Swedbank analyses theSwedish and Baltic Economies.

1. Swedbank Economic Outlook
Swedbank Analyses the Swedish and Baltic Economies April 7, 2011
A more balanced growth going forward
Global development
Table of Content:  The global recovery is on despite Japan’s disaster, the Middle East’s
political turmoil, and the euro zone’s debt crisis. Global GDP increased
by 4.7% last year and will settle in at 4% this year and next as economic
Introduction: The recovery policies tighten.
takes hold – but headwinds  A backlash can still happen. Important challenges are rising commodity
prices, overheated emerging markets, unsustainable sovereign debts,
are picking up 2 and fragile banks in many advanced countries, causing financial instability
and new recessions.
Global: Inflation and sovereign Sweden
debt endanger the global  The Swedish economy responded vigorously to the stabilising global
recovery 4 conditions and growth reached 5.3% last year, amongst the highest in the
advanced economies. In particular, employment picked up strongly but a
large number of unemployed are having difficulties finding jobs.
Sweden: Households shift to a  We expect investments to be the main driver of growth in 2011 and 2012,
lower gear 6 while household consumption is set to fall back as prices and interest
rates are rising. Real economic growth is projected at 4% in 2011 and
2.6% in 2012. Monetary and fiscal policy will continue to provide support,
Estonia: Recovering domestic although the Riksbank is gradually reversing its stance. The main
economic policy challenge remains the labour market.
demand supports economic
growth 11 Estonia
 In 2010, the Estonian economy grew by 3.1%, driven mainly by exports.
Towards the end of the year, domestic demand started contributing, and
Latvia: Stronger recovery, but both investments and private consumption showed positive annual growth
lack of reforms cuts into future rates in the fourth quarter. The successful euro adoption and strong fiscal
position added to the positive picture.
growth 15
 In 2011 and 2012, we expect the Estonian economy to grow by 4.5%.
Domestic demand will gradually replace exports as the main source of
Lithuania: Growth accelerates growth, with investments as the main factor. Private consumption will
recover only slowly due to modest wage developments, increasing prices,
and it’s more balanced 19 and lingering unemployment.
Latvia
 The recovery in Latvia has continued to strengthen and widen. By the end
of 2010, GDP had grown by 3.7% since the trough in the autumn of 2009.
Economic growth and a more stable fiscal situation have helped raise
Latvia’s sovereign credit ratings.
 Somewhat disappointing post-election fiscal and structural policies will
weigh down on growth, as higher taxes are undermining private spending.
We still expect 4% economic growth in 2011 but are lowering the forecast
for 2012 to 3.9% (4.2% before). Export growth is expected to slow due to
capacity constraints, but investments will pick up.
Lithuania
 Recovery accelerated in the final quarter of 2010, when GDP grew
annually by 4.6% and boosted last year’s growth to 1.3%. Overall in 2010,
only inventories had a positive impact on growth, but in the last quarter
both investments and household consumption gave support.
 We expect this pace to continue this year and in 2012, and raise our GDP
forecast to 4.2% and 4.7%, respectively. Recovery will be much more
balanced as investments and household consumption will continue to
contribute to growth. Due to global developments, inflation will be higher,
jeopardising EMU entry. Budget consolidation is also a challenge.
April 7, 2011 1

2. Introduction Swedbank Economic Outlook
The recovery takes hold – but headwinds are
picking up
Sweden and the Baltic countries US$8 to US$98 for next year. This supportive of growth in Sweden and
benefited from strong global tailwinds means higher inflation and interest the Baltics, the headwinds facing
during last year, and the recovery rates in many countries. While the the global economy are building up.
has gained momentum, resulting in democratization process in the Middle The higher commodity prices risk
GDP growth of some 4-4.5% in all East has recently contributed to the creating both higher inflation and
four countries this year. As stimuli higher oil price, the global recovery negative growth prospects. In the
from economic policy worldwide are and the expansionary monetary policy emerging markets, overheating risks
abating, growth in external demand is are other important factors explaining will increase, and, in certain advanced
slowing. Still, exports remain important the upturn. economies, policy rates may be
for growth, not least as it spurs raised earlier than expected, despite
In 2011 and 2012, the “two-speed
investments and employment. the negative growth impact from the
world economy” continues, with
fiscal side. The sovereign debt crisis
Headwinds, however, are picking global growth of 4% both years. This
in the advanced countries is causing
up due to higher commodity prices, is a slight upward revision due to the
uncertainties with regard to growth, the
which increase inflation and interest faster recovery last year. Emerging
banking sector, and political stability.
rates. While households will become markets will continue to make up the
Portugal is the third euro country
more supportive of growth in the Baltic major share of global growth, while
requesting a rescue package, while
countries although inflation holds advanced countries still struggle with
Spain is likely to make it through the
back developments somewhat, their structural problems involving labour,
crisis without external support. The
importance will decline in Sweden as credits, and housing. Fiscal austerity
risk of an unorderly restructuring
higher costs for energy and mortgages will slow demand growth, especially in
of Greek and Irish sovereign debt
will slow consumption. GDP growth in Europe, while the US and Japanese
should also not be neglected. The
the Baltic countries will stay at around consolidation plans have been
euro zone is, despite problems with
4-4.5 % or rise slightly in 2012, while postponed. In Japan, the combined
crisis management, struggling to
Sweden’s growth declines to 2.6%, effect of the earthquake, the tsunami,
improve the debt situation, while the
which is still above trend growth. and nuclear power accident explains
US is not. If the US postpones its more
the change in the government’s
Since our January forecast, global ambitious plans for medium-term fiscal
fiscal position. The disaster will slow
recovery has continued. Last year’s consolidation much longer, there would
growth this year, but increase it next
global GDP is seen to have been be risks for worldwide financial market
year as reconstruction speeds up.
somewhat stronger than expected turbulence and new recessions.
