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Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
Swedish Economic Outlook
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Swedish Economic Outlook

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Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to …

Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.

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  1. Swedbank Economic Outlook Swedbank’s analysis of the international and Swedish economies 22 January 2009 Economic Secretariat, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 1028 e-mail: ek.sekr@swedbank.se Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 1588 Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897 Worldwide recession creates major challenges for the Swedish economy • The effects of the financial crisis on the real economy arrived faster and more forcefully than expected, not least in the USA, Europe and Japan. The emerging economies also experienced slow-downs. We expect that global GDP growth will reach ½ % this year. Thus, world economic growth will be the weakest since the early 1980s. • The driving force for a recovery, albeit slow, is low inflation and low interest rates in combination with fiscal stimulus. Next year, GDP growth is expected to in- crease to 2.5 %, which will be half of the 2007 growth rate. Growth levels before the financial crisis were not sustainable, however, but were driven by a substan- tial build-up of debt which must now be reduced. • There is reason for a strong economic policy expansion, as the threat of a spiral of credit squeeze, falling demand and deflation must be given serious attention. On the other hand, the risk of dangerous deflation after the IT bubble in the late 90s was exaggerated, and resulted in a policy that contributed to the crisis which we are now experiencing. • Sweden is developing in step with Europe. This year, GDP will decline by 1.8 % and in 2010 GDP will grow by 0.5 %. Exports will decline somewhat less than in Germany. Swedish households will gradually adjust their balance sheets. We ex- pect that the government will continue to prioritise budget discipline. This means restraint in the size of the fiscal stimulus package (SEK 30 billion) next year – de- spite the fact that it will be an election year. When the business climate improves, Sweden will probably be in a stronger position than the euro-area, as public fi- nances will be under less strain here. • Consumer prices are expected to fall by 0.2 % this year, and increase by 1.2 % next year. The reversal will be driven by interest costs and raw material prices. The Swedish Riksbank will again deviate from its own repo interest rate forecast and will further reduce the key interest rate in the spring to 1 %. • The downturn will hasten structural change in Swedish business, for example in the motor vehicle industry. Times of crisis are times of change and strategy work, which improve competitiveness in the long run. Change? Yes, we can! Cecilia Hermansson Jörgen Kennemar
  2. List of Contents Page World economy on crutches 3 Balance of resources and key ratios 5 - A clearly darker view of the world than last autumn 6 - Quality-assure forecasts! 7 - Not a normal recession in the world economy 8 - Ten questions about deflation, the financial crisis and 10 economic policy - Three scenarios for growth prospects 23 - Forecast risks should be given attention 24 - A summary of our forecast assumptions 25 - Trends in individual countries and regions 26 + USA – households drive the downturn 27 + Japan – will not avoid recession 29 + China – noticeable fall in temperature 31 + India – moderate downturn 33 + The EU – a strong decline in exports 34 Sweden – outlook and risks 38 A severe bout of flu in exports 40 Investment falls on a broad front 45 Big risks in the labour market 48 Households keep their wallets closed 53 Inflation, up and down 59 Economic policy as a counterweight 60 - Monetary policy has room for improvement 60 - Fiscal policy: There will be more 62 References 65 2 Swedbank Economic Outlook • 22 January 2009
  3. Introduction World economy on crutches The state of ill health of the global economy has worsened. The financial crisis intensified during the autumn and the effects on the real economy attained colossal proportions. World trade slowed down, as did industrial production, and redundancies in the labour market reached new heights. Not unexpectedly, business and consumer confidence weakened. We have revised global GDP growth downwards in 2009-2010 to just ½ % and 2½ % respectively (from about 5 % in 2007 and 3 % in 2008). This is the weakest growth rate since the early 1980s. The downturn is driven by a contracting financial sector with consequent credit squeeze and lower asset prices, which in turn reduce demand in the real economy. Nor can Sweden avoid being affected by this downward spiral: GDP will decline by 1.8 % this year, but there will be a slight improvement in 2010 to 0.8 % growth, in step with the start of a slow world-wide recovery (see page 35 for a summary of the forecast for Swe- den). We expect lowest global growth since the early 1980s The threat to the world economy can be found in the risk of a debt-deflation spiral. As yet, consumer prices are falling as a result of the reversal in the commodities market, although weaker demand – if protracted – in combination with debt re- structuring can cause good deflation to become bad or even dangerous deflation. The risk of a spiral of debt restructuring, weaker demand and deflation should not be taken lightly One conclusion is that deflation will occur more often as the central banks have become better at creating price stability. Fi- nancial crises and asset bubbles which burst also increase the probability of deflation. At the same time, each period of defla- tion must be judged as unique on the basis of the prevailing economic trend. In the early 2000s, central banks exaggerated the fear of dangerous deflation and conducted an economic pol- icy which was far too expansive, which also resulted in high growth of credit and housing bubbles. A one-sided inflation tar- get measured in terms of consumer prices tends to create un- evenness and imbalance when inflation appears more on the asset side (shares, housing, commodities) and globalisation pushes down import and consumer prices. This time around the risk of dangerous deflation is real. Our re- port describes three prevailing channels between financial crisis and deflation, asset prices and deflation, and credit squeeze and deflation. Far-reaching monetary and fiscal stimuli are re- quired to soften the effects. Another factor that contributes to the need for expansion is the size of the financial sector and its importance for the global economy. A major financial melt-down must be avoided. The challenges are considerable, both for the new president of the USA and politicians in Europe and Asia, jointly to create better rules for the financial sector and to at- tempt to minimise the risk of new bubbles and savings imbal- ances. The patient will not re- cover without medicine Swedbank Economic Outlook • 22 January 2009 3
  4. Introduction The uncertainties in the forecasts are substantial, and therefore we discuss three scenarios in this report. A long drawn-out re- cession with a considerable balance sheet correction is our main scenario (with 45 % probability) and the most desirable al- ternative. A scenario that we consider less likely is that the busi- ness climate will recover rapidly (25 %), and with that there would be a risk of new, even greater imbalances within a short period of time. It would be a mistake, both for the economy and ecologically, to attempt to maintain the build-up of debt as a driving force for consumption. The least desirable scenario (30 %) is that the world economy will enter a period similar to that which took place in Japan since the 90s, i.e., with stagna- tion and deflation. Using monetary and fiscal policy forcefully – and also implementing structural change – can prevent this. Our three scenarios all have relatively high probability – with great uncertainties What would drive a slow recovery of the world economy? Low inflation and lower interest rates in combination with expansion- ary public policies. Only after the forecast period, when debt re- adjustment has progressed further, will there be any opportunity for a modest recovery driven by private investment and con- sumption. During the next few years, the importance of government and the public sector in economies throughout the world will in- crease. Fiscal expansion, capital injections and banking emer- gencies to get rid of bad loans and “quantitative/credit easing” when the key interest rate approaches zero will inflate the bal- ance sheets of central banks and impair public finances, both in the short term and in the medium term. There is a very fine bal- ance between stimulating in the right way and at the right time, and reducing incentives and cleaning up when the recession is over. In times of uncertainty, forecast risks must be given attention. The assumption that the financial crisis will slowly dissipate is a highly uncertain one, not least as a new wave of credit losses could occur in the wake of the recession. Up to now, the un- ease in the financial markets has been concentrated on share prices and interest rates, while movements in the major curren- cies have been relatively controlled. Here there are risks, not least in the light of worsening public finances. In the report, we look at many other risks, but we also believe that there must be greater focus on “known unknowns”, with sensitivity for all “un- known unknowns”. In times of uncertainty, forecast risks must be focused on! Cecilia Hermansson 4 Swedbank Economic Outlook • 22 January 2009
  5. Balance of resources and key ratios Swedbank’s economic forecast for Sweden January 2009 National Accounts Changes in volume, percent 2007 2008 P 1) 2009 P 1) 2010 P 1) Households’ consumption 3.0 1.0 (1.8) 0.0 (1.5) 1.5 expenditure Government consumption 0.4 1.2 (0.8) 1.5 (1.2) 1.7 expenditure Gross fixed capital formation 7.5 2.5 (3.7) -7.5 (2.5) -3.0 - private excl. housing 8.4 3.8 (3.9) -8.5 (2.6) -6.1 - public 3.2 3.5 (5.8) 9.5 (8.0) 8.0 - housing 8.7 -5.0 (1.2) -18.0 (-3.0) -1.8 Changes in inventories 2) 0.8 -0.4 (-0.2) -0.5 (0.0) 0.0 Exports, goods and services 5.7 2.2 (4.5) -3.5 (3.0) 2.0 Imports, goods and services 9.4 3.4 (5.5) -3.7 (4.2) 1.8 GDP 2.6 0.5 (1.5) -1.7 (1.2) 0.8 GDP, calendar-adjusted 2.7 0.2 (1.2) -1.8 (1.4) 0.5 Domestic demand 2.9 1.2 (1.7) -1.0 (1.5) 0.6 Net exports -1.1 -0.3 (0.0) -0.2 (-0.3) 0.2 1) The figures from our last forecast in September 2008 are given in brackets 2) Percentage change in previous year’s GDP Economic indicators Annual change in percent unless otherwise indicated 2007 2008 P 2009 P 2010 P Nominal hourly wages, total 3.6 4.0 3.5 3.0 Nominal hourly wages, industry 3.9 4.3 3.2 3.0 Industrial production 2.3 -1.0 -3.0 1.2 CPI, annual average 2.2 3.5 -0.2 1.2 CPI, Dec-on-Dec 3.5 0.9 0.9 1.7 CPIX, annual average 1.2 2.5 1.1 1.3 CPIX, Dec-on-Dec 2.0 1.4 1.5 1.4 Real disposable income 3.9 3.3 2.6 2.0 Savings ratio 5) 9.3 11.5 14.0 14.3 Open unemployment 3) 6.1 6.2 8.4 9.5 Total unemployment 3) 4) 8.1 8.1 10.6 12.0 Total labour force 2.6 1.0 -2.5 -1.3 Current account balance 5) 8.3 7.0 6.4 6.4 Financial savings in public 3.6 2.1 -1.5 -2.6 sector 5) Central government 40.7 39.3 41.1 42.5 debt (Maastricht) 5) 3) Percentage of the labour force, EU-harmonised 4) Open unemployment and labour market measures (individuals aged 15-75) 5) Percentage of GDP Swedbank Economic Outlook • 22 January 2009 5
  6. Global economy Worsening outlook for the world economy A distinctly darker view of the world than last autumn When we made our last forecasts in August and September, future prospects were quite different from those prevailing to- day. In our main scenario, we assumed that financial unease would continue, but that it would not deepen and persevere to the extent that the autumn’s outcome showed. We considered a worse scenario to be 35 % probable, but the main scenario also had relatively low probability, even though it was some- what higher, at 50 %. However, the worst recession scenario became reality, and the risks that we noted in the main scenario have been mostly realised: Our more pessimistic scenario was realised … Deeper, longer lasting financial unease A greater degree of credit squeeze Rapidly falling asset prices A more rapid increase in the savings ratio of American households Greater negative effect on emerging economies On the other hand, the risks characterising continued, high commodity prices and a rapidly falling dollar, were not realised. On the contrary, there was a positive development in that com- modity prices fell strongly and contributed to a lower inflation rate. This, together with a reduction in demand, has also meant that economic policy could be much more expansive than we forecast. This applies both to monetary policy with lower key in- terest rates and a fiscal policy with a stimulus package which comes into effect during the current year. … but the turnaround in commodity prices con- tributed to lower inflation than expected Global GDP forecast (%) Source: National statistics and Swedbank’s forecasts. * The countries represent about 70 % of the global economy. World Bank weights from 2007 (purchasing power parity, PPP) have been used. January forecast September forecast 2007 2008 2009 2010 2008 2009GDP growth (%) USA 2.0 1.2 -1.6 1.0 1.7 1.1 2.6 0.9 -2.0 0.7 1.4 0.8EMU countries Germany 2.6 1.3 -2.2 0.6 1.8 0.6of which: France 2.1 0.9 -1.6 0.9 1.2 0.8 -0.3 -1.7 0.5 0.5 0.2Italy 1.4 1.3 -2.0 0.0 1.2 -0.2Spain 3.7 3.0 0.8 -2.3 0.4 1.4 1.0UK 2.4 0.1 -2.1 0.2 1.1 1.1Japan 13.0 9.6 6.8 7.4 9.8 8.7China 9.3 6.2 5.5 6.0 6.9 6.4India Brazil 5.4 6.0 2.8 4.0 4.7 4.0 8.1 6.2 1.0 4.2 7.3 6.8Russia Global * 4.9 3.1 0.3 2.5 3.6 3.0 6 Swedbank Economic Outlook • 22 January 2009
  7. Global economy Compared with our revised forecasts in September, GDP growth for 2008 is expected to be ½ percent lower, and the out- look for 2009 is substantially reduced (by 2½ percentage points). The global demand slow-down during the autumn – following the failure of Lehman Brothers and the resulting disruption of financial markets throughout the world – has con- tributed to the more developed economies already beginning to contract and continuing to do so. Emerging economies are also growing more slowly. The forecasts have been revised strongly downwards since September This development is driven by a spiral of a contracting financial sector, worsening sentiment and weaker demand. When these factors reinforce one another, economies are deeply affected. Because the global spread is considerable and previous ex- perience of banking crises show that it takes a relatively long time for recovery, we consider that the recession will be more drawn-out than recent recessions. Therefore, it is expected that recovery will be slow when the turnaround actually transpires, and GDP growth will be relatively weak during 2010 as well. This is our main scenario, but on page 21 and forward, we also discuss alternative scenarios and forecast risks. The world economy is in a downward spiral, where forces reinforce one another Quality-assure forecasts! The forecasts made last year were not realised and will not be realised. There are several explanations as to why the forecast- ers – including ourselves – did not manage to assess develop- ments. The appearance of completely unknown factors (un- known unknowns) and the inability to evaluate the course of that which was known (known unknowns) are some of the rea- sons. Also, few proposed the worst scenario before there was sufficient evidence for it occurring (optimists usually dominate pessimists). The prevailing trend was extrapolated, and the dif- ficulty is to determine when the turnaround will occur. It is there- fore important to determine the relevance of the forecasts – are they needed if they nevertheless cannot forecast when the turnaround will occur? We will always need assessments of the future and perhaps even more so when there is considerable uncertainty. At the same time, greater caution is needed both with those who pro- duce and those who consume forecasts. Some sort of quality assurance would be desirable. When uncertainty is at its greatest, the need for forecasts is also unusually great In the first place economic developments are not a statistically exact science as, for example, the natural sciences. Dynamics as well as influence from the forecasters themselves also exist. Pessimistic forecasts can, for example, contribute to greater in- centive packages, which means that developments can be bet- ter than the forecasts predicted. Also, pessimistic forecasters can contribute to a more pessimistic climate, and the forecasts become self-fulfilling because they are disseminated in the me- dia. Swedbank Economic Outlook • 22 January 2009 7
  8. Global economy In the second place, now that we are going forward, we will also continue to have many “known and unknown unknowns”. This concerns the continued progress of the financial crisis, the ef- fect of the crisis on the real economy and on economic policy and the effect of incentives on the economy. Instead of just reading tables and focusing on individual growth figures, it is better to see how various scenarios compare with another and on forecast risks. One should also see the figures as an aver- age value in a broader range. Finally: Individual forecasters seldom make better forecasts than the average assessment over time, but in downturns, pes- simists have an advantage and optimists a disadvantage (and vice versa). Therefore, the consumer of forecasts also needs to consider what organisation is behind them and how they look historically – among optimists and pessimists. Forecasts are of- ten revised when developments change rapidly. Consensus forecasts should therefore be monitored on a continuous basis. Not a normal recession in the world economy A typical recession normally lasts four quarters and involves a 2 % decline in GDP. The IMF economists, Claessens, Kose and Terrones (2008) have, however, found that if credit squeezes and falling asset prices are included or contribute to the down- turn, recessions are longer and deeper. See also Rogoff and Reinhart (2008). Type of crisis No. of quarters Effect Credit squeeze 10 -20 % decline in credit Fall in house prices 18 -30 % decline in house prices Fall in share prices 10 -50 % decline in share prices Experience suggests a more prolonged recession If both a credit squeeze and a fall in house prices are included, the recession is prolonged by at least one quarter, while the downturn in GDP will be two to three times greater. With re- spect to the size of the financial crisis and its consequences for both the credit squeeze and the fall in price of asset prices – and that it has a global spread – the probability is considerable that the recession in the world economy will last longer this time than, for example, in 2001 when the IT bubble burst. Previously – see, for example, Swedbank Analysis No. 2 (2008) – we explained the financial crisis as a combination of political failure (micro and macro), market failure (micro), and economic psychology (mania, panic and crash resulting from herd behav- iour, exaggerated expectations and asymmetric information). 8 Swedbank Economic Outlook • 22 January 2009
