Swedbank Economic Outlook April 2012


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Swedbank Economic Outlook April 2012

  1. 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies April 24, 2012Continuing on the road to recovery G Global development Table of Content:  Global economic data have been mixed since January. We have maintained our forecast of global GDP growth at 3.1% this year, but have revised it up- Introduction: A shaky wards to 3.4% from 3.1% for 2013,as the muddling-through scenario in the euro area seems to be more clearly in place. surrounding – but a  Our main scenario has a probability of 60%, while the probabilities for a turnaround is near 2 worse and a better scenario are 30% and 10%, respectively. The main nega- tive risks include a higher oil price, a new crisis in the euro area if Spain and Global: Lacklustre global Italy need rescue, a hard landing in China, and a slower recovery in the US. Sweden S growth at best 4  Economic growth contracted sharply in the last quarter of 2011, pulled down by falling exports but partly offset by resilient household consumption. This Sweden: Recovering after led to an annual growth rate of 4.0%. Economic data for the first months of the hit last year 7 2012 suggest that the downturn has hit bottom and that growth will resume.  The economy will start recovering in 2012, but unemployment will remain Estonia: Growth prospects high. Monetary policy will not provide additional support, and fiscal policy is in a wait-and-see position. With external demand dampened by Europe’s improve 12 crisis, the growth outlook for 2012 and 2013 is 0.5% and 2.2%, respectively. Estonia E Latvia: Better outlook, but  After three quarters of nearly 9% year-on-year growth, GDP growth slowed caution still necessary 16 in the last quarter and annual growth in 2011 reached 7.6%. Exports grew by a solid 24.9% despite a slowdown at the end of the year. Employment grew by 6.7%, supporting households’ confidence and willingness to spend. Lithuania: Rosy developments  We keep our GDP growth forecast at 2.7% for this year and revise it slightly stained with oil 20 upwards for 2013, from 4.0% to 4.2%, due to a better outlook for foreign demand growth. Inflation will decelerate from 5% in 2011 to 3.8% in 2012 and further to 3.2% in 2013. Despite the resumption of budget deficits, public finances will remain solid. Latvia L  The economy expanded by a robust 5.5% in 2011. Investments contributed most to growth, but private consumption supported it as well. Growth, albeit slowing, has remained strong in early 2012, owing to the surprisingly robust confidence and resilience of Latvian exporters in response to the slowdown in external demand.  We are raising the growth forecast to 2.5% in 2012 and 3.5% in 2013, owing to the stronger economy in recent months and somewhat better outlook for Latvia’s main trading partners. Inflation is to retreat from 2.8% this year to 2.5% in 2013. Euro adoption in 2014 is feasible, but has become more chal- lenging. Lithuania L  The economy grew more slowly at the end of last year, mainly because companies slashed their inventories. Despite falling confidence, growth of household consumption and investments remained strong in the final quarter of 2011. At the end of the year, unemployment dropped below 14%, and real wage growth has accelerated.  We expect GDP growth to accelerate to 4.3% next year after a more mod- est 3.3% growth in 2012. Inflation will be somewhat higher than previously forecast and, at 2.8%, is likely to be above the Maastricht inflation criterion. Inflation will ease to 2.5% and unemployment will drop to 11% in 2013. April 24, 2012 1
  2. 2. Introduction Swedbank Economic OutlookA shaky surrounding – but a turnaround is nearThe economic situation in Sweden and holds could change if labour markets Emerging markets are reducing theirthe Baltic countries slowed markedly at improved or worsened more than ex- problems with overheating and canthe end of last year and has continued pected. In addition, internal risks deal counteract some of the slowdown withits hesitating pace since our forecast with statistical uncertainties because stimulus; still, growth will abate some-in January. Economic data have been revisions of national accounts and em- what in oil-importing countries and pickmixed, leading us to keep the global ployment have blurred the picture both up in commodity-based Russia andforecast in aggregate terms unchanged backwards and forwards. Brazil. China’s growth falls towards 8%for this year; meanwhile, the prospects this year and next, as its property sec- Our main scenario comes with a prob-for a pickup in growth in 2013 have tor cools and the export sector loses ability of 60% and has a global growthimproved as the muddling-through speed. Also, Japan is affected by Chi- rate of 3.1% in 2012, with a mild upturnscenario in the euro area seems to be na’s slowdown, but investments are in- in 2013 to 3.4%. This is still lower thanmore clearly in place. creasing after the tsunami and nuclear in 2011, when GDP growth reachedThe outlook for 2012 in Sweden and the 3.5%. Stronger manufacturing activ- plant accident last year, and next yearBaltic countries is not much changed ity and investments are driving the US Japan’s growth will also benefit from afrom the one in January; for 2013, it economy. Although growth has picked weaker yen against the US dollar.has been revised upwards slightly. In up, the higher oil price and the slower Commodity prices will increase duringSweden, GDP is set to grow by 0.5% employment creation is counteracting the forecast period, contrary to our as-in 2012, before reaching 2.1% in 2013. this development, leaving GDP growth sumptions in January. The oil price isIn the Baltic countries, GDP growth will with a marginal revision upwards, to assumed to reach US$119 per barrelvary between 2.5% and 3.3% this year, 2.1% this year and 2.3% next year. this year on average, meaning that itand between 3.5% and 4.3% next year, will fall back in the second half of this The recession in the euro area is ex-with Latvia at the lower and Lithuania at year as concern about a conflict in the pected to become deeper in the crisis-the higher ends of the interval. Middle East alleviates. The oil price will struck economies, while it will go awayThe main risks to the Swedish and in Germany and France in the second reach an average of US$113 per bar-Baltic outlook are international, such half of this year. The worst of the crisis rel next year, and the consumer priceas new instability in the euro area. in terms of management is assumed pressure from commodity markets willThis could result if Spain and also Italy to be over, as member countries avoid abate, which, will cause inflation to fallneeded rescue funding, and if this were new rescue packages. Liquidity support during 2012 and 2013. Monetary policyfollowed