Although Japan will be severely hit by
at 4.7% (4.6% in January). Most
the disaster, the effects on the global We have assumed that the European
important, commodity prices have
outlook will most likely be only mildly Central Bank (ECB) will start hiking
risen further, and our assumption
negative. policy interest rates this spring, while
regarding the oil price has been raised
the Bank of England (BOE) will wait
US$20 to US$105 for 2011, and by Even if external demand is still
until autumn. These actions are
sooner than in our previous forecast.
Macro economic indicators, 2009- 2012 The US Federal Reserve is still
2009 2010 2011f 2012f
Real GDP growth, annual change in % expected to wait to make monetary
Sweden (calender adjusted) -5.3 5.3 4.0 2.6 policy less expansionary until next
Estonia -13.9 3.1 4.5 4.5
Latvia -18.0 -0.3 4.0 3.9
year, but already this summer it will
Lithuania -14.7 1.3 4.2 4.7 end quantitative easing (QE2) without
Unemployment rate, % of labour force putting in place any new easing. The
Sweden 8.3 8.4 7.3 7.0 dollar will strengthen vis-à-vis the
Estonia 13.8 16.9 13.5 12.7
Latvia 16.9 18.7 15.5 13.9 euro. The Bank of Japan (BOJ) will
Lithuania 13.7 17.8 15.5 13.5 not change its policy rates during the
Consumer price index, annual change in % forecast period, and will try to weaken
Sweden -0.3 1.3 3.4 2.0 the yen.
Estonia -0.1 3.0 3.8 3.2
Latvia 3.5 -1.1 4.2 2.6
Lithuania 4.5 1.3 3.2 2.5
The risks facing Sweden and the Baltic
Current account, % of GDP countries are mainly related to global
Sweden 6.9 5.9 6.0 5.7 developments. Domestic risks include
Estonia 7.3 6.8 5.7 4.9 political developments, the reform
Latvia 8.6 3.6 0.0 -2.5
Lithuania 4.3 1.8 -1.0 -1.7 process, the labour markets, and
Sources: National statistics authorities and Swedbank.
April 7, 2011 2

3. Introduction Swedbank Economic Outlook
capacity constraints. Households face compared with this year. expected to grow by 4.0 % and 3.9%,
headwinds as their expenditures for respectively. This is a slight downward
Estonia’s economy picked up more
energy, food, and mortgages rise. Debt revision for next year as higher
markedly at the end of last year, with
levels in the public sector, especially inflation and taxes are putting pressure
business investment as the main
in Estonia, are lower than elsewhere, on households, and the government
driving force. Last year’s growth rate
while the private sector deleveraging has slowed in its progress with
reached 3.1% (2.8% in our January
has further to go. The Nordic-Baltic structural reforms. There is a great
forecast), and the economy is set to
economic climate is positive, following need for reforms, as the labour market
grow by 4.5% both in 2011 and 2012,
a more resolute management of the is still struggling with sluggish job
which is an upward revision of 0.3
crisis than in many other countries, creation. The opportunity to introduce
percentage point for this year. Exports
and there is a commitment to build the euro in 2014 remains, but a
support growth, and, increasingly,
institutions that can make these growing risk is the inflation outlook,
domestic demand will take over,
economies – as small, open, and which requires government action to
although household consumption will
vulnerable to outside risks – more contain price growth. An upside risk in
remain modest. Higher inflation – of
resilient to global turbulence. our forecast is that investments may
3.8% this year and 3.2% next year
increase faster than expected, as the
After an increase of 5.3% last year, – may also dampen the outlook for
capacity ceiling in many sectors has
Sweden’s GDP is now set to grow private consumption, although falling
more or less been reached.
by 4 % in 2011 (3.3% in our January unemployment will counteract this
forecast) and 2.6% in 2012 (2.5 %). trend somewhat. Already last year, the GDP growth in Lithuania for 2010
The stronger outlook is mainly due government attained a fiscal surplus exceeded our expectations and
to an upward revision of investments due to the higher economic growth. reached 1.3 %. Hence, and as
and exports; household consumption The successful adoption of the euro domestic demand is strengthening, our
is expected to grow slower due to is also contributing to the positive forecast for 2011 has been revised to
higher inflation and, this year, a faster sentiment towards the Estonian 4.2 (3.0%). In 2012, we expect GDP
rise in interest rates. The Riksbank is economy. Apart from global risks, to grow by 4.7 % (4.5 %). Our inflation
seen as hiking policy rates to 2.50 % the main risk is the labour market, forecast has been revised upwards as
(2.25%) at the end of 2011, but we still especially the combination of high international commodity prices have
expect the rate at the end of 2012 to unemployment and increasing labour increased, adding to growth risks.
