50 0.50 0.75 1.00 Italian sovereign bonds will be possi- Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.10 ble only if and when governments re-Exchange rates quest support bailout funds and fulfil the EUR/USD 1.23 1.16 1.18 1.20 1.22 1.25 conditions set up by the bailout funds. EUR/GBP 0.79 0.77 0.76 0.75 0.75 0.75 RMB/USD 6.36 6.30 6.20 6.08 5.98 5.85 Until then, financial market instability USD/JPY 79 80 83 88 90 90 and fear will continue, and the prob- August 21, 2012 5
    • Global Swedbank Economic OutlookTwo-year government bond yields (in percent)and the euro in relation to the US dollar Downward risks are abundant 8 1.55 We have given a probability of 60% to 7 1.5 our main scenario, while arguing that 6 downward risks are much larger (35%) 1.45 Germany than upward risks (5%). Among the 5 1.4 risks that would cause the outcome to 4 Spain 1.35 become more negative, we find the fol- 3 EUR/USD (rhs) lowing: 1) increased financial market 1.3 2 instability and a spreading crisis in the 1 1.25 euro area, with the any of the adverse 0 1.2 scenarios for the euro described above materialising; 2) a fall off the fiscal cliff, -1 1.15 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 reducing US GDP growth by some Source: Reuters Ecowin 3-4%, driving the US into recession; 3)ability that Italy and Spain will have to Japan’s quarterly growth reached 1.3% much higher commodity prices due torequest support increases as interest in the first quarter of this year; this was drought and/or geopolitical tensions,rates keep rising – a probability that is unexpectedly strong and driven by limiting the room for manoeuvre forhigher than 50%. As Germany also is consumer spending. Growth slowed to monetary policy makers, especially inexperiencing a slowdown of economic 0.3% in the second quarter. Despite the the emerging markets; 4) a hard land-activity, the need for policy measures need for public reconstruction that will ing in China and a stalling of growthbecomes stronger, and a weaker euro increase GDP going forward, private in other emerging markets, which aremay at least give some relief to export investment is slowing and exports are more affected by the crisis in the ad-sectors. GDP in the euro area is fore- struggling because of the strong yen vanced economies; and 5) politicalseen to fall by 0.4% this year, before and the decelerating Chinese growth. risks in connection with upcoming elec-growing by a marginal 0.1% next year The Bank of Japan will resume buy- tions in the US, Germany, and Italy, andand 0.8% in 2014. ing assets, but fiscal policy will not be with the transfer of power in China. adjusted to fix medium- and long-termIn our main scenario, the euro area re- Amongst the risks that would improve threats. GDP will grow by 2.2% thismains intact, with all 17 countries part the outlook, we find the following:1) year, before falling to 1.3% next yearof the currency union. Institutions are confidence building and crisis manage- and 1.2% in 2014. Deflation is comingstrengthened as an answer to the un- ment improving in the euro area, thus back, but at least the yen might depre-stable financial markets and the crisis. shortening the recession and stabilising ciate while the more negative currentThe mechanisms for banking and fiscal financial markets; 2) lower commodity account trend continues.cooperation slowly improve, also open- prices due to improved supply condi-ing up an enhanced role for the ECB as GDP growth in Brazil and India – and, tions; 3) a consumption boom in Ger-lender of last resort. In a second sce- to a lesser extent, in China and Russia many in line with lower unemploymentnario, Greece leaves the euro area; the – has been revised downwards, taking and inflation; 4) more stimulus in theprobability of this happening is close to into account the weakening demand emerging markets, driving up growth;50%. In a third scenario, all the south- from advanced economies. The ques- and 5) an improvement in the politicalern European countries leave the euro, tion is whether potential growth in these process for enacting fiscal measures inthus strengthening the currency union countries will also be lower going for- the US, creating confidence, and thusfor the countries that remain. In a fourth ward, as capital inflows for investments strengthening the growth outlook.and less probable scenario, the euro are slowing, capacity has not been The global outlook remains uncertain,area is dismantled, as the basis for co- built, and reforms are lacking. China not least for 2013 and even more so foroperation disappears; Germany finding is the exception; here, investments, at 2014, as political and economic devel-the price of bailing out countries that least in the short term, may be too large opments are likely to change the pic-do not sufficiently reform their econo- in relation to demand. The rebalancing ture. The challenges facing, especially,mies to be too high. The second, third, is continuing. This means that the out- the advanced economies are vast, andand fourth scenarios have side-effects look for growth below 8% is actually a less probable developments but withthat would be very costly, not only for positive development – if the authorities large consequences, i.e.“fat-tail” out-Europe, but for the global economy at do not try to boost investments again, comes, cannot be excluded. Swedenlarge. This – and the goal of further in- increasing the risk for a hard landing and the Baltic countries may not betegrating Europe – is the reason why at a later stage – and instead focus on at the centre of these challenges, but,politicians will continue to work to re- consumption, while maintaining exports as open and export-dependent econo-alise the first scenario, although the as much as possible. For an extended mies; they will not be spared should thechallenges to keep the currency union discussion on country developments, outcome become more negative.together continue to grow. read the Swedbank Global Outlook, published August 21st. Cecilia Hermansson August 21, 2012 6
    • Swedbank Economic OutlookSweden: External conditions strain growthEconomic growth in Sweden was sur- We expect the main drag on Swedish the krona to remain relatively strong.prisingly strong in the first half of 2012. growth in the near term to be a weak- In the last year of our forecast period,Following an annual growth of 1.5% in er external demand. We have revised 2014, we expect growth to continue tothe first quarter (calendar-day adjust- downwards our global outlook from the increase, reaching 2.4%, but the combi-ed), the second-quarter rate of expan- April forecast, and this slowdown will nation of weak external conditions andsion was estimated at 2.3%. According have a negative impact on economic a continued strong krona will be a chal-to these preliminary numbers, growth activity in Sweden for the remainder lenge to Swedish export companies.in Sweden was broad based, with net of 2012. This development will be re- The main risk to our forecast, and toexports accounting for the largest con- inforced by the sharply stronger krona. the Swedish economy, is a worseningtribution to GDP. The positive devel- Thus, we expect the reduction of unem- of the crisis in the euro area. This wouldopment was mirrored in other sectors ployment to be protracted. Household entail significantly lower growth ratesas well. Demand for labour picked up, consumption will take over as the main in the euro area and deepen the mis-but, due to a large increase in the la- driver of growth, while investments will trust in the ability of southern Europeanbour supply, the unemployment rate fall back after the large increase in the countries to stabilise their economies.increased in line with our expectations. first quarter. Overall, we expect GDP Such a worsening would have ripple ef-Households benefitted from employ- growth of 1.8% for the whole year. fects on global growth and on Swedishment and wage growth, but neverthe- In 2013, as global conditions improve, exports. In addition, given the prelimi-less showed some restraint in raising underlying quarterly growth will pick up nary nature of the second-quarter GDPspending. Instead, savings increased (although the annual growth rate, at estimates, there is a nonnegligible riskand borrowing slowed. 1.6%, will be lower than in 2012). The that the past growth numbers will be re-Recent macroeconomic data give a improvement in the labour market will vised downwards, thereby altering themixed picture. The purchasing manag- lag, however, and we foresee the un- growth path of the Swedish economy.ers’ index for manufacturing indicates employment rate in early 2013 gradu- Challenging export conditionsstagnation, while the index for serv- ally increasing to reach 7.8%, before going forwardices points to a continued growth in the falling to around 7.5% in the end ofservices sector. The economic tenden- 2014. Structural unemployment will re- After a sharp fall at the end of last year,cy indicator, while declining in recent main a major concern, although we ex- export volumes recovered faster dur-months, has shown an upward trend pect there will be some government ini- ing the first six months of 2012 than wefor consumer confidence. This sug- tiatives to address this. The monetary expected in our April report. This wasgests that the underlying conditions for policy rate will, in our view, be kept too mainly driven by exports of servicesthe Swedish economy are still sound, high, since resource utilisation in Swe- and nondurables, while weak global in-although vulnerability – in particular, to den is still low and price increases will vestment activity led to a decline in theexternal shocks – is high. fall short of the inflation target over the exports of investment goods, such as forecast horizon. This will also cause telecommunications products and vehi- cles. In total, export volumes increasedKey Economic Indicators, 2011 - 2014 1/ by nearly 2% at an annual rate in the 2011 2012f 2013f 2014f first six months, with exports of serv- Real GDP (calendar adjusted) 4.0 1.8 1.6 2.4 ices growing by 3.2%, compared with Industrial production 6.7 -3.5 1.8 3.0 1.7% for exports of goods. A limited ex- CPI index, average 3.0 1.2 1.8 1.9 posure to the crisis-struck countries in CPI, end of period 2.3 1.0 2.0 1.8 southern Europe – less than 4% of total CPIF, average 2/ 1.4 1.1 1.7 1.6 exports - and relative strong demand CPIF, end of period 0.5 1.6 1.6 1.5 from the Nordic countries and Germany Labour force (15-74) 1.2 0.4 0.4 0.4 explain why Swedish exports have so Unemployment rate (15-74), % of labor force 7.5 7.5 7.7 7.6 far avoided a slowdown in 2012. An ad- Employment (15-74) 2.1 0.4 0.2 0.5 Nominal hourly wage whole economy, average 2.6 3.3 3.0 3.2 ditional factor is the diversification of Nominal hourly wage industry, average 2.8 3.4 2.8 3.2 exports to emerging markets. Savings ratio (households), % 9.7 10.3 10.0 9.9 Another important structural change is Real disposable income (households) 3/ 3.0 2.7 2.3 2.5 that services have gradually increased Current account balance, % of GDP 7.0 6.9 6.4 6.3 their share of total exports, from 20% General government budget balance, % of GDP 4/ 0.1 0.2 0.0 0.2 at the beginning of the 1990s to nearly General government debt, % of GDP 5/ 38.4 37.3 36.2 35.5 one-third last year. Although the servic- Sources: Statistics Sweden and Swedbank. es trade is still significantly smaller than 1/ Annual percentage growth, unless otherwise indicated. the goods trade, its rate of growth has 2/ CPI with fixed interest rates. 3/ Based on short-term earnings statistics accelerated due to globalization and 4/ As measured by general government net lending. 5/ According to the Maastricht criterion. August 21, 2012 7