  9. Global economy In this report, we investigate the connection between the finan- cial economy and the real economy. In 1933 (“The Debt- Deflation Theory of Great Depressions”), Irving Fisher had al- ready found a connection between financial crisis and deflation. In the 1980s, Hyman Minsky developed the model by also in- cluding asset prices (1982), and the present Federal Reserve Chairman, Ben Bernanke (1983), investigated the connection between credit market and deflation. Below, we see how these three channels act together. The components reinforce one an- other in a downward spiral of losses in the financial system and weaker demand and prices. It is time to take a new look at old theories from the 1930s, for example, Fisher’s debt-deflation theory Connections between financial sectors (indebtedness) and the real economy (deflation) Source: Goetz von Peter (2005) This spiral can be “triggered” by such factors as an increase in interest rates by the central bank, which creates stress among many of those who are in debt. Asset prices (such as house prices) fall. In 1994, Ben Bernanke, together with Gertler and Gilchrist, wrote about the financial accelerator (The financial ac- celerator and the flight to quality). In times of high productivity growth, the balance sheets of companies and households im- prove, and this reduces premiums on the credit market. In this way, the financial sector strengthens the upturn in the economy, but on the other hand, the downturn is also strengthened be- cause the effect of the financial sector on the business climate is procyclical. For many years, the financial accelerator has been positive, but since the financial crisis started, it has in- stead been negative. Since the beginning of the 1980s, many countries have increased their debt burden considerably faster than their GDP growth. We must learn to understand the financial accelerator better! Deflation Losses Indebtedness Banking system Credit- squeeze Suspend payments Forced to sell Repay- Monetary squeeze Asset - prices Expenditure Reduce Minsk Minsky BernankeFisher y Swedbank Economic Outlook • 22 January 2009 9
  10. Global economy American debt in relation to GDP (left-hand scale) and nominal and real bond interest (right-hand scale) S o u rc e : R e u te rs E c o W in In the USA, the debt burden as a percentage of GDP doubled from 160 % in 1980 to 360 % in 2008; some of the reasons be- ing a result of hyperactivity, deregulation in the financial mar- kets and other product markets, lower market interest rates in the wake of greater competition, and the entry of emerging countries into the world market. Also, higher indebtedness has driven growth in the real economy for many years. The debt burden (and associated imbalances in savings) cre- ates risks for the world economy. The size of the financial sec- tor and its globalisation are problematic as management of cri- ses by central banks and governments is made more difficult. Similarly, there is an increase in the risk of a greater depres- sion, including a spiral of reduced indebtedness, weaker de- mand and deflation similar to that of the great depression of the 1930s and Japan’s financial and property crisis of the early 1990s. It is not good risk management to allow accumulation of debt to drive growth Ten questions about deflation, the financial crisis and economic policy 1. Is inflation always preferable to deflation? Inflation is an increase in the general price level in the econ- omy, while deflation is ditto reduction. The change in price lev- els is determined by the growth of the money supply in relation to the growth of the economy (adjusted for the speed in which money circulates). In 1968, Milton Friedman said that “inflation is everywhere and always a monetary phenomenon”. Thus also deflation. In our last Swedbank Economic Outlook, we discussed the risks of stagflation, i.e., a period of stagnation and high inflation. The turnaround in the business climate and the fall in commodity prices have now instead increased the probability of deflation. It is common to differentiate between: The turnaround from stagflation to deflation has been rapid 10 Swedbank Economic Outlook • 22 January 2009
  11. Global economy Disinflation, i.e., a period of decreasing inflation resulting from such factors as lower commodity prices and strong productivity development. During such a period, months of mildly falling price levels can occur. Deflation, falling prices with a deflationary dynamic which is made permanent by weaker demand and expectations of prices continu- ing to fall. Low inflation, about 1-2 % (rather than having the goal of no in- flation at all) has been prescribed in order to reduce the risk of ending up a deflationary spiral. Wage formation is helped by in- flation as nominal wages are not easily permitted to fall. Fur- thermore, monetary policy is made more difficult as nominal in- terest rates cannot be less than zero. Financial stability is also greatly put at risk by deflation. Since the Second World War, the central banks have seen their task as fighting inflation, and have, overall, succeeded. During the 1800s, however, deflation occurred much more frequently, and in contrast to the general perception, there were also periods of growth and deflation. There are several good arguments as to why deflation can be dangerous – but it is important to differentiate between different types of deflation Changes in the USA’s general price level, 1800-2008 S o u rce: R euters E coW in Michael Bordo and Andrew Filardo (2005) divide deflation into three types: Good, bad and ugly. 1873-96 – good deflation which became bad 1837-43 – bad deflation 1919-21 – bad deflation, ugly for some 1921-29 – good deflation 1929-33 – ugly deflation 1937-38 and 1948-49 – two episodes of bad deflation Deflation, thus, does not need to be a problem in connection with high productivity growth and the emergence of new sectors (cars, telephones, radios, refrigerators and IT). Bordo and Fi- lardo rather maintain that it is a matter of seeing each period of deflation as unique (and as an effect of economic development in general rather than the other way round). The focus should be on the ugly deflation (the depression of the 1930s and Ja- pan), but not only on this type. Swedbank Economic Outlook • 22 January 2009 11
  12. Global economy In the future, periods of deflation will increase. The emphasis of monetary policy towards low inflation means that periods of de- flation will occur more often. Possibly, the reallocation aspect should also be included: Is it right that borrowers (indebtedness) are always given a premium over lenders (savings) which oc- curs with continuous inflation? Either the inflation target must be raised to avoid deflation, or the view of deflation must be re- examined so that it can also be desirable depending on what creates it. There is a strong indication of more periods of deflation in the future – perhaps not necessarily bad 2. Was fear of deflation exaggerated in the early 2000s and what does asymmetric monetary policy mean? Now that we know the answers, it is easy to conclude that fear of deflation after the IT bubble had burst was exaggerated. As- set prices did fall, as did companies’ investments, but the de- cline was not sufficient in general over enough sectors and enough countries for there to be a definite risk of weaker de- mand and deflationary expectations. Instead, considerable high productivity growth contributed to a period of “jobless growth”. Incorrect analysis of the risk of deflation in the early 2000s … Because fear of deflation is greater than the fear of inflation among many central banks, they will pursue an asymmetric monetary policy. The Federal Reserve in the USA is an exam- ple of this. If inflation varies around (the unofficial) inflation tar- get, the central bank will act more aggressively if there is a risk of a downturn in price levels than with an equivalent upturn in price levels. The Federal Reserve also tends to reduce interest rates more when asset prices fall than it increases interest rates when asset prices rise. The key interest rate was kept at a low level for a long time after the IT crash. Monetary policy thus contributed to increasing the growth of credit, indebtedness and the risk of a subsequent major downturn in the business cycle. Thus, the monetary policy of the central banks has also meant an increased risk of ugly deflation. … contributed to an asymmetric monetary policy, primarily in the USA 3. Is it different this time – how uneasy should we be about deflation? As opposed to the beginning of the 2000s, the trend since 2007 has had components of a process leading towards “debt defla- tion” according to the channels described above. There is cause to compare the course of events with the 1930s in a global sense, or the 1990s in Japan, although there are also dif- ferences, primarily in how economic policy has been conducted up to now. This time, we need to take the risk of deflation seri- ously, because underlying developments point towards a con- tracting financial sector, credit squeeze, expectations of weaker demand and, in due course, also expectations of falling prices. The three channels between financial crisis and deflation indicate that things are different this time The turnaround from relatively high inflation to low inflation has been rapid. In July, inflation in the OECD was 4.7 %, and in No- vember it had fallen to 2 %. In the USA, inflation was negative, 12 Swedbank Economic Outlook • 22 January 2009
  13. Global economy on an annual basis in November, and in many other countries inflation is falling quickly. Inflation in the USA, Japan and Europe (%) S o u rc e : R e u te rs E co W in During the forecast period, we expect inflation first to fall. After that there will be a period of deflation. Part of this will be due to the reversal in commodity prices and another part of it will be due to weaker demand. Depending on how quickly and to what extent the monetary and fiscal stimulus have an effect, confi- dence will increase and there will be expectations of rising prices. We consider that 2010 will also be a year of relatively low inflation, although slowly rising. Japan is the exception, and there deflation will continue both in 2009 and part of 2010. In our main scenario, we avoid ugly deflation Global CPI forecast (%) CPI Y/Y (%) 2007 2008 2009 2010 USA 2.9 3.7 0.2 1.5 EMU countries 2.1 3.3 0.7 1.4 of which: Germany 2.3 2.6 0.5 1.1 France 1.6 3.0 0.7 1.2 Italy 2.0 3.4 1.2 1.4 Spain 2.8 4.3 1.3 1.8 UK 2.3 3.5 0.3 1.2 Japan 0.1 1.5 -1.1 -0.2 China 4.8 6.2 2.5 3.0 India 6.3 8.3 6.5 5.0 The risk of ugly deflation arising increases the longer the period of weak demand lasts, and the longer the structural problems remain in the financial sector (bad loans, solvency problems) and the less goal-oriented the economic policy is. Swedbank Economic Outlook • 22 January 2009 13
  14. Global economy 4. Which economic policy needs to be conducted in this situation? It is reasonable to be pragmatic in this situation Since the financial crisis started in 2007, economic policy has been directed towards both attempting to stabilise develop- ments in the financial markets, and to counteract the downturn in demand. All means and economic theories are permitted si- multaneously. The degree of pragmatism is considerable. Un- certainties about the future require a mix of different measures. Below is given a highly simplified division according to a num- ber of “schools”: The monetarists (for example, Alan Greenspan) increase the money supply in order to increase investment and consumption. In- terest rate reductions, the supply of liquidity through purchases of bonds by the central bank or the “money printing presses” are tools intended to reduce instability in the financial markets, to reduce credit restraint and increase demand in the economy. The Keynesians (for example, Paul Krugman) increase demand (both consumption and investment) through greater public expendi- ture, lower taxes and lower interest rates. The structuralists (for example, Edmund Phelps) prescribe support for investment through lower interest rates and tax rebates to com- panies rather than households. An increase in potential growth can strengthen finances in the medium term. Warnings are given of crowding out the private sector when the public sector grows rap- idly (private sector is given less access to capital and also innova- tion, etc.). The conclusion is that a strongly expansive economic policy needs to be conducted in order to minimise the risk of a long period of falling demand and deflation. It is meritorious that pragmatism prevails and that several tools are being used. Poli- cies need to be coordinated – both within the country and be- tween countries – in order to give the maximum possible effect. On top of this, all forms of protectionism need to be resisted. Can the expansive policy reduce the risk of protectionism? 5. Has the economic policy improved financial stability? After the failure of Lehman Brothers, the financial markets ceased functioning normally. A major capital injection for the fi- nancial sector was demanded in order to create confidence and improve the liquidity situation. A coordinated action in Europe and also in the G20 countries created some confidence. In the USA, action began slowly when Congress first refused the so- called TARP initiative of USD 700 billion, but subsequently ap- proved it. Between September and December last year, various countries announced bank guarantees worth about USD 4 000 billion. The principal part of this (USD 3 340 billion) was attrib- uted to Europe. So-called asset swaps, in which non- functioning assets were purchased from financial institutions in exchange for government bonds, were announced for a value equivalent to USD 1 930 billion. Central banks have also re- duced their key interest rates. Countries have established li- quidity funds to a value of USD 1 690 billion (primarily in the Large amounts have been lent or put into the financial system 14 Swedbank Economic Outlook • 22 January 2009
  15. Global economy USA and the UK) and depositor guarantees have been in- creased or stated to be unlimited (Austria, Denmark, Germany, Iceland, Ireland and others). Capital injections announced during 2008 (USD millions) Announced Completed % Completed Announced % of GDP USA 595 760 172 461 28.9% 4.2 UK 60 575 38 376 63.4% 2.2 The Netherlands 42 376 23 400 55.2% 4.7 Belgium Germany 25 494 1 999 7.8% 0.7 22 658 16 228 71.6% 4.3 France 18 361 4 334 23.6% 0.6 Ireland 7 652 0 0.0% 2.7 Iceland 6 848 945 13.8% 36 Switzerland 6 000 0 0.0% 1.2 Austria 5 428 0 0.0% 1.3 South Korea 3 574 378 10.6% 0.4 Kazakhstan 3 470 0 0.0% 2.5 Saudi Arabia 2 680 2 680 100.0% 0.5 China 1 152 1 152 100.0% 0 Denmark 892 892 100.0% 0.2 Finland 885 885 100.0% 0.3 Latvia 434 0 0.0% 0.2 Japan 398 398 100.0% 0 Total 804 637 264 128 32.8% Sources: Media reports and rating institutions, and our own calculations. Not all countries have put a value on their operation (for example Sweden, Portugal and Russia) and have therefore not been in- cluded. In addition to the above government interventions on the finan- cial markets, capital injections were announced worth USD 900 billion during last year, of which about one third have been completed. In the USA, this involves almost 600 billion, of which about USD 170 billion reached AIG, JP Morgan Chase (for Bear Stearns), Citigroup, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley. Additional funds are anticipated for such institutions as Fannie Mae, Freddie Mac, AIG, Citigroup and IndyMac. The above is an attempt to estimate the extent of the capital injections for each country and how much has been announced and been completed respectively. The picture is not complete, but gives an indication of the magnitude. As a result of these actions, public finances have worsened and the balance sheets of central banks have grown with a large proportion of risky assets. In the USA, assets more than dou- bled and in the ECB, the increase was some 50 per cent. The measures have caused the balance sheets of central banks to grow Swedbank Economic Outlook • 22 January 2009 15
  16. Global economy The ECB’s and Federal Reserve’s assets in their balance sheets (USD trillions) S o u rc e : R e u te rs E c o W in w 2 w 8 w 1 4 w 2 0 w 2 6 w 3 2 w 3 8 w 4 4 w 5 0 0 8 thousandbillions 0 .7 5 1 .0 0 1 .2 5 1 .5 0 1 .7 5 2 .0 0 2 .2 5 2 .5 0 E C B F e d e ra l R e s e rv e Confidence in the financial markets has improved and interest rate differentials have decreased compared with last autumn. They are still higher than normal and there is also a risk of new adverse outcome. A new wave of credit losses is anticipated in the banking system when the recession worsens. New rescue packages (up to now, the UK, but several other countries may follow suit) come in a situation in which fear of a worsening fi- nancial crisis is again increasing and share prices are falling. The rescue packages have produced results – but the risk of a new wave of unease and new packages is considerable Interest rate differentials, percentage, between inter-bank rates and treasury bills (3 months) S o u rc e : R e u te rs E c o W in 6. Key interest rates near zero – what other possibilities do the central banks have to increase demand? The USA and Japan have key interest rates close to zero. Dur- ing the autumn of 2007 and the whole of 2008, the Federal Re- serve lowered its key interest rate considerably, and about a year later the European central banks followed. 16 Swedbank Economic Outlook • 22 January 2009
  17. Global economy Key interest rates in the USA, the EMU area, the UK, Sweden and Japan (%) S ource: R euters E co W in 00 01 02 03 04 05 06 07 08 Percent 0 1 2 3 4 5 6 7 S verige U S A E uroland U K Japan There is still a larger gap than normal between risk-free gov- ernment securities and market interest rates. The latter consists of the risk-free interest rate, a risk premium for loans against companies and households, for example, and inflation. The central banks attempt to force this risk premium down which remains at a high level as a result of the financial crisis and the lack of confidence in the inter-bank market. The fact that people have difficulty obtaining loans and must pay higher interest rates (especially on long maturities) makes recovery of the economy more difficult. By buying long-term bonds, central banks attempt to bring down the high risk premiums When the key interest rate reaches zero, the central banks must use other methods in order to ease conditions in the credit mar- ket. Below is given a small selection from the American strat- egy, which includes continued use of the central bank’s balance sheet: 1. Communication: By communicating that the key interest rate will con- tinue to be low for a long period of time, expectations are created, which also affect long bond rates (all according to textbook). 2. Short-term liquidity for financial institutions (amended discount and ac- cepted security with low liquidity for borrowing): This also includes cur- rency swaps with other central banks, including the Swedish central bank, in order to improve access to American dollars. 3. Liquidity direct to borrowers and investors with security which has good creditworthiness with the aim of bypassing financial institutions which, as a result of their solvency and liquidity problems, have tightened lending. 4. Purchase of long-term bonds issued by the government housing loan giants and their assets (mortgage-backed securities) and any long- term government bonds. Swedbank Economic Outlook • 22 January 2009 17