be 3%. As the ECB will start raising shortages in certain sectors. An internal risk is the parliamentary
its policy rates earlier than expected, elections in 2012, which may generate
The Latvian economy has
the Swedish krona is no longer more growth-restricting propositions.
strengthened, and the recovery
expected to strengthen. Fiscal policy At the forefront is still the goal of
is broadening. By the end of last
will continue to support growth as the introducing the euro in 2014, and there
year, GDP had grown by 3.7%
government plans new tax reductions. is a policy dilemma of balancing lower
since the trough in the third quarter
With the help of privatisations and inflation with budget consolidation. The
of 2009. Exports have increased,
economic growth, the debt ratio will Lithuanian economy is moving in the
and inventories have been rebuilt.
fall to some 35 % of GDP. The main right direction, as the fiscal position is
Recently, private consumption
challenge for the government is the strengthening and growth is becoming
and investments have started to
lingering high unemployment. Despite more balanced. However, challenges
support growth. The recovery and
the positive growth outlook, we foresee remain, and the reform agenda will
the stabilising fiscal situation have
that unemployment will average 7.0% need to be kept alive.
also raised Latvia’s sovereign credit
next year – only a minor reduction
rating. During 2011 and 2012, GDP is Global developments create
opportunities for, and challenges to,
Sweden and the Baltic countries.
Inflation (annual growth in %)
20.0 Export sectors are benefiting from
higher growth, but, at the same
15.0 time, competition is increasing. It
Estonia
is therefore important to continue
Lithuania
10.0 Latvia
supporting adaptation to the changing
Sweden environment, and to enhance the
5.0 employability and competence of the
labour force, in order to strengthen
0.0 competitiveness.
Cecilia Hermansson
-5.0
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11
Source: Reuters Ecowin
April 7, 2011 3

4. Global Swedbank Economic Outlook
Inflation and sovereign debt endanger the global
recovery
The global recovery continues at good The euro zone and the UK face property markets and higher consumer
speed, and last year’s developments slower growth, at around 1½ %. The prices. The goal is to make growth
surprised on the upside with GDP sovereign debt crisis and the need more coordinated, stable, sustainable,
growth of 4.7%. Compared with our to cut the budget deficits are in the and balanced. During 2011-2015,
forecast one year ago, Germany, forefront of economic policy. The growth should average 7%, but this
Japan, Brazil, China, and India policy mix is complicated by the fact goal may be hard to achieve, given the
performed better than expected, while that higher inflation also pushes up high growth rates during 2011-2012 of
the US, the euro zone (excluding policy interest rates, with hikes starting 8.8% and 8.4%, respectively. Anyhow,
Germany), the UK, and Russia were already this spring (the European policy measures will try to restrict
basically in line with our expectations. Central Bank) and later in the autumn credit growth, in order to slow domestic
(the Bank of England). demand, and, compared with last year,
Going forward, the world can be
growth is slowing.
characterised as a “two-speed Germany will continue to drive growth,
economy,” with emerging markets and the more negative outlook for After the earthquake, the tsunami, and
as the main growth engine and the Portugal, Ireland, Greece, and Spain the nuclear plant accidents, Japan is
advanced economies lagging behind. remains. facing major challenges. We expect
All in all, GDP will be growing by the economy to grow slower this year,
Portugal is the third euro zone country
4% both in 2011 and 2012 – a small but faster next year when the damaged
requesting a rescue package, while
upward revision compared to our region will be reconstructed. Fiscal
a similar package for Spain is treated
January forecast. policy will become more expansionary
as a risk in our forecast which would
as some US$300 billion will be needed
The US has postponed fiscal potentially cause financial turbulence
according to preliminary estimations.
consolidation and has agreed on a as the current rescue fund would
Monetary policy will also remain
stimulus during 2011, pushing up be insufficient. Another risk is the
supportive, with a focus on weakening
the budget deficit and worsening the unorderly restructuring of sovereign
the yen.
sovereign debt outlook. Next year’s debt, causing increased strain on
presidential election is in focus. The the banking system in the euro zone, As in China, also in India, domestic
recovery continues, but will be slow with potential effects also on the real demand is growing faster than what
due to structural problems with labour, economy. is sustainable with regard to supply
housing, and credits. Households are constraints. Higher international
China is struggling with overheating in
struggling, and, with higher energy commodity prices are also driving
prices, growth will stay at 3%. up domestic consumer prices and
interest rates; thus, growth is slowing
GDP forecast 2010 - 2012 (annual percentage change) 1/ somewhat.
April 2011 January 2011
In Russia and Brazil, inflation
2010 2011 2012 2010 2011 2012
pressures are similarly increasing,
US 2.9 3.0 3.0 2.8 2.6 2.7 but, as resource-based economies,
EMU countries 1.7 1.5 1.5 1.8 1.6 1.5
they will prosper from the upbeat
Of which: Germany 3.6 2.4 1.9 3.6 2.5 2.0
commodity markets.
France 1.5 1.5 1.6 1.6 1.6 1.5
Italy 1.1 0.9 1.0 1.1 1.0 1.1 Our assumption regarding commodity
Spain -0.1 0.3 1.0 -0.4 0.3 1.0 and energy prices is that the Brent
UK 1.4 1.5 2.0 1.7 1.8 2.0 oil price will average US$105 this
Japan 4.0 0.6 3.0 3.2 1.5 1.3 year, and US$98 next year, up from
China 10.3 8.8 8.4 10.1 8.5 8.1 US$79 in 2010. This is a major upward
India 9.1 8.0 7.5 8.8 8.2 7.5 revision from January, when our
Brazil 7.5 4.3 4.0 7.5 4.8 4.5 forecasts for 2011 and 2012 amounted
Russia 4.0 4.6 4.5 4.0 4.3 4.5 to US$85 and US$90, respectively.
