Swedbank Economic Outlook June 2009

Swedbank Economic Outlook
Swedbank’s analysis of the international and Swedish economies 11 June 2009

Deepening recession with
glimmers of hope
• The financial crisis is easing and confidence among households,
businesses and financial market players is rising in light of major
stimulus packages around the world. We see the economy headed for a
turnaround, but the recovery will be slow due to remaining imbalances.

• The global economy is expected to shrink by 1.6% this year and grow
by 2.2% in 2010. This is significantly lower than the growth rate of
about 5% achieved in 2007 and even lower than the long-term trend of
around 3.5%. As a result, the global economy will continue to struggle
with overcapacity for some time to come.

• The Swedish economy is affected by global developments, not least the
export industry and auto industry in particular. GDP will fall by 4.7% this
year and rise marginally by 0.4% in 2010. Shrinking investments are
driving the slowdown, at the same time that lower demand is weakening
the labour market. Unemployment is expected to rise toward 11% in
2010.

• As the financial crisis abates and the economy slowly improves, the
Swedish krona could potentially strengthen against the dollar and euro.
The Riksbank is expected to begin raising interest rates in late 2010,
but monetary policy will continue to support the economy. Fiscal policy
will also be expansive – but restrictive enough to maintain financial
stability – with rising deficits and public debt as a result of economic
conditions and policies. The need for structural reforms is increasing to
offset the effects of the recession.

• Swedish households are increasing their precautionary savings during
the period and holding back on spending. Because of the Riksbank’s
rate cuts, there is the chance of a W-shaped trend in consumption and
the housing market, where conditions improve short-term but where
rising unemployment continues to exert pressure on households.

Cecilia Hermansson Jörgen Kennemar Magnus Alvesson

Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 1028
e-mail: ek.sekr@swedbank.se Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 1588
Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897

Contents

Recession poses challenge to economic policy 3

National accounts and economic indicators 6

Slow global recovery on the way 7

Substantial decline in foreign trade 14

Auto industry's importance to the Swedish economy 16

Investments plunge 19

Deep decline in labour market 22

Households save like never before 27

Fiscal policy: Restraint, but big deficits are still expected 31

Monetary policy and financial markets: 34
Inflation, interest rates and exchange rates

2 Swedbank Economic Outlook • 11 June 2009

Introduction

Recession poses challenge to economic policy
In March we predicted that 2009 would be characterised by a
major decline in Sweden's GDP, but an even stronger drop in
global and domestic demand has necessitated a further revision
in our forecasts. This may seem strange considering the
growing number of reports signalling an impending stabilisation
and rebound.

We reaffirm in this Economic Outlook that the financial crisis Stronger confidence is
has eased – partly with the help of stimulus measures by the first step toward a
governments and central banks – and that investors have turnaround
shown an increasing appetite for risk in the financial markets.
Some players have become slightly less pessimistic about the
future, though not yet optimistic, either. This is a positive first
step toward a turnaround. Glimmers of hope in the financial
markets and in public sentiment have not been matched by an
equally robust upswing in the real economy, however. Industrial
production and trade are still falling, though not as dramatically
as before.

We expect overall demand in the global economy to shrink by Global GDP is
1.6% this year before beginning a slow recovery at the end of expected to grow next
the year, with GDP growing by 2.2% in 2010. Beyond the year – but remain
forecast period we see the possibility of GDP growing at nearly below the long-term
at the long-term average of about 3.5% by 2012. Not until then trend
will the global production gap be closed, and the process of
doing so could take another few years.

The slow recovery is based on our view that it will take time to
reduce high loan ratios, that labour markets will continue to
weaken and limit growth, and that the growing public debt in
many countries will lead to budget consolidation and weaker
growth prospects.

The risk of a setback cannot be overlooked, either. Progress will The rebound is likely to
be anything but stable. Despite that trends point higher, we be anything but stable,
could see a “W-shaped” curve that makes for a rockier picture and risk of a setback is
than usual. The reasons could be rising commodity prices and great
long-term market interest rates, which lead to higher costs,
though we don’t see a great risk of inflation at the consumer
price level in the years ahead. Until the recovery is “assured,”
the risk of deflation will weigh more heavily than that of inflation,
but uncertainty about economic and political stimulus measures
and how they are eventually phased out is still a factor that
could raise concerns about rapidly rising inflation in the next
couple of years.

Swedbank Economic Outlook • 11 June 2009
3

Introduction

Countries with strong export industries and auto production, The recession is
such as Germany, Japan and Sweden, have suffered more creating a need for
than most others in terms of demand. Whether the upturn will reforms in many
be faster there once global demand rebounds will depend on countries – the crisis
whether the industrial crisis is economic or structural. We is probably both
anticipate a structural transformation in which many auto economic and
suppliers will have to switch businesses. Boosting domestic structural
demand and deregulating labour and product markets will be
even more important in these countries. Countries with their
own financial and real estate crises are also being hard hit by
the recession. This includes the UK, US, Ireland, Spain and the
Baltic countries. It is hard to reduce imbalances. Reforms will be
needed to make these countries more competitive. The
structural transformation is being fuelled by the crisis and it has
become essential to develop new growth engines.

