Swedbank Economic Outlook April 2011


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Swedbank analyses theSwedish and Baltic Economies.

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Swedbank Economic Outlook April 2011

  1. 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies April 7, 2011A 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. 2. Introduction Swedbank Economic OutlookThe recovery takes hold – but headwinds arepicking upSweden and the Baltic countries US$8 to US$98 for next year. This supportive of growth in Sweden andbenefited from strong global tailwinds means higher inflation and interest the Baltics, the headwinds facingduring 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 riskGDP growth of some 4-4.5% in all East has recently contributed to the creating both higher inflation andfour countries this year. As stimuli higher oil price, the global recovery negative growth prospects. In thefrom economic policy worldwide are and the expansionary monetary policy emerging markets, overheating risksabating, growth in external demand is are other important factors explaining will increase, and, in certain advancedslowing. Still, exports remain important the upturn. economies, policy rates may befor growth, not least as it spurs raised earlier than expected, despite In 2011 and 2012, the “two-speedinvestments and employment. the negative growth impact from the world economy” continues, with fiscal side. The sovereign debt crisisHeadwinds, however, are picking global growth of 4% both years. This in the advanced countries is causingup due to higher commodity prices, is a slight upward revision due to the uncertainties with regard to growth, thewhich 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 countrymore supportive of growth in the Baltic major share of global growth, while requesting a rescue package, whilecountries although inflation holds advanced countries still struggle with Spain is likely to make it through theback developments somewhat, their structural problems involving labour, crisis without external support. Theimportance will decline in Sweden as credits, and housing. Fiscal austerity risk of an unorderly restructuringhigher costs for energy and mortgages will slow demand growth, especially in of Greek and Irish sovereign debtwill slow consumption. GDP growth in Europe, while the US and Japanese should also not be neglected. Thethe Baltic countries will stay at around consolidation plans have been euro zone is, despite problems with4-4.5 % or rise slightly in 2012, while postponed. In Japan, the combined crisis management, struggling toSweden’s growth declines to 2.6%, effect of the earthquake, the tsunami, improve the debt situation, while thewhich is still above trend growth. and nuclear power accident explains US is not. If the US postpones its more the change in the government’sSince our January forecast, global ambitious plans for medium-term fiscal fiscal position. The disaster will slowrecovery has continued. Last year’s consolidation much longer, there would growth this year, but increase it nextglobal 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 byat 4.7% (4.6% in January). Most the disaster, the effects on the global We have assumed that the Europeanimportant, commodity prices have outlook will most likely be only mildly Central Bank (ECB) will start hikingrisen further, and our assumption negative. policy interest rates this spring, whileregarding the oil price has been raised the Bank of England (BOE) will waitUS$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. 3. Introduction Swedbank Economic Outlookcapacity 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 moreenergy, food, and mortgages rise. Debt revision for next year as higher markedly at the end of last year, withlevels in the public sector, especially inflation and taxes are putting pressure business investment as the mainin Estonia, are lower than elsewhere, on households, and the government driving force. Last year’s growth ratewhile the private sector deleveraging has slowed in its progress with reached 3.1% (2.8% in our Januaryhas further to go. The Nordic-Baltic structural reforms. There is a great forecast), and the economy is set toeconomic 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 0.3crisis than in many other countries, creation. The opportunity to introduce percentage point for this year. Exportsand 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 willvulnerable to outside risks – more contain price growth. An upside risk in remain modest. Higher inflation – ofresilient to global turbulence. our forecast is that investments may 3.8% this year and 3.2% next year increase faster than expected, as theAfter an increase of 5.3% last year, – may also dampen the outlook for capacity ceiling in many sectors hasSweden’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 thisforecast) and 2.6% in 2012 (2.5 %). trend somewhat. Already last year, the GDP growth in Lithuania for 2010The stronger outlook is mainly due government attained a fiscal surplus exceeded our expectations andto an upward revision of investments due to the higher economic growth. reached 1.3 %. Hence, and asand exports; household consumption The successful adoption of the euro domestic demand is strengthening, ouris expected to grow slower due to is also contributing to the positive forecast for 2011 has been revised tohigher inflation and, this year, a faster sentiment towards the Estonian 4.2 (3.0%). In 2012, we expect GDPrise in interest rates. The Riksbank is economy. Apart from global risks, to grow by 4.7 % (4.5 %). Our inflationseen 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 haveexpect 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 parliamentaryits