Also, metal prices will rise, by 12%
Global GDP in PPP 4.7 4.0 4.0 4.6 3.9 3.8
and 5% respectively, which is lower
Global GDP in US$ 3.8 3.1 3.3 3.7 3.1 3.0
than last year’s 42% increase. The
Sources: National statistics authorities and Swedbank. escalation of food prices that started in
1/ Countries representing around 70 % of the global economy. The World Bank weights from
2009 (purchasing power parity, PPP) have been used.
April 7, 2011 4

5. Global Swedbank Economic Outlook
second half of last year will accelerate Interest and exchange rate assumptions
annual growth to 30% this year, and for Outcome Forecast
2012 we foresee an 8% increase. 5 Apr 30 Jun 31 Dec 30 jun 31 Dec
2011 2011 2011 2012 2012
All in all, headline inflation is therefore Policy rates
increasing in most parts of the world, Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50
but most noticeably in the emerging European Central Bank 1.00 1.25 1.75 2.25 2.50
markets. Bank of England 0.50 0.50 1.00 1.50 2.00
Bank of Japan 0.10 0.10 0.10 0.10 0.10
In advanced countries, one effect of
Exchange rates
higher inflation is that central banks will
EUR/USD 1.42 1.45 1.30 1.25 1.25
start hiking policy interest rates earlier RMB/USD 6.54 6.40 6.25 6.10 5.95
than we expected in our January USD/JPY 85 87 90 95 100
forecast. Second-hand effects from Sources: Reuters Ecowin and Swedbank projections.
higher inflation and wage expectations
are creating uncertainties and demand dollar will increase.
for hikes despite a low underlying price probability of 15%, and (2) a worsened
We expect that China will allow
pressure. sovereign debt crisis has a probability
the yuan to strengthen some 5%
In Europe, policy rates will be raised per year vis-à-vis the US dollar in of 15%; and two stronger ones, where
this year, while the US Federal nominal terms, but in real terms the (3) a rebalancing of growth between
Reserve waits till next year, and appreciation will be greater as labour China and the US speeds growth
Japan postpones hikes till after the costs increase faster in China going (5% probability) and (4) the risks of
forecast period. In addition, longer- forward. overheating are ignored, and more
term market rates will show an upward stimulus in both emerging markets and
In an uncertain world, our main advanced economies creates higher,
trend due to continued growth, higher
scenario presented above may not but more unsustainable growth (15%
inflation, and the sovereign debt
be realized due to certain risks for the probability).
crisis; the increasing competition for
world economy, such as the Japanese
capital arising from the Basel III bank At this juncture, it is important for
disaster, the democratization process
regulation is another contributing policymakers to search for the optimal
in the Middle East, and the debt crises
factor. economic policy. We emphasise the
in the euro zone and the US.
A stronger US and a weaker Europe importance of consolidating budgets
Therefore, we have created four and carrying out more ambitious stress
and Japan are creating a stronger US
alternative scenarios: two weaker tests in banks in order to break the
dollar over the forecast horizon, while
ones, where (1) stagflation with low vicious circle between the sovereign
the euro and the yen will weaken. Over
growth, high unemployment, and debt crisis and the continuing fragility
time, if passivity still permeates fiscal
high inflation comes through with a of the financial sector.
policy, the risk for a larger fall in the US
At the same time, central bankers
should not rush to hike interest rates,
as domestic demand will slow due to
Public gross debt 2012 (% of GDP)
fiscal austerity. Growth risks will most
Japan
likely outweigh inflation risks in Europe,
Greece
US, and Japan in the years to come.
Italy
Emerging markets, on the other hand,
Ireland
must put in more effort to restrain
US
Portugal
overheating.
France That is the name of the game in a
Euro zone “two-speed world economy”!
UK
Germany Cecilia Hermansson
Spain
Latvia
Finland
Denmark
Lithuania
Sweden
Estonia
0 50 100 150 200 250
Source: EU commission.
April 7, 2011 5

6. Swedbank Economic Outlook
Sweden: Households shift to a lower gear
With an economic growth rate of public consumption made up the rest, factored into our growth projections,
5.3%, Sweden experienced one of the 0.6 percentage points. Despite the but continued turmoil in the Middle
fastest recoveries among comparable sharp increase in exports, the net East could raise prices even further,
developed economies last year. Partly contribution from external demand to with negative effects on prices and
this was the effect of the sharp drop in growth was neutral due to the strong profits in Sweden. The probability for
economic activity during the crisis (i.e., import demand. renewed financial sector turbulence
a rebound), but the Swedish economy due to the sovereign debt crisis in
We revise upwards our economic
also surprised in terms of its flexible Europe remains and is not negligible.
growth forecasts for 2011 and 2012
response to the changing economic Domestically, there is a risk that rapid
to 4.0% and 2.6%, respectively. In
conditions. Not least was this evident expansion in some sectors could
particular, investments are expected
in the labour market. Following a large have economy-wide spill-over effects
to drive growth, while the contribution
increase in the number of unemployed through wage demands and increased
from household consumption will fall.
