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Swedbank Economic Outlook January 2011


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Swedbank analyses theSwedish and Baltic Economies.

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Swedbank Economic Outlook January 2011

  1. 1. Swedbank Economic OutlookSwedbank Analyses the Swedish and Baltic Economies January 13, 2011Recovery on track - next step is to entrench growth Global development Table of Content: • The speed of global recovery in 2010 exceeded our September forecast, with GDP up by 4.6%. Tailwinds into 2011 are making us revise also 2011 upwards to just below 4%, while 2012 is marginally lower. Emerging Introduction: Moving on to economies are still in the driver’s seat, while more advanced ones are sustainable growth 2 struggling in the backseat with private and public deleveraging. • The risk of a new recession and deflation has decreased, but many Global: Despite the many risks uncertainties linger: the euro zone crisis, slow recovery in the US, escalating commodity prices, and overheating in emerging markets. - global recovery is on! 4 Sweden • The rapid recovery of the Swedish economy continued during the fall of Sweden: Rapid rebound - time 2010. Aided by rebounding external demand, household consumption for forward-looking growth and investments surprised on the upside, and we estimate real growth in reforms 6 2010 at 5.3 %. • The outlook for 2011 and 2012 is characterised by a slow-down in growth Estonia: First year in euro to 3.3 % and 2.5 %, respectively. Temporary boosts to activity, such as inventory restocking, will dissipate. To lift real growth over the medium zone 11 term, renewed efforts to reform the economy are needed. Estonia Latvia: Stronger than expected • Economic growth in 2010 was stronger than expected on support of recovery, yet reforms are rapidly expanding exports. Although weak, domestic demand grew needed 15 as unemployment declined and prices rose. The budgetary situation remained strong. • The economy will expand by 4-4.5% in 2011-2012 as exports will remain Lithuania: Recession is over - the driving force, albeit domestic demand is gradually strengthening investments key to sustainable on support of investments and consumer spending. The major positive recovery 19 effects of the euro adoption will be lower risks and stronger confidence. Latvia • Recovery in 2010 has been stronger than expected both due to quick private sector adjustment and better growth in export markets – we estimate that during 2010 GDP has grown by about 4% from the trough in the fourth quarter of 2009. • Faster than expected growth is forecast in 2011 (4%) due to stronger exports and investments, while the 2012 outlook remains unchanged (4.2%). Inflation will pick up, which is a major risk for euro adoption in 2014. This is still a muddling-through scenario, as the elections so far has not brought fast and comprehensive structural reforms. Lithuania • GDP grew in the second and third quarters 2010, indicating the end of the recession and the beginning of a new economic cycle. The recovery has relied on strong exports, but, in addition, gross fixed capital formation grown by 15% in the third quarter, mainly due to public investments . • Growing exports, continuing restocking and strong pick up in investments will drive faster growth in 2011. Next year due to recovered household consumption GDP growth will accelerate further – from 3.0% in 2011 to 4.5% in 2012. Medium term challenges include public finances and structural unemployment. January 13, 2011 1
  2. 2. Introduction Swedbank Economic OutlookMoving on to sustainable growthAfter large falls in demand were global demand. Russia, although still risks are a big concern for forecasting,experienced in 2008-2009 – especially underperforming, has been fortunate as political decisions – being uncertainin the Baltic countries, but also in because energy and metal prices have and difficult to foresee – will have aSweden – the recovery started to take continued to increase. large impact on the economies.hold last year. GDP increased more Looking to this year, a large carryover While Sweden’s GDP level is alreadythan in our September forecast, mainly for some of the countries, like back at the pre-crisis level, there isdue to a stronger global demand, Germany, will support growth in 2011. still a long way to go for the Balticbut also, domestically, because In the US, a new stimulus package countries, where deleveraging and/of better performances of labour will add to growth but, with the or budget consolidation are limitingmarkets and improved confidence postponement of budget consolidation, the recovery. As demand fell by 15-among companies and households. risks are building up, affecting stability 20%, the recovery should have beenSweden’s growth also benefited from not only in the US, but also worldwide. stronger, but, as deleveraging is stillexpansionary economic policies. Momentum in the emerging markets is in focus, new lending will be lowerIn the Baltic countries, reforms set to slow somewhat, as the effects and domestic demand weaker thanfocused on budget consolidation from stimulus measures fade and during normal recovery periods. Thereand competitiveness, as well as on demand from the advanced economies are three main domestic risks in theimprovement of credit ratings and weakens. We expect global GDP Baltic countries. First, political risksthe investment climate. The worst growth to stay slightly below 4% in pose a threat to budgets and over, and all four countries must 2011 and 2012: compared