policy rates earlier than expected, elections in 2012, which may generate The Latvian economy hasthe Swedish krona is no longer more growth-restricting propositions. strengthened, and the recoveryexpected to strengthen. Fiscal policy At the forefront is still the goal of is broadening. By the end of lastwill 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 quarterWith 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 consumptionchallenge for the government is the strengthening and growth is becoming and investments have started tolingering high unemployment. Despite more balanced. However, challenges support growth. The recovery andthe positive growth outlook, we foresee remain, and the reform agenda will the stabilising fiscal situation havethat unemployment will average 7.0% need to be kept alive. also raised Latvia’s sovereign creditnext 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. 4. Global Swedbank Economic OutlookInflation and sovereign debt endanger the globalrecoveryThe global recovery continues at good The euro zone and the UK face property markets and higher consumerspeed, and last year’s developments slower growth, at around 1½ %. The prices. The goal is to make growthsurprised 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 thisJapan, Brazil, China, and India policy mix is complicated by the fact goal may be hard to achieve, given theperformed better than expected, while that higher inflation also pushes up high growth rates during 2011-2012 ofthe 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 restrictbasically 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, andas the main growth engine and the Portugal, Ireland, Greece, and Spain the nuclear plant accidents, Japan isadvanced economies lagging behind. remains. facing major challenges. We expectAll in all, GDP will be growing by the economy to grow slower this year, Portugal is the third euro zone country4% both in 2011 and 2012 – a small but faster next year when the damaged requesting a rescue package, whileupward revision compared to our region will be reconstructed. Fiscal a similar package for Spain is treatedJanuary forecast. policy will become more expansionary as a risk in our forecast which would as some US$300 billion will be neededThe 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 remainstimulus during 2011, pushing up be insufficient. Another risk is the supportive, with a focus on weakeningthe budget deficit and worsening the unorderly restructuring of sovereign the yen.sovereign debt outlook. Next year’s debt, causing increased strain onpresidential election is in focus. The the banking system in the euro zone, As in China, also in India, domesticrecovery continues, but will be slow with potential effects also on the real demand is growing faster than whatdue to structural problems with labour, economy. is sustainable with regard to supplyhousing, and credits. Households are constraints. Higher international China is struggling with overheating instruggling, and, with higher energy commodity prices are also drivingprices, growth will stay at 3%. up domestic consumer prices and interest rates; thus, growth is slowingGDP 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 upbeatOf 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 BrentUK 1.4 1.5 2.0 1.7 1.8 2.0 oil price will average US$105 thisJapan 4.0 0.6 3.0 3.2 1.5 1.3 year, and US$98 next year, up fromChina 10.3 8.8 8.4 10.1 8.5 8.1 US$79 in 2010. This is a major upwardIndia 9.1 8.0 7.5 8.8 8.2 7.5 revision from January, when ourBrazil 7.5 4.3 4.0 7.5 4.8 4.5 forecasts for 2011 and 2012 amountedRussia 4.0 4.6 4.5 4.0 4.3 4.5 to US$85 and US$90, respectively. Also, metal prices will rise, by 12%Global GDP in PPP 4.7 4.0 4.0 4.6 3.9 3.8 and 5% respectively, which is lowerGlobal GDP in US$ 3.8 3.1 3.3 3.7 3.1 3.0 than last year’s 42% increase. TheSources: National statistics authorities and Swedbank. escalation of food prices that started in1/ Countries representing around 70 % of the global economy. The World Bank weights from2009 (purchasing power parity, PPP) have been used. April 7, 2011 4
  5. 5. Global Swedbank Economic Outlooksecond half of last year will accelerate Interest and exchange rate assumptionsannual growth to 30% this year, and for Outcome Forecast2012 we foresee an 8% increase. 5 Apr 30 Jun 31 Dec 30 jun 31 Dec 2011 2011 2011 2012 2012All in all, headline inflation is therefore Policy ratesincreasing in most parts of the world, Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50but most noticeably in the emerging European Central Bank 1.00 1.25 1.75 2.25 2.50markets. Bank of England 0.50 0.50 1.00 1.50 2.00 Bank of Japan 0.10 0.10 0.10 0.10 0.10In advanced countries, one effect of Exchange rateshigher inflation is that central banks will EUR/USD 1.42 1.45 1.30 1.25 1.25start hiking policy interest rates earlier RMB/USD 6.54 6.40 6.25 6.10 5.95than we expected in our January USD/JPY 85 87 90 95 100forecast. Second-hand effects from Sources: Reuters Ecowin and Swedbank projections.higher inflation and wage expectationsare 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 allowpressure. 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, wherethis year, while the US Federal nominal terms, but in real terms the (3) a rebalancing of growth betweenReserve waits till next year, and appreciation will be greater as labour China and the US speeds growthJapan postpones hikes till after the costs increase faster in China going (5% probability) and (4) the risks offorecast period. In addition, longer- forward. overheating are ignored, and moreterm 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 Japanesecapital arising from the Basel III bank At this juncture, it is important for disaster, the democratization processregulation is another contributing policymakers to search for the optimal in the Middle East, and the debt crisesfactor. 