Swedbank Economic Outlook January 2012
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Swedbank Economic Outlook January 2012



Swedbank Economic Outlook January 2012: When the going gets tough, the tough get going

Swedbank Economic Outlook January 2012: When the going gets tough, the tough get going



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Swedbank Economic Outlook January 2012 Swedbank Economic Outlook January 2012 Document Transcript

  • Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies January 24, 2012When the going gets tough, the tough get going Global development Table of Content:  The global recovery is losing steam with the euro zone in a recession and the US only slowly gaining speed. Global growth – estimated at 3.6% last year – was driven by emerging markets. We have revised the growth rate to 3.1% in Introduction: Weak growth – 2012 and 2013, from October’s 3.6% and 3.7%. negative risks weigh heavily 2  Global growth relies on the euro zone’s policy response. Our main scenario (55% probability), foresees small steps of progress but high short-term mar- Global: Rough patch – but ket volatility. A worsening (40% probability) nearly stalls global growth. A euro collapse has a small probability of 5% but with much larger negative growth no meltdown 4 effects. Sweden Sweden: Challenging times  After strong growth for most of 2011, macroeconomic indicators now suggest ahead 12 that the Swedish economy is slowing significantly. Exports are receding, indus- trial production is stagnating, and labour market improvements are slowing. Estonia: Shifting from high  Growth is revised downwards to 0.6% for 2012 and 1.8% for 2013 as the deep- ening euro zone crisis will continue to negatively affect the Swedish economy. to lower gear 17 Worsening sentiments of both households and companies will strain consump- tion and dampen investments. We expect unemployment to start to rise in 2012, Latvia: Holding up better before slowly falling back in 2013, as economic growth picks up moderately. this time 21 Estonia  Estonian economic growth was very strong in 2011, supported by better-than- expected export growth, albeit the pickup in domestic demand was solid as Lithuania: Growth in spite well. Strong foreign demand boosted investments and job creation. Rising em- of fiscal consolidation 25 ployment (8% up to third quarter) and wages supported private consumption.  Despite a worse global outlook, Estonia is estimated to grow by 2.7% in 2012 and 4.0% in 2013, fostered by domestic demand – investments are supported by growing public sector and environment-related investments; private con- sumption by the improving labour market situation and easing inflation. Latvia  In 2011, economic growth was stronger than expected, boosted by export- ing sectors and their investments, as well as by household consumption. We estimate that GDP growth exceeded 5%. The IMF/EC-supported bailout pro- gramme was successfully completed in December.  We are lowering the 2012 growth forecast to 2.0%, as slower growth for the main trading partners will cut into Latvian exports, while weaker confidence will dampen consumption and investments. We anticipate growth to pick up again in 2013, reaching 3.2%. Euro adoption in 2014 is still our main scenario. Lithuania  Consumption and investments continued fuelling GDP growth last year, when the economy expanded by an estimated 6.3%. Unemployment declined by al- most 3 percentage points, but real wage growth was still negative. Annual infla- tion peaked in May and was 3.4% at the end of 2011.  Growth will decrease in 2012 and 2013, but the economy is not expected to be in recession. The economy will continue to be driven by domestic demand, especially investments. This year, inflation is expected to decelerate to 2.5% and the budget deficit will contract from more than 5% of GDP in 2011 to 3% in 2012. Uncertainty has increased, but euro adoption in 2014 is still possible. January 24, 2012 1
  • Introduction Swedbank Economic OutlookWeak growth – negative risks weigh heavilyThe economic recovery in Sweden and slower speed. Sweden faces a couple advanced economies would have beenthe Baltic countries was strong up to of quarters of negative growth, thus in used up. The Baltic economies wouldthe third quarter last year, and labour technical terms falling into recession, also shrink, but their recessions wouldmarkets improved accordingly. Due to but would be able to sustain growth for be much milder than the ones experi-weaker global developments, especial- the whole year of 2012, and even more enced in 2008-2009, since imbalancesly in the euro zone, all four economies so in 2013. The Baltic countries stag- have been reduced and reforms havehave now shifted to a lower gear. We nate in the short term, but will see posi- been implemented to strengthen com-expect GDP growth to dampen during tive annual growth both in 2012 and petitiveness.the first half of 2012 and pick up only 2013. The probability of this scenario is In our main scenario, global growth fallsmildly thereafter. Hence, in Sweden relatively low (55%), thus pointing to a to 3.1% in 2012 and 2013, from 5.1%and the Baltic countries we still foresee great uncertainty about an outlook that in 2010 and 3.6% in 2011. GDP growthslight positive growth on an annual ba- is mainly dependent on policymakers’ in the US economy has been revisedsis, although the risks weigh heavily on reform ambitions and commitment to upwards to a moderate 2.0% in 2012the downside. save the euro zone. but downwards in 2013 to 2.2%, sinceIt is the global outlook that mainly cre- If our main euro zone scenario is rather deleveraging continues. The euro zoneates the uncertainty in our forecast. We downbeat, our alternative scenarios are economy shrinks by 0.3% this year, andsee three scenarios for the euro zone even more negative. The most likely of growth will be only marginally positive incrisis, which then set the stage for our them – with a probability as high as 40% 2013. Hence, there will be two years ofglobal scenarios. Our main scenario – is a continually worsening situation lost economic development for the euroforesees a volatile spring but is more with falling confidence and rising risk zone. The UK will also grow at a near-optimistic on the possibilities of confi- premiums, making government and stagnation rate, struggling with fiscaldence improving near autumn, when bank funding more difficult. The global consolidation and – on a political notethe new support mechanism, the Eu- economy’s growth would then come – relations with the euro zone. Japan isropean Stability Mechanism (ESM), is close to recession, and growth in recovering from last year’s tsunami, butin place and banks are better capital- Sweden and the Baltic countries would not at the speed first envisaged. Slowerised. During the spring, policymakers be more negative and stay so longer, global growth and a strong yen are rais-are expected to take decisions that will postponing the recovery until towards ing the hurdles.strengthen institutions, and this scenar- the end of the forecast period at best. China’s export sector is slowing, al-io thus presupposes small but crucial The likelihood of an even worse sce- though domestic consumption is ex-steps of policy improvement. nario – in which the euro zone breaks pected to stay awake with lower taxes,Even so, there will be a recession in up during our forecast period – is low lower inflation, and higher wages. Wethe euro zone driven by fiscal auster- (5%) but the negative impact on the foresee that there is room for stimulus,ity, credit crunch and lower confidence, euro zone, and the global economy as inflation is coming down to morebut the global economy will be able would be substantial. Sweden’s GDP palatable levels, although the amountto avoid it, as emerging markets and would shrink as it did in 2008-2009, or of stimulus will fall short of the vastthe US continue to recover, albeit at a even worse, as the policy tools in the support given in 2008-2009. Growth in India, Brazil, and Russia will also slow, although these countries, together withMacro economic indicators, 2010- 2013 2010 2011e 2012f 2013f many other emerging economies, will Real GDP growth, annual change in % support global growth through the con- Sweden (calender adjusted) 5.3 4.5 0.6 1.8 tinuation of their catching up of living Estonia 2.3 8.0 2.7 4.0 Latvia -0.3 5.4 2.0 3.2 standards. This is in contrast to most Lithuania 1.4 6.3 3.3 4.0 advanced economies, whose fiscal Unemployment rate, % of labour force stances and credit policies will be crip- Sweden 8.4 7.5 7.8 8.0 Estonia 16.9 12.5 10.7 8.6 pled by high debt and austerity. Latvia 18.7 15.4 13.7 12.0 Lithuania 17.8 15.5 13.5 11.5 Commodity prices will fall during the Consumer price index, annual change in % forecast period, as global demand Sweden 1.2 3.0 1.5 1.7 abates. The oil price – for which risks Estonia 3.0 5.0 3.2 3.0 are building up in relation to EU embar- Latvia -1.1 4.4 2.4 2.5 Lithuania 1.3 4.1 2.5 3.0 go of Iranian oil – is expected to drop Current account, % of GDP from last year’s $112 per barrel to $102 Sweden 6.2 7.5 7.7 7.3 this year, and $96 in 2013. Food and Estonia 7.2 6.7 4.4 2.7 Latvia 3.0 -0.9 -1.8 -1.9 metal markets will also on average see Lithuania 1.5 -2.0 -2.5 -2.7 prices decrease in 2012 and then sta- Sources: National statistics authorities and Swedbank. January 24, 2012 2
  • Introduction Swedbank Economic Outlookbilise in 2013. This means that inflation be positive, reaching 0.6% in calendar- fore picking up to 3.2% in 2013, whenpressures are coming down, thereby adjusted terms, before picking up to the euro zone situation improves some-allowing for a more expansionary mon- 1.8% in 2013. The Riksbank will cut its what. Unemployment will continue toetary policy, especially in emerging policy rate to 1% towards the end of fall, reaching 12% in 2013, and inflationmarkets, where there is room. In most 2012, while the government will reject will also drift downwards to 2.5%. Theadvanced economies, policy interest demands for further stimulus unless the main domestic forecast risks are house-rates will stay low or near zero, being situation worsens markedly. hold resilience, and politicians’ commit-raised only towards the end of 2013. ment to further budget consolidation. Estonia’s economy is forecast to haveMore quantitative and/or credit eas- Although the euro adoption target for grown by a respectable 8% last year,ing is foreseen in the UK and Japan, 2014 remains on the Latvian political supported both by stronger exports andbut not in the US unless its recovery agenda, the euro zone’s ability to ac- a pickup in domestic demand. The ef-slows. In the euro zone, the ECB is cept new members may be obstructed fect on the labour market has beenforeseen as cutting the repurchase rate by the recession and debt crisis. positive, with a substantial drop in un-to 0.75%, and as providing more liquid- employment to 12.5% on average in Lithuania’s GDP growth seems to haveity, if needed, to calm financial markets. 2011 from almost 17% the year before. been in accordance with our earlier ex-The US dollar is expected to strengthen Going forward, exports and invest- pectations, as it is estimated to haveagainst the euro during 2012, and then ments will lose steam, as the demand reached 6.3% last year. The exportto weaken somewhat. The euro will de- from the rest of Europe dampens. sector and domestic demand drove thepreciate, thus providing some stimulus Growth will slow to 2.7% this year and recovery, although, as in Latvia, net ex-to the export industry. The yen is also then return to a higher rate in 2013 of ports actually contributed negatively toseen as weakening against the dollar, 4.0%. Although revised upwards, the growth. We expect lower export growthnot least since Japan’s trade balance is inflation rate is set to slow compared ahead, as demand from Lithuania’sworsening. And the Chinese renminbi with last year, and the unemployment main export markets will dampen. In-will continue to appreciate against the rate is expected to decrease to 8.6% vestments will continue to grow rela-dollar, unless exports hit the wall and in 2013. The main domestic risk is the tively fast because they remain nearthe Chinese administration once again labour market, since there is a short- historical lows, the demand for busi-looks for ways of stimulating the econ- age of skilled labour in some sectors; ness investment is still high, and largeomy. meanwhile, long-term unemployment EU funds are still available. House-Sweden’s GDP is estimated to have remains a structural problem. holds will benefit from unemployment’sincreased by 4.5% last year, continu- coming down to 11.5% next year from Latvia’s economy also grew faster thaning its strong development in 2010. Af- 15.5% in 2011, and from inflation’s fall- expected in 2011, as GDP is estimatedter three quarters of brisk growth, the ing to 2.5% this year, before rising again to have grown by 5.4%. Stronger ex-economy is seen to have shrunk in the in 2013. Even so, private consumption ports pushed up investments, and, asfourth quarter. With a contraction also growth is set to decrease. Domestic the labour market improved, reducingin this year’s first quarter, Sweden’s risks include a stronger need for budget unemployment from almost 19% ineconomy is technically in recession. consolidation as the economy slows, as 2010 to 15.4% in 2011, confidence andIn particular, exports are decreasing, well as the outlook for euro adoption, household consumption strengthened.and household spending growth is be- which has become more uncertain. The IMF/EC-supported bailout pro-ing held back by low confidence and gramme was successfully completed The outlook for the advanced econo-expectations of higher unemployment. in late 2011. Going forward, a global mies looks bleak for the next couple ofAs the economy recovers due to better slowdown and euro zone recession will years, and their fiscal challenges areexport possibilities, hitherto favourable dampen Latvia’s growth prospects, as substantial also from the longer termunit labour costs, and lower interest GDP growth slows to 2.0% in 2012 be- perspective. Without structural policiesrates, overall annual growth in 2012 will to enhance growth, Sweden’s and the Baltic countries’ main export markets Gross domestic product (annual growth in %) will – with some exceptions – develop 15 weakly for many years to come. The 10 Estonia need to step up export diversification, 5 Euro zone i.e., focus more on the emerging mar- Lithuania kets, is increasing. To remain competi- 0 Latvia tive, it will be crucial to put more weight -5 Sweden on R&D, supporting our regional clus- -10 ters of excellence. -15 -20 Cecilia Hermansson -25 2006 2007 2008 2009 2010 2011 Source: Ecowin January 24, 2012 3
  • Swedbank Economic OutlookGlobal rough patch – but no meltdownThe worldwide recovery after the finan- hovering around 50 – these indicate no selling assets, and to buffer more capi-cial crisis and the global recession in growth or shrinking industrial produc- tal and become more cautious about2008-2009 slowed during the autumn tion. The OECD’s leading indicator sig- onward lending to other banks, compa-of 2011. Growth in GDP, industrial pro- nals a recession, mainly due to falling nies, and households. Interbank inter-duction, and exports dampened, es- new orders and more negative finan- est rates have risen in the euro zone,pecially in the euro zone, as well as in cial market statistics. In line with these and banks are depositing more fundsmany of the emerging markets, such as soft data, hard data on the outcome of overnight at the central bank, the ECB.China, India, and Brazil. In the US, on global trade have shown stagnation at The vicious circle involving the debt cri-the contrary, economic growth picked best. sis in the euro zone, budget consolida-up after a disappointingly weak first half The most obvious deterioration during tion, and the fragile banking system isof the year. the autumn can be found in the increas- at the forefront of the crisis. The resultThe main reasons for the world econo- ingly negative confidence indicators, as at the moment is austerity in public fi-my’s shifting to a lower gear have been well as in the more severe stress on nance as well as credit markets, caus-economic, political, and psychological. financial markets. The main reason for ing demand to shrink and the risks of aAs the financial crisis has changed its the lower confidence is the public debt more severe recession to increase.focus from private to public debt, politi- crises in the US, UK, and – especially – Although the US, UK, and Japan arecal decisions on how to handle budget the euro zone. facing serious difficulties in even-high-deficits, austerity programs, and re- Downward revisions of credit ratings er budget deficits and increasing pub-forms have been more difficult to agree for banks and countries, falling bank lic debt, the financial markets trust thatupon. This has been true in the US as shares, widening spreads on contracts these countries will be able to handlewell as in the UK, and especially so in for credit default swaps (CDSs) and the challenges in the short to mediumthe euro zone, where one political sum- government bonds for the crisis-struck term. In the euro zone, on the othermit after another has claimed – without countries Greece, Portugal, and, in- hand, financial markets are demandingsubstantiation – to have come up with creasingly so, for Spain and Italy – all very high risk premiums for countriescredible solutions. However, financial these signal rising concern about a where default risks have increased. Inmarket actors, companies, and house- default on government debt and also, addition, while the debt crisis there hasholds have lost confidence in the future, even more so, about the politicians’ de- coincided with the building up of strong-thereby helping to worsen the outlook mands for private sector involvement. er institutions to manage the currencyfor financial conditions, investments, In addition, the requirements for banks union, these institutions are at the mo-and consumption. to increase capital adequacy as early ment not capable of handling defaultNotable are the low purchasing man- as June this year also increases the risks within an EMU context. Instead,agers’ indices (PMIs) in most countries stress on the financial system, causing there have been attempts to find sup-during the second half of last year – banks to shrink their balance sheets by port elsewhere, such as from the IMF, emerging markets, and other non-EMUGlobal GDP outlook 2010 - 2013 (annual percentage change) 1/ countries. January 2012 October 2011 The challenges for the currency union 2010 2011 2012 2013 2011 2012 2013 are linked to the lack of fiscal coordi- nation/cooperation, the inclination ofUS 3.0 1.8 2.0 2.2 1.6 1.9 2.4EMU countries 1.8 1.6 -0.3 0.2 1.6 0.8 1.2 countries to take a national responseOf which: Germany 3.7 3.0 0.4 0.9 2.9 1.1 1.5 to banking regulation instead of ap- France 1.4 1.6 0.2 0.5 1.4 1.2 1.4 pointing a sole banking regulation for Italy 1.2 0.5 -1.3 -0.8 0.6 0.3 0.8 the euro zone, and the divergence in Spain -0.1 0.6 -1.0 -0.5 0.6 0.4 1.0 growth, labor participation, and com-UK 1.8 0.9 0.5 0.5 1.1 1.2 1.7 petitiveness between the North and theJapan 4.5 -0.5 1.7 0.9 -0.2 2.5 1.2 South in the euro zone.China 10.3 9.3 8.2 7.8 9.0 8.4 8.0 Three scenarios for the euroIndia 10.1 7.3 6.7 7.0 7.7 7.5 7.5 zone set the global stageBrazil 7.5 3.0 2.7 2.2 3.7 4.0 4.3 Since the global economic outlook isRussia 4.0 4.2 3.9 3.7 4.5 4.2 4.5 so dependent now on political and psy-Global GDP in PPP 5.1 3.6 3.1 3.1 3.6 3.6 3.7 chological factors in, especially, theGlobal GDP in US$ 4.1 2.7 2.3 2.3 2.7 2.8 2.9 euro zone, we have built our globalSources: National statistics and Swedbank. scenarios on the basis of probabilities1/ Countries representing around 70 % of the global economy. The World Bank weights from 2010 have for three different outcomes in the eurobeen used. January 24, 2012 4