with our Second, inflation pressures are beingnow concentrate on creating better September Outlook, this represents an generated by higher commodity prices.preconditions for sustainable growth. upward revision for 2011 and a slightly And third, labour market imbalancesFor the export-oriented Nordic-Baltic downward revision for 2012. are worsening due to a combination ofcountries, global demand is of the higher long-term unemployment and We foresee that major centralutmost importance. During 2010, increased labour shortages in certain banks will not raise policy rates untilglobal GDP seems to have grown sectors, as economic structures are 2012, and will need to use moresomewhat faster (4.6% compared with changing from loan driven to export unconventional measures this year4.4% in our September forecast), as oriented and as emigration continues. than expected in September. How toactivity in the euro zone, the UK, and Swedish domestic risks are also exit from these measures remains aemerging markets like India, China, geared towards the labour market, large risk to stability, as do currencyand Brazil strengthened more than characterised by the same combination tensions, protectionism, and, most ofexpected. Overall, developments of lingering unemployment and higher all, the sovereign debt issues in thein the Baltic Sea region have been labour shortages. Other domestic risks euro zone. Our main scenario includesmore favourable than in other parts of include the effects on households a rescue package for Portugal, whileEurope, as the situation has stabilised from making monetary policy less similar packages for Spain and otherfaster in the Baltic countries; Germany, expansionary, as the debt ratio has countries are regarded as majorPoland, and the Nordics have been increased, along with interest rate forecast risks. Overall, the politicalable to make the most of a stronger sensitivity. Even if house prices are not expected to fall dramatically, Sweden’sMacro economic indicators, 2009- 2012 credit and housing markets are 2009 2010e 2011f 2012f Real GDP growth, annual change in % becoming more vulnerable to external Sweden (calender adjusted) -5.2 5.3 3.3 2.5 risks, and household consumption, Estonia -13.9 2.8 4.2 4.5 especially, could face a larger Latvia -18.0 -0.5 4.0 4.2 Lithuania -14.7 0.5 3.0 4.5 slowdown than expected in our main Unemployment rate, % of labour force scenario. Sweden 8.3 8.4 7.7 7.5 Estonia 13.9 17.0 14.3 12.5 Sweden’s rebound was even Latvia 16.9 18.9 16.5 14.5 stronger than we expected in Lithuania 13.7 17.7 15.5 14.0 September, and, during the autumn, Consumer price index, annual change in % Sweden -0.3 1.3 2.2 2.4 both domestic demand – including Estonia -0.1 3.0 3.7 3.2 inventory restocking – and external Latvia 3.5 -1.1 3.0 2.5 trade recovered at top speed. GDP Lithuania 4.5 1.3 2.0 2.5 Current and capital account balance, % of GDP in calendar-adjusted terms is now Sweden (current account) 6.9 6.1 6.1 5.9 expected to grow by 5.3% during Estonia 7.3 7.0 5.5 4.5 2010, creating a carryover to 2011 Latvia 12.0 6.9 3.8 0.1 Lithuania 7.7 4.2 2.7 2.5 and thus resulting in an upward Sources: National statistics authorities and Swedbank. revision for that year to 3.3% (2.4% in January 13, 2011 2
  3. 3. Introduction Swedbank Economic OutlookSeptember). However, the quarterly to inflationary pressures but these expect the budget deficit to come downrate of expansion will slow after last will dampen gradually. In the longer to 3% of GDP in 2012, thus satisfyingyear’s bounceback. The main drivers term, foreign support for investments the Maastricht criteria. Hence, inflationof growth in 2011 are the higher in Estonia is likely to increase due is expected to be the most difficult goalhousehold consumption, supported by to a perceived higher stability and to fulfil.a better labour market performance; predictability of the economy. Fiscal Lithuania’s recession has also ended,the stronger confidence; and a further policy is disciplined, and the budget and GDP in 2010 is expected to haverecovery of investments. Net exports situation will be better than the shown marginal growth of 0.5%. Thewill be marginally higher. In 2012, government plans throughout the outlook is improving as GDP will growGDP growth is set to slow somewhat forecast period. The main fiscal risks by 3% in 2011 and 4.5% in 2012.more than the September forecast, are geared towards social spending Exports explain last year’s betterto 2.5% (2.9%). The most important and developments in labour markets performance, as well as inventoryreason for this is the slower growth and municipal budgets. Increasingly, restocking, which added extensivelyof exports due to higher unit labour higher inflation is likely to be a major to growth. For 2011, investments arecosts and a slightly stronger krona. challenge for policy makers, with set to grow somewhat faster, whileThe Riksbank will raise the policy rate possible negative consequences for general government consumptionmarginally faster during the spring of growth and competitiveness. will decrease more than previously2011, reaching 2,25% at end- 2011 Latvia already experienced a recovery envisaged. We have revised upwardsand 3% at end- 2012. Fiscal policy will last year, despite the negative GDP the inflation rate for 2011 and 2012become tighter, and there is still room growth, which was due to a carryover as commodity prices have increasedfor targeted reforms improving the effect from 2009. During the first more than expected, and excise dutiesfunctioning of the labour market. nine months of 2010, the economy on tobacco