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 stressand Japan are creating a stronger US alternative scenarios: two weaker tests in banks in order to break thedollar over the forecast horizon, while ones, where (1) stagflation with low vicious circle between the sovereignthe euro and the yen will weaken. Over growth, high unemployment, and debt crisis and the continuing fragilitytime, 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. 6. Swedbank Economic OutlookSweden: Households shift to a lower gearWith 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 Middlefastest 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 andthis was the effect of the sharp drop in growth was neutral due to the strong profits in Sweden. The probability foreconomic activity during the crisis (i.e., import demand. renewed financial sector turbulencea rebound), but the Swedish economy due to the sovereign debt crisis in We revise upwards our economicalso surprised in terms of its flexible Europe remains and is not negligible. growth forecasts for 2011 and 2012response to the changing economic Domestically, there is a risk that rapid to 4.0% and 2.6%, respectively. Inconditions. Not least was this evident expansion in some sectors could particular, investments are expectedin the labour market. Following a large have economy-wide spill-over effects to drive growth, while the contributionincrease 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 swiftlylate 2008, the rebound in employment Riksbank to raise policy rates even raise the monetary policy rate, withcame 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 reachcrises experienced in Sweden. at the same time the unemployment 3.0% at end-year. Public financesAlso, economic policy was fast on rate is high. The key will be an remain sound and except for theits feet, with the quick enactment of increased focus on structural reforms already announced reductions of taxfiscal stimulus and rapid slashing of that encourage and prepare the rates, we expect that the main fiscalmonetary policy rates. Adding to the unemployed to find employment. initiatives will be directed at the laboursupport for the recovery was the boost market. Despite the rapid growth in Rebound in exports despite ain exports following the falling value of employment, reducing the still-high stronger kronathe krona. unemployment rate remains the largest The recovery in Swedish exportsThe economic recovery in 2010 policy challenge. continued at the end of 2010 and totalwas 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 ofconsumption 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 marketsinvestments by 1.1 percentage points. main risks relate to higher volatility in but also in the OECD countries, hasThe buildup in inventories, reversing commodity markets, with increasing been favourable for Swedish exportersthe sharp fall during 2009, added prices for, in particular, energy-related as the demand for investment andanother 2 percentage points, while products. The already-high oil price is intermediate goods has been restoredKey Economic Indicators, 2009 - 2012 1/ after the deep decline during the global 2009 2010 2011f 2012f financial crisis. The export increaseReal GDP (calendar adjusted) -5.3 5.3 4.0 2.6 was mainly driven by a strong reboundIndustrial 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 alsoCPI, end of period 0.9 2.3 3.2 2.2 improved and are more or less at theCPIF, average 2/ 1.9 2.1 1.8 1.5 same level as two years ago, whichCPIF, end of period 2.7 2.3 1.4 1.6 is not yet the case for manufacturingLabour 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 7.0Employment (15-74) -2.1 1.0 2.1 1.0 World market growth for SwedishNominal hourly wage whole economy, average 3.4 2.5 2.8 3.3 exporters is expected to slowNominal 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 investmentReal disposable income (households) 3/ 1.6 1.3 2.0 1.6 goods will be relatively strong duringCurrent account balance, % of GDP 6.9 5.9 6.0 5.7 the period, particularly in the emergingGeneral 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 andSources: Statistics Sweden and Swedbank. old production facilities need to be1/ Annual percentage growth, unless otherwise indicated. renewed.2/ CPI with fixed interest rates.3/ Based on short-term earnings statistics4/ As measured by general government net lending. We revise up our export growth5/ According to the Maastricht criterion. April 7, 2011 6
  7. 7. Sweden Swedbank Economic Outlookprojection from 6.8% to 7.6% for 2011, Export development and the Swedish krona 20 150still above the long-term trend of about6.5%. This is due mainly to the better 15 145outlook for the composition of Swedish 10 140exports. According to the latest short- 5 135term 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 125from Sweden increased by 23% in -10 120nominal terms, and confidence in the -15 115manufacturing sector was strong. -20 110We foresee the export volume growth 1994 1995 1997 1999 2001 2002 2004 2006 2008 2009to drop below trend next year, when Sources: SCB and Swedbank projections.the competitiveness of Swedishexporters is expected to fall as tax reductions for renovation, higher are expected to trigger an increase inproductivity growth weakens and unit housing prices, and better labour business investments. Total investmentlabour costs increase. There will, thus, market conditions. However, the volume in Sweden is projected tobe 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 realThe trend of diminishing surpluses in at 3.0% of GDP, is still among the investment will be higher than the peakthe 