  18. Global economy The American central bank differentiates between the method described above and the one that the Japanese central bank used in 2001-2006. This is reasonable, because in the USA the problem is the high risk premiums, and in Japan it was instead deflation and weak demand which had already progressed a considerable way. The USA is therefore prescribing “credit eas- ing”, which involves a mix of loans and security in balance sheets in order to make things easier for the credit market. In Japan, it was rather a matter of “quantitative easing”, in which the balance sheet was used to increase the banks’ reserves and buy government bonds. In Japan, the tool was put into use much too late when demand for credit was already low. The country had already become enmeshed in the much-talked- about liquidity trap. In the USA, the direction taken may be to provide loans while demand still exists, which would make the tool more effective. There is a somewhat greater chance of the USA’s central bank succeeding better than its Japanese colleague 7. What is the magnitude of the fiscal incentives which have been promised, and will they be effective? When the key interest rate is zero and a central bank buys gov- ernment bonds, the difference between monetary policy and fis- cal policy has been erased. If demand for credit has already de- clined strongly, monetary policy will not be effective. It is then a matter of finding other methods to encourage demand so that the debt-deflationary spiral does not take hold. Fiscal policy can be better targeted in order to stimulate demand where it is lack- ing. When interest rates reach zero, the borders between fiscal policy and monetary policy are erased However, fiscal policy has difficulty in supporting the business climate, according to economic theory. In small, open econo- mies, discretionary input (i.e., active directed fiscal policy) in- volves a greater risk of leaking out to other countries. Actors have expectations regarding the future and save more if public debt is permitted to increase. Often agreements are also reached too late regarding size and direction, when the busi- ness cycle has already started to turn upwards. This time, there is a considerable risk of a deeper and more drawn out down- turn. Now, fiscal policy may be necessary as a supplement to monetary policy. Economists have often been doubtful as to the effectiveness of fiscal policy as a stabilising tool – but the crisis has made many people change their minds about this 18 Swedbank Economic Outlook • 22 January 2009
  19. Global economy Fiscal incentives for 2009 as a percentage of GDP left-hand scale, and public debt as a percentage of GDP (debt ratio) right-hand scale 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 China US Spain France Germany Japan Sweden UK Italy 0 20 40 60 80 100 120 140 160 180 Stimulus package (% av GDP) lhs Debt ratio (%) rhs Source: Media information for incentive package and the OECD forecast for public debt 2009 (China CIA factbook for 2007) Previous experience shows that fiscal policy has produced mildly positive effects in the more mature economies, while it has instead had the opposite effect on emerging countries. Higher public debt, for example, tends to contribute to higher interest rates. When there are liquidity problems in households and companies, fiscal policy tends to be more effective than otherwise. The IMF has demanded incentives throughout the world of 2 % of global GDP. According to the above, China and the USA have the greatest incentives as a proportion of GDP, but these are preliminary assessments which also do not say anything about the time of application and emphasis. The major part of the American package is to be directed at in- vestment in infrastructure. Usually, this takes a long time to get started. As opposed to F.D. Roosevelt’s time, when labour was required en masse to construct roads, etc., capital intensity is now high. VAT reductions in the UK risk being mainly saved, and are not targeted at those groups who need them most. Much has happened since Roosevelt’s road construction programme Some measures which are perhaps more effective than others: Allow the automatic stabilisers to work (falling tax revenues and greater expenditure on social compensations); Carry out discretionary measures in coordination with other countries and in coordination with monetary policy; Public investment tends to give a higher multiplier effect than other measures (however, it is necessary to start in good time); Tax reductions on working income have a greater effect on consump- tion than such tools as VAT reductions; Labour market policy measures and training input. Swedbank Economic Outlook • 22 January 2009 19
  20. Global economy The amount of input in each country must take account of the size of the country and the size of the existing automatic stabi- lisers. Therefore it is obvious that larger countries, such as the USA and China, have advertised larger packages than, for ex- ample, some European countries. Similarly, the public debt bur- den initially also limits the possibilities of discretionary input, for example, in Japan, Italy and some other countries. It is not strange that China and the USA are making the greatest input 8. What will happen after recovery comes? It will be more difficult to assess the direction of monetary policy during the next few years. What amount of incentives will be applied through improvements in the balance sheets of the cen- tral banks? There is a risk that too much liquidity will enter the system which cannot be absorbed when the recovery comes. Then it will be important not to wait too long with interest rate increases when the economy has improved. At the same time, an increased debt burden will require contin- ued low interest rates (compare with Japan). The USA’s public debt ratio will increase strongly over the next few years (and also in the medium term) and would have done so without the incentives which were announced recently. The debt burden of households is also considerable. Incentives are such that low interest rates should prevail. Consumers will probably continue to be cautious for a long time, and this also indicates relatively low inflation. There is also the possibility of rising asset prices from time to time. The higher the debt burden, the more important it is that interest rates remain low In Europe, public debt is also rising in the wake of the incentive package. Here, there are increasing tensions within the euro area as regards financing these deficits. The rating institutions have reduced creditworthiness on, for example, Spain and Greece. Interest rate differentials compared with Germany are rising, despite the fact that the countries share the same cur- rency. Watch interest rate differentials in Southern Europe! 20 Swedbank Economic Outlook • 22 January 2009
  21. Global economy Interest rate differentials between the 10-year treasury bonds of some euro countries and the German ditto (per cent) S ource : R eu te rs E co W in Governments must also be able to finance their growing budget deficits. During 2009, the USA will need to borrow USD 2 000 billion, i.e., 14 % of GDP. The UK’s proportion of GDP will amount to about 10 % (USD 215 billion). In Germany, govern- ment bonds will be issued (USD 20 billion each week) for dou- ble the amount of previous years. During the first quarter alone it is estimated that USD 350 billion in European government bonds will be auctioned on the market. Enormous issues of government bonds are expected In the future, unease will increase vis-à-vis countries being un- able to cope with their commitments. Interest rate differentials for Greece and Italy show that this is already the case for some countries, but the unease can also apply to states in general. The thin market, the so-called Credit Default Swaps (CDS) in which the risk of non-payment is insured, also demonstrates in- creasing unease as regards the USA and the UK. Nor are the auctions attracting sufficient investors at the present low interest rates. Competition for investors is increasing between the pri- vate and public sectors. The aftermath will also include the role of governments, which has grown during the financial crisis. In step with nationalisation of banks, the inflation of central banks’ balance sheets and a great increase in borrowing requirements in the public sector, the state will assume increasing importance during the next few years. The question is, the extent to which the effects of crowd- ing out the private sector will be, and how this will affect growth in the long term. There is also the question of how the state will effectively withdraw when recovery commences. Buchanan’s theories on “public choice” and maximisation in the public sector will perhaps gain ground again. It will again be relevant to talk about “crowding out” of the private sector 9. What has the finance crisis taught us? The finance crisis has taught us that economic policy has been very important as regards the origin of the crisis, and that it will continue to be of considerable importance for resolving it. The fact that the central banks are part of the problem is clear from the above. Despite what many assumed, the financial markets Swedbank Economic Outlook • 22 January 2009 21
  22. Global economy are not self-regulating, but a sector as innovative and profit- driven as the financial sector needs to be monitored with effec- tive regulation. The imbalances in the world are of considerable importance as regards the origin of the crisis. International institutions are weak and are not sufficiently coordinated to make a big differ- ence. After the period of major incentives ends and recovery starts, it will be of considerable importance to attempt to create more sustainable growth models – not least for China and the USA. The lack of understanding of economic psychology, economic history and the ways in which the financial markets function is another lesson which is persuasive in, for example, central banks, governments, regulators, banks, and rating institutions. Incorrect use and reliance on models can also be counter- roductive. Not everything can be included in models. Tail risks must also be given greater attention and cannot be totally ig- nored. 10. What reforms are required (financial policy and financial sector) in order to create growth which is more balanced in the future? In our last issue of Swedbank Economic Outlook, we warned that the world economy cannot grow out of this crisis. It is nec- essary to have a period of correction of imbalances and high indebtedness. The fact that major monetary policy and fiscal in- centives are now needed is due to the increasing risk of a nega- tive debt-deflation spiral. Not to attempt to alleviate the down- turn would have very serious consequences for many people, including bankruptcies, unemployment and social tension. It is not reasonable to attempt to grow out of the crisis – but incentives can alleviate the downturn If the unease is justified, there will be a long period of low growth and low inflation. If the unease is unjustified, it is neces- sary that the incentives be withdrawn much faster than was the case in the early 2000s, so that a new, even greater crisis can be avoided in a few years’ time. These major incentives create the risk of new bubbles, above all if normality returns earlier than expected. The question is, however, whether normality is desirable. Nor- mality in relation to what? During the last few years, growth has been driven by high indebtedness, and this development has not been sustainable either for the economy or the climate and the environment. It is thus a matter of creating a more sustain- able, balanced growth which is not driven by bubbles and “stop and go” in economic policy. Below is a summary, not exhaus- tive, in the form of a list of 20 important measures to minimise the risk of new crises. Back to normal is not a desirable strategy 22 Swedbank Economic Outlook • 22 January 2009
  23. Global economy List of economic policy measures, including regulatory changes: 1. Change the unilateral focusing of central banks on consumer prices (see also growth of credit, asset prices) 2. Take a more composite view of deflation so that monetary policy does not contribute to bubbles 3. Central banks: Avoid interest rates that are too low for too long 4. Increase understanding of economic, psychological and financial behaviour (also in models) 5. Improve knowledge of the economy and financial markets (also in schools) 6. Increase teaching of economic history 7. Include the finance sector in models of the real economy, and improve understanding of how the interaction takes place 8. Improve risk control and reduce system risks 9. Strengthen regulation and monitoring of the financial sector so that innovations are followed up 10. Change the incentive system in the market and increase long-termism 11. Increase the importance of liquidity in the financial system 12. Reduce pro-cyclical finance markets 13. Include measures of leverage in regulations 14. Improve insight in financial products 15. Simplify financial products 16. Reform rating institutions so that market discipline improves 17. Coordinate economic policy at global level with all countries involved 18. Do not over-regulate 19. Counter the use of shadow balance sheets 20. Review and coordinate the international institutions’ role in improving the economic world order Three scenarios for growth prospects Three growth scenarios are sketched out below, together with the probability of them being realised. 1. Long drawn-out recession The financial markets will continue to wrestle with major problems, but the trend will proceed slowly in the right direc- tion. Economic incentives will provide the desired effect. Demand in the more mature economies is considerably de- pressed by the need, primarily of households, to correct their balance sheets. The labour market will worsen. Housing markets will bottom out during the forecast period, first in the USA, and with some delay also in Europe. Recovery will, however, take time and it is only after the forecast period (2011) that the peak of GDP level of early 2008 will be achieved. We estimate the probability of this growth scenario in which growth falls rapidly and a recession occurs, and the period of “bottom level” is drawn out and recovery slow, at 45 %. 2. Stagnation and deflation Japanese style In this scenario, new problems arise in the financial markets which further increase credit tightening. This can involve bankruptcies and falls in the value of currency values or as- set prices with considerable effect on other actors. Eco- nomic policy will be more or less without effect, nevertheless key interest rates will be kept around zero and fiscal policy will be strongly expansive with growing deficits and debt burden in the public sector. The trend towards deflation will be unstoppable. We estimate the probability of the world economy being driven into a period similar to that in Japan over the last decade at 30 %. 3. Faster recovery and back to normal It can already be concluded that the downturn in the global economy will be more prolonged than in the last recessions of 1997 and 2001. Many of the indicators show similarities with the recession of the 1980s or the downturns in connec- We estimate the probability of recovery occurring earlier and more strongly than we expected at 25 % Swedbank Economic Outlook • 22 January 2009 23
  24. Global economy tion with the oil crises in the 1970s. Similarly, recovery can be faster than anticipated in our main scenario. It is a matter of the effects of the expansive eco- nomic policy being positive and sentiment improving, for ex- ample, as a result of the USA’s new president. In the same way as the downturn was strong and fast, the upturn could be comparable. Forecast risks should be given attention Because there are relatively small differences between the probabilities of our scenarios, a picture emerges of considerable uncertainty in the work of forecasting. As with the latest fore- casts, it is reasonable to place considerable emphasis on the forecast risks. The more pessimistic scenario: • Renewed, greater unease in the credit markets, which would involve the trend going “the wrong way.” Tightening of credit would increase and the downturn in the real economy would deepen. • A major reduction in demand in the emerging countries, primarily in countries which have, up to now, been dependant on exports or which have large deficits in their balance on current account and/or budget. Considerably worsened labour market situation. • A transition to weak demand and price falls which start a period of stagnation and deflation. • Large, more uncontrolled oscillations in major currencies. • Economic policy is only an insufficient incentive (for example, within Europe) or does not give the desired effect (USA, Asia, Europe). • Reduced appetite for government bonds and a greater risk that coun- tries suspend payments, thus driving up long bond rates. • Protectionism in various forms, which further reduces world trade and worsens growth prospects for the future. • Sentiment becomes increasingly negative, which becomes self-fulfilling and produces a more sustained period of recession. 24 Swedbank Economic Outlook • 22 January 2009