when external demand collapsed in inflation expectations, forcing the
We expect the Riksbank to swiftly
late 2008, the rebound in employment Riksbank to raise policy rates even
raise the monetary policy rate, with
came much earlier than expected, faster. Furthermore, shortage of
an additional four hikes this year,
in particular compared with previous qualified personnel is growing while
before slowing down in 2012 to reach
crises experienced in Sweden. at the same time the unemployment
3.0% at end-year. Public finances
Also, economic policy was fast on rate is high. The key will be an
remain sound and except for the
its feet, with the quick enactment of increased focus on structural reforms
already announced reductions of tax
fiscal stimulus and rapid slashing of that encourage and prepare the
rates, we expect that the main fiscal
monetary policy rates. Adding to the unemployed to find employment.
initiatives will be directed at the labour
support for the recovery was the boost
market. Despite the rapid growth in Rebound in exports despite a
in exports following the falling value of
employment, reducing the still-high stronger krona
the krona.
unemployment rate remains the largest
The recovery in Swedish exports
The economic recovery in 2010 policy challenge.
continued at the end of 2010 and total
was broad based, and mainly
The external environment for the export volume increased by 10.7%
domestically sourced. Private
Swedish economy is stabilising, and despite a significant appreciation of
consumption contributed to overall
we expect global growth to reach the krona. Strengthened global trade,
growth by 1.7 percentage points and
4.0% in both 2011 and 2012. The particularly in the emerging markets
investments by 1.1 percentage points.
main risks relate to higher volatility in but also in the OECD countries, has
The buildup in inventories, reversing
commodity markets, with increasing been favourable for Swedish exporters
the sharp fall during 2009, added
prices for, in particular, energy-related as the demand for investment and
another 2 percentage points, while
products. The already-high oil price is intermediate goods has been restored
Key Economic Indicators, 2009 - 2012 1/ after the deep decline during the global
2009 2010 2011f 2012f financial crisis. The export increase
Real GDP (calendar adjusted) -5.3 5.3 4.0 2.6 was mainly driven by a strong rebound
Industrial production -17.9 15.0 10.5 5.0 in goods like vehicles and machinery.
CPI index, average -0.3 1.3 3.4 2.0 Exports of services have also
CPI, end of period 0.9 2.3 3.2 2.2 improved and are more or less at the
CPIF, average 2/ 1.9 2.1 1.8 1.5 same level as two years ago, which
CPIF, end of period 2.7 2.3 1.4 1.6 is not yet the case for manufacturing
Labour force (15-74) 0.2 1.1 0.9 0.6 goods.
Unemployment rate (15-74), % of labor force 8.3 8.4 7.3 7.0
Employment (15-74) -2.1 1.0 2.1 1.0 World market growth for Swedish
Nominal hourly wage whole economy, average 3.4 2.5 2.8 3.3 exporters is expected to slow
Nominal hourly wage industry, average 3.0 2.8 3.0 3.5 somewhat in 2011. We assume,
Savings ratio (households), % 12.9 10.8 10.0 9.8 however, that demand for investment
Real disposable income (households) 3/ 1.6 1.3 2.0 1.6 goods will be relatively strong during
Current account balance, % of GDP 6.9 5.9 6.0 5.7 the period, particularly in the emerging
General government budget balance, % of GDP 4/ -0.7 0.0 0.4 0.5 markets but also in OECD countries,
General government debt, % of GDP 5/ 42.8 40.3 37.4 35.2 when utilisation rates increase and
Sources: Statistics Sweden and Swedbank. old production facilities need to be
1/ Annual percentage growth, unless otherwise indicated. renewed.
2/ CPI with fixed interest rates.
3/ Based on short-term earnings statistics
4/ As measured by general government net lending. We revise up our export growth
5/ According to the Maastricht criterion.
April 7, 2011 6

7. Sweden Swedbank Economic Outlook
projection from 6.8% to 7.6% for 2011, Export development and the Swedish krona
20 150
still above the long-term trend of about
6.5%. This is due mainly to the better 15 145
outlook for the composition of Swedish 10 140
exports. According to the latest short-
5 135
term statistics and business surveys, Export volume, ann.
0 130 change (ls)
export performance is still improving.
SEK, TCW-index (rs)
In January 2011, exports of goods -5 125
from Sweden increased by 23% in -10 120
nominal terms, and confidence in the
-15 115
manufacturing sector was strong.