by a deeper-than-expected from the European Central Bank (ECB) will remain expansionary in advancedrecession. Also, a higher (or lower) oil could be provided if the situation war- economies (interest rates will stayprice, a more pronounced slowdown rants. The UK and the Nordic countries close to zero while quantitative easingin China and other emerging markets, will grow below potential, especially the will be forthcoming mainly in Japan andand a slower (or faster) recovery in the UK and Denmark, where the financial the UK). In emerging markets, mon-US are other external risks. Internal crisis is still felt. etary policy will become less restrictive.risks are geared towards private con- Fiscal policy in most of Europe will besumption, as the sentiment of house- restrictive. The effects of monetary pol- icy, and also of a weaker euro againstMacro economic indicators, 2010- 2013 the US dollar, cannot counteract the 2010 2011 2012f 2013f negative growth effects from less gov-Real GDP growth, annual change in % ernment spending and higher taxation. Sweden (calender adjusted) 5.8 4.0 0.5 2.2 Estonia 2.3 7.6 2.7 4.2 More budget consolidation could be Latvia -0.3 5.5 2.5 3.5 needed if growth slows. Unemployment Lithuania 1.4 5.9 3.3 4.3 is already above 10% and increasing inUnemployment rate, % of labour force the euro area, where it has reached its Sweden 8.4 7.5 7.8 7.9 Estonia 16.9 12.5 10.5 8.6 highest level for 15 years, while the op- Latvia 18.7 15.4 13.6 11.9 posite is true for Germany, where the Lithuania 17.8 15.4 13.0 11.0 rate of 6.7% is the lowest in 20 years.Consumer price index, annual change in % Sweden 1.2 3.0 1.5 1.9 In our worse scenario, to which we Estonia 3.0 5.0 3.8 3.2 Latvia -1.1 4.4 2.8 2.5 give 30% probability, the crisis in the Lithuania 1.3 4.1 2.8 2.5 euro area worsens further, with SpainCurrent account, % of GDP requesting rescue funding to avoid a Sweden 6.8 7.2 6.9 7.1 collapse, and with risks therefore also Estonia (incl. capital account) 7.2 6.7 5.9 5.5 Latvia 3.0 -1.2 -1.8 -2.6 increasing for Italy. The recession Lithuania 1.5 -1.6 -2.5 -2.7 deepens, and political and social un-Sources: National statistics authorities and Swedbank. April 24, 2012 2
  3. 3. Introduction Swedbank Economic Outlookrest worsens. Financial market senti- government budget is cautious, leav- larger market share and export growthment becomes volatile, with new wealth ing room for expansion next year when in an overall weak export market. Inlosses weakening confidence. Also, the the economy will have already started addition, Latvia’s main export partnersoil price could rise higher, and China to improve. are still rather strong, compared withcould land harder, with growth below the crisis-struck countries in southern Estonia’s economy expanded by a6-7% this year and next. In the US, if Europe. In 2013, economic growth will strong 7.6% last year; and our GDPthe Bush tax cuts would not be extend- increase to 3.5% as the global outlook forecast for 2012 remains at January’sed, restrictive fiscal policy would slow improves and the inventories give a 2.7%. Global demand lost steam con-growth. As global growth would fall un- positive contribution to growth. Unem- tributing to negative quarterly growth atder 2% and trend towards stagnation, ployment is set to fall under 12% next the end of last year. In 2013, GDP isthe world economy would move into a year. As the budget deficit shrinks in expected to increase by 4.2%, a slightrecession. line with EU rules, the EMU entry is upward revision from January in light of made possible, although the inflationA better growth case is also made pos- the somewhat stronger global outlook. outlook is challenging (2.5 % next year)sible, with a low probability of 10%, if Inflation will also be higher due to higher not least as other euro nations’ inflationthe oil price falls, the euro area reces- global commodity prices, thus reducing outcome is uncertain. Also, the eurosion turns out to be shallow, and the re- real wages, sentiment, and consumer area’s willingness to accept new mem-covery in the US picks up, while growth spending. The main domestic risk is the bers still constitute major uncertainties.in emerging markets reaches sustain- labour market, where the lack of quali-able high levels. fied labour in some sectors is increas- Lithuania’s GDP growth has slowed ingly becoming a problem; meanwhile, markedly, but the rate was still posi-Sweden’s economic data were re- long-term unemployment remains high. tive in quarterly terms at the end of lastcently revised. In 2011, GDP grew by Also, emigration may pose a threat to year, thus leading to a high but lower-4%, compared with expected 4.5%, competitiveness, going forward. While than-expected growth of 5.9% for 2011.while growth in 2010 was revised up having the lowest government debt ra- The inventory cycle contributed to theto almost 6%. A sharp drop in exports tio in Europe, Estonia’s loan payments weaker outcome, while exports and do-pulled down growth in the last quarter by the European Financial Stability Fa- mestic demand held up relatively well.of 2011, but private consumption was cility (EFSF), help to raise the gross Going forward, GDP is set to weakenresilient. Since then, the purchasing debt ratio from 6% to 10% of GDP in to 3.3% this year, before reaching 4.3%managers’ index indicates a marginal 2013. Even so, the overall public fi- next year as export and investmentimprovement only, and the rebound in nances remain solid, and the budget demand improves. In 2013, unemploy-new orders is still weak. GDP is set to deficits are temporary. ment is expected to fall to 11% on av-increase by 0.5% this year (with fourth erage, and the inflation outlook dropsquarter last year markedly negative, Latvia’s GDP grew by 5.5% in 2011, the to 2.5%. Public finances have becomeand first quarter showing a minor drop first full year of growth after the reces- less strained, but risks remain becausebefore activity picks up in the second sion. The drivers for the recovery were politicians’ propositions could lead tohalf of this year). Unemployment will al- exports and EU funding, which boosted a more expansionary fiscal policy asmost reach 8% early next year before investments. Better confidence among this year’s election approaches. Thefalling back slowly in line with the higher households also led to higher consump- outlook for membership in the EMU is,GDP growth in 2013 of 2.1%; as house- tion. In 2012, we forecast GDP to slow therefore, cautiously positive with re-hold spending will increase more than to 2.5% as the global climate weakens gard to domestic risks with the inflationwe assumed in January. The Riksbank (up from January’s 2.0% on the basis outlook especially challenging; and, it iswill keep the repo rate at 1.5% this year, of stronger demand). External com- still uncertain with regard to actions bybefore hiking it twice next year. The petitiveness has improved, leading to a the policymakers of the euro area. Unit labour cost (annual change in %), 2000 - 2011 The outlook for Sweden and the Baltic 28 countries has marginally improved for 24 the next year, but the risks are skewed 20 and remain high for a weaker outcome. 16 Estonia Therefore, it is still important to manage 12 Lithuania risks, and to continue the reform proc- 8 Latvia ess to strengthen competitiveness in all 4 Sweden four countries, thereby increasing resil- 0 Euro area ience if worse comes to worst. -4 -8 -12 Cecilia Hermansson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat. April 24, 2012 3