and diesel fuel will addEstonia’s GDP growth has also been grew by 3%, mainly due to stronger to inflationary pressures. Like Latvia,revised upwards for 2010, from 2.2% exports and inventory restocking. The Lithuania has the goal of becoming ain the September Outlook to 2.8%. A labour market has also improved in member of the EMU in 2014, whichstronger export performance explains line with the stronger growth climate, means that all Maastricht criteria mustmost of the difference. For 2011 and and unemployment is falling from the be fulfilled in 2012. While we foresee2012, we are keeping the overall peak of above 20% at the beginning that the government can manageGDP growth basically unchanged, but of 2010. Going forward, GDP will to reduce the budget deficit to 3%exports are now forecast to speed grow by 4% and 4.2% in 2011 and of GDP in 2012 , the inflation rateup in line with a stronger global 2012, respectively. Growth in 2011 could become a greater hindrance.demand, while domestic demand is stronger than the September Labour productivity will increase, butwill increase more slowly than in the forecast (3%) as a result of a better not as fast as during 2010, and moreSeptember forecast. A more subdued global demand situation, as well as measures are needed to improveinvestment growth and the effects stronger investments. Household competitiveness.on households of higher inflationary consumption, although remaining Many challenges for sustainablepressures explain the downward subdued, will slowly pick up in line with growth remain, and all fourrevision of domestic demand. GDP lower unemployment and stronger countries should continue towill grow by approximately 4.5% in confidence. Inflation is also increasing, focus on reforms that will add toboth years. Estonia has now become but the government will focus on longer-term competitiveness bythe 17th member of the Economic holding price pressures down as Latvia supporting education and researchand Monetary Union (EMU). In the is still aiming to join the EMU in 2014. and development, improving theshort term, price increases will add Fiscal improvements continue, and we functioning of labour markets, Quarterly real GDP levels( quarterly peak =100) 1/ increasing competition on domestic 105 product markets, and strengthening 100 the business climate. The times when loan-driven economies could generate 95 success stories are over. Only by 90 creating an environment for companies that are dynamic and environmentally 85 and economically sound may the 80 standard of living grow in a sustainable way. 75 Latvia Lithuania Sweden Estonia 70 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Cecilia Hermansson Sources: National statistics authorities and Swedbank. 1/ Each quarter of the year is compared to the highest level of that quarter’s GDP. January 13, 2011 3
  4. 4. Global Swedbank Economic OutlookDespite the many risks - global recovery is on!Global economic growth has surprised growth, and preparations for the response. As austerity measureson the upside. Industrial production election in 2012 may include some are implemented and credit growthand foreign trade have shown strong stimulus, thus – and not without risks is restrained, demand could weakensigns of recovery, helped by stimulus – postponing the medium-term budget more than expected. An upside riskmeasures and inventory correction. consolidation. could materialize if structural reforms are carried out, improving confidence,Countries – where governments, Emerging markets will continue productivity, competitiveness, and thecompanies, and households have to show strong growth, although functioning of markets.been spared from repairing balance losing some momentum when thesheets, such as in most of northern bounceback and stimulation period Second, there is still a risk of aEurope, and in many of the emerging end, and because many advanced double dip on the US housing market,markets – have recovered faster than economies will continue to show aggravating credit availability andexpected. On the other hand, crisis- weaker demand. In some countries, unemployment. The local governmentstruck economies in southern Europe like China and India, there is a need fiscal situation may also worsen,are continuing to struggle with austerity to combat overheating by tightening which would threaten employmentmeasures, wider interest rate spreads, economic policies, and thus growth and overall growth. The politicaland a lack of growth. The recovery in will slow. Although higher than in our weaknesses on the federal level maythe US and the UK is also slower than September forecast, GDP growth will also continue until the election in latewhat is usual after normal recessions, stay below 4% in both 2011 and 2012, 2012.pointing to lingering difficulties on the slowing from 4.6% in 2010. Third, the inflation risks in manylabour, credit, and housing markets. Even if the continued recovery has emerging markets may force politiciansCompared with our September reduced the risk of a double dip and to tighten economic policies more thanforecast, global growth is expected to a deflation scenario, many other desired, which could cause a hardbe higher in 2011, as 2010 showed a risks are contributing to forecast landing. There are still asset bubblesstronger-than-expected recovery. The uncertainties. that could burst, like on the Chinesemain difference is the strong German real estate markets, where housing First, the economic and financialbounceback, where a large carryover prices are increasing again despite situation in the euro zone couldinto 2011 will motivate