  • Global Swedbank Economic Outlookzone. Notable is the great uncertainty Structural defict 2011, necessary fiscal adjustment, and itssurrounding the outlook, as evidenced impact on growth 10by the rather even chances for the 8main scenario and worse outcomes. 6Our probabilities are only broad guide-lines designed to make clear what the 4 Percent of GDP Structural def icitassumptions are, and should not be 2 Adjustmentseen as having been constructed in a 0 Growth impactscientific or rigorous manner. -2 -41. Main scenario: some small positivesteps towards improvement in the euro -6zone and subsequently a global slow- -8down in which recessions are limited to -10 Sources: Finland Germany Italy Eurozone France Portugal Spain Greece Ireland EU commission andcrisis-struck countries in the euro zone Swedbank(55%)The main arguments for a more op- Mechanism (ESM) to July this year, with However, even if the crisis in the eurotimistic view on the euro zone can be an effective lending capacity of €500 zone does not worsen during 2012 (es-linked to the agreements made at the billion, and in dropping the reference to pecially in the second half of the year,most recent EU Summit, the measures future private sector involvement and as we see room for volatility and back-taken by the ECB, and the increased deciding on voting procedures that will lashes in the first half), the effects onpace of reform and consolidation in the allow lending decisions to be taken on growth will be massive, as the budgetcrisis-struck countries. the basis of a qualified majority of 85%. consolidation measures will dampen These initiatives strengthen the stability demand, especially in the crisis-struckAt the EU Summit, on December 9, an mechanism, as the current European countries, but also in the rest of Europeagreement was reached on stronger Financial Stability Facility (EFSF) has and globally as well. Also, the creditfiscal cooperation, or a fiscal compact. been seen as both inadequate in size crunch will be negative for growth.Countries are required to limit their and too fragile in its setup. There is alsostructural budget deficits to 0.5% of Therefore, our main scenario includes a possibility that additional resourcesGDP, and public debt ratios to 60% of recessions in the countries where ad- will be supplied to the IMF by nationalGDP, otherwise semi-automatic sanc- justment is the largest, and low growth banks in the euro zone and other EUtions set in. This is allowing the ECB to or stagnation in other parts of Europe. countries.play a larger role in the short term, as Global growth will slow, but not as se-the bank now provides unlimited liquid- There are other indications that the cri- verely as if the euro zone crisis hadity for banks with three-year fixed-rate sis may become less contagious. The worsened. Emerging markets will con-loans at 1%, in addition to loosening up technocratic governments in Greece tinue to grow, but somewhat more slow-its collateral policies. and Italy, as well as the new govern- ly than during 2010 and 2011, and the ments in Spain, Portugal, and Ireland, US will start to see a more robust re-These measures are thereby directly are moving forward with their consolida- covery, although at a slower pace thansupporting banks in their efforts to in- tion and reform measures. In addition, during most other recession recoveries.crease their capital adequacy through even if Italy’s interest rates were to be Overall, global growth will reach justimproved profitability, thus potentially al- 7% or above, it would take years for the above 3% during 2012 and 2013 in pur-leviating the credit crunch; indirect sup- debt-service costs to cause a collapse chasing power parity (PPP)-weightedport is also being given to governments since Italy’s debt stock has a relatively terms.since the additional funds, in turn, are long maturity (about seven years).likely to be invested in sovereign bonds. 2. Worse scenario: gradual deteriora-In addition, the ECB still has room to Increasingly, reforms will be designed tion in the euro zone, as in 2011, withcontinue to purchase bonds in the Se- to support growth, thereby facilitating lower confidence and increased finan-curities Markets Programme (SMP), the deleveraging of public debt. Finan- cial stress – and with demands for larg-thereby indirectly absorbing some of cial markets will also gain confidence in er policy responses – leading to deepthe new supply from Spain and Italy. the decisions to remove private sector recession in the euro zone and muchAll in all, the ECB’s interventions are involvement; this combined with a bet- weaker global demand (40%)becoming sizable despite the bank’s re- ter understanding of the differences There are still extensive risks to thesistance to monetary financing of sov- between the economic strengths of brighter scenario described above, asereign debt and its stated adherence to Italy, France, and Spain, on the one financial markets may not be convincedthe terms of the EU Treaty. hand, and the economic weaknesses of that the measures agreed upon are suf- Greece, on the other, will help containAn important step was also taken in ficient. First, there are risks concerning the spread of the crisis, going forward.bringing forward the European Stability the details with regard to the measures January 24, 2012 5
  • Global Swedbank Economic Outlookthat will be settled in March this year. of private sector involvement may not 3. Chaotic scenario: breaking up of theNot all national parliaments may go succeed, thus increasing the risk for a euro zone with severe stress on finan-along with the agreement reached at default in March. Even if Greece is not cial markets and global recession asthe summit in December. Backlashes forced to leave the euro zone as a re- outcome (5%)may occur, as financial markets find out sult, the contagion to other countries The reasons for the relatively low prob-that the measures will be less reassur- could rise, meaning that the crisis again ability of a breakup the euro zone areing than hoped. escalates. In addition, there are great that there is a strong political will to uncertainties with regard to Greece’sSecond, even if private sector involve- keep the currency union together, and commitment to fulfill the conditions setment is taken off the table, except in that the costs of a breakup would far up in the reform program, as implemen-Greece, financial markets may not be exceed the costs of a rescue. tation so far has been very slow.able to fully believe this will hold; thus, Even so, the probability is not 0 %. De-interest rate spreads will remain high. Also, the spread of the crisis from the spite support mechanisms provided byThird, the effects of Standard and periphery to the core countries could the EFSF, ESM, IMF, and ECB, therePoor’s decision to downgrade 9 of the still continue during 2012 and 2013, is a risk that politicians and their voterseuro zone countries may have more se- increasing the need to take measures, in stronger member countries no longervere economic effects than so far not- such as more support from the ECB, want to show solidarity with the weakered. In addition, the effects of the down- transfers to the IMF, and an enlarge- ones, or that the politicians and theirgrading of the EFSF could become ment of the ESM. The large issuance voters in the crisis-struck countries nomore crucial, especially if the ESM is of debt during 2012 of some €2,000 longer want to adhere to the condition-not brought forward to July this year. billion will cause stress, especially for ality that comes with the support.If financing costs increase as a result Italy and Spain during the first half ofof the downgrading, as well as to simi- this year. If a crisis-struck country like Greece de-lar decisions by other rating institutes, cided to not comply with the conditions In this scenario, the politicians andthe outlook for the real economy could set for support, public sector and finan- other policymakers continue “kickingworsen. cial sector insolvency could lead it to the can down the road.” They manage the drastic decision to leave the curren-Fourth, the agreements made on the to keep the currency union together cy union. The costs involved would befiscal compact will speed up the budget during 2012 and 2013, but the effects enormous: the government would shutconsolidation, especially after our fore- on financing costs, financial markets’ down, the banking sector would face acast horizon of 2014 and onwards. stress, confidence, and demand will be systemic crisis, with bank runs, capitalEuro zone members will have to build more negative, thus also contributing to flight, credit crunch, and nationalisa-up larger primary surpluses in order a faster slowdown of global growth than tion as a result, private wealth would beto reach the debt ratio of 60% of GDP in our main scenario. hurt, confidence would fall, a recessionin some 20 years, as seems to be the The recovery in the US will be fragile, would set in, and the government wouldgoal. If reforms are not undertaken to and emerging markets will have diffi- have to start adjusting fiscal balancesincrease growth, competitiveness, and culties in keeping up their exports and by tightening despite the depreciationlabour market participation, the outlook subsequently also their domestic de- of the new currency by some 40-60%for the euro zone worsens and stagna- mand. Global growth will reach at best compared with the euro. Even with thetion can be expected at best in the short only 2%: the dividing line between glo- lower value of the new currency, theand medium term. bal growth and global recession. export outlook (including for the tour-Moreover, the likelihood for deflation ism sector) would be hampered by theand new recessions will increase in credit crunch and the falling confidence,combination with political and social un-rest. The financial markets may not find Interest rate diffence vs. Germany (10y government bond)the agreements made to be credible 35in the sense that debt problems could 30worsen, and the growth outlook will bevery bleak. In addition, the divergence 25 Greecebetween the North and the South may Portugal Percentage points 20 Irelandwiden as a result, thus driving expec- Italytations that the currency union may 15 Spainnot hold together in the medium term, 10 Belgiumwhich, in turn, would affect the short- Franceterm view. 5 0Of great importance is the handling ofthe crisis in Greece. The negotiation -5 2007 2008 2009 2010 2011 Source: Ecowin January 24, 2012 6
  • Global Swedbank Economic OutlookOECD industrial production and leading indicators; and global ment for most OECD countries in eitherexports the short or medium term. 15 190 The drivers of the main scenario are 10 170 the fiscal austerity packages in the OECD industrialAnnual percentage change 5 150 production euro zone, the lower confidence, and the credit crunch, as well as the rise in Index 0 130 OECD leading indicators unemployment, all of which are lead- -5 110 ing to lower demand growth, which Global export volume (rhs) will spread to other regions as well. In -10 90 the euro zone, the need for austerity -15 70 amounts to 3.3% of GDP – the level re- quired in order for countries on average -20 50 to reach a structural deficit of 0.5% of 1995 1996 1998 2000 2002 2003 2005 2007 2009 2010 Source: Ecowin GDP. This would mean some 1.7% of GDP in negative growth effect, perhaps spread out over two years (see Chartas generated political and social unrest. this time it would be more difficult to on page 5). In the US, the fiscal stimu-Most likely, the depreciation of the cur- overcome the problems since the room lus is decreasing compared with 2010rency would lead to higher inflation. for massive monetary and fiscal stimu- and 2011, but more extensive austerity lus is no longer there.For countries remaining in the euro will be postponed to 2014 and beyond.zone, the risk of financial market con- Global growth would most likely be Both the labour market and the housingtagion would be high, although the ef- negative in this scenario since the euro market are starting to recover, althoughfects on the real economy would be zone is heavily linked to the rest of the slowly.small due to the relatively small size world through financial markets and The weaker demand will also driveof Greece (compared with what would trade; moreover, since the recession commodity prices lower. Since emerg-happen if, e.g., Spain and Italy left would again be characterised as a bal- ing markets will grow relatively quickly,the EMU). The strains on the banking ance sheet recession, the recovery pe- although slower than in the past twosystem in the euro zone would be the riod would be slow and prolonged. The years, the demand for commoditieslargest problem, but falling confidence long-term costs of a breakup would be will stay rather high. We foresee thethrough fear and negative wealth ef- large as well, as EU cooperation would oil price per barrel falling from $112fects would also lower demand in the be affected through the poorer function- in 2011 to $102 in 2012 and to $96 inremaining euro zone countries, as well ing of the single market, and the outlook 2013. Also, metal and food prices willas in other parts of the world, depend- for Europe from a global competitive- fall during 2012 and then stabilise ining on the size of the country/countries ness perspective would be less benign. 2013. There are many risks involved,leaving the EMU. Main features driving the global such as Iran’s threatening to cut off theIf any or a few of the stronger euro zone outlook in our main scenario supply of oil from the Strait of Hormuzmembers decided to leave the currency We find the scenario of small steps to- following EU oil embargo, leading to aunion, the appreciation of the new cur- wards improvement in the euro zone higher oil price than we assume here.rency would lead to lower competitive- most likely, although the risks for a All in all, however, commodity pricesness and a loss of jobs in the export worse scenario are very high. In the will face downward pressure as the glo-sector, weaker public finance, and an longer term, the risk of a breakup of bal slowdown accentuates.increased need for bank recapitalisa- the euro is higher than 5%, unless in- Inflation will therefore abate this year,tion. Countries remaining in the euro stitutions are strengthened sufficiently compared with the relatively high pricezone would face problems involving in order to enhance growth and com- increases during 2011, not least in thecapital flight, the decreased potential petitiveness and to facilitate the con- emerging markets. This opens up roomfor support through the EFSF/ESM, fall- vergence of developments in euro zone for a looser monetary policy in emerg-ing confidence, and expectations that countries. ing markets, as well as in the euro zone,the remaining countries would leave The slowdown of GDP growth from where the ECB will be able to cut policythe union as well. some 5% in 2010 and 3.6% in 2011 to interest rates further. Also, in advancedThe effects on the European econo- just above 3 % in 2012 and 2013 rep- countries where policy rates have beenmies and the global economy would resents a shift to a lower gear, thus raised, there is room for a more expan-be severe in the context of a breakup, leading to a worsening outlook for la- sionary monetary policy, limiting theeven if it did not happen overnight. The bour markets and household income in downturn in the business cycle. In therisk of a repeat of the standstill in the many countries. This outlook will also US, another round of quantitative eas-credit markets, as occurred during the make budget consolidation more dif- ing cannot be excluded, but in our mainautumn of 2008, would be large, and ficult to achieve, a necessary require- scenario the need for this may be de- January 24, 2012 7