    • Sweden Swedbank Economic Outlookspecialisation. This adds to the diversi- Trade balances in exports and imports of goods and services, SEK billionsfication of Swedish exports and reduc- 50es the vulnerability to changes in theglobal investment cycle. Furthermore, 40the increase of services input in indus- Trade balance intrial production has been important for 30 servicesstrengthening the competitiveness of, Trade balance in goodsand raising value added in, exports. 20In the second half of 2012, we expect 10export growth to slow due to the re-newed weakness in the global industry 0and the significantly stronger krona.In addition, the temporary boost from -10 Source: Statistics Sweden 1981 1983 1985 1987 1990 1992 1994 1996 1999 2001 2003 2005 2008 2010postponed export deliveries and unex-pectedly large increases in merchant- ucts is expected to be modest, both in cast an export growth of 1.5% duringing1 is unlikely to be repeated. For mature and in emerging markets. 2013. For 2014, we expect Swedish ex-2012, we thus foresee an annual export That the krona is appreciating when port volumes to grow by 3.3%, mainlygrowth of 1.2%, which, although an up- global demand is worsening is unu- driven by a modest pickup in global de-ward revision of our April forecast, is sual for Swedish exporters and will be mand. This export growth is below thelargely a result of the stronger outcome a challenge to Swedish competitive- long-term trend, which was 4.6% duringin the first half of the year. ness. Historically, the Swedish krona the latest decade. The surplus in the normally depreciates when external current account balance is expected toIn our updated global outlook, world demand weakens. However, due to the decrease in 2013-2014 due to a strongmarket growth for Swedish exporters extraordinary developments in Europe, krona, which, together with robust do-is expected to be somewhat faster next we cannot expect the krona to adjust mestic demand, will stimulate growth inyear than in 2012 (4.6% compared with to the weaker demand, and Swedish imports.3.9%) but slower than we forecast inthe spring. A low utilisation rate in the companies will instead have to raise Rebound in investments wasbusiness sector, a high unemployment productivity or adjust costs to maintain temporaryrate, and budget consolidations in sev- competitiveness. Thus, the business Gross fixed investments increased byeral OECD countries will dampen global sector’s competitiveness is expected to 6.6% annually in the first half of 2012,investment activity after the strong re- come under pressure in 2012. For next which was significantly stronger thanbound in 2010-2011. The weakest per- year and for 2014, we foresee a decline we expected. In the private sector, ex-formance will be in the euro area, but in unit labour cost growth as productiv- cluding residential, the growth rate wasthe emerging markets will also be af- ity in the economy is picking up. The even more pronounced, driven by largefected by the slow growth in the OECD krona will, however, remain relatively investments in the energy sector and inregion. The global demand for heavy strong. This will in particularly affect ex- private services. Growth in industry in-trucks and telecommunications prod- port of commodity products like wood vestments was modest and in line with and metal, but services with main costs the weak growth in goods exports and1 The values of production and exports that comprises in Sweden will also struggle. Export declining production. A decrease in thepurchases and sales made by Swedish enterprises of companies with a large import content number of housing starts during 2011products that have been manufactured and then soldabroad without having been imported to Sweden. will be less affected. Overall, we fore- has led to a sharp drop in real estateSwedbank’s GDP Forecast – Sweden investments so far in 2012. Public in-Changes in volume, % vestments, however, picked up, mainly 2011 2012f1/ 2013f1/ 2014f1/ on account of municipalities. Volatil-Households consumption expenditure 2.0 1.9 (1.3) 2.7 (2.5) 2.8 ity in gross fixed investments is high,Government consumption expenditure 1.8 1.1 (0.6) 0.8 (0.9) 1.1Gross fixed capital formation 6.3 3.6 (0.1) 2.4 (2.6) 3.3 and factors such as a mild winter have private, excl. housing 5.0 8.2 (2.6) 3.0 (4.0) 3.8 boosted investments in buildings. Post- public 1.5 0.4 (-1.8) 1.6 (0.4) 2.4 poned investments from last year also housing 15.1 -7.5 (-6.2) 1.1 (-0.2) 2.2 spilled over to 2012, and we do not be-Change in inventories 2/ 0.7 -0.7 (-0.4) 0.0 (-0.1) 0.0 lieve the growth rate from the first sixExports, goods and services 6.9 1.2 (-1.3) 1.5 (2.6) 3.3 months is sustainable. Early warnings,Imports, goods and services 6.3 0.4 (-1.1) 2.9 (2.0) 3.4 such as dampened imports of invest-GDP 3.9 1.6 (0.2) 1.6 (2.2) 2.3 ment goods, decelerating credit growthGDP, calendar adjusted 4.0 1.8 (0.5) 1.6 (2.2) 2.4 in the business sector, and heightenedDomestic demand (excl. inventories) 2/ 2.6 1.8 (0.8) 2.0 (1.9) 2.2 uncertainties about the global econo-Net exports 2/ 0.7 0.4 (-0.2) -0.5 (0.4) 0.1 my, signal a slowdown in investmentSources: Statistics Sweden and Swedbank.1/ The figures from our forecast in April 2012 are given in brackets. activity. However, due to a significantly2/ Contribution to GDP growth. stronger investment performance in the August 21, 2012 8
    • Sweden Swedbank Economic Outlookfirst half of the year, the annual growth Unit labour cost and productivity (annual change in %) 7 5rate for the whole year has been re-vised upwards to 3.6%. 6 4For next year, we foresee a further 5 3slowdown in investment growth to 4 22.4%. The stronger krona and mod- 3 Unit labour cost 1est global demand will squeeze profit 2 Productivity (rhs)margins and returns on investments. In 0 12014, when global growth is expected -1 0to improve slightly, we forecast Swed- -2ish investment growth to pick up. The -1investments in energy are expected to -2 -3 Source: Statistics Sweden and Swedbank calculations 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014continue to grow in line with the goal toincrease investment by SEK 300 billion due to a weakening external demand. tion with a strengthened krona, we an-over a 10-year period. Investments in Digging deeper into the numbers, ticipate that relative unit labour costshousing will also increase during 2013- one can see it was primarily the pub- for Swedish companies will grow by2014, although from a low level. Fun- licly financed sectors that added to the 3.0% in 2012 compared with 0.9% indamentally, there is a need for more in- payroll, while manufacturing and retail 2011. Swedish competitiveness will re-vestment in housing. A growing popula- trade reduced employment. Public ad- main challenged also in 2013 and 2014tion, particularly in the large cities, and ministration and education were strong, due to the still-strong krona, althougha lack of housing in 60 percent of the and it is a worrying sign that employ- growth in unit labour costs will deceler-municipalities mean there is still a large ment decreased in business-cycle- ate to 2.1% in 2013 and 0.7% in 2014,underlying need for new houses. Fur- dependent sectors. Also, in terms of when productivity growth strengthens.thermore, infrastructure investmentsgrowth has been amongst the lowest hours worked, the underlying data do When the economy gradually improvesin European countries. The govern- not paint as positive a picture. Over- in 2013, we expect the unemploymentment has indicated that new investment all, hours worked were unchanged in rate to decline, even if the average an-measures will be in the budget for next the second quarter, after increasing by nual rate still increases to 7.7% fromyear, but it is still uncertain how far- 1% in the first. This is a notable slow- 7.5% in 2012. The improvement in thereaching they will be. down compared with 2011, when hours labour market will continue, but we ex- worked increase by an average of 2.3% pect unemployment to remain aboveThe private sector lags in job in the first half of the year. Again, it was 7% (seasonally adjusted) by the end ofcreation the private sector that reduced its la- 2014. External conditions are expectedThe Swedish labour market performed bour demand. Within the private sector, to improve and domestic demand iswell during the first half of 2012, and producers of services raised labour in- supported by stable public finances.employers have been able to meet the put, reinforcing the picture that manu- As 2014 is an election year, we shouldsurprisingly strong growth in labour facturing and retail trade are seeing a see intensifying efforts to bring downsupply. This means that the unemploy- slowdown in demand and/or a growing unemployment, and, together with ament rate has developed approximately need to improve productivity. more stable environment, this shouldas expected, and it reached 7.5% in support employment growth. The main Productivity in the Swedish economyJune (seasonally adjusted). However, challenge in the medium term will be to picked up during the first half of 2012.for the remainder of the year, unem- reduce structural unemployment. The However, the wage increase, in par-ployment rates will remain stubbornly long-term unemployment rate remains ticular in the industry sector, has beenhigh as employment creation will slow high, at 30% of all unemployed, which faster than expected, and, in combina- is almost 20% higher than during 2006-Employment change Q2 2012 - Q2 2011 1/ 2008. Total Still some hesitation among householdsConstruction Household consumption continued Public adm to recover in the first half of 2012, but Education there are signs of hesitation in con- sumers’ sentiments and willingness to Health spend. In the first quarter, the rebound Retail in consumption continued, with 2.1% Industry annual growth, but slowed again in the second quarter to 0.8%. In particular, -20000 -15000 -10000 -5000 0 5000 10000 15000 20000 25000 30000 households drew down on purchases of 1/ Not all sectors are inlcluded in the chart Source: Statistics Sweden durables, such as cars, but retail trade August 21, 2012 9
    • Sweden Swedbank Economic Outlookwas also affected. Instead, expendi- holds. In July, the consumer confidence marginally, reflecting increased worriestures on housing, something that can- indicator (NIER) rose and is now above concerning euro area developments.not easily be affected by households the historical average. In particular, For the majority in the Board, the debtin the short run, provided the biggest households’ view of their own economy buildup amongst households was stillboost to overall spending. This sug- is improving, while the outlook on the a major concern, and, as the Swedishgests that consumers were somewhat Swedish economy is less upbeat. How- economy was performing surprisinglymore cautious than the headline growth ever, the perceived risk for unemploy- well, they saw no immediate reason tonumbers indicated. ment did not show much of an improve- let up. A minority of two Board mem-Household income has developed sol- ment during the first half of the year, bers continued to argue for a cut in theidly on the back of robust employment which could hold back households’ will- repo rate of 50 basis points and for agrowth and increasing wages. We ex- ingness to spend. lower repo rate path since inflation willpect, however, that unemployment, Given the stronger-than-expected con- fall short of the inflation target and re-although lower than we previously sumer spending so far in 2012, we are source utilisation was still weak.forecast, and the slow growth in hours revising upwards the annual growth The recent sharp appreciation of theworked will limit income developments rate to 1.9%. This is still quite modest Swedish krona increases the chal-in the remainder of 2012. On the other by historical standards, but the uncer- lenges for monetary policy. The kronaside, pension payments are set to in- tainty that characterises, in particular, has been at its strongest against thecrease in real terms in both 2012 and economic developments in Europe, euro since the beginning of the last2013, which will boost spending power, in addition to many households’ still- decade. As worries