an upward tighter policies. worsen as problems in Greece andrevision. The disparity within the Ireland spread to Portugal and Spain. Fourth, large capital flows to emergingeuro zone continues; hence, growth In addition, the political situation markets have caused some countriesin some countries has been revised will be affected, both domestically, to introduce capital controls. Currencydownwards. The extension of the with the risk of riots, and in the euro tensions have also increased, and theBush tax cuts and the unemployment zone, if crisis management fails to coordination among G20 countriesbenefits will add somewhat to US provide a proactive and sufficient has weakened, increasing the risks of protectionism and currency wars.GDP forecast 2010 - 2012 (annual percentage change) 1/ Fifth, major central banks are still January 2011 September 2010 creating entry strategies; thus, 2009 2010 2011 2012 2010 2011 2012 there could be problems with their US -2.7 2.8 2.6 2.7 2.8 2.2 2.5 exit strategies during the forecast EMU countries -4.1 1.8 1.6 1.5 1.4 1.1 1.6 period. Also, there is a risk of Of which: Germany -4.7 3.6 2.5 2.0 3.0 1.4 1.7 financial turbulence when terminating France -2.6 1.6 1.6 1.5 1.3 1.5 1.7 unconventional policies, and, in Italy -5.0 1.1 1.0 1.1 0.5 0.9 1.3 Spain -3.7 -0.4 0.3 1.0 -0.7 0.5 1.6 addition, central banks could lose UK -5.0 1.7 1.8 2.0 1.1 1.6 1.9 independence. Japan -5.2 3.2 1.5 1.3 3.2 1.4 1.5 Last, but not least, commodity prices China 8.9 10.1 8.5 8.1 9.8 8.5 8.1 have risen faster than expected, India 5.7 8.8 8.2 7.5 8.0 7.5 7.8 partly due to policy measures leading Brazil -0.2 7.5 4.8 4.5 7.2 5.0 5.0 to higher liquidity like in the US, Russia -7.9 4.0 4.3 4.5 4.3 4.5 5.0 partly due to a faster global recovery. Global GDP in PPP -0.7 4.6 3.9 3.8 4.4 3.6 3.8 There is a risk that higher energy and Global GDP in US$ -2.0 3.7 3.1 3.0 3.5 2.8 3.1 commodity prices will dampen profit margins, raise consumer prices, and Sources: National statistics authorities and Swedbank. reduce growth in many parts of the 1/ Countries representing around 70 % of the global economy. The World Bank weights from 2009 (purchasing power parity, PPP) have been used. January 13, 2011 4
  5. 5. Global Swedbank Economic Outlookworld. The effects of higher commodity Commodity prices , 2002 - 2012 (indices) 500prices will be more severe in countries Food Metals Oilwhere food and energy make up a 450relatively large share of consumption, 400and where competition on product 350markets is weak. 300Analysing our forecast assumptions, 250commodity prices – especially food 200prices, but also some metals - have 150increased faster than we expected in 100September. Our oil price assumption is 50raised from US$82 per barrel to US$87 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12in 2011, and kept unchanged at US$90 Sources: Ecowin and Swedbank 2012. Upside risks are involvedas the oil price could continue aboveUS$100 if oil producing countries do push up demand for earlier repo rate world economy remain, not leastnot increase production. hike, not least among German policy in advanced economies with large makers. deleveraging needs. During 2011 andThe inflation outlook varies between 2012, global growth will be drivenemerging and advanced countries, The US dollar strengthens in 2011- by emerging markets. Structuraland is the foundation for monetary 2012 against the yen and the euro, reforms should be added to stimuluspolicy assumptions. Chinese inflation as the situation in the euro zone measures, where these are still beingwill slow from 5% to 3.5% in 2012. is regarded as more uncertain introduced (like in the US), and alsoIn India and Brazil, inflation will stay by financial markets, and growth to austerity measures in crisis-struckabove 5%, despite tighter policies. prospects are weaker there and in economies in Europe. The best way toPolicy interest rates in many emerging Japan than in the US. China continues alleviate the debt burden is to enhancecountries will continue upwards. In the with the appreciation of the yuan growth by improving productivity,euro zone and in the US, inflation will against the US dollar, but slowly, at entrepreneurship, and innovation, thusbe lower, around 1.5%, as domestic some 4-5% per year. More important, creating room for more employment.demand stays weak. Federal Reserve though, is the higher Chinese wage With stronger political leadership,and the ECB will postpone their first growth and inflation, which will chances of a stronger global outlookpolicy rate hikes until 2012 and keep appreciate the yuan in real terms. will improve.unconventional measures for a longer Hence, the muddling-throughperiod. There is an uncertainty in the Cecilia Hermansson scenario we presented in Septembereuro zone as higher inflation may is still alive. The challenges for theInterest and exchange rate assumptions Outcome Forecast 11 Jan 30 Jun 31 Dec 30 jun 31 Dec 2011 2011 2011 2012 2012Policy rates Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50 European Central Bank 1.00 1.00 1.00 1.50 1.75 Bank of England 0.50 0.50 0.75 1.00 1.25 Bank of Japan 0.10 0.10 0.10 0.10 0.10Exchange rates EUR/USD 1.30 1.24 1.22 1.20 1.20 RMB/USD 6.62 6.50 6.35 6.20 6.05 USD/JPY 83 85 90 100 105Sources: Reuters Ecowin and Swedbank projections. January 13, 2011 5
