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  • 1. Economic recovery but higher risks, depressed key rates and Nordic Outlook bond yields Nordic countries well equipped for Economic Research – August 2010 upturn
  • 2. Contents International overview 5 The United States 16 Japan 22 Asia 23 The euro zone 25 The United Kingdom 31 Eastern Europe 32 The Baltics 33 Sweden 35 Denmark 43 Norway 44 Finland 48 Economic data 49 Boxes Downside risks have increased 7 Stable commodity prices 8 Basel III postponed 9 Moving towards Japanese yields? 12 An unusual recovery 19 Falling unemployment even with slow growth 28 Stress tests dispel uncertainty despite shortcomings 30 Why is Sweden doing so well? 36 Major Swedish GDP revisions 38 Nordic Outlook – August 2010 | 3
  • 3. Economic Research This report was published on August 31, 2010. Cut-‐off date for calculations and forecasts was August 27, 2010. Robert Bergqvist Håkan Frisén Chief Economist Head of Economic Research + 46 8 506 230 16 + 46 8 763 80 67 Daniel Bergvall Mattias Bruér Economist Economist +46 8 763 85 94 + 46 8 763 85 06 Ann Enshagen Lavebrink Mikael Johansson Editorial Assistant Economist + 46 8 763 80 77 + 46 8 763 80 93 Andreas Johnson Tomas Lindström Economist Economist +46 8 763 80 32 + 46 8 763 80 28 Gunilla Nyström Ingela Hemming Global Head of Personal Finance Research Global Head of Small Business Research + 46 8 763 65 81 + 46 8 763 82 97 Susanne Eliasson Johanna Wahlsten Personal Finance Analyst Small Business Analyst + 46 8 763 65 88 + 46 8 763 80 72 SEB Economic Research, K-‐A3, SE-‐106 40 Stockholm Contributions to this report have been made by Thomas Köbel, Klaus Schrüfer, SEB Frankfurt/M and Olle Holmgren, Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible for the Norwegian analysis. 4 | Nordic Outlook – August 2010
  • 4. International overview Continued economic recovery but increased risks will also reduce the need for unconventional monetary US growth below trend for the next year policies. Strong recovery in Sweden and Germany In our judgement, the deceleration signals in the Ameri-‐ can economy will have consequences for the recovery interest policies dynamic in the coming year. Renewed weakness in both Dilemmas for Nordic central banks the labour and housing markets will block a traditional recovery dynamic. We have thus adjusted our forecast downward and expect GDP growth somewhat below trend in the US during late 2010 and early 2011. This will mean major economic strains, including persistent-‐ In recent months the world economic outlook has dete-‐ riorated, mainly due to clear signs of weakness in the American economy. Increased worries about a slowdown At the global level, however, extremely loose monetary in the United States and Asia, combined with contin-‐ policy and continued good growth capacity in many parts of the world economy will contribute to decent growth in the next couple of years. Fast-‐growing Asian markets and sharply falling interest rates, among other economies will remain an important driving force, things. The growth rate was unexpectedly strong in although some deceleration is on the way. We believe many countries during the second quarter, and the emergency response to the southern European crisis has tools to ensure an economic soft landing. In the OECD, differences in the underlying balance negative news. situation have become increasingly important. Germany -‐ and Sweden are among countries where the strength of tations have fallen. It is becoming increasingly clear the upturn has been surprising. A strong German econ-‐ -‐ omy is not enough to keep up the momentum of the nant problem for major central banks in the 32 member entire euro zone, though. There will thus be wide gaps countries of the Organisation for Economic Cooperation within the currency area as the full effects of powerful and Development (OECD). This is creating room for austerity programmes are felt in southern Europe. continued record-‐low interest rates in the next couple Global GDP growth of years. Year-‐on-‐year percentage change We expect the US Federal Reserve (Fed) and the Euro-‐ 2009 2010 2011 2012 pean Central Bank (ECB) to maintain today’s record-‐ low key interest rates throughout 2011 and to begin United States -‐2.6 2.6 2.2 2,9 cautious rate hikes only in 2012. Due to low key rates in Japan -‐5.2 2.5 1.5 1.5 -‐ Germany -‐4.7 3.3 2.1 1.8 tion expectations in the long term as well, government China 8.7 10.0 9.0 8.0 bond yields will remain at historically very low levels in the next couple of years. United Kingdom -‐4.9 1.7 2.0 2.2 Euro zone -‐4.1 1.6 1.3 1.5 There is a renewed focus on the potential for central banks to stimulate their economies by means of quanti-‐ Nordic countries -‐4.4 2.5 2.4 2.4 tative easing (QE). We expect that because of low long-‐ Baltic countries -‐15.6 0.4 4.2 4.5 their balance sheets at current levels and thus not Emerging markets 2.4 6.8 6.0 6.4 implement new QE programmes. The Basel Committee on Banking Supervision has presented a proposal which World, nominal -‐1.3 3.7 3.1 3.6 postponed, creating an economic stimulus effect that Source: OECD, SEB * Purchasing power parities Nordic Outlook – August 2010 | 5
  • 5. International overview We are sticking to the main scenario from our economic large negative contribution to growth in the second analyses of recent years: the after-‐effects of the deep quarter, among other things due to stimulus measures crisis will hamper economies for a rather long period. and a stronger US dollar. Debt retirement in both the private and public sectors, -‐ To ensure a sustainable recovery, it will now be crucial tem, will mean slower growth for some time to come. Low interest rates may ease the adjustment, but their consumption to take over when the inventory cycle stimulus effect will be weaker than normal in today’s ceases to serve as an economic engine. The box entitled ravaged economic environment. “Recovery at a crossroads” in the November 2009 issue of Nordic Outlook discussed this take-‐over. One conclu-‐ Amid a fragile economic situation, international sion was that mid-‐2010 would be the critical period. But economic policy makers face major challenges, for the outlook is mixed. -‐ Capital spending took off in many countries early in joint European institutions. Belt-‐tightening in southern Europe will put the political system under severe strains investment level was exceptionally depressed. But there, but political authority is being questioned even there are also factors that point towards a sustained in leading industrial countries. In the US, for example, recovery. President Obama’s popularity has plunged and this -‐ autumn’s congressional election may lead to further pressed, even in a longer time perspective. Unlike restraints on the government’s ability to make and normal economic expansions, the capital spending implement decisions. In Germany, Chancellor Angela level in the OECD countries remained rather low Merkel’s position has weakened and her governing during the boom years 2006-‐07. coalition is going through a rough patch. In the UK, a new and inexperienced coalition government is facing Balance sheets, especially in large American corpo-‐ painful spending cuts. rations, are much stronger than normal. This will The ongoing slowdown trend in the global economy is system remains relatively fragile. largely due to the fading of stimulus effects from the Historical associations signal that capital spending growth is more dependent on the change in capac-‐ movements have been pivotal to the recovery in the ity utilisation than on its actual level. This indicates manufacturing sector. Since most merchandise invento-‐ ries are traded across national boundaries, this means relatively soon. One important factor that may delay an upturn is that -‐ As a percentage of GDP, current prices 14.5 14.5 ing loans. The credit market is performing sub-‐optimally 14.0 14.0 in this respect, both in the US and Europe. 13.5 13.5 US: Uniform pace of debt retirement 13.0 13.0 Per cent of disposable income 12.5 12.5 140 12 12.0 12.0 11 11.5 11.5 130 10 11.0 11.0 120 9 10.5 10.5 8 110 10.0 10.0 7 100 9.5 9.5 6 9.0 9.0 90 5 70 75 80 85 90 95 00 05 10 80 4 3 Source: US Department of Commerce 70 2 60 1 It is thus not illogical for all parts of the world economy 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 to begin their recovery with export-‐led growth. The trend in net exports, when imports are also included, is Household debts (LHS) Household saving (RHS) Source: Federal Reserve another question. Early in the crisis, the effect of international trade was to ease global imbalances. On the consumption side, the outlook is gloomier. Domestic demand, and thus imports, fell sharply in There is still a major need for debt retirement. New US countries with large domestic imbalances, such as the US. In recent months, this pattern has reversed to some than previously reported. The adjustment process is extent. For example, net US exports accounted for a thus occurring faster than expected. Given new labour 6 | Nordic Outlook – August 2010
  • 6. International overview market disappointments and a housing sector that again cent months, and we expect a 4.7 per cent upturn this seems to be on its way down, the underlying prerequi-‐ year. Exports have recovered strongly after their sharp sites for a normal American consumption recovery are missing. In the UK, southern Europe and elsewhere, -‐ ing. In Germany and Japan, consumers are cautious In the other Nordic countries, growth will be far more despite their strong balance sheets. In Asian emerging moderate. The Danish economy is still being hampered economies, there is an impending shift towards greater by the repercussions of the housing market crash. emphasis on consumption, as illustrated by accelerat-‐ In Finland there is good potential for an export-‐led ing pay increases, but this is too lengthy a process to manufacturing upturn similar to Germany and Swe-‐ den. So far, the upturn has been modest, but a weaker economic engine. euro will contribute to an acceleration over the next few quarters. In Norway, the economy has also been Our overall conclusion is that, in part because of sub-‐ held back by an appreciating currency. A strong labour a slower growth phase during the second half of 2010 to get domestic demand moving. Because of the very mild downturn in 2008-‐09, resource utilisation is also quarters, growth will again end up below trend. The high in Norway compared to other countries, and this output gap will thus widen. At present, however, most will dampen long-‐term growth potential from the supply indications are that growth will remain well above side. recessionary levels. GDP growth, Nordic and Baltic countries Very strong recovery in Sweden Year-‐on-‐year percentage change The Nordic economies have generally shown good resil-‐ 2009 2010 2011 2012 ience against the global crisis. In Denmark, Sweden and especially Finland, GDP indeed fell sharply during 2009, Sweden -‐5.1 4.7 2.9 2.3 but the impact on domestic demand was rather minor Norway -‐1.4 0.7 2.1 2.1 and the upturn in unemployment surprisingly small. Denmark -‐4.7 1.8 1.8 2.2 central government debts are at a low level. Combined Finland -‐7.8 2.5 2.6 2.7 with sizeable current account surpluses, this is creating a favourable platform for recovery. The weakening of Estonia -‐14.1 2.0 5.0 4.0 the euro is helping to ease competitiveness problems which have hampered growth in Finland and Denmark Latvia -‐18.0 -‐1.5 4.0 5.0 to some extent. Lithuania -‐14.8 1.0 4.0 4.5 Baltics In Sweden, growth has been surprisingly vigorous in re-‐ Source: OECD, SEB Downside risks have increased As earlier, our main scenario implies a relatively slug-‐ around 25 per cent, compared to 15 per cent in the gish global recovery, with medium-‐term growth being May issue of Nordic Outlook. Conversely, the prob-‐ -‐ ability of upside surprises has naturally diminished. Despite signs of strength in such countries as Germany, a rapid recovery in the world economy is relatively un-‐ Since last spring, the risk picture has changed in likely without support from a more dynamic American some respects. The crisis-‐ridden countries of southern economy. Europe continue to face major challenges, but the GDP OECD countries overall picture looks less threatening. With a credible Index 2000=100 bail-‐out mechanism in place and after the completion 127.5 127.5 of stress tests in the European banking system, risks 125.0 15% 125.0 122.5 122.5 that southern European problems might cause a global 120.0 120.0 recession have receded. The International Monetary 117.5 117.5 Fund (IMF) and euro zone countries have approved 115.0 25% 115.0 a second emergency loan disbursement to Greece, 112.5 112.5 another sign that the structural adaptation process has 110.0 SEB forecast 110.0 begun. 107.5 107.5 105.0 105.0 Yet the deterioration in the American economy has 04 05 06 07 08 09 10 11 12 increased the overall risks of a global recession. We New crisis wave SEB's main scenario now estimate the probability of such a scenario at Raprid recovery Source: OECD, SEB Nordic Outlook – August 2010 | 7
  • 7. International overview Baltic countries slowly on the way up New labour market patterns The Baltic economies have now slowly begun to re-‐ In recent months, the differences in labour market bound from the deep declines they experienced after trends between various countries have become more the credit bubble burst. The three countries’ internal pronounced. In Germany and the Nordic countries, for devaluation policy appears likely to be successful. Their example, the labour market situation has begun to competitiveness has improved, mainly via pay cuts. Also improve, whereas the situation in the US is plagued by making the situation easier is that the euro, to which new disappointments. their currencies are pegged, has weakened and the Divergent employment trends currencies in several important competitor countries in Index = 100 januari 2008 Eastern Europe have appreciated. Their external bal-‐ 101 101 100 100 99 99 is coming to an end. They have also shown political 98 98 97 97 Estonia will join the euro zone on January 1, 2011. This 96 96 95 95 94 94 spread to Latvia and Lithuania. But there is a degree 93 93 of lingering uncertainty about the political situation in 92 92 91 91 90 90 89 89 Lithuania. Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 08 09 10 Looking ahead, we expect a modest growth rate of 4-‐5 Sweden US Germany Spain Source: Reuters EcoWin per cent, well below the previous trend. Continued pri-‐ vate sector adjustment needs, combined with a less ex-‐ During the economic downturn phase, the decline in pansionary credit environment, will contribute to this. employment was substantially sharper in the US than, for example, in Germany and the Nordic countries investment projects among long-‐term foreign investors. despite a milder GDP decline. In part, this followed We expect Latvia and Lithuania to have an opportunity traditional patterns coupled to such factors as how easy to join the euro zone in 2014. Stable commodity prices Oil prices will rise somewhat from current levels. Commodity prices have followed the pattern of the At present, reserve oil production capacity is rela-‐ global recovery. A turnaround came early in 2009 and tively large. Increases in demand next year will not was probably initially strengthened by China’s need to be large enough to change this. Saudi Arabia’s large -‐ ity prices have tended to level off at the same time future price strategy of the Organisation of Petroleum as global manufacturing has reached a more mature Exporting Countries (OPEC). Saudi Arabia can boost phase, or somewhat ahead of this. production and squeeze oil prices if it turns out that global growth is slowing too quickly. Iran and Iraq also High commodity prices have major potential to increase the oil supply, but Index, monthly date, USD in the prevailing uncertain political situation, it is 500 500 hardly likely that any large production changes will be 450 450 implemented. We are thus assuming that Brent oil will 400 400 350 350 continue to trade in the USD 70-‐90/barrel interval. 300 300 Agricultural commodities will level off, but there is 250 250 a risk of further upturn in the short term. Extreme 200 200 weather in two key wheat-‐producing countries, Rus-‐ 150 150 sia and Ukraine, led to a 70-‐80 per cent price spike 100 100 in July and August. Russia has decided to halt grain 50 50 00 01 02 03 04 05 06 07 08 09 10 exports during the rest of 2010, aimed at ensuring domestic supplies and counteracting price increases to Agriculture Industrial metals Energy Source: HWWI consumers. This will pose risks of a new wave of price increases and might spread to the maize (corn) and Given our scenario of continued moderate global soya markets. But in our assessment, global wheat and growth, with a slight weakening in the short term, other grain stockpiles are large enough to avoid price continued price hikes are also likely to be modest. In shocks. This is very different from several few years particular, a calmer growth dynamic in fast-‐growing ago, when low grain stockpiles led to major price Asian economies points in this direction. hikes that affected food prices worldwide. 8 | Nordic Outlook – August 2010
  • 8. International overview employment was also sustained by special economic Rate of pay increases is stabilising policy programmes. Year-‐on-‐year percentage change 4.5 4.5 4.0 4.0 increase in a number of European countries, while remaining weak in the US, it is clear that other expla-‐ 3.5 3.5 nations for these labour market trends are needed. 3.0 3.0 One pattern seems to be that in countries with milder 2.5 2.5 rebounded faster. Because the need for restructuring 2.0 2.0 measures is smaller in these countries, when demand 1.5 1.5 takes off again, companies can rather easily begin 1.0 1.0 rehiring. 98 99 00 01 02 03 04 05 06 07 08 09 Euro zone US Source: ECB, BLS On the other hand, we see no major risks of a danger-‐ months. As long-‐term bond yields have fallen and -‐ concerns about the economy have mounted, there has ary increases has stopped falling. This will reduce the -‐ -‐ ary forces of globalisation will lose energy compared to not been especially dramatic. Rising energy and food the previous decade. The level of wages and salaries in prices have caused some upside surprises in Consumer fast-‐growing emerging economies seems to be rapidly on the way up, while currency appreciation and produc-‐ continued to fall. tivity growth potential will help narrow previously wide gaps in the cost situation. forces caused by large output gaps will dominate the in-‐ Basel III postponed During the summer, the Basel Committee for Bank-‐ study also shows that the level of the output gap has ing Supervision approved various amendments to the -‐ proposal it submitted late in 2009 for comments by interested parties. The purpose of the reform package being a consequence of rapid growth in individual years is to strengthen the resilience of the banking sector by tightening capital and liquidity requirements, and to expansion, without the presence of underlying condi-‐ thwart excessive risk-‐taking, diminish gearing effects tions related to factors such as capacity utilisation or and reduce pro-‐cyclicality. wage formation. Core inflation is continuing to fall Year-‐on-‐year percentage change leverage ratios, liquidity coverage ratios, net stable 3.0 3.0 funding ratios and management of counterparty risk. SEB The details will be presented later this year, and a 2.5 2.5 forecast formal decision is expected in November. 2.0 2.0 Generally speaking, the standards have been eased, 1.5 1.5 while the deadline for implementing them has been extended from December 2012 to January 2018. Our 1.0 1.0 -‐ 0.5 0.5 enced by last spring’s sovereign debt crisis, combined with the picture of a sluggish global economic recov-‐ 0.0 0.0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 that remains weakened. Euro zone US Source: Eurostat, BLS, SEB All else being equal, these amendments will have a positive impact on our economic scenario. A slower will continue downward in the coming year. Economic adjustment process will substantially reduce risks of poorer access to capital and higher borrowing costs, improvement in the labour market situation. The out-‐ which were inherent in the original proposal. Mean-‐ put gap will not close during our forecast period. Pay -‐ increases will thus be low and unit labour costs will also -‐ be pushed down by a recovery in productivity. stability. Nordic Outlook – August 2010 | 9