  4. 4. Global Swedbank Economic OutlookLacklustre global growth at bestSince our January forecast, economic faltered in the euro area, the UK, and increased funding, with the additiondevelopments have been mildly positive Japan, while losing speed in the emerg- with increased funds from the IMF, thusalthough increasingly mixed over time, ing markets. lowering the still-present risks of con-as the impact on sentiment from central tagion. Recently, the focus has shiftedbanks’ liquidity injections abates. The In the euro area, the European Central to Italy and especially Spain, where therecovery in the US economy has picked Bank (ECB) has once again injected risk premium for sovereign bonds againup but is still cautious; the recession in liquidity (through long-term refinanc- is increasing despite the ECB’s meas-the crisis-struck euro area economies ing operations, or LTROs). In Febru- ures, and where market actors doubtis more evident while core countries ary, the ECB’s loans amounted to EUR that the Spanish government’s effortshave stagnated. For now, the worst is 530 billion, thus adding to Decem- will be sufficient to cut the budget deficitlikely to be over in terms of crisis man- ber’s amount of EUR 489 billion. Al- to reach the agreed 5.3% of GDP thisagement; the region has returned to the though financial stress is abating, it is year, and 3% next year.“muddling-through-mode.” GDP growth still high, as banks are shrinking theirin emerging markets has slowed. Also, balance sheets and credit austerity is Even so, sentiment among investors,with higher energy costs for oil-import- weakening growth in the region. The companies, and households has im-ing countries, the global economy will agreement made in March to support proved, as a response to both the in-grow modestly, just above 3% this year, Greece with a second loan conditional creased liquidity in the euro area andbefore returning in 2013 to last year’s on reforms, while forcing private banks the somewhat stronger recovery in thegrowth of near 3.5% – a modest up- to write down their claims, has given US economy in terms of growth andward revision since January. Greece more time. However, political, lower unemployment. In the US, pur- economic, and social stress is building chasing managers are signalling higherSince the beginning of the year, the up in the country before the election manufacturing activity. The stock mar-world economy has been characterised in May, driving expectations of either kets have continued to strengthen, al-by a continuation of the recovery, albeit calls for more support or, but less likely, though remaining volatile and fragile.with some mixed signals. Commodity a decision to leave the euro area and However, there are new disappoint-and share prices have risen, and the reintroduce the drachma. To strengthen ments, as employment growth againpurchasing managers’ index and con- crisis management, the two rescue is slowing and the oil price – since thefidence indicators have strengthened facilities, the European Financial Sta- geopolitical stress has raised supplyslightly. GDP growth in the last quarter bility Fund (EFSF) and the European concerns - has returned to the high lev-of 2011 indicates that the recovery has Stability Mechanism (ESM), now have els last seen during the Japanese ca-picked up in the US; meanwhile, it has the possibility of running parallel with tastrophe a year ago.Swedbank’s GDP forecast - Global1/ The winding down of growth in emerg-(annual percentage change) ing markets also explains why the world Outcome April 2012 January 2012 recovery has over the last two quarters 2011 2012 2013 2011 2012 2013 been losing speed. After policymakers reduced overheating by removing stim- US 1.7 2.1 2.3 1.8 2.0 2.2 ulus, domestic activity is slowing while EMU countries 1.4 -0.5 0.4 1.6 -0.3 0.2 global demand is growing less briskly. Of which: Germany 3.1 0.5 1.3 3.0 0.4 0.9 Especially in China, the property mar- France 1.7 0.3 0.6 1.6 0.2 0.5 ket and car consumption have cooled, Italy 0.4 -1.8 -0.3 0.5 -1.3 -0.8 driving expectations of a hard landing. Spain 0.7 -2.0 -0.8 0.6 -1.0 -0.5 Manufacturing growth has slowed and Finland 2.9 0.8 1.7 2.9 0.4 1.5 export orders’ growth is much weaker UK 0.7 0.5 1.0 0.9 0.5 0.5 than a year ago. Inflation has de- Denmark 1.0 0.5 1.0 1.0 0.7 1.3 Norway 1.7 2.0 2.5 1.7 2.0 2.3 creased, but, since it is still a concern, the room for new stimulus – although Japan -0.7 1.5 1.2 -0.5 1.7 0.9 China 9.2 8.1 8.0 9.3 8.2 7.8 building up – is somewhat limited. India 7.2 6.7 7.3 7.3 6.7 7.0 Expectations of modest growth Brazil 2.7 3.1 3.5 3.0 2.7 2.2 in our main scenario Russia 4.3 4.1 3.9 4.2 3.9 3.7 Global GDP in PPP 3.5 3.1 3.4 3.6 3.1 3.1 In our main scenario, to which we give Global GDP in US$ 2.5 2.2 2.6 2.7 2.3 2.3 60% probability, global output growth will be lacklustre at best. The world Sources: National statistics and Swedbank. economy is now expanding at a rate 1/ Countries representing around 70 % of the global economy. The World Bank weights from 2010 have been used. of just below 3% in purchasing power April 24, 2012 4
  5. 5. Global Swedbank Economic Outlookterms; this will increase towards the Global PMI, S&P 500 (indeces) and Brent oil price, Jan 2007 - Apr 2012second half of this year before reaching 80 140an average of 3.1% in 2012 and 3.4% 75 130in 2013. For more details of the outlook 70 120see Swedbank’s Global Economic Out- 65 110 PMI Outputlook, published April 24th. 60 100 global Oil price Brent inCompared with our January forecast, 55 90 USDgrowth in the US has been revised 50 80 S & P 500upwards only slightly, as the stronger 45 70momentum will be negatively affected 40 60by higher energy prices. Growth in the 35 50euro area has been revised downwards 30 40 Source: Ecowinfor 2012; however, in 2013 we see pos- Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12sibilities for stronger activity in the corecountries such as Germany, as export In the advanced part of the world, fis- For oil-importing countries, responsibleand investment demand picks up in the cal austerity is putting on the brakes for some 80% of global output, the highsecond half of this year. Germany is ex- to growth; meanwhile, households