grow concerningbefore contracting in 2014. Thus, a vulnerable financial position, is likely the increased turmoil in the euro area,dampening in hours worked and wage to dampen spending. Together with the many investors are looking for alter-increases in 2013 will reduce overall strong income growth, this is causing native currencies to spread risks; thisreal disposable income growth to 2.3% the savings ratio to increase from 9.7% includes other central banks that arefrom 2.7% in 2012, before increasing of disposable income in 2011 to 10.3% trying to offset appreciation pressures.again in 2014 to 2.5%. in 2012. As the underlying growth mo- In trade-weighted terms, the krona isHousehold savings, according to the mentum strengthens in 2013, an im- also stronger, but to a lesser extent.financial accounts, showed a strong in- proved labour market will boost house- Nonetheless, the index value of 117.7crease in the first quarter of 2012, and, hold consumption. We therefore expect recorded at the end of July implies thetogether with a deceleration in credit a real growth in private consumption of strongest krona in more than 10 years.growth, the decrease in households’ 2.7% in 2013, to be followed by an ex- The main short-term impact from thenet wealth slowed. Approximately 80% pansion of 2.8% in 2014. The main lim- krona appreciation on inflation is lowerof the increase in savings was due to iting factor will be households’ indebt- prices for imported goods. Thus, we ex-valuation changes, stemming mainly edness, but, given the improvement of pect inflationary pressures to be lowerfrom the stock market recovery, but the economy, we expect the savings than previously anticipated. However,growth in bank deposits was also high. ratio to continue to decline. the stronger-than-anticipated growthAt the same time, credit expansion to A stronger krona complicates and improved labour market we wit-households slowed, especially mort- monetary policy nessed in the spring should counteractgage borrowing. This suggests that the The Riksbank kept the repo rate un- this, and we are reducing our averagehouseholds’ financial situation was re- changed at 1.50% on July 4th and, at inflation forecast (with fixed mortgagecovering in the early half of the year and the same time, the majority of the Ex- rates—CPIF) only marginally down, toit provides grounds for robust growth in ecutive Board reinforced the message 1.6%, in 2012. As the euro area econo-consumption going forward. that, barring a deepening of the euro mies stabilise next year, we expect theRecent confidence indicators confirm crisis, no easing was in the cards. How- Swedish krona to weaken somewhatan improved sentiment among house- ever, the repo rate path was lowered but to remain strong in historical terms. This will have a negative impact on the Credit to households (annual growth in %) competitiveness of Swedish compa- 14 nies. Thus, we expect export growth 12 to dampen and its contribution to eco- nomic growth to decline. It would also 10 reduce inflationary pressures further 8 out in the forecast period. For 2014, we 6 forecast the CPIF to increase by 1.5%, which is significantly below the Riks- 4 bank’s inflation target. 2 Seen in isolation, the strengthening of the Swedish krona would argue for 0 Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 Sep-11 a looser monetary policy to offset dis- Source: Statistics Sweden August 21, 2012 10
    • Sweden Swedbank Economic Outlook Interest rate and currency outlookinflationary pressures and the loss Outcome Forecastof competitiveness. Furthermore, the 2012 2012 2013 2013 2014 2014Swedish economy, despite its recent 17 Aug 31 Dec 30 Jun 31 Dec 30 Jun 31 Decstrong growth rates and rising employ-ment levels, is still operating below po- Interest rates (%) Policy rate 1.50 1.50 1.50 2.00 2.25 2.50tential. Thus, in our view, the Riksbank 10-yr. gvt bond 1.51 2.00 2.40 3.00 3.40 3.50should lower the repo rate during the Exchange ratesautumn to support a reduction in unem- EUR/SEK 8.22 8.40 8.50 8.60 8.70 8.70ployment and raise growth rates. The USD/SEK 6.67 7.30 7.20 6.88 6.96 6.96weak demand situation, especially from TCW (SEK) 1/ 116.2 119.8 120.0 120.4 121.4 121.4external markets, suggests that the in- Sources: Reuters Ecowin and Swedbank.flation risks will undershoot the target, 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).rather than being too high. However,we expect the Riksbank to maintain cal government taxes are expected to budget surplus to be eliminated. A zerothe current level of the repo rate until increase this year, which, together with balance is, however, only mildly coun-the second half of next year, when the a one-off transfer, will yield a small sur- tercyclical, and fiscal policy could pro-rate would be raised to reach 2.00% at plus in this sector. We expect the public vide more support to domestic demandthe end of 2013 and 2.50% at the end sector debt (according to the Maastricht and growth.of 2014. The Riksbank itself forecast a criteria) to fall to 37.3% of GDP thisrepo rate at the end of 2014 of 2.75%, In 2014, government finances are ex- year; due to a revision of local govern-but in our view the combined impact pected to generate a surplus corre- ment debt statistics. This is higher thanfrom the krona appreciation and lower sponding to 0.2% of GDP, including our in our April forecast.growth will bring about a reduction. expectation of additional spending ini- As the general economic conditions are tiatives of about SEK 20 billion. As 2014However, with this rather tight mon- improving, we expect the public sec- is an election year, we expect the rulingetary policy, compared with other cen- tor finances to continue to be solid in coalition government to expand fiscaltral banks, we foresee that the Swedish 2013. This, together with the fact that policy. There will be a continued needkrona will remain strong over the fore- the economy is still operating below po- to increase spending on research andcast period, and this will have a nega- tential, will provide room for additional education, as well as on infrastructure.tive impact on growth and employment. spending initiatives in the fiscal budget Furthermore, as pension paymentsRoom and reason for fiscal for 2013 – according to our estimates, are projected to decline, it is not un-expansion around SEK 20 billion. There are, in likely that the government will corral aStronger-than-expected real economic particular, reasons for the government majority for a reduction of tax rates ongrowth, together with faster employ- to increase infrastructure investment, pensions, as well as on other tax ratement growth and associated higher tax which will raise future growth potential; reductions.revenues, will improve the public sec- however, we would also support more The high economic growth rate in thetor balances in 2012. In April, we fore- spending on research and education – first half of 2012, might suggest that thecast a deficit corresponding to 0.3 % something that has already been sug- need for additional stimulus is declin-of GDP, but increased revenues and gested by government officials. In all, ing. However, as we expect a weaken-limited spending pressures will in our we expect additional spending amount- ing of the global business cycle, and aestimation produce a surplus of around ing to SEK 15 billion in 2013, with the persistently high unemployment rate0.2 % of GDP. This includes the ad- bulk ending up on the expenditure side. we would still argue that fiscal policyditional spending announced in the In the same year, pension payments should remain expansive during thespring budget proposal. In addition, lo- will also increase, and we expect the forecast period. Although the margins in the fiscal framework are declin-Inflation, the repo rate and the exchange rate ing; both according to the business6.0% 150 cycle-adjusted budget balance and5.0% 145 the expenditure ceiling, these should4.0% be used. In particular, we would argue 140 CPI yoy3.0% for targeted reforms aimed at reducing 135 CPIF yoy structural unemployment, in particu-2.0% lar amongst foreign born and youths.1.0% 130 Repo rate These would also be growth enhancing0.0% in the medium term and would reduce 125 Krona (TCW-index,-1.0% rhs) future spending needs.-2.0% 120 Magnus Alvesson Source: Riksbanken, Jörgen Kennemar-3.0% 115 Statistics Sweden and Swedbank Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 August 21, 2012 11
    • Estonia Swedbank Economic OutlookEstonia: Domestic economy safeguards growthGDP growth slowed in the last quar- the impact from increased uncertainties tries, together with the outcomes of theter of 2011, and, in the first quarter of is lagging. current crisis in the euro area countries.2012, growth reached 3.6%; this was According to our alternative scenario, GDP growth to be slow this yearexplained by the base effect (annual there is a probability of a partial breakup but accelerate in coming yearsgrowth in the first quarter of 2011 was of the Economic and Monetary Unionmore than 9%), as well as by slowing GDP growth this year is expected to (EMU) – this kind of outcome dependsforeign demand. The growth slowed reach 3% a bit faster than we expect- highly on the chronology of events, asfurther in the second quarter, to 2%. ed in April. The main reason behind well as the magnitude of the losses inGrowth in the first half of 2012 was the upward revision is the better-than- the financial sector. The latter will havemainly driven by domestic demand. expected performance of domestic de- its effects on the sentiments and deci-During the first half of 2011, the main mand. According to our global outlook, sion making of investors throughoutcontributor was manufacturing, while the overall economic development in Europe. All in all, the effect of theseat the end of the year domestically ori- the EU will be contradictory – Nordic kinds of developments will not appearented sectors (e.g., construction, retail countries are doing better than in our in the Estonian economy directly as asales, and services) started to contrib- April forecast, and southern Europe will direct trade relationship with southernute more. In the beginning of this year, face a more severe recession. This by European countries is very limited orthe domestic economy continued to and large means better outcomes for even absent. This, however, does notshow strong growth rates – households export growth, too, as Estonia’s main mean that there will not be any effects,are more confident and eager to spend, trading partners are its neighbouring as indirect impacts such as a liquidityand investment growth is supported by countries, including the Nordics. The freeze, higher capital prices, etc., willgovernment investments. year 2013 will be characterised by a harm the economy through the financial modest recovery in the world; this will markets and trade affecting the recov-Growth in the first quarter of 2012 was affect the Estonian economy through ery of the domestic economy as well.a bit faster than we expected in our economic sentiments and thus, also,April forecast. This points to stronger the demand for Estonian services and At the same time, there is also a prob-economic activity than the confidence products. We foresee export growth ability, albeit small, that the externalindicators show, and, all in all, the larg- accelerating in the second half of 2013 environment will be more favourable forer uncertainties in the euro area seem as, according to our main scenario, the the Estonian economy, boosting exportnot to be affecting domestic spending global environment starts to improve. In volumes already by the end of 2012 or– private consumption and investments addition, the Nordic countries’ outlook the beginning of 2013, and fosteringwere showing strong growth rates de- has strengthened somewhat due to the growth even more than we predict inspite slowing export growth and weak better-than-expected developments so this report.confidence indices. Judging