  • 9. International overview Central banks will wait until 2012 where differences in terms of resource utilisation, the Increased worries about the economy, combined with housing markets have pointed to a substantially higher strong motives for continuing their extremely low inter-‐ key interest rate than that of the ECB. Having begun est rate policies. Due to the economic slowdown in the its rate hikes as early as October 2009, Norges Bank has gradually adopted a more cautious strategy. Due to con-‐ couple of years. The crisis-‐ridden countries of southern cern about the strong krone and the competitiveness Europe will be strongly dependent on low interest rates of Norwegian manufacturers, the bank has not wanted for a long time in order to deal successfully with imbal-‐ to open up an excessive interest rate spread over the Asymmetric risks on the growth side will also help The Riksbank is now beginning to face a similar dilem-‐ ensure that central banks will be very cautious. The ma. Resource utilisation in Sweden is admittedly lower consequences of interrupting a nascent recovery by than in Norway, but rapid economic growth is quickly raising interest rates too early may be relatively large changing that situation. Unemployment has fallen rap-‐ idly, while home prices and household borrowing have is sharply circumscribed in many countries and the continued upward as in Norway. monetary policy arsenal is also relatively exhausted. We Key interest rates thus anticipate that the central banks in major OECD Per cent countries will not begin hiking their key interest rates 7 7 until early 2012. 6 SEB 6 forecast Key interest rates 5 5 Per cent 7 7 4 4 6 SEB 6 3 3 forecast 5 5 2 2 4 4 1 1 3 3 0 0 00 02 04 06 08 10 12 2 2 Euro zone Norway Sweden Source: ECB, Norges Bank, Riksbank, SEB 1 1 In some respects, the Nordic central banks are playing 0 0 00 02 04 06 08 10 12 a pioneering role when it comes to learning from the mistakes that preceded the crisis and then applying the Euro zone US Source: ECB, Fed, SEB new guidelines that are emerging from the international A long period of extreme low interest rate policy entails monetary policy discourse. What the major countries certain potential risks. Asset prices may once again be mainly perceive as problems in the distant future is pumped up to unsustainable levels. Economic players starting to be fairly urgent in the Nordic countries. may also be given an inaccurate picture of the normal Minutes of Riksbank policy-‐making meetings show major disagreements of principle within the Executive Board, allocation. In addition, the banking system may become which the bank does not try to hide either. too dependent on liquidity supplied by central banks, Our scenario is that the Riksbank will hike its key inter-‐ with a more poorly functioning interbank market as a est rate at each monetary policy meeting until Febru-‐ consequence. The postponed launch of Basel III com-‐ ary 2011, when the rate will reach 1.50 per cent. After plicates the situation of the central banks, eliminating that, rate hikes will be more cautious. An international instruments for controlling credit growth and asset prices that might have eased the pressure on interest stronger krona may be arguments for a more cautious rate policy. strategy. At year-‐end 2011 the repo rate will be 2.25 At present, the potential problems of low interest rate per cent, and at the end of 2012 it will be 3.0 per cent. policy are relatively minor in relation to the macroeco-‐ Our forecast is thus lower than the Riksbank’s rate path nomic risks of raising interest rates. but higher than market expectations. Norges Banks deposit rate will remain at 2.00 per cent Policy dilemma in Norway and Sweden up until the second quarter 2011. A closing output gap The differences in the conditions surrounding major OECD central banks and the central banks in Norway gradual hikes. At the end of 2011 we see the deposit and Sweden are becoming increasingly clear. For a rate at 2.75 per cent and at the end of 2012 at 3.75 per long time, Norges Bank has had to deal with a situation cent. 10 | Nordic Outlook – August 2010
  • 10. International overview The acute crisis in southern Europe last spring led to a adjustment needs. in earlier recommendations from the OECD and IMF, for Low bond yields example, has been to focus on credible medium-‐term The decline in long-‐term bond yields has been very programmes, but implementation could be delayed sharp, and yields are now exceptionally low. American 10-‐year government bond yield has fallen from 4.0 per obvious that many countries lacked such room for cent in April to 2.60 per cent, while equivalent German manoeuvre. Large-‐scale austerity packages became bonds have now declined to an exceptionally low level necessary, especially in southern Europe. In France and of 2.25 per cent. Germany, however, austerity measures are rather small. There have been several driving forces behind this As a result, the total dose of austerity in the euro zone yield trend: concerns about economic growth, falling will be no more than about 1 per cent of GDP annually in 2010-‐12. key interest rates. The search for safe investments has been better than expected. and growing government debts on both sides of the probably be reduced to less than 3 per cent of GDP as -‐ early as 2011. The government had previously aimed at ing the economic crisis, savings in the OECD countries achieving this level only in 2013. As for the effects of the austerity packages in southern Europe, it is too ear-‐ the increased public sector borrowing requirement and ly to draw any reliable conclusions. The improvements helped squeeze interest rates. -‐ The box below discusses how asymmetric downward suade the IMF and EU institutions to approve a second disbursement of emergency loans. Most of the success lead to long-‐term uncertainty about the ability of cen-‐ in stopping the bleeding has been on the expenditure tral banks to normalise monetary policy. We expect this uncertainty to help keep long-‐term yields depressed, collection have yielded smaller results so far. especially in the coming year. German 10-‐year yields Given more pessimistic economic prospects, we are will bottom out at about 2.20 per cent around year-‐end not likely to see further belt-‐tightening in the major 2010 and remain below 2.50 per cent well into next OECD countries during the coming year. In the UK, the year. Only when it begins to be apparent that central new government has admittedly decided to deal with banks can actually begin interest rate hikes do we be-‐ Japan, however, new stimulus measures are the focus will remain depressed, however. At the end of 2012, of attention, although in our judgement such measures German 10-‐year government bond yields will stand at will hardly be implemented. 3.20 per cent and American ones at 3.50 per cent. Net lending Per cent Per cent of GDP 7.0 7.0 2010 2011 2012 6.5 6.5 SEB United States -‐10.9 -‐8.2 -‐5.9 6.0 forecast 6.0 Japan -‐9.8 -‐9.1 -‐8.5 5.5 5.5 5.0 5.0 United Kingdom -‐11.4 -‐9.4 -‐7.6 4.5 4.5 Euro zone -‐6.2 -‐5.5 -‐5.0 4.0 4.0 3.5 3.5 OECD -‐7.8 -‐6.7 -‐5.5 3.0 3.0 2.5 2.5 Source: OECD, IMF, SEB 2.0 2.0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 weakly tightening effect in the next couple of years. US Germany Source: Reuters EcoWin, SEB that government debt will continue to grow. The sharp Cautious stock market valuations downturn in government bond yields in major countries The stock market has recently reacted negatively to signals of an American economic slowdown. Surpris-‐ force belt-‐tightening either. Not even threats of down-‐ ingly strong company earnings reports have not been grading by credit rating agencies are likely to change enough to offset this. There are both threats and the picture. Given continued weak economic condi-‐ opportunities ahead. The ‘simple’ phase when the tions, high private saving and supportive central banks stock market was driven upward by positive surprises Nordic Outlook – August 2010 | 11
  • 11. International overview in sales and improved leading indicators is over. The sons why they may continue to do so. SEB Enskilda’s next phase will be characterised by a maturing mar-‐ company analyses indicate a 56 per cent increase ket for industrial products, with major macroeco-‐ nomic challenges, especially in the US. Companies Nordic countries and 17 per cent next year. Strong growth in key Nordic markets, Germany and Asia rather than cost savings, in order for share prices to continue rising. of years. Low company valuations also allow room for good share price increases. Shares on the Nordic So far the stock exchanges in the Nordic and Baltic exchanges are now trading at a price-‐earnings ratio countries have generally performed better than ex-‐ -‐ changes elsewhere this year. There are several rea-‐ Moving towards Japanese yields? The key interest rates set by central banks are at exceptionally low levels. But bond yields are also low for a rather long time. The market’s assessment historically very low, with American 10-‐year Treasuries of what should be viewed de facto as a normal key yielding 2.6 per cent and equivalent German bonds 2.2 interest rate will probably move downward as the per cent. By way of comparison, a Japanese 10-‐year period of low interest rates is extended. In addition, it is reasonable to assume that new regulatory tools between 1 and 2 per cent for the past 13 years. for dealing with such problems as pro-‐cyclical forces Above we discussed the forces that have pushed down banks to maintain low interest rates and to instead long-‐term yields to these levels. One crucial question devote monetary policy energy to price stability. is how long they will last, and to what extent today’s interest rates in the Western world are abnormally low Japan’s average GDP growth since the early 1990s is or completely normal. This can be analysed in terms 1.2 per cent. Even if we assume that growth moves of normal key interest rates and the normal steepness higher, for example close to 2 per cent, there is still of the yield curve. reason to believe that continued imbalances justify a lower real interest rate than 2 per cent. If we also The level of a normal key interest rate can be based on the level of the real interest rate plus for example 1 per cent, the normal key interest rate expectations. A proxy for the real interest rate is will be pushed down further. In a medium-‐ term per-‐ long-‐term GDP growth. Given the need to adjust spective, the normal key interest rate might be in the imbalances, there is reason to expect lower growth 1.5-‐2.5 per cent interval. potential, which will push down the real interest rate. is based on the level of the low. Given asymmetric negative risks for both growth normal key interest rate. The historical average for the steepness of the yield curve (10-‐year yield minus the key interest rate) has been about 130 basis points. interest rate. Japanese interest rate squeeze environment may justify lowering the risk premium. Short-‐ and long-‐term interest rates in US and Japan If in our example we assume that this premium is 10 10 9 9 halved, the differential between the key interest rate 8 8 and the low-‐term yield will be about 100 basis points 7 7 6 6 (130 minus 25 basis points). 5 5 4 4 Based on this reasoning, long-‐term bond yields would 3 3 be at 2.5-‐3.0 per cent. Arguments that the market 2 2 1 1 will adjust expectations of a normal key interest rate 0 0 88 90 92 94 96 98 00 02 04 06 08 10 year perspective, where the elements of similarities  Japan:  10-­year  government  yield with the Japanese situation may be clear. What may  Japan:  Key  interest  rate  US:  Key  interest  rate be regarded as abnormally low interest rates, viewed  US:  10-­year  government  yield in a historical perspective, may be rather normal Source: Reuters EcoWin interest rates viewed in a future perspective. Given exceptionally low key interest rates during the 12 | Nordic Outlook – August 2010
  • 12. International overview low their historical average. Worth adding is that the rates). In the short term, uncertainty about the ratio between share prices of listed companies and global economic recovery will dominate the for-‐ their book values is 25 per cent below its 10-‐year eign exchange market, but we believe that market average. positioning is now more neutral than for a long time, which will restrain movements in the future. We thus Stock market indices, 2010 see various reasons why the trend towards smaller Spain (MadSE) Japan (Nikkei 225) continue. Norway U.K. (FTSE100) The risk aversion evident in the market over the past USA (S&P500) few months has led to heavy demand for defensive Germany (DAX) currencies like the JPY and CHF. Shrinking interest Sweden rate spreads against the US and euro zone will lead Finland to continued upward pressure on these currencies, Denmark Iceland (OMX) but the Swiss central bank has not repeated its Lithuania (OMX) foreign exchange market interventions of last spring, Estonia (OMX) despite an ever-‐stronger CHF. Nor do we regard this Latvia (OMX) as likely in the future. In Japan, the issue of inter-‐ -‐30 -‐20 -‐10 0 10 20 30 40 50 vention is heating up. Our assessment is that if the USD/JPY exchange rate approaches its historical low of just under 80 (in 1995), this will be critical in The yield on listed shares in the Nordic countries determining whether the Bank of Japan intervenes in during the next couple of years looks set to be at the foreign exchange market. almost 4 per cent, or twice the yield on 5-‐year go-‐ vernment bonds. This also illustrates the exchange’s Overall, our forecast implies small movements in cautious valuations. But valuation analyses are leading currencies during the coming year. The EUR/ not better than the forecasts that are used in the USD exchange rate may again fall below 1.20 in the next six months, driven by continued low risk ap-‐ have rebounded above their previous record levels petite in the world economy, then rise somewhat. in 2007/2008. The uncertain macroeconomic envi-‐ In the long term we expect the EUR/USD rate to be ronment raises the question of whether this pace at levels around 1.20-‐1.30. The US economy will admittedly remain weak and continue to show ex-‐ focus again on fundamental valuations, a number of ternal trade imbalances, but on the other hand the basic questions about future developments must be euro system is facing long-‐lasting uncertainties and answered. quandaries. The yen will gain some strength against P/E ratios in Nordic exchanges the USD in the short term but will then decline as 35.0 35.0 the interest rate spread between Japan and other countries widens again in the future. 30.0 30.0 EUR and USD 25.0 25.0 Real effective exchange rates. Index 100 = average 1980-‐2010 140 140 20.0 20.0 130 130 15.0 15.0 120 120 10.0 10.0 110 110 100 100 5.0 5.0 90 90 0.0 0.0 96 98 00 02 04 06 08 10 12 80 80 70 70 1980 1985 1990 1995 2000 2005 2010 Fair valuations, more stable currencies In the past year, the foreign exchange market has USD EUR Source: Bank of England undergone a normalisation process after major tur-‐ The question of further quantitative easing by cen-‐ tral banks is a source of uncertainty in the foreign crisis. Many currencies have again reached more exchange market. If the Fed or Bank of England were neutral levels, based on long-‐term valuation mod-‐ to expand their balance sheets further, it would els. Today the G3 currencies (EUR, USD and JPY) are weaken the dollar and pound, but this is not our close to historical average levels in trade-‐weighted, main scenario at present. Nordic Outlook – August 2010 | 13
  • 13. International overview Commodity-‐producer currencies with relatively high exchange rate will reach 9.00 at the end of 2010. valuations are extra sensitive to the global slow-‐ After that, we foresee room for a slight further ap-‐ down. Yet the trend towards appreciating currencies preciation, with the EUR/SEK rate standing at 8.75 in emerging economies will continue, driven by such by late 2011. factors as the search for higher returns. The economic policy framework Since June, when China’s central bank resumed Both the European Union (EU) and the Group of 20 the appreciation of the yuan against the USD, the (G20) countries are continuing their efforts to improve Chinese currency has strengthened by less than 1 per cent. Worries about have contributed to this caution. In addition, the European Commission presented a proposal on June CNY has strengthened by more than 5 per cent in the 30 for strengthening economic policy coordination. Its past year in trade-‐weighted terms as a consequence overall purpose is to strengthen budget discipline in the of the USD recovery. However, we expect an increase in the pace of appreciation to about 5 per cent, resulting in a USD/CNY exchange rate of 6.00 by the 1. Macroeconomic surveillance (warning system: score-‐ end of 2012. This forecast is nevertheless dependent on the movements of the USD against other curren-‐ on debt levels 4. Wider sanctions 5. Economic policy cies; Chinese authorities are very likely to keep close coordination track of the yuan’s movements in terms of a trade-‐ weighted basket. Adjustments to the imbalances -‐ in real exchange rates will also occur by means of gration. The basic idea is to enable the Commission rapid wage increases in China. The ongoing internal revaluation process will thus determine the size of making in a way that does not challenge the sovereignty nominal changes in the exchange rate. of national parliaments on budget policy issues: by SEB EUR/SEK model means of collaboration in the form of problem analysis, 12.0 12.0 consistency tests and recommendations. 11.5 11.5 Already under way is an equivalent Mutual Assessment Process (MAP) for the G20 countries, which will be 11.0 11.0 coordinated by the IMF. MAP is a key element of the G20 10.5 10.5 sustainable and balanced economic growth at global 10.0 10.0 level. The G20 meeting in Seoul on November 11-‐12 will provide an important opportunity to gauge the level of 9.5 9.5 potential coordination and the pace of reform. 9.0 9.0 07 08 09 10 The economic crises have also fuelled an intensive international debate concerning the role of central Regression Actual Source: Reuters EcoWin, SEB banks. This debate is being pursued within the G20 and other forums under IMF leadership. There seems to be The Swedish krona and the Norwegian krone have a consensus that price stability will remain the overall recently demonstrated great stability. Underlying economic strength and rising key interest rates have risks should be integrated into goal formulation to a prevented the weakening that normally occurs in greater extent. troubled times. Looking ahead, we expect the two currencies to continue trending higher. By year-‐end 2012 the EUR/NOK exchange rate will be 7.80. In continue to lie outside of interest rate policy. This will the short term, however, we see reasons for a slight require new instruments with a clearer macroeconomic weakening of the krone to 8.20 per euro at the close connection. These will mainly consist of regulations and of 2010, among other things because Norges Bank is continuing its cautious strategy of emphasising the systemic crises and reducing pro-‐cyclical elements in risks of an excessively strong currency. lending. Concrete examples are capital requirements that are both constant and variable over time, forward-‐ The strengthening of the Swedish krona also risks looking reserves for loan losses and liquidity ratios. being halted by international worries, as well as by increased political uncertainty related to the The UK has taken a major step by placing its regula-‐ September 19 parliamentary election. We neverthe-‐ tory authority under the umbrella of the central bank. less expect such effects to be very short-‐lived, and Within the Bank of England, an independent Financial we are sticking to our forecast that the EUR/SEK 14 | Nordic Outlook – August 2010