  • Global Swedbank Economic OutlookInterest rate and exchange rate assumptions southern part of Europe and Ireland are Outcome Forecast 20 Jan 30 Jun 31 Dec 30 Jun 31 Dec much worse, as these economies are 2012 2012 2012 2013 2013 shrinking due to fiscal and credit aus- Policy rates terity, high (youth)unemployment, and Federal Reserve, USA 0.25 0.25 0.25 0.25 0.75 weak confidence. The result is lower European Central Bank 1.00 0.75 0.75 0.75 1.00 consumer spending, postponements of Bank of England 0.50 0.50 0.50 0.50 1.00 investment, and more bankruptcies in Bank of Japan 0.10 0.10 0.10 0.10 0.10 both the nonfinancial and the financial Exchange rates sector. EUR/USD 1.29 1.20 1.25 1.30 1.30 USD/RMB 6.34 6.18 6.05 5.94 5.82 The economic outlook will get worse USD/JPY 77 78 80 82 85 before it gets better, and we expect the euro zone to remain in recession dur- Sources: Reuters Ecowin and Swedbank. ing the first half of this year, before im-creasing. Still, there and in other OECD During 2012, the presidential election is proving slightly and becoming stagnantcountries policy rates will remain low or in focus. Difficulties in reaching agree- during most of 2012 and 2013. GDP inclose to 0% during the forecast period ment on the Republican candidate, as the euro zone is expected to decreasedue to the restrictive fiscal policy; not well as an improvement in labour and by 0.3% in 2012, before returning tountil towards the end of or beyond 2013 housing, increase President Obama’s positive territory, at 0.2%, in 2013. Thiswill rates start to be raised. chances of reelection. During 2013, the means two lost years for the euro zone fiscal gridlock will accentuate regard- during our forecast period. GermanyIn a climate of few policy tools and less of which party wins the election. will also technically be in recession asweaker domestic demand, countries The lack of trust among the members of GDP most likely fell fourth quarter lastwill not like to see their exchange rates congress partly explains their unwilling- year and the first quarter this year, al-appreciate substantially, as exports will ness to find compromises, a situation though a stronger labour market, bet-remain the most important source of that does not have to improve after the ter competitiveness and lower inflation/recovery. China has declared that the election unless leadership (and “follow- weaker euro will support the recoveryrenminbi will be allowed to appreciate ership”) strengthens. occurring in the second half of 2012.somewhat faster against the dollar,the US may see the dollar strengthen There is a risk that tax cuts and unem- As we see some improvements in theagainst the euro with its more robust re- ployment benefits will not be extended policy process directed towards cri-covery, and the yen is likely to weaken beyond the two months already agreed, sis management and the longer-termas Japan’s trade balance deteriorates. thus creating an unnecessarily restric- building of stronger monetary union tive fiscal policy during the forecast pe- institutions, we do not foresee a dis-Developments in major orderly default and exit of Greece riod, as well as a more negative GDPeconomies from the euro zone, nor do we expect outlook than we have forecast. AnotherUS risk is, of course, the outlook in the more countries to need a restructuringAlthough the momentum in the US euro zone, which, due to the increased of debt besides the ones already witheconomy has become more positive squeeze on US credit markets, as well IMF/ECB/EU-supported programmeslately, as shown by, inter alia, GDP as lower exports and confidence, could (Greece, Ireland, and Portugal).growth and PMI figures, fundamental lead to slower growth in the US also. Italy and Spain are favoured by thechallenges remain, such as the on- The Federal Reserve will maintain its new rules and measures decided at thegoing deleveraging and great fiscal zero-interest-rate policy during most of EU summit at the end of last year. Theuncertainties, which continue to hold the forecasting period; it will use more amount of new bonds needed to be is-down households’ and companies’ con- quantitative easing only if growth falls sued for these two countries is €450fidence. In addition, despite improve- below 2%, if deflation risks are building billion in 2012 – €150 billion in thements, the labour and housing markets up, or if fiscal policy becomes more re- first quarter alone. Since the introduc-are still a drag on the economy. strictive, thus risking the occurrence of tion of the three-year fixed- rate loans, a new recession. yields in the shorter maturities haveWe have revised our forecast upwardsfor 2011 and 2012 to 1.8 % and 2.0 % Euro zone decreased substantially; this improvesrespectively, but are still sceptical about the funding situation for these countries The euro zone is already experienc-the longer-term outlook, which includes and reduces the need for further ECB ing negative growth on a quarterly ba-a slight downward revision for 2013. government bond purchases on the sis, including in Germany and France,Without structural reforms creating secondary markets. where conditions for manufacturingstronger impetus for higher demand, and retail worsened towards the end The spread of the crisis to the core ofthe trend growth is likely to stay just of last year. However, developments the euro zone will also abate in ourabove 2% going forward. in the crisis-struck economies in the main scenario, thus resulting in high, January 24, 2012 8
  • Global Swedbank Economic Outlookbut not very much higher, financing beat) scenario. Other risks to the euro addition, the strong yen and the morecosts of sovereign debt. zone include political developments, as negative global outlook are dampening Finland, France and Greece face elec- Japanese export possibilities. AlmostDue to the shrinking of balance sheets tions this spring, and the momentum of half of Japan’s exports are directed toin the banking sector, we expect the reforms and budget consolidation could the US and the euro zone, and lowerfinancing costs of private debt to rise be interrupted (the French Socialist demand from China will also affectfurther, and the availability of credit to candidate Hollande would like to rene- some 7% of exports. The current ac-diminish. Especially during the first gotiate the fiscal compact if elected). count surplus decreased by almosthalf of 2012, before the recapitalisation The outlook for emerging markets is 50% in the first half of the 2011 fiscalof banks has been finalised, and while also a risk, and if demand slows more year, compared with the same period inbanks/countries are still faced with fall- than expected, the export outlook for 2010. The earthquake is an importanting bank shares and the downgrading the euro zone will worsen substantially. explanation, but so is the increasinglyof credit ratings, financial developments This risk is higher for Ireland and Ger- weaker competitiveness. The strivingare likely to worsen before improving many, where exports to the world as a to take part in the Trans-Pacific Part-in the second half of the year. share of in GDP are 54% and 36%, re- nership, as well as to improve foreignAfter decisions on budget rules have spectively, and the share of euro zone exchange and trade cooperation withbeen taken in March at the latest, the exports is 22% and 15%. A weakening China, should be seen as measuresESM has been put in place in mid-2012, of the euro could have a positive impact that need to be taken to improve tradeand the recapitalisation of banks has on the growth outlook for the euro zone relations.been finalised (although the Basel III through better exporting possibilities – The stronger yen, fundamentally weakrules will demand further actions), the important not least for the crisis-struck demand, and lower global commoditypolicy focus is likely to move to struc- countries in southern Europe, where prices will cause deflation during mosttural reforms and measures to increase competitiveness is weaker. of the forecast period. The Bank of Ja-growth and competitiveness. Without Japan pan will continue to keep the policy ratesuch measures, the response by the Japan’s economy also seems to have near zero and use the tool of credit eas-ECB will have only “bought time,” and shifted to a lower gear, after recovering ing from time to time. Purchases of for-the underlying problems of high debt during the third quarter last year with eign assets should not be excluded asand low growth will remain. The ECB is an increase of 1.4% over the previous a tool to weaken the yen. Fiscal stimu-likely to lower the policy rate to 0.75% quarter. The slower growth in the rest of lus for the recovery programs amountsalthough the overnight interest rate will the world is affecting Japan negatively, to 3.8% of GDP in the first three sup-be lower, and it will continue to pur- but due to the need to build up the pro- plements to the original budget of fis-chase sovereign debt in the secondary duction levels after the earthquake, tsu- cal-year 2011. For fiscal-year 2012, themarkets through the SMP. Up to now, nami, and Fukushima nuclear disaster new budget is somewhat smaller thanliquidity operations (both credit and last spring, there are still expectations the previous one; however, the budgetquantitative easing) represent €788 bil- of 1.7% growth in 2012 – higher than in deficit is expected to be higher than 5%lion; thus, the ECB is more supportive 2011, when the economy is expected to of GDP, and debt equivalent of sometowards banks, governments, and bor- have shrunk by 0.5%. $3,500 billion will be issued to financerowers than at any time before. the budget. In the short run, govern-There are great risks to this outlook. As There are several reasons for our down- ment debt as a share of GDP will in-we have described above, the probabil- ward revision of the Japanese outlook. crease above 230%. In the longer run,ity of a worse outcome is almost as high Even if production in the private sec- the plan to raise the income tax over theas our more optimistic (but still down- tor is being restored, there have been next 25 years is one step in the process lags in the public recovery programs. In of improving the fiscal outlook. How- ever, Prime Minister Noda’s proposal toCommodity prices (indices) increase national sales taxes from 5%180 to 10% has not yet been accepted by160 parliamentarians in his own party.140 Commodity prices - total China120 Weaker exports have dampened the Food prices100 outlook for China, but to a lesser extent than for many other economies. The 80 Commodity rebalancing of growth to household prices - excl. 60 energy spending is still mostly rhetoric, but with higher wages, lower taxes, and infla- 40 tion, the outlook for private consump- 20 tion can improve. The government’s 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Ecowin January 24, 2012 9
  • Global Swedbank Economic Outlookprogram to build affordable housing outlook were to deteriorate sharply, a Brazilwill uphold investments. The economy slowdown of this appreciation could be A more restrictive economic policy andcan also – if needed – be supported by expected. slower global demand caused the Bra-a more expansionary fiscal and mon- zilian growth rate to dampen markedly Indiaetary policy than has been announced; during 2011. We estimate GDP to havethis will be made possible as the infla- After a strong 2010, GDP growth increased by 3% in annual terms, com-tion rate approaches comfort levels of slowed gradually during 2011, and we pared with the strong recovery after thesome 3-4%. We expect GDP to grow expect it reached on average 7.3%. crisis in 2010, when GDP increased byby 8.2% this year, revised downwards During this year, growth will fall further, 7.5%.from 8.4% in October because the glo- to 6.7%, before recovering somewhat to 7.0% in 2013. Going forward, the effects from higherbal trade and manufacturing outlook interest rates will be felt more through-has worsened. In 2013, the growth The main reason for the lower growth is out the economy. The Central Bankrate will slow further, to 7.8%, as the the attempts to reduce inflation, which increased the policy rate to 12.5% lastdomino effects from weaker real estate had reached double digits after the glo- summer and has since lowered it threeprices affect the economy. bal recession and financial crisis. The times to 11%. The credit expansion has Reserve Bank of India has over a peri-The main factor contributing to our been brisk but will start to slow. od of almost two years hiked the policyview, which is a bit more negative than rate by 475 basis points to 8.5%. After The global outlook will put a downwardthe consensus, is the property market, the summer of 2010, the inflation rates pressure on commodity prices, whichwhich is affecting the economy in many came down and have since stagnated will also affect Brazilian exports andways. Real estate investments make up at this lower level. Counteracting higher dampen investment growth in industrymore than 7% of GDP, and other parts interest rates and less liquidity, the in- and energy. Inflation will thus also beof the economy (10-15 %) are heavily flation rate has been driven by higher able to fall further, to just above 5%.reliant on property investments. About commodity prices, inflows of capital, a In order to maintain growth, fiscal andhalf of local governments’ revenues high growth of demand – not least in monetary policy will be made morecome from land sales. The rate of hous- the urban areas – and a weaker rupee. expansionary; this will also make theing starts, as well as of house prices, slowdown milder of growth in employ-has come down dramatically in some of We expect the inflation pressures to ment, income, and credit.the major cities over the last couple of abate in the coming quarters, and thatquarters, and land prices have started the Reserve Bank of India can start Countries with special impact onto fall. Mainly, this outlook sees a mild easing monetary policy this spring. Sweden and the Baltic countriesslowdown of the real estate market; if There are several risks affecting the In- Despite strong growth in quarterlyit were to accelerate and deepen, the dian economy, of which the global out- terms (0.5%) in the third quarter, theeffects on the economy would also be look is one. Another is the current ac- United Kingdom’s (UK) underlyingmore negative. The People’s Bank of count (export growth is slowing faster demand outlook is weak. We foreseeChina has cut reserve requirements, than import growth) and the budget twin GDP to grow, but only by 0.5% in bothand in the first half of 2012 it will also deficits which put a cap on the fiscal 2012 and 2013. To reduce the vastcut the policy rate, as inflation has fall- stimulus available if needed and also budget deficit of almost 9% of GDP inen further. The appreciation of the ren- affect confidence negatively, leading to 2011, the austerity package – which isminbi against the dollar will continue at lower consumption and investments. front-loaded and large – will dampensome 4-5 % per year, but if the export growth going forward.Consumer price outlook, 2010 - 2013 (annual percentage change) Despite the high inflation (reaching Outcome Forecast 5.2% in September before falling to 2010 2011 2012 2013 4.8% in November), the Bank of Eng-US 1.6 3.2 2.4 2.1 land has resisted calls to restrict mon-EMU countries 1.6 2.7 1.5 1.4 etary policy, expressing the view thatOf which: Germany 1.1 2.4 1.7 1.4 inflation pressures, caused by higher France 1.5 2.1 1.7 1.5 taxes, the weaker pound sterling, and Italy 1.5 2.8 2.1 1.0 higher commodity prices, are mainly Spain 1.8 3.1 1.8 1.6 temporary. The policy rate will remainUK 3.3 4.4 2.5 2.0 close to zero, and the unconventionalJapan -0.7 -0.2 -0.4 -0.2 monetary policy will be continued. TheChina 3.2 5.5 3.5 3.0 use of quantitative easing, as a shareIndia 10.2 8.4 5.3 4.5 of GDP, lately has been more substan-Brazil 5.9 6.6 5.2 5.0 tial than in most other central banks.Russia 6.9 8.6 7.0 7.5 Even so, the credit market is faced withSources: National statistics and Swedbank. austerity as British banks have become January 24, 2012 10