are oil price is applying another brake, low-pected to have a recession in technical busy deleveraging, which means in- ering growth while increasing inflation.terms, but the underlying strength of the creased savings and cautious spend- However, over the forecast horizon,economy is still good. The recession in ing. Monetary policy will stay expan- global inflation in terms of consumersouthern Europe will deepen this year, sionary, but will not be sufficiently effec- and commodity prices will not be a ma-and we still cannot see growth coming tive in counteracting the adverse effects jor problem. Capacity utilisation is stillback until after the forecast horizon. arising from the restrictive fiscal policy. low, and the output gap (assuming po-Investments are growing in Japan as Still, policy interest rates will remain tential global growth of some 4%), al-a response to the tsunami shock, al- close to zero in most advanced econo- though shrinking, will close only a fewthough the strong yen, high energy mies, and we foresee more initiatives years’ from now. Labour costs will stag-costs, and slower demand from China from central banks to provide liquidity nate or grow weakly, as the bargainingwill reduce growth expectations some- in various forms, especially in the UK power of the labour force remains low.what this year before they strengthen in and Japan – and to lesser extent in the Global growth is also too weak to sup-2013 as the yen weakens. US and the euro area, where criticism is port a new boom in the commodity mar- arising and calls for exit strategies areOur forecast is not much altered in kets. Even so, commodity price inflation growing louder (e.g., from the Bundes-emerging markets, as we maintain our will stay high for some time, before the bank).view, expressed in January that growth oil price falls as expectations of a warwill slow in 2012 before picking up The US dollar will continue appreciat- between Iran and Israel cool down.slightly in 2013. Growth in oil-exporting ing, as the economic recovery there Most commodity prices will remain highcountries like Russia and Brazil looks is expected to remain stronger than in as they are supported by the global re-stronger than in our January forecast, the euro area or Japan, which will be covery, high liquidity, and low interestwhile India and China will try to limit the relieved to see the yen weakening. The rates. Our assumptions for the oil pricelarger negative growth effects by using appreciation of the renminbi will be kept have been revised upwards to $119more expansionary economic policies. at close to 4% per year. Tensions re- and $113 per barrel for 2012 and 2013,A hard landing in China will thus be garding exchange rates are building up, respectively (up from $102 and $96 peravoided. not least as Brazil and other emerging barrel in January). Metal and food pric- markets try to keep their industries from es – already high – will continue their losing competitiveness. slow ascent during 2012 and 2013.Interest and exchange rate assumptions The fundamental driver for commodity Outcome Forecast prices is the emerging markets, where 20 Apr 30 Jun 31 Dec 30 Jun 31 Dec catching up to richer countries’ living 2012 2012 2012 2013 2013 standards and improving productivity Policy rates are increasing the demand for com- Federal Reserve, USA 0.25 0.25 0.25 0.25 0.25 modities. Emerging markets, although European Central Bank 1.00 1.00 1.00 1.00 1.00 experiencing a slowdown, have less Bank of England 0.50 0.50 0.50 0.50 0.50 need to deleverage and tighten their fis- Bank of Japan 0.10 0.10 0.10 0.10 0.10 cal belts. High commodity prices have Exchange rates so far been met by more restrictive eco- EUR/USD 1.32 1.28 1.26 1.23 1.20 nomic policies, and, over the forecast EUR/GBP 0.82 0.81 0.81 0.81 0.80 horizon, most of the overheating prob- RMB/USD 6.30 6.18 6.05 5.94 5.82 USD/JPY 82 85 87 90 95 lems will have been overcome. April 24, 2012 5
  6. 6. Global Swedbank Economic Outlook Interest rate differences to German 10 year government bond, Jan 2008 - Apr 2012 (percentage points) leaving the currency union. In the US, 40 the main risk, except for that of energy Greece 35 prices eating a big hole in consumers’ Portugal wallets, is the continuation of a con- 30 Ireland gressional gridlock beyond this fall’s Spain 25 presidential election. If tax exemptions Italy 20 are removed, fiscal policy could be- Belgium come restrictive, thus slowing growth. 15 France The problems involved in deciding on 10 UK debt ceilings, tax and expenditure poli- 5 Sweden cies, and health reform could escalate 0 during the rest of the forecast period, Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 breaking the momentum of the US re- -5 Source: Ecowin covery and increasing tensions on the global financial markets. Another nega-In January, we limited our discussion because the probability of a worse sce- tive risk is, of course, of a hard land-on scenarios to the euro area. Then, nario, which we put at 30%, is higher ing in China, as falling property pricesthe main scenario was characterised than the probability of a better scenario, could reduce local and regional activityas one in which small, but important which we assess to be only 10%. and weaken the financial sector.steps were taken to alleviate the crisis. The factors driving the better scenario –With almost as high a probability, we In the longer term, there are many towards potential growth of around 4%envisaged a weaker scenario – resem- challenges for the world economy. For – are greater-than-expected stimulus inbling the crablike movement seen dur- those interested in this discussion, see emerging markets, supporting growth;ing 2011 – and also a crisis scenario in Swedbank’s Global Economic Outlook. either a lower oil price or less negativewhich a euro area collapse had a small In this we discuss a number of long- effects from the current price level; andbut not negligent probability. In April, we term issues: how to exit an expansion- stronger confidence arising from theinclude our main euro area scenario in ary monetary policy; how to safeguard crisis management in the advancedthe overall global main scenario, see- financial and consumer price stability; economies, mainly the US and the euroing a continuation of the muddling- how to create growth in Europe de- area, which would generate higher con-through policies. Fiscal cooperation is spite an environment of austerity; how sumer and investment spending.slowly being strengthened; the rescue to avoid global imbalances; how to putfunds are being made larger – although A worse scenario – with global growth the environment back on the globalperhaps not sufficiently. The policy still of 2% or less – could materialise if the policy agenda; and how to reduce un-includes balancing crisis support and oil price continues to rise along with employment, which most