  • 14. International overview Policy Committee (FPC) is now being established along-‐ side the existing Monetary Policy Committee (MPC). The FPC will oversee economic developments and identify macro trends that may threaten economic and Our conclusion is that the interesting reform task in the area of economic-‐policy is continuing, but that its ambi-‐ tions and pace seems to have been lowered. A fragile economic situation, but also the weakened authority of political leaders in many countries, is contributing to this. Nordic Outlook – August 2010 | 15
  • 15. The United States Recovery continuing, but at a slower pace Faster debt retirement Many signs of deceleration Aside from slower GDP growth and a lukewarm labour New labour and housing market slump market, various indicators have weakened in recent Sustained upturn in capital spending lower than at the beginning of 2010. The ISM purchasing managers’ index for manufacturing has fallen during the Fed will not hike its key rate until 2012 past few months, while the service sector index has lev-‐ elled off, but both indices remain well above 50, which The American economic recovery is now becoming retail sales, which recovered strongly early this year but have stagnated during the past months. contribution from the inventory cycle diminishes. The improvement in the labour market has slowed in Small firms are lagging behind Index recent months, and the housing market has become 65 30 time home buyers has expired. GDP rose 1.6 per cent 60 25 in the second quarter on an annualised basis, a clear 55 20 50 higher imports provided a strong negative contribution 15 45 to growth and inventory build-‐up also slowed, compared 10 40 showed strong growth, however. 35 5 Yet the low Federal Reserve key interest rate is still 30 0 86 88 90 92 94 96 98 00 02 04 06 08 10 propping up the economy. We thus believe that the recovery will continue, but at a slower pace than esti-‐ ISM Manufacturing (LHS) NFIB (RHS) Source: ISM, NFIB mated in our May forecast. forecast is on the downside. The slowdown has opened small businesses. While the ISM, which is dominated the way for the Fed to provide further economic stimu-‐ by large companies, continues to show a rather bright lus by expanding its balance sheet and postponing key picture of the situation, the National Federation of In-‐ rate hikes until 2012. dependent Business (NFIB) index of small business senti-‐ Slower GDP growth Quarterly percentage change, annualised loans and that depressed construction companies weigh 5 5 heavily in the NFIB index. 4 4 3 3 Higher saving holds back consumption 2 2 The latest national accounts show substantially weaker 1 1 consumption and higher saving than the previously 0 0 -‐1 -‐1 savings ratio was 6.1 per cent, an upward revision of SEB forecast -‐2 -‐2 several percentage points. A higher level of saving indi-‐ -‐3 -‐3 cates a faster pace of adjustment in household balance -‐4 -‐4 sheets. In the long term this will set the stage for a -‐5 -‐5 sustainable recovery in consumption, but over the next Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 couple of years we believe that the need to pay down 09 10 11 12 Source: BEA, SEB debts will cause the savings ratio to continue upward a bit, thereby holding back consumption. 16 | Nordic Outlook – August 2010
  • 16. The United States Our current assessment is that the savings ratio will accelerated their home purchases to take advantage of the tax credit. Once this effect has faded, the number . This is also of home sales transactions will stabilise. During 2011 we consistent with our model projections, which have sig-‐ thus expect slightly rising home prices. nalled for some time that the savings ratio will rise to The housing market recovery decelerates a level closer to the average for the past 50 years. We Index 2004:1 = 100 thus believe that overall consumption will increase 140 140 135 135 downward revision compared to our assessment in 130 130 the last Nordic Outlook. 125 125 120 120 Uniform pace of debt retirement 115 115 110 110 Per cent of disposable income 140 12 105 105 11 100 100 130 10 95 95 120 9 90 90 110 8 04 05 06 07 08 09 10 7 100  S&P  Case-­Shiller  20  FHFA 6 Source: OFHEO, Standard & Poor's 90 5 80 4 The July issue of the Fed’s Beige Book points out that 3 the commercial real estate market remains weak. 70 2 Assessments of future trends ranged from continued 60 1 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 decline in activity to weak growth, but one bright spot is that corporate capital spending on commercial real Household debts (LHS) Household saving (RHS) estate appears to have stabilised. Source: Federal Reserve Housing market unsteady again Company capital spending a bright spot Despite record-‐low interest rates, pushed down partly One bright spot during the recovery this year is capital by the Fed’s mortgage bond purchases, and a subsidy in spending by businesses, which has climbed sharply in the form of a USD 8,000 federal tax credit to home buy-‐ 2010. During the second quarter, the annualised in-‐ ers, the housing market recovery has not really taken crease was 17.6 per cent. This growth in capital spend-‐ off in earnest. In May 2010, the S&P/Case-‐Shiller home ing focused on machinery and software. Commercial price index was only some 5 per cent higher than when real estate investments were stable. The sharp increase it bottomed out one year earlier. The number of home during the second quarter was partly a consequence of sales and housing starts are also at historically very low earlier very depressed levels. Our assessment is thus levels. In July the number of housing starts was only that capital spending growth will slow during the rest 546,000, less than one third of the July average from of the year, but in a longer perspective there are fac 2003 to 2005. Despite the low number of homes being tors that indicate good capital spending growth. In a historical perspective, the capital spending ratio in the months. In July, inventory rose to 12 months. Such a business sector remains very low. Meanwhile companies high level will help hold prices and new construction down. Because the home buyer tax credit expired at stronger than during any previous economic downturn. the end of April, both residential construction and the Capacity utilisation and company capital spending number of contracted home sales have weakened mark-‐ Per cent edly during the past few months. Mortgage applications 90.0 40 are at a record low. The National Association of Home 87.5 30 85.0 20 also declined. 82.5 10 80.0 0 77.5 in the housing market. We anticipate that the rapid -‐10 75.0 decline in the number of sales will drive down prices 72.5 -‐20 during the next few months. Housing market activity 70.0 -‐30 will also be hampered by the slow recovery in the la-‐ 67.5 -‐40 70 75 80 85 90 95 00 05 10 bour market, but low mortgage rates should be able to  Capacity  utilisation  (LHS) mortgage rate has decreased from around 5 per cent  Company  capital  spending,  annualised  Q  growth  (RHS) Source: BEA, Federal Reserve in April to just below 4 per cent. Many households also Nordic Outlook – August 2010 | 17
  • 17. The United States High imports weaken trade balance slightly, because the increase in the labour force that was discernible early in 2010 was followed by a decline past few years there has been a trend towards improve-‐ during the past three months. ment in the US current account balance, due to sharply Unemployment and private sector employment higher saving by both businesses and households. 10 116 Recently, however, trade imbalances seem to have 9 115 widened again. The improvement in the balance of 8 114 7 113 6 112 5 111 has increased greatly in recent months and was just 4 110 above USD 26 billion in June. If it does not fall during 3 109 the autumn, the slow appreciation of the Chinese yuan 2 1 108 may become a hot issue in the campaign leading up to 0 107 November’s congressional elections. 07 08 09 10 Current account and budget balance Unemployment, per cent (LHS) Procent of GDP Private sector employment, millions of individuals (RHS) Source: BLS 5.0 5.0 -‐ 2.5 2.5 not contribute to the labour market recovery. In July, 0.0 0.0 the number of state and local government employees -‐2.5 -‐2.5 fell by nearly 50,000. The federal government has ap-‐ -‐5.0 -‐5.0 plight of state governments, but many of them will -‐7.5 -‐7.5 need to continue trimming their payrolls. -‐10.0 -‐10.0 One new phenomenon during the latest American eco-‐ -‐12.5 -‐12.5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 nomic downturn is the scale of chronic unemployment. The share of unemployed people without a job for 27 Current account Federal budget balance Source: BEA, US Department of the Treasury weeks or longer is now around 45 per cent. This is the highest level recorded since such statistics began to be Because imports rose far more rapidly than exports, collected in 1948. In response to this chronic unemploy-‐ foreign trade made a large negative contribution to GDP growth during the second quarter. Export growth is ex-‐ been extended. pected to decelerate faster than import growth, which means that US economic growth seems unlikely to get One positive sign in the labour market is the increase in any help from foreign trade in the next few quarters. the number of hours worked during the past year. This increase indicates continued expansion in employment. Labour market disappointments Forward-‐looking indicators also hold out some hope of After a fairly positive trend during the spring, the future improvements in the labour market. The employ-‐ labour market has now lost momentum and the most ment sub-‐index of the ISM survey clearly indicates that recent reports have been clearly disappointing. The manufacturing employment will continue to increase. recovery is moving slowly, and unemployment remains There is also job creation in the private service sector. very high. From a peak of 10.1 per cent in October The construction sector, however, remains depressed 2009, the jobless rate had only fallen to 9.5 per cent and its number of employees has again begun to fall in in July: far from the equilibrium unemployment level, recent months. Our overall assessment is that employ which is around 5 per cent. Unemployment will continue to fall and will be just Total employment increased sharply during the spring, but this was primarily due to the large number of peo-‐ ple with temporary jobs with the 2010 US Census. For example, around 410,000 people out of a total increase of 432,000 jobs in May could be explained by Census The slow labour market recovery and high unemploy-‐ effects. Employment in the private sector is showing a substantially more subdued trend, although the number increase in manufacturing activity, capacity utilisation of people with jobs has now risen for seven months remains well below normal. Unit labour costs have fall-‐ in a row. In the most recent three-‐month period, job en rapidly in recent years, and the historical association growth has been only 50,000 people per month, far lower than the underlying increase in the labour supply. bank lending and the low rate of increase for M2 money Actual unemployment has nevertheless continued to fall 18 | Nordic Outlook – August 2010
  • 18. The United States ate future, but we also expect it to bottom out dur-‐ pressure. ing 2011 and then slowly rise. Altogether, we expect Strong connection between inflation and unit labour cost per cent. Year-‐on-‐year percentage change 15.0 15.0 Low inflation pressure 12.5 12.5 Year-‐on-‐year percentage change 6 6 10.0 10.0 5 SEB 5 7.5 7.5 forecast 5.0 5.0 4 4 2.5 2.5 3 3 0.0 0.0 2 2 -‐2.5 -‐2.5 1 1 -‐5.0 -‐5.0 0 0 50 55 60 65 70 75 80 85 90 95 00 05 10 -‐1 -‐1 CPI inflation Unit labour costs Source: BLS -‐2 -‐2 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 0.9 per cent. Such a low level has not been recorded Core inflation Headline inflation Source: US Department of Commerce, SEB was at 1.2 per cent in July. Our forecast is that core A dilemma for the Fed Because of large US government debt, the chances of again, ending up just above 1 per cent at the close of -‐ -‐ tinues to weaken, the Fed will thus be under increas-‐ An unusual recovery The National Bureau of Economic Research (NBER) recessions have often been caused by excessive inven-‐ tories and exaggerated optimism among investors. This US economic cycles. Although the agency has not yet time, the recession has instead centred on a severely declared that the recession is over, the general per-‐ wounded banking system as well as on household bal-‐ ception is that it ended in the summer of 2009. The ance sheets and debt retirement. When the dotcom recovery has thus lasted four quarters so far. On the (IT) bubble popped in 2001, household balance sheets other hand, economic developments have diverged experienced a shock, but an expansionary monetary from the “normal” cyclical pattern, which is probably policy quickly helped the housing market to soar. the reason why the NBER is hesitant to declare that the recession is over. An unusually sluggish recovery Total number of employed, index=100 in the quarter preceding the beginning of the recession Since the Second World War, annualised GDP growth 102.5 102.5 has averaged 6 per cent at this point in the economic 1974 1990 cycle, compared to 1.6 per cent during the second 1981 quarter of 2010. Looking back at more than half a 100.0 2001 100.0 century of data, two and a half years after a recession started the GDP level has averaged 8 per cent above 97.5 97.5 the previous peak. Today’s weak labour market also diverges from the 95.0 Current 95.0 historical pattern. The previous two recessions were admittedly also characterised by relatively long 92.5 92.5 periods before job creation began to prevail, but the 0 5 10 15 20 25 30 35 40 45 Source: BLS latest recession is unique in terms of its combination of depth and length. And without the support of a The NBER focuses mainly on four variables in assess-‐ stronger labour market, the American economy will ing economic cycles: sales, employment, industrial dynamic. fallen in recent months while the latter two have levelled off at slow speed. In such a situation, it is This recovery does not resemble others, due to the natural to be cautious in making assessments. causes of the economic crisis. Short, shallow post-‐war Nordic Outlook – August 2010 | 19
  • 19. The United States ing pressure to act, but the central bank has limited potential for increasing its stimulus. The federal funds rate is in the 0-‐0.25 per cent interval and cannot be cut further. As early as March 2009 the Fed also pledged to the end of 2012. keep its key rate at an exceptionally low level for an “extended period”. The remaining weapon in the Fed’s Obama faces uphill political battle arsenal is thus to expand its balance sheet by purchas-‐ President Barack Obama’s public approval rating has ing securities. a Gallup poll on whether the president was doing a The Fed's balance sheet good job or a bad job gave him a 68-‐21 per cent score. USD trillion Today’s polls give him 41-‐52. Despite the passage of 2.50 2.50 2.25 2.25 new president has not managed to live up to people’s expectations. High unemployment and last year’s bank-‐ 2.00 2.00 ing sector bail-‐out have soured many voters on the 1.75 1.75 Obama administration. 1.50 1.50 1.25 1.25 jeopardising continued Democratic control of the House 1.00 1.00 of Representatives following the November 2 mid-‐ term election. It is nothing unusual for an incumbent 0.75 0.75 president’s party to lose seats in Congress, but our 07 08 09 10 analysis (see chart) shows that the Democrats will only Source: Federal Reserve barely retain control of both houses. With a weakened president, Washington risks political paralysis until the At its interest rate meeting in August, the Fed con-‐ autumn 2012 presidential election. This is occurring in a situation where both the American economy and global and outlined a new monetary policy strategy. The cooperation efforts are in great need of clear US politi-‐ central bank decided that it will keep its balance sheet cal leadership. at the current level, instead of shrinking it over time. Its interest revenue and the principal it receives back as   Democratic control of House of   its existing stock of mortgage bonds matures will thus Representatives in jeopardy   10   be reinvested in government securities. In itself, this 0   decision does not signify any new stimulus, but it sends 30                   -‐10   35 40 45 50 55 60 65 70 a clear signal that monetary policy has now become -‐20   more dovish and that a key rate hike is very distant. -‐30   The Fed has shifted from a situation where it had begun -‐40   Democratic projected preparing for normalisation of monetary policy to one seat loss   -‐50   of paving the way for possible further stimulus. -‐60   If the recovery should weaken even more, the shift in Number of seats gained/lost (vertical axis)   Fed strategy has opened the door for further quantita-‐ Presidential approval rating, per cent (horisontal axis)   Source:, SEB   tive easing (QE), thereby pushing down market interest Today’s US domestic political scene is dominated by discord and by Republican attempts to stop or at least for the Fed to hold off on QE for the time being. To stall reforms. There is also disagreement as to whether begin with, interest rates are already falling due to the economy needs further stimulus, or whether belt-‐ tightening is required. The Republicans oppose further admittedly low, though they have not yet approached -‐ pact from earlier stimulus packages. Even among Demo-‐ the Fed also risks being criticised for monetising the crats and the general public, there are doubts about -‐ the need for further stimulus measures. The pendulum tion is how much stimulus effect the Fed can expect thus seems to be swinging towards support for greater to achieve by further squeezing interest rates that are austerity. Obama’s plan for another large-‐scale stimulus already extremely low. package has undergone radical cuts. The extension of Our assessment is thus that the Fed will hold off on further stimulus during the next several months but may implement such measures later this autumn if the state of the economy deteriorates substantially. Our 20 | Nordic Outlook – August 2010
  • 20. The United States pursuing an exceptionally accommodative policy, in-‐ -‐ cluding zero interest rates and a possible expansion of the central bank’s balance sheet. the tax cuts implemented by President George W. Bush, which expire at the end of 2010, will be extended. at just above USD 1.4 trillion, equivalent to nearly 10 The Republicans want to retain the tax cuts, while 2010 and the administration and most Democrats only want to 2011 will be lower than in our May forecast -‐ retain the cuts for people who earn a maximum of USD cit will end up around USD 1.4 trillion this year and just 250,000 per year. In August, the independent Congres-‐ will shrink further. outlook, but not changed especially much since May. We expect federal stimulus measures to contribute 1 percentage point to 2010 growth and -‐0.5 points in 2011. Given our will put the Fed under additional pressure to continue Nordic Outlook – August 2010 | 21