  • Global Swedbank Economic Outlookmore cautious in their lending due to terest rates and higher real disposable Take a look at the long viewtheir exposure towards euro zone fi- income stimulate private consumption. The long-term developments are, ofnancial markets. Fiscal and credit aus- New oil discoveries and real estate course, dependent on the outcome interity will dampen consumption and in- construction will lift investments. Un- the next couple of years. If the situ-vestment, holding back imports during employment will stabilise as the grow- ation in the euro zone improves, thethe forecast period. ing labour demand will be met by net need for acute crisis management is re- immigration. GDP is expected to grow duced, and there will be more room forGrowth in Russia will slow, but only by 2.0% in 2012 and 2.3% in 2013. growth-oriented policies. Reforms aremildly, as GDP growth falls from 4.2%in 2011 to 3.9% in 2012 and 3.7% in The collapse of the Danish hous- important – not just austerity! The need2013. Russian companies will increase ing market, which started in 2007 and is vast, especially in southern Europeinvestments more cautiously, as the where the situation deteriorated in where efforts must focus on strength-global outlook worsens and commod- 2008, is still affecting the economy ad- ening competitiveness by improving theity prices fall. Membership in the WTO versely as domestic demand is being functioning of labour and product mar-could mean stronger competition for held back by households’ adjustments kets, and increasing efforts on educa-Russian producers. A larger fall in the of their balance sheets. In the third tion and research and development. Aoil price than we have assumed here quarter, GDP fell by 0.8% in quarterly higher growth and export performancewould dampen the outlook and the terms. With its main trading partners in would alleviate budget and current ac-budget situation further. Another risk the euro zone, the crisis there will hit count constraints. It is important to noteis the credit crunch in the euro zone, Denmark. Because of the worsening that the situation in Germany does notwhich also affects Russia through de- global outlook and the Danish govern- have to worsen in order for the situationcreased capital inflows, and larger ment’s need to consolidate the budget, in Greece or Portugal to improve – this,outflows (in central and eastern Eu- the risk for a deeper recession has in- in the context of the euro zone, is not arope, also, there are large risks of a creased. We still see positive growth of zero-sum game.credit crunch as capital will be direct- 0.7% in 2012, followed by somewhat As mentioned above, the building ofed to banks in the euro zone, e.g., in stronger growth in 2013 as exports and stronger institutions in the euro zoneAustria, Italy, France, and Germany). investments improve slowly. must continue and will take time. In or-Russian households will feel the effects der for a eurobond market to function The recovery in Finland is losing mo-from the increased fiscal austerity after well, political and fiscal coordination will mentum, and GDP is now estimatedthe election, and this will hold back have to strengthen. Meanwhile, there to have increased by 2.8% last year. Asa more substantial increase in private could be setups where some countries the export outlook will worsen when theconsumption. On the other hand, lower take the lead. global economy slows, Finnish demandinflation during 2012 will ease the situa- is set to dampen. Consumer confidence The longer-term perspective also in-tion for households somewhat. is eroding and real income is falling, cludes the global imbalances and theThe Nordic countries show a mixed thereby slowing private consumption challenges to include the emergingeconomic picture in which Norway out- and real estate investments. Also, busi- markets in the global institutions, whichperforms the others. Even so, Norway ness investments are likely to be post- so far have been managed by the richerentered a soft patch during last year poned. GDP is expected to increase by countries. Multilateralism will be testedwhen GDP grew by only 1.4 % due to 0.4% this year, followed by a stronger further during 2012 and going forward,weakened confidence and subdued ex- performance of 1.5% in 2013, when net when it comes to trade negotiations, cli-ports. Domestic demand will provide exports and domestic demand begin to mate change, and financial regulation.the main growth impetus as lower in- recover slowly. As China and other stronger emerging markets enter more deeply into the glo- GDP growth in Norway, Finland, Denmark and the euro zone bal economy, the global monetary and 10 financial systems will also change, and 8 in the next decade or so the dollar will 6 face increasing competition from other euro zone 4 currencies, including the renminbi . TheAnnual growth in % 2 Finland euro will be part of the multipolar cur- 0 Norway* rency world;- how strong it will be will -2 Denmark be determined by the measures taken -4 now. A lot is at stake – the policymakers * total have a chance to make a difference, -6 -8 and it had better be positive! -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Ecowin Cecilia Hermansson January 24, 2012 11
  • Swedbank Economic OutlookSweden: Challenging times aheadUp to the third quarter of last year, the Against this background, we revise high household indebtedness furtherSwedish economy defied the global tur- down our growth forecast for 2012 increase the vulnerability, and the fi-bulence and expanded in real terms by to 0.6% and for 2013 to 1.8% (calen- nancial sector, despite having improvedmore than 5% compared with the same dar adjusted), significantly below our prudential ratios, would be forced toperiod 2010. This puts Sweden among October forecast. The slowdown in scale down on credit provision. Thus,the top performers in Europe. Growth 2012 is expected to be broad based, growth would likely turn negative inwent clearly beyond a rebound of the in particular in the first half of the year. 2012 and possibly also in 2013.sharp contraction in 2008-2009, and External demand will be negatively af-output now stands about 5% higher fected by the sovereign debt crisis in Export rebound to endthan in late 2007. While this demon- Europe and the associated fiscal tight- Swedish exports of goods and serv-strates the flexibility and strong dynam- ening. Increasing unemployment will ices have been surprisingly resilient toics in the Swedish economy, it could strain household spending, and erod- a weaker global demand. In the thirdalso provide ample room for a down- ing confidence is expected to dampen quarter of 2011, total export volumeward adjustment should conditions private sector investments. The policy increased by 8.3% annually and bychange. response will mainly come from the 9.7% on average for first nine months monetary side, and we expect the pol- of 2011. This is stronger growth thanIn the last months of 2011, it became icy rate to be lowered to 1.0% by the we expected in October and also fasterclear that the Swedish economy would end of 2012. Although growth will pick than world market growth, thus corre-not be insulated from the growing tur- up in 2013, the Swedish economy will sponding to two years of market gainsbulence in the global economy. Export still be adversely affected by the linger- for the Swedish export industry. Exportsperformance lost momentum as growth ing effects of the European sovereign of investment goods, such as vehicles,in large trading partners, particularly in debt crisis. equipment, and telecom products, ac-Europe, slowed. We have also seen a counted for the largest contribution indrop in industrial production, and for- In our adverse global scenario, with 2011, while services performed moreward-looking indicators, such as new sharp drops in euro zone growth, modestly.orders, are pointing towards a further Swedish exports would be hit harder,slowdown. Sentiment indicators began with ripple effects spreading to house- The importance of emerging marketsfalling, which will negatively affect the holds and company confidence. A slow- for Swedish exports has increased, andwillingness to invest, and households down in consumption and investment these accounted for more than half ofstarted to reduce spending, in particu- would lead to even sharper increases the total export increase in 2011. Ex-lar on capital goods. Labour market im- in unemployment and the fiscal defi- ports to the US have been surprisinglyprovements were losing speed, and the cit, straining the economic policy re- strong during last two years, drivenreduction in unemployment slowed. sponse. Elevated housing prices and mainly by telecom products and vehi- cles. Large volume markets like the Nordic countries and Germany (30%Key Economic Indicators, 2010 - 2013 1/ of total export), still the largest trading 2010 2011e 2012f 2013f partners, also contributed to the in-Real GDP (calendar adjusted) 5.3 4.5 0.6 1.8 crease in Swedish exports.Industrial production 14.6 9.3 -3.0 1.5CPI index, average 1.2 3.0 1.5 1.7 Since October 2011, the global outlookCPI, end of period 2.3 2.3 1.1 2.0 has worsened, and we now expect sig-CPIF, average 2/ 2.0 1.4 1.2 1.6 nificantly lower export growth during theCPIF, end of period 2/ 2.3 0.5 1.5 1.7 coming quarters. Leading indicators,Labour force (15-74) 1.1 1.1 0.3 0.3 such as export orders, have declinedUnemployment rate (15-74), % of labor force 8.4 7.5 7.8 8.0 since July 2011, and industrial produc-Employment (15-74) 1.0 2.1 -0.2 0.1 tion has decreased in recent months.Nominal hourly wage whole economy, average 2.5 2.5 3.0 3.0 In October and November, the exportNominal hourly wage industry, average 2.8 2.6 3.0 3.0 value started to decrease.Savings ratio (households), % 3/ 10.6 12.3 13.5 13.0Real disposable income (households) 3/ 1.6 3.1 1.9 1.4 The world market growth for SwedishCurrent account balance, % of GDP 6.2 7.5 7.7 7.3 exporters is also expected to decelerateGeneral government budget balance, % of GDP 4/ 0.0 0.3 -0.3 -0.2 further in 2012 and 2013 due to a weak-General government debt, % of GDP 5/ 39.7 37.2 37.7 36.0 er global economy. The largest drop isSources: Statistics Sweden and Swedbank. expected for the EMU countries, mainly1/ Annual percentage growth, unless otherwise indicated. caused by the austerity programmes2/ CPI with fixed interest rates.3/ Based on national accounts statistics implemented in Italy, Greece, Spain,4/ As measured by general government net lending.5/ According to the Maastricht criterion. and Portugal. Although we assume a January 24, 2012 12
  • Sweden Swedbank Economic Outlooklimited recovery in the US and Japan in Exports and industrial productionour base scenario, overall export mar- 30ket growth for Swedish exporters will be 20modest in OECD countries and signifi- Annual change in % (3m ma)cantly weaker than we anticipated Oc- 10 Productiontober. World market growth is expected 0 Export valueto pick up to 4.8% in 2013 from 3.8% Export ordersin 2012, but the growth rate will still be -10lower than the long-term trend. -20We foresee a fall in Swedish export vol- -30ume during 2012, driven by decreas-ing global demand for investment and -40intermediate goods. In 2013, exports Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 Source: Statistics Swedenare expected to increase by nearly 2%,below world market growth. We ex- the investment level is still lower than at turning weaker. After a large expansionpect a loss of market shares during the the peak in the beginning of 2008. in 2011, public investment is expectedforecast period due to an unfavourable to decelerate during the forecast pe-demand composition, rising unit labour In 2012 and 2013, investment growth riod, when ongoing investments in in-costs, and a stronger krona. Industrial is headed for a significant slowdown. frastructure will be completed. Localproduction, which is highly correlated During recent months, business and government investment plans are likelywith export performance, is expected household confidence has deteriorated to be scaled down as economic condi-to decrease in 2012 after a strong re- and the utilisation rate in the private tions worsen. Thus, we are loweringbound during 2010-2011. A buildup of sector has started to fall. The growing our projected total investment growth toinventories in the industry will also hold uncertainty about the global outlook 1.5% in 2012 and to 2.5% 2013.down production. In 2013, we anticipate and a significantly weaker export per-industry production to return to positive formance will lead to a postponement Unemployment set to increasegrowth as internal and external demand of investment plans in the private sec- Unemployment continued to decreasestarts to improve. tor. Lower confidence among house- during the latter half of 2011 but at a holds and slower growth in private con- declining rate. The average unemploy-Weak investment growth sumption will lead to slower investment ment rate in the third quarter of lastInvestment expanded in 2011 but more activity in the retail sector and other year was 7.4 percent, down from 7.7%slowly than we anticipated in our Oc- business services. during the first quarter; however, Octo-tober forecast. This was partly due to ber and November saw a slight uptick Investment in real estate is expectingrevised outcome figures for the first half in the rate (all seasonally adjusted). In to fall due to a weaker labour market,of 2011. On average, gross fixed invest- particular, the decline in youth unem- diminishing use of tax deductions forment increased by 6.7% during the first ployment has been halted, and the rate rebuilding, and a dampening of creditnine months of 2011 compared with increased to 23% in November. Young expansion towards the household sec-the same period in 2010. The highest people, who are able to switch more tor. In the second half of 2011, fewergrowth rate was found in real estate. easily between education and work, building permits and lower credit de-Despite an accumulated investment in- usually provides an early signal of la- mand from Swedish households in-crease of 33% since the end of 2009, bour market turnarounds. Therefore, dicated that the housing market was the recent drop in labour force partici-Swedbank’s GDP Forecast – Sweden 1/Changes in volume, % 2010 2011e 2012f 2013f pation among 15-24-year-olds is likely to be an early indicator of weaker la-Households consumption expenditure 3.7 1.4 (2.2) 0.2 (1.3) 2.1 (2.2) bour demand.Government consumption expenditure 2.1 1.7 (1.2) 0.7 (0.3) 0.9 (0.7)Gross fixed capital formation 6.7 5.8 (8.0) 1.5 (3.9) 2.5 (3.6) Also, the number of hours worked is private, excl. housing 5.1 2.9 (5.1) 2.7 (4.1) 4.3 (4.7) levelling off, predominantly in the pri- public 5.0 6.6 (7.8) -0.8 (1.6) 0.4 (1.4) vate sector. Employers normally react housing 15.1 15.4 (18.9) -0.5 (5.4) -1.5 (2.2) to falling demand by cutting down onChange in inventories 2/ 2.1 0.6 (0.4) -0.5 (-0.2) 0.2 (0.2)Exports, goods and services 11.0 8.4 (7.0) -1.1 (3.3) 1.7 (4.1) overtime and temporary workers. TheImports, goods and services 12.7 5.9 (6.6) -1.7 (3.9) 2.2 (4.6) shift in recent years in the Swedish la- bour market towards increased usageGDP 5.7 4.5 (3.9) 0.3 (1.1) 1.8 (2.2)GDP, calendar adjusted 5.3 4.5 (3.9) 0.6 (1.5) 1.8 (2.2) of staffing agencies is speeding up thisDomestic demand (excl. inventories) 2/ 3.6 2.2 (2.8) 0.5 (1.4) 1.7 (1.9) development. In particular, manufac-Net exports 2/ 0.0 1.6 (0.6) 0.2 (0.0) -0.1 (0.0) turing showed a declining demand forSources: Statistics Sweden and Swedbank. labour late last year, while retail has1/ The figures from our forecast in October 2011 are given in brackets. seen a slowing demand since mid-year.2/ Contribution to GDP growth. January 24, 2012 13
  • Sweden Swedbank Economic Outlook Labour demand is held up by sectors Hours worked dominated by the public sector, such as 3 education and health, and, somewhat 2 Education and surprisingly, by a pickup in construc- 1 health Annual change in %, trend tion. However, investment in housing is 0 Financial sector set to decrease, and local governments Construction -1 are increasingly strained by tighten- -2 Retail ing budgets, which will likely lead to a broader dampening of labour demand -3 Manuf acturing in 2012 and early 2013. -4 Other short-term indicators are also -5 pointing towards increasing unemploy- -6 ment. The number of layoff notifica- Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: Statistics Sweden tions has been rising quickly, starting in September, reaching almost 6,500 The restraint shown to date is compli- economies. However, labour market in November, more than double that cating the current wage bargaining, as efficiency, in particular as measured by of November 2010. Also, the number the economy is heading for another the number of open positions relative of vacancies and unfilled positions is slowdown. The first set of agreements to unemployment rates, is still worse trending downwards. Forward-looking has been struck in the industry sector, than prior to the 2008-2009 crisis (the indicators, such as hiring intentions in and the wage rate, at 3.0% over 14 so-called mismatch problem). Further- the private sector, are dampening, fur- months, was higher than in the previous more, long-term unemployment is in- ther reinforcing the trend of a slowing period. As productivity slows with weak- creasing, reducing the employability of labour market. ening growth, we are revising up our a growing number of people. Although forecast of unit labour cost, and expect recent labour market reforms, such as We, thus, expect the unemployment that the decline of the last two years will lower labour taxation, will facilitate in- rate to start to increase in 2012 and re- be reversed. Profitability in the private creased employment, the reforms of main high for the duration of the fore- sector will thereby be strained, after re- the health insurance system, with the cast period. For 2012, we forecast an covering in 2010 and 2011. However, accompanying increase in labour force average unemployment rate of 7.8% of we anticipate that wage drift will be lim- participation, will reinforce the chal- the labour force, up from an estimated ited by falling labour demand, and that lenge of attaining high employment rate of 7.5% in 2011. Unemployment is wage agreements in other sectors will while at the same time lowering unem- expected to peak in 2013 at 8.3% (sea- be in line with the industry, even though ployment rates. sonally adjusted), with an average rate uncertainties will be increasing as the of 8.0% for the year. Households backtrack amidst growth outlook worsens. bad news The wage-bargaining process will play Despite the relatively positive labour Despite the otherwise strong econom- a prominent role in 2012, with wage market developments since 2009, the ic growth in the first three quarters of agreements for approximately 2.5 mil- structural challenges will be exacer- 2011, households started to pull back lion employees expiring between late bated by the oncoming slowdown. On on consumption. After rebounding in 2011 and the summer of this year. Fol- the plus side, the employment rate in the second quarter, consumption de- lowing the agreements in 2010, which Sweden among 20-64-year olds has clined in the third, even with relatively were affected by the economic crisis, recovered strongly and is approach- strong growth in household disposable wage developments have been mod- ing 80%, which is significantly higher income. In particular, nominal wage in- est, with actual declines in real terms. than in other comparable European come picked up in 2011 compared with 2010, with an added benefit from theHousehold sentiments reduction of taxes. Also net-interest in- 100 come, including return on investments, 80 contributed to household revenues. 60 However, pension payments were re- 40 duced as the automatic brake was ap- Conf idence indicator plied due to the decline in value of pen-Net balance 20 Unemployment in 12 sion fund assets. 0 months -20 Micro conditions Eroding confidence among households -40 Macro conditions has had a dampening impact on con- sumer behaviour and suggests further -60 weakening ahead. The negative me- -80 dia reports concerning the debt crisis 2005 2006 2007 2008 2009 2010 2011 Source: NIER January 24, 2012 14