  25. Global economy The more optimistic scenario: • Economic policy has a greater positive effect than in our main scenario and recovery is more rapid than expected. • Sentiment improves more than in our main scenario and contributes to the turnaround. The new president of the USA can create a greater confidence in the future. News in real time which is spread throughout the world influences actors simultaneously and strongly. General risk factors – also beyond the forecast period: • A new period of inflation, new bubbles in asset prices and growing gov- ernment debt, which must be worked out in due course. Similarly, diffi- culty in handling the “exit” of the government from the financial sector. In this risk picture, the elbowing out of the private sector by the state is also included, together with an upturn in long market interest rates. • Gigantic budget deficits which create the need for greater public sav- ings for many years ahead with negative consequences for growth and financial markets. • Political uncertainty in connection with forthcoming parliamentary elec- tions (for example, Germany, Japan and India during 2009 and the UK not later than May 2010). • Social tension in many countries as a result of greater income and wealth gaps and/or recession. • Increasing effect on world resources and climate effects, which affect the economy, health and geopolitics. • Attacks and similar terrorist action and major, more drawn out war and trouble spots which affect confidence in the future, and financial and commodity markets. • The entirely unknown factor (the unknown unknown). A summary of our forecast assumptions • It is presumed that the financial crisis will be resolved slowly during the forecast period. No new major trouble spots will occur in our main sce- nario. The negative effects on the real economy will get stronger. • Economic policy will be strongly expansive. Key interest rates at a very low level during most of the forecast period and only during the second half of 2010 will the Federal Reserve raise its key interest rate and the Europeans will follow suit. Fiscal incentives will amount to 3-4 % of GDP per year in China and the USA, and 1-2 % of GDP in a number of European countries. The measures will be introduced after some delay but will give some positive effect during the forecast period. • The American dollar will strengthen in relation to the euro, as it is an- ticipated that the euro countries will develop less well in relative terms. Beyond the forecast period, the probability of a weakening of the dollar will increase, on account of the trend of government finances. • Commodity markets will continue to show falling prices. The oil price will stabilise and will rise somewhat, but weak demand will have a con- straining effect during the forecast period. Swedbank Economic Outlook • 22 January 2009 25
  26. Global economy Forecast assumptions Outcome --->---> ---> Forecast--->---> 2006 2007 2008 2009 2010 Oil price, Brent USD/ 65 73 97 50 60barrel yearly average Outcome Forecast --->---> ---> ---> 22 Jan 2009 30 Jun 2009 31 Dec 200930 Jun 2010 31 Dec 2010 Minimum lending rates -Federal Reserve 0.25 0.25 0.25 0.25 0.75 -Bank of Japan 0.10 0.10 0.10 0.10 0.10 -ECB 2.00 1.50 1.50 1.50 1.75 -Bank of England 1.50 0.50 0.50 0.50 1.00 Currencies -EUR/USD 1.29 1.20 1.13 1.10 1.00 Trends in individual countries and regions Below we give a summarised picture of economic development in the USA, Japan, China, India and the euro countries. The UK and the Nordic Area are also included. Russia and Eastern and Central Europe will however, be looked at in our Baltic report, to direct investment, which also affects the prospects t clude efficiencies and readjustment to more sustainable growth. untries slacken off wnturn and the upturn – glimmers of hope! be published later. The emerging economies will put the brakes on – this applies not least to China, Russia and many other countries in Europe. Brazil has as yet, gone against the current and has even in- The BRIC co creased growth, but during the forecast period this will slacken. In a first wave of the financial crisis, mature countries with strong connections to the global financial markets are primarily affected. In a second wave, countries with a large proportion of commodities in their exports are affected. In a third wave, ex- port-dependant countries are affected by falling demand for manufactured goods. For most countries it is also a matter of less foreign of growth. The USA has led the downturn in the world economy. Probably the USA will also experience recovery first and this will spread to the rest of the world. This also means that growth in the USA will be less than its potential for many years to come because corrections in balance sheets take time and households are re- sponsible for a large part of the economy. Europe will be hit relatively hard because the region is dependant on foreign trade and investment. Asia will also be affected; not least Japan, bu The USA will lead in both the do also China and India will find their growth prospects reduced. There are glimmers of hope: The imbalance in savings be- tween the USA and Asia will lessen. Cost pressures and price increases will be restrained. Utilisation of the world’s resources will be reduced, which will benefit the environment. The need for structural change will be recognised in many companies in order to better survive competition, and this will hopefully in- Despite the gloom there are some 26 Swedbank Economic Outlook • 22 January 2009
  27. Global economy USA – households drive the downturn The main components of the forecast: 1. The USA will experience a deep, drawn-out recession, driven by house- holds and the finance and property sectors. 2. At the end of 2009, a cautious recovery will commence, driven by public and private investment. 3. Economic incentives will soften the downturn. 4. Forecast risks include new financial unease, the housing market, deflation and weak confidence in the future. Beyond the forecast period, problems of the risk of a weaker dollar will increase in the wake of large public defi- cits. Since December 2007, the USA has officially experienced a re- cession driven by trends in the property and financial markets. The recession started with the downturn in the labour market last year, when the number of employed fell by almost 2.6 mil- lion persons, of whom 75 % lost their jobs between September and December. During the autumn, industrial production also declined strongly, as did consumer confidence. The downturn in the labour market is alarming It thus appears that there is a clear turnaround since the culmi- nation of the financial crisis last September. During the first half of last year, the economy grew at 2.3 % per annum. Reasons included tax rebates, which temporarily increased disposable household income, and a good export trend in the light of the weaker dollar. During the second half of the year, GDP growth fell. The recession became clearer, not least when the financial crisis contributed to the contraction of household consumption and investment by businesses, at the same time as growth in exports slackened when the dollar strengthened and the out- look in the rest of the world became less favourable. The USA’s purchasing manager index and employment trend S o u r c e : R e u te r s E c o W in 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 Index 2 5 3 0 3 5 4 0 4 5 5 0 5 5 6 0 6 5 7 0 Person(millions) - 0 .7 5 - 0 .5 0 - 0 .2 5 0 .0 0 0 .2 5 0 .5 0 0 .7 5 1 .0 0 1 .2 5 1 .5 0 In k ö p s c h e fs in d e x F ö r ä n d r in g a v a n ta le t s y s s e ls a tta Purchasing managers’ index Change in the number of persons employed Swedbank Economic Outlook • 22 January 2009 27
  28. Global economy How serious is this recession compared with previous reces- sions in the USA? Up to now, it is similar to the average of the last six recessions, but it will last longer than the two most re- cent ones (1991 and 2001). On the other hand, it is much milder than the great depression of the 1930s, even if as yet we have not seen the end of it. Major incentives and more success- ful attempts to stabilise the financial markets should make a dif- ference. Up to now, this recession resembles previous ones Up to now, industrial production has fallen for 16 months in suc- cession by a total of 7½ %, which can be compared with the re- cessions of 2001 (17 months and 6.9 %), 1981-82 (19 months and 9.1 %) and 1973-75 (16 months and 15.3 %). By compari- son, industrial production fell for 36 months in the 1930s by a total of about 55 %. If the labour market often indicates the starting signal for a recession, growth in industrial production signals the end of a recession. We are not there yet, but it is an indicator to monitor carefully. We expect that the economy will continue to contract during the first half of this year, but that there will subsequently be a slow recovery. This year the American economy will contract by about 1½ % and next year there will be prospects for growth of about one per cent. It should however, be noted that with such a course of events, the fourth quarter GDP level of 2010 will not exceed the top level achieved during the second quarter of last year. The downturn in the economy will weaken during the second half of the year – without a clear recovery What then is going to propel the American economy during the forecast period? Not least because the financial sector and property, which have driven household wealth and consump- tion, will more probably restrain growth. The fiscal incentives and expansive monetary policy will in due course have an ef- fect, even if it is difficult to know how sizeable the effect will be. With this, confidence in the future will also improve. Nor should the Barack Obama effect be underestimated in turning around the negative sentiment, even though expectations are high. In- centives of about USD 800 billion are intended to create 3.5-4 million new jobs, but these hopes may not be realised and could create a loss in confidence. The challenges for the new president are considerable. There are great hopes that Barack Obama can create confidence in the future Companies that have relatively sound balance sheets at the beginning of the recession, and which concentrate more on in- put and investment goods, can see a brighter outcome, albeit slowly. On the other hand, it takes longer for companies close to consumers and those affected most by the financial crisis, for example, in the retail trade, construction and the property sec- tors and in the financial sector. Company bankruptcies will in- crease in a number of sectors, and additionally the recession will also hasten structural change (sourcing, relocation, techno- logical development, etc.). Consumer-oriented companies have a hard time When households have corrected their balance sheets and the housing market starts to experience greater activity after a pe- 28 Swedbank Economic Outlook • 22 January 2009
  29. Global economy riod at the bottom of the recession, there will also be possibili- ties for greater growth in private consumption. We estimate that this development will take off soon after the forecast period. Meanwhile, the household savings ratio will improve. Dispos- able income will be restrained by rising unemployment and a weak wages trend, but one positive aspect is lower inflation (lower petrol prices and food prices). Japan – will not avoid recession The main features of the forecast: 1. Japan will again experience a recession and mild deflation. 2. A stronger yen and weaker foreign demand will restrain exports. 3. Fiscal incentives will not achieve the required effect – instead the business cycle in the outside world will determine when recovery can start. 4. Domestic forecast risks, including the currency, fiscal policy, reform policy and the result of a new parliamentary election. For the first time in seven years, Japan’s economy has entered into a recession, after the second and third quarter of last year showing a contracting GDP. The most important motor for growth in the Japanese economy – exports – is faltering. Growth in exports slackened last year in step with the business climate in the outside world, and the yen strengthened. The fall in housing investment has flattened out. On the other hand, business investment will continue to contract. Companies’ profit margins have also been affected negatively by the stronger yen, and also by high commodity prices during parts of last year. The car manufacturer, Toyota, also expects a year of loss – the first in 70 years! The Japanese export motor falters Japan’s industrial production (index) and companies’ perception of the profit situation (per cent) S o u rc e : R e u te rs E c o W in 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 Percent -3 5 -3 0 -2 5 -2 0 -1 5 -1 0 -5 0 Index 8 0 8 5 9 0 9 5 1 0 0 1 0 5 1 1 0 1 1 5 < ---- B u s in e s s s e n tim e n t o n p ro fit m a rg in M a n u fa c tu rin g p ro d u c tio n --> Japanese households will continue to consume carefully, and the prevailing business climate and financial situation do not in- dicate an unexpected lift. During last year, the total workforce Swedbank Economic Outlook • 22 January 2009 29
  30. Global economy declined, not least part-time workers and temporary employees who have greater difficulty in the labour market. The Japanese yen appreciated in real terms by 28 % between July 2007 (at which time it was at its weakest since 1985) and November last year. In nominal terms against the dollar, the yen is now at its weakest for 13 years. A stronger yen is normally connected to an improved export trend – but not this time. Nor has household consumption increased as a result of the stronger currency. On the other hand, import prices may de- cline, and then the risk of deflation will increase. A stronger yen causes additional difficulties Japan’s Prime Minister – Taro Aso – has seen opinion figures worsening since he succeeded Yasuo Fukuda in September. Although the banking sector is relatively solid, Japan is affected by the global recession because of its considerable export de- pendence. Economic policy must become more expansive. The key inter- est rate is already at a low level (0.1 %). Therefore, the gov- ernment is proposing a fiscal package of 23 000 billion yen (about USD 258 billion), of which 4 000 billion is “new money” equivalent to less than 1 % of GDP. Additionally, greater credit possibilities are being given to companies (3 000 billion yen). There is considerable uncertainty as to how these funds will as- sist the economy, but perhaps a greater fall than would other- wise occur will be prevented. For several years already, Japan has experienced ineffective fiscal incentives, which have driven up the public debt ratio to 170 % of GDP. Japan does not have good experience of previous incentive packages We expect Japan’s recovery to be built on improvements in the outside world, primarily driven by the USA. Also, parts of the rest of Asia may contribute to exports helping in due course. Af- ter the stagnation of 2008, we expect Japan’s economy to con- tract by about 2 % during 2009 and in 2010 to grow by a me- diocre 0.2 %, in step with a mild improvement in the economies of the outside world. Japan appears to be the country which has the greatest risk of again becoming caught in a deflationary spiral. Domestic de- mand has fallen while the share of exports has progressively increased (now 17.6 % of GDP). At the same time, demograph- ics are important because an aging population consumes less. Also, purchasing power of the population is less. Companies are increasingly investing in their sales in foreign markets when the domestic market stagnates. Companies within the areas of health and care are missing out on business opportunities, be- cause the markets continue to be regulated despite the fact that this demand could potentially grow. With this, there is room for reform to increase domestic demand to strengthen productivity in the service sector, increase IT usage and implement deregu- lation of the service markets. Also, more foreign direct invest- ment would be beneficial for the economy (at present it consti- tutes only 3 % of GDP which is the lowest proportion of all the OECD countries). New risk of a period of deflation – the work of reform must be speeded up 30 Swedbank Economic Outlook • 22 January 2009
  31. Global economy China – noticeable fall in temperature The main features of the forecast: 1. Overheating 2007 will be transformed into rapid slow-down 2009-2010 2. Gigantic incentive package and interest rate reductions can be of some benefit 3. China must change its growth model and allow domestic demand to be of greater importance for the economy 4. Domestic forecast risks include the property market, the labour market and economic policy The period of double-digit growth in China is over for the time being. At present, the country is growing officially at a respect- able 9 % per annum. This development is desirable because overheating was the dominant risk factor just a few years ago (13 % growth in 2007 if the official statistics are correct). Now the risk, to a major extent, is that China will put the brakes on excessively. For several years, exports grew at about 20 % in fixed prices, but are now slackening off, and in December fell by 2.8 %. Car sales and activities in the housing market are also falling (but note that regional differences are considerable). As the factors which drove growth in China are now weakening, prospects for the Chinese economy are also now worsening. At the same time, employment and wages trends are weakening in the cit- ies, which will restrain retail trade. Important to question the sustainability of China’s growth strategy It is reasonable to question China’s growth model. It is based on considerable export-dependence and on the USA continuing to run a large deficit in its balance on current account. China’s producers are rated more highly than China’s consumers. Dur- ing the next few years we will see attempts to move more de- mand to the domestic economy. China’s exports in USD and sales of cars (numbers of) (annual percentage change, two months’ moving average) S o u rc e : R e u te rs E co W in The Chinese administration is conducting a more expansive fi- nancial policy to sustain growth and to cope with the serious Swedbank Economic Outlook • 22 January 2009 31
  32. Global economy social tensions that often arise in recessions. Because the gov- ernment has acted with some degree of panic and acted early, there is cause to suspect that growth in the economy has al- ready fallen more than the official figures show. The growth in industrial production (5.4 % in November) is the slowest in seven years. An incentive package of USD 586 billion (about 15 % of GDP) has been presented and will apply for two years. The package is aimed at infrastructure, health and education and also in- cludes tax reductions and investment in social insurance. It is unclear what direction it will take, and also how much is “new money” (perhaps half), how quickly it can be put into effect and where the money is coming from (only one quarter from the central administration, and the rest from state banks and com- panies and local administration, which are already experiencing economic difficulties). Major incentives indicate that the administration considers the situation to be serious China’s administration will probably proceed more carefully in appreciation of the renminbi with the objective of safeguarding exports. Monetary policy is also directed at stimulating lending by reducing interest rates and reserve requirements in the banking system. China’s most important key interest rate has fallen from 7.5 % in September last year to 5.4 %. Inflation came down from about 8 % in the spring of 2008 to 2.4 % in November on an annual basis. Thus, inflation is no longer the focus of the risk situation. Rather, there is unease about a pos- sible collapse of private investment if the slow-down in the prop- erty market threatens bank lending. A large number of bank- ruptcies and many redundancies are other major risks which af- fect the economy. There is anecdotal information about facto- ries being closed down and enraged Chinese who have lost their jobs. Without its expansive economic policy, China’s growth rate would slow to 5-6 % this year. Probably the incentives will have some form of effect, increasing the possibilities of growth to about 7-7½ % in 2009-2010. This is also a challenge, because China needs at least 8 % growth per year to absorb newcomers to the labour market. It is also the Chinese administration’s growth target in this period of global recession. A growth rate which is too low will risk creating social tensions 32 Swedbank Economic Outlook • 22 January 2009