  • 21. Japan Strong currency leads to policy dilemma Brisk exports, but strong yen an obstacle PPP). The euro zone economic crisis, combined with uncertainty about the American economy, has quickly resulted in a clear appreciation of the yen. The USD/ BoJ will hike key rate only in 2012 JPY exchange rate has moved from over 90 in January to just above 85 today. The yen has also strengthened against the euro: from about 130 per EUR in January The Japanese economy showed unexpected strength 2010 to about 112 today. In spite of this, the yen is around year-‐end and early in 2010, but second quarter growth was a big disappointment. GDP growth was a forecast that the USD/JPY will approach 80 (the yen’s , raising questions about the strength foreign exchange market cannot be ruled out. interpreted; quarterly statistics are often erratic, and leading indicators like the Tankan Survey from the Bank USD/JPY rate follows relative prices 325 of Japan (BoJ) point to continued decent growth in 300 255 the near future. But there are also worrisome signs, 275 230 among them that the housing and construction industry 250 as well as retail sales seem to have lost momentum. 225 205 200 180 Exports and industrial production have bounced back 175 155 after last year’s dramatic fall. Due to high growth else-‐ 150 130 where in Asia, combined with a favourable product mix 125 in trade with the US, exports will rise by about 20 per 100 105 cent this year. 75 80 75 80 85 90 95 00 05 10 Despite the weak second quarter, we foresee that USD/JPY, Yen per dollar (LHS) consumption will continue to be sustained by govern Relative prices, Japan compared to US, Jan. 2010=100 (RHS) ment stimulus measures totalling about 7 per cent of Source: Reuters EcoWin GDP over the period 2008-‐2010. Private consumption Due to the strong yen and the trend towards weaker will increase by nearly 2 per cent this year, the fast-‐ global demand, Japanese policy makers will face new est rate since 1996. We predict challenges. The government, also confronted by falling cent this year, the same forecast as in May. stock prices, will seek to have new stimulus measures outlined by late August. We expect a A slight cooling in global demand, the lagging effects , of yen appreciation so far this year and the phase-‐out somewhat lower in 2011-‐2012. Government debt is ap-‐ of stimulus measures will lead to a deceleration late this year and in 2011. Export growth will slow to about must be managed in an uncertain political landscape. 5 per cent in 2011, capital spending growth to about The Social Democratic Party recently withdrew from the 4 per cent and consumption growth to less than 1 per -‐ cent. Overall, 2011 as well as 2012. since 2006. The Bank of Japan will raise its key interest . Unemployment has risen in recent months (currently 5.3 per cent), which risks blunting the consumption upturn. We expect GDP growth to be close to or just above trend during the next couple of years, which means that unemployment will move sideways. CPI will decline and end up around zero in keeping with the theory of purchasing price parity, 22 | Nordic Outlook – August 2010
  • 22. Asia Slight deceleration in growth Slowdown from high level regulation of home sales, seem to have had an effect. Various indicators are also showing continued decelera-‐ Balanced growth in China tion. The purchasing managers’ index has continued Monetary tightening needed in India to fall, in July reaching its lowest level since February 2009. Industrial production, retail sales and car sales have also decelerated. Exports have also slowed, but Asia’s emerging countries have shown good resilience the rate of increase remains high; their level is nearly in the face of global recession, recovering far more 40 per cent higher than in 2009. rapidly than the OECD countries. Good central govern-‐ stimulus packages, and their export-‐driven economies 2.4 per cent in June. This will probably mean that the -‐ authorities will be cautious about further tightening er, there are signs that the recovery that started during measures. the second half of 2009 is now slowing a bit. In China, there was a welcome deceleration in economic activity Inflation in China and India during the second quarter of 2010. The latest outcomes Year-‐on-‐year percentage change 15.0 15.0 for industrial production, exports and purchasing man-‐ agers’ indices also indicate a slowdown in such econo-‐ 12.5 12.5 mies as Malaysia, South Korea and Taiwan. Despite this 10.0 10.0 deceleration, we expect good growth in the region 7.5 7.5 during both 2010 and 2011. 5.0 5.0 Industrial production Year-‐on-‐year percentage change 2.5 2.5 60 60 0.0 0.0 50 50 40 40 -‐2.5 -‐2.5 30 30 07 08 09 10 20 20  China  India 10 10 Source: National Bureau of Statistics of China, Ministry of Commerce and Industry, India 0 0 -‐10 -‐10 -‐20 -‐20 There is a continued focus on the risks of overheating -‐30 -‐30 in the housing market. A sharp decline in home prices -‐40 -‐40 would impact the real economy mainly through falling Jan May Sep Jan May Sep Jan May Sep Jan May activity in the construction sector. Government-‐con-‐ 07 08 09 10 Thailand Taiwan trolled Chinese banks nevertheless have sizeable South Korea India reserves, and the home loan-‐to-‐value ratio is very low, Source: Reuters EcoWin providing a substantial cushion against falling home Rapid wage increases, partly in response to an increas-‐ ing number of strikes in various Asian countries, repre-‐ crisis. countries, such as India, the authorities will need to A certain slowdown in the housing market now seems respond with continued monetary policy tightening. In a to be on the way. Construction investments and the longer perspective, rising wages are a natural develop-‐ number of home sales have diminished. The rate of mental step in the region that will help reduce global price increases has also cooled somewhat but remains imbalances, both by narrowing cost differences and by above 10 per cent. In our assessment, the risk of a shifting these economies towards a larger consumption sharp decline in home prices is fairly small. Chinese element. authorities will try to respond to an initial price slide. Overheating is also largely a local problem. There have China: Slowdown but no crash landing been major price hikes in cities like Shanghai and Shen-‐ zhen, but in the housing market as a whole the increase forecast of a soft landing in China. Year-‐on-‐year growth is more limited. Looking a little further ahead, there is also a large underlying demand for housing. per cent. The government’s tightening measures during the spring, including restrictions on bank lending and Nordic Outlook – August 2010 | 23
  • 23. Asia China: Home prices that Chinese labour market conditions are changing. Year-‐on-‐year percentage change The share of younger people in the population is shrink-‐ 15.0 15.0 ing, which will eventually hamper the geographic mobil-‐ 12.5 12.5 ity in the labour force. This will help push up wages in regions where demand for labour is largest. Rising 10.0 10.0 wages and disposable incomes will then help narrow 7.5 7.5 cost differentials with other countries, while strength-‐ 5.0 5.0 ening domestic demand. China’s imports will thus rise. 2.5 2.5 Chinese authorities have repeatedly shown their ability 0.0 0.0 to craft economic policies in such a way that growth ends up in the interval they regard as compatible with -‐2.5 -‐2.5 07 08 09 10 economic and social balance. This is one reason why we Source: National Bureau of Statistics of China predict that the economy will decelerate in a controlled fashion. Our forecast is that Since China’s central bank resumed the appreciation of the yuan against the US dollar in June, the currency has strengthened very moderately: less than one per cent. speculative curren Monetary tightening in India , appreciation is likely to continue occurring The Indian economy is characterised both by high growth relatively slowly. A continued low-‐interest policy in the by 8.6 per cent year-‐on-‐year. The upturn was mainly may raise the question of introducing capital controls driven by exports and industrial production, but the rate similar to those used in countries like Brazil. Further-‐ of increase in manufacturing is decelerating from the more, due to the general USD upturn over the past year, China’s currency has strengthened by more than India: Inflation and key interest rate 5 per cent in trade-‐weighted terms, also contributing Per cent 9.0 to caution in adjusting the USD/CNY exchange rate. We 14 8.5 expect the USD/CNY rate to stand at 6.40 by mid-‐2011 12 8.0 and then continue downward to 6.00 by late 2012, but 10 7.5 these levels will depend greatly on the performance of 8 7.0 the USD against other currencies. The Chinese authori-‐ 6 6.5 ties are likely to pay close attention to the trend of the 4 6.0 yuan in terms of a trade-‐weighted currency basket. 2 5.5 China's effective exchange rate 0 5.0 Monthly averages. Index = 100, Janaury 2005 -‐2 4.5 125 125 07 08 09 10  Inflation  (LHS)  Key  interest  rate  (RHS) 120 120 Source: Reserve Bank of India 115 115 The agricultural sector accounts for between 15 and 20 per cent of the overall economy. The monsoon season 110 110 runs from June to September and is of key importance 105 105 to agricultural production. This year’s monsoon ap-‐ pears likely to result in a somewhat better harvest than 100 100 normal. Since the 2009 season was much worse than 95 95 normal, the shift in agricultural production, and the 05 06 07 08 09 10 impact on GDP, will be relatively large. We expect that Source: BIS . tensions with the US. In light of the yuan’s slow appreciation,and because China’s trade surplus against domestic harvest may contribute to slower price the US is on its way up ( in July it reached USD 28.7 increases, but we still expect India’s central bank to billion), the issue is likely to heat up again this autumn, express concern about the situation. Since March 2010 it has raised its key interest rate by one percentage the US stance towards Chinese currency policy. point to 5.75 per cent. Further hikes to 6.50 per cent continuing into 2011 are expected but these hikes will Looking further ahead, however, other forces besides not occur as frequently as they have so far. Key inter-‐ currency rates will also lead to a better trade balance. est rate hikes help to strengthen the currency and the The recent increase in the number of strikes is a sign rupee will stand at 43.5 per USD one year from now. 24 | Nordic Outlook – August 2010
  • 24. The euro zone Doing better, but increasingly divided Germany’s strong competitive position was a full 2.2 per cent (3.7 per cent year-‐on-‐year). In driving rapid growth France, GDP grew by 0.6 per cent and in Italy 0.4 per cent while other southern European countries lagged Debt reduction tough on southern Europe behind: Spanish GDP grew only 0.2 per cent, while the Greek economy shrank by 1.5 per cent. Especially in Germany, short-‐term indicators also sup-‐ port a scenario of continued strong growth. For exam-‐ ple, order bookings in the German manufacturing sector The economic trend in the euro zone has been favour-‐ rose by 3.2 per cent in June compared to May, and by able in the past few months. GDP growth was strong in a full 24.6 per cent year-‐on-‐year. Germany’s IFO index the second quarter, leading indicators have continued has continued upward at a rapid pace, and its current level indicates an upside risk to our growth forecast. worries about sovereign debt problems have eased The purchasing managers´ index (PMI) has also pro somewhat. vided upside surprises in most countries and is now signalling a clearer recovery. The widening gap between The next couple of years will be characterised by big Germany and other parts of the euro zone is especially apparent from the OECD’s leading indicator, which has very strong global competitiveness and comparatively continued to climb in Germany but has turned down-‐ good balances in its domestic economy. Southern ward in France and the “PIIGS” countries (Portugal, European countries face continued major challenges Ireland, Italy, Greece and Spain). restoring their competitiveness. Germany in the lead, PIIGS lagging behind Composite leading index 112.5 112.5 keep its key rate very low to support adjustment proc-‐ 110.0 110.0 esses in southern Europe. We expect it to begin hiking 107.5 107.5 105.0 105.0 102.5 102.5 IFO climbs higher 100.0 100.0 Year-‐on-‐year percentage change (GDP), IFO index 2000=100 97.5 97.5 5.0 120 95.0 95.0 115 92.5 92.5 3.0 110 90.0 90.0 1.0 105 87.5 87.5 85.0 85.0 100 -‐1.0 00 01 02 03 04 05 06 07 08 09 10 95 -‐3.0 90 Germany France PIIGS Source: OECD 85 -‐5.0 80 -‐7.0 75 Can domestic forces take the lead? 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 As in many other countries, exports have been the GDP, Germany (LHS) engine of the recovery. For some time, German manu-‐ Business conditions, IFO (RHS) facturers have been improving their competitiveness. In Expectations, IFO (RHS) Source: Federal Statistics Office, IFO the past six months they have received extra help from a weak currency. With an EUR/USD exchange rate of around 1.30, the growth stimulus in 2010 from the euro is equivalent to about 0.7 per cent of GDP. Now that the but also illustrated increasingly obvious gaps between global industrial cycle is entering a more mature phase, countries. Euro zone economic growth totalled 1.0 per while the American economy moves into a slowdown cent quarter-‐on-‐quarter, and the upturn in Germany phase, exports will become a less important driving force. The historical association between America’s ISM Nordic Outlook – August 2010 | 25
  • 25. The euro zone purchasing managers’ index and the IFO index indicates , a slight deceleration in the euro zone early next thanks to rising exports and capital spending. In the year. near future, the German economy will also expand relatively fast; we expect GDP to rise At present, there are mixed signals as to whether do-‐ 2011 and somewhat more slowly in 2012. France will mestic demand can take over as a growth engine. Vari-‐ grow by about 1.5 per cent a year, Italy 1-‐1.5 per cent. ous indicators, among them rising capacity utilisation in Countries with the biggest austerity programmes will manufacturing, show that we are approaching a period continue to perform very weakly. For example, the of stronger capital spending. year and a further 2 per cent in 2011. Spanish GDP will German households are an uncertainty factor a bit fall 0.5 per cent this year, then grow by some 0.5 per further ahead, despite lower unemployment and rising cent in 2011. -‐ scored by Germany’s rather weak retail sales so far in Decent growth in spite of everything Percentage change 2010, but June sales rose by 4.7 per cent year-‐on-‐year 5.0 5.0 according to revised statistics. This was stronger than expected. We anticipate that private consumption will 2.5 2.5 0.0 0.0 (nearly unchanged in the euro zone as a whole), speed-‐ -‐2.5 SEB -‐2.5 forecast ing up a bit in 2011 and 2012. -‐5.0 -‐5.0 Sharp increase in investments Year-‐on-‐year percentage change and per cent -‐7.5 -‐7.5 10 85.0 -‐10.0 -‐10.0 82.5 04 05 06 07 08 09 10 11 12 5 80.0 Quarter-‐on-‐quarter, annualised 0 Year-‐on-‐year percentage change 77.5 Growth indicator (Euroframe) -‐5 Source: Euroframe, Eurostat, SEB 75.0 -‐10 72.5 Large austerity packages -‐15 70.0 During the spring and summer, various euro zone coun-‐ -‐20 67.5 00 01 02 03 04 05 06 07 08 09 10 Gross capital formation (LHS) these programmes include Capacity utilisation, manufacturing (RHS) tightening. In Greece, such cutbacks are equivalent Source: Eurostat, DG ECFIN to about 12 per cent of GDP in 2010-‐2012. Spain and Portugal have also pushed through major austerity pack-‐ quarter of next year (0.2 per cent, quarter-‐on-‐quarter), ages. In the core countries of the euro zone, austerity two quarters after the US, then slowly recover in the measures are far more modest. The German govern-‐ course of 2011 and 2012. GDP growth will end up at 80 billion until the end of 2014. This is equivalent to cautious upward revision since our May forecast and 3.4 per cent of GDP in all, but the annual effects will well above the consensus. Growth will then remain at be moderate over the next couple of years. As early as around 1.5 per cent in 2011 and 2012. January, the French government announced austerity measures amounting to EUR 11 billion (0.6 per cent of Consumption recovers slowly Year-‐on-‐year percentage change GDP), spread over several years. Further cutbacks are 5 4.0 planned, but no formal decisions will be made before 0 September. 3.0 -­5 2.0 -­10 -­15 1.0 are largely based on decisions that have already been -­20 0.0 made, while those for 2012 are largely based on esti-‐ -­25 mates of what is reasonable. At present, these meas-‐ -­1.0 -­30 ures total less than 1 per cent of euro zone GDP, and -­35 -­2.0 up to some 4 per cent of GDP in the PIIGS countries. 00 01 02 03 04 05 06 07 08 09 10 Further austerity measures may follow. Consumer confidence (LHS) Private consumption (RHS) Source: DG Ecfin, Eurostat, SEB 26 | Nordic Outlook – August 2010
  • 26. The euro zone with its austerity package. The accumulated Greek Austerity measures announced so far Per cent of GDP 2010 2011 2012 Total than the government’s own target. This means that the country will qualify for its second round of bail-‐ Greece 4.2 4.2 4.0 12.4 out funds from the European Commission, euro zone Ireland 3.7 0.0 0.0 3.7 countries and IMF. But although the pace of reform Spain 2.3 2.3 2.0 6.6 has been faster than expected during the summer, major challenges and risks remain. The market still Portugal 2.0 2.2 2.0 6.2 mistrusts the ability of the PIIGS countries to tighten Italy 0.8 0.8 1.5 3.1 up their economies. This is clear from their continued France 0.3 0.1 0.5 0.9 high interest rate spreads against Germany. The rapid Germany 0.0 0.5 0.8 1.3 upturn in CDS spreads over the past few weeks, espe-‐ cially for Ireland and Italy but also for the other PIIGS countries, is another sign of mistrust. Source: SEB Yield spreads against Germany   Percentage points 10 10 The direct effect of these austerity programmes will 9 9 be to dampen growth, especially via weaker consump-‐ 8 8 tion. But there is also a neutralising effect, since 7 7 6 6 extricate themselves from their current crisis may 5 5 improve -‐ 4 4 3 3 weaker 2 2 euro because of the debt problem will also contribute 1 1 to stronger growth. 0 0 Oct Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Such indicators as data on sovereign borrowing require-‐ 08 09 10 France Ireland Portugal ments show that the combination of austerity measures Greece Italy Spain and growth recovery has already had some impact on Source: Reuters EcoWin This mistrust may have various causes. To date, budget mainly via increased tax revenue as the economic improvements seem to have been the result of slashing situation has strengthened expenditures -‐ appears likely to drop below 3 per cent of GDP as early cy of tax collection will be the most important meas-‐ as 2011; last spring the government declared that its ure, and initial signals from Greece indicate certain ambition was to achieve this by 2013. disappointments in this regard. Angry reactions among employees and trade unions also indicate that countries Budget balance, selected countries face major challenges when it comes to creating con-‐ Per cent of GDP sensus and understanding about their austerity policies. 2009 2010 2011 2012 This summer, for example, Greek lorry drivers struck in protest against deregulation of the haulage trade, and Ireland -‐14.3 -‐11.7 -‐12.1 -‐10.6 public transport in both Spain and Portugal have been Greece -‐13.6 -‐9.1 -‐8.6 -‐8.0 hard hit. So far, however, governments have responded Spain -‐11.2 -‐9.8 -‐8.5 -‐7.0 with toughness: in Greece with emergency legislation Portugal -‐9.4 -‐8.3 -‐7.6 -‐6.1 forcing the lorry drivers back to work. France -‐7.5 -‐7.6 -‐7.1 -‐5.6 Growing debt levels Belgium -‐6.0 -‐5.0 -‐5.0 -‐3.5 Per cent of GDP Italy -‐5.3 -‐5.3 -‐4.7 -‐3.2 140 140 Netherlands -‐5.3 -‐6.0 -‐5.0 -‐3.5 120 120 Austria -‐3.4 -‐4.7 -‐4.5 -‐3.0 100 100 Germany -‐3.3 -‐4.0 -‐3.0 -‐2.5 80 80 Finland -‐2.2 -‐3.5 -‐2.9 -‐2.2 60 SEB 60 forecast 40 40 Source: European Commission, SEB 20 20 01 02 03 04 05 06 07 08 09 10 11 12 According to the European Commission, the ECB and Euro zone France Spain Greece the IMF, Greece in particular has made great progress Germany Italy Ireland Source: Eurostat, SEB Nordic Outlook – August 2010 | 27