  • Sweden Swedbank Economic Outlookin Europe and the associated fear of Interest rate and currency outlookrecession spreading to Sweden have Outcome Forecast 2012 2012 2012 2013 2013affected households’ views on general 20 Jan 30 Jun 31 dec 30 Jun 31 Decmacroeconomic developments. House-holds’ views on their own economic Interest rates (%)conditions have also deteriorated, not Policy rate 1.75 1.25 1.00 1.25 1.75least due to falling stock prices and 10-yr. gvt bond 1.76 2.00 2.20 2.40 2.50rising mortgage rates. Unemployment Exchange ratesexpectations jumped up during the au- EUR/SEK 8.77 8.70 8.85 8.90 8.90tumn and will likely lead to households’ USD/SEK 6.78 7.25 7.08 6.85 6.85remaining cautious. TCW (SEK) 1/ 121.4 122.5 123.0 122.5 122.3 Sources: Reuters Ecowin and Swedbank.The households’ hesitation is mainly 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).affecting sales of durable goods andof other goods sensitive to the busi-ness cycle. Car sales fell again after ume in 2012, compared with an esti- come if they were to lose their jobs.rebounding in the first half of 2011, and mated 1.4% in 2011. We expect strong- This is likely to increase precautionarygoods such as clothes and shoes were er growth in 2013 as sentiments are savings by households during employ-negatively affected by a decline in sen- expected to improve and some pent-up ment and lead to sharper reductions intiment and warmer weather compared demand will spill over from 2012. At the consumption when unemployment in-with last year. Furthermore, the drop same time, interest and unemployment creases. Furthermore, households arein stock market prices during 2011 and rates will come down, providing a boost burdened by relatively high indebted-concerns about the housing market are to the retail sector, which, in turn, will ness, although borrowing slowed dur-also affecting consumption behaviour. help support employment growth, fol- ing 2011, to about 6.5% from 10% inShopkeepers have responded by low- lowing a relatively modest 2012. 2010. Thus, a combination of rapid jobering prices, but preliminary information loss and a fall in housing prices would Household savings rates are expectedsuggests that sales in the retail sector seriously strain households’ balance to remain high over the forecast period,in 2011 was flatter than in 2010. sheets and purchasing power. Together reflecting an overall increase in house- with diminishing spreads, the grow-We expect consumption to remain hold risk sentiments. Following a drop ing risk sentiments among householdsdampened in 2012 before picking up in 2010, the savings ratio is expected are also reflected in their increasingin 2013. The last quarter of 2011 is to increase in both 2011 and 2012, to tendency to opt for fixed interest rateestimated to have remained flat, and 12.3% of disposable income and to loans.the contribution from consumption to 13.5%, respectively, before droppingoverall growth was reduced by almost off in 2013 to 13.0%. Mounting monetary policy splithalf compared with 2010. A weakening The most significant risk factor in The Riksbank reversed its tighteninglabour market in 2012 will moderate household finances is the employment of monetary policy in December of lastnominal income growth. Income sup- outlook and, thus, income security. year and lowered the policy rate by 0.25port from fiscal policy will be limited, Lower remuneration rates (relative to percentage point to 1.75%. It is notableand many local governments have al- income) and decreasing enrolment in that the majority of the central bank’sready decided to raise taxes in anticipa- the unemployment insurance policy governors has a significantly less nega-tion of falling revenues and increased have exposed a growing number of tive view of the economic outlook thanexpenses. Thus, household spending households to sharp reductions in in- most financial market analysts, andis forecast to increase by 0.2% in vol- there is a risk that, if these governors’ stance prevails, inflation will seriouslyInflation, exchange rate and reporate undershoot the target. Two of the gov- ernors dissented, arguing for a larger 6.0 160 CPI yoy cut in both the policy rate and path. This 5.0 150 has been the case since the financial 4.0 crisis and, despite the replacement of CPIF yoy 3.0 140 two (other) governors, we expect the 2.0 pattern to remain in the short run. 130 Policy rate 1.0 (Swedbank After a spike in 2011, when prices in- forecast) 0.0 120 creased by almost 3%, the inflation rate Krona -1.0 (TCW, rhs) is now expected to decline rapidly. One- 110 off effects from energy-related price -2.0 hikes will dissipate, and lower overall -3.0 100 demand will ease price pressures. We Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sources: Riksbank, Statistics Sweden and Swedbank. January 24, 2012 15
  • Sweden Swedbank Economic Outlookforecast overall inflation (CPI) to contin- a surplus equivalent of 0.3% of GDP. continue with unfinanced stimulusue to decline in early 2012, before pick- Growing employment raised govern- measures; the fiscal policy frameworking up again. The underlying inflation ment tax revenues, while transfers to provides room for this. The margin for(the CPIF – mortgage rates kept con- households declined as a share of GDP. the expenditure ceiling is significant,stant) is expected to increase to 1.5% Lower spending on pensions, labour and the structural balance is expectedby the end of 2012, and then reach market programmes, and on health in- to be in surplus. At the same time, the1.7% in 2013. The margin between surance explain the bulk of the reduction government has indicated that furthermarket mortgage rates and policy rates of overall expenditures. Government expansion of the in-work tax credit willremains wide in the short term as banks consumption also grew more slowly last be undertaken only when the fiscal sur-are facing higher financing costs due to year following a boost in 2010 relating plus returns. We therefore expect thatincreased capital requirements, longer to labour market policy and an expan- the main part of a budgetary expan-term financing and elevated uncertain- sion of tertiary education. At the same sion would take place on the expendi-ties in the interbank market. time, revenues were lower in 2011 due ture side, amounting to around SEK 15 to the decrease in the taxation of pen- billion. Thus, 2013 would also entail aWe expect the Swedish krona to remain sions. Public debt as a share of GDP fell budget deficit, of around 0.2% of GDP.stable over the forecast period, with by almost 2.5 percentage points of GDP, The main risk to the fiscal outlook is aa slight appreciation towards the end a result of strong GDP growth and sub- significantly worse development in un-of the period. A strengthening against stantial revenues from the sale of shares employment, with related fiscal costs.the euro in 2012 will be followed by an in Nordea and Telia-Sonera.appreciation vis-à-vis the US dollar in In our assessment, the overall policy2013. The risk is that, if the Riksbank Budgetary pressures are set to increase stance over the next two years coulddoes not move its policy rate closer to in 2012 and 2013, but a significant become too tight. A protracted adjust-other larger central banks’, a stronger weakening is not expected. The budget ment of monetary policy, coupled with akrona could, together with an increas- for 2012 contains unfinanced measures cautious fiscal policy, may deepen theing unit labour cost, erode the competi- amounting to SEK 15 billion (0.4% of expected downturn and drag out thetiveness of Swedish production. GDP). The main part of this amount, recovery. In light of the already sound SEK 12 billion, is on the expenditure fiscal balances, and taking into accountAs inflationary pressures decline and side (infrastructure investments, mainte- the already-planned tax rate increasesour economic growth forecast is re- nance, and costs related to unemploy- in many local governments, the Minis-vised down, we expect the Riksbank ment). On the revenue side, a reduced try of Finance should consider extend-to lower monetary policy rates more value-added tax on restaurants and ing support to these governments toaggressively. In 2012, we forecast the catering constitutes the lion’s share, avoid layoffs in areas such as healthpolicy rates to reach 1% by year’s end, while household taxation is expected and education. Furthermore, as usagein particular as market rates are likely to increase due raised tax rates of local of the tax exemptions for renovationsto respond relatively slowly to monetary governments. We forecast an overall fis- and rebuilding of single-dwelling hous-policy loosening. As growth picks up in cal deficit of 0.3% of GDP in 2012, with es is getting saturated, a case could be2013, we expect a gradual tightening, lower employment dampening taxable made for extending the programme towith the policy rate at end of the year income. apartment houses. This could counterreaching 1.75%. the expected downturn in construction In 2013, when growth picks up, theIncreased fiscal pressures sector employment and help upgrade underlying fiscal position will again im-Public finances continued to strengthen the deteriorating housing standard. prove. In addition, and given that theduring 2011, and we estimate that the economy is still operating below po-overall public sector balance reached tential, we expect the government to Magnus Alvesson Jörgen KennemarPublic finances (% of GDP) 55 4.0 3.5 3.0 50 2.5 Balance (rhs) 2.0 Revenues 45 1.5 Expenditures 1.0 Public debt 0.5 40 0.0 -0.5 35 -1.0 2006 2007 2008 2009 2010 2011 2012 2013 Source: NIER January 24, 2012 16
  • Estonia: Shifting from high to lower gearFor the Estonian economy, the year nevertheless, will pick up in the second bal commodity markets pose a risk for2011 was a very good one – the econo- half, and for 2013 we expect it to reach the Estonian economy as well. Higher-my grew at strong rates, bringing along 4% (3.8% before). than-forecast inflation will harm the pur-job creation and investment growth. chasing power of households, increas- The main risks for the Estonian econ-Growth of 8.7% year on year (in real ing the number of budget-constrained omy continue to be external – a globalterms) during the first three quarters households; hence, private consump- slowdown with stagnation of the mainwas mainly export driven (exports grew tion growth might be considerably low- export partners’ economies will have itsby 31.1% during the same period), al- er. effect on Estonia’s economic recovery.though the contribution of domestic Nevertheless, we believe that the effect Internally, the biggest risk stems fromdemand increased as well. Domestic of a possible global stagnation will be the labour market – many sectors aredemand was mainly supported by in- considerably weaker than the effect of facing difficulties in hiring new employ-vestment growth, which reached 23.2% the 2008 credit crunch. The reasoning ees as there is not enough qualified la-during the first three quarters (in real behind this is that economic develop- bour available. This means that in theterms). Investments were fuelled by ments have been more balanced, and near future another wage rally mightinvestments in machinery and equip- the need for foreign financing is some- develop for certain occupational groupsment, together with construction invest- what smaller. This, however, does not (e.g., ICT sector specialists, engineers,ments. Private consumption continued mean that the Estonian economy will health care workers, etc.), as was seento grow at strong rates, reaching about be untouched – a widespread slow- in the mid-2000s. In addition to the4% (annual growth, in real terms) dur- down of the global economy would skills mismatch, emigration continuesing the first three quarters of the year. most probably reduce export volumes, to pose a threat to competitiveness, asWe have upgraded our economic lower investments, and dampen job during the crisis years many residentsgrowth estimate for 2011 from 7.6% to creation. All in all, this means that, if the found jobs outside Estonia and have8.0% due to the higher-than-expect- adverse scenario (see Global chapter) no intention of returning. As a result, ined export growth, together with the materialises, the Estonian economy will an environment of an aging and shrink-stronger domestic demand growth. The suffer also, from recession although not ing population, labour shortages mightbiggest contributor in 2011 was still as severe as in 2008. develop. This, in turn, might affect in-exports, driving both investments and vestment decisions of foreign investors Another set of risks is related to thejob creation. The latter had its impact (e.g. small-scale production). overall perception of the markets – theon private consumption, as the overall increased uncertainty and nervousness Exports continue to grow but atwage bill rose considerably, increasing of financial markets does not encour- a slower ratehouseholds’ income, confidence, and age investments, and, therefore, even Exports grew during the first three quar-willingness to spend. if the global economy were not facing ters of 2011 by a strong 31.1% in realFor 2012, we have downgraded the recession or stagnation, the overall terms; therefore, we revised our exportexpected economic growth from 3.3% sentiments might affect investments estimate upwards from 23.4% to 25.8%to 2.7% due to weaker economic de- decisions in Estonia, especially of for- for 2011. For 2012 and 2013, we down-velopments in the main export markets eign-owned and/or exporting firms. graded our export forecast from 3.5%during the first half of the year. Growth, and 7% to 2.7% and 6.7%, respective- Also, adverse developments in the glo- ly. The main reason behind this down- Key Economic Indicators, 2010 - 2013 1/ grade is the deteriorating global (espe- 2010 2011e 2012f 2013f cially European) economic outlook for Real GDP 2.3 8.0 2.7 4.0 the first half of this year. According to Nominal GDP, billion euro 14.4 16.1 17.1 18.3 our main scenario, economic activity in Consumer prices (average) 3.0 5.0 3.2 3.0 the core European countries, as well Unemployment rate, % 2/ 16.9 12.5 10.7 8.6 in the Nordic countries, will diminish Real gross monthly wage -2.0 0.3 1.8 2.9 Exports of goods and services (nominal) 25.5 27.4 3.2 7.4 somewhat at the beginning of the year. Imports of goods and services (nominal) 24.8 34.0 5.2 9.0 The second half of 2012 should be Balance of goods and services, % of GDP 7.4 3.8 2.0 0.6 more favourable for the Estonian econ- Current account balance, % of GDP 7.2 6.7 4.4 2.7 omy. Nevertheless, the high growth FDI inflow, % of GDP 8.1 8.0 9.8 10.7 rates observed during 2011 will disap- Gross external debt, % of GDP 114.5 98.6 92.1 88.1 pear for two reasons: developments in General government budget balance, % of GDP 3/ 0.2 0.5 -1.9 -0.3 Europe will be less favourable, and the General government debt, % of GDP 6.7 5.9 5.8 6.0 base will be much higher than it was in Sources: Statistics Estonia, Bank of Estonia and Swedbank projections. 2011 (exports formed in our estimation 1/ Annual percentage change unless otherwise indicated. 2/ According to labour force survey. approximately 90% of GDP in 2011). 3/ According to Maastricht criterion.January 24, 2012 17
  • Estonia Swedbank Economic OutlookAt the same time, Estonia’s main export Contributions to GDP growth (percentage points)partners, its neighbouring countries1, 20%are doing better than the core Europe- 15%ans, especially Latvia, Lithuania, and 10%Russia. The Nordic countries, however,will show considerably weaker growth 5% Net exportsrates than last year. We are of the opin- 0% Investmentsion that consumers and producers in Government -5% Householdsexport markets are increasingly price -10% GDP (%)sensitive; this means that Estonianfirms’ market shares in foreign mar- -15%kets are also increasing due to price -20%competitiveness, as wage growth is 2006 2007 2008 2009 2010 2011e 2012f 2013f Sources: SE, Swedbankexpected to be modest and current in-vestments will make future production which will result in less need to import are mainly affected by government in-more effective and less labour inten- production inputs and slower private vestments (financed by revenues fromsive. In addition, a weaker euro is also consumption growth. The latter means the CO2 quota trade, EU funds, andstrengthening the competitiveness of that households are still less willing to the State Real Estate of Estonia funds)Estonian firms. spend, and, therefore, import demand and some larger infrastructure-relatedWe assume that the share of machin- will suffer. As imports will grow faster projects. In addition, the two largest en-ery and equipment in goods exports will than exports both this year and next, ergy sector companies have stated inremain large, but somewhat lower than the trade surplus will be reduced. their investment plans that the invest-in 2011, as other sectors’ exports are ments expected this year will exceed Public sector investments growalso increasing. We expect an increase considerably last year’s numbers. Nev-in exports in sectors such as food pro- During 2011, we saw rapid growth in in- ertheless, we expect investment growthduction, wood and wood products, and vestments – in the first three quarters, to be more modest at the beginning ofthe production of chemicals. the average growth rate reached 23%. this year as the uncertainty in the euro Facing growing demand, many enter- area will remain.Exports of services will continue to grow prises reached their limits in capacitythis year and the next, supported by an For 2013, we expect investment activity utilisation, which induced investmentsincrease in demand for other business to increase, with growth reaching 9.8%. in machinery and equipment (in currentservices (accounting, legal support, The inflow of foreign direct investments prices, annual growth was more thanetc.) as well as by transport and travel- will increase in our main senario where 70% during the first three quarters).related services. confidence picks up, as the tax policy Large investments were observed in for enterprises is still more favourableAs Estonia is a very small and open the energy sector (the wind park project, than in neighbouring countries. Also,economy, its exports and imports are e.g.). Also, the contribution of construc- the outlook for small-scale production isclosely connected. We expect imports tion and renovation increased last year. still relatively good together with low as-to grow this year by 2.9% (4.6% be- For this year, we expect investments to set prices and comparatively low wagefore). The main reasons behind this grow further, but at a slower rate than levels.downgrade are slower export growth, we expected in October 2011 – we have downgraded the growth rate from The housing market showed growing1 The main export-destination countries are 11.5% to 7.5% as many exporting com- activity already at the end of 2011, andSweden, Finland, Denmark, Norway, Latvia, panies prefer to postpone investments we believe that this activity will remainLithuania, and Russia (approximately 80%of total exports). until the outlook for trading partners im- at elevated levels. On one hand, there proves. At this point, future investments is demand for new apartments/housesSwedbank’s GDP Forecast – Estonia1/ as the average number of square me-Changes in volume, % 2010 2011e 2012f 2013f ters per member of household in Esto- nia in 2011 was only 30.1, comparedHousehold consumption -1.7 4.3 (4.0) 3.0 (4.6) 5.6 (4.7) with 42.9 in Germany and Austria andGeneral government consumption -1,1 2.6 (1.2) 3.0 (1.6) 2.0 (1.4) 45.2 in Sweden2. On the other hand,Gross fixed capital formation -9.1 20.2 (20.6) 7.1 (11.5) 9.8 (8.1) the uncertainty in financial markets en-Inventories 2/ 4.2 0.0 (1.1) -1.0 (1.3) -0.1 (0.5) courages households that have con-Exports of goods and services 22.5 25.8 (23.4) 2.7 (3.5) 6.7 (7.0) siderable amounts of available fundsImports of goods and services 20.6 27.0 (25.5) 2.9 (4.6) 8.9 (8.4) to invest in the real estate market – anGDP 3.1 8.0 (7.6) 2.7 (3.3) 4.0 (3.8)Domestic demand (excl. inventories) 2/ -3.4 7.0 (6.6) 3.7 (5.3) 5.6 (4.8) increasing number of purchase salesNet export 2/ 2.5 1.0 (0.2) 0.0 (-0.7) -1.6 -0.8) contracts were financed with house-Sources: Statistics Estonia and Swedbank.1/ The figures from our forecast in October are given in brackets. 2 National Statistic Institutes for 2006,2/ Contribution to GDP growth 2009, and 2009, respectively.January 24, 2012 18