-20 110
We foresee the export volume growth 1994 1995 1997 1999 2001 2002 2004 2006 2008 2009
to drop below trend next year, when Sources: SCB and Swedbank projections.
the competitiveness of Swedish
exporters is expected to fall as tax reductions for renovation, higher are expected to trigger an increase in
productivity growth weakens and unit housing prices, and better labour business investments. Total investment
labour costs increase. There will, thus, market conditions. However, the volume in Sweden is projected to
be a loss of market shares in 2012 recovery is starting from low levels, increase by 9.7% in 2011 and 8.3%
after two consecutive years of gain. and housing investment in Sweden, in 2012. This means that total real
The trend of diminishing surpluses in at 3.0% of GDP, is still among the investment will be higher than the peak
the trade balance, which started in lowest in the EU. In the private sector, in 2008.
the middle of the 2000s, is expected excluding housing, investment activity
The strong rebound in real estate
to continue during 2011-2012 when went up by nearly 7%, driven mainly
investment in 2010 will also have
domestic demand expands. On the by service companies; meanwhile,
spillover effects in 2011. We foresee
other hand, the increasing importance development in manufacturing
that, coupled with an improving
of the exports of services in the was more subdued despite strong
labour market and tax reductions
Swedish export structure, with more production growth and an increasing
for rebuilding, investment in real
value added and relatively smaller utilisation rate. Public investments
estate will grow strongly during 2011.
import content, will lead to a growing continued to grow for the seventh
For 2012, we anticipate a gradual
surplus in the services balance. This consecutive year and reached 18% of
slowdown as interest rates will be
means the surplus in the current gross fixed investment in 2010, which
higher. Although investment in housing
account will remain large during the is the highest level since 1998.
is rising, there will still be an underlying
next two years. With output continuing upwards in need for new houses, particularly
Investments become the main the private sector, there will be a in regions with high growth and
growth engine growing need for investment to expand increasing population.
capacity. In the fourth quarter of 2010,
Gross fixed investment increased by Labour shortages despite high
the utilisation rate in industry was
6.3% in volume terms during 2010 unemployment
89.0%, which is above the average
after the sharp fall in 2009. The largest since 1990. In combination with strong The strong recovery of the labour
investment growth was concentrated confidence, relatively favourable market has continued during early
in real estate, which was stimulated by financing terms , and rising profits 2011. Employment is now back to
Swedbank’s GDP Forecast – Sweden the same level as prior to the crisis,
Changes in volume, % 2009 20101/ 2011f1/ 2012f although this conceals a shift from
Households' consumption expenditure -0.4 3.5 (3.6) 2.8 (2.9) 1.9 (2.0) manufacturing to the services sector.
Government consumption expenditure 1.7 2.6 (2.0) 1.3 (0.9) 0.4 (0.4) At the same time, the growth of the
Gross fixed capital formation -16.4 6.3 (4.7) 9.7 (8.2) 8.3 (8.0) labour force has been strong due
private, excl. housing -19.1 4.5 (1.4) 11.3 (9.4) 11.2 (10.9) to underlying demographic factors
public 4.2 4.3 (3.5) 2.6 (0.5) -0.1 (-0.5) and reforms of the sickness benefit
housing -23.3 16.0 (19.7) 11.4 (11.7) 5.3 (5.5) system. Thus, the unemployment rate
Change in inventories 2/ -1.7 2.1 (2.3) 0.0 (0.0) -0.3 (-0.3)
has fallen at a slower rate, dropping
Exports, goods and services -13.4 10.7 (11.1) 7.6 (6.8) 5.6 (5.5)
from 7.8% in December to 7.6% in
Imports, goods and services -13.6 12.7 (12.5) 7.5 (7.3) 6.6 (6.4)
February, seasonally adjusted.
GDP -5.6 5.5 (5.6) 4.0 (3.3) 2.2 (2.1)
GDP, calendar adjusted -5.3 5.3 (5.3) 4.0 (3.3) 2.6 (2.5) We expect a faster reduction of
Domestic demand (excl. inventories) 2/ -3.1 3.6 (3.1) 3.5 (3.1) 2.6 (2.5) the unemployment rate than in our
Net exports 2/ -0.8 -0.1 (0.1) 0.5 (0.2) -0.1 (-0.1) January forecast, to averages of
Sources: Statistics Sweden and Swedbank. 7.3% in 2011 and 7.0% in 2012. In
1/ The figures from our forecast in January 2011 are given in brackets.
2/ Contribution to GDP growth.
April 7, 2011 7

8. Sweden Swedbank Economic Outlook
particular, employment has picked up Real investment growth, 1993=100
more rapidly than expected, but also 500
the number of hours worked points 450
towards a growing demand for labour. 400
As employers become more confident 350
in the economic recovery and as many 300 Industry
of those who reduced their work hours 250 Services excl real
now have returned to fulltime, the estate
200 Public investments
unemployment rate is set to fall. 150 Real estate
100 Total
Despite the still-high unemployment
50
rate, reports of labour shortages are
0
becoming more widespread. This is
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
particularly prevalent in construction, Source: SCB.
where 40% of companies surveyed bargaining agreements for more than the economic downturn, and thus
claim to have difficulties in finding 1.5 million employees, in retail and were not counted as unemployed, will
qualified personnel. Furthermore, the local governments that will run out increase the need for job creation.
number of new vacancies and unfilled before May of next year. Also, the reduction in the number
positions increased throughout 2010 of people covered by the sickness
and is now back to the levels that We expect nominal wages to increase
benefit system will add to the number
prevailed prior to the crisis. However, somewhat faster in both 2011 and
of job seekers in the economy, as
the labour market gap, as measured 2012, by 2.8% and 3.3%, respectively.