  33. Global economy India – moderate downturn The main features of the forecast: 1. India is affected by reduced capital flows in the wake of the financial crisis, and weaker global demand for Indian products. 2. A faster pace of reform would keep growth of domestic demand more buoyant – fiscal incentives are not enough. 3. Forecast risks also include parliamentary election, inflation, currency and share prices. India’s banks have got through the global financial crisis well, and the country’s external debt is manageable. Nevertheless, India has been affected negatively. The stock exchange lost 60 % of its value last year, and foreign investors became more hesitant about the Indian market. Indian companies could no longer finance themselves on the international financial mar- kets. In total, this caused the Indian rupee to lose about 20 % of its value against the dollar last year. Share prices and investment are affected by the financial crisis Over the last five years, India grew at an average of 8.9 % per year, not least as a result of the high and increasing investment ratio (now about 35 % of GDP). During the third quarter of last year, growth fell to 7.6 %. Industrial production stagnated and exports are now declining for the first time in seven years. Infla- tion will continue to show high figures, even though they will be somewhat lower, and the budget deficit will grow to about 8½ % of GDP. This is disquieting, not least because the fiscal incen- tives up to now have not been very effective. A new package is now being introduced comprising about USD 4 billion, or ¾ % of GDP. Earlier this year, monetary policy was being tightened to fight inflation, but during the autumn, the Indian central bank lowered its key interest rate from 9 % to 5½ % and has shifted focus from inflation to growth. We anticipate that GDP growth will continue to decline to 5½- 6 % in 2009-2010. Domestic demand is relatively good. There has not been much will to reform so far, but if it does occur as a result of the recession, growth prospects may be somewhat im- proved. Changes in public finances, subsidies (which amount to 3 % of GDP) and privatisation of state companies (including banks) would contribute to better growth prospects. Similarly, the country needs far-reaching reforms to improve the infra- structure. The government’s plans include investment at pre- sent amounting to 8 % of GDP per year for five years, but such enormous resources will probably not materialise. Reform policy could strengthen domestic demand Risks in the forecast include India’s dependence on interna- tional finance, a major downturn in global business which would reduce demand for India’s products, including IT services, and trouble between India and Pakistan. The parliamentary election in 2009 is also an element of uncertainty. Swedbank Economic Outlook • 22 January 2009 33
  34. Global economy The EU – a strong decline in exports The main features of the forecast: 1. The export-dependent euro countries are affected by weaker growth in the world in general, which is also causing investment to contract. In some countries, consumption is also falling. 2. Further interest rate reductions and fiscal incentives will materialise, but after some delay as resource utilisation capacity has declined. 3. The UK is faced with its greatest recession for several decades and is making input both in monetary measures and fiscal measures. The Nordic countries will manage somewhat better than the euro countries on aver- age. The euro area: The financial crisis has its epicentre in the USA, but the euro area is also affected very severely. During the au- tumn, a number of European banks (ING, Fortis, Hypo Real Es- tate, Commerzbank and Dexia) were rescued or restructured with the help of state intervention. The European Central Bank has attempted to stabilise the financial markets by providing li- quidity, lowering the key interest rate, and governments have also issued credit guarantees. In Europe it is also recognised that the financial crisis requires action Households and companies, confidence in the future, net balance S o u rc e : R e u te rs E c o W in 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 Netbalance -3 5 -3 0 -2 5 -2 0 -1 5 -1 0 -5 0 5 1 0 B u s in e s s s e n tim e n t H o u s e h o ld s e n tim e n t The euro countries’ GDP fell in both the second and third quar- ters of last year by 0.2 % on a quarterly basis. The recession has been caused partly by lower foreign demand, and partly by weaker domestic demand, primarily from households. The un- derlying explanation is the global financial crisis which has af- fected the real economy, housing and share markets. The sup- ply of credit has become more difficult, and household wealth has fallen, and this has resulted in weaker domestic demand. During part of 2008, households were also affected negatively by high mortgage rates and rising energy and food prices. In pace with declining confidence in the future by households, sales in the retail trade have declined. In the second quarter of last year, growth in households’ real disposable income was the lowest since 2003. The trend of household income is weakening… 34 Swedbank Economic Outlook • 22 January 2009
  35. Global economy After a period of healthy development in the labour market (in Germany the best since the 1970s) employment is now slowing down sharply. In Germany, unemployment rose in December for the first time in three years to 7.6 % and in the euro area as a whole, unemployment during the greater part of 2008 rose from 7.2 % in February to 7-8 % in November. Companies’ em- ployment plans indicate a continued weakening of the labour market. At the end of the forecast period, it is expected to ex- ceed 10 %. This fits well with the more pessimistic outlook for exports and investment. … the labour market situation is worsening There are also glimmers of hope: Inflation has started to fall, which benefits both companies and households. The fiscal in- centive package is signalling growth, while the automatic stabi- lisers are working. Monetary policy will be more expansive with lower key interest rates as a result. We do expect, however, that the recession will continue to be felt, and that the financial incentives will certainly make the downturn less painful but will not manage to stop it. During 2009, the economies of the euro countries will contract in total by 2 %, and during 2010 there will be a slow recovery, in which GDP will grown by 0.7 %. Mainly exports and investment are falling in the euro countries Despite the fact that Germany does not show the same need for correction on financial and property markets than, for example, Ireland and Spain, the economy will slow rapidly when domestic demand does not manage to compensate for weaker foreign demand. The UK: The British economy has been especially hard hit by the financial crisis because the country – in common with the USA – had important driving forces for growth from the finance and property markets. Several British banks have been rescued by the government, and the housing market continues to show falling prices. Unemployment is rising in both the industrial and service sectors. Households’ confidence in the future is weak and is affected by negative wealth effects and weaker income prospects. Investment is also slowing and exports are declining. Credit has contracted. During the second quarter of last year, the economy stagnated and during the third quarter, GDP de- clined by 0.6 % compared with the previous quarter. The UK had its own epicentre in the mort- gage debt crisis The British central bank has lowered its key interest rate to a record low level of (1.5 %) and the pound has depreciated by about 30 % against the dollar and about 20 % against the euro since the beginning of 2008. Further interest rate reductions are expected, although the currency trend will also be followed closely. Inflation has begun to decline, but in November was still at about 4 %. During 2009 and 2010, inflation is, however, ex- pected to be less than 2 %. Historically low interest rate levels can help to some extent … Swedbank Economic Outlook • 22 January 2009 35
  36. Global economy The government’s support package of 20 billion pounds con- tains a disputed reduction in VAT. Because the budget deficit has already grown as a proportion of GDP from about 3 % in 2007 to about 5 % in 2008, unease is also growing in respect of sustainability of public finances (government debt as a propor- tion of GDP exceeds 50 %) and room for further incentives is limited. We expect that the UK’s economy will contract by 2¼ % this year and subsequently a recovery will start, so that GDP will increase by 0.4 % in 2010. …and VAT reductions, but the question is whether people will save to a great extent instead of consuming The pound compared with the dollar and the euro (index 01-01-2008= 100) and the British central bank’s key interest rate (%) S o u rc e : R e u te rs E c o W in The Nordic Area: The Nordic countries have an advantage due to relatively healthy government finances to start off with, and surpluses in their balances on current account. On the other hand, they are sensitive to lower market growth because they are small, open economies. Also, these countries have built up a high level of indebtedness in households, house prices have risen and the financial sector has been affected by the global crisis. Country/GDP growth January forecast 2007 2008 2009 2010 Denmark 1.6 -0.6 -1.3 0.7 Norway 0.7 4.1 0.2 1.5 Finland 4.5 1.5 -1.5 1.0 Denmark already experienced the recession last year. Worsen- ing of market growth in the rest of Europe meant that the reces- sion will be prolonged during 2009, and a slight recovery is de- pendent on developments outside the country. The country is experiencing a credit squeeze and also high key interest rates in order to defend the Danish krone – a situation which has worsened households’ confidence in the future. Fiscal incen- tives of about 1 % of GDP will soften the downturn somewhat. 36 Swedbank Economic Outlook • 22 January 2009
  37. Global economy Finland’s economy slowed down during the second half of last year. Exports and investments were affected by slower growth in the world in general. Households are favoured by a more ex- pansive fiscal policy (1.2 % of GDP) and the worsening of the labour market can also be mitigated by this. Recovery is com- pletely dependent on developments in the world in general. Norway is expected to use more of the oil fund money to stimu- late the economy. A lower oil price will affect the will to invest in the oil sector, and can also bring down the Norwegian krona, which would benefit other exports. The housing market is un- dergoing a correction. Cecilia Hermansson Swedbank Economic Outlook • 22 January 2009 37
  38. Sweden – summary Sweden – outlook and risks Sweden is a small, open economy. A severe recession in the world economy affects Swedish exports and investment rela- tively profoundly for this reason. This year, export volumes will fall by 3.5 % and investment by a full 7.5 %. Also, next year in- vestment will continue to contract because capacity utilisation continues to be low. The trend in household income will be rela- tively favourable, but uncertainty in the labour and property markets will cause buffer saving to increase. Private consump- tion will stabilise this year and will strengthen somewhat next year. GDP is thus expected to decline by 1.8 % this year, but to grow somewhat during 2010 by 0.8 %. Less favourable developments in the world in general give Sweden less favourable prospects for growth Contributions from various components to GDP growth (per cent) -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2008 2009 2010 Net exports Inventories Gross fixed investment Public consumption Private consumption The forecast risks are primarily to do with the world economy in general and the financial markets. Domestic risks include the downturn spreading into other sectors. For example, there is cause to expect a more marked downturn in the vehicle indus- try, which has both recessional and structural problems, than in IT and telecommunications which underwent structural im- provements in the early 2000s when the IT bubble burst. An- other risk is the speed with which households correct their bal- ance sheets. We expect growth which will be primarily built on indebtedness growing more slowly than disposable income. A third risk is the extent and direction of fiscal policy. We expect some restraint as budget discipline is high on the government’s agenda, and reduced creditworthiness and higher bond rates in Southern Europe are a deterrent. The crisis may spread, correction of debt by households, and the formulation of fiscal policy – these are three important domestic forecast risks With this, the Swedish economy will be stimulated by fiscal pol- icy in common with other European countries. Nor will monetary policy be very different. The Swedish Riksbank will reduce its key interest rate to 1 %, and the ECB will reach bottom with 1.5 %. The krona has weakened, but we expect a slow strengthening against the euro during the forecast period. Restraint by the Swedish government contributes to incentives on a euro scale 38 Swedbank Economic Outlook • 22 January 2009
  39. Sweden - summary Swedish exports will develop somewhat less negatively than, for example, Germany’s, as Germany has a higher proportion of vehicles in its exports. Our composition of exports includes a larger component of telecommunications, IT and services which can develop somewhat more strongly in relative terms. Neither Sweden nor Germany has excess investment in the construc- tion industry, but a decline is nevertheless included in the fore- cast when financial and business trend developments have worsened. Investment will fall somewhat faster in Sweden than in Germany. Household consumption will develop marginally more strongly in Sweden, as disposable incomes will strengthen somewhat more. In what way will Sweden differ from the euro countries? In the short term during the forecast period: Marginally. On a some- what longer perspective beyond the forecast period and after recovery has got under way: Sweden will then be stronger as the need for adjustment in public finances is absent. The Swed- ish composition of business is also well adapted for increasing demand for input and investment goods and commodities. Equal in the short term, but Sweden will be stronger when the economic climate improves Cecilia Hermansson Swedbank Economic Outlook • 22 January 2009 39
  40. Foreign trade A severe bout of flu in exports The volume of Swedish exports of goods & services rose by about 4 % on an annual basis during the first three quarters of last year. The deteriorating global financial crisis and deepening international recession did, however, mean a considerable turn- around in Swedish exports during the two last quarters of last year. Not least, this applied to the important engineering exports which increased by a mere 1.5 % on an annual basis during the third quarter compared with 9.6 % in the previous quarter. An important contributory factor is the strong fall in the volume of exports of road vehicles and other investment goods. Engineering exports lose momentum Export values of different groups of commodities, percentage change Source: Reuters EcoWin 00 01 02 03 04 05 06 07 08 Percent -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 Total varuexport Tjänsteexport Personbilar Total exports of goods Exports of services Passenger cars The export of services which was previously so expansive, and grew by 10-15 % per year for four years in a row, has almost levelled out, and increased by only about 1 % in volume during the first three quarters of last year. The turnaround is a result of demand for company services declining when exports of goods grow more slowly. Foreign trade statistics for October and No- vember show that exports of goods continued to weaken, for which reason we estimate that total export volume growth for the full year of 2008 to be only 2 %. This is the weakest trend since 2002 and much lower than we forecast in the September forecast (4.5 %). Weakest growth in exports since 2002 Up to now, the downturn in exports has been concentrated to the North American market where export values have continu- ally fallen since 2006. Deliveries to the European market, which account for about 70 % of Swedish exports of goods, continued to increase, although less strongly. The slow-down is not least due to the Spanish market, and also to markets in the Nordic Area, which in terms of volume are larger, and which have shown signs of weakening. Exports to China, Poland and Rus- sia continued to grow strongly. The slackening off of exports is spreading to more markets 40 Swedbank Economic Outlook • 22 January 2009
  41. Foreign trade Two years of weak export growth Swedish export prospects for the coming year have considera- bly worsened because of the financial crisis and the consequent weaker global business climate. This is also reflected in com- panies’ export orders which declined strongly during the last months of last year. Assuming our international assumptions are correct (given on pages 23-24) world market growth for Swedish exports will de- cline by an estimated 1.5 % this year after an increase of 4 % last year. There are parallels with the recessionary year of 2001, when global world trade declined, and demand for in- vestment goods declined after the IT bubble burst. A decisive difference compared with that time is that we expect a deeper recession as regards volume export markets which are impor- tant for Sweden. In the OECD countries, which receive 80 % of Swedish exports, it is estimated that the market will decline by about 3 % this year. This means that the global market for Swedish companies will be much weaker during 2009 than in the early 2000s. Lower growth of world markets for Swedish companies during 2009 World market growth for Swedish exports -4 -2 0 2 4 6 8 10 12 14 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 For next year, we expect world market growth for Swedish in- dustry to grow by about 3.5 % in step with a slow recovery in the global business climate. This is, however, a way long from the growth rates of 2000-2008 when the world market for Swed- ish companies grew at an average of 6.5 %. Continued moder- ate global investment growth in the wake of the financial crisis and low global resource utilisation will limit export opportunities for Swedish companies. Expectations of a weak recovery in 2010 Total Swedish export volumes are expected to decline by 2-3 % during 2009, which is a greater decrease than in the two last re- cessions. We expect that exports of processed goods will de- cline rapidly during 2009 on account of the weak investment business climate, and this also occurred during the recession- ary year of 2001. This applies above all to deliveries of transport equipment and telecommunications products which are sensi- Constrained global investment will stunt Swedish export industry Swedbank Economic Outlook • 22 January 2009 41