from the far. All in all, we expect Estonian GDP Another set of risks is related to energypreliminary estimates of the second growth to reach 4% in 2013 and to ac- and commodity prices – a faster-than-quarter GDP1 it cannot be excluded that celerate even more, to 4.3%, in 2014. expected increase in oil prices will raise1 This estimate is based on the revised national accounts As before, the main risks for the Esto- the domestic price level and, in turn,which are not directly comparable to the first quarterfigures. nian economy continue to be external private consumption, and the higher in- – the overall development of EU coun- flation will harm purchasing power.Key Economic Indicators, 2011 - 2014 1/ Internal risks are, as stated already in 2011 2012f 2013f 2014f several earlier Swedbank EconomicReal GDP 7.6 3.0 4.0 4.3 Outlooks, related to the labour marketNominal GDP, billion euro 16,0 16.8 18.3 19.9 as long-term unemployment continuesConsumer prices (average) 5.0 3.9 3.1 2.7 to pose a risk to the social system,Unemployment rate, % 2/ 12.5 10.5 9.8 8.7 as well as to the well-being of thoseReal gross monthly wage 0.5 2.3 1.9 3.5 households whose members are hav-Exports of goods and services (nominal) 30.7 7.7 8.1 9.0 ing trouble finding jobs (the povertyImports of goods and services (nominal) 34.1 11.6 7.3 7.8Balance of goods and services, % of GDP 6.4 3.1 3.8 4.8 trap). In addition, unemployment mightCurrent account balance, % of GDP 2.1 -0.1 0.0 -0.5 not decrease as much, especially whenFDI inflow, % of GDP 1.2 1.9 5.1 5.9 parts of the adverse global scenario areGross external debt, % of GDP 97.1 95.5 91.4 85.2 realised (especially for the euro area).General government budget balance, % of GDP 3/ 1.0 -1.2 -0.6 1.0General government debt, % of GDP 6.0 10.1 11.5 10.5Sources: Statistics Estonia, Bank of Estonia and Swedbank projections.1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey.3/ According to Maastricht criterion. August 21, 2012 12
    • Estonia Swedbank Economic OutlookBetter outlook for trading part- Contributions to GDP growth (percentage points) 20ners improves export growthexpectations 15Exports showed strong growth rates in 102010 and 2011. The growth was driven 5 Net exportsmainly by one sector – electronics – 0 Investmentswhose export sales began to soar in Government2010. In 2011, contributions by other -5 Householdsmanufacturing sectors started to grow -10 GDPas well. During the first five months -15of 2012, however, goods exports suf-fered from a drop in mineral products -20 2006 2007 2008 2009 2010 2011 2012f 2013f 2014fsales, which are by nature transitory. Source: SE, Swedbank forecastThe overall annual growth in goods andservices exports (real terms) in the first Import growth, supported by rising pri- about 30% (in nominal terms) the to-quarter of 2012 reached 6.5%, which vate consumption, is expected to reach tal for 2011. Public sector investmentsinduced us to revise upwards our out- 6.7% in 2012. Growth will be somewhat are also affected by local authorities’look for this year. For 2012, we expect lower in 2013, reaching 4%. In 2014, willingness to lend – the restriction onexports of goods and services to grow the growth rate will accelerate, along local municipalities lending was eased,by 3.4%. For 2013, we have revised with economic activity in foreign mar- which might make municipalities morethe growth number downwards to 5.9% kets (imports are very much connected willing to lend to finance their invest-from 7.1%, as we expect uncertainties with exports as many production inputs ments in public housing, renovation ofto grow during the first half of 2013, are imported rather than produced lo- kindergartens, schools, etc. In 2012,causing a moderate slowdown in trade. cally) and household spending. Higher overall investments are expected to in-In 2014, export growth will accelerate to import demand will drive the current crease by 12.6% – a bit more than we6.8% in real terms. account balance into deficit, but the ef- expected in April. fect will gradually disappear as in 2013Estonian goods exports are highly de- The main reason behind the upward trade will improve somewhat. The cur-pendent on overall developments in revision is the higher-than-expected rent account will be affected by inflowsneighbouring countries2 (approximately growth in corporate investments in of current transfers; these inflows will60% of total goods exports). The sec- the first quarter of 2012, which indi- gradually decrease because the currentond half of 2011 and the first months of cates that private sector investors are transfers consist mainly of EU funds.2012 showed that Estonian firms (other less cautious than, was envisaged insectors than electronics) have been do- Investment growth to decelerate April. For 2013 and 2014, the growthing rather well in selling their goods and Investments last year grew at a high of investments is expected to reachservices despite the overall slowdown rate (volume increased by more than approximately 7%. In 2013, privatein the EU economies. Unit labour costs 25%) and continued to increase in the sector contributions will start to revivehave been increasing in almost all sub- first quarter of 2012. This year, the and continue to grow throughout thesectors in manufacturing and this could overall volume of investments will be forecast period. At the same time, wehave a negative impact on compete- higher because of the government’s expect government sector investmentstiveness. However, the weaker euro obligation to use revenues from CO2 to begin falling next year. In 2014, totalcould improve the outlook for sales of quota sales to make energy-efficien- public investment will start to diminishEstonian exports. cy-related investments. Public sector because the programming period of investments are planned to exceed by EU funds ends in 2013 (see also the2 Sweden, Finland, Norway, Denmark, Lithuania, Latvia, government subsection of this report);and Russia. according to the “State Budget StrategySwedbank’s GDP Forecast – Estonia 2013-2016,”3 the next wave of fundsChanges in volume, % 20111/ 2012f1/ 2013f 2014f starts flowing in 2015, as the new pro-Household consumption 4.2 4.3 (2.7) 3.3 (4.2) 3.9 gramming period is planned to begin inGeneral government consumption 1.6 2.3 (1.8) 1.6 (1.7) 1.8 2014. As a result, public investmentsGross fixed capital formation 26.8 12.6 (11.5) 7.0 (7.4) 7.3 planned for 2014 are about 40% lessInventories 2/ -0.7 0.2 (-0.8) -2.0 (0.6) -0.6 than those planned for 2012. PrivateExports of goods and services 24.9 3.4 (3.1) 5.9 (7.1) 6.8 sector investment will start to revive,Imports of goods and services 27.0 6.7 (4.6) 4.0 (8.4) 6.6 according to our estimate, at the end ofGDP 7.6 3.0 (2.7) 4.0 (4.2) 4.3 this year. The largest contributions willDomestic demand (excl. inventories) 2/ 8.1 5.7 (4.5) 3.9 (4.4) 4.3Net export 2/ 0.3 -2.8 (-1.1) 2.1 (-0.8) 0.6 3 Available at the Ministry of Finance webpage www.fin.eeSources: Statistics Estonia and Swedbank.1/ The figures from our forecast in April are given in brackets.2/ Contribution to GDP growth August 21, 2012 13
    • Estonia Swedbank Economic Outlookbe made by the manufacturing, con- Contributions to annual growth in enterprise investments (percentage points)struction, and energy sectors.4 80%Residential investments are also ex- 60% landpected to grow, but at a slower rate 40%than seen last year. Households’ in- machinery and equipmentsvestments in dwellings have not af- 20% computersfected much the overall loan stock vehichles 0%– even though new loans are increas- constructionsing at a modest rate, the overall loan -20%stock is still decreasing, as many buildings -40%households prefer to pay back their Totalloans (there is still some housing with -60% Source: SE 2006 2007 2008 2009 2010 2011 2012negative equity). We expect residen-tial investments in housing to increase We expect the overall wage bill to in- such as energy, electronics, and ICT re-this year, and the growth rate to accel- crease by 8.6% in 2012 (in nominal lated. In 2013, the number of employederate in coming years. In addition, we terms) and to continue at a similar rate will be roughly the same – employmentexpect an increase in energy-efficien- throughout the forecast period. Real growth will reach a modest 0.3% as thecy-related investments in apartment wages, which started to grow in the problem of skills mismatch becomeshouses, supported by government third quarter of 2011 after 11 quarters more pronounced. In 2014, we expectprogrammes. of decrease, are expected to grow by job creation to accelerate again due toFavourable trends in the favourable developments in the econ- 2.3% this year. This growth will decel-labour market continue, but omy; employment growth should reach erate somewhat in 2013 and acceler-downward risks increase 1%. Activity on the labour market will ate again in 2014. Overall productiv-In 2011, the recovery of employment continue to be high, and unemployment ity showed negative growth rates atwas remarkable – more than 38,000 will decrease from 10.5% in 2012 to the end of last year, but this might bepeople found jobs (annual growth of 8.7% in 2014. explained by the inertia on the labour6.7%). In the first half of 2011, the jobs market – employment is by nature more The shortage of skilled labour is morewere mainly created in the manufac- stable than output. Productivity growth pronounced in the electronics, ITC-turing sector, which had started to cre- is expected to accelerate throughout related, energy, and health care sec-ate jobs already by the end of 2010. this year and continue outpacing wage tors. The latter is affected by the ageThe services sector gained from the growth during the forecast period. structure of workers in this sector andrapidly increasing number of tourists by the increase in pendulum migration Private consumption recoveryand the gradually recovering purchas- of young doctors. In addition, employ- strong despite the euro areaing power of residents. The unem- ment growth will be affected by the low crisisployment rate dropped to 12.5% in inland mobility of the labour force. In Household spending increased in 20112011. During the first months of 2012, this connection – entrepreneurs have by 4.2%, supported by the strong re-employment continued to grow. We stated that it is hard to find workers, covery of employment and graduallyexpect employment to grow by 1.8% e.g., in eastern Estonia; at the same rising wages. Even the deteriorationin 2012, supported mainly by the serv- time, there are people in other counties in household confidence at the end ofices sector’s needs, as well as by the unemployed with relevant skills and 2011 and the beginning of 2012 didcontinuing labour shortage in sectors knowledge. This means that there is a not seem to have had an effect on4 need for some support to increase in- overall spending behaviour. In the first See also the monthly letter, The Estonian Economy, land labour mobility. quarter of 2012, private consumptionpublished in August. grew by 3.2% in annual terms (theConsumer confidence, consumption, retail sales and wages first quarter is usually characterised 25% 30 by lower growth rates). We expect pri- 20% vate consumption to grow by 4.3% in 20 15% Private consumption, 2012; this is considerably faster than annual growth in % 10 we expected in April. The main reason 10% Retail sales, annual growth in % behind such an upward revision is the 5% 0 more favourable developments on the 0% -10 Gross wage annual real growth in % labour market (employment and wage -5% growth), as well as the households’ -20 Consumer confidence,-10% net balance (rhs) positive perceptions of their own finan--15% -30 cial well-being, seemingly unattached to perceptions of the developments in-20% -40 Sources: SE, DG ECFIN 2007 2008 2009 2010 2011 2012 August 21, 2012 14