will the reduction in the number of
by the number of employees in relation Productivity picked up in 2010 as
early retirees, in contrast to the early
to the long-term trend, still remains companies were able to increase
2000s, when approximately 65,000
substantial, in particular for the production by utilising idle labour. As
people per year (2003-06) entered
manufacturing sector. This reflects the new employees are hired, productivity
early retirement schemes. Finally, a
problem of matching jobs with qualified growth is set to slow in the coming
3 percentage point reduction of the
personnel in the Swedish labour years and be exceeded by nominal
unemployment rate from 8% to 5%,
market. wage growth, thus raising unit labour
excluding the underlying change to
costs. While productivity varies
Following the relatively low the labour force, will require in itself
significantly with the business cycle,
wage increases during the crisis, an additional 165,000 jobs. Thus, the
we do not expect the growth rate to
expectations are now building for main challenge for the government
reach previous years’ trend levels.
upward revisions during the coming will be to enhance the skills of those
For the medium term, investments
years. Many trade unions agreed currently unemployed, while providing
in technology and education will be
during the crisis to restrain wage the conditions for dynamic labour
necessary to provide a sustainable
development and, in the case of market development, which includes a
source of productivity and growth.
manufacturing, to reduce the number strengthening of the matching process.
of hours worked. This helped preserve Reducing the unemployment rate
Increasing vulnerabilities in
the competitiveness of production in in the medium term will also be a
household budgets
Sweden. However, starting this spring, significant challenge. We estimate that
both blue-collar and white-collar 335,000 new jobs must be created Although household consumption
workers in manufacturing will initiate between now and 2015 to bring the continued to grow at the end of last
wage negotiations. This will also set unemployment rate down to 5 %. In year, there were signs of a slowing
the benchmark for the collective- particular, the return of about 60,000 rate with real consumption growing by
people who left the labour force during 1 % in the fourth quarter, compared
with the 1.3% growth seen in the
Labour market indicators third quarter. Consumer durables
90 20
sales remained strong, while overall
80 18
16
turnover in the retail sector became
70
14
more subdued. It was, in particular,
60
12 cars sales that proved resilient, with
50
10 a growth rate of almost 40% in the
40 Lay-off
8 notifications (rs) fourth quarter of 2010. The pent-up
30
6 New vacancies demand from the sharp drop during
20 the financial crisis last year is being
4 Unfilled positions
10 2 saturated . Consumption of retail
0 0 goods continued to expand in the
Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10
fourth quarter, but growth turned
Sources: Riksbank and Public Employment Service.
April 7, 2011 8

9. Sweden Swedbank Economic Outlook
negative in the December- February employment and wage growth gives and commodities are temporary, these
period. a positive impulse, compared with our impulses could lead to a general
January forecast. However, growing increase in inflation if they lead to
Household nominal payroll picked
cost-of-living expenses for households, compensation both from companies,
up in 2010, but disposable income
in particular from debt servicing and in terms of maintained profit margins,
was held back by growing interest
higher inflation, together with a slowing and from employees, in the form of
costs, increasing tax payments and
momentum in purchases of consumer real wage adjustments. In March, the
flat transfers. As disposable income
durables, are dampening consumption 12-month inflation expectations of
grew by less than consumption,
growth compared with 2010. The households reached 3.1%.
households continued to draw down
growth of real disposable income is
on their savings, which fell to 10.8% The tightening of monetary policy by
expected to continue to rise in 2011,
of disposable income in 2010 from the Riksbank has contributed to a
before the growth rate dampens in
12.9% in 2009. In the first months of further appreciation of the Swedish
2012 to 1.6%. However, due to the
2011, inflation has exceeded wage krona. At the end of the first quarter
faster growth of consumption, the
increases, leading to falling real of 2011, the krona has reached the
household savings ratio will continue
wages, further straining household strongest level in trade-weighted terms
to decline.
budgets. In addition, mortgage rates at 120 since the year 2000. Besides
(three months) rose to almost 4% at Reducing inflation expectations higher Swedish short-term interest
the end of last year from 1.5% at the without curtailing growth rates, the appreciation of the krona
end of 2009. is also driven by strong economic
The Riksbank raised in its February
growth and solid public finances. We
The household debt level has meeting, as expected, the main policy
anticipate a further strengthening of
continued to rise, and the share of rate to 1.50 %. Also, the policy path
the krona in the first half of 2011 as
income spent on debt service has was revised upwards, according to
the Riksbank raises interest rates.
likely reached its low point. Debt as which the Riksbank expects the policy
In second half of 2011 and in 2012,
a share of disposable income rose to rate to marginally exceed 3% by the
when we foresee a tightening of
171% at end-2010, a record level and end of 2012.The main arguments
monetary policy in Europe and the
also high in international comparisons. for tightening monetary policy are
US, we expect the Swedish krona to
We expect household debt to continue the growing underlying inflationary
weaken somewhat in trade-weighted
to increase, although at a slower rate. pressures and increased resource
terms. The US dollar is expected to
However, as interest rates rise, interest utilisation. Indeed, headline inflation
strengthen more significantly against
payments as a share of disposable increased to 2.5% in February,
the euro as the US economy improves,
income will continue to grow, and the exceeding the Riksbank’s and most
while the krona is expected to be
liquidity situation of households will others’ expectations. It was mainly
stable against the euro during 2012
become more strained. Increasing energy and food prices that lead
as the Swedish economy continues
debt-service costs, compounded to the increase, but a revision of
to outperform the Eurozone, while the
by rising energy costs and elevated the methodology also contributed.
European Central Bank raises policy
inflation rates, are thus likely to Underlying inflationary pressures
rates faster than the Riksbank.
dampen consumer spending. (CPIF) grew by 1.3%.