  6. 6. Swedbank Economic OutlookSweden: Rapid rebound – time for forward-lookinggrowth reformsThe Swedish economy is recovering consumer durables. In addition, the financial sector stability would also befaster than we had earlier anticipated. economic stimulus is being wound negatively affected by rapid price fallsDuring the autumn, both domestic down as monetary policy rates are in the housing market. On the upside,demand and external trade rebounded being raised and the impact from fiscal a faster international recovery wouldsharply, resulting in a pronounced policy is dissipating. We also expect benefit well-positioned and stableupturn of economic growth. In the third global economic conditions to loose Swedish companies.quarter of 2010, real growth reached momentum in 2011, although we have Exports make up lost ground6.9%, compared with the same period raised the growth forecasts somewhatin 2009. Short-term indicators suggest from our September outlook. Factoring Swedish exports are picking up, andthat growth continued in the fourth in the large statistical carryover from the loss of market shares in 2009quarter, albeit more slowly in quarterly 2010, this implies annual growth rates has, despite the appreciation of theterms. We estimate that overall of 3.3% in 2011. For 2012, the annual Swedish krona, been restored fastergrowth for 2010 was 5.3% (calendar rate drops to 2.5% despite the slightly than expected. Export volume for theadjusted), significantly higher than higher quarterly growth rates. first three quarters in 2010 increasedin our September projection. This by 9.9% in annual terms. To a large The risks to the forecast mainlyoutcome implies that the Swedish extent, the rebound in exports is stem from abroad, but strains areeconomy has, in only eight quarters, being driven by growing demand for also building up domestically. Amade up for the output loss sustained intermediate and investment goods – a deterioration of the sovereign debtduring the downturn; this compares situation that is favourable to Sweden. crisis in Europe would severely affectfavourably with the almost five years Swedish growth prospects through In 2011, market growth for Swedishneeded to recover from the financial falling demand and financial sector exports is expected to deceleratecrisis in the early 1990s. turbulence. Domestically, the main when the global rebuilding ofWe foresee that the quarterly rate of risk can be attributed to eroding inventories dampens and fiscal policyexpansion will dampen during 2011 competitiveness. Labour market tightens. Export market growth forand 2012. A sizable share of the bottlenecks, with subsequent wage Swedish industry is, nevertheless,rebound in 2010 was due to temporary increases, together with a stronger expected to be stronger in 2011factors. Inventory restocking boosted krona, would weaken Swedish than we earlier anticipated, partlygrowth, and private consumption grew companies’ positions on external due to spillover effects from theagainst large declines of, in particular, markets. Household consumption and strong rebound in 2010; meanwhile, development in 2012 has been revisedKey Economic Indicators, 2009 - 2012 1/ slightly downwards due to a weaker 2009 2010e 2011f 2012f momentum in the global economy.Real GDP (calendar adjusted) -5.2 5.3 3.3 2.5 The projected world market growth forIndustrial production -17.9 13.5 7.0 5.0 Swedish industry of 6½-6¾% in 2011CPI index, average -0.3 1.3 2.2 2.4 and 2012 is below the long-term trend.CPI, end of period 0.9 2.5 1.4 2.4 Continued deleveraging in severalCPIF, average 2/ 1.9 2.1 1.4 1.6 OECD countries will have a restrainingCPIF, end of period 2.7 2.4 0.5 1.7 impact on demand. The emergingLabour force (15-74) 0.2 1.1 0.7 0.5 markets are expected to account forUnemployment rate (15-74), % of labor force 8.3 8.4 7.7 7.5 the largest export market growth,Employment (15-74) -2.1 1.0 1.4 0.7 although we anticipate a gradualNominal hourly wage whole economy, average 3.4 2.2 2.4 2.9 deceleration there due to a moreNominal hourly wage industry, average 2.9 2.6 2.6 3.0 restrictive economic policy.Savings ratio (households), % 12.9 11.6 10.4 10.2Real disposable income (households) 3/ 1.6 2.4 1.5 1.7 We foresee overall export growth inCurrent account balance, % of GDP 6.9 6.1 6.1 5.9 2011 of 6.8% in volume terms. AnGeneral government budget balance, % of GDP 4/ -0.7 -0.3 0.0 0.6 improved outlook for global demandGeneral government debt, % of GDP 5/ 41.9 39.9 37.7 35.5 and decreasing unit labour costs dueSources: Statistics Sweden and Swedbank. to a higher productivity growth will1/ Annual percentage growth, unless otherwise indicated. mitigate the impact of a stronger krona.2/ CPI with fixed interest rates.3/ Based on short-term earnings statistics For 2012, we foresee a weakening4/ As measured by general government net lending. in export performance when the5/ According to the Maastricht criteria. competitiveness of the Swedish January 13, 2011 6
  7. 7. Sweden Swedbank Economic Outlookindustry worsens due to a stronger Real GDP levels and growth, 1980 - 2012 3500 6krona and rising unit labour costs. Growth (% real; rhs) Level (real) 3300We expect export growth in that year 4 3100of 5.5%, implying losses of market 2900shares for Swedish companies. The 8 quarters 2 2700growth contribution from foreign trade 2500 0will be limited by the strong growth in 2300imports. Following an expansion in -2 21002010 of 12.5%, import growth in 2011 1900and 2012 is expected to decelerate to 18 quarters -4 17007.3% and 6.4%, respectively. 