likely has be-avoidance of moral hazard, thus forcing geopolitical tensions, while the supply come more structural in the advancedcrisis-struck countries to speed up their of oil is reduced. In the euro area, po- economies. A modest recovery in thereform efforts. Even though sentiments litical and social unrest could pick up, short term is one thing; the build-up ofon financial markets improved after the increasing uncertainty before the elec- challenges for the world economy in theECB’s LTRO support, a credit crunch is tions this spring in Greece and France, medium and long term is quite another.in the making; because of this, together and next year in Italy and Germany. Cecilia Hermanssonwith fiscal austerity, the region is in a There could also be backlashes fromrecession. the crisis management in the euro area, with the risk of one of more countriesIn our main scenario, the recession inthe euro area levels off towards the sec-ond half of this year, driven by stronger The Japanese yen, the Chinese yuan, the euro and Brazilian real against the US dollar, Jan 2007 - Apr 2012 (Aug 2008=100)growth in the core countries. Some 160relief will come from a weaker euro, 150mainly in relation to the US dollar. Over 140the forecast horizon, and well beyond, 130unemployment will remain high in the 120 Eurocrisis-struck countries in southern Eu- 110 Realrope, resulting in an inevitable severe 100 Yuansocial, economic, and political crisis. 90 YenAsymmetric risks – a worse sce- 80nario is more likely than a better 70There are plenty of negative risks to this 60forecast. The risk view is asymmetric Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Ecowin April 24, 2012 6
  7. 7. Swedbank Economic OutlookSweden: Recovering after the hit last yearA sharp drop in exports pulled down these numbers is a stronger recovery in according to our assessment, while thegrowth rates in the last quarter of 2011. the latter half of the year. Thus, we ex- upside risks have increased somewhat.Following a surprisingly strong perform- pect a turnaround of the declining trend The actions to resolve the Greek debtance during the first three quarters of in economic growth seen since mid- crisis, together with increased lending2011, economic growth contracted by 2011. In 2013, the recovery continues, by the European Central Bank (ECB)more than 1% (seasonally adjusted), but at a slower quarterly rate, and an- to banks, have calmed the Europeanreducing overall annual real growth to nual growth is forecast at 2.2%. Due to economies, but the debt dynamics in4.0%, compared with our previous esti- the weak external environment, growth Spain and Italy could again pull downmate of 4.5%. Among the positive signs is still below trend, and the main growth European growth rates. Also, emergingwas a surprising resiliency of private engine will be domestic demand, in par- markets and the US are facing someconsumption. Households increased ticular private consumption. headwinds, in particular from rising en-their spending at an annual rate of ergy prices. Domestically, risks have re- The quite substantial data revisions in2.1% and withstood the worsening risk ceded, in our view, with a lack of hous- connection with the 2011 GDP releasesentiments in the global markets. ing underpinning real estate markets have altered the path and dynam- and unemployment rates increasing atData in the first couple of months of ics of the Swedish economy following a slower rate.2012 give a mixed picture. Export the financial crisis in 2008-2009. GDPgrowth has recovered somewhat, la- growth for 2010 was revised upwards, Exports to recover after a sharpbour market developments are not as while the rate of expansion in the first declinebad as were previously expected, and three quarters of 2011 was lowered. After rebounding strongly in the previ-sentiments have strengthened. How- Thus, the recovery was faster in 2010, ous quarters, Swedish export volumeever, industrial production plummeted but the performance of the economy fell in the fourth quarter last year byin February – although one month’s has since been more modest. In addi- much more than we expected. The de-reading should be interpreted care- tion, the number of hours worked was cline was driven by weaker global de-fully – and the purchasing managers’ significantly higher than previously re- mand and growing uncertainty aboutindex (PMI) does not point to a rapid ported. This implies that productivity the sovereign debt crisis in the eurorebound in either manufacturing or growth in the Swedish economy was area and its impact on the global econ-services. Furthermore, uncertainty re- slower, and together with rising unit la- omy. In particular, Swedish exports ofgarding international developments bour costs, competitiveness was not as intermediate and investment goodshas increased, with weaker data com- strong. were affected when investment plansing in from both Europe and the US late globally were postponed, not least in The risks to the forecast, and to thein the first quarter. On an annual basis, Europe, which is the largest export Swedish economy, mainly derive, aswe are lowering our growth forecast for market for Swedish industry. On an an- before, from external sources. Howev-2012 from 0.6% to 0.5%, but underlying nual basis, however, total export vol- er, the downside risks have decreased, ume increased by 6.8% in 2011 due toKey Economic Indicators, 2010 - 2013 1/ the strong growth in the first three quar- 2010 2011 2012f 2013f ters. Goods exports increased by 8.5%, Real GDP (calendar adjusted) 5.8 4.0 0.5 2.2 while services picked up by 2.9%. Industrial production 19.8 6.7 -3.5 2.0 CPI index, average 1.2 3.0 1.5 1.9 The world market growth for Swedish CPI, end of period 2.3 2.3 1.3 2.0 exporters will be below the long-term CPIF, average 2/ 2.0 1.4 1.3 1.6 trend during the forecast period, mainly CPIF, end of period 2.3 0.5 1.7 1.6 due to a slow growth rate in the OECD Labour force (15-74) 1.1 1.2 0.2 0.3 region. Since 2000, the annual growth Unemployment rate (15-74), % of labor force 8.4 7.5 7.8 7.9 of world markets for Swedish firms has Employment (15-74) 1.0 2.1 -0.1 0.2 increased by 6-6.5%. For 2012, we ex- Nominal hourly wage whole economy, average 2.5 2.7 3.2 3.1 pect these markets to grow by 3.5-4%, Nominal hourly wage industry, average 2.8 2.4 3.1 3.0 which is more or less the same level Savings ratio (households), % 8.5 9.7 10.1 9,8 we forecast in January. The weakest Real disposable income (households) 3/ 1.2 3.3 2.0 2.1 growth performance will be seen in the Current account balance, % of GDP 6.8 7.2 6.9 7.1 euro area, while emerging markets’ General government budget balance, % of GDP 4/ -0.1 0.2 -0.3 0.2 growth will still be relatively high. For General government debt, % of GDP 5/ 39.4 36.5 35.8 33.5 next year, we foresee market growth as Sources: Statistics Sweden and Swedbank. somewhat stronger but still below the 1/ Annual percentage growth, unless otherwise indicated. 2/ CPI with fixed interest rates. long-term trend. A low utilisation rate 3/ Based on short-term earnings statistics in the business sector and budget con- 4/ As measured by general government net lending. 5/ According to the Maastricht criterion. solidations in several OECD countries April 24, 2012 7