    • Estonia Swedbank Economic Outlookthe euro area. Despite higher expec- we expect price growth to slow; the few years, the one-off effects will dimin-tations for spending growth rates, we average price increase is estimated to ish or disappear, lowering expenditureexpect savings to continue to increase slow to 3.9%. In 2013 and 2014, overall growth considerably. However, therefurther this year – household deposits inflation will decelerate even further. In might be a risk of a faster rise in cur-have shown stable (albeit lower than 2013, the main factor affecting the over- rent expenditure due to pressures forlast year) growth rates throughout this all price level will be the opening of the wage and/or employment increases,year as well. In 2013 and 2014, the sav- electricity market, which most probably especially before the parliamentaryings rate will fall as the memory of the will affect all other prices in the consum- elections, scheduled for early 2015. Allcrisis gradually vanishes and the pre- er basket. During the second half of the in all, the budget deficit will start to de-cautionary motive becomes less pro- year, the effect will gradually vanish, crease gradually, before turning into anounced. Private consumption growth and the overall inflation rate will slow surplus in 2014.is expected to slow somewhat in 2013, to 3.1%. In 2014, inflation will deceler- The government has committed itself toto 3.3% and to accelerate in 2014 to ate to 2.7%. The main determinant of easing the tax burden5, while increas-3.9%. Even though one might say that this rate will be the shortages appear- ing the share of consumption taxes onprivate consumption has recovered ing in the labour market – the increase account of the decreasing labour taxes.strongly, the growth rates are well be- in economic activity will create another The former includes periodical exciselow those seen in the pre-boom years; wage-push effect as the labour short- hikes, and the latter a fall in the unem-this points to the households’ remain- age becomes even more pronounced. ployment insurance tax (from 4.2% toing cautiousness, as well as to the in- Public sector deficit falling, but 3% in 2013) as well as in the incomecreasing number of budget-constrained debt increasing tax (from 21% to 20% in 2015).households. The latter phenomenonhas been influenced by the rising prices Strong private consumption growth and Although the public debt level is veryof necessities and the uneven increase the favourable labour market develop- low in Estonia, it will grow noticeablyin wages across sectors. During the ments in the first half of this year have this year and peak next year (11-12%forecast period, household spending stimulated tax collection, which has of GDP), after which it will stabilise andwill depend on the growth of disposable been about 10% higher than in the cor- start to fall again. The major part of theincome (i.e., of both employment and responding period of 2011; this rate will increase comes from loan paymentswage growth), as well as the prices of slow at the end of the year as economic made by European Financial Stabilitynecessities. growth decelerates. Nontax revenues, Fund (EFSF), which are reflected as which have constituted a large share an increase in the participating memberInflation about to slow of revenue in recent years, will start to countries’ debt. Payments to increaseInflation accelerated in 2011 to 5% (an- decline during the forecast period, af- the energy company Eesti Energia’snual terms). The main factors affecting fected by smaller proprietary income stock capital will have an impact asthe overall price level were external – revenues, the end of CO2 quota sales well. Membership in the European Sta-the rapid increase in both energy and period, and the change in the EU budg- bility Mechanism (ESM), which wasfood prices in the global markets. In the etary period (between 2013 and 2014); contested as unconstitutional in April byfirst quarter of 2012, the price increase this change will temporarily lower rev- the Chancellor of Justice, got the greenreached 4.4% in annual terms, fuelled enues from foreign financing. light from the Supreme Court in July.by rising housing costs (an increase in The parliament is ratifying the treaty; The high level of expenditures this yearadministratively controlled prices) and our forecast includes down payments is affected by one-off factors (e.g., thethe unexpectedly high oil price in the to the ESM during the forecast period. record-high investments on accountglobal market. The latter affected trans- of the previous CO2 quota sales rev-portation costs, as well as other prices, enues and the full recovery of the pen-as many goods and services prices in- Annika Paabut sion pillar payments). During the nextclude costs of transportation. In 2012, Elina AllikaltGeneral government investments, EUR millions1,2001,000 Funded from sales of 800 CO2 quota Local governments 600 Areas of government in state budget 400 200 0 Source: MoF (State Budget 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f Strategy 2013-2016) 5 Estimated at 33% of GDP in 2012 August 21, 2012 15
    • Swedbank Economic OutlookLatvia: Decent growth despite the global headwindsIn the first half of 2012, Latvia’s growth percentage points (pp) each year until We are cutting the forecast for averagefigures were outstanding – the econo- reaching 20% in 2015. This is expected consumer price growth from 2.8% tomy expanded by 6% compared to the to encourage employment growth and 2.5% in 2012 to account for lower glo-same period last year. Annual growth support cost competitiveness (in 2012, bal oil prices and the VAT cut. The infla-slowed (from 6.9% in the first quarter to the comparable tax rates are 23% in tion outlook for 2013 stays unchanged5.1% in the second) but remained the Estonia and 25% in Lithuania). This ac- at 2.5%. We expect consumer prices tomost rapid in the EU. Quarterly growth tion may be too little to radically cut tax grow by 3.5% in 2014, as (i) PIT cutsstayed at about 1% for the third quar- evasion, although a small effect is still support private consumption, making itter in a row, reflecting the fundamental expected; yet, it will give a positive sig- easier for businesses to lift prices, andeconomic strength. The export engine nal to potential foreign investors. (ii) increasing global energy prices willhas so far kept up the good work, sup- raise fuel, gas, and heating prices. The GDP growth is expected to slow in theporting the growth of investments and target of introducing the euro in 2014 second half of the year, reflecting morehousehold spending. Both retail trade remains on the agenda, and we be- sluggish global growth. The calendarand manufacturing growth slowed in lieve it is feasible. The major challenge effects will play the opposite role forthe second quarter but were about 8% seems to be fulfilling the Maastricht cri- Latvia in the second half of 2012, andabove last year’s level. The registered terion on long-term interest rates, while annual GDP growth is thus anticipatedunemployment rate continued to retreat government finances and inflation are to slow quite sharply, sliding below 2%to 11.9% in July (7.7% in Riga). expected to be in line with the criteria in the last quarter. However, due to un- (for details, see Swedbank Analysis,Economic growth early this year sur- expectedly strong developments in the August 2012).prised on the upside, partly because first quarter and the improving competi-we had underestimated the calendar tiveness of Latvian exporters, we have The unemployment rate is to continueeffects (actual first-half GDP growth revised our GDP growth forecast to 4% falling (11.5% in 2014), although thewas 1.2 percentage points higher than in 2012 (2.5% before). Growth is ex- levels are now somewhat higher thanthe seasonally and working-day-adjust- pected to pick up towards the second in our previous Outlook due to histori-ed), and partly because of the better- half of 2013 and 2014, owing to an im- cal data revisions. Assuming that busi-than-expected growth in Europe. Bet- provement in the global situation, local nesses will take advantage of PIT cutster growth has brought higher tax rev- tax cuts, and rising confidence. We are and will thus raise gross wages moreenues, opening up room for tax policy keeping our 3.5% growth forecast for slowly, we hold to our forecast of a risechanges. As of July 1, 2012, the base 2013, as slower export growth due to in average net wages of 4% in 2012rate for the value-added tax (VAT) was downward revisions in the global out- and 5.5% in 2013. In 2014, we expectcut to 21% from 22% reversing some look will be outweighed by stronger in- net wages to pick up by 6.5%.of the austerity-induced tax increase vestments and private consumption. In The current account deficit is anticipat-during the recession. More important, 2014, growth is anticipated to speed up ed to widen, mostly due to larger tradethe personal income tax (PIT) rate will to 5.2% as the global background im- deficits. As it will remain fully coveredbe cut to 24% on January 1, 2013 from proves and a further PIT cut promotes by EU funds and foreign direct invest-the current 25% and by a further 2 domestic demand. ment (FDI) inflows, the deficit so far poses no sustainability risks. Yet, itKey Economic Indicators, 2011 - 2014 1/ may be a risk over the medium term 2011 2012f 2013f 2014f if EU fund inflows are reduced in theReal GDP 5.5 4.0 3.5 5.2 next planning period (2014-2020) and/Nominal GDP, billion euro 20.0 21.7 23.6 26.0 or foreign investors become more riskConsumer prices (average) 4.4 2.5 2.5 3.5 averse in times of excessive financialUnemployment rate, % 2/ 16.2 15.5 13.7 11.5 market volatility.Real net monthly wage 0.1 1.5 2.9 2.9Exports of goods and services (nominal) 22.5 11.9 9.2 12.4 The risks to the forecast are biased toImports of goods and services (nominal) 27.2 12.0 10.3 13.4 the negative side. The main negativeBalance of goods and services, % of GDP -3.4 -3.6 -4.2 -4.9 risks come from abroad (see the globalCurrent account balance, % of GDP -1.2 -1.6 -2.7 -3.8 section of this Outlook) – higher-than-Current and capital account balance, % of GDP 0.9 -0.2 -1.3 -3.1 expected commodity prices and wors-FDI inflow, % of GDP 5.5 3.3 3.6 3.2 ening crisis management in the euroGross external debt, % of GDP 146 137 130 123 area. Locally, labour market tighteningGeneral government budget balance, % of GDP 3/ -3.5 -1.9 -1.2 -0.7 still poses a risk for higher inflation andGeneral government debt, % of GDP 42.6 40.2 37.6 34.1 a possible deterioration in competitive-Sources: CSBL, Bank of Latvia and Swedbank.1/ Annual percentage change unless otherwise indicated. ness; however, the planned tax de-2/ According to labour force survey.3/ According to Maastricht criterion. August 21, 2012 16