1500 -6Broad recovery in fixed 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: SCB and Swedbank projections.investmentThe recovery in investments has during 2011, followed by a deceleration falling back in 2012.strengthened in line with increasing in 2012 when the industrial capacity isproduction and a higher utilisation rate. Inventory restocking is expected to larger.Housing shows the largest pickup, have contributed 2.3 percentagetogether with the services sector, while The rebound in real estate investment points to GDP growth in 2010,industry investments are lagging. in 2010 was more pronounced than significantly more than expected.Large public investment projects in we had anticipated. This will also have Companies’ needs for growing stocksinfrastructure also contributed more to spillover effects in 2011. Because of of intermediate and finished goodsthe investment rebound in 2010 than this rebound, as well as an improving in industry explain to a large extentwe expected. labour market and tax reductions this boost from inventories. This is for renovations, we foresee double- a sharp reversal from 2009, whenWith private sector output continuing digit investment growth in real estate the destocking process started andupwards, there will be a growing need during 2011. For 2012, we anticipate industrial production fell expand capacity. Together with a gradual slowdown in real estate We foresee a further rebuilding ofstrengthening confidence, favourable investments when the interest rates stocks during the forecast period duefinancing terms and rising profits will be higher. Supply constraints, such to the low current levels, growingwill trigger an increase in business as a lack of qualified labour, are also industrial production, and higherinvestments. Total investment is expected to limit growth in real estate investment growth. The momentumexpected to grow by 8.2% in 2011 investment. is, however, expected to slow, andand 8% in 2012, which means that the contribution to GDP growth frominvestments will exceed the pre-crisis Ongoing and investments brought inventories will be zero during 20112008 level by the end of the forecast forward in infrastructure and new and slightly negative in 2012.period. We expect an uptick in the projects by local governments willmomentum of industrial investment boost public investment in 2011 before Sustained, but slow, labour market improvements The labour market continues toSwedbank’s GDP Forecast – Sweden recover, but at a slower rate thanChanges in volume, % 2009 2010e1/ 2011f1/ 2012f economic growth. By November of lastHouseholds consumption expenditure -0.4 3.6 (3.0) 2.9 (2.6) 2.0 (1.8) year, the Swedish economy had addedGovernment consumption expenditure 1.7 2.0 (1.7) 0.9 (1.0) 0.4 (0.4) more than 90,000 jobs comparedGross fixed capital formation -16.4 4.7 (4.3) 8.2 (5.5) 8.0 (6.7) with the same month in 2009, and private, excl. housing -19.1 1.4 (4.3) 9.4 (6.7) 10.9 (8.3) the unemployment rate had fallen to public 4.2 3.5 (-3.6) 0.5 (-1.3) -0.5 (-0.4) 7.8% (seasonally adjusted). However, housing -23.3 19.7 (13.5) 11.7 (7.7) 5.5 (6.9)Change in inventories 2/ -1.7 2.3 (1.8) 0.0 (0.0) -0.3 (0.0) compared with the rapid expansionExports, goods and services -13.4 11.1 (11.2) 6.8 (5.6) 5.5 (6.4) of GDP, employment is lagging.Imports, goods and services -13.6 12.5 (13.5) 7.3 (6.7) 6.4 (6.4) Instead, the number of working hoursGDP -5.6 5.6 (4.3) 3.3 (2.4) 2.1 (2.6) is increasing. This suggests that slackGDP, calendar adjusted -5.2 5.3 (4.0) 3.3 (2.4) 2.5 (2.9) that had accumulated is now beingDomestic demand 2/ -3.1 3.1 (2.7) 3.1 (2.5) 2.5 (2.2) used up. Also, productivity levels haveNet exports 2/ -0.8 0.1 (-0.2) 0.2 (-0.1) -0.1 (0.4) been rising quickly, and, in tandemSources: Statistics Sweden and Swedbank. with low wage increases, unit labour1/ The figures from our forecast in September 2010 are given in brackets. costs have fallen. As many companies2/ Contribution to GDP growth. now are faced with making new hirings January 13, 2011 7
  8. 8. Sweden Swedbank Economic Outlookinstead of rehiring previously laid-off Productivity and unit labour cost, 2001 - 2012personnel or increasing hours, we 7 5expect employment creation to slow 6 4down. 5 3 4The challenge to reduce the 2unemployment rate over the medium 3 1term is significant. Primarily, due to 2 0demographic factors the labour force 1is set to grow over the next couple 0 -1of years. Furthermore, although the -1 Unit labour cost Productivity (rs) -2number of long-term unemployed -2 -3has started to fall, the share of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: SCB and Swedbank projections.unemployment remains steady.Thus, as unemployment reducesemployability it will be increasingly of 5-6%.1 To continue to reduce the As the service sector, which oftenharder to reduce the unemployment unemployment level, targeted policy entails lower productivity levels, israte. Employment expansion so far measures, such as improved skills growing as a share of the economy,has also been uneven across sectors. matching, tailored training, and skills renewed reform efforts are necessaryThis means that in sectors that are enhancement, are necessary. to increase the growth dynamics of theexpanding, eg. construction and IT, it Swedish economy. If not, there is a riskmay become difficult to find qualified Restrained wage developments that competitiveness worsens and thepersonnel, while many unemployed are continuing to benefit Swedish growth potential becomes constrained.will not have the right skill set for competitiveness, but this could bethose jobs that are created. This could reversed when the wage agreements Households continue to drivelead to labour shortages despite high start to expire in 2012. Wage increases growth – at their own periloverall unemployment rates. in the overall economy are estimated Household consumption picked up to have increased by 