  • 27. The euro zone Fundamentally, however, market mistrust is due to However, there are major differences in employment uncertainty as to whether the escalation of sovereign trends between euro zone countries. The strong Ger-‐ debt can be halted and whether some form of debt re-‐ man employment trend is partly due to a system of structuring is unavoidable. According to the calculations government allowances (“Kurzarbeit”) which result in on which its bail-‐out programmes are based, Greek a form of job-‐sharing. When these subsidies are phased government debt will reach about 140 per cent of GDP out, there is admittedly a risk that unemployment in 2013, the highest level in the whole euro zone. Italy’s will rebound, but the lack of large underlying imbal-‐ debt will end up at about 130 per cent, Portugal and Ireland just below 100 per cent and Spain just below 80 The economy can now take advantage of the upturn in per cent. international demand without needing to implement far-‐reaching structural changes. In various respects, Unemployment has peaked Spain is the opposite of Germany. Spain faces a long The decline in German unemployment in July (20,000 period of structural adjustment, for example when it fewer people without jobs) raises hopes that today’s comes to cutting down the size of the construction sec-‐ upturn in export and industrial production will also tor, reforming the labour market and streamlining the spread to the household sector. According to national public sector. statistics, unemployment ended up at 7.6 per cent, the lowest jobless level in 20 months. Falling unemployment even with slow growth The positive effect of the German government’s anti-‐ In Spain the level is nearly 3 per cent, among other unemployment programme can be analysed with the things due to high productivity growth over the past aid of “Okun’s Law”, which relates unemployment to decade. In the euro zone as a whole, GDP growth of GDP growth and the output gap (i.e. the difference between actual and potential GDP). According to the historical association, unemployment in the euro zone should have risen faster late in 2008 and in 2009, also GDP growth required for unchanged remaining at a higher level in 2010-‐2012 (see chart). unemployment According to Okun’s Law, when the GDP gap narrows Year-‐on-‐year percentage growth by 1 percentage point, unemployment falls by 0.5 percentage points. Germany 2.5 2.6 2.6 0.8 Unemployment has peaked Per cent France 2.2 3.2 2.1 1.2 11.0 11.0 Italy 1.8 0.4 2.1 -‐0.7 10.5 10.5 Spain 2.9 3.8 2.6 2.8 10.0 10.0 9.5 9.5 0.9 9.0 9.0 US 2.9 2.9 2.8 2.7 8.5 8.5 8.0 8.0 UK 2.4 3.1 1.9 2.3 SEB 7.5 forecast 7.5 Japan 2.8 4.0 3.5 1.0 7.0 7.0 Nordics 2.5 2.3 2.3 2.4 6.5 6.5 6.0 6.0 Source: IMF data, SEB estimates 00 01 02 03 04 05 06 07 08 09 10 11 12 In an international comparison, we can note that Classical Okun Unemployment NAIRU Source:  Eurostat,  OECD,  SEB this required GDP growth rate in the United States, We have also analysed how the level of GDP growth the United Kingdom and the Nordic countries has not compatible with constant unemployment has changed fallen in the same way as in the euro zone and Japan. over time. One result that is evident from the table This can be explained by a higher underlying produc-‐ below is that this growth requirement has decreased tivity growth trend, as well as a more favourable trend sharply in the euro zone over the past decade. of labour supply for demographic and other reasons. During the period 2000-‐2010, for example, Germany has required a GDP growth rate of only 0.8 per cent and France 1.2 per cent to keep unemployment un-‐ 28 | Nordic Outlook – August 2010
  • 28. The euro zone Divergent employment trends pay squeeze throughout the economy. In Germany, we Index, January 2008=100 discern the opposite trend. Rapidly increasing industrial 101 101 production and a strong labour market have resulted 100 100 in demands from IG Metall and other trade unions for 99 99 98 98 higher pay increases. 97 97 96 96 95 95 -‐ 94 94 93 93 nised Index of Consumer Prices (HICP), rose to 1.7 per 92 92 cent in July from 1.4 per cent the month before. This 91 91 upturn was expected and was largely driven by tempo-‐ 90 90 89 89 rarily higher energy and food prices, which contributed Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr about 0.7 percentage points. According to our forecast, 08 09 10 however, the price of oil will fall towards USD 75 per Italy France Germany Spain Source: Deutsche Bundesbank, INE, INSEE, Istat barrel this autumn and winter, which means that the We expect unemployment in the euro zone as a whole, -‐ which stayed at 10 per cent in June for the fourth tion will thus decelerate to 1.2 per cent by December straight month, to peak in August and then slowly -‐ decline. Joblessness will be slightly below 10 per cent tion rate will end up at 1.4 per cent this year, 0.8 per in December this year, then gradually fall to 9.0 per cent in 2011 and 1.2 per cent in 2012, in other words well below the ECB’s target. than today’s consensus forecast of 10.1 per cent both this year and in 2011. Unemployment will continue to fall in Germany and France, level off in Italy but continue upward in Spain. to fall further this autumn and winter, bottoming out Pay squeeze in southern Europe The upturn in unemployment over the past few years cautiously climb in the course of 2011 and 2012. Meas-‐ is continuing to squeeze wages and salaries. Last year ured as annual averages, total hourly wage costs in the euro zone rose by 4 per cent, but this year and in 2011 they are unlikely to per cent in 2012. increase by more than about 1.5 per cent. The associa-‐ tion between wages and unemployment indicates that No ECB rate hike until 2012 the risks may even be on the downside. The ECB’s interest rate policy has been relatively simple Core inflation will continue downward Per cent May last year. The sharp slide in the world economy, 4.5 4.5 -‐ 4.0 4.0 pectations and extremely restrictive credit and money 3.5 3.5 supply growth, are unambiguous arguments for excep 3.0 3.0 2.5 SEB 2.5 tionally low interest rates. The ECB may also continue forecast 2.0 2.0 to provide loans on favourable terms to commercial 1.5 1.5 banks in problem countries 1.0 1.0 Greek banks. However, it cannot be ruled out that 0.5 0.5 0.0 0.0 -‐0.5 -‐0.5 that the ECB will accept government securities as col-‐ -‐1.0 -‐1.0 lateral despite poor sovereign credit ratings. 01 02 03 04 05 06 07 08 09 10 11 12 Core inflation HICP inflation Source: Eurostat, SEB -‐ In the May issue of Nordic Outlook, we analysed the large differentials in the cost increase situation mainly easily be even lower (see chart). The ECB is appar-‐ between Germany and the PIIGS countries. Our conclu-‐ ently making a similar assessment, since the European sion was that the need for internal devaluations in the Overnight Index Average of interbank interest rates . Some adjustments in the cost situation have now begun. Cuts rate since last summer. in public sector pay in various countries have mainly But in the same way as occurred in the Baltic coun-‐ mountain of debt, the countries of southern Europe are tries, for example, these measures will also lead to a in need of exceptionally low interest rates for a long Nordic Outlook – August 2010 | 29
  • 29. The euro zone then be raised to 1.25 per cent. This hike will then be that a scenario in which unemployment rises to 11 per followed by another two the same year, bringing the cent and remains at that level until mid-‐year 2011 . The would have to be met by interest rate cuts of about 75 rate hiking cycle is roughly coniststent with what the basis points. Taylor rule recommends. In the short term, the di-‐ lemma of divergent growth dynamics in the euro zone ECB starts to hike in March 2012 Per cent 5 5 and the ECB also has reasons to try to get German 4 SEB 4 consumers moving. In the long term, however, diver-‐ forecast gent growth prospects, especially between Germany 3 3 2 2 political trade-‐offs for the ECB. 1 1 -‐ 0 0 nomic cycle and the sustainability of euro zone recov-‐ -‐1 -‐1 ery in general. If the euro zone should suffer a double 00 02 04 06 08 10 12 dip, in the sense that the GDP level again begins to fall Refi rate Taylor rule, main scenario Taylor rule, "double dip" scenario Source: ECB, Eurostat, SEB Stress tests dispel uncertainty despite shortcomings As a result of the EU’s tests of the European banking The tests have not escaped criticism. Their assump-‐ tions have been described as too easy. There was no -‐ scenario in which an EU country defaults on its sover-‐ -‐ eign debts. There was also a lack of clarity about the lished minimum Tier 1 capital of 6 per cent. According way German banks reported their exposure to various to the hypothetical scenarios, the EU banking system government securities. Of the 14 German banks that would need to be capable of managing losses totalling participated in the stress tests, six chose not to report EUR 566 billion. details related to their holdings of government bonds and treasury bills. Many of the 91 banks ended up close to the minimum, The criticism is partly deserved. Nevertheless, the test -‐ -‐ -‐ tries simultaneously, giving the risk picture a systemic ability. Euro zone banks play an especially important dimension. Because it strengthened dialogue among role in the economic recovery, since they account for some 80 per cent of the total credit supply. Meanwhile helped to increase transparency and reduce uncertain-‐ ty. In particular, the stress tests eased the uncertainty over the next 2-‐3 years. Continued recapitalisation about the status of the Spanish banking system, with (through capital injections or earnings) is needed in all the country’s banks participating. -‐ ing costs down. 30 | Nordic Outlook – August 2010
  • 30. The United Kingdom Emergency budget will slow economic growth ing the second half of 2010 and that prices will stagnate in 2011 and 2012. Housing market will cool off again Bank of England will hike rate in late 2011 The labour market has improved clearly since the turn of the year; in April, unemployment was 7.8 per cent. -‐ ever, labour market performance will be adversely Rising exports and industrial production have contrib-‐ uted to a recovery in the battered British economy. -‐ During the second quarter of 2010, GDP grew by 1.2 per sibility (OBR) estimates that around 600,000 people, 2 cent compared to the preceding quarter, or well above per cent of all employees, will lose their jobs. Overall, expectations. This expansion will probably slow during we expect unemployment to increase slightly during the the second half, and over the next couple of years we coming year. foresee growth somewhat below trend. GDP will climb Headline and core inflation in the UK . Per cent 5.5 5.5 Future economic performance will be greatly affected 5.0 5.0 by the emergency budget that the new coalition gov-‐ 4.5 4.5 ernment unveiled in June. This budget represents total 4.0 4.0 3.5 3.5 least for the time being, such austerity will help the UK 3.0 3.0 avoid a downgrading of its AAA credit rating. A spend-‐ 2.5 2.5 ing review will be unveiled in October, but it is already 2.0 2.0 known that 80 per cent of tightening will consist of 1.5 1.5 spending reductions, the remaining 20 per cent of tax 1.0 1.0 increases. Cutbacks in the various departments will be 07 08 09 10 around 25 per cent, but the National Health Service  Headline  inflation  Core  inflation (NHS) has been exempted. Source: ONS (Basel III) may have a major impact on the UK’s impor-‐ declined to 2.6 per cent in July. Our forecast indicates and in practice the implementation of Basel III has been postponed. This also postpones the risks to the British economy that poorer access to capital and higher bor-‐ rowing costs may later imply. per cent, respectively. We expect a similar trend for Exports recovered strongly from their 2009 lows. in January 2011 will be neutralised by other austerity However, looking ahead exports will be squeezed as the pound regains some of its earlier decline against the will enable the Bank of England to keep its key inter-‐ euro. Private consumption has so far held up but will est rate low and thereby continue to stimulate the show weakness because government austerity measures economy and counteract the effects of the emergency will restrain income growth, but if these measures are budget. We believe the BoE will wait until the last perceived as credible they may have a positive impact . The housing market now seems to be weakening, after We expect the pound to continue regaining some of its having recovered from its nadir early in 2009. Recent earlier decline against the euro. The pound is still fun-‐ transactions indicate stagnating or even falling home prices. Weak growth in disposable household income that interest rate hikes are somewhat more imminent. will hamper activity in the housing market ahead. We We expect the EUR/GBP exchange rate to be 0.80 at foresee that the recovery in home prices will slow dur-‐ year-‐end, then remain around the same level. Nordic Outlook – August 2010 | 31
  • 31. Eastern Europe Gradual economic upturn Domestic demand slowly reawakening Ukraine has recovered unexpectedly fast after last year’s 15 per cent GDP slide. The economy grew by Improved macroeconomic balance Currencies once again appreciating currency have driven the upturn. A new loan agreement is also tied to austerity requirements and reforms. Bank The economic upturn in Eastern Europe will soon lending is recovering slowly. We predict GDP growth of broaden. In the autumn of 2009, exports and industrial 4-‐5 per cent annually during the next couple of years. production began to recover. In some places, growth Declining inflation has been stronger than in the West. The upturn oc-‐ CPI, year-‐on-‐year percentage change curred from a low level, however; Eastern Europe was 35 35 the region hardest hit by the global credit crisis, due 30 30 to its large foreign loans. The manufacturing sector is now moving into a more mature phase. Meanwhile 25 25 -‐ 20 20 tion has begun to join the recovery. Households are 15 15 being sustained by stabilisation in the labour market 10 10 and resumption of real wage growth. The outlook for corporate capital spending has also brightened 5 5 somewhat. But we are continuing to predict a rather 0 0 sluggish upturn in domestic demand. The main reasons 06 07 08 09 10  Russia  Ukraine  Poland well as a credit situation that is only slowly thawing. Source: Local statistical offices Taken together, this implies decent GDP growth in the The underlying balance situation in Eastern Europe next few years, which in the most cases will reach just has improved -‐ below potential rate. tively low in several countries; Russia, Hungary and the In terms of economic fundamentals, Poland and Russia that arose during the crisis are gradually shrinking, and are in the best shape this is helping to keep government debt levels relatively In Poland Russia to a record-‐low 5 per cent in July. This downturn from 3.5 per cent this year to 4.5 per cent in 2012. The has been driven by large resource gaps and pressure Poor grain harvests as well as administrative increases appears realistic. A recently adopted four-‐year plan in-‐ however, underlying price increases will be sedate. cludes a boost in value-‐added tax, a ceiling on spending increases and faster privatisations of state enterprises. Russia’s growth accelerated during the second quarter key rates in the spring of 2011. Many Eastern European to a year-‐on-‐year rate of 5.2 per cent. Extreme weather currencies have weakened since May, thus tending to reverse a long-‐term appreciation trend. This can largely grain production, will hamper growth in the short term. be explained by shrinking global risk appetite, but also Overall, agriculture accounts for no more than 4 per cent of GDP, but other disruptions in production will stronger growth in Eastern Europe, as well as capital also slow expansion. We are lowering our GDP growth renewed currency appreciation this forecast by half a percentage point to 4.5 per cent but autumn. But this appreciation will not be rapid, since believe it will then rise to 5.5 per cent in 2012. The worries about the US economy are likely to hamper risk appetite. The forint may be under pressure again in the run-‐up to Hungary’s local elections this autumn. 32 | Nordic Outlook – August 2010
  • 32. The Baltics month basis and in current prices, is around 30 per cent in Estonia and Latvia and nearly 40 per cent in Lithuania. Behind this upswing is greater international demand, but the Baltic countries also regained market share in 2009 (Lithuania in 2008 as well). They have im proved their competitiveness partly due to this year’s The three Baltic economies have once again begun to decline in the euro, but mainly because of their internal grow, sustained by strong exports. The brutal adjust devaluations. This is clear from real effective exchange ment process following their previous severe external -‐ and internal imbalances, which led to GDP declines of ed exchange rate trend compared to 58 economies. around 30 per cent from peak to trough, is now ap Real effective exchange rates proaching its end. Growth will not, however, reach our Index 100 = 2005 previous estimate of its potential rate, about 6-‐7 per 135 135 cent. A tighter lending environment and more cautious 130 130 investment behaviour compared to the earlier boom 125 125 will hold back growth. In addition, the crisis triggered 120 120 new emigration trends in the labour force. We thus 115 115 expect a gradual economic recovery to a growth of 110 110 . 105 105 100 100 The European Commission’s composite business and 95 95 household survey, which began rebounding in the spring 90 90 85 85 of 2009, has continued upward in recent months, 00 01 02 03 04 05 06 07 08 09 10 though at a calmer pace. Household optimism has clear-‐ ly returned in Estonia during the past year, while still Estonia Lithuania Latvia Source: BIS remaining at low levels in Latvia and Lithuania. One Wages and salaries have been pushed down sharply, reason may be positive expectations about Estonia’s especially in Latvia, where the need for adjustment euro zone accession in 2011, but also that at an early stage the Estonian government managed to generate levels from their peak late in 2008 has been 15 per practice the cuts have probably been far bigger than control. this. Public sector salaries have been lowered by about The improvement in sentiment indicators has also be-‐ 25 per cent. The private sector has also strengthened gun to show up in GDP data. In the second quarter, Es-‐ tonia’s GDP rose 3.5 per cent year-‐on-‐year and Lithua-‐ There will probably be some further downward pressure on pay in yearly terms this year in all countries. After since the fourth quarter of 2007 and the third quarter that, we expect the adjustment process to end, and we of 2008, respectively. We expect Latvia’s growth rate to are predicting certain pay increases next year. This turn positive no later than the fourth quarter. Outcomes means, in turn, that have been in line with expectations: Our 2010 GDP fore-‐ consumer prices will vanish; in Estonia and Lithuania, casts for Estonia (2.0 per cent) and Lithuania (1.0 per cent) are thus unchanged from the May issue of Nordic spring. However, price increases to date are largely due Outlook. However, for Latvia we have made an upward to administrative increases (taxes and fees) as well as adjustment, from -‐2.8 to -‐1.5 per cent. pace. We expect price increases to average 2-‐3 per cent Improved competitiveness (highest in Estonia) in 2011. Exports will remain the clearly dominant economic engine this year, although we expect the growth rate Meanwhile internal devaluations have dampened import to slow due to fading positive base effects. The year-‐ demand and contributed to a sharp swing in current on-‐year rate of increase in exports, on a rolling three account balances Nordic Outlook – August 2010 | 33