    • Latvia Swedbank Economic Outlookclines will somewhat withhold demand Contribution to annual GDP growth (percentage points) 15for higher wages. Although there is asmall chance of better global develop- 10 6.9 6.6 5.2 Net exportsments, positive risks to the outlook are 5.6 5.7 3.5 3.5 4.0mainly local. If current policy discus- 5 Inventoriessions on industrial policy, social benefit Gross fixed capital form. 0system, and educational and regional Governmentpolicy turn into an active implementa- -5 Householdstion phase, growth potential will beboosted. However, this would begin -10 GDP growthto significantly support GDP growth in -152014 at the earliest. 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2012f 2013f 2014f Sources: CSBL, Swedbank frecastsExporters gain from improvingcompetitiveness port growth was freight transportation, Stronger exports require more imports;Although export growth has been slow- followed by tourism and other services. yet, as domestic demand, especially in-ing, it remains strong – volumes were vestments, is picking up, import growth Taking into account the global uncer-up by nearly 10% in annual terms in the continues to exceed that of exports. tainty, the focus of manufacturers re-first quarter of 2012. Some of the main The trade deficits in the balance of mains primarily on lowering costs rath-trading partners have so far performed payments will grow to just below 5% er than expanding production. Overallbetter than our April Outlook expected of GDP in 2014. So far there are no capacity utilisation in manufacturing(e.g., Germany and the Nordics); how- threats to current account financing; it has reached the pre-crisis level. Thereever, developments in others have is covered through FDI inflows and EU are capacity and resource constraintsbeen weaker (e.g., Russia and the UK). funds (see the next section for details). in the exporting services sectors (forOverall, Latvian exports are growing However, this is a risk in the medium details, see our Latvian monthly news-more rapidly than foreign demand, and term – expanded output capacity and letter, May 2012). We maintain our viewwe expect this trend to continue over new higher-value-added products and that export growth will continue to slow,the forecast period. services are needed to raise exports yet we have raised our export forecast and finance imports.The main reason is the ongoing im- for 2012 to account for the stronger-provements in competitiveness that than-expected beginning of the year. Robust investment activityhave allowed Latvian manufacturers With global developments improving Investment growth in the first quarterto raise their market shares (especially slowly, average quarterly export growth of 2012 was very strong – the annualto Poland and the Nordics). In the first will pick up again in 2013 and 2014. growth of gross fixed capital formationquarter of 2012, unit labour costs in accelerated to 39%. Economic senti- The weakening euro exchange ratemanufacturing were 5% lower than a ment in Latvia continues to be surpris- will support exports to Commonwealthyear ago. The quality-price relation of ingly robust and support growth; mean- of Independent States, Sweden, andLatvian products (and small volumes while, in Europe confidence is falling Norway. Rising prices globally and aon a global scale) seems to be what cli- again after a temporary boost caused change in product mix towards higher-ents currently want. by the European Central Bank’s op- value-added products and services will erations. Latvian manufacturers remainFurthermore, during the last three quar- also help to raise export revenues. For cautious in their investments – to retainters, the growth of services’ exports instance, a recent hike in global grain flexibility, they are implementing invest-exceeded that of goods, accounting prices is favourable for Latvian export- ment projects piecemeal even if thisfor nearly half of total export volume ers, particularly as this year’s harvests costs more. Facing slowing demandgrowth. The main driver of services’ ex- are expected to be good. growth, exporters keep focus on costSwedbank’s GDP Forecast – Latvia cutting to preserve their profit marginsChanges in volume, % 2011 2012f1/ 2013f1/ 2014f1/ – major investments are in machinesHousehold consumption 4.4 3.9 (2.5) 3.0 (3.0) 4.8 and equipment to improve efficiencyGeneral government consumption 1.1 2.0 (2.0) 2.3 (2.3) 2.4 and reduce labourGross fixed capital formation 27.9 17.0 (7.8) 10.5 (8.0) 11.5 There are new entrants expandingInventories 2/ 1.8 -2.3 (-0.9) 0.3 (0.8) 0.1 production capacities, e.g., new FDI inExports of goods and services 12.6 6.8 (4.7) 4.8 (5.6) 7.0 metal industry from Russia, attractedImports of goods and services 20.7 7.2 (4.9) 7.2 (7.5) 8.5 by availability of EU funds. Construc-GDP 5.5 4.0 (2.5) 3.5 (3.5) 5.2 tion activity in residential real estate isDomestic demand (excl. inventories) 2/ 8.8 7.1 (4.0) 5.3 (4.5) 7.0 to remain poor over the coming years;Net export 2/ -5.2 -0.9 (-0.5) -2.1 (-1.8) -1.8 yet, such activity in office and retailSources: CSBL and Swedbank. spaces will continue growing slowly.1/ The figures from our forecast in April are given in brackets.2/ Contribution to GDP growth August 21, 2012 17
    • Latvia Swedbank Economic OutlookThe investment activity will remain driv- Annual growth of Latvian manufacturing and exports, %en by underinvestment in productive ca- 40 12pacity and infrastructure in the run up to 30 9 Unit labour costs inthe crisis and during the crisis. In 2012- 2012f manufacturing2013, EU funds will remain a major 20 6 Manufacturing outputsource of investment financing, both in (sa) 10 3industry and the public sector. In 2014, Exports volumesa new EU fund-planning period begins, 0 0 (swda)and fewer new projects are expected 2013f Weighted growth of 17 -10 -3since extensive administrative work 2014f trading partners (rhs)is required from the state and compa- -20 -6nies, to set the rules and apply for the -30 -9 Sources: CSBL, Swedbankprojects before actual investments are 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 calculations and forecast for 2012 -2014 global growthmade. It is also likely that less EU fundswill be allocated to Latvia in the 2014- the neighbouring countries for FDI re- fore, we are revising our forecast and2020 (negotiations on this continue), as mains fierce. now expect the average unemploymentthe focus in EU is placed on fiscal aus- rate to be about 15.5% this year and toterity. Already-commenced investments Labour market will continue to drop to 11.5% in 2014, assuming theand regular capital expenditure will still improve emigration flows diminish slowly. Thebe in place, but the average quarterly Employment grew by 2.2% in the sec- unemployment rate will then be quitegrowth of gross fixed capital formation ond quarter of 2012 in annual terms. close to its 2003 level. This might cre-is expected to decelerate. Net of active labour market pro- ate a buildup of upward wage pressuresThe corporate sector is mostly invest- grammes (ALMPs), it expanded by an since nearly a half of the currently un-ing own resources with the support of outstanding 4.6% or about 38 thousand employed are long-term (most of themEU funds. The financial situation of new jobs since the second quarter of for structural reasons). So far, thesebusinesses remains good – despite 2011. Meanwhile, the number of per- pressures have been muted, and withgrowing investments, deposits of non- sons in the ALMPs declined by 19 thou- rising employment, the vacancy ratefinancial corporations largely remain sand. Economic growth has lured peo- has been stable for more than a year.stable. Bank lending is growing – in the ple back to the labour market, and the participation rate rose to 66.5% from The participation rate is set to rise slow-first quarter of 2012, new loans made 64.9% a year ago. Due to the excep- ly. From 2014 onwards, this rise will beup 19% of total gross capital formation tional rise in supply, the unemployment supported by the increasing retirement(up from 13% a year ago). Lending is rate only declined from 16.3% in the first age (moving to 65 years in 2025 fromexpected to become more active in to 16.1% in the second quarter (down the current 62). We expect employment2013-2014 as the global situation and from 17.1% a year ago). The registered growth to slow somewhat towards theconfidence improve. unemployment rate diminished more end of this year before returning to overFDI inflows are stable and anticipated 2% in 2013-2014. rapidly and was 11.9% in July.to remain over 3% of GDP. PIT cuts These labour market data have now Real wages continue to grow almost asand an improvement in the business been adjusted by the 2011 population fast as productivity. In manufacturing,environment (e.g., in the World Bank’s census results, which raised the unem- where the largest positive gap exists“ease-of-doing-business” index, Latvia ployment rate by 0.8 percentage points between productivity and wage levels,ranked 21st in 2011, up from 31st a and lowered the participation rate by wage pressures remain subdued sinceyear ago) give positive signals to for- 0.9 percentage points for 2011. There- businesses are continuing to replaceeign investors, though competition with labour with capital thus undermining Economic sentiment (index) employees’ bargaining power. Services120 sectors, especially exporting ones, are more labour dependent – with turno-110 Germany ver growing, they will need to give in to wage demands (especially in Riga).100 Sweden Wage pressures in the public sector are Euro area rising, although so far they have been 90 Latvia withstood by the government – the only Estonia across-the-board wage increases this 80 Lithuania year are planned for school teachers. 70 We expect wage demands to strength- en in 2013-2014, but actual gross wage 60 2007 2008 2009 2010 2011 2012 growth will be partly held back by PIT Source: DG ECFIN August 21, 2012 18
    • Latvia Swedbank Economic Outlookcuts. We forecast real average net Economic sentiment, points Labour market indicators (adjusted after census as of 2011 onwards)wages to rise by 1.5% in 2012 and to 25pick up to nearly 3% annually in 2013- 20 Unemployment rate (<122014. 15 months), in %Inflation recedes 10 Unemployment rate (>12 months), in %Consumer price inflation has slid be- 5 Productivity per 1 full-timelow 2% for two consecutive months, equivament, annual growth in % 0supported by favourable develop- Real average gross wage, -5 annual growth in %ments in global commodity prices andmuted domestic price pressures (core -10inflation, excluding energy and unproc- -15essed food, is growing slower than the 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 Source: CSBL, Eurostatheadline inflation). After an unexpectedpickup early in the year, oil prices have household spending in the first quarter rebound will run out – revenue growthretreated. Yet, the pickup is still hav- (including mortgages), which is similar will soon slow down. Thus, expendi-ing a delayed effect on administratively to a year ago. The current very low in- tures must remain under control, andregulated prices – as of July, gas and terest rates do not encourage savings, additional spending should be directedheating tariffs have risen. At the same and deposits remain by and large sta- to sectors implementing social- andtime, a fall in the VAT has held down ble. growth-boosting structural reforms,price growth a bit. rather than to an across-the-board in- We are revising upwards our house-Due to the recent hike in global grain crease in the entire set of expenditures. hold consumption growth forecast forprices, we now expect somewhat swift- On the basis of good revenues, budget 2012 to account for strong first-quarterer food price growth in the second half expenditures will be raised (the govern- results (including swifter-than-expectedof the year; however, lower oil prices ment has just submitted supplementary growth in the number of working hours);will suppress fuel, gas, and heating budget to the parliament), but the 2012 however, we expect this to weaken inprices, compared with the previous budget deficit will be contained at about the second half of the year in line withOutlook. We are thus lowering the fore- 2% of GDP an overall slowdown in the economy.cast for average consumer price index In 2013-2014, the average quarterly Besides the already-discussed tax cuts,(CPI) growth for 2012 to 2.5% from growth of private spending is antici- further discussions have been held2.8%. We still expect consumer prices pated to pick up due to strengthening on other reforms. The most progressto grow by the same 2.5% in 2013. Be- purchasing power, rising optimism, and seems to have been made in educa-cause income growth is boosting confi- more active bank lending. tion. There are discussions on changesdence and domestic demand, and be- in industrial policy, on linking access to Fiscal situation continues tocause global energy prices are rising, health care to tax contributions in order improvethe Latvian CPI is anticipated to grow to squeeze tax evasion, on relocationby 3.5% in 2014. The government’s fiscal position has benefits to cut emigration and boost continued to improve. Tax revenues in physical and administrative capacityPrivate spending to slow before the first 7 months of this year grew bypicking up in 2013-2014 of regional centres, to mention just few 13% over the same period last year and of the reform areas. If correctly draftedHousehold spending in the first quarter are 8% above the plan. We see three and implemented, such reforms wouldof 2012 was somewhat stronger than explanations for this good revenue significantly boost growth potential. Yet,expected (up by 5.4% in annual terms). growth. First, strong economic growth unless the existing financing mecha-In the second quarter annual growth of has yielded better tax revenues. Sec- nisms are changed, reforms will notretail sales slowed to still solid 7.9% ond, tax administration may have im- yield tangible results. It still remains to(11.7% in the first quarter). The rebound proved. Third, there has been a post- be seen how much of this will be part ofin sales of durable goods is starting to recession rebound – IMF studies show the 2013 budget.fade away. that during recessions revenues con- tract more sharply than the tax base, Lija StrašunaRetreating inflation, the strengthen- whereas the opposite is the case during Mārtiņš Kazāksing labour market, and the diminishing recoveries.debt burden are supporting householdpurchasing power and, thus, spending. It is impossible to single out the indi-Transfers from emigrants and other in- vidual contribution of these three ef-comes besides wages (including those fects. Yet, unless tax administration isfrom the “grey” economy) continue to unusually successful in squeezing thesupport consumption. New bank lend- grey economy – given that economicing remains weak, just 0.7% of total growth will slow and the post-recession August 21, 2012 19