2.2% in 2010,Based on recent developments, we in the third quarter, adding to the below our expectations, while wagesare revising our labour market outlook. already significant growth contribution in the industry sector are likelyEmployment is set to grow by 1.4% in in 2010. While the contraction of to have exceeded our projection.2011 before slowing to 0.7% in 2012. real consumer spending for 2009 With falling unit labour costs andThe stronger job creation is a result was revised upwards from -0.8% strong productivity growth, Swedishof the faster-than-expected economic to -0.4%, third-quarter growth was competitiveness has improvedrecovery, and we now expect to 3.5% compared with the same period significantly. Looking forward,reach pre-crisis employment levels in 2009. Thus, the relatively strong however, we expect productivityby mid-2011. The annual average expansion continues. At the same growth to fall, while wage drift andunemployment rate will fall to 7.7% time, the limited growth of wages has rising wage demands will increasein 2011 and 7.5% in 2012. At the end dampened real disposable income costs. Productivity in the Swedishof the forecast period, we expect the growth, and households have dipped economy was high prior to the crisis,unemployment rate to dip below 7%, into their savings. in large part due to investments insignificantly lower than during the IT and deregulation of the economy. Looking forward, improved labourheight of the recession but still far market performance is expected tofrom the estimated equilibrium level 1 See Anders Forslund raise real disposable income. The (Fiscal Policy Council, 2008). strong economic rebound has led to both increased employment and toLabour market indices, 2005 - 2012 5 100 9.5 growing numbers of hours worked. 9.0 Despite a slightly higher inflation, 5 000 8.5 this will lead to a stronger real wage 4 900 8.0 development and work related income 4 800 7.5 will increase. At the same time, the 4 700 7.0 favourable policy mix that has so 4 600 6.5 far supported household income 4 500 6.0 and spending levels is about to be 4 400 5.5 reversed. Apart from reduced tax rates 4 300 5.0 on pensions, the pre-crisis lowering jan-05 sep-05 maj-06 jan-07 sep-07 maj-08 jan-09 sep-09 maj-10 jan-11 sep-11 maj-12 of in-work tax rates is unlikely to be Employment (000, sa) Labour force (000, trend) Unemployment rate (rate in %, sa, rhs) continued in the same magnitude, Sources: SCB and Swedbank projections. although a another lowering has been January 13, 2011 8
  9. 9. Sweden Swedbank Economic Outlooksuggested for 2012, and transfers precautionary savings can be expected by 2.5% at the end of the year. Infrom the government will decline in to fall off as household confidence light of this, we expect the Riksbankline with falling unemployment and improves, supporting increasing to raise policy rates at a faster pace,the tightening of health benefits. The consumption levels. and to effectuate two additional hikesminority government has strongly of 25 basis points during the first half Put together, we expect the householdcommitted itself to fiscal policy of 2011. The output and employment saving ratio to continue to decline inrestraint and does not seem to have gaps are closing faster than expected, 2011 and 2012, but will remain at aparliamentary support for any major which shortens the way toward a relatively high level. It soared duringdemand enhancing policies. Also, the normalisation of monetary policy, which the crisis as precautionary savingsnormalisation of monetary policy will strengthen the krona and dampen surged. A combination of increasingmake a dent in household finances. inflationary pressures. The consumer consumption, limited growth ofAs the share of mortgages at flexible price index with fixed interest rates disposable income, and improvingrates was 59% in September 2010, (CPIF) is expected to reach 1.7% at confidence will lead households tocompared with 43% in October 2008, the end of 2012. There have also been draw down on savings. However, asincreasing interest rates will reverse concerns that the exceptionally low interest rates increase, we expectthe beneficial impact that low rates interest rates are fuelling asset prices, amortisation to pick up, supportinghave had on consumers’ budgets. including those in real estate. For a relatively high saving ratio andEven though consumer behaviour has 2012, the pace of rate hikes will slow, dampening consumption growth.stabilized economic activity during the and we forecast a policy rate of 3% byrecent turbulent years, vulnerabilities Monetary policy – a balancing the end of the year, i.e., unchangedare building up. We forecast household act from our September forecast.debt levels to reach close to 180% of The Riksbank has continued on The Riksbank will need to performdisposable income and debt service its path towards a normalisation of several balancing acts over the nextto rise quickly with policy rate hikes. monetary policy. In October, the policy couple of years. Primarily, as economicIncreasing utility prices, in particular rate was raised to 1.0%, but the policy activity is again picking up, there isof electricity during another cold spell rate path was revised downwards at a risk that a too rapid normalisationthis winter, and rising inflation due the same time amidst concerns over of monetary policy will prematurelyto food and commodity prices will the international economic recovery. strain economic growth. The Swedishlimit household budgets and curb In December, another increase of 25 economy is likely to have becomeconsumption