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 estateto continue during 2011-2012 when went up by nearly 7%, driven mainly investment in 2010 will also havedomestic demand expands. On the by service companies; meanwhile, spillover effects in 2011. We foreseeother hand, the increasing importance development in manufacturing that, coupled with an improvingof the exports of services in the was more subdued despite strong labour market and tax reductionsSwedish export structure, with more production growth and an increasing for rebuilding, investment in realvalue 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 gradualsurplus in the services balance. This consecutive year and reached 18% of slowdown as interest rates will bemeans the surplus in the current gross fixed investment in 2010, which higher. Although investment in housingaccount will remain large during the is the highest level since 1998. is rising, there will still be an underlyingnext two years. With output continuing upwards in need for new houses, particularlyInvestments become the main the private sector, there will be a in regions with high growth andgrowth 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 was6.3% in volume terms during 2010 unemployment 89.0%, which is above the averageafter the sharp fall in 2009. The largest since 1990. In combination with strong The strong recovery of the labourinvestment growth was concentrated confidence, relatively favourable market has continued during earlyin real estate, which was stimulated by financing terms , and rising profits 2011. Employment is now back toSwedbank’s GDP Forecast – Sweden the same level as prior to the crisis,Changes in volume, % 2009 20101/ 2011f1/ 2012f although this conceals a shift fromHouseholds 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 theGross 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 rateChange in inventories 2/ -1.7 2.1 (2.3) 0.0 (0.0) -0.3 (-0.3) has fallen at a slower rate, droppingExports, 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% inImports, 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 ofDomestic demand (excl. inventories) 2/ -3.1 3.6 (3.1) 3.5 (3.1) 2.6 (2.5) the unemployment rate than in ourNet exports 2/ -0.8 -0.1 (0.1) 0.5 (0.2) -0.1 (-0.1) January forecast, to averages ofSources: Statistics Sweden and Swedbank. 7.3% in 2011 and 7.0% in 2012. In1/ The figures from our forecast in January 2011 are given in brackets.2/ Contribution to GDP growth. April 7, 2011 7
  8. 8. Sweden Swedbank Economic Outlookparticular, employment has picked up Real investment growth, 1993=100more rapidly than expected, but also 500the number of hours worked points 450towards a growing demand for labour. 400As employers become more confident 350in the economic recovery and as many 300 Industryof those who reduced their work hours 250 Services excl realnow have returned to fulltime, the estate 200 Public investmentsunemployment rate is set to fall. 150 Real estate 100 TotalDespite the still-high unemployment 50rate, reports of labour shortages are 0becoming more widespread. This is 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011particularly prevalent in construction, Source: SCB.where 40% of companies surveyed bargaining agreements for more than the economic downturn, and thusclaim to have difficulties in finding 1.5 million employees, in retail and were not counted as unemployed, willqualified 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 numberpositions increased throughout 2010 of people covered by the sicknessand is now back to the levels that We expect nominal wages to increase benefit system will add to the numberprevailed prior to the crisis. However, somewhat faster in both 2011 and of job seekers in the economy, asthe labour market gap, as measured 2012, by 2.8% and 3.3%, respectively. will the reduction in the number ofby the number of employees in relation Productivity picked up in 2010 as early retirees, in contrast to the earlyto the long-term trend, still remains companies were able to increase 2000s, when approximately 65,000substantial, in particular for the production by utilising idle labour. As people per year (2003-06) enteredmanufacturing sector. This reflects the new employees are hired, productivity early retirement schemes. Finally, aproblem of matching jobs with qualified growth is set to slow in the coming 3 percentage point reduction of thepersonnel 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 variesFollowing 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 toexpectations 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, investmentsyears. Many trade unions agreed currently unemployed, while providing in technology and education will beduring the crisis to restrain wage the conditions for dynamic labour necessary to provide a sustainabledevelopment 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 inthe competitiveness of production in in the medium term will also be a household budgetsSweden. However, starting this spring, significant challenge. We estimate thatboth blue-collar and white-collar 335,000 new jobs must be created Although household consumptionworkers in manufacturing will initiate between now and 2015 to bring the continued to grow at the end of lastwage negotiations. This will also set unemployment rate down to 5 %. In year, there were signs of a slowingthe 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. 