  • Estonia Swedbank Economic Outlookholds’ own funds (i.e. without loans). Contribution to goods export growth (percentage points)Households’ loan stock will continue 40% otherto decrease during 2012 but will show 30% USAa modest increase in 2013. Moreover,interest from nonresident buyers is 20% Russiastill present. 10% other EUHousing sales will increase this year 0% Latvia, Lithuaniaand even more in 2013, due to high- Swedener household incomes. Last year, -10% Finlandresidential investments could be de- -20%scribed as driven by the increase in Total (%)investments into energy efficiency. -30%This trend will continue this year3 and 2007 2008 2009 2010 2011 Source: SEthe next as well: energy prices are looking for a job or employed in the 8% compared with the same period ofexpected to rise even more in 2013, 2010. We expect that employment will population aged 15 to 74 reached his-when the electricity market will open continue to increase, but at a slower torically high levels (68.4% in the third(electricity is, according to Europe’s rate, as many entrepreneurs are more quarter). Different reasons underlieEnergy Portal, almost the cheapest in careful in hiring than they were last this kind of uptick in activity. First, theEstonia – only in Bulgaria it is cheaper year. In addition, some manufacturers budget of households is tighter due to– and opening up the market might are announcing a decrease in demand, quite rapid price increases (especially,raise prices for households consider- and they are already cutting back hours the prices of necessities) and the ratherably, as energy has to be purchased to avoid layoffs. During 2012, we ex- modest wage increases; this, in turn,in competition with other countries). pect employment to grow by 1.2% and means that there is a need for addi-Government investments are, accord- tional income to cope with all the higher in 2013 by 1.4%.ing to the budget plan, to increase by costs in certain income groups. This The unemployment rate will continuealmost one-third (in nominal terms) may be observed in the labour market to fall, reaching 10.7% this year (fromin 2012 and are mostly infrastructure data as well – activity increased the 12.5% in 2011), and, partly due to therelated (cofinanced by EU funds). In most in the groups aged 15-24 and 55 expected decline in activity, the un-2013, government investments will and older. Second, the increase in ac- employment rate will fall even fartherdecrease as projects financed by rev- tivity might be induced by the change next year, to 8.6%. Nevertheless, evenenues from the CO2 quota trade have in demographics – the larger cohort en- though developments in the labourto be finalised this year. Nevertheless, tering the labour market and the raising market continue to be encouraging, theoverall investment growth will pick up of the retirement age will increase the problem of structural unemployment re-as the corporate sector is expected to number of economically active individu- mains; if the young people (aged 15 24)accelerate their investments in 2013. als. Third, the fall in confidence about remain in the labour market instead of future economic well-being will push up studying, the skills mismatch will wors-Employment growth slows, activity as well – to avoid future hard- en in the medium to long run.activity rate falls ship, individuals will try to find a (better-In 2011, activity in the labour market As pointed in the previous Swedbank paying) jobs now.increased – the share of those either Economic Outlook, the Estonian labour Together with activity growth, the market is characterised by pendulum3 For households, the prices of natural number of employed increased at a rap- migration – Estonian residents con-gas, electricity, and heat energy increasedby 15%, 5%, and 4%, respectively, on id rate – during the first three quarters tinue to work abroad (in neighbouringJanuary 1, 2012. of 2011, employment grew by almost countries). It is to be hoped that the tak- ing of temporary jobs in neighbouring Labour market indicators countries will not be transformed into 25% 69% emigration – in a country with an aging 20% Gross and shrinking population, an increase 67% wage, annual in outflow of the working-age popula- 15% real growth 65% Unemployment tion will create problems for the social 10% rate security system in the long run. At the 63% Employment, same time, the shortage of labour might 5% annual growth 61% in the medium run spark another wage 0% Activity rate (rhs) rally similar to that seen in 2006-2007; -5% 59% this, in turn, would jeopardise the com- -10% 57% petitiveness of local producers/service providers. -15% 55% 2006 2007 2008 2009 2010 2011e 2012f 2013f Sources: SE, Swedbank forecast January 24, 2012 19
  • Estonia Swedbank Economic OutlookReal wage growth in 2011 turned posi- look, we expect resident consumption Two years with budget deficitstive only in the third quarter (we expect- spending to increase by 3% in 2012. aheaded an increase in purchasing power Nevertheless, we downgraded the ex- Last year, the faster-than-expectedalready in the second quarter). Accord- pected growth rate from 4.6%, as wage economic recovery and above-expec-ing to our forecast, real wages will grow growth expectations are lower and con- tations labour market developmentsby 1.8% this year and 2.9% in 2013. sumer confidence is already eroding. lifted tax collection, which outshot thatWage growth will be uneven within sec- Lower confidence, together with the planned by 2.2%. Nontax revenuestors, and, as mentioned above, wages fear of future hardship, will encourage were also good, supported by success-of some occupation holders might in- households’ savings – during the first ful CO2 quota sales. After many yearscrease more quickly due to a shortage 11 months of 2011, households’ depos- of austerity, government expendituresof qualified labour. This is especially its grew by a strong 11.4%. Neverthe- started to increase as well; neverthe-true in the case of construction workers less, most of the deposits are held by less, we still estimate a small budget– the statistics on started construction higher-income earners, which means surplus for the end of last year withworks, together with building permits; that the number of budget-constrained 0.5% of GDP, up from the 0.1% fore-show a continued growth in construc- households might be increasing and cast in October.tion-related investments. At the same the growth of deposits this year will betime, real estate developers and con- modest. We foresee budget deficits for both thisstruction firms have to compete with year and next 1.9% and 0.3% of GDP, We foresee, private consumption respectively. Expenditures are goingfirms in Finland for construction work- growth at the beginning of 2012 to be to be overstretched for many one-offers, and, to attract them, might have to slower, as the weaker external demand reasons, e.g., full restoration of secondraise wages quite rapidly. and subdued production volumes will pension pillar payments and mandatoryIncomes support households’ affect wages and employment (i.e., the infrastructure investments connectedspending despite hazier outlook number of jobs and working hours). with previous CO2 quota sales. Also,Private consumption started to pick up During the second half of the year, the nontax revenues will be affected byalready at the end of 2010 and showed growth of private consumption is ex- smaller dividend payments from state-persistent growth during the first three pected to pick up in line with overall owned companies and lower growth ofquarters of 2011. Consumption was economic activity. EU structural funds. We expect thesesupported by favourable developments Another factor affecting private con- deficits to be funded by current re-in the labour market – strong employ- sumption growth is inflation – inflation serves, as market conditions for loanment growth, together with rising wag- expectations have come down a bit financing could be less favourable. Ases, increased households’ disposable since the beginning of last year but re- the current government continues to beincome, and boosted consumer con- main at an elevated level. We expect committed to conservative fiscal poli-fidence. The growth of resident con- inflation to slow, but this slowdown will cies, we can expect budget surplusessumption expenditures was bolstered be less pronounced than we expected from 2014 onwards.by spending on durables and semi-du- in the autumn. We raised our price The general government debt level willrables. Consumption of food products, growth expectations from 2.7% to 3.2% remain low and under 6% of GDP dur-on the other hand, remained modest, for 2012 as the rise in energy prices ex- ing our forecast period. In 2013, thebeing influenced by the rapid price in- pected for households will affect hous- first payment to the European Stabilitycrease of those products throughout the ing costs. For 2013, we expect a bit Mechanism will be transferred, whichyear. In addition, consumer spending faster inflation than before as well (3%), will increase the debt level by 0.17%was affected by higher energy prices. due to rollover effects and increased of GDP. To lessen the pressure on theDespite the hazier world economic out- economic activity. overall debt level during the upcoming deficit years, it was decided to postpone the raising of the net debt ceiling for lo-Consumption and consumer confidence 30% cal governments from 2012 to 2013. 25 This debt ceiling, together with stricter 20% lending conditions, was set in 2009 as a 15 Private part of the austerity measures package. consumption 10% 5 growth -5 Retail sales Annika Paabut 0% growth Elina Allikalt -15 -10% -25 Consumer confidence, pts -20% (rhs) -35 -30% -45 2006 2007 2008 2009 2010 2011 2012 Sources: SE, DG ECFINJanuary 24, 2012 20
  • Swedbank Economic OutlookLatvia: Holding up better this timeLatvian economic growth was stronger euro zone) in the second half of 2011. of 3.9%. The target of introducing thethan expected in 2011; we estimate it The third-quarter results of Latvia’s euro in 2014 remains on the politicalhas exceeded 5%. By the third quarter main trading partners were still quite agenda, and we believe that it is still re-of 2011, GDP had grown by 10% from robust, thus supporting exports, and alistic. Yet, the ongoing sovereign debtthe trough in the third quarter of 2009, certain policy decisions made in the crisis may potentially limit entry of newbut it is still about 17% below the peak euro zone late in the year (closer fiscal members into the euro zone.level of late 2007. The rebound in 2011 oversight and a more accommodative The unemployment rate is forecast toowed mostly to swift growth in export- monetary policy; see the Global chap- continue coming down due to emigra-ing sectors, such as manufacturing, ter for more details) started clearing tion and job creation. Employmenttourism, and transport and storage. It a path out of the debt crisis. However, growth will be slower than in 2011,resulted in soaring investments, help- the uncertainty is still high, and growth though. The unemployment rate baseding the construction sector to start rates are expected to decelerate sub- on the Labour Force Survey (LFS)recovering. Household consumption stantially in 2012, thus making growth is expected to retreat to about 12%grew due to higher optimism, employ- for Latvia’s exports and investments in 2013 from 15.4% in 2011. We arement, and wages thus supporting do- much more challenging. keeping the average inflation forecastmestic trade. Over the last years the We are lowering our GDP growth fore- at about 2.5% in 2012-2013, with up-economic structure has become more cast for 2012 to 2% (3% before): slow- ward risks for the second half of 2013balanced, shifting from domestic con- er growth in the main trading-partner in case the euro adoption is approvedsumption towards exports. countries will cut into Latvian exports, and consumer demand picks up. WithThe IMF/EC-supported bailout pro- uncertainty and stress in the finan- imports following exports quite closely,gramme was successfully completed cial markets will hurt investments, and we expect the foreign trade deficit toin late 2011. During the programme’s weaker confidence will weigh on con- remain close to 3% of GDP throughoutthree years, both public and private sumption. We expect a very weak first this period and therefore not to threatensectors have done a great job in reduc- half of 2012, most likely with negative the sustainability of current account fi-ing internal and external imbalances quarterly growth in the second quarter, nancing via EU funding or foreign direct(e.g., a cumulative fiscal adjustment but somewhat stronger development investment (FDI) inflows. Gross exter-of about 16% of GDP). This does not in the second half of the year. We do nal debt as a percent of GDP, includ-mean, however, that all the homework not foresee a new recession (i.e., two ing also public debt, will continue to gois done – we see it crucial to continue consecutive quarters of negative quar- down.improving competitiveness, promoting terly GDP growth). Meanwhile, the an- Hence, our base scenario is of subparmedium-term growth, and balancing nual GDP growth rate is anticipated to economic growth. This growth could begovernment finances. diminish during 2012, coming close to swifter (especially in 2012) if GermanyStructural reforms addressing these is- zero late in the year. With the global and the Nordic countries turn out to besues are of particular importance, tak- outlook improving in 2013, we expect more resistant to a recession in theing into account the worsening of the somewhat faster growth (3.2%), yet a weak euro zone countries. Among theexternal environment (especially in the bit weaker than our October forecast local factors investment dynamics are subject to the highest uncertainty (andKey Economic Indicators, 2010 - 2013 1/ possible upward/downward revisions), 2010 2011e 2012f 2013f especially in light of the historical vola-Real GDP -0.3 5.4 2.0 3.2 tility of investment data and the recur-Nominal GDP, billion euro 18.1 20.2 21.2 22.7 ring, substantial data revisions.Consumer prices (average) -1.1 4.4 2.4 2.5 Negative external risks haveUnemployment rate, % 2/ 18.7 15.4 13.7 12.0 risenReal net monthly wage -6.6 0.1 1.4 2.9Exports of goods and services (nominal) 20.3 22.1 7.0 9.1 The main negative risks to our fore-Imports of goods and services (nominal) 19.4 24.9 7.8 8.9 cast are external ones, and there is notBalance of goods and services, % of GDP -1.0 -2.4 -2.9 -2.9 much separating the probabilities ofCurrent account balance, % of GDP 3.0 -0.9 -1.8 -1.9 the baseline and the two negative sce-Current and capital account balance, % of GDP 4.9 1.1 -0.6 -0.8 narios (see Global chapter). If the euroFDI inflow, % of GDP 1.6 5.4 3.5 3.9 zone debt crisis is not being solved andGross external debt, % of GDP 165 151 146 139 financial market stress escalates, caus-General government budget balance, % of GDP 3/ -7.6 -3.7 -2.4 -0.9 ing deep and extensive recessions inGeneral government debt, % of GDP 44.7 43.1 42.4 39.7 core countries, the Latvian economySources: CSBL and Swedbank. would suffer more than the base sce-1/ Annual percentage change unless otherwise indicated.2/ According to labour force survey. nario suggests.3/ According to Maastricht criterion.January 24, 2012 21