We expect monetary policy rates to
We expect growth in private Rising inflation expectations are
be raised more rapidly during 2011
consumption to slow in real terms in emerging as a growing risk to
than we forecast in January, but also
2011 and 2012 to 2.8% and 1.9%, maintaining price stability. Although it
that the rate of policy rate hikes will
respectively. An improved labour can be argued that largely externally
slow in 2012. For the remainder of the
market outlook with continued strong induced price increases for energy
current year, we foresee an additional
four hikes, while in 2012 we expect the
Household savings and consumption (real change in %) Riksbank to raise rates only twice. The
8.0 14.0
immediate task of the Riksbank will
6.0 12.0 be to dampen inflation expectations,
Disposable
which would serve not only to reduce
10.0
4.0 income nominal demands in the upcoming
Consumption
8.0 wage negotiations, but also to limit
2.0
Savings ratio (% pressures to increase prices in retail.
6.0
of disp. income) However, as the demand pressure
0.0
4.0 will ease and unemployment rates
-2.0 2.0
remain relatively high, we expect
that the Riksbank will slow down the
-4.0 0.0
rate increases in 2012, and that the
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Sources: SCB and Swedbank projections.
April 7, 2011 9

10. Sweden Swedbank Economic Outlook
repurchase rate will reach 3.0% at the Interest rate and currency outlook
end of the year. Outcome Forecast
2011 2011 2011 2012 2012
Still a role for active fiscal policy 5 Apr 30 Jun 31 Dec 30 Jun 31 Dec
Government finances are improving
Interest rates (%)
rapidly, and the budget deficit is Policy rate 1.50 1.75 2.50 2.75 3.00
estimated to have been limited to 10-yr. gvt bond 3.28 3.30 3.30 3.40 3.50
0.3% of GDP in 2010. The actual Exchange rates
outcome was better than budgeted EUR/SEK 9.00 8.85 8.90 8.90 8.90
on the revenue and expenditures USD/SEK 6.32 6.10 6.85 7.12 7.12
sides. Central government tax TCW (SEK) 1/ 120.6 118.7 122.1 122.5 122.9
revenues exceeded the budget by Sources: Reuters Ecowin and Swedbank.
SEK 58 billion, mainly on account 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).
of value-added and capital gains
taxes. Spending came in lower by government coalition also intends in construction and in parts of the
an amount of approximately SEK 20 to further reduce public sector debt services sector risk a spillover into
billion. The main source of saving is from the already low level of 40.3% of increasing wage drift, which, in turn,
found in spending on labour market GDP in 2010. In early 2011, a stake could fuel rising inflation expectations.
programmes, following the better-than- in Nordea was sold, generating about These developments could mean that
expected labour market developments. SEK 20 billion. However, the recent monetary policy needs to be raised
blocking by a parliamentary majority of faster than otherwise would have
The relatively strong macroeconomic
the privatisation of four mainly state- been the case, in effect applying the
development expected over the next
owned companies will limit the inflow brakes to an economy that is being
couple of years provides room for
of capital; as a result, we believe that accelerated by fiscal policy. In order
further fiscal policy initiatives. The
overall privatisation revenues for 2011 to balance the structural reforms
government has indicated that, in
and 2012 will amount to SEK 40 billion. implied by the general lowering of
addition to the lowering of tax rates on
tax rates, which essentially spurs
pensions and on restaurant meals that We expect that, following two years
consumption, the government should
is already in the budget, it intends to of deficits, the public sector will reach
also consider lowering corporate
continue to pursue reductions of the surpluses of 0.4% in 2011 and 0.5% in
tax rates and capital gains taxes.
income tax, although there have been 2012. This will put the public sector on
This would stimulate an increase
disagreements within the government the track of meeting the medium-term
in private sector savings and
coalition as to how much the top rates surplus target over the business cycle.
provide financing for investments.
should be lowered. We expect that the In addition, the margin of spending
An additional benefit would be a
government will in the spring budget under the expenditure ceilings would
withdrawal of some stimulus through
bill propose additional spending of allow for further expenditure increases.
a corresponding stepwise lowering
about SEK 10 billion in 2011, primarily We expect public debt to continue to
of interest deductions on mortgages,
to strengthen the labour market and decline, falling to 35.2% of GDP in
which would also serve to reduce
to support education. For 2012, we 2012.
the pressure on the housing market.
expect the government to implement
The key challenge for fiscal policy However, the key role for fiscal policy
the fifth step in the reduction of
over the next two years will be in at this stage of the economic recovery
income taxes, as pledged during the
providing direct support in order to would be to improve the functioning
election campaign in 2010, at an
alleviate bottlenecks and structural of the labour market. By alleviating
estimated cost of SEK 15 billion. The
impediments. Labour shortages some of the structural impediments
to increased employment, through
Household debt burden improved matching and better skills
12.0 200
enhancement, the government would
simultaneously contribute to lowering
10.0 180
unemployment while reducing inflation
8.0 160
pressures stemming from labour
Debt (% of GDP, rs)
shortages and the increasing potential
6.0 140 for growth.
Interest expenditures
(% of disp. inc.)
4.0 120
Magnus Alvesson
2.0 100
Jörgen Kennemar
0.0 80 Sources: SCB and Swedbank
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 projections.
April 7, 2011 10