spending. basis points took place, but with no more interest rate sensitive as the debt change in the policy rate path. While burden has increased, in particularAlthough consumer spending is referring to the strong economic amongst households. Higher interestexpected to grow more slowly during growth and improvement in the labour rates will affect consumption behaviourthe next two years, it will remain market, the Riksbank noted that the more now than before the important source of growth. A underlying inflation rate was still low, Regarding whether the Riksbanksignificant share of the increase in despite higher utility and commodity should be more proactive in preventingconsumption during 2010 was due to prices. asset price bubbles, we believe thatpent-up demand for durables such ascars. As households are returning to there is a role for monetary policy to Against the background of a stronger-their desired levels of consumption “lean against the wind” to prevent, than-expected economic recovery andof capital goods, we expect real e.g., housing prices from becoming too rising food and energy prices, inflationspending to increase at a slower rate excessive. In that sense, the on-going began accelerating in 2010 andin 2011 and 2012. At the same time, normalization of the monetary policy consumer prices (CPI) had increased is welcome. In general, balance-sheet concerns should also be addressedHousehold income , consumption and saving, 1998 - 2012 through financial supervision measures 14 Real disposable income and appropriate fiscal policy measures. 12 Private consumption This way, policy interventions will be Saving ratio 10 Saving ratio (excl. occupational and premium pensions) more targeted, through, e.g., loan-to- 8 value ratios or mandatory amortisation of highly leveraged house purchases, 6 or through a phase-in of a reduction of 4 the mortgage interest tax deduction. 2 0 Fiscal policy – towards -2 surpluses -4 The rapid economic recovery has 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 improved fiscal balances. A better- Sources: SCB and Swedbank projections. January 13, 2011 9
  10. 10. Sweden Swedbank Economic Outlookthan-expected income development Interest rate and currency outlookand solid private consumption are Outcome Forecastsupporting the revenue side, and 2011 2011 2011 2012 2012 11 Jan 30 Jun 31 Dec 30 Jun 31 Decexpenditures are being limited bythe reforms of the health insurance Interest rates (%)system, lower spending on Policy rate 1.25 1.75 2.25 2.50 3.00unemployment policies, and reduced 10-yr. gvt bond 3.20 3.20 3.20 3.40 3.60interest payments on the public debt. Exchange ratesFollowing data revisions, the budget EUR/SEK 8.87 8.70 8.65 8.60 8.55deficit for 2009 is now reported at 0.7% USD/SEK 6.85 7.02 7.09 7.17 7.13of GDP, among the lowest in Europe. TCW (SEK) 1/ 122.1 120.3 120.1 118.9 118.2For 2010, we estimate that the budget Sources: Reuters Ecowin and Swedbank.deficit was 0.25% of GDP, slightly less 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).than in our September report. Publicdebt is estimated at 40% of GDP. minister has suggested that further support demand, but rather for active lowering of the income tax could be labour market policies directed atFiscal policy is likely to become less implemented provided there sufficient resolving skills mismatch problems andsupportive of economic activity. The fiscal resources. We estimate an strengthening the job skills of thosegovernment remains committed to additional fiscal expansion for this currently unemployed. For the mediumrestoring the public sector balances year of SEK 10 billion. Public debt will, term, to maintain the competitivenessand reducing public debt to create nevertheless, continue its downward of the Swedish economy, in particularbuffers for a future crisis. Furthermore, path, aided by privatisation revenues. as the Swedish krona is strengthening,a weak parliamentary situation will Estimating that privatisation will bring higher productivity growth will belimit the scope for continuing the bold in about SEK 25 billion over 2011- essential. This is a challenge, but keyreforms on the income side, as well 2012, out of a potential SEK 100 reform policy areas would includeas the health insurance reforms that billion, we foresee public debt reaching continued liberalisation of product andcharacterised the government’s first about 35% of GDP by the end of the labour markets, and renewed effortsterm. We thus expect a balanced forecast period. to stimulate R&D and also to increasebudget for 2011, followed by a surplus both quality but also the number ofin 2012. The government is committed Faced by increasing labour market students in the Swedish educationto reducing the tax rate on pensions, matching problems and slowing system.and on restaurant meals, but the productivity growth, the governmenteffects on the budget will in our view should increase the priority ofbe compensated for by the stronger targeted labour market policies andeconomic development. In addition, structural reforms to enhance medium-we maintain that the spring budget bill term growth and reduce long-term Magnus Alvessonis likely to include additional spending unemployment. Currently, we see Jörgen Kennemarof SEK 15 billion. For 2012, the prime little need for broad-based policies to Inflation and exchange rate indices, 2008 - 2012 5.0 150 TCW CPI yoy in % CPIF yoy in % 145 4.0 140 3.0 135 130 2.0 125 1.0 120 0.0 115 110 -1.0 105 -2.0 100 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Sources: Riksbanken, SCB and Swedbank projections. January 13, 2011 10