  • 33. The Baltics were replaced by sizeable surpluses during 2009. A will be needed. The October parliamentary election in Latvia represents a further source of uncertainty, but in strengthened current account balances. Our assessment is that these surpluses will shrink or turn into moderate to allow the implementation of the main features of -‐ the country’s economic policy, although some proposals ally strengthens. may be eliminated or adjusted. Because an economic Current account recovery is on the way, political risks are generally also Per cent of GDP diminishing. 15 15 -‐ 10 10 solidation policies and effective internal devaluation 5 5 policies have helped the Baltic countries regain the 0 0 . During the spring and -‐5 -‐5 summer, Estonia received the green light to join the -‐10 -‐10 euro zone in 2011. This has also contributed to greater -‐15 -‐15 market stability in Latvia and Lithuania. In addition, -‐20 -‐20 Latvia’s discussions with its creditors, the IMF and the -‐25 -‐25 EU, have become far less dramatic. Since February-‐ -‐30 -‐30 01 02 03 04 05 06 07 08 09 10 March, the Latvian government has signalled the need to use international loans has decreased substantially. Estonia Latvia Lithuania Source: Bank of Estonia, Bank of Latvia, Bank of Lithuania Domestic demand is still being squeezed, but there is Per cent evidence that household consumption has bottomed 30 30 out. A stabilisation in the labour and housing markets 25 25 has contributed to this. Looking ahead, consumption 20 20 will also be sustained by rising wages and salaries. In our assessment, Estonia domestic demand will slowly 15 15 begin to recover late in 2010, with a certain extra 10 10 impetus for investments as the euro transition ap-‐ proaches. In Latvia and Lithuania, domestically oriented 5 5 portions of the economy will not gain momentum until 0 0 early 2011. Jan May Sep Jan May Sep Jan May Sep Jan May Sep 07 08 09 10 Estonia: TALIBOR Lithuania: VILIBOR A number of factors indicate that the recovery in do Latvia: RIGIBOR Euro zone: EURIBOR mestic demand will be sluggish, however. GDP growth Source: Reuters EcoWin In this environment, interbank rates have fallen sharply market improvement; unemployment of 15-‐20 per cent since late 2009; during the summer, three-‐month rates were less than one percentage point above the equiva-‐ policies will remain tight in Latvia and Lithuania next lent euro rates (in Latvia the margin was only 40 basis year. The ongoing phase-‐down of private debt is also points). Fundamentally, this is an indication of greater likely to continue in 2011. currency pegs against the euro will also survive; this has Budget consolidation, but risks remain been our main scenario all along. Public sector budget consolidation has largely been completed in Estonia, while it is continuing in Latvia As expected, in July the EU formally approved Esto-‐ and Lithuania. We anticipate that Latvia will thus con-‐ nia’s transition to the euro on January 1, 2011 without tinue to live up to the targets established by its interna-‐ any exchange rate adjustment. Our main scenario is tional lenders, the IMF and the EU. We expect Latvia’s that Latvia and Lithuania will also become euro zone GDP this year and 6 per cent in 2011. Lithuania’s budget Latvian government and the ambition of the Lithuanian Public sector debt will stop growing during 2011-‐2012. Its levels are moderate: around 40 per cent of GDP in Lithuania and 60 per cent in Latvia. Estonia’s public per cent of GDP by 2012, which may prove quite tough. sector debt is well below 10 per cent. Certain political risks remain in Latvia and Lithuania. These countries have been led by minority governments to push through the remaining austerity measures that 34 | Nordic Outlook – August 2010
  • 34. Sweden Very fast recovery Other statistics also indicate that total resource utilisa-‐ Highest 2010 growth in the West tion has rebounded from crisis levels and is now at Unemployment will fall rapidly this about the same level as during the mild downturn of autumn 2001. A stronger krona, low collective pay agreements and a recovery in productivity nevertheless indicate -‐ riod. the Riksbank The situation of the Riksbank has changed to some ex-‐ tent in recent months. The recovery is occurring faster than expected. Meanwhile Basel III regulations have been softened and postponed. We expect the Riksbank The Swedish economy is now growing considerably to raise its key interest rate at every monetary policy faster than comparable countries. Second quarter GDP meeting this autumn. The key rate will reach 1.5 per was stronger than expected and the outlook for the rest -‐ of 2010 appears favourable. This is why we have raised sure and slower growth will help slow the pace of these our GDP forecast for 2010 and expect growth of 4.7 per hikes. There is also a risk that the krona will be exces-‐ cent (calendar adjusted: 4.4 per cent). Looking ahead, sively strong as a consequence of a wider short-‐term however, world economic deceleration will also result in interest rate spread against other countries. We expect slower Swedish growth. Due to high household savings a repo rate of 2.25 per cent at the end of 2011 and 3.00 per cent at the end of 2012. will remain higher than in other countries, though. We expect 2.9 per cent growth in 2011 and 2.3 per cent in Sweden will continue to demonstrate strong public 2012. close to balance as early as 2010. This will allow room Strong recovery for GDP 2010 6 6 September 19 election, and both governing alternatives 5 SEB 5 forecast (the incumbent non-‐socialist Alliance and the Red-‐ 4 4 3 3 Green opposition) have also announced more and more 2 2 election promises. Regardless of which block forms 1 1 0 0 a government after the election, we expect reforms -‐1 -‐1 equivalent to about SEK 25 billion during 2011 (0.8 per -‐2 -‐2 -‐3 -‐3 cent of GDP), primarily in the form of lower taxes for -‐4 -‐4 pensioners and higher state grants to the local govern-‐ -‐5 -‐5 ment sector. In 2011, economic policy will be more -‐6 -‐6 -‐7 -‐7 demand-‐ than supply-‐side oriented regardless of who Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 wins the election. 07 08 09 10 11 12  Quarter-­on-­quarter  percentage  change  Year-­on-­year  percentage  change Our main forecast assumes a continued Moderate Party-‐ Source: Statistics Sweden, SEB led Alliance government. The results of public opinion surveys vary, but it is not unlikely that the right-‐wing populist Sweden Democrats, who now have no seats declined in recent months. When growth slows, the in Parliament, will gain a kingmaker role there. In labour market improvement will also enter a calmer the short term, a minority government may lead to a phase, but the jobless rate will continue downward throughout our forecast period. At the end of 2012, we foreign exchange markets. Further ahead, such a parlia-‐ expect unemployment of just above 7 per cent. This is mentary situation may also lead to agreements spanning about one percentage point above the low of the pre-‐ the divide between the Alliance and Red-‐Green blocks ceding boom period and is very close to our estimate of that would help stabilise government policies. The equilibrium unemployment. will help ensure a stable economic policy in the short and long term. Nordic Outlook – August 2010 | 35
  • 35. Sweden Why is Sweden doing so well? We expect Swedish growth in 2010 to be about twice not hit by a housing market crisis, with large price de-‐ the OECD average, and no other mature industrialised clines, as was the case in a number of other countries. country seems close to Sweden’s growth rate. One This preserved the strong wealth position of Swedish explanation for this is that the downturn in 2008 and households, while the downturn in the residential sec-‐ 2009 was deeper than in most other countries; the po-‐ tor was milder. The housing market was stable partly tential for recovery is thus larger. These large swings because cuts in key interest rates had a larger impact are due to the major role of exports in the Swedish on mortgage loan rates, but also because of the low economy (50 per cent), but the structure of the export level of residential construction for many years. A con-‐ tinued rise in home prices has led to a strong wealth This is not the most important explanation, however; position, which in turn has helped stimulate consump-‐ even in terms of levels, output and employment have tion. expanded more strongly in Sweden. Over the past Mortgage lending rates year, for example, Sweden has regained about half the Short-‐term, per cent 8 8 downturn in employment, whereas the euro zone job market remains depressed. 7 7 6 6 Employment 5 5 Index 100=2007 4 4 102.5 102.5 3 3 102.0 102.0 2 2 101.5 101.5 1 1 101.0 101.0 05 06 07 08 09 10 100.5 100.5 US, Freddie Mac 1 year 100.0 100.0 United Kingdom, standard variable rate Sweden, 3-‐month 99.5 99.5 Source: Reuters EcoWin 99.0 99.0 98.5 98.5 As a whole, the Swedish economy is thus characterised Q1 Q3 Q1 Q3 Q1 Q3 Q1 by rapid, broad growth in demand and has managed to 07 08 09 10  Sweden  Euro  zone Source:  Eurostat,  Statistics  Sweden sectors. But at the same time, many of the factors Various factors can explain why the slump in domes-‐ behind this favourable trend may also be interpreted tic demand both consumption and capital spend-‐ as potential future risks. The section below on ing was more short-‐lived in Sweden than in other consumption discusses the risks that rapid credit countries. Consumption has been sustained by high expansion and large home price increases may lead to initial household savings and good income growth. This problems ahead. The section on exports analyses the large international dependence of the Swedish that was made possible by robust central government economy. Broad upturn in exports fades in the course of 2010, exports will enter a calmer The recovery in merchandise exports began later than phase. in many other countries, but the upturn of the past 4-‐5 months has been correspondingly stronger. The 20 275 year-‐on-‐year change in merchandise exports is now the 15 highest since 1994-‐95. The National Institute of Eco-‐ 250 10 nomic Research’s Economic Tendency Survey indicates 225 5 that exports will continue to grow strongly in the near 200 0 future. The average increase between 2009 and 2010 -‐5 175 will be around 11 per cent. -‐10 150 The export upturn is broadly based, with large upturns -‐15 125 especially in the sectors that fell the most during 2009, -‐20 for example the automotive industry. The recovery for -‐25 100 the metal and mining industries has also been very 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 strong. This year’s vigorous upturn in exports is largely  Year-­on-­year  percentage  change  (LHS) driven by a reversal of the international inventory  Level  (RHS) Source: Statistics Sweden, SEB draw-‐down during 2009. When this process gradually 36 | Nordic Outlook – August 2010
  • 36. Sweden Despite the appreciation of the krona, the manufactur-‐ ing sector is relatively competitive. Sweden’s export Percentage change, 2009 level in current prices (SEK bn) structure is also well suited to respond to the upturn in international demand that we foresee in a longer 2009 2009 2010 2011 2012 perspective. The growth rate of Swedish exports will nevertheless slow somewhat over the next couple of Government sector 103 7 2 -‐1 -‐1 years as the global market for industrial goods enters a less expansive period. Housing 91 -‐23 17 12 8 High correlation with other countries Business GDP, year-‐on-‐year percentage change sector 362 -‐19 6 5 5 7.5 7.5 US Sweden Total 555 -‐16 7 5 4 5.0 5.0 Source: Statistics Sweden, SEB 2.5 2.5 Euro zone Room for higher consumption 0.0 0.0 Private consumption will be sustained by income growth Correlation: -‐2.5 Sweden -‐ US: 0.82 -‐2.5 averaging more than 2 per cent annually in 2010-‐12. Sweden -‐ Euro zone: 0.91 -‐5.0 -‐5.0 spite of record-‐low nominal pay increases. Combined with rising employment, this will lead to a solid upturn -‐7.5 -‐7.5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 in total real wages and salaries. In addition, Sweden’s Source: Reuters Ecowin nearly one percentage point annually during 2010-‐2012. But if the international economic situation should Household income and consumption deteriorate dramatically, Sweden will inevitably be af-‐ Year-‐on-‐year percentage change fected. A deep downturn in international trade, driven for example by the emergence of new problems in the 2009 2010 2011 2012 Consumption -‐0.8 2.9 2.6 2.2 historical correlation with US and euro zone growth is high. In such crisis situations, Sweden is extra vulner-‐ Income 0.9 1.8 2.9 2.2 able in its role as a small open economy. Savings ratio 12.6 11.6 11.8 11.8 Higher resource utilisation means Source: Statistics Sweden, SEB capital spending During the economic crisis, Sweden’s household savings Because of the steep deceleration in manufactur-‐ ratio reached record-‐high levels. A gradual decline in ing during 2008-‐2009, capacity utilisation plunged to unemployment and a strong wealth position, with home record-‐low levels, with a sharp fall in capital spending prices at record levels, mean that households could as a consequence. Capacity utilisation has now rapidly now reduce their saving. We thus expect the savings rebounded and is back at levels more consistent with a ratio to fall by one percentage point this year. In 2011 normal recession. and 2012, our forecast is that consumption will largely Capital spending in the business sector began climb-‐ follow the trend of income, but the uncertainty risks in ing early in 2010 from very low levels. The recovery is our consumption forecast is on the upside. continuing, according to the Statistics Sweden business Home prices investment survey. The upturn is relatively broad-‐based, Index 2000 = 100 with higher activity both in manufacturing and in many 250 250 domestically oriented sectors. The upturn will continue 225 225 during the next couple of years, but the level of capital 200 200 spending in 2012 will remain lower than before the 175 175 economic crisis. Residential construction in Sweden has 150 150 also rebounded sharply in recent months. As a percent-‐ 125 125 age of GDP, it has been lower than in nearly all other EU 100 100 rising home prices. 75 75 00 01 02 03 04 05 06 07 08 09 10 United Kingdom Denmark Sweden Norway Spain US Germany Source: Reuters EcoWin Nordic Outlook – August 2010 | 37
  • 37. Sweden Imbalances are being postponed Households continuing to increase their debts In a longer perspective, however, there is reason for Per cent of disposable income greater concern. Due to the strong transmission mecha-‐ 11 180 nism in Swedish monetary policy, household borrowing 10 160 is continuing to increase far faster than income. This 9 140 diverges sharply from the pattern in other countries. 8 Home prices have rebounded after a brief slump and 7 120 6 have thus doubled over the past ten years. In an inter-‐ 100 5 national comparison only Spain despite the downturn 80 4 of recent years shows a larger price increase for the 3 60 decade as a whole. 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 There are, of course, various reassuring special features  Sweden:  Interest  rate  burden  after  taxes  (LHS)  Sweden:  Debts  (RHS) in the Swedish housing market, such as high household  US:  Debts  (RHS) saving, low residential construction and fewer specu-‐ Source: Riksbank, Federal Reserve, SEB lative elements in the housing market. Yet the gap between Sweden and other countries is sizeable. The The experiences of other countries show that a build-‐ process of de-‐leveraging and adjustment of home prices up of debt as rapid as in Sweden usually ends rather that is now quite typical of other countries has thus not abruptly. This is often associated with a negative spiral begun in Sweden. in which falling home prices lead to increased sav-‐ Major Swedish GDP revisions In recent months, revisions in the Swedish GDP growth cussed in detail the discrepancy that existed between forecast have been larger than in other countries. a strong labour market, rising optimism and upside Until the end of May 2010, the consensus forecast was around 2 per cent. Then it rose to 3.5 per cent in August, and we expect the upward trend to continue 2009, on the other hand. in the coming months in line with our own forecast. There are similar trends in other countries whose GDP bottomed in Q1 2009, revised figure show cyclical patterns are strongly dependent on interna-‐ Index Q1 2008 = 100 101 101 tional trade and the market for manufactured goods. For example, GDP growth in Japan was revised sharply 100 100 upward during the spring, but weak second quarter 99 99 GDP makes a new downswing in the consensus forecast 98 98 likely. As for Germany, the strong data of recent Aug 2010 97 97 -‐ 96 96 sus forecast. 95 95 GDP growth 2010 94 94 Per cent according to Consensus Forecasts Feb 2010 3.5 3.5 93 93 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 3.0 3.0 08 09 10 Source: SCB 2.5 2.5 2.0 2.0 picture changed. The new data indicate that GDP 1.5 1.5 1.0 1.0 far more consistent with other economic information. 0.5 0.5 Technically speaking, this greatly changed the basis 0.0 0.0 for the full-‐year 2010 forecast. In our box in May, Jan Mar May Jul Sep Nov Jan Mar May Jul 09 10 we implicitly assumed that such a revision would be US Euro zone Germany unavoidable, but we could naturally not draw the full Japan Sweden Source:  Consensus  Economics consequences of this revision. The major adjustments in Swedish GDP forecasts for 2010 can thus be viewed The change in the Swedish forecast is also partly due to revisions in the national accounts. In the May is-‐ economy on shifts in the global economic situation, sue of Nordic Outlook, we predicted GDP growth of but also as showing that revisions in the statistics may 3.0 per cent in Sweden during 2010, well above the be more arbitrary in small countries. consensus forecast at that time. In the box entitled “Large gap between GDP and labour market”, we dis-‐ 38 | Nordic Outlook – August 2010
  • 38. Sweden ing, declining consumption and rising unemployment. Statistics on new job vacancies and lay-‐off announce-‐ Economic policy makers in Sweden ments do not provide quite as bright a picture of monetary policy face the challenge of ensuring a soft developments but still indicate that the employment landing for credit growth and home prices, which so upturn is continuing to gain strength. Looking a bit many countries have failed to achieve. further ahead, the recovery in GDP nevertheless points Expansive hiring plans in the business sector to a moderate upturn in employment. There is major 30 4 potential for productivity improvements after the large 20 SEB 3 declines of recent years, and this will reduce the need forecast for new hiring. 10 2 0 1 Low pay hikes in 2010 and 2011 -‐10 0 The 2010 wage round is now largely completed. Ac-‐ -‐20 -‐1 -‐30 -‐2 average contractual pay increases appear likely to end up at 1.9 per cent during 2010 and 1.7 per cent in 2011. -‐40 -‐3 These collective agreements were largely signed during -‐50 -‐4 a period when there were fears that unemployment 02 03 04 05 06 07 08 09 10 11 12 would climb far above today’s levels. Now that the la-‐  Companies   intending   to   boost   employee   numbers,   net   index   (LHS)  Employment,  year-­on-­year  percentage  change  (RHS) bour market is strengthening, it is reasonable to assume Source: NIER, Statistics Sweden, SEB that total pay increases will be somewhat higher than the agreed levels. Our forecast is that pay increases Falling unemployment will total 2.0 per cent in 2010 and 2.3 per cent in 2011. Seasonally adjusted unemployment has decreased rap-‐ Monthly statistics (according to the National Mediation are often volatile, especially during the summer, most and salary increases, even after taking into account the signs are that unemployment will now trend downward. Short-‐term indicators show that the downturn may Slower wage and salary increases occur quite rapidly in the near future. According to Year-‐on-‐year percentage change the NIER Economic Tendency Survey, for example, the 5.0 5.0 percentage of companies stating that they intend to 4.5 4.5 hire new employees payrolls is higher than at any time during 2007, when the number of jobs expanded by 4.0 4.0 more than 2.5 per cent. 3.5 3.5 3.0 3.0 Labour market, percentage change 2.5 2.5 2009 2010 2011 2012 2.0 2.0 Employment -‐2.1 0.9 1.2 0.5 1.5 1.5 Labour supply 0.2 1.0 0.5 0.3 01 02 03 04 05 06 07 08 09 10 Unemployment, % 8.3 8.5 7.9 7.6  Business  sector  Total Source: National Mediation Office Average hours worked -‐0.5 0.3 -‐0.4 0.0 The new collective agreements expire at the end of Productivity (GDP) -‐2.5 3.2 2.1 2.1 2011 or early in 2012. In the next wage round, trade unions will probably try to compensate for having Source: Statistics Sweden, SEB of an excessively pessimistic picture of the economic Productivity and GDP/hours situation and the labour market. Yet we believe that Index 2003 = 100 117.5 117.5 target, along with the fact that real wages rose in 2010 115.0 115.0 and 2011 despite low nominal increases, will help keep 112.5 112.5 wage formation problems from becoming too large. 15-‐year trend 110.0 110.0 We thus estimate that pay increases will accelerate 107.5 Productivity 107.5 to about 3.5 per cent during 2012, consistent with the SEB forecast average in recent decades. 105.0 105.0 102.5 102.5 100.0 100.0 97.5 97.5 will be low in the next couple of years. The krona has 03 04 05 06 07 08 09 10 11 12 appreciated greatly, following its sharp decline dur-‐ Source: Statistics Sweden, SEB Nordic Outlook – August 2010 | 39