  8. 8. Sweden Swedbank Economic Outlookmean that global investment activity is Swedish export and order, Jan 2005 - Feb 2012 (annual change in %) 30expected to be modest in the comingyears. 20In the immediate term, there are signs 10of an improvement in the Swedish ex- Export value (nom.)port industry after the sharp slowdown 0 Export volumeat the end of 2011. New orders have -10started to pick up, although from low Export orderslevels, and the export value for the first -20two months shows only a minor de-crease from the last months of 2011. -30Swedbank’s PMI for the manufacturing -40sector also improved marginally in the Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 Source: Statistics Swedenfirst quarter of 2012. Although we as-sume a mild recovery in Swedish ex- Investments on hold Modest global demand and lower ca-ports during the second half of 2012, pacity utilisation will restrain private in- Gross fixed investment increased inthe average export volume will be 1.3% vestments during 2012. In Swedish in- volume terms by 5.8% in 2011. Thislower than in 2011. dustry, the utilisation rate fell to 82.8% was in line with our expectations. Al-Weak investment activity in the OECD though investment has trended up- in the first quarter of 2012 from 86% inwill limit Swedish export possibili- wards since 2010, with an accumulated the same period last year, in line withties. The global outlook for e.g. heavy investment growth of 16%, total invest- the decreasing production volume. Intrucks is expected to weaken in 2012, ment volume has not yet reached the the Statistics Sweden’s investmentmainly on mature markets; however, pre-crisis level of 2008. Furthermore, plan survey of February 2012, the in-demand is also expected to deceler- the investment trends differ across sec- dustry reports plans to increase invest-ate in emerging markets. In particular, tors. The largest shift has been in real ment volume by 5%, which seems opti-slower export demand from Germany estate. Investments in housing fell by mistic due to the modest export outlook– destination for nearly 10% of total 7.3% (seasonally adjusted) between and low utilisation rate. In the servicesSwedish exports - will have a dampen- the third and fourth quarters last year, sector, which accounts for more thaning impact on Swedish export perform- after two years of strong growth. De- one-third of total investment, we fore-ance. We foresee an export volume spite the large drop, real estate volume see a continued increase in investment,growth of 2.5-3% in 2013, when global was 12.8% higher in 2011 than in 2010. particularly in household-related indus-demand is improving. After two years In the private sector excluding housing, tries. Public investment, which startedof market gains, we foresee losses of investments continued to grow even to decrease at the end of 2011, is ex-market shares in 2012-2013 due to a while production growth was decelerat- pected to continue to shrink in 2012,less favourable demand composition ing and uncertainty about the business mainly due to declining infrastructureand worsening competitiveness. Unit outlook was growing. The strongest in- investments. This is the first time sincelabour costs are expected to increase vestment performance was recorded in 2003 that investment in the public sec-faster than we expected in January due the services sector, while the transport tor is expected to fall.to lower productivity growth and higher industry and energy sector showed the The main downward revision fromwage increases. largest slowdown. January concerns real estate invest- ment. The sharp drop in the numberSwedbank’s GDP Forecast – Sweden of building permits issued at the end of Changes in volume, % 2010 20111/ 2012f1/ 2013f1/ last year will have a negative impact on Households consumption expenditure 3.7 2.1 (1.4) 1.3 (0.2) 2.5 (2.1) investment growth this year. Although Government consumption expenditure 1.9 1.8 (1.7) 0.6 (0.7) 0.9 (0.9) house improvements will be stimulated Gross fixed capital formation 7.7 5.8 (5.8) 0.1 (1.5) 2.6 (2.5) by the continuing tax reductions for private, excl. housing 5.7 5.0 (2.9) 2.6 (2.7) 4.0 (4.3) renovation, the growth rate will decel- public 6.2 1.6 (6.6) -1.8 (-0.8) 0.4 (0.4) housing 17.2 12.8 (15.4) -6.2 (-0.5) -0.2 (-1.5) erate from a high level. Since Decem- Change in inventories 2/ 2.1 0.7 (0.6) -0.4 (-0.5) -0.1 (0.2) ber 2008, when these tax reductions Exports, goods and services 11.7 6.8 (8.4) -1.3 (-1.1) 2.6 (1.7) were introduced, investment in rebuild- Imports, goods and services 12.7 6.1 (5.9) -1.1 (-1.7) 2.0 (2.2) ing has increased by 50%. Overall, we GDP 6.1 3.9 (4.5) 0.2 (0.3) 2.2 (1.8) foresee a fall in housing investment of GDP, calendar adjusted 5.8 4.0 (4.5) 0.5 (0.6) 2.2 (1.8) 6% in 2012; this means that investment Domestic demand (excl. inventories) 2/ 3.7 2.6 (2.2) 0.8 (0.5) 1.9 (1.7) in real estate as a share of total invest- Net exports 2/ 0.3 0.7 (1.6) -0.2 (0.2) 0.4 (-0.1) ment will decrease. Fundamentally, Sources: Statistics Sweden and Swedbank. there is still a need for more invest- 1/ The figures from our forecast in January 2012 are given in brackets. 2/ Contribution to GDP growth. ment in housing. The growing popula- April 24, 2012 8
  9. 9. Sweden Swedbank Economic Outlook Gross fixed investments in different branches, 2005 Q1 - 2011 Q4 (annualtion, particularly in the large cities, and change in %)the lack of housing in 60 percent of the 30Swedish municipalities imply a largeunderlying demand for new housing. 20Of the Nordic countries, Sweden has 10the lowest investment in housing per Total investmentscapita. 0 Real estateWe foresee investment growth in 2012 -10 Private sector exclto be weaker than envisaged in the out- housing -20 Public investementlook in January, and gross fixed capitalformation is expected to grow by only -300.1% this year. In 2013, we expect total 2005 2005 2006 2007 2008 2008 2009 2010 2011 2011investment volume to pick up by 2,6%, Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Source: Statistics Swedendriven by stronger investment activity inthe private sector and a recovery in the early 2012 from 2011, and new regis- rates and slow the reduction of the un-real estate market. trants as job seekers at the public em- employment rate. Furthermore, as real ployment service are also up. A positive growth is expected at 2,1%, below po-Unemployment to increase, sign is that the number of open posi- tential, we do not expect a significantcompetitiveness a challenge tions is increasing. Partly, this is a result dent to unemployment rates.Although the labour market is losing of employers bringing forward summer- The wage-bargaining process that wassteam, it is holding up somewhat bet- season temporary jobs. The “hours initiated last year is expected to in-ter than we expected earlier in the year. worked” statistic is also holding up bet- crease cost pressures for companies,The unemployment rate in February, ter than expected, and data do not yet which could further strain competitive-seasonally adjusted, was 7.5%, which show a decline. This suggests that em- ness in Sweden. Due to quite drasticis roughly unchanged from January and ployers are not seeing an urgent need revisions of data on hours worked inDecember. On average in the first two to reduce labour input. 