  • Latvia Swedbank Economic OutlookThe first hit would certainly be on ex- Seasonally adjusted GDP, 2007=100ports. Despite improved competitive- 120ness, more diversified markets, and a 110 Householdsbuildup of financial reserves, a fall in 100external demand in European coun- 90 Governmenttries (the largest export market) would 80 Investments (w/osharply reduce Latvian export volumes. inventories) 70This would weigh on investments, es- Exportspecially if the credit crunch in Europe 60 Importsstrengthens and confidence sharply 50 Total GDPworsens. Given that companies invest- 40ed heavily in 2011, investments could 30fall quite abruptly. Yet, the availability 2007 2008 2009 2010 2011 Source: CSBL.of EU funding would lessen the slapsomewhat, and the projects already rate. Latvian exporters continued to come, action should be taken to with-under way would delay the pronounced expand their market shares in the main stand a more negative scenario. Whileinvestment drop until the second half of trading-partner countries. Manufac- companies seem to have taken such2012 and early 2013. turers have become more resistant to actions, the government and house-Households are perhaps the sector holds seem to be more exposed. negative external shocks – they haveleast prepared for negative external reduced leverage, optimised debtor Export levels break records, butshocks. Although they are continuing and creditor flows (e.g., by shifting their growth is slowingto reduce their leverage, unemploy- payment dates for received deliveries Latvian exporters in 2011 benefited earlier and obtaining liquidity buffer),ment is still high and savings are low, not only from quite robust growth in managed to retain good profit marginswhile income and regional inequal- their main trading partners (the Baltics, amidst weakening global growth, andity has risen. Consumer confidence in the Nordics, Germany, and Russia), built up financial reserves. InvestmentsLatvia held up surprisingly well in the but also managed to boost exports to (largely supported by EU funds) helpedsecond half of 2011, compared with, emerging markets in Asia and Africa. exporters to streamline the productione.g., Estonia, Lithuania or the euro An additional factor supporting exports process and diversify the product mix.zone, but if exporting sectors, as the was the transit of NATO nonmilitarymain growth engine, are hit, confidence Exports of services in 2011 expand- freight to Afghanistan. Despite an ex-would worsen significantly, weakening ed about twice as slowly as those of pected euro zone recession in 2012,consumption. This would result in lower goods. Services’ exports were boosted the main trading partners of Latvia aretax revenues. Although the government by freight transportation (especially rail- forecast to grow. We thus expect exportbudget has a safety margin to accom- way), tourism, and commercial services volume growth to slow but remain posi-modate somewhat slower economic (e.g., IT and financial). Although devel- tive for the year overall, even thoughgrowth (it is planned under 2.5% growth opment of infrastructure (e.g., expand- negative quarterly growth in one of theassumption), under a worse scenario, ing the capacity of ports and railway) quarters is possible.additional fiscal consolidation would will raise export potential, a more slug-definitely be needed to keep the deficit In 2011, exporters managed to sustain gish growth of services’ exports is ex-under 3% of GDP. their hard-won competitiveness gains – pected due to the slowing of economic unit labour costs (ULC) in manufactur- activity in the Baltic Sea region.Addressing these external risks is the ing were by and large stable, as was themain local challenge. Although exces- Imports grew more quickly than expect- ULC-deflated real effective exchangesive pessimism is certainly not wel- ed in 2011, mostly owing to stronger in- vestments and consumption. However,Swedbank’s GDP Forecast – Latvia1/ with the deceleration of export, invest-Changes in volume, % 2010 2011e 2012f 2013f ment, and consumption growth, importHousehold consumption 0.4 4.4 (3.4) 1.7 (2.5) 2.7 (3.5) volumes are set to increase more slowlyGeneral government consumption -9.7 -0.9 (-0.1) 0.5 (0.1) 2.4 (1.0) in 2012-2013. Consumption and, thus,Gross fixed capital formation -12.2 25.7 (22.0) 7.0 (15.0) 3.5 (15.0) imports of durable goods will be ham-Inventories 2/ 4.5 0.9 (0.6) -0.7 (-0.6) 0.3 (-0.1) pered as confidence worsens, importsExports of goods and services 11.5 12.9 (13.5) 3.3 (4.5) 4.6 (5.0) of machinery and equipment will sufferImports of goods and services 11.5 18.9 (18.0) 4.0 (5.0) 4.2 (8.0) due to weaker investment growth, andGDP -0.3 5.4 (4.2) 2.0 (3.0) 3.2 (3.9) the growth of imports of commoditiesDomestic demand (excl. inventories) 2/ -4.4 8.5 (6.7) 3.5 (4.3) 3.1 (6.4) needed in production of exports willNet export 2/ -0.5 -4.0 (-3.2) -0.7 (-0.6) -0.2 (-2.4) also weaken. We expect a negative netSources: CSBL and Swedbank. contribution of exports to GDP in 2012-1/ The figures from our forecast in October are given in brackets. 2013, although smaller than in 2011.2/ Contribution to GDP growth January 24, 2012 22
  • Latvia Swedbank Economic OutlookStrong investment activity to in the energy sector and infrastructure. Just published preliminary results ofmoderate going forward The amounts of EU funds available/ 2011 Population Census reveal higherGross fixed capital formation is ex- planned for 2012 are similar to last year. unemployment rate in March 2011pected to have soared by over 25% in These two factors will drive investments (17.7% vs. 16.6% reported by LFS for2011, largely supported by EU funds. in 2012, especially in the first half of the the first quarter of 2011). Our forecast isMost of this was invested in machinery year. In addition, although the share of based on LFS data and will be revisedand equipment (a major part of which gross fixed capital formation in GDP when detailed Census data are availa-in manufacturing) and in infrastructure increased in 2011, so far it reached ble. We know already that employmentdevelopment (e.g., public projects). only the level of 2001. However, taking and participation rates were smaller inFDI inflows were large – above 5% of into account the risen uncertainty glo- 2011 than suggested by LFS. It mostGDP. About half of FDI in the first nine bally, slowing external demand growth, likely implies that average labour pro-months of 2011 went to the financial shrinking profit margins, and higher risk ductivity growth in 2011 was somewhatsector (strengthening the banks’ bal- premiums, exporters are expected to faster than current estimate shows.ance sheets) and real estate sector be less aggressive in continuing to ex- pand their investments in 2012. Fewer Gross wage growth in 2012 is expected(mainly the takeover of existing real to decelerate to less than 4% from theestate rather than new developments). new projects are likely to be initiated in the second half of this year, thus weak- 4.5% estimated for 2011, as weaker op-About 10% flowed into manufacturing, timism and lower inflation will reduce theproviding a direct boost to economic ening annual investment growth for 2013 (despite increasing activity in the bargaining power of employees, while agrowth, half of this being reinvested weaker growth of companies’ turnoversearnings, and half being new equity. second half of next year). As a result, we are revising downwards our gross will reduce opportunities for increasingMost of the investments in 2011 were labour costs. At the same time, emigra-made by incumbent local and foreign fixed investment outlook from 15% to about 7% in 2012 and 3.5% in 2013. tion, along with regional and skills mis-investors (financed by their own re- matches in the labour market, will up-sources and loans), with not too many More jobs needed to limit hold wage growth. There is a particularnew players coming into the market. emigration upward potential for wage increases inDemand for new housing remains The recovery in the labour market was the exporting sectors, where productiv-weak, and households are still quite strong in 2011. According to the LFS ity growth during the last few years wascautious about undertaking long-term data the unemployment rate declined to notably above real wage growth. Weliabilities. The existing stock of already 14.4% in the third quarter of 2011. We expect real average net wage growthbuilt, but still unsold, real estate will expect it to continue to retreat, though to pick up from nearly zero in 2011 tocontinue to undermine new residential somewhat more slowly than in 2011. about 1.4% in 2012 and 2.9% in 2013,construction. We thus do not expect In the first quarter of 2012, the number moving by and large in line with labourmuch new investment activity in the of unemployed will increase due to productivity growth. Additional factorsresidential real estate sector, although seasonal effects and the bankruptcy driving up wages in the public sector inthere is potential for growth of supply of Latvijas Krājbanka bank (about 900 2013 will be the improved fiscal situa-of premium-class dwellings. In turn, persons). Job creation is expected to tion and upcoming municipalities’ elec-commercial real estate construction will weaken this year, owing to diminish- tions in 2013 and parliamentary elec-mainly continue to be driven by export- ing optimism regarding new orders for tions in 2014.ing sectors, e.g., production buildings manufacturers and weaker consumer Consumer price inflation peaked inand warehouses, and energy efficiency. demand growth. Emigration will contin- May 2011 and has subsequently been ue, though, and we forecast the unem-There are big projects from previous diminishing, largely owing to retreat- ployment rate to decline to about 12%years that will carry into this year, e.g., ing global commodity prices. Since no in 2013. major tax hikes are planned for 2012 and commodity prices are anticipated to recede, the inflation rate is forecast Economic sentiment index, points (s.a.) 130 to decline in 2012. In the first quarter of the year, a rise in gas and heating tar- 120 iffs is anticipated, due to earlier oil price 110 Latvia rises (which influence these tariffs with a nine months’ lag) and a weaker euro. 100 Estonia However, unless oil prices increase 90 Lithuania substantially (e.g., due to a geopolitical Eurozone conflict in the Middle East), housing tar- 80 iffs will remain by and large stable for 70 the rest of the year. Overall, prices of food, transport, and housing – the main 60 inflation drivers in the past year – are 2006 2007 2008 2009 2010 2011 Source: DG ECFIN.January 24, 2012 23
  • Latvia Swedbank Economic Outlookexpected to grow much more slowly in Contribution to annual goods export growth (percentage points)2012 than in 2011. Unless rapid glo- 35bal commodity price growth resumes, 28 OtherLatvian inflation is anticipated to stay at Poland 21about 2.5% in 2013. Nordics 14Given these inflation trends, we think Germany 7that fulfilling the Maastricht criterion in Russiaearly 2013 is realistic, although lower 0global commodity price pressures and Estonia -7slower growth will result in somewhat Lithuania -14lower inflation rates in other EU coun- Total growth, %tries as well. However, it is important -21to keep an eye on local competition is- 2008 2009 2010 11M 11 Source: CSBL.sues to keep Latvia consumer inflationunder control. mostly driven by durable goods, which discipline), but the results are yet to be might decrease quite sharply if opti- seen.Household savings to pick up mism worsens. Household consump-Household consumption growth ex- There is a comfortable reserve left in tion growth is thus forecast to slow inceeded our expectations in 2011. It the 2012 budget to fulfil the Maastricht 2012 and pick up again in 2013 as theseems that the savings rate declined criterion. Our base forecast suggests economic situation improves.– although households kept reducing somewhat lower tax revenues, but if thetheir debt burden, the risen optimism Public finances: so far so good, government keeps to its expendituremotivated them to spend the increase but keep hand on pulse plans, we forecast the general govern-in incomes (due to higher employment The general government finished 2011 ment deficit to be about 2.4% of GDP.and wages), while deposits were by with a budget deficit substantially less However, we urge the government “toand large stable during the year (except than the initial plan of 5.4% of GDP (on keep its hand on the pulse”, followingfor the short-lived turbulence kicked off accrual basis), mostly owing to strong- economic developments, especially re-by the Latvijas Krājbanka bankruptcy er-than-expected economic growth. garding confidence and exports and taxin the fourth quarter). In addition, con- Tax revenues were about 7% above revenue figures very closely. A “Plan B,”sumption continues to be supported by the plan. The deficit most likely was or blueprint of possible additional fiscalmoney transfers from emigrants to their less than 4%. The ratio of tax revenues austerity measures, should be readiedfamilies. to GDP bottomed out, indicating that for implementation as soon as possible collection of tax revenues might have in case more negative scenario comesAs economic growth is still export de- true and/or tax revenues fall short. It started to improve.pendent, the forecast slowdown of ex- is crucial that this blueprint include re-ports will spill over to weaker household Following parliamentary elections, a forms promoting medium-term growthconsumption growth. A shrinking popu- new government came to office in Oc- and improving incentives, rather thanlation due to lower birth rates and emi- tober 2011. It has stayed the previous only simplistic expenditure cuts and taxgration also means less spending. The course of economic policy, and the IMF/ increases that would weigh on medium-real growth of the total wage bill is an- EC-supported programme was finished term growth and confidence, and boostticipated to decelerate and, thus, pur- successfully late in the year. More open the “grey” economy. This work shouldchasing power to rise more slowly. We and active discussions by the govern- be started immediately.also expect households to save some- ment with respect to structural reformswhat more of their incomes in 2012 – have been initiated (e.g., in education, As it stands, the state treasury liquid-the growth in retail sales in 2011 was social security, health care, and fiscal ity will be ample and sufficient until late 2012. The Treasury plans to issueLabour market indicators, % bonds of about LVL 500 million this year 40 20 in line with the medium-term strategy. Change in Taking into account the persisting un- employment, thsd 20 10 (rs) certainty globally and the high risk of a negative scenario, we see it appropri- Job-seekers rate (rs) ate to borrow sooner rather than later, 0 0 before the resources are actually need- Average labour productivity, annual ed, as in such a case more favourable growth conditions are possible -20 -10 Real gross wage, annual Lija Strašuna growth Mārtiņš Kazāks -40 -20 Dainis Stikuts 2006 2007 2008 2009 2010 2011 Source: CSBL. January 24, 2012 24
  • Swedbank Economic OutlookLithuania: Growth in spite of fiscal consolidationIn the first three quarters of 2011, the Lithuanian export markets are expect- tions, to be held in October this year,Lithuanian economy expanded by ed to grow this year and the next, we we do not expect any significant chang-6.4% over the same period a year do not see a contraction in Lithuanian es in tax policy or business regulationago; the expansion was driven mainly exports over this period. However, real in 2012.by household consumption and in- growth will be significantly slower than As the tensions in the euro sovereignvestments. During the same period, last year. The growth of gross fixed debt market are not likely to abate soonaverage quarterly growth was a solid capital formation will also slow from the and the euro zone economy is expected1.8% but probably decelerated in the estimated 20% in 2011, but we still ex- to contract in the first half of this year,last quarter of 2011, when GDP was pect an expansion of 11% this year and businesses and consumers will re-some 6% higher than a year ago. The 8% in 2013. main wary. Should Europe plunge intoeconomy probably grew by 6.3% in Average annual inflation at the end of a deeper recession and the euro zone2011, in line with our forecasts. 2011 was 4.1% – only 0.1 percentage start to disintegrate, recession wouldWe expect this year to be more tur- point higher than our August forecast. be hard to avoid also in Lithuania. Thebulent, and prospects less sanguine. Annual inflation is decreasing rapidly banking sector has a capital adequacyThe recession looming in the euro and is expected to continue on this path ratio above 14% and is awash with li-zone will affect the Lithuanian econo- throughout 2012. Oil, food, metals, and quidity, indicating that lending condi-my not only directly, via slower growth other commodities are expected to be tions are not likely to worsen. This,of exports, but also indirectly, via low- cheaper this year, whereas domestic however, may change under a worseer household and business expecta- factors remain muted. All considered, global scenario – a credit crunch in Eu-tions. Although, in our main scenario, we leave our forecast for 2012 inflation rope would make banks unwilling or un-the euro zone economy contracts by unchanged, at 2.5%. Higher domestic able to lend to businesses. However,only 0.3% in 2012, the risk of less demand, increasing wages, and, to as we mentioned in the August Swed-orderly developments and increas- some extent, capacity utilisation con- bank Economic Outlook, Lithuanianing tensions is high. We have cut our straints will drive inflation in 2013, for companies increased their efficiency,growth forecast for 2012 to 3.3%, which we forecast a 3.0% increase in deleveraged, and have substantial re-down from 4.2% and to 4.0% in 2013, consumer prices. tained earnings, whereas householdsdown from 4.2%. increased their savings rate and eased Internal and external risks their credit burden. All this suggestsThe main reasons behind the lower At the end of 2011, discussions on that, even under worse global develop-growth forecasts for 2012 are weaker budget consolidation were hectic and ments, a contraction of the Lithuanianhousehold consumption, contracting disorderly; the plethora of propositions economy would be nowhere near thegovernment spending, and slower on new taxes or increases to existing double digits seen in 2009.growth of exports. Households are tax rates did not improve the businessvery likely to increase their savings environment. Although there will be Exports are expected to expand,rate; thus we lowered our forecast of plenty of noise and populist proposi- despite the recession in the eurohousehold consumption growth by 0.5 tions before the parliamentary elec- zonepercentage point, to 3%. As the main Lithuanian exports (at current prices)Key Economic Indicators, 2010 - 2013 1/ during the first 11 months of 2011 were 2010 2011e 2012f 2013f 30.9% higher than over the same pe-Real GDP 1.4 6.3 3.3 4.0 riod a year ago. Annual growth hasNominal GDP, billion euro 27.5 30.4 31.9 34.2 been decelerating since the beginningConsumer prices (average) 1.3 4.1 2.5 3.0 of 2011, but remained relatively strongUnemployment rate, % 2/ 17.8 15.5 13.5 11.5 until the end of last year. During theReal net monthly wage -4.3 -2.0 1.4 1.5 same period, exports of goods pro-Exports of goods and services (nominal) 29.8 27.0 10.0 8.0 duced in Lithuania (except re-exports)Imports of goods and services (nominal) 28.9 29.0 10.5 8.0 increased by 26.8% and exceededBalance of goods and services, % of GDP -1.1 -2.5 -3.0 -3.0 pre-crisis records; however, exports ofCurrent account balance, % of GDP 1.5 -2.0 -2.5 -2.7 services grew at a much slower paceCurrent and capital account balance, % of GDP 4.2 1.0 0.5 -0.7 (17.9%) and remain a significantly lessNet FDI, % of GDP 2.1 3.5 4.0 4.0Gross external debt, % of GDP 86.0 80.0 77.0 74.0 important element of Lithuania’s foreignGeneral government budget balance, % of GDP 3/ -7.1 -5.2 -3.0 -2.0 trade.General government debt, % of GDP 38.2 39.0 40.0 39.0 The real growth of exports of goods andSources: LCD and Swedbank. services probably was 14.0% in 20111/ Annual percentage change unless otherwise indicated.2/ According to labour force survey. but will decelerate significantly this3/ According to Maastricht criterion. year and the next, when we forecast,January 24, 2012 25