  • 39. Sweden ing 2008-‐09. Prices of imported goods in Sweden rose sharply in 2009 unlike the euro zone, for example. expected to remain expansionary. Now that the krona is strengthening, much of the price upturn is likely to be reversed. This effect will help In the next few months, we expect the Riksbank to carry out the interest rate hikes it has announced, rais-‐ ing its key rate at each monetary policy meeting until Low inflation February. The repo rate will thus reach 1.5 per cent in Year-‐on-‐year percentage change February 2011. 5 5 4 SEB forecast 4 Indicators for capacity utilisation 45 90.0 3 3 40 87.5 2 2 35 85.0 1 1 30 82.5 0 0 25 80.0 -‐1 -‐1 20 77.5 -‐2 -‐2 15 75.0 08 09 10 11 12 10 72.5 CPIF CPIF excl energy and food CPI 5 70.0 Source: Statistics Sweden, SEB 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Labour shortage, share of firms (LHS) with a recovery in productivity, will also lead to a de-‐ Capacity utilisation, manufacturing, per cent (RHS) Source: NIER cline in unit labour cost both in 2010 and 2011. We also expect international price increases on imported goods After that, we expect the rate hiking cycle to shift to in general to be low. a slower pace. The recovery will lose momentum and meanwhile there will be increasing focus on Sweden’s interest rate) excluding energy and food fell gradu-‐ interest rates in other countries will indirectly affect ally from nearly 3 per cent at the end of 2009 to just the Riksbank, among other things because the krona above 1.5 per cent in July. We expect this downturn to will be appreciating. Since a large majority of Swed-‐ continue until mid-‐2011, when the effects of krona ap-‐ ish households have adjustable mortgage rates, home preciation culminate. After that there will be a gradual prices and lending are also likely to be very sensitive upturn, but CPIF will remain below the Riksbank’s 2 per to higher short-‐term interest rates. To some extent, the housing market will also cool as a result of the new will climb gradually to just above 2 per cent in 2011 mortgage loan ceiling. The change in funding for mort-‐ due to the Riksbank’s key rate hikes, which will boost gage institutions a shift towards longer-‐term funding the interest costs for home mortgages. will also contribute to a larger increase in short-‐term Rapidly climbing resource utilisation will represent The Riksbank’s estimates of a neutral key rate may also continue to be adjusted downward. Taking all factors into account, we expect the repo rate to stand at 2.25 when a period of economic expansion is about to culmi-‐ per cent late in 2011 and 3.0 per cent late in 2012. nate. That is presumably beyond our forecast horizon. Front-‐loaded key rate hikes Spread vs Germany The Riksbank now faces an ever-‐clearer dilemma. Very Basis points 1.5 0.7 strong Swedish GDP and labour market data imply a need for major revisions in forecasts. On the other 1.0 0.5 hand, the Riksbank must weigh this against downward 0.3 revisions in the international picture and increasing 0.5 0.1 0.0 US. -‐0.1 -‐0.5 In the short term, domestic factors will predomi-‐ -‐0.3 nate. Based on revisions of output and labour market -‐1.0 -‐0.5 gaps, the Riksbank will probably continue to draw the 99 00 01 02 03 04 05 06 07 08 09 10 11 12 conclusion that current interest rates are too low. In  Repo  rate  spread  (LHS) addition, home prices and lending are expected to  10  year  government  yield    (RHS) Source: Reuters EcoWin continue climbing faster than underlying factors justify. 40 | Nordic Outlook – August 2010
  • 40. Sweden Wider spread against Germany The differential between Swedish and ECB key interest Per cent of GDP rates is the most important explanatory variable behind divergences in long-‐term yields against Germany. We Sweden Euro zone Germany expect Sweden’s repo rate at the end of 2011 to be 2007 balance 3.5 -‐0.7 -‐0.2 Change since 2007 -‐4.5 -‐5.6 -‐3.5 GDP, change 08/09 -‐5.5 -‐3.6 -‐3.7 keep the yield spread narrower. Overall, we anticipate Source: Eurostat, Statistics Sweden that the spread will widen to 30 basis points by mid-‐ 2011, from around 0 points today. Swedish bond yields We expect Sweden’s central government debt to fall will thus climb slowly from today’s very depressed lev-‐ to 31.7 per cent of GDP in 2012: lower than before the els. This forecast implies that the Swedish yield curve economic crisis. This still includes more than SEK 100 mainly in the form of a loan to the Riksbank aimed at Normalised krona exchange rate strengthening its foreign exchange reserve. If the re-‐ The krona has regained most of the ground it lost dur-‐ serve reverted to normal size, this would reduce central ing the economic crisis years. In trade-‐weighted TCW government debt by nearly 3 per cent of GDP. In our terms, it is now only 3-‐4 per cent weaker that before calculations, we have not taken into account the incum-‐ the crisis broke out in 2007. The EUR/SEK exchange bent Alliance government’s declaration that it intends rate is now back in the upper part of the relatively to carry out divestments of state-‐owned companies stable 9.00-‐9.40 interval that prevailed during 2002-‐07. averaging SEK 25 billion (0.8 per cent of GDP) annually. Economic and interest rate forecasts unambiguously The graph below shows central government debt and indicate that the krona will continue to strength against the effect on central government debt of a repayment the euro. Our forecast that the EUR/SEK rate will be of the SEK 100 billion loan to the Riksbank and sales 9.00 at the end of 2010 remains unchanged. revenue of SEK 25 billion a year 2011 and 2012. Underlying fundamentals such as labour costs and cur-‐ Falling central government debt rent account point towards a further strengthening of Per cent of GDP the krona in a longer perspective. These fundamentals 75 75 -‐ 70 70 65 65 ing problems of the euro zone, we expect the krona to 60 60 strengthen past the 9.00 mark, reaching an exchange 55 55 rate of SEK 8.75 per euro at the end of 2011. Given our 50 50 EUR/USD forecast, the krona will end up at 6.89 per 45 45 dollar at the end of 2011. 40 40 35 35 The risks in our forecast of a continued apprecia-‐ 30 30 25 25 tion of the krona lie mainly in a clear deterioration in 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 risk appetite ahead. In the short term, an uncertain  Forecast parliamentary situation may also lead to a temporary  Forecast  with  privatisation  and  loan  repayment weakening of the currency. Source: Statistics Sweden, SEB Unlike most other OECD countries, Sweden will pursue to improve. This is due to brighter economic prospects, but also to unexpectedly strong tax revenue. Sweden meanwhile about SEK 25 billion (0.8 per cent of GDP). The shape managing to carry out expansionary measures aimed at of this stimulus will naturally depend on the election easing the impact of the crisis mainly due to its strong outcome, but tax cuts for pensioners totalling SEK 5-‐10 billion and additional billions to the local government sector will be important elements of economic policy, both Germany and the euro zone as a whole posted def-‐ regardless of the election outcome. icits despite several years of strong economic growth. There is further room for reforms in the years after Nor was the historical pattern of greater cyclical sensi-‐ 2011. The government’s latest estimate is a total of SEK This was mainly due to a relatively moderate downturn a whole (of which SEK 10 billion in 2011), beyond what in the labour market as well as stable private consump-‐ had already been announced. In our assessment, this tion, which kept up value-‐added tax revenue. is a cautious forecast which includes safety margins Nordic Outlook – August 2010 | 41
  • 41. Sweden beyond the surplus targets that are part of the existing with the Green Party and the Left Party has probably also created greater uncertainty about the Red-‐Green coalition’s ability to govern. During the election campaign, the battle for centrist voters has escalated. As a result, the two blocks have In spite of this, the election outcome is far from moved closer to each other, among other things be-‐ decided. Public opinion surveys in August have shown cause the government has made its election programme a very even race, though with a lead for the Alliance. more demand-‐oriented and toned down its emphasis on Most surveys have nevertheless shown a narrower gap creating incentives to join the labour market. Yet there between the blocks than at the same point before the are still important differences between the two govern-‐ 2002 and 2006 parliamentary elections. In both these ing alternatives when it comes to economic policy. An elections, the gaps between the blocks narrowed in the Alliance government would continue its current policy of strengthening the driving forces behind working, by likely election outcome is that the Alliance will win enacting further earned income deductions and social more seats than the Red-‐Green block. it will restore earlier cuts in compensation levels in the In most surveys, the right-‐wing populist Sweden Demo-‐ transfer payment system. The Red-‐Green block has also proposed tax increases of about SEK 10 billion in the minimum of voter support required to win any seats at form of energy, payroll and wealth taxes. This kind of all. The party is relatively likely to make it into Parlia-‐ more demand-‐oriented and perhaps more expansionary ment. An Alliance government without a majority of policy will lead to a somewhat greater need for interest its own would be forced to seek support from one or rate hikes. more other parties on various issues. Such an election outcome might create short-‐term concerns and lead to Per cent of GDP foreign exchange markets. Looking further ahead, how-‐ -‐ 2009 2010 2011 2012 Revenue 52.4 51.7 50.7 50.7 strong support, and in the long term such a parliamen-‐ Expenditures 53.4 52.1 51.2 50.3 tary situation may lead to agreements across the divide between the two main blocks, which would contribute Net lending -‐1.0 -‐0.5 -‐0.6 0.3 to political stability. General gov’t gross debt 41.7 41.3 40.1 38.2 Central gov’t debt 37.0 34.8 33.6 31.7 Central gov’t borrowing Requirement, SEK bn 176 12 24 -‐7 Source: Statistics Sweden, SEB A new minority government? In the course of 2010 the Alliance government has grad-‐ ually increased its support in voter opinion polls and has moved ahead of the Red-‐Green block. The improved Swedish economy, in clear contrast to the problems of other countries, has contributed to this improvement. The Alliance government has shown that it can steer the country through an economic crisis while sticking to -‐ ised such traditional Social Democratic arguments as on the party’s earlier decades-‐long tenure in govern-‐ ment. The Social Democrats’ new formal collaboration 42 | Nordic Outlook – August 2010
  • 42. Denmark Modest growth but better balance The labour market is stabilising Because of the upswing in exports, the trade and cur-‐ rent account balances have again shown large surpluses Large foreign trade surpluses during the past year. These will shrink somewhat as imports gradually strengthen. After an upturn from a very low 1.7 per cent in the summer of 2008, unemployment has levelled off at The Danish economy is climbing at a modest pace. First 4-‐4.5 per cent in the past six months. We predict a quarter GDP was 0.6 per cent higher than in the fourth slow downturn to an average of 3.5 per cent in 2012. quarter of 2009. This third straight quarter of growth The jobless rate can fall at least one percentage point was somewhat stronger than expected. Sentiment from today’s level without triggering a surge in pay and indicators are signalling a continued gradual recovery. prices. Our pay forecast is continued slow increases Both manufacturing and service sector surveys have of slightly above 2 per cent this year and next. The trended upward for more than a year. After a minor deceleration in wage pressure over the past few years, slowdown last spring, the purchasing managers’ index in combined with this year’s weakening of the Danish manufacturing has strengthened, again climbing above krone, has strengthened competitiveness. Pay growth the expansion level of 50. The service sector indica-‐ exceeding that of competitor countries has previously tor has shown a similar pattern, while expectations at been a structural problem, but the implementation of construction companies remain cautious. -‐ Exports, inventory build-‐up and public sector consump-‐ ket appears to have had a favourable impact. tion have initially driven the economic turnaround, but -‐ private consumption has also started to rebound this year. The upturn in domestic demand will be sluggish, trended downward to 1 per cent. Using the broad HICP measure to average less than 2 higher savings ambitions among households and much per cent in 2011 and just above 2 per cent in 2012. calmer construction and housing markets than during the overheating of 3-‐5 years ago. Home prices have climbed weakly for three straight quarters. We expect a above 5 per cent of GDP this year. Partly because of continued weak upturn in prices. Big trade surpluses are back a DKK billion, moving three month average billion. This package came unexpectedly early, consid-‐ 9 9 ering that the economic upturn has just begun, but the 8 8 government probably wants to avoid announcing belt-‐ 7 7 6 6 tightening close to next year’s election. The measures 5 5 include lower public sector investments, deceleration 4 4 of automatic indexing of pensions and other transfer 3 3 2 2 payments plus cancellation of certain planned tax cuts. 1 1 We foresee that these measures will help shrink the 0 0 . -‐1 -‐1 -‐2 -‐2 Given robust surpluses in Denmark’s external balance, -‐3 -‐3 04 05 06 07 08 09 10 the central bank can leave its low 5 basis point spread Current account Trade balance Source: Reuters EcoWin year. However, we believe that Denmark will begin interest rate normalisation one–two quarters before Positive growth surprises in Sweden and Germany, and the ECB well as currency depreciation, are providing an extra 2012. Looking ahead a year or two, the spread vs the impetus for exports this year. This is the main reason ECB will gradually widen to 20 basis points, which has why we are historically been more normal. cent, compared to 1.5 per cent in May. The 2011 . We foresee . Nordic Outlook – August 2010 | 43
  • 43. Norway Mainland GDP back at previous peak level The consumption conundrum Unexpectedly weak H1 consumption The turn around mid-‐2009 was spurred by private consumption as households reacted to sharply lower Norges Bank constrained by ECB Weaker NOK in the near term demand. However, while private consumption was up -‐ half of 2010. The recovery in the Norwegian economy has been sub-‐ par so far, but activity accelerated towards mid-‐year as The weakening has been surprising considering that fun-‐ sequential growth in mainland GDP (excluding oil, gas supportive. One reason might be that the considerable per cent from the year-‐earlier period. Moreover, under-‐ boost to disposable income from Norges Bank’s deep lying momentum was somewhat better as a sharp drop rate cuts up until June 2009 was seen by households as in electricity production subtracted 0.2 points from a one-‐off. the quarterly growth rate in mainland GDP: excluding this, growth accelerated more markedly and the level Moreover, Norwegian households’ gross debt has surpassed the previous peak. risen from some 150 per cent of disposable income at the start of 2004 to slightly above 190 per cent by Meanwhile, overall GDP inched up only 0.1 per cent on end-‐2009. Part of the reason for a higher debt-‐to-‐in-‐ the quarter in Q2 and a sub-‐par 0.9 per cent year-‐on-‐ -‐ year, among other things due to another drop in exports ferences (such as more saving for pensions through of oil and gas and a substantial drag from higher net taxes) and high public savings. In particular, assets in imports of ships and oil platforms. An uneven recovery so far Year-‐on-‐year percentage change some 145 per cent of mainland GDP as of mid-‐2010. 12.5 20.0 10.0 15.0 Households have made correction 7.5 Per cent of disposable income 10.0 12.0 225 5.0 5.0 2.5 10.0 0.0 200 0.0 8.0 -‐2.5 -‐5.0 6.0 175 -‐5.0 -‐10.0 4.0 2.0 150 -‐7.5 -‐15.0 99 00 01 02 03 04 05 06 07 08 09 0.0 125 -‐2.0  Final  non-­oil  private  domestic  demand  (LHS)  Public  demand  (LHS) -‐4.0 100  Exports  traditional  goods  (RHS) 90 92 94 96 98 00 02 04 06 08 10 Source: Statistics Norway  Household  saving  ratio,  4Q  moving  average  (LHS) The 2010 forecast for growth in mainland GDP has  Household  savings  ratio  excl  share  dividends,  4Q  mov.  av.  (LHS)  Household  gross  debt  (RHS) been nudged down to 1.6 per cent because of the slow Source: Norges Bank, Statistics Norway start of the year, while 2011 should see acceleration Nonetheless, a period of debt consolidation might be to 2.7 per cent. The downward revision is mainly due likely, but it is uncertain whether the relative level will to lacklustre private consumption. However, non-‐oil start falling. This has happened before: gross debt fell investment shows signs of bottoming out and is likely from 148 per cent of disposable income in 1990 to 117 to add to overall growth going forward. Moreover, oil per cent in 1995. During that period, average annual companies expect markedly higher investment in 2011. growth in private consumption was broadly in line with Growth in overall GDP should be a modest 0.7 per cent that of real disposable income. It should be noted, in 2010 but somewhat stronger at 2.1 per cent in 2011. though, that interest expenses as a share of disposable 44 | Nordic Outlook – August 2010