  42. Foreign trade tive to changes in investment demand. At the same time, tight financial conditions make financing of new investment more dif- ficult, which will reduce export growth further. The commodities markets are characterised by overcapacity and an increasing supply of commodities, bringing down com- modity prices. This indicates further production reductions dur- ing the coming year. Swedish exports of commodities, which mostly go to the EU countries, are expected to decline this year as a result of the worsening recession. The weakening of the Swedish krona in relation to the euro and the dollar does give some competitive advantage, however, in relation to the most important competitors in Europe. Exports of services are ex- pected to contract during 2009 when the growth of world trade slackens. This applies not least to transportation services, fi- nancial services and also a decline in international tourism. The fact that competitiveness improved in 2009 on account of the weakening of the Swedish krona during last year, and lower increases in labour costs is, however, insufficient to compen- sate for the strong decline in global demand. Swedish compa- nies anticipate losing market share. Since 2000, Sweden has gained market share in only three years (2000, 2003 and 2004) and we consider it less likely that increased share can be taken in a contracting market. The gradual strengthening growth of world markets and, in the long-term, increased demand for input and investment goods during the course of 2010, is expected in due course to improve Swedish exports. At the same time, we expect competitiveness to improve on account of lower increases in unit labour costs and, despite the strengthening of the Swedish krona, neverthe- less a relatively weak krona. Prospects for Swedish export of services could improve. We therefore expect Swedish exports to increase by 2-3 % in volume next year. This does, however, require greater resource utilisation in the world economy, greater propensity to invest and a financial market which func- tions better. Here there is considerable uncertainty, and the risk of a weaker recovery in exports can be considered highly likely. Swedish exports will recover during 2010 when global demand slowly improves Structural change in the vehicles industry intensifies The Swedish transport equipment industry is responsible for about 13 % of Swedish exports of goods, and last year em- ployed about 140 000 persons according to Bil Sverige. The sector is faced with major challenges, as is also the case in a number of other countries. The global financial crisis and sub- sequent recession have led to a considerable decline in de- mand for passenger cars and lorries throughout the world. At the same time, demands on car companies to develop products which further reduce energy consumption and carbon dioxide emissions are increasing. Greater environmental awareness The downturn in the passenger car industry is due both to the recession and to structural change 42 Swedbank Economic Outlook • 22 January 2009
  43. Foreign trade among consumers has led to a gradual shift in demand towards more environmentally friendly, energy efficient car models. The strong drop in demand has led to a large number of dis- missals and redundancies during the autumn and winter. There have been greater demands for the government to intervene and support the car companies in order to secure the Swedish vehicle industry. We do not consider that this is an appropriate route, apart from emergency and relief loans as a result of the financial crisis. The elimination of the textile and shipbuilding in- dustries during the 1970s could not be prevented because of increasing international competition. Instead, demands were made on companies to implement long-term investment to strengthen competitiveness. Developing new vehicles which are better environmentally adapted will be at the forefront. Here, some competitors have been more successful than others. Greater demand for developing competitive, environmentally friendly vehicles How do Swedish exports compare with Germany’s? Sweden and Germany are two economies with large foreign trade. German exports have increased considerably and have been responsible for a large proportion of the country’s GDP growth during the last few years. The importance of exports in the economy is increasing, and in 2007, made up about 45 % of GDP compared with about 30 % in 2000. In Sweden, the pro- portion of exports in the economy has also increased consid- erably and amounts to about 52 % of GDP. The weak global prospects of growth which we expect during the forecast period of 2009/10 will limit the export opportunities of these countries. The extent of the downturn will partly depend on how the com- position of the countries’ exports is made up. Considerable export dependence both in Sweden and in Germany German exports are characterised by considerable exposure of machinery and transport equipment, which constitute almost 40 % of the country’s total exports of goods. In Sweden, the equivalent proportion is about 30 %. On the other hand, exports of raw materials and deliveries of electronic products are more important in Swedish exports. During the last recession in the early 2000s, the downturn in exports was greater in Sweden than in Germany. The considerable decline in Swedish exports of telecommunications products when the IT bubble burst probably contributed to Swedish exports losing more than did the German export industry. The car industry is an important component of German exports In the short term, there is a risk that the German export industry may be affected more severely by the global recession than Sweden’s. This applies not least on account of the structural crisis which is ongoing in the passenger car industry, a sector which is dominant in German goods exports. Greater exposure of machinery relative to Sweden is another factor which sug- gests that the downturn in German exports may be greater when demand for investment contracts. Declining unit labour costs during 2009/10 will strengthen the competitiveness of The structural crisis in the vehicle industry may have greater negative effects for German exports than for Swedish exports Swedbank Economic Outlook • 22 January 2009 43
  44. Foreign trade Swedish export companies despite the assumption of a weak appreciation of the Swedish krona. Export shares of total exports of goods, Germany and Sweden Sweden Gemany Forestry- minerals 22.5 10 Chemicals 11.5 16.5 Machinery 16.1 19.4 Vehicles 13.2 18.8 Electronics 12.6 3.8 Chemical products 11.5 16.5 Source: National statistics agencies Weak domestic demand limits imports Swedish imports of goods & services grew at an average of 5.4 % on an annual basis during the first three quarters of last years. It is the second year in succession that total imports grew more quickly than exports. During the latter part of 2008, de- mand for imports weakened further. Less investment in ma- chinery, declining retail trade turnover and a reduction in indus- trial production constrained imports of goods. At the same time, there is a reduction of inventory ongoing in business as a result of the quick turnaround in the business climate. We adjudge that total imports grew at about 3 % on average during the full year of 2008 after having weakened further during the last quar- ter of last year. Imports will decline during 2009 Demand for imports in the Swedish economy is expected to continue to decline during 2009. Falling investment in business, further production reductions in industry and unchanged private consumption are expected to lead to a decline in imports of al- most 4 % in volume. At the same time, a weak development in trade will result in the import of freight services declining. Household consumption abroad is expected to decline as a re- sult of the weak labour market, although we assume a moder- ate strengthening of the Swedish krona during the present year. During 2010, we expect a slight improvement in imports when domestic demand slowly improves. Limited improvement in domestic demand will produce a slight increase in imports Jörgen Kennemar 44 Swedbank Economic Outlook • 22 January 2009
  45. Investment Investment falls on a broad front Investment in the Swedish economy increased by an average of 5 % in volume during the first three quarters of last year, which is a slight easing compared with the annual growth of invest- ment of 8-9 % for the period 2005-2007. The decline in invest- ment growth is from a high level. Since 2003, the country’s total investments as a proportion of GDP rose from 16 % to about 19 %, and this is the highest proportion since 1990. The fact that the investment climate is on its way down became clearer at the end of last year. Total investment increased by only 3 % on an annual basis during the third quarter of 2008, while business investment plans were quickly reduced on ac- count of the rapidly worsening business climate. The global fi- nancial crisis also contributed to the downturn in the investment trend when Swedish companies encountered increasing difficul- ties in financing new investment. This has led to more invest- ment projects being shelved. Reduction in planned investment The turnaround in the investment business climate started within industry back in the second half of 2007 and spread to an increasing number of sectors. The biggest and fastest turn- around was in the construction sector. Since the second quarter of 2008, investment in housing has declined. The number of housing starts fell by about 70 % during the third quarter com- pared with the same period of 2007. In total, we estimate that total investment in the Swedish economy increased by 2.5 % during the full year of 2008 and thus shows the weakest growth rate since 2003. Strong decline in the construction sector reduces total investment Investment development during 2007-2008, annual percentage change -10 -5 0 5 10 15 20 25 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 Industrin Bostäder Totalt - - - - Industry -+-+- Housing ------- Total The strong turnaround in the investment business climate is reminiscent of the recession of the early 1990s and the period immediately after the IT bubble burst in 2000. The diagram shows how business, housing investment and public investment Swedbank Economic Outlook • 22 January 2009 45
  46. Investment developed during these two periods and our forecasts for this year and next year. The goods-producing sector was the main cause of total investment falling by 2 % during the period 2000- 2002. On the other hand, investment in housing and in the pub- lic sector rose. During the crisis of the 1990s, total investment fell by a full 30 % in three years. The deep financial and prop- erty crisis and a strong decline in domestic demand contributed to the broad fall in investment in business and in housing. Investment during the latest recessions, percentage change -50 -40 -30 -20 -10 0 10 20 30 Totalt Bostäder Näringsliv exkl bostäder Offentlig 1990-1993 2001-2002 2009-2010 The downturn in investment which has started will deepen dur- ing 2009, if not as severely as in the early 1990s. An important difference compared with the crises of the 1990s is that the Swedish economy is on a more stable basis. Defence of the krona up until 18 November 1992 led to record high interest rates in the Swedish economy, which depressed domestic de- mand – consumption and investment. At the same time, Swe- den’s creditworthiness was brought into question when public expenditure and government debt reached new heights. This also meant a contracting capacity for fiscal incentive measures. The downturn in investment will deepen in 2009 We estimate that the country’s combined investment volume will fall by 7.5 % this year. It is also expected that total investment will contract in 2010, although less rapidly. A weak business climate in the rest of the world and low capacity utilisation will constrain business expansion requirements during the entire forecast period. At the same time, companies’ financing possi- bilities will consistently be made more difficult by the global fi- nancial crisis. Lower capacity utilisation in industry and a severe reduction in production plans will reduce industrial investment. This is ex- pected to fall by about 10 % this year and by 2 % next year, with a considerable decline within the transport equipment sec- tor and raw materials industry. The private service sector will also reduce investment over the next two years. In sectors 46 Swedbank Economic Outlook • 22 January 2009
  47. Investment which are closely connected to manufacturing and construction industries, the decline in investment may be particularly pro- nounced. The expansive investment in the trade sector of the last few years, and the emergence of several shopping centres, will be followed by two years in succession of weak investment, when private consumption weakens. Tighter credit and rapidly declining confidence on the part of households and companies have resulted in the flow of new housing projects decreasing rapidly. This applies both to rental property, housing cooperatives and houses. We estimate that about 18 500 apartments and houses were started last year compared with 25 000 in 2007. In 2009, we expect 15 000 apartments to be started, which would be the lowest level in al- most ten years. Investment in housing is expected to fall by 15- 20 % in volume during 2009, after a contraction of almost 6 % last year. The number of housing starts during 2009 is expected to be the lowest for ten years Demand for housing will be weak during 2010 as well, on ac- count of the weak labour market. There are, however, prospects for stabilisation of the housing market during 2010. A reduction in production costs for construction companies in connection with lower interest rates, lower labour cost increases and cheaper raw materials will improve profitability for the construc- tion companies, and in the long run could increase the supply of housing. There is, however, a risk on the downside. It is primar- ily the weak labour market and continued turbulence in financial markets which could lead to a delay in the recovery of the hous- ing market. Weak labour market and continued turbulence in financial markets may delay recovery It is within the public sector that we expect investment will in- crease during the forecast period, which has also been the case during the last recessions. This will primarily consist of in- creased government grants for road and rail investment, con- tributing to an increase in public investment of about 15 % dur- ing the next two years. It is not improbable that more resources will be applied during the forecast period when the business cy- cle worsens. This could involve further investment in infrastruc- ture and in the municipal sector, where modernisation of hous- ing is a prioritised area. Worsening municipal finances in the wake of growing unemployment will, however, reduce the ca- pacity for new investment. An increase in public investment is anticipated during 2009/2010 Jörgen Kennemar Swedbank Economic Outlook • 22 January 2009 47
  48. Labour market Big risks in the labour market Reduced demand for labour The Swedish labour market will continue to create new jobs dur- ing 2008, despite lower GDP growth and less favourable busi- ness climate prospects. On average, the number of people em- ployed rose by 1 % during last year, which was in line with our forecast in August. The increase in employment by 45 000 per- sons was primarily in the private service sector, while industry and the public sector cut their workforces. Compared with the record year of 2007, when the number of employees increased by about 100 000 persons and work hours rose by over 3.5 %, this is a clear slow-down. The down- turn was especially noticeable during the fourth quarter of 2008, when the number of dismissals rose by almost 60 000. This is the fastest increase since the crisis of the 1990s when redun- dancies amounted to 100 000-200 000 persons per year. About half of dismissals last year were within the manufacturing indus- try, where the transport sector was responsible for the biggest increase. The first reductions that companies make are in the number of temporary employees when demand worsens. Tem- porary employees have declined in number for three quarters in a row, while those permanently employed show a more stable trend. Severe reversals on the labour market We expect demand for labour to continue to fall. The number of vacant jobs reported to the country’s job centres in December 2008 was 27 000, which is 17 000 fewer than a year ago. The vacancies now reported are on the decline in most major busi- ness sectors, but the decline is especially marked in the con- struction sector, manufacturing industry, contracting and trans- port. The strong increase in company redundancies and revised business production plans are expected to lead to a greater re- duction in employment than we forecast last autumn. In Swedbank’s purchasing manager index of December, the in- dex of company production plans fell to a new record low level in the 14-year history of the index. The services production in- dex from Statistics Sweden shows that the recession is spread- ing to yet more sectors. Further personnel reductions are ex- pected in municipalities and county councils due to worsening finances when tax revenues decline and the cost of unemploy- ment rises. We estimate that total employment will fall by an average of about 2 % in 2009, a reduction of 115 000 persons compared with 2008. A decline in the demand for labour is spreading to yet more sectors Next year will also be a weak labour market year with an ex- pected loss of employment of about 1 %. This means that the number of employed will decline by almost 170 000 persons over two years. In our labour market forecast for 2009/10 the fall in employment will be greater compared with the recession of the early 2000s, when the number of employed persons fell The decline in employment is expect to be deeper than that of the recession of the early 2000s 48 Swedbank Economic Outlook • 22 January 2009