2010, productivity was developing sig-months of 2012, 390 000 people were Against the background of a better- nificantly more slowly in the Swedishregistered as unemployed, compared than-expected outturn in the early economy in 2010 and 2011 than waswith the 400 000 registered in the same months of 2012, and a stronger pro- earlier believed. This also implies thatperiod of 2011. However, labour market jected economic turnaround, we are unit labour costs are increasing faster.participation is trending down, suggest- revising down our unemployment fore- Thus, we expect companies to struggleing that more people are discouraged cast for 2012 and 2013; however, we harder in the export markets while pro-from looking for jobs. Also, the reforms still expect the unemployment rate to ductivity growth continues to lag behindof the sickness benefit system imply increase well into next year. The av- wage costs over the next two years.that many that were previously regis- erage unemployment rate for 2012 istered as unemployed are now leaving Although the employment rate has forecast at 7.8%, unchanged from ourthe labour force and returning to the been trending downwards since the au- January forecast, and at 7.9% in 2013,health insurance, thereby reducing the tumn of 2011, a stronger-than-expect- compared with 8.0% in the Januaryunemployment rate. ed growth recovery in the second half forecast. We do not expect the unem- of 2012 will raise employment levels.Short-term indicators suggest that the ployment rate to exceed 8% in season- However, we expect that job growthunemployment rate is set to increase ally adjusted terms during the forecast will be unevenly distributed among dif-in the immediate term. The number of period. In 2013, we expect a pickup in ferent groups in the labour market. Anotifications has more than doubled in labour demand to raise participation long period of relatively high unemploy- ment has increased structural unem-Employment rates: difference between Swedish born and foreign born, Apr2005 - Feb 2012 (percentage points) ployment, i.e., long-term unemployed 25 who have had little or no job experi- ence in recent years find it increasingly 20 more difficult to find employment. This is particularly the case for young en- 25-54 year 15 trants and for foreign-born job seekers. 55-74 year For these groups, employment rates 15-24 year dropped last year, and, with their lack 10 of experience and labour market con- 5 nections, we believe that redoubled efforts will be needed to reduce the 0 unemployment rates in these groups. Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11 Source: Statistic s For the age cohort of 25-54-year-olds, SwedenApril 24, 2012 9
  10. 10. Sweden Swedbank Economic Outlookthere has been a steady increase in the tion has continued to grow in line with proved conditions implies that the sav-difference between domestic born and developments at the end of last year. ings ratio will not increase to the sameforeign born, despite the improvement extent as in our January forecast, but The financial situation of householdsof the labour market since mid-2009. instead is estimated at around 10% of has been bolstered by solid earnings,For 15-24-year-olds, the employment disposable income. In 2013, the labour but increasing interest costs and highrate varies more by season, suggest- market will strengthen further and we indebtedness underscore their continu-ing that Swedish-born youth have eas- expect household sentiments to im- ing vulnerability to shifts in asset pricesier access to temporary seasonal jobs, prove as the European situation stabi- and employment. Real disposable in-something that improves their future lizes. Together with fiscal policy sup- come rose by 3.3% in 2011, more thanwork prospects. porting household incomes through tax double compared with 2010. At the rate reductions, private consumptionHouseholds - the backbone of same time, consumption grew by 2.1% will continue to increase and the sav-growth in real terms. Not only eroding senti- ing ratio will fall to 9,8% of disposableHousehold consumption picked up rap- ments but also a decrease in house- income. Thus, we expect that house-idly in the fourth quarter of last year af- hold assets can explain the difference. hold spending will provide the largestter declining sharply in the third quarter. Overall household net financial assets contribution to growth over the next twoSeen over the whole year, however, declined as a share of disposable in- years.consumption grew by 2.1%, compared come. In particular, households’ holdingwith 3.6% in 2010. Thus, despite a of equities fell in value by about 10%, The monetary easing cycle hasstrong growth in real disposable in- while housing assets was roughly un- endedcome, households prioritised savings, changed. Using estimates from Statis- The Riksbank kept the repo rate con-which is an indication of the persist- tics Sweden (2006), this would mean a stant on April 17 at 1.50% and gaveing elevated sense of economic un- decline in nominal consumption growth fairly strong signals that there would becertainty. The savings ratio increased of about 1 percentage point, which can no more reductions, barring a signifi-to 9.7% of disposable income in 2011 partly explain why consumption grew cantly worsening of the economy. Mar-from 8.5% in 2010. In addition, credit by less than incomes last year. The ket expectations of a rate cut have de-expansion continued to decline in early impact of a housing price decrease of clined recently and the new repo will be2012, slowing the growth of household the same magnitude would be about 3 higher than we forecast in our Januaryindebtedness. Note that the statistics percentage points. report. At the same time, the Riksbankwere revised significantly downwards Against the background of a better la- is presenting a slightly worse economicfollowing the exclusion of nonprofit in- bour market than in our January fore- outlook, which leads us to believe that itstitutions serving households (NPISH). cast, with higher employment and earn- is putting