    • Swedbank Economic OutlookLithuania: Stronger growth after a stutter stepIn line with our expectations, the expected by the end of our forecasting increasing during most of the first halfLithuanian economy expanded at period. Like this year and the last, the of this year. The risk that Greece anda slower pace in the first half of this biggest contribution to growth in the perhaps some other countries will leaveyear. Annual growth eased to 2.1% in coming years will be from household the euro area has increased. Shouldthe second quarter, down from 3.9% in consumption and investments. this materialise, the economic reces-the first quarter. Most of the slowdown sion in the euro area would worsen, Inflation has also been easing in linewas caused by the five weeks mainte- and Lithuanian growth would be further with our expectations – in July, aver-nance work on the oil refinery, which dented or even turn into a recession. age annual inflation was down to 3.5%.makes up one-fourth of total indus- Longer-term risks that could damage It will remain on a downtrend and istry output. As expected, growth was confidence and potential output are re- expected to fall to 2.8% at the end ofdriven by investments and household lated to the October 14 parliamentary this year. This trend will continue intoconsumption. We expect that annual elections. As during elections in other the beginning of 2013, but we fore-growth has bottomed out and will pick European countries, surveys show that cast slightly higher inflation next year,up slightly in the second half of this the Lithuanian voters are likely to oust mainly due to an increase in regulatedyear; thus we are keeping our annual the incumbent government. As no polit- prices. Inflation will accelerate further inforecast unchanged at 3.3%. ical party is likely to win more than 20% 2014, when we expect it to reach 3.4%.We have lowered our forecast for of total votes, the government will be a Abundant external and internal2013 by 0.2 percentage point to 4.1%, coalition of three-four parties. The main risksmainly due to the bleaker outlook in domestic risk is related to the economicthe euro area, which will be a drag Since the publication of our last Outlook policy path that will be chosen by theon Lithuanian exports. Unemploy- in April, tension in the euro area and new government. We expect that thement will also decline slightly slower the accompanying risks have become reforms initiated in higher educationthan we envisaged in our April Swed- more acute (see the global section in and the management of state-ownedbank Economic Outlook, causing this Outlook). Although Europe is mov- enterprises, the numerous measuresslightly weaker growth in household ing towards the creation of institutions taken against the shadow economy,consumption. Overall sentiments will needed to ensure the successful func- the energy projects, and overall fiscalremain depressed by external and tioning of the monetary union, these discipline will be continued, but this isdomestic uncertainties – particularly, will not be quick or easy steps. Even far from certain.further developments in the euro though so far the direct impact of the euro area crisis has been muted, the The upside risks are slim and could ma-area, as well as the upcoming parlia- terialise only next year, especially if thementary elections and possible shifts uncertainty related to the euro area debt crisis has sparked heated debate euro area manages to accelerate thein economic policy. We expect the pace of reforms and institution building.economy to return to close to potential about whether “the second wave of cri- sis will hit Lithuania”. This has some- However, most previous breakthroughsonly in 2014, when GDP will expand provided only false hope, and the pick-by 4.5%. Nevertheless, a return to the what damaged consumer and business confidence, which dropped in July after up in confidence was short-lived.natural level of unemployment is not Exports remain resilient,Key Economic Indicators, 2011 - 2014 1/ the direction has shifted 2011 2012f 2013f 2014f Export growth remained strong in theReal GDP 5.9 3.3 4.1 4.5 first half of this year, when it expand-Nominal GDP, billion euro 30.7 32.2 34.5 37.2 ed by 7.3% (at current prices) overConsumer prices (average) 4.1 2.8 3.0 3.4 the same period a year ago. The no-Unemployment rate, % 2/ 15.4 13.2 11.5 9.3 ticeable contraction of exports in MayReal net monthly wage -1,3 1.4 1.8 2.0 was caused by the aforementionedExports of goods and services (nominal) 27.5 10.0 7.0 13.0Imports of goods and services (nominal) 27.6 10.8 7.5 13.5 maintenance work on the oil refinery,Balance of goods and services, % of GDP -1.3 -2.0 -2.3 -2.8 and growth picked up to 5.2% in JuneCurrent account balance, % of GDP -1.6 -2.5 -3.0 -3.6 (exports except for oil products grewCurrent and capital account balance, % of GDP 0.9 0.5 -1.0 -1.4 by 16.6%). As expected, the euro areaNet FDI, % of GDP 2.8 4.0 4.0 4.5 countries contributed less to Lithua-Gross external debt, % of GDP 80.8 79.5 76.6 73.2 nian export growth during the first halfGeneral government budget balance, % of GDP 3/ -5.5 -3.0 -2.0 -1.0 of this year – exports to Germany andGeneral government debt, % of GDP 38.6 40.0 39.3 37.4 France contracted by 2.9% and 0.7%,Sources: LCD, Bank of Lithuania and Swedbank. respectively. The baton was picked up1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey. by rapidly expanding Latvia and Esto-3/ According to Maastricht criterion. August 21, 2012 20
    • Lithuania Swedbank Economic Outlooknia, as well as by Sweden and Russia. Contributions to GDP growth, percentage points 10%A 62.3% surge in exports to the UK (in 5.9%line with a contraction of exports to Po-land) is related only to the redistribution 4.1% 4.5% 5% 3.3% Net exportof product flows from the Orlen oil refin- Stockbuildingery in Lithuania. 1.4% Investment (excl. inventories)Since the beginning of the summer, the Government 0% consumptionPolish zloty, Swedish krona, and Rus- Household consumptionsian rouble have appreciated versus GDP growththe euro by more than 7 percent. As -5%the weakness of the euro is not likely 2010 2011 2012F 2013F 2014Fto be temporary, this development will Sources: Statistics Lithuania and Swedbank.further strengthen Lithuanian export- Despite uncertainty, investment appropriate, clear signals: a stable anders’ competitiveness. Unit labour costs growth to remain strong business-friendly tax policy, fewer un-have been dropping for four years now necessary regulations, more liberal la-– average labour productivity is in- Investments have been growing in bour laws, and a clear target date forcreasing faster than the wage bill. Dur- line with our expectations – in the first euro accession.ing the first half of this year, Lithuanian quarter of this year, gross fixed capitalindustry production (except for refined formation was 8.4% higher than a year A similar pace of growth in investmentsoil products) already exceeded its pre- ago. However, gross capital forma- is expected for both 2013 and 2014,crisis peak, reached in the first half of tion (including inventories) contracted and we project gross fixed capital for-2008. However, the industry employs by 5.9%. The reduction of inventories mation to reach 23.8% of GDP by thesome 20% fewer employees than it did started in the last quarter of 2011 and end of our forecasting period, up frombefore the crisis. seems to have continued throughout 18.3% in 2010. Although capacity utili- the first half of this year. Continued sation was stuck at 72% during the firstDespite Lithuania’s increasing competi- half of this year, it will likely trend higher problems in the euro area, slowertiveness, it will be hard to sustain the and help meet the demand for invest- growth in exports, and the perceivedrapid growth of exports. The recovery ments. As we mentioned in our April threat of a “second crisis” were behindin the euro area will be weaker (we Outlook, retained earnings, credit, and this trend. Although the problems in theexpect it to stagnate next year), and EU funds will remain abundant and will euro area will not abate, we do not ex-Russia and Germany will also grow not constrict the growth of investments. pect inventories to contract much fur-slower than we projected in our April Until the end of 2013, companies can ther during the second half of this year.Outlook. Thus we have lowered the still benefit from investments in techno-Lithuanian real export growth forecast The foreign direct investment (FDI) logical renewal; this can lower taxableto 4.5% in 2013. As Europe emerges flow accelerated in the first quarter of profits by up to 50%. We expect thatfrom the crisis and growth accelerates this year, but mainly due to reinvested this tax exemption will be extended andin neighbouring countries, we also ex- earnings. There was relatively little will further stimulate investments.pect Lithuanian export growth to climb new equity, especially in greenfield in-to 7.0% in 2014. Import growth will be vestments. We expect the FDI flow to Currently, 62.5% of the total EU struc-slightly faster than that of exports, but remain similar this year and the next, tural funds allocated for the period fromthe trade and current account deficit will and to accelerate slightly in 2014, es- 2007 until 2013 (which amounts toremain sustainable. pecially if the new government sends EUR 7.4 billion) have been allotted, but only 50.3% of the total has been paid out. It seems that not all operational programmes will be able to use all al-Swedbank’s GDP Forecast – Lithuania located funds by the end of 2013. TheChanges in volume, % 2011 2012f1/ 2013f 2014f growth of investments could be stimu-Household consumption 6.1 3.5 (3.5) 3.5 (3.7) 4.0 lated by a more effective acquisition ofGeneral government consumption 0.2 -2.8 (-3.0) 1.0 (1.0) 2.0 the structural funds allocated for theGross fixed capital formation 17.1 11.0 (11.0) 9.0 (10.0) 9.0 renovation of energy-inefficient build-Inventories 2/ -2.0 -0.1 (-0.1) 0.2 (0.0) 0.0 ings. Some breakthrough in this areaExports of goods and services 14.1 4.0 (4.0) 4.5 (5.0) 7.0 could be expected next year, but anImports of goods and services 12.9 4.8 (4.8) 5.0 (5.5) 7.5 altogether different model for financingGDP 5.9 3.3 (3.3) 4.1 (4.3) 4.5 these projects is needed.Domestic demand (excl. inventories) 2/ 6.9 3.9 (3.4) 4.3 (4.5) 4.8Net export 2/ 1.0 -0.5 (-0.1) -0.3 (-0.2) -0.3Sources: CSBL and Swedbank.1/ The figures from our forecast in April are given in brackets.2/ Contribution to GDP growth August 21, 2012 21