  49. Labour market by 26 000 persons between 2001 and 2004. The decline is, however, not expected to be as dramatic as during the crisis of the 1990s when employment fell by about 500 000 between 1990 and 1993. The turnaround in the labour market will be delayed The improvement in the general world economic situation that we expect to take place slowly during the course of next year, will not have a very great effect on employment in Sweden. The labour market is also that part of the economy that reacts rela- tively late in a turnaround. In a business climate with low re- source utilisation, there is room for companies to increase pro- duction without having to employ more people. After the reces- sion of 2001, it took until 2006 before employment took off again, despite an acceleration of GDP growth. A period which was designated “jobless growth”. The considerable improve- ment in productivity in the business sector took place partly via new technological solutions and also through changes in com- panies’ production and purchasing patterns via the intensifica- tion of global competition. Employment in the private business sector in three recessions 80 85 90 95 100 105 0 1 2 3 4 5 1990-1995 2001-2006 2008-2010 The weak prospects for global growth during 2009/10 will in- crease demands for rationalisation and efficiency in the busi- ness sector. At the same time, global competition will intensify, which can be expected to lead to new changes in the produc- tion composition of the business sector. Structural change in the business sector may therefore intensify during a recession. Therefore, the need to employ new people will be limited over the next few years. This applies not least in the transport equipment industry, which is on the verge of considerable struc- tural change. We expect productivity growth to increase by 2- 2.5 % next year, after having been generally unchanged during 2007-2009. The weak business climate in the world at large may hasten structural change in companies Swedbank Economic Outlook • 22 January 2009 49
  50. Labour market Where will jobs be lost? The greatest reduction in personnel, also as a proportion, is ex- pected to be in the goods-producing sector. The downward trend in industrial employment will continue, and at the end of the forecast period the number of employees will be fewer than 650 000 persons compared with last year’s 720 000 employees. Service companies close to the corporate sector, which grew strongly during the past few years, will reduce their employees when industrial companies reduce their consultancy costs. At the same time, productivity growth in many of the service com- panies has been negative over several years, for which reason we expect an increase in the growth of productivity when com- panies are rationalised and business is made more efficient. Greater government subsidies to municipalities and county councils can lead to some employment effect. But at the same time, an increasing number of municipalities and county coun- cils are under pressure because of worsening finances, with the risk of the government’s incentive measures from last autumn being insufficient. Rationalisation and efficiency improvements will increase productivity in goods-producing and service-producing companies during 2009/2010 A rapid increase in unemployment The supply of labour rose by an average of 1 % per year during 2005-2008. Strong demand for labour, a growing population of working age and the government’s economic policy in stimulat- ing a greater supply of labour contributed to more people going into the labour market. During the forecast period of 2009/10, it is expected that the supply of labour will be generally un- changed when the labour market worsens and the population of working age increases more slowly. The government’s eco- nomic policy for stimulating the supply of labour will, however, prevent a major decline in supply, which usually occurred in the recessions of the 1990s. The changes which are to come in sickness insurance are expected to contribute to some persons, who were previously outside the labour force, putting them- selves at the disposal of the labour market. It is estimated that 25 000 persons will leave sickness insurance in 2010 when the time-limited sickness benefit ceases. The government’s goal of increasing the supply of labour also involved changes in the mix of labour market policy measures. A reduction in employment programmes has increasingly been replaced by more training programmes, in which work experi- ence and job guarantees for young people are included. In step with the weakening of the labour market, we expect labour mar- ket policy measures to increase, and it is expected that they will amount to 2.5 % of the labour force next year. Training invest- ment will increase above all, and this is also given priority in the government’s incentive package of December 2008. In the gov- ernment’s budget proposals of last autumn, it was estimated that the training programmes would increase by almost 40 000 persons during 2009-2010. This would involve about 100 000 people participating in some form of training programme next year. The employment programmes, which were eased off dur- An increase in labour market policy measures is expected when the labour market worsens 50 Swedbank Economic Outlook • 22 January 2009
  51. Labour market ing 2007, are expected to be generally unchanged during the forecast period, however, and to involve about 15 000 persons. Additional labour market policy investment is, however, highly probable during the forecast period when unemployment rises and closer to the parliamentary election. It is also reasonable to expect more young people to continue studying at colleges and universities when the labour market weakens. This would mean that the supply of labour could decline by more than our fore- cast. Total number of persons studying, 100s 0 1000 2000 3000 4000 5000 6000 7000 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 100-tal Source: the Swedish National Institute of Economic Research and the Swed- ish Ministry of Finance Those unemployed not in training or programmes will increase to 9.5 % next year compared with about 6 % during 2008. If those in labour market policy programmes are included, total unemployment will rise to about 12 % of the labour force and is expected to reach a peak at the beginning of 2011. If the supply of labour declines more than expected on account of weak de- mand for labour and greater investment in training and educa- tion, the number of those unemployed but not in labour market policy programmes may be somewhat fewer. We expect that if the government produces new fiscal incentives, investment in education will be a prioritised component of this. Unemployment is expected to peak during 2011 Lower wages and unit labour costs The weakening of the labour market has not yet been reflected in the wage statistics. Total hourly wages in the Swedish econ- omy rose by an average of 4 % during January – October 2008. This is expected also to be the average rate of increase of wages for the full year 2008, and will mean that the increase in wages was much higher than in 2007. The lower resource utilisation in the labour market and pressure on business profit margins will restrain wage increases in the Swedbank Economic Outlook • 22 January 2009 51
  52. Labour market Swedish economy during the forecast period. The wage nego- tiations from 2007 which were entered into, which equate with an annual wage increase rate of 3.4 % do, however, limit a de- cline in the growth rate of wages during 2009. Instead, there is a lower rate of wage drift in the private business sector, contrib- uting to a lower rate of increase in wages in total. It is expected that wage drift will remain relatively unchanged this year after having contributed about 0.5 per cent to the total wage in- creases of last year. During 2010, the rate of increase in Swedish wages will slacken further when the majority of the wage agreements from 2007 expire at the beginning of next year. A much weaker labour market situation during 2010 compared with the previous round of wage negotiations indicates much lower wage agreements compared with those entered into in 2007. We estimate that to- tal wages will rise next year by 3 %. A new round of wage negotiations will commence at the beginning of next year The trend of rapidly rising unit labour costs will be broken during the forecast period. The clear turnaround on the labour market and higher growth in productivity in the Swedish economy indi- cate lower increases. Last year, we estimated that they rose by 4 %, while they will be generally unchanged during 2010. The biggest change is expected to be in the goods-producing sector where the greatest productivity improvements are expected to occur. Unit labour costs and productivity for the entire economy, percentage change -1 0 1 2 3 4 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Enhetsarbetskostnader P troduktivite Unit labour costs •-•-• Productivity Source: Swedbank and the Swedish National Institute of Economic Research Jörgen Kennemar 52 Swedbank Economic Outlook • 22 January 2009
  53. Household economy Households keep their wallets closed Slow-down in the desire to consume During the first half of 2008, household consumption rose at about 2¼ %, this being a somewhat large increase, although less than that of the peak year of 2007. After that, the picture changed totally. Rising inflation and interest rates, an escalating financial crisis and reports of an increasingly weak economy and falling asset prices induced households to keep their wal- lets closed. Confidence in the future fell fast, primarily in respect of the Swedish economy but also vis-à-vis personal economy. During the third quarter, consumption in fixed prices fell, and it is probable that the decline continued during the fourth quarter. Many households are uneasy about the future … Both the retail trade (including grocery sales) and car purchases have declined. Trade in specialist goods continued to grow, but the trend is slackening. Households expect to continue to avoid “unnecessary” consumption. In the USA, this development is called “cutting corners”, which also means that households change over to cheaper products and cheaper retail trade chains. … and consumption already fell last year Households’ confidence in the future of the Swedish economy, personal economy and the labour market (net figures – higher minus lower) During the last few months, households have become some- what less pessimistic. Lower inflation and the Swedish Riks- bank’s interest rate reductions may have influenced the out- come. At the same time, fear of rising unemployment has in- creased, and reports of developments outside Sweden have become more pessimistic. Therefore, we expect a continuation of a low level of confidence among households during the fore- cast period. Lower inflation and interest rates are positive – but unease about the labour market is growing Swedbank Economic Outlook • 22 January 2009 53
  54. Household economy On the basis of income developments for households as a group, the unease may not be as intense. Disposable income adjusted for inflation will continue to grow comfortably at about 2 – 2½ % in 2009-2010, despite the weakened labour market. Lower inflation and an expansive fiscal policy with tax reduc- tions (work tax deduction, ROT deduction) and major public transfers (including to pensioners and the unemployed). Addi- tionally, the majority of households with flexible mortgages will have lower interest rates when the Swedish Riksbank continues to reduce the key interest rate and if the financial crisis be- comes less severe. Incomes will develop comfortably in spite of everything At the same time, there are considerable differences among households. Many have small margins and when people lose their jobs, consumption prospects are considerably reduced. Others consciously increase their savings when unease about unemployment increases. Those who have substantial margins usually save a larger proportion of the income improvements, which are not perceived to be permanent. Another factor which suggests continued caution in consumption is that balancing of the pension system will commence in 2010, because in 2008 the liabilities already exceeded the assets in the pension sys- tem. At the same time as this affects retired pensioners directly, negative expectations are also being created in those in house- holds which are on the way to retirement. As usual, it is difficult to see households as a single group Households’ real disposable income and private consumption (annual percentage change) and savings (in relation to disposable income) S ou rce: R eute rs E c oW in 94 96 98 00 02 04 06 08 10 Percent -2.5 0.0 2.5 5.0 7.5 10.0 12.5 15.0 D isposable incom e P rivate consum ption S avings ratio F ore cast We expect private consumption to stagnate this year, with a cautious recovery during next year of 1.5 %. Thus, consumption will increase more slowly than disposable income, which will mean that the savings ratio will increase towards about 14 %. This is relatively high, but if savings in contract pensions are excluded, the proportion of discretionary saving is more like 8 % (in 1993 it was 9.6 %). We expect the savings ratio next year to be the highest since 1993 Should one expect falling consumption during 2009? It is not unfeasible, although it is not our main scenario. In 2001 the rate of consumption also fell to a low level, and this time the down- 54 Swedbank Economic Outlook • 22 January 2009
  55. Household economy turn in the world business cycle and in the Swedish economy is deeper and broader. On the other hand, households have more savings initially, and incomes are expected to develop some- what better than was the case after 2002. In Germany, it is expected that households will reduce con- sumption, but Sweden is different from Germany in that the trend of disposable incomes has been and is expected to be better, and that interest rate reductions will have a greater effect on the indebted economies of households. Additionally, Swed- ish women participate in the labour market to a greater extent. When two persons in a household work, there is greater secu- rity when there is a downturn in the labour market. Also, Swed- ish households basically have a more positive attitude to con- suming and trying new capital goods. The ROT deduction and deduction for services involving households also hold up the consumption of services somewhat better in Sweden. However, Swedish households are more sensitive to falling share and property prices than German households, and here there is a clear forecast risk on the downward side. Slow reduction of high debt ratio As opposed to Germany, Swedish households have cause to adjust their balance sheets. The debt ratio has increased to re- cord high levels, and at the same time, financial assets continue to fall in value. An increase in saving in the wake of greater cau- tion can be used to pay off debts and to build up wealth. Although it is not advantageous from the point of view of a na- tional economy that households should save in a recession, it can be a good idea from the perspective of the individual. Be- cause this recession also has its roots in growth which was fi- nanced too much by debt (primarily in the USA, but also in Europe and elsewhere) it is reasonable that balance sheets should be adjusted as a result of the crisis. The adjustment will commence in 2009-2010 when the debt ratio falls from 149 % to 144 %. In common with debt restructuring in the early 1990s, this process will take time. Indebtedness will increase more slowly than the growth of disposable incomes. We anticipate that the debt ratio will decline slowly Swedbank Economic Outlook • 22 January 2009 55
  56. Household economy Households’ balance sheets: Debt and net wealth in relation to disposable income (%) 0% 50% 100% 150% 200% 250% 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0% 50% 100% 150% 200% 250% Debt ratio Financial net wealth ratio Financial net wealth and debt as a share of disposable income Financial net wealth ratio, excl. Tenant ownership rights and insurance technical reserves When we published Swedbank Economic Outlook last August, we warned that there could be an increase in the interest rate in the wake of increased debt burden and interest rate increases by the Swedish Riksbank. As interest rates have instead fallen, and are expected to continue to fall during the forecast period, the interest ratio of household will decline by a couple of per cent to just under 5 %. This will be welcomed especially by those who have tight margins. One reason is that the interest ratio is declining … Another way of assessing the financial situation of households is to investigate what proportion of debt can be covered by liq- uid funds (bank accounts and bonds). In this way, the vulner- ability of households’ balance sheets can be investigated. In 2004-2005, this proportion declined to 47 %. Although net wealth of households was high, it consisted to a great extent of ownership rights in apartments, shares and insurance savings. The decline in the proportion between 1996 and 2004 was also affected by the strong increase in household debt. During the forecast period, the increase in debt will weaken, while induce- ments to save more in banks and in interest paper rose as a re- sult of the decline in share prices. With this, vulnerability has been somewhat reduced, and the proportion rises to 56 %, but it is still much lower than in the mid-1990s, when over three quarters of debt was covered by liquid funds. 56 Swedbank Economic Outlook • 22 January 2009
  57. Household economy Households’ liquid funds as a proportion of debt (0.9 = 90%) 0.30 0.40 0.50 0.60 0.70 0.80 0.90 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 The property market will probably show a decline in the prices of housing and owner-occupied apartments during 2009, and possibly also during 2010. The decline in prices is driven by the weaker labour market which reduces flexibility – both in jobs and geographically. Increased unemployment also leads to weaker activity and also in some cases, households which must move to cheaper accommodation. A counteracting effect is the decline in interest rates, which – when mortgage rates continue to decline – also make it easier for households to manage their mortgage loans in a more difficult economic climate. Lower in- flation has also improved the real income of households. With this, the decline in prices need not be dramatic, but may be re- stricted to a decline of 5-10 % during 2009. … and that the fall in house prices will probably be relatively moderate The Real Estate Price Index reinforces this picture. During the first three quarters of 2008, the Real Estate Price Index was less than 100, which indicates a price fall during the same quar- ter of 2009. Because mortgage rates came down during the fourth quarter and house prices are stagnating, there is reason to expect an increase in the Real Estate Price Index. With this, the fall in prices can be both mild and relatively short-term. However, it is appropriate to be cautious. As usual, the model misses certain aspects. A more pronounced weakening of the labour market has not been included in the Real Estate Price Index, and risks not being included to the extent that is reason- able. The statistics are constructed on households in which at least one person in the household works. Therefore, the model is untested in periods of a strong downturn in the business cycle. A weaker labour market will probably not be included sufficiently in the Real Estate Price Index Swedbank Economic Outlook • 22 January 2009 57