more weight on financial sta-This did not, however, cause a change ings, together with stable asset prices, bility and household indebtedness.in the pattern. we revise upwards our consumption Inflationary pressures have decreased,Overall consumption continued to de- growth forecast to 1.3% for 2012 and to but with higher oil prices we expect in-velop strongly in the first couple of 2.5% in 2013. The underlying quarterly flation to start picking up. However, ac-months in 2012. Both consumer dura- growth rate for 2012 is expected to be cording to our current forecast, pricebles and nondurables picked up, while significantly higher than in our Janu- increases with fixed mortgage ratesconsumer sentiment improved from low ary forecast. The reasons are a better (CPIF) will clearly undershoot the targetlevels. Some hesitation remains, how- labour market where employment is of 2% at the end of the forecast period.ever, as registration of cars dropped by gradually increasing and a higher real At the end of 2013, headline inflation isalmost 4% in the first quarter of 2012 disposable income in combination with expected to be 2.0%, while the CPIF iscompared with same quarter in 2011. In stable asset prices and a somewhat forecast at 1.6%. Thus there is clearlyall, we estimate that private consump- better global growth outlook. The im- room for a more expansionary mon- Household balance sheet, 2005 - 2011 (% of disposable income) etary policy in the short run.450 8,0 Despite falling exports at the end of last400 7,0 year, the Swedish krona has strength- Debt350 ened since the beginning of the year, 6,0 Net assets primarily against the euro. The rela-300 5,0 tively strong performance of the Swed-250 4,0 Interest ish economy, together with the coun-200 payments; try’s growing status as a safe haven 3,0 rhs150 following the demonstration of solid 2,0 fundamentals in internal and external100 balances (budget balance and current 50 1,0 Sources: Statistic account), is likely to lead to an appre- 0 0,0 Sweden and real ciation of the krona. Against the US dol- 2005 2006 2007 2008 2009 2010 2011 estate statistics. April 24, 2012 10
  11. 11. Sweden Swedbank Economic Outlooklar, we do not expect much change, but Interest rate and currency outlookthe euro will lose in value. Together with Outcome Forecastincreasing wage costs and a slowing 2012 2012 2012 2013 2013 20 Apr 30 Jun 31 Dec 30 Jun 31 Decproductivity growth, a stronger kronawill put pressure on Swedish competi- Interest rates (%)tiveness and increase the challenge of Policy rate 1.50 1.50 1.50 1.75 2.00gaining export market shares. 10-yr. gvt bond 1.80 2.10 2.60 2.90 3.10We expect the Riksbank to maintain the Exchange ratesrepo rate at 1.50% for the remainder of EUR/SEK 8.84 8.70 8.65 8.60 8.60 USD/SEK 6.68 6.80 6.87 6.94 6.85the year, before raising it twice in 2013. TCW (SEK) 1/ 121.8 120.3 119.8 119.5 119.1However, in our view, the monetary Sources: Reuters Ecowin and Swedbank.stance will dampen the economic re- 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).covery and reduce the rate of decline ofunemployment. Thus, we would argue hold tax payments, but increased con- ever, the impact on the economy willfor a continued reduction in the mon- sumer spending will underpin revenues be offset by local governments’ strivingetary policy rate and would propose from value-added taxes. Furthermore, to consolidate their balances throughdealing with financial stability issues by as labour taxation will remain under spending restraint and tax hikes.other means, primarily banking supervi- pressure, we expect local governmentssion and fiscal policy. The room for expansionary fiscal policy to increase their deficits in 2012. In the is declining, but the biggest obstacleA return to fiscal deficit complementary budget for 2012, the to the implementation of the govern-The public sector, according to pre- government presented reforms aimed ment’s policy is the weak parliamentaryliminary estimates, ran a surplus corre- at improving housing market flexibility. situation that it faces. The downwardsponding to 0.2% of GDP in 2011, which This will have a small budgetary impact revision of productivity growth lowersis an improvement over the previous in 2012, and only a limited one over the potential GDP. Together with the fairlyyear by 0.3 percentage point. While the coming years (SEK 1.6 billion). rapid GDP growth seen in the last twosurplus in the pension system (0.5% of The public sector balance for 2013 is years, this will reduce the amount ofGDP) improved the bottom line, the lo- expected to improve as growth picks up business cycle-adjusted savings. Also,cal governments continued to run defi- and unemployment starts to decrease. the seven-year rolling budget deficitcits (0.3% of GDP). Furthermore, gov- Labour market-related taxes and profit indicator points toward reduced spaceernment consumption and investments taxes are expected to increase, and for increased deficits, and the expendi-both declined as a share of GDP. The we forecast the public sector to have a ture ceilings will restrict the expansionpublic sector debt decreased by almost small surplus corresponding to 0.2% of of permanent spending to about SEK3 percentage points of GDP (according GDP. Included in the budget is an addi- 18 billion (0.5 % of 2011 GDP). How-to the Maastricht criterion) as a result of tional fiscal stimulus amounting to SEK ever, we still believe that fiscal stimulusthe surplus, positive economic growth, 15 billion, the bulk of which will be on the would be appropriate, in particular dur-and from revenues of sale of govern- expenditure side. The government has ing the current year of slowing growth.ment assets (mainly Nordea shares). already signalled that it will increase its For next year, we would endorse notThe slowdown in growth, together with efforts to bring down unemployment, only a targeted spending initiative tounfinanced reforms corresponding to and we expect targeted measures ad- reduce unemployment, but also tax0.4% of GDP, is expected to move pub- dressing the situation of youth and reforms that support growth. The chal-lic finances into deficit during 2012. A foreign born. Additional spending is lenge for the government is to developweaker labour market reduces house- also expected on infrastructure. How- reforms that can be supported by a ma- jority in the parliament.Inflation, the repurchase rate and exchange rate (index) 6,0 150 However, with the possibility of tax cuts in 2013 and 2014, there is a risk that 5,0 145 a procyclical fiscal stance will force the 4,0 140 CPI yoy Riksbank to raise policy rates faster 3,0 than planned. 135 CPIF yoy 2,0 Magnus Alvesson 130 Jörgen Kennemar 1,0 Policy rate 125 0,0 Krona (TCW, rhs)-1,0 120-2,0 115 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sources: Riksbanken, Statistics Sweden and Swedbanks forecasts. April 24, 2012 11