    • Lithuania Swedbank Economic OutlookUnemployment will decline Nominal export growth contribution by countries, %slower 40 32.7 28.5Unemployment was slightly higher in 30 28.9 Otherthe first quarter of this year. This was CIScaused partially by seasonality and 20 Other EU 11.1partially by much weaker business con- 10 7.3 Germanyfidence at the end of last year, which UK 0slowed the creation of new jobs. Confi- Estoniadence has recovered since, and 31,600 -10 Polandnew jobs were created during the first Latvia -20five months of this year (a 2.3% in- Export growthcrease in the number of employed). In -30 -26.6 2007 2008 2009 2010 2011 2012 6mline with better confidence, unemploy- Sources: SL and Swedbank.ment dropped in the second quarter to13.3% Similar trend is seen in regis- tions, but it is to be hoped some agree- sharply at the beginning of this yeartered unemployment – after increasing ments can be reached next year. (against our expectations); we expectto 11.7% in the first quarter, it dropped it to be somewhat higher next yearback to 10.6% in the second. Growth in consumption to slow barring quick, confidence-lifting break- Household consumption grew slightly throughs in Europe.As the labour market reforms stalled faster than we expected in the firstand the first-quarter data were worse quarter of this year; it was 7.8% higher Household consumption growth will ac-than expected, average unemployment than a year ago. Household consump- celerate to 4.0% in 2014 but will remain(labour survey data) is not likely to drop tion probably grew much slower in the below wage bill growth. There are up-to 13%, as we envisaged in our April second quarter, and total annual growth side risks, especially if consumer con-Outlook. Thus, we have raised our un- will be a more modest 3.5%. fidence picks up and household debtemployment forecast to 13.2% for 2012 starts rising again – the loan stock toand 11.5% for 2013. In 2014, we expect Retail trade annual growth in the sec- households was still declining in thegrowth in employment to accelerate ond quarter, at 4.0%, was already two first half of this year, although thereand average unemployment to drop to times slower than in the first quarter were the first signs of an increase in9.3%. and is expected to grow at a similar newly issued loans. pace in the second half of this year.Our gloomier outlook for employment Growth in retail trade has been sup- Inflation will remain low, butthis year is partially related to the gov- ported by a record inflow of tourists, euro prospects are dimernment’s inability to find common including Byelorussians who come for The main drivers of inflation in Lithua-ground with trade unions and to change weekend shopping. nia remain developments in globalsome rigid regulations of the labour goods and commodities markets;code. The possibility of setting working Despite the lower unemployment and however, some increases in regulatedhours and vacation days more freely, higher real wage growth next year, we prices will also have a tangible effect.renegotiating wages, and terminating do not expect household consumption The monopoly Lithuanian Gas has de-contracts (in some cases) would help to grow faster. Domestic demand has cided (and the regulator has agreed)employers to feel more confident in the been supported by non-labour income to increase gas prices for householdsface of huge uncertainty and create – pensions were increased by 9.3% this by about 22% as of July 1. This deci-more new jobs. We do not expect more year – and this effect will ebb next year. sion was due to higher oil prices (theprogress before the parliamentary elec- Furthermore, the savings rate dropped import price of gas is directly indexed toUnemployment rate, % the price of oil); however, this increase21 now seems excessive, considering the 18.3 18.1 17.8 17.2 17.118 steep decline of oil prices during the 15.6 15.1 past few months. Our estimates show 14.8 14.8 14.5 14.2 14.1 13.9 13.8 13.3 13.215 that this will add about 0.35 percentage 11.7 11.6 11.5 point to annual inflation. The price of 10.7 10.6 10.512 Unemployment (survey) 9.3 heating in some major cities will go up 9 Registered unemployment in the second half of 2012, and public 6 transport will become more expensive in Vilnius as of August 15. 3 The biggest impact, however, on infla- 0 tion will be from developments in com- 2012Q1 2012F 2013F 2014F 2010 2011 modities markets, which have so far Sources: SL, Lithuanian Labour Exchange and Swedbank. been favourable for Lithuania. Thus we August 21, 2012 22
    • Lithuania Swedbank Economic Outlookkeep our inflation forecast unchanged General government budget and its balance, % 25 24for this year. Next year, however we ex-pect slightly higher inflation – 3.0%. Al- 18though the average oil price will decline General governmentby 5.5% – slightly more than we previ- 20 12 budget, % of GDPously forecast – the effect will be par- Tax revenue, % oftially offset by a weaker euro. Further- 6 domestic demandmore, droughts in the US and floods in Tax revenue, % ofRussia are causing shortages of corn, 15 0 GDPsoybean, and wheat; thus we forecast -6the global food price index to be 7.0%higher next year. In 2014, because 10 -12commodity prices and faster wage 2007 2008 2009 2010 2011 2012growth in some sectors will create more Source: Ministry of Finance and Swedbank.upward price pressures, we forecast a 6.1% higher than during the same time mented a number or reforms aimed atfurther increase of inflation to 3.4%. a year ago and exceeded the plan by reducing tax evasion and the size of theThe government has increased the 1.4%. The above-the-plan revenues shadow economy, but so far these haveminimum monthly wage by LTL 50 raise the likelihood that neither tax in- brought limited success. The Nielsen(EUR 14.48), or 6.25%, starting August creases nor spending cuts are neces- “empty-pack” survey shows that in the1. This is below the anticipated LTL 100 sary to meet the 3.0% of GDP deficit second quarter the share of smuggled(or 12.5%) hike, which we considered target this year. cigarettes dropped to 29.3%, downin our April forecast. This increase and from 34.6% a year ago and a stunning We forecast that the budget deficit willlabour costs in general will have limited 43.0% from the end of 2010. The meas- decline further in 2013 and 2014, to 2%(if any) impact on inflation – high unem- ures taken thus far – the rotation of cus- and 1% of GDP, respectively. Beginningployment will keep employees’ negotia- toms officers, taxation of goods once a January 1, 2013, lower VAT taxes fortion power low and productivity growth person has crossed the eastern border the printed media, technical assistancewill be in line with wage growth during more than five times, implementation of means for the disabled and their repair,our forecasting period. cashiers in covered markets – all these and public transport tickets will go into represent a positive progress towardsAlthough it is still possible that Lithuania effect. Spending is likely to increase in a more transparent economy but havewill meet the price stability and budget coming years, but departures from fis- not solved the large-scale corruptiondeficit Maastricht criteria in the spring cal discipline will be guarded against by and smuggling problem. The continua-of 2013, the prospects of adopting the the European Fiscal Compact, ratified tion of these reforms should remain theeuro in 2014 are dim because the gov- by the Lithuanian parliament in June. priority of the new government.ernment has not yet designated this as Thus, general government debt willan official national target.1 peak this year at 40.0% and decline to 37.4% by the end of our forecastingGovernment revenues up Nerijus Mačiulis period.despite large shadow economy Vaiva Šečkutė Tax revenues as a share of domesticDuring the first seven months of this demand (and GDP) have disappointedyear, national budget revenues were somewhat and remain close to 15%, well below the pre-crisis average of1 For a more detailed analysis of Lithuania’s and Latvia’s 18.3%. The government has imple-prospects, see our recent Swedbank analysis, 2012 08 01Confidence Indicators (net balance) 40 20 Overall sentiment Industry (40%) 0 Construction (5%) Retail trade (5%)-20 Services (30%) Consumer (20%)-40-60 2010 2011 2012 Source: SL. August 21, 2012 23
    • Swedbank Economic OutlookEconomic Research DepartmentSweden Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se Group Chief Economist Chief Economist, Sweden Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se Head of Economic Forecasting Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se Senior Economist Anna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.se AssistantEstonia Annika Paabut +372 888 5440 annika.paabut@swedbank.ee Chief Economist, Estonia Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee Senior Economist Teele Reivik +372 888 7925 teele.reivik@swedbank.ee EconomistLatvia Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv Deputy Group Chief Economist Chief Economist, Latvia Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv Senior EconomistLithuania Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt Chief Economist, Lithuania Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt Senior Economist Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt Senior EconomistAugust 21, 2012 24
    • Swedbank Economic OutlookDisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Department. The EconomicResearch Department consists of research units in Estonia, Latvia, Lithuania and Sweden, is independent of otherdepartments of Swedbank AB (publ) (“Swedbank”) and responsible for preparing reports on global and home marketeconomic developments. The activities of this research department differ from the activities of other departments ofSwedbank and therefore the opinions expressed in the reports are independent from interests and opinions that might beexpressed by other employees of Swedbank.This report is based on information available to the public, which is deemed to be reliable, and reflects the economists’personal and professional opinions of such information. It reflects the economists’ best understanding of the information atthe moment the research was prepared and due to change of circumstances such understanding might change accordingly.This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge thisreport is correct and accurate, however neither Swedbank or any enterprise belonging to Swedbank or Swedbanks directors,officers or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faultswithin this report.Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financialservices (issue loans, among others) to them. Aforementioned circumstances might influence the economic activities of suchcompanies and the prices of securities issued by them.The research presented to you is of informative nature. This report should in no way be interpreted as a promise orconfirmation of Swedbank or any of its directors, officers or employees that the events described in the report shall take placeor that the forecasts turn out to be accurate. This report is not a recommendation to invest into securities or in any other wayenter into any financial transactions based on the report. Swedbank and its directors, officers or employees shall not be liablefor any loss that you may suffer as a result of relying on this report.We stress that forecasting the developments of the economic environment is somewhat speculative of nature and the realsituation might turn out different from what this report presumes.IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT THEN YOU ACT SOLELY ON YOUR OWN RISK ANDARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTIONINDEPENDENTLY.August 21, 2012 25