  • 44. Norway income at the start of that period were approximately Our forecast for private consumption growth in 2010 has twice as high as today. So far, available data do not been cut markedly to 2.7 per cent, but growth should indicate that households have started to reduce their accelerate to 3.3 per cent in 2011. In addition, signs debts to any large extent. of the expected broadening in domestic demand are emerging, and growth in mainland GDP should acceler-‐ However, the household savings ratio shows a sizeable ate somewhat over the second half of 2010 and in 2011. correction from slightly negative at the start of 2008 In particular, private non-‐oil investments seem to have stable savings measure which excludes share dividends bottomed out. Residential investments, which fell by shows a similar trend and is far above its long-‐term a third between mid-‐2007 and end-‐2009, show signs average. of stabilising and new orders for dwellings have risen. Moreover, business investments outside manufacturing One more factor behind the soft patch in private con-‐ saw a very marked rebound in the second quarter. Such sumption was the 50 per cent spike in electricity prices investments tend to be very volatile, but they were up over the six months to March due to unusually cold winter weather. History shows that sharp movements in such prices, whether up or down, often have a rather immediate effect on consumption. This is not surpris-‐ Other indicators also suggest an improving outlook. ing, as electricity makes up a sizeable part of monthly Firstly, Norges Bank’s latest lending survey reported household expenses. In fact, the subsequent jump in rising loan demand from businesses, and lending to the sector has turned around. Secondly, producers of invest-‐ ment goods expect rising domestic demand according to Statistics Norway’s Business Tendency Survey, and Private consumption and inflation orders for such goods increased markedly in the second Percentage change over two quarters 6 -‐2.0 quarter from the year-‐earlier period. 5 -‐1.0 Investments in the manufacturing sector dropped 23 per 4 cent in the year to the second quarter of 2010. Manu-‐ 3 0.0 2 facturing output was up 4.3 per cent over the same pe-‐ 1 1.0 riod, and capacity utilisation increased somewhat. The 0 2.0 level remains well below its long-‐term average, which -‐1 will put a lid on future investment, although manufac-‐ 3.0 -‐2 turers reported higher planned investments in the Q2 -‐3 4.0 Business Tendency Survey. This suggests a slow improve-‐ 99 00 01 02 03 04 05 06 07 08 09 10 ment. Nonetheless, other business sectors will account  Private  consumption  (LHS) for all of the expected pickup in investment, averaging  Inflation,  lagged  1Q  (RHS) 4.6 per cent in 2011. Source: Statistics Norway The outlook has improved for oil sector investments as Signs of a broadening recovery well. Oil companies reported surprisingly high invest-‐ We expect fundamentals to reassert themselves and private consumption to re-‐accelerate over the re-‐ per cent higher in nominal terms than the expected mainder of the year. The correction in the household savings ratio has likely ended and consumption should manufacturers have shot up. We expect investments in be somewhat stronger than growth in real disposable in-‐ the oil sector to be up 5.0 per cent in 2011 following a come (about 2.5 per cent this year and next). In recent slight decline in 2010, providing stimuli to the rest of the economy, manufacturing in particular. should help consumption to recover. In addition, the labour market shows signs of a modest improvement, but there is a discrepancy in unemploy-‐ ment measures. The unemployment rate according to the annual rate for the core CPI-‐ATE measure (excluding the Labour Force Survey inched up from 3.3 per cent at taxes and energy) slowing more than one percentage end-‐2009 to 3.5 per cent on average in May-‐July. How-‐ point from last December to 1.3 per cent as of July, -‐ March to 1.9 per cent. Part of the slowing in headline clined to a level well below that at the end of last year. CPI is due to a marked turn in electricity prices fol-‐ Of the two measures, the latter has tended to be more lowing the surge until spring. In addition, the decline reliable in the past. In addition, employment shows tentative signs of accelerating, rising 0.5 per cent in Norwegian krone. This effect is likely to continue in the May-‐July from six months earlier. near term but will wane in due time. Nordic Outlook – August 2010 | 45
  • 45. Norway -‐ Year-‐on-‐year percentage change balances. Taking into account our new forecasts for 5 5 4 4 patch in growth abroad, we now expect the deposit 3 3 rate to remain at 2.00 per cent until year-‐end, with 2 2 1 1 0 0 -‐1 -‐1 -‐2 -‐2 -‐3 -‐3 We see several reasons for Norges Bank to continue -‐4 -‐4 -‐5 -‐5 hiking the deposit rate gradually thereafter. The output 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 gap is expected to be closed by early 2012 and core  CPI,  excluding  taxes  and  energy  Core  inflation,  domestic  goods  and  services bank’s room to manoeuvre will still be constrained by  Core  inflation,  imported  consumer  goods monetary policy elsewhere, as it will want to avoid a Source: Statistics Norway, SEB markedly stronger NOK. As the ECB and the Fed is now expected to keep their -‐ key interest rates unchanged until 2012, Norges Bank ary pressure is likely to remain muted. Wage growth is will move more slowly as well: we foresee the deposit expected to moderate from 4.5 per cent in 2009 to 3.5 rate ending 2011 at 2.75 per cent. Such a level implies per cent in 2010. Productivity has staged a recovery, a continued stimulative monetary policy as the real resulting in markedly slower growth in unit labour costs compared with the rather strong rise seen previously. will be less than ¾ percentage point according to our Overall, we now see a slightly more benign outlook forecast, well below what Norges Bank regards as a “normal” level of some 2 per cent. year, averaging 1.9 per cent in 2011 and close to Norges Bank’s 2.5 per cent medium-‐term target late in 2012. As indicated above, Norges Bank will continue to nor-‐ Even slower interest rate hikes malise its key rate at a faster pace than the ECB. Our Norges Bank’s monetary policy meeting in August con-‐ forecast implies that the interest rate spread will be 175 basis points by the end of 2011. While this normally Policy Report, in which the bank once again cut its means that the 10-‐year government bond yield spread optimal rate path quite markedly: the rate path shows against Germany should rise, we expect it to remain a 50/50 chance for a hike in the 2.00 per cent deposit unchanged or even decline somewhat from current high rate before end-‐2010, while the report lowered the levels. The current low global bond yield environment makes Norwegian government bonds attractive from a points to 2.74 per cent on average. yield pick-‐up perspective. We thus believe that the 10-‐ Norges Bank's rate path year government bond yield will be unchanged at 2.95 8 8 per cent at the end of 2010, rising to 3.50 per cent by end-‐2011 and 3.95 per cent at the end of 2012. 7 7 6 6 5 5 4 4 The Norwegian krone remains a central element of Norwegian monetary policy. Although Norges Bank has 3 3 focused more on the European debt crisis in recent 2 2 months, the central bank continues to express concern 1 1 about the relatively strong currency. At today’s levels, 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Norges Bank deposit rate Optimal rate path, MPR 2/10 Optimal rate path, MPR 1/10 Source: Norges Bank foresee a weaker krone, at least in the short term. The Domestic economic developments have been in line Norges Bank deposit rate will probably remain at 2 per with Norges Bank’s expectations and suggest that the cent until early 2011, and although expectations are set bank should continue hiking its key rate as planned. very low, we will not see hawkish surprises during the Among other things, the bank regards a gradual rise next few months. “closer to a more normal level” as warranted, in 46 | Nordic Outlook – August 2010
  • 46. Norway Exchange rate EUR/NOK 10.0 10.0 9.5 9.5 9.0 9.0 8.5 8.5 8.0 8.0 7.5 7.5 7.0 7.0 02 03 04 05 06 07 08 09 10  EUR/NOK  spot  SEB  regression Source: Reuters EcoWin, SEB Foreign interest in buying Norwegian equities has also cooled somewhat, although we saw a slight increase in the summer. Still, there is a risk that the global eco-‐ nomic slowdown will reduce foreign investors’ purchas-‐ es of Norwegian company shares and that capital will be repatriated, which would have a big impact on the NOK. Norges Bank has also announced that it will begin buying foreign currencies for the Government Pension top it off, the NOK looks expensive in real trade-‐weight-‐ ed terms. Our internal EUR/NOK model (including oil prices, interest rate spreads and risk appetite) points at an equilibrium exchange rate close to 8.60. At the end of 2010, the EUR/NOK rate will be 8.20. In a slightly longer perspective, we expect the krone to strengthen as Norges Bank continues to raise its key interest rate and the global economic outlook improves. The EUR/ NOK exchange rate will be 7.90 at the end of 2011. Nordic Outlook – August 2010 | 47
  • 47. Finland Strong autumn and winter Leading indicators climbing, GDP taking cut back on consumption last year, are being stimulated off by low interest rates and have already begun to spend; private consumption will climb by around 2 per cent both this year and in 2011. The household savings ratio will decline somewhat. Altogether, GDP and somewhat higher The Finnish economy was very hard hit by last year’s in 2012 roughly the same forecast as in May and still global slowdown and early 2010 was unexpectedly well above consensus. The risks in the immediate future weak. GDP fell by 8 per cent in 2009 the largest de-‐ are on the upside. Given Finland’s export structure, the cline in the OECD economy could take off even more strongly, thus follow-‐ ing the pattern in Sweden and Germany. quarter  of  last  year.  However,  the  downturn  was  largely   due  to  the  protracted  dock  workers’  strike,  which  para-­ The negative labour market trend following the crisis lysed  a  large  percentage  of  exports,  hurting  the  paper   has ended. In the second quarter, the number of job and  forest  product  industry  in  particular.   vacancies was nearly 30 per cent higher than a year earlier. Unemployment peaked at 8.9 per cent in Janu-‐ Yet leading indicators are still pointing upward. ary and has now fallen to 8.2 per cent. We expect the Surveys show that the service sector is leading the up-‐ jobless rate to continue downward towards 7.5 per cent turn, but the manufacturing sector and recently the in mid-‐2011, then to 7 per cent at the end of 2012, construction industry are also recovering. Industrial somewhat below the OECD’s measure of non-‐accelerat-‐ production rose 2.1 per cent month-‐to-‐month in June, equivalent to a year-‐on-‐year increase of nearly 15 per cent. Today retail sales are also rebounding, with a Wage and price formation are affected by the labour year-‐on-‐year increase of more than 4 per cent in June. market with a certain time lag, and last year’s upturn in unemployment and collective agreements point substantially stronger towards low increase in hourly wages both this year and growth in a number of important countries, especially next. In the economy as a whole, wages and salaries Germany and Sweden, which each buy 10 per cent of will climb by 2.8 per cent this year and just below 2.5 Finnish exports. Continued strong growth in Russia and per cent in 2011. In 2012, the rate of pay increases China (together accounting for 15 per cent of exports) will accelerate due to a tighter labour market situa is also having a positive impact. Altogether, exports will tion. increase by about 6 per cent this year and in 2011. Service sector leading the upturn Index has gradually climbed this year: from -‐0.2 per cent 70 70 year-‐on-‐year in January to 1 per cent in July. This sum-‐ 50 50 mer’s value-‐added tax hike will result in a continued 30 30 upturn this autumn and winter. up averaging 1 per cent this year, just over 2 per cent 10 10 in 2011 and even higher in 2012. Eurostat’s harmonised -‐10 -‐10 -‐ -‐30 -‐30 -‐50 -‐50 will average 1.5 per cent this year, then climb gradually -‐70 -‐70 to somewhat above 2 per cent in 2011 and 2012. 00 01 02 03 04 05 06 07 08 09 10 Decent growth and falling unemployment will con-‐ Construction sector Service sector Manufacturing sector Source: DG ECFIN cent of GDP this year and less than 3 per cent in 2011. Capital spending will grow by 2 per cent this year, GDP among other things due to rapidly rising capacity uti-‐ better shape than the euro zone average. lisation (about 80 per cent today). Households, which 48 | Nordic Outlook – August 2010
  • 48. Economic data DENMARK Yearly change in per cent 2009 level, DKK bn 2009 2010 2011 2012 Gross domestic product 1,660 -‐4.7 1.8 1.8 2.2 Private consumption 817 -‐4.3 1.9 2.2 2.7 Public consumption 492 3.4 0.8 0.3 0.5 Stockbuilding (change as % of GDP) -‐2.4 0.7 0.0 0.0 Exports 784 -‐10.2 6.0 5.5 5.0 Imports 727 -‐13.2 4.5 5.7 6.0 Unemployment (%) 3.6 4.4 4.0 3.5 Consumer prices, harmonised 1.1 2.1 1.9 2.1 Wage cost 3.1 2.3 2.1 3.0 Current account, % of GDP 4.0 3.5 3.0 2.5 Public sector debt, % of GDP 39.0 45.0 47.0 48.0 FINANCIAL FORECASTS Deposit rate 1.05 1.05 1.05 1.10 1.65 1.95 10-‐year bond yield 2.21 2.30 2.55 2.95 3.15 3.35 10-‐year spread to Germany, bp 6 10 15 15 15 15 USD/DKK 5.85 6.11 5.96 5.87 5.73 5.73 EUR/DKK 7.45 7.45 7.45 7.45 7.45 7.45 NORWAY Yearly change in per cent 2009 level, NOK bn 2009 2010 2011 2012 Gross domestic product 2,256 -‐1.4 0.7 2.1 2.1 Gross domestic product (Mainland Norway) 1,732 -‐1.4 1.6 2.7 2.9 Private consumption 956 0.2 2.7 3.3 3.1 Public consumption 487 4.7 3.0 2.4 1.8 Stockbuilding (change as % of GDP) -‐2.2 1.7 0.0 0.0 Exports 1,008 -‐4.0 -‐0.1 0.7 1.9 Imports 638 -‐11.5 6.7 3.4 4.2 Unemployment (%) 3.2 3.6 3.6 3.4 Consumer prices 2.1 2.4 1.6 2.4 CPI-‐ATE 2.6 1.5 1.8 2.3 Wage cost 4.5 3.5 3.7 4.0 Deposit rate 2.00 2.00 2.25 2.75 3.25 3.75 10-‐year bond yield 2.97 2.95 3.00 3.50 3.75 3.95 10-‐year spread to Germany, bp 82 75 60 70 75 75 USD/NOK 6.29 6.72 6.40 6.22 6.00 6.00 EUR/NOK 8.01 8.20 8.00 7.90 7.80 7.80 Nordic Outlook – August 2010 | 49
  • 49. Nordic key economic data SWEDEN Yearly change in per cent 2009 level, SEK bn 2009 2010 2011 2012 Gross domestic product 3,108 -‐5.1 4.7 2.9 2.3 Gross domestic product, working day adjusted -‐5.0 4.4 2.9 2.7 Private consumption 1,516 -‐0.8 2.9 2.6 2.2 Public consumption 863 1.7 1.0 0.9 0.9 Stockbuilding (change as % of GDP) -‐41 -‐1.4 0.7 0.2 0.2 Exports 1,507 -‐12.4 11.3 6.7 5.1 Imports 1,294 -‐13.2 12.4 6.9 5.1 Unemployment, (%) 8.3 8.5 7.8 7.6 Employment -‐2.1 0.9 1.2 0.5 Industrial production -‐19.1 10.0 5.0 4.0 Consumer prices -‐0.3 1.2 1.7 2.2 CPIX 1.9 2.0 1.1 1.6 Wage cost 3.4 2.0 2.3 3.5 Household savings ratio (%) 12.6 11.6 11.8 11.8 Real disposable income 0.9 1.8 2.9 2.2 Trade balance, % of GDP 4.0 3.3 2.5 2.5 Current account, % of GDP 7.5 6.0 5.5 5.5 Central government borrowing, SEK bn 176 12 24 -‐7 Public sector debt, % of GDP 42 41 40 38 Repo rate 0.50 1.25 1.50 2.25 2.75 3.00 3-‐month interest rate, STIBOR 1.03 1.78 1.85 2.65 3.15 3.40 10-‐year bond yield 2.25 2.30 2.70 3.20 3.40 3.60 10-‐year spread to Germany, bp 10 10 30 40 40 40 USD/SEK 7.41 7.38 7.20 6.89 6.73 6.77 EUR/SEK 9.43 9.00 9.00 8.75 8.75 8.80 TCW 129.6 124.6 123.5 120.4 120.0 120.7 FINLAND Yearly change in per cent 2009 level, EUR bn 2009 2010 2011 2012 Gross domestic product 171 -‐7.8 2.5 2.6 2.7 Private consumption 94 -‐1.8 2.0 2.2 2.0 Public consumption 43 0.8 0.5 0.7 1.1 Stockbuilding (change as % of GDP) -‐0.9 0.3 0.1 0.0 Exports 62 -‐24.4 6.6 6.0 5.5 Imports 57 -‐22.3 6.0 5.9 5.0 Unemployment (%) 8.2 8.4 7.7 7.1 Consumer prices, harmonised 1.6 1.5 2.2 2.5 Wage cost 3.9 2.8 2.4 2.9 Current account, % of GDP 1.3 1.8 2.1 2.3 Public sector debt, % of GDP 44.0 47.1 49.7 51.9 50 | Nordic Outlook – August 2010
  • 50. International key economic data EURO ZONE Yearly change in per cent 2009 level, EUR bn 2009 2010 2011 2012 Gross domestic product 8,979 -‐4.1 1.6 1.3 1.5 Private consumption 5,170 -‐1.2 0.2 0.7 1.1 Public consumption 1,975 2.7 1.5 1.4 1.6 Stockbuilding (change as % of GDP) -‐0.8 0.7 0.2 0.0 Exports 3,259 -‐13.2 7.6 4.7 4.5 Imports 3,140 -‐11.9 6.6 6.0 5.1 Unemployment (%) 9.4 10.0 9.7 9.2 Consumer prices, harmonised 0.3 1.4 0.8 1.2 Household savings ratio (%) 9.6 9.5 9.3 9.0 US Yearly change in per cent 2009 level, USD bn 2009 2010 2011 2012 Gross domestic product 14,119 -‐2.6 2.6 2.2 2.9 Private consumption 10,001 -‐1.2 1.5 2.2 2.4 Public consumption 2,915 1.6 1.1 2.2 2.0 Stockbuilding (change as % of GDP) -‐0.6 1.4 0.1 0.0 Exports 1,578 -‐9.5 12.0 8.2 6.6 Imports 1,965 -‐13.8 14.8 13.4 7.4 Unemployment (%) 9.3 9.5 9.0 7.8 Consumer prices -‐0.3 1.6 0.8 1.2 Household savings ratio (%) 5.9 6.5 7.9 7.6 LARGE INDUSTRIAL COUNTRIES Yearly change in percent 2009 2010 2011 2012 GDP United Kingdom -‐4.9 1.7 2.0 2.2 Japan -‐5.2 2.5 1.5 1.5 Germany -‐4.7 3.3 2.1 1.8 France -‐2.5 1.5 1.5 1.7 Italy -‐5.1 1.0 1.1 1.5 United Kingdom 2.2 3.1 2.1 1.3 Japan -‐1.3 -‐1.0 0.0 0.3 Germany 0.2 0.9 1.2 1.5 France 0.1 1.6 1.7 1.9 Italy 0.8 1.6 1.7 1.9 Unemployment (%) United Kingdom 7.6 7.9 8.2 7.9 Japan 5.1 5.2 5.2 5.3 Germany 7.5 7.8 7.2 6.9 France 9.4 10.1 9.8 9.5 Italy 7.8 8.4 8.1 7.8 Nordic Outlook – August 2010 | 51
  • 51. International key economic data EASTERN EUROPE 2009 2010 2011 2012 GDP, yearly change in per cent Estonia -‐14.1 2.0 5.0 4.0 Latvia -‐18.0 -‐1.5 4.0 5.0 Lithuania -‐14.8 1.0 4.0 4.5 Poland 1.7 3.5 4.0 4.5 Russia -‐7.9 4.5 5.0 5.5 Ukraine -‐15.1 5.0 4.0 4.5 , yearly change in per cent Estonia 0.2 2.5 3.0 2.0 Latvia 3.3 -‐1.0 1.9 1.8 Lithuania 4.2 1.0 2.0 3.0 Poland 3.4 2.5 2.7 2.9 Russia 11.7 7.0 7.5 8.5 Ukraine 15.9 9.5 11.0 10.0 FINANCIAL FORECASTS Dec12 US Fed funds 0.25 0.25 0.25 0.25 0.75 1.25 Japan Call money rate 0.10 0.10 0.10 0.10 0.10 0.50 United Kingdom Repo rate 0.50 0.50 0.50 0.75 1.25 2.00 Bond yields US 10 years 2.48 2.45 2.50 3.00 3.20 3.50 Japan 10 years 0.95 1.00 1.20 1.50 1.70 1.90 Germany 10 years 2.15 2.20 2.40 2.80 3.00 3.20 United Kingdom 10 years 2.89 2.90 3.00 3.40 3.60 3.80 Exchange rates USD/JPY 84 82 85 85 90 95 EUR/USD 1.27 1.22 1.25 1.27 1.30 1.30 EUR/JPY 107 100 106 108 117 124 GBP/USD 1.55 1.49 1.47 1.55 1.63 1.67 EUR/GBP 0.82 0.82 0.85 0.82 0.80 0.78 GLOBAL KEY INDICATORS Yearly percentage change 2009 2010 2011 2012 GDP OECD -‐3.3 2.2 2.0 2.3 GDP world -‐0.6 4.4 3.8 4.3 CPI OECD 0.1 1.4 0.9 1.2 Export market OECD -‐11.5 7.7 5.7 7.8 Oil price, Brent (USD/barrel) 61.9 76.2 80.0 80.0 52 | Nordic Outlook – August 2010
  • 52. International Cash & Treasury Management Conference in Geneva 2010 Take the opportunity to network with colleagues in the same line of business by attending the largest conference on International Cash and Treasury Management. Programme and registration on Eurofinance website: Time October – , Place Geneva Palexpo Geneva, Switzerland We hope to see you in Geneva at the SEB stand! SEB
  • 53. Finland St: Petersburg Norway Moskva Russia Sweden Estonia Latvia New York Denmark Beijing Lithuania Dublin Shanghai London New Delhi Poland Germany Warsaw Ukraine Luxembourg Kiev Singapore Geneve Nice São Paulo SEB is a North European financial group serving some 400,000 corporate customers and institutions and five million private individuals. SEB offers universal banking services in Sweden and the Baltic countries - Estonia, Latvia and Lithuania. It also has local presence in the other Nordic countries and in Germany and a global presence through its international network in major financial centres. On 30 June 2010, the Group’s total assets amounted to SEK 2,318bn while its assets under management totalled SEK 1,328bn. The Group has about 19,000 employees. Read more about SEB at With capital, knowledge and experience, we generate value for our customers − a task in which our research activities are highly beneficial. Macroeconomic assessments are provided by our Economic Research unit. Based on current conditions, official policies and the long-term performance of the financial market, the Bank presents its views on the economic situation − locally, regionally and globally. One of the key publications from the Economic Research unit is the quarterly Nordic Outlook, which presents analyses covering the economic situation in the world as well as Europe and Sweden. Another publication is Eastern European Outlook, which deals with the Baltics, Poland, Russia and Ukraine and appears twice a year. SEMB0041  2010.08