  • Lithuania Swedbank Economic Outlookrespectively, 4.0% and 4.8% growth. Contributions to GDP growth (percentage points)Lithuanian export growth is expected to 10stagnate or increase only marginally in 8the first half of this year but will acceler- 6.3 Net exportate in the second half, when the euro 6 4.0 Stockbuildingzone emerges from recession. There 3.3 4 Investment (excl.are, however, a few reasons to believe 1.4 inventories)Lithuanian exports will keep increasing 2 Government consumptiondespite sagging demand in the euro Household 0zone. consumption GDP growth (%) -2First, the real effective exchange rateincreased marginally from the post- -4 Sources: Statisticscrisis bottom reached in the middle of 2010 2011e 2012f 2013f Lithuania, Swedbank2010, but it remains below the peaksreached at the beginning of 2009. The uation and increasing competitiveness A recent survey by Statistics LithuaniaPolish zloty depreciated by some 14% is continuing – which is going to be an shows that 38% of industrial compa-last year, posing a threat not only to important factor in competition for tight- nies plan to increase their investmentsLithuanian exporters, but also to local er export markets in 2012 and 2013. in 2012 (down from 53% in 2011), andretailers, as households can do their only 10% intend to reduce their invest-weekend shopping in Polish shopping Finally, corporate profits in the first three ments (down from 24% in 2011). Themalls – a very common behaviour in quarters of 2011 were 83% higher than main purpose of investments is the2009, when the zloty depreciated by a year ago and are rapidly approaching renovation of old machinery, followedmore than 30%. However, although pre-crisis levels. Retained earnings are closely by the expansion of existing ca-the current euro weakness is dragging also increasing rapidly and are likely pacity. Capacity utilisation was stuck atsome (allegedly) more risky countries to be used to fund investments and/or 71% for the past seven months and isdown with it, a sustained depreciation provide liquidity in case of more volatile still below previous peaks of 75%. How-of the zloty is not likely. The weak euro demand and cash flows. Nevertheless, ever, companies are probably intend-increases Lithuanian competitiveness export growth poses the main down- ing to invest in technologies enablingoutside the euro zone; thus, if the euro side risk to our GDP forecast in 2012 them to broaden their scope, ratherdepreciation persists, we can expect a and 2013. than scale, of production. Producersslight shift of Lithuanian exports from Investments to continue rapid of clothes and furniture have capacitythe EU to other, faster-growing coun- growth utilisation rates above 75% and maytries. be more inclined to invest in increasing Annual growth of gross fixed capitalSecond, since the beginning of the re- formation decelerated in the third their capacity.covery two years ago, Lithuanian pro- quarter to 7.9%, but growth probably The number of companies saying thatductivity increased by some 11.5%, was close to 20% in 2011. However, they will invest in new technologies iswhereas real net wages during the it will decelerate to 11% this year and the highest since 2005, indicating pos-same period contracted by about 6.5% 8% in 2013. A rather rapid growth of sible breakthroughs in technology-driv-(and by 13.1% since the beginning of investments is likely to be sustained en productivity growth. In the first threethe crisis). This divergence between despite looming uncertainty in the euro quarters of last year, investment in fixedproductivity and real wage growth indi- zone and deteriorating consumer con- tangible assets made up only 11.5% ofcates that the process of internal deval- fidence. GDP and remains at its lowest level in a decade. Investments eventually should Swedbank’s GDP Forecast – Lithuania1/ pick up to more acceptable levels of 15-Changes in volume, % 2010 2011e 2012f 2013f 20% of GDP.Household consumption -4.9 5.5 (5.5) 3.0 (3.5) 3.5 (4.2) In line with our expectations, the acqui-General government consumption -3.3 1.7 (1.7) -3.0 (2.0) 1.0 (2.0) sition of EU funds continued at a rapidGross fixed capital formation 1.0 20.0 (25.0) 11.0 (11.0) 8.0 (8.0) pace – of the total funds allocated forInventories 2/ 4.9 0.4 (-0.1) -0.2 (-0.2) 0.0 (0.0) 2007-2013, which amount to EUR 7.4Exports of goods and services 17.4 14.0 (14.0) 4.0 (5.0) 4.8 (5.4) billion, 78.7% have already been al-Imports of goods and services 17.3 15.2 (15.2) 4.2 (5.5) 5.0 (6.0) located and 43.6% paid out (up fromGDP 1.4 6.3 (6.3) 3.3 (4.2) 4.0 (4.2) 36% at the beginning of August 2011).Domestic demand (excl. inventories) 2/ -3.7 7.1 (7.1) 3.6 (4.8) 4.2 (5.7) This means that more than half of theNet export 2/ 0.2 -0.7 (-0.7) -0.1 (-0.4) -0.2 (-0.5) total allocated amount will have to beSources: CSBL and Swedbank. paid out in the remaining two years of1/ The figures from our forecast in October are given in brackets. the 2007-2013 programmes; this will be2/ Contribution to GDP growth January 24, 2012 26
  • Lithuania Swedbank Economic Outlooka significant funding source of invest- Investment in fixed tangible assets (% of GDP)ments, along with large profits and re- 30 25.6 60tained earnings. 20.4 20.4 18.5 18.1 16.9 Equipment, machinery, 20 14.2 40 transport vehicles 12.7Unemployment will decline and 11.5 12.4 11.5 12.8 12.5 9.4 Construction and 6.8wages increase 10 20 repairs of buildingsUnemployment declined rapidly Other 0 0throughout 2011, probably reaching Total investment14.4% in the last quarter, compared -10 -20with 17.2% at the beginning of the year. Investment, yoy (rs)We expect this trend to continue this -20 -40year, although at a slower pace. Un-employment should decline to 12.8% at -30 -60the end of 2012 and be slightly above 2008 2009 2010 2011 Sources: Statistics Lithuania, Swedbank10% at the end of 2013. Average an-nual unemployment in 2012 and 2013 to the natural level of unemployment, over the same period a year ago andwill be 13.5% and 11.5%, respectively, which we estimate to some 5-6%, is probably continued its brisk growth inslightly above our previous forecast. well beyond our forecasting period. the final quarter of the year. As real wage growth was negative and so-Registered unemployment was drop- Although nominal wages probably in- cial benefits were more or less flat, itping even more rapidly – at the end of creased by 2% last year, net real wages is likely that households reduced theirlast year, there were 227,100 unem- were still declining in 2011. The three- savings rate, which peaked at 7.9%ployed, down from more than 311,300 year process of internal devaluation in 2010. Consumer confidence hasat the end of 2010. During the same should be over this year, and we fore- dropped by 15 percentage points sinceperiod, the number of long-term un- cast 3.9% growth in nominal net wages, July, reflecting larger uncertainty aboutemployed has declined to 93,400 from whereas real net wages are expected future income and financial well-being.130,000. The State Social Insurance to increase by 1.4%. This forecast for Thus, we forecast that the savings rateFund reports that last year 57,000 new nominal growth is slightly above our is likely to increase in 2012, comparedjobs were created, indicating that the previous forecast of 3.5%. We fore- with 2011. The real wage bill is expect-decline in unemployment was not due cast that the government will agree ed to rise by 3.2%, whereas house-to emigration or other less cheerful rea- in the middle of this year to increase hold consumption will increase by onlysons. the minimum monthly wage by 12.5% 3.0%. In 2013, uncertainty regarding to LTL 900 (EUR 261). This alone willHowever, the problem of structural un- the euro debt crisis and future econom- push up the average monthly wage byemployment persists – the increase in ic developments should abate; thus, 1.2%. Overall, wage increases will bethe job vacancy rate was more rapid the household savings rate will stabilize selective, as most companies are warythan the decline in unemployment. The and consumption will rise by 3.5%. of a negative impact from the euro zonemajority of the unemployed are low problems and employees’ negotiation Consumption in the final quarter ofskilled and were previously employed power remains low due to high unem- 2011 and the beginning of this year mayin the construction sector. This sector ployment. be distorted somewhat by the recentgrew by 14.3% in the first three quarters bankruptcy of the Snoras bank. On oneof last year but remains 41% below the Households remain relatively hand, households were faced with tem-2008 level. Moreover, a rapid recovery sanguine porary liquidity constraints as all fundsin the construction sector and a return Household consumption increased by were frozen for about a month. On the 6% in the first three quarters of 2011 other, once the depositors were com- Labour market developments (%) pensated via the Deposit and Invest- 20 ment Insurance Fund, roughly LTL 1 bil- 17.8 lion (or 0.9% of GDP) was retained by 15 15.5 Unemployment households in cash and not transferred rate (% of 13.7 13.5 labour f orce) to other financial institutions. Some of 10 11.4 11.5 Labour the households may have decided to 8.3 productivity use these savings for consumption, as 5 5.6 5.8 4.3 Net real wage indicated by some preliminary data on 0 retail trade in December. Employment As we mentioned in our August fore- -5 cast, household consumption poses -10 the biggest upside risk to our GDP fore- 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f Sources: Statistics casts for 2012 and 2013. In the first half Lithuania, Swedbank January 24, 2012 27
  • Lithuania Swedbank Economic Outlookof 2011, retail trade of food and non- and companies are facing higher elec- funds to 1.5%, down from 2%. This isalcoholic beverages was almost un- tricity prices; heating prices are also the third cut from the pre-crisis level ofchanged from the previous year; how- increasing in some municipalities. All 5.5%. It was also agreed to introduceever, starting September, average an- this, however, will have only a marginal real estate taxes on properties worthnual growth was almost 5%. This was effect on inflation this year, about 0.12 more than LTL 1 million (EUR 290,000).the consequence of a new obligation percentage point. Excise taxes on to- This is unlikely to help collect any tangi-imposed on food traders to use cash bacco products will increase by 5% as ble income, but it lays a legislative andregisters in covered market places. The of March 1, and this will have an impact institutional foundation for future actiongovernment plans to require usage of on inflation of about 0.14 percentage – the non-taxable property thresholdcash registers in all market places be- point. may be lowered significantly after par-ginning May of this year. This and other liamentary elections in October 2012. Although there is no clear trend in in-measures are likely to reduce the size flation expectations yet, domestic and Although the Ministry of Finance fore-of the shadow economy and improve external price pressures will remain casts of nominal GDP are LTL 1.2 bil-official statistics and tax revenues. relatively weak this year. Uncertainty in lion below our forecast, its projectionsInflation lower due to external the euro zone economy and the loom- on household consumption are morefactors ing recession in the region will keep optimistic than ours; thus, we estimateDuring December prices declined by wage growth expectations anchored. that some government tax revenue0.2% and annual inflation dropped from All considered, we leave our forecast plans may be hard to meet. In particu-4.4% in November to 3.4% in Decem- of inflation unchanged at 2.5% in 2012 lar, we believe that value-added taxber; consumer prices are expected to and 3% in 2013. (VAT) income will be about LTL 120decline further this year. In 2011, infla- million short of the plan, unless the Unexpectedly, the governmenttion was driven solely by the prices of government continues to clamp down continued budget consolidationfood, housing, and transport. This is on smuggling and illegal trade, e.g., by The worsening economic outlook and introducing cash registers in all marketslikely to change in 2012 and 2013, as commitment to restore retirement pen- as soon as possible.downward pressures will be exerted on sions to pre-crisis levels have forcedcommodity prices. Average price of oil Euro adoption still possible, but the government to come up with moreis expected to drop by 6.5% (in euros) the risks have increased consolidation measures, amounting toin 2012, slightly less than in our previ- about LTL 1 billion (EUR 290 million), Inflation may be one of the hindrancesous forecast, whereas the food price or 0.9% of GDP. The Parliament agreed to euro adoption, but the risk of notindex is expected to decline by 9.6% on a 2012 budget, which will have a meeting the budget deficit criterion has(in euros). Other commodities are ex- deficit of 3% of GDP, slightly above the also increased, since the new budgetpected to be cheaper in 2012; thus, ex- 2.8% projected in the Convergence deficit forecast is exactly at the margin.ternal factors, unlike last year, will pro- Programme. Although the government has reiter-vide downward pressure on producer ated its strong determination to adoptand consumer prices. Commodities Government consumption will contract the euro in 2014, the introduction ofare also expected to become cheaper by 3.0% this year, compared with our new consolidation measures in thein 2013, albeit at a slower pace. previous forecast of a 2.0% increase. middle of the year (a few months be- Only very few areas are exempt fromOn the other hand, despite fiscal con- fore elections) would be a very difficult spending cuts – contributions to the EUsolidation, some domestic factors, task. Under our worse global scenario, budget, the servicing of public debt,such as increasing nominal wages, will we do not see the government finding and spending on public defence. Onprovide upward pressure on prices. enough political will to introduce deeper the revenue side, it was decided to cutAt the beginning of 2012, households consolidation measures; thus, the pos- contributions to second-pillar pension sibility of introducing the euro in 2014 would probably be lost. Furthermore,Contribution to annual CPI growth (percentage there remains uncertainty about thepoints), household credit growth (yoy,%) 14 70 willingness of the euro zone to accept 12 60 Others a new member, given its ongoing sov- Housing ereign debt crisis. 10 50 Nerijus Mačiulis 8 40 Transport Lina Vrubliauskienė 6 30 Food Vaiva Šečkutė 4 20 CPI growth 2 10 Household credit (rs) 0 0 *Average annual inflation -2 -10 2007 2008 2009 2010 2011 2012f * 2013f * Sources: Statistics Lithuania, Swedbank. January 24, 2012 28
  • 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.January 24, 2012 29
  • Swedbank Economic OutlookEconomic Research DepartmentSweden Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se Group Chief Economist Chief Economist, Sweden Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se Senior Economist Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se Senior Economist Anna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.se AssistentEstonia Annika Paabut +372 888 5440 annika.paabut@swedbank.ee Acting Chief Economist Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee Senior EconomistLatvia Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv Deputy Group Chief Economist Chief Economist, Latvia Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv Senior Economist Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv Senior EconomistLithuania Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt Chief Economist, Lithuania Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt Senior Economist Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt EconomistJanuary 24, 2012 30