  58. Household economy The Real Estate Price Index moved forward one year, and the trend in house prices on an annual basis (%) 0 20 40 60 80 100 120 140 160 180 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -20 -15 -10 -5 0 5 10 15 Housing affordability index (LHS) House prices (RHS) Affordability index House prices (annual rate) In summary, Swedish households will not be able to avoid commencing a correction of their balance sheets either. Vulner- ability is still considerable, because the proportion of liquid funds in relation to the large debt burden is low, even though it is somewhat on the increase. The property market is expected to contract during the forecast period as a result of higher un- employment, but interest rate reductions will ease the burden somewhat. Greater uncertainty regarding the labour market and develop- ments in respect of wealth will lead to increased saving and weak consumption. This year, we expect stagnation, and during 2010 a slight increase in the desire to consume. Because pur- chasing power is relatively good, not least with those who have work, the situation for households as a group is nevertheless, not too bleak. Cecilia Hermansson 58 Swedbank Economic Outlook • 22 January 2009
  59. Inflation Inflation, up and down Last year, inflation (in the form of the Consumer Price Index, CPI) rose until September and reached a peak of 4.4 %. Stronger resource utilisation and rapidly rising commodity prices pushed inflation up to its highest level in 15 years. Since Octo- ber, it has instead fallen sharply, and in December, the decline in one month was a full 1.3 % to an annual rate of 0.9 %. Such a large decrease has not been recorded previously during the post-war period (statistics from 1950). Almost the entire decline can be explained by lower interest rate costs for owner- occupied homes. Major turnaround in consumer prices An earlier focus on excessively high inflation has moved to a general fall in prices during 2009. The decline is primarily ex- plained by lower interest rate costs. The CPI at a fixed interest rate will instead continue to be positive, although at lower fig- ures. There are also other so-called base effects which show through in both measures, such as lower prices of commodities and lower transport costs and heating, and relatively low food prices. During 2009, lower prices for postal services and tele- communications, and clothes and shoes will result in inflation showing negative figures. Apart from these base effects, lower demand will have the effect of holding down price pressures in the economy. A slight strengthening of the Swedish krona will also bring down import prices. Productivity will improve and unit labour costs will decline during the forecast period. The gov- ernment’s reductions of payroll taxes will also ease cost pres- sure. At the same time, it is especially difficult at this stage of the business cycle to move cost increases onto the next price step. Raw material prices and changes in interest rates cause inflation to oscillate Outcome and forecast for the CPI and the CPIX (with fixed interest) (%) -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Jan 06 Apr Jul Oct Jan 07 Apr Jul Oct Jan 08 Apr Jul Oct Jan 09 Apr Jul Oct Jan 10 Apr Jul Oct -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 CPI CPIX CPI Swedbank CPIX Swedbank We expect the CPI to decline by 0.2 % this year and increase by 1.2 % in 2010. The risk of deflation is thus minor, but one must take a longer view and a global perspective. It is instead a matter of good deflation in accordance with earlier arguments. The CPI at fixed interest will increase by 1 % during 2009. Cecilia Hermansson Swedbank Economic Outlook • 22 January 2009 59
  60. Financial policy Economic policy as a counterweight Monetary policy has room for improvement As with inflation, monetary policy has also gone up and down. The period of interest rate increases which commenced in January 2006 and ended in September last year resulted in a rise from 1.5 % to 4.75 %. The last rise was reversed when the Swedish Riksbank reduced it by 0.5 per cent just a few weeks later in a coordinated action with other central banks. After that, there were reductions of a further 0.5 per cent in October and 1.75 per cent to 2 % in December. The interest rate reduction in December was the biggest since the repo rate system was introduced in 1994. The fact that the decline in interest rates during the autumn was so large can be explained by the actual financial unease and the rapid deterio- ration of the business climate, and by the fact that the Swedish Riksbank’s key interest rate was still unnecessarily high after the increase in September. Interest rate reductions … During the financial crisis, the transmission mechanism was partly put out of operation. Additional input is required to rein- force confidence in the financial markets so that market interest rates come down. Because the crisis is global, it is necessary for many countries to carry out similar measures at the same time. The Swedish Riksbank has accordingly eased the supply of credit and the functioning of the financial markets by provid- ing liquidity in general to the market, among other things, and has directed support to individual financial institutions. During the second half of the year, the Swedish Riksbank increased its balance sheet by SEK 500 billion to SEK 700 billion (a bigger percentage upturn than either the Federal Reserve or the ECB). Also, so-called swap agreements have been entered into with Iceland and Latvia in order to safeguard financial stability close to home. … and additional measures to strengthen the financial markets during the crisis have been necessary The Swedish Riksbank did well as regards mitigating the global crisis in the Swedish financial markets. As regards monetary policy, there is considerable room for improvement, both as re- gards interest rate decisions and communication. Globalisation, asset bubbles and financial crisis – the challenges are many. When the crisis is over, they should be analysed in more detail. A more open attitude is also needed in respect of our monetary policy framework, which should be reviewed from time to time: The monetary policy framework needs to be reviewed! • It is time to investigate whether use of the inflation target needs to be reviewed or whether the target should be reformulated. Appoint an in- dependent review body and include the changes which were encoun- tered by Swedish monetary policy since the inflation target was intro- duced in 1993. The situation has changed since the Mishkin/Giavazzi report. Is it necessary to expand inflation targets to take into account asset prices, the growth of credit and the risk of financial crises occur- ring when there is total focus on consumer prices? 60 Swedbank Economic Outlook • 22 January 2009
  61. Financial policy • The Swedish Riksbank conducts a “flexible inflation target policy” in which inflation is stabilised around an inflation target and resource utili- sation is stabilised. One problem is that the production gap, which is a measure of resource utilisation, is not easily measured. Uncertainty is considerable. The Swedish Riksbank declines to explicitly explain its goal function, i.e., the importance it attaches to price stability and how much importance is given to changes in resource utilisation. Frederic Mishkin (2004) in the article: “Can transparency go too far?” considers that increased insight into how the Swedish Riksbank thinks in this re- spect would hardly improve monetary policy, possibly the opposite. It is probably difficult for those responsible to decide and agree over a pe- riod of time on such a function. Furthermore, it can be questioned whether this is not more a political decision. How can the decision be communicated to the general public? There is a risk that communica- tion will be made more difficult and that public expectations will create new balance levels. • Expectations are otherwise an important part of monetary policy. Ac- cording to the Swedish Riksbank, monetary policy works through the expectations that the interest rate trend creates. As with the goal func- tion, the production of an interest rate trend can make the work of the committee more difficult, according to Mishkin. It is sufficiently difficult to make decisions on interest rates at present. The financial crisis and the quick turnaround in the business cycle have also shown that the in- terest rate track has been revised rapidly and often. Confidence in the interest rate track in the financial markets is lacking, both in the short term and in the long term. Confidence in the Swedish Riksbank among the general public has declined (according to Synovate, from 65 to 56 % between October and December), but it is not possible to deter- mine whether corrections in the interest rate track have had any effect or whether, for example, it is the financial crisis alone which has dam- aged confidence in the Swedish Riksbank. • The fact that the Swedish Riksbank produces its own repo rate fore- casts with a horizon of three years has, according to Svensson (2008) in the article: “Transparency under Flexible Inflation Targeting: Experi- ences and Challenges”, also had something to do with the fact that the Swedish Riksbank has better information about the market and there- fore can make better forecasts. 1 The excerpts below show an exag- gerated belief in the central banks making better interest rate forecasts over time than does the market. There is no evidence for this. Rather, it is more probable that exogenic factors guide events to a high degree, which, the financial crisis of the past year and quick turnaround in the business cycle demonstrate. Furthermore, there must also be times when a central bank does not want to communicate its most “reason- able” interest rate forecast. For example, a forecast of zero rates in this situation would create unnecessary negative expectations. Maximum openness is not always optimal openness (Fromlet, 2006). Shortly after the Swedish Riksbank reported its repo rate track in December in which the key interest rate of 2 % was to remain unchanged during 2009, this was questioned by the market, un- ion organisations and the National Institute of Economic Re- search. Our assessment is that reductions in the key interest We – as with many other observers – expect the interest rate to further decline during the spring – but the Bank of Sweden does not! 1 Page.6 “In the realistic situation of information asymmetry when the central bank knows more about its monetary policy and its policy intentions than the private sector, transparency about monetary policy can reduce private-sector uncertainty about monetary policy and make monetary policy easier to pre- dict.” Page.7 “… publishing its own interest-rate forecasts should be the most effec- tive way for the central bank to manage private-sector interest-rate expecta- tions.” Swedbank Economic Outlook • 22 January 2009 61
  62. Financial policy rate will continue during the spring and that it will reach 1 % and subsequently will only be increased towards the end of the fore- cast period. The long-term market rates will increase, at first very slowly when inflationary and growth expectations are low, while the key interest rate will be maintained at a low level. Supply factors will play a role, and these, together with somewhat improving expectations of recovery will contribute during 2010 to maintain- ing an upturn for government bonds with long maturities. The Swedish krona will slowly strengthen against the euro in line with the financial crisis receding during 2009 and somewhat more during 2010. Interest rate and currency assumptions Outcome Forecast --->---> ---> ---> 22 Jan 2009 30 Jun 2009 31 Dec 200930 Jun 2010 31 Dec 2010 USA 0.25Key interest rate 0.25 0.25 0.25 0.75 10-year interest rate 2.47 2.70 3.40 4.00 4.20 EMU/Germany 2.00Key interest rate 1.50 1.50 1.50 1.75 10- year interest rate 3.02 3.2 3.50 3.70 3.80 Sweden 2.00Key interest rate 1.00 1.00 1.00 1.50 10- year interest rate 2.81 3.00 3.4 3.80 3.90 FX EUR/USD 1.29 1.20 1.13 1.10 1.00 EUR/SEK 10.77 10.20 9.70 9.30 9.20 USD/SEK 8.34 8.5 8.08 8.45 9.20 TCW 143 137 130 131 132 T, corporate taxes and capital taxes are s not unexpected t with full effect Fiscal policy: There will be more After having improved over several years, a period has now commenced in which public finances will worsen. The starting point is, however, strong. Last year, public savings amounted to 2.2 % (3.7 % in 2007). Income as a proportion of GDP has de- clined over the last two years, but during 2007 income as a pro- portion of GDP, also declined. The expenditure ratio is now in- creasing as a result of rising unemployment and fiscal incen- tives. Incomes continue to decline because, among other things, total wages, VA There is now a deficit in the public finances, which i growing more slowly. Because Sweden has relatively large automatic stabilisers, pub- lic saving falls rapidly when the business climate worsens. It is primarily the balance of the government’s finances which is af- fected because the municipal sector has balance sheet re- The automatic stabilisers are permitted to ac 62 Swedbank Economic Outlook • 22 January 2009
  63. Financial policy tion to grow at about 1½ % per year during 2009 and 2010. s it of extra importance to have sta- ble government finances. finances is expected to be 1.5 % in 2009 and 2.6 % in 2010. will also be directed to those pensioners who are worse off. quirements and receives government support. In our forecast, we estimate public consump The fiscal incentive package amounts this year to about 1.3 % of GDP (about SEK 40 billion). During next year, we anticipate somewhat lower incentives of about SEK 30 billion (or about 1 % of GDP). Of course, it is an election year, but the govern- ment has repeatedly said that it will exercise restraint in order to avoid putting the finances at risk. Greater interest rate differen- tials and lower credit rating of Greece, for example, strengthen the argument for budget discipline. The Swedish krona is also a minor currency which make The deficit in the public The measures decided upon are expected to have a structural improvement component so that long-term potential growth can be increased. One priority is the labour market and those out- side it. Therefore, we do not expect a large support package for households, but we rather expect support to go to training and infrastructure investments combined with tax reductions which fit the structure concept and lead to consumption rather than savings (for example, tax reductions for those on low incomes instead of VAT reductions). With this, the government will also attempt to reduce the conflict of targets between short-term (demand) and long-term (structure) targets. In order to mitigate the effects of the balance in the pension system tipping over in 2010 (so that a pension of SEK 12 000 a month is reduced by SEK 450) measures Budget balance and public debt as a proportion of GDP (%) S ource: Reuters EcoW in ill nd d for incentives ing rket are still in focus Labour market, train and those who are excluded from the labour ma The government w balance between budget discipline a greater nee Swedbank Economic Outlook • 22 January 2009 63
  64. Financial policy During the forecast period, government debt will worsen, and in so-called Maastricht terms, it will again reach 40 % of GDP. Net debt, i.e., when the government’s assets are included, is still positive and the debt situation is much better than in the euro countries (about 70 % of GDP gross). The debt ratio is again increasing – but not at an alarming rate There is thus room for more extensive investment by the gov- ernment than we anticipate. Not doing this would mean that Sweden would develop in the same way as a number of other European countries which are also investing about 1 % of GDP, but at the same time Sweden would emerge stronger because of its better government finances once the recession comes to an end. Cecilia Hermansson 64 Swedbank Economic Outlook • 22 January 2009
  65. Referenser References Bernanke, B. (1983), “Nonmonetary Effects of the Financial Cri- sis in Propagation of the Great Depression”, American Eco- nomic Review, Vol. 73(3), June 1983, p.257-76. Bernanke, B. Gertler. M & S. Gilchrist (1994) “The financial ac- celerator and the flight to quality”, NBER Working Paper, 4789. Bordo, M & A. Filardo (2005), “Deflation in a historical perspec- tive”, BIS Working Papers No.186. Claesson. S, Kose M.A, M.E Terrones (2008). “What happens during recessions, crunches and busts”, IMF Working Paper (WP/274). Fisher, Irving. 1933 ”The debt-deflation theory of Great Depres- sions”. Econometrica, Vol. 1(4), October 1933. p.337-57. Fromlet, Hubert. (2006), Riksbankens antydan om egna ränte- prognoser – Transparens till varje pris?. Swedbank Analys nr.26 2006 Hermansson, C. (2008). ”Finanskrisen öppnar upp för ny eko- nomisk politik”. Swedbank Analys nr 2. 2008 Mishkin, Frederic. (2004)”Can transparency go too far?” i Mone- tary Policy Strategy (2007). Minsky, H (1982), Debt-deflation Processes in Today’s Institu- tional Environment”, Banca Nazionale del Lavoro, Quarterly Review, December. Rogoff .K. & C. Reinhart (2008). “The aftermath of financial cri- ses”, for the AEA annual conference 2008. Svensson, L.E.O (2008). ”Transparency under Flexible Inflation Targeting: Experiences and Challenges”, Preliminärt utkast pre- senterat på Riksbankens konferens i September 2008 “Refining Monetary Policy: transparency and Real Stability, uppdaterat December 2008. von Peter, G (2005), ”Debt-deflation: Concepts and a stylised model”. BIS Working Paper No. 176. Economic Research Department SE-105 34 Stockholm, Sweden Telephone +46-8-5859 1588 ek.sek@swedbank.se www.swedbank.se Legally responsible publishers Cecilia Hermansson, +46-8-5859 1588 Jörgen Kennemar, +46-8-5859 1478 ISSN 1103-4897 Swedbank Economic Outlook is published as a service to our customers. We be- lieve that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omis- sion in the underlying material or its use. Readers are encouraged to base any (in- vestment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any er- rors or omissions in Swedbank Economic Outlook. Swedbank Economic Outlook • 22 January 2009 65

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