9. Sweden Swedbank Economic Outlooknegative in the December- February employment and wage growth gives and commodities are temporary, theseperiod. a positive impulse, compared with our impulses could lead to a general January forecast. However, growing increase in inflation if they lead toHousehold 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 ofcosts, increasing tax payments and momentum in purchases of consumer real wage adjustments. In March, theflat transfers. As disposable income durables, are dampening consumption 12-month inflation expectations ofgrew by less than consumption, growth compared with 2010. The households reached 3.1%.households continued to draw down growth of real disposable income ison 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 in12.9% in 2009. In the first months of further appreciation of the Swedish 2012 to 1.6%. However, due to the2011, inflation has exceeded wage krona. At the end of the first quarter faster growth of consumption, theincreases, leading to falling real of 2011, the krona has reached the household savings ratio will continuewages, 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 interestthe end of last year from 1.5% at the without curtailing growth rates, the appreciation of the kronaend of 2009. is also driven by strong economic The Riksbank raised in its February growth and solid public finances. WeThe household debt level has meeting, as expected, the main policy anticipate a further strengthening ofcontinued to rise, and the share of rate to 1.50 %. Also, the policy path the krona in the first half of 2011 asincome 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 of171% at end-2010, a record level and end of 2012.The main arguments monetary policy in Europe and thealso high in international comparisons. for tightening monetary policy are US, we expect the Swedish krona toWe expect household debt to continue the growing underlying inflationary weaken somewhat in trade-weightedto increase, although at a slower rate. pressures and increased resource terms. The US dollar is expected toHowever, as interest rates rise, interest utilisation. Indeed, headline inflation strengthen more significantly againstpayments 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 beliquidity situation of households will others’ expectations. It was mainly stable against the euro during 2012become more strained. Increasing energy and food prices that lead as the Swedish economy continuesdebt-service costs, compounded to the increase, but a revision of to outperform the Eurozone, while theby rising energy costs and elevated the methodology also contributed. European Central Bank raises policyinflation 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 toWe expect growth in private Rising inflation expectations are be raised more rapidly during 2011consumption to slow in real terms in emerging as a growing risk to than we forecast in January, but also2011 and 2012 to 2.8% and 1.9%, maintaining price stability. Although it that the rate of policy rate hikes willrespectively. An improved labour can be argued that largely externally slow in 2012. For the remainder of themarket 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. 10. Sweden Swedbank Economic Outlookrepurchase rate will reach 3.0% at the Interest rate and currency outlookend of the year. Outcome Forecast 2011 2011 2011 2012 2012Still a role for active fiscal policy 5 Apr 30 Jun 31 Dec 30 Jun 31 DecGovernment finances are improving Interest rates (%)rapidly, and the budget deficit is Policy rate 1.50 1.75 2.50 2.75 3.00estimated to have been limited to 10-yr. gvt bond 3.28 3.30 3.30 3.40 3.500.3% of GDP in 2010. The actual Exchange ratesoutcome was better than budgeted EUR/SEK 9.00 8.85 8.90 8.90 8.90on the revenue and expenditures USD/SEK 6.32 6.10 6.85 7.12 7.12sides. Central government tax TCW (SEK) 1/ 120.6 118.7 122.1 122.5 122.9revenues 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 gainstaxes. Spending came in lower by government coalition also intends in construction and in parts of thean amount of approximately SEK 20 to further reduce public sector debt services sector risk a spillover intobillion. 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 thatexpected 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 haveThe relatively strong macroeconomic the privatisation of four mainly state- been the case, in effect applying thedevelopment expected over the next owned companies will limit the inflow brakes to an economy that is beingcouple of years provides room for of capital; as a result, we believe that accelerated by fiscal policy. In orderfurther fiscal policy initiatives. The overall privatisation revenues for 2011 to balance the structural reformsgovernment has indicated that, in and 2012 will amount to SEK 40 billion. implied by the general lowering ofaddition to the lowering of tax rates on tax rates, which essentially spurspensions and on restaurant meals that We expect that, following two years consumption, the government shouldis already in the budget, it intends to of deficits, the public sector will reach also consider lowering corporatecontinue 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 increasedisagreements within the government the track of meeting the medium-term in private sector savings andcoalition 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 agovernment will in the spring budget under the expenditure ceilings would withdrawal of some stimulus throughbill propose additional spending of allow for further expenditure increases. a corresponding stepwise loweringabout 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 reduceto 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 policythe fifth step in the reduction of over the next two years will be in at this stage of the economic recoveryincome taxes, as pledged during the providing direct support in order to would be to improve the functioningelection campaign in 2010, at an alleviate bottlenecks and structural of the labour market. By alleviatingestimated 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