We expect Sweden's calendar-adjusted GDP to fall by 4.7% Investments are the
this year and grow marginally by 0.4% next year. The biggest biggest reason for a
reason for the decline this year is investments, followed by net GDP decline of nearly
exports and household consumption. Investments will continue 5% this year
to fall in 2010, while consumption and net exports will contribute
positively to growth. During the period households will increase
their precautionary savings, mainly as a result of higher
unemployment and a further decline in their net worth. The
reason why investments will shrink in both years is low capacity
utilisation, which we expect will rise more slowly than in
previous recoveries.

Weak corporate investment demand is also impacting the It is probably going to
Swedish labour market. Jobs are expected to be cut mainly by take time for the labour
goods-producing companies, but also in service sectors. In market to rebound
total, a quarter-million people will lose their jobs. Unemployment
will rise to an average of nearly 11% next year, at the same
time that the number of people in labour market interventions
will increase. We think it will take time before the labour market
again sees the same favourable conditions as in 2007-2008.
The challenge for economic policymakers is to make sure that
unemployment doesn’t permanently get stuck at such high
levels, especially among young people. There is also a future
labour shortage to contend with. Making the labour market more
flexible is becoming more important due to the recession.

Economic policy is expansive from both a fiscal and monetary Economic policy must
standpoint. After the Riksbank’s 50 bp cut, we think the repo address the crisis
rate is as low as it’s going to get. Interest rates will remain while strengthening the
steady through 2010, after which a gradual normalisation will Swedish economy
begin, though monetary policy will still support the economy for long-term
a while. The likelihood of a quantitative easing has decreased
of late. Fiscal policy is mainly providing support through so-
called automatic stabilisers. The government is also taking
discretionary measures, though showing some restraint in doing
so, to ensure financial stability. We expect a stimulus package
this fall worth SEK 30 billion (about 1% of GDP), in addition to
the SEK 10 billion committed in the spring fiscal policy bill.


Introduction

Public finances will worsen this year and next, contributing to an
increase in public sector debt. Despite this, we expect the
Swedish government’s finances to remain healthy. Using
economic policy to stimulate demand while strengthening
Sweden competitively through incentives for businesses and
innovation will be a challenge for the Swedish government in
the years ahead.

Cecilia Hermansson

5

Supplay balance and key financial ratios

Swedbank’s economic forecast for
Sweden June 2009
National accounts
Changes in volume, percent
1) 1)
2007 2008 2009 P 2010 P
Household consumption 3.0 -0.2 -1.6 (-1.0) 0.6 (1.2)
expenditure
Government consumption 0.4 1.5 1.5 (1.5) 0.5 (1.7)
expenditure
Gross fixed capital formation 7.5 2.7 -12.3 (-8.5) -4.3 (-4.0)
- private excl. housing 8.4 4.6 -14.5 (-9.9) -8.0 (-7.0)
- public 2.4 4.0 7.7 (9.5) 5.9 (8.0)
- housing 8.7 -5.4 -22.3 (-20.0) -0.8 (2.5)

Changes in inventories 2) 0.8 -0.6 -0.8 (-0.3) 0.3 (0.2)
Exports, goods and services 5.8 1.8 -14.0 (-4.5) 2.5 (1.5)
Imports, goods and services 9.4 3.0 -13.8 (-4.8) 1.0 (1.3)

GDP 2.6 -0.2 -4.6 (-2.3) 0.7 (0.6)
GDP, calendar-adjusted 2.7 -0.5 -4.7 (-2.4) 0.4 (0.3)
Domestic demand2) 2.9 0.9 -2.7 (-1.8) -0.4 (0.2)
Net exports 2) -1.1 -0.4 -1.1 (-0.2) 0.8 (0.2)
1) The figures from our last forecast in March 2009 are given in parentheses
2) Percentage change in previous year’s GDP

Economic indicators
Annual change in percent unless otherwise indicated
2007 2008 2009 P 2010 P
Nominal hourly wages, total 3.6 4.0 3.0 2.2
Nominal hourly wages, industry 3.9 4.3 3.0 1.8
Industrial production 2.3 -3.1 -15.0 1.5

CPI, annual average 2.2 3.5 -0.4 1.1
CPI, Dec-on-Dec 3.5 0.9 0.7 1.5
CPIX, annual average 1.5 2.7 1.7 1.2
CPIX, Dec-on-Dec 2.4 1.6 1.9 1.3

Real disposable income 3.9 3.3 0.8 1.3
Savings ratio 9.3 11.9 14.0 14.5
Open unemployment 3) 6.1 6.1 8.9 10.9
Total unemployment 3) 4) 8.1 8.1 11.6 15.5
Total labour force 2.6 1.1 -3.0 -2.7

Current account balance 5) 9.0 8.2 4.2 4.5

Financial savings in public 3.5 2.5 -2.5 -4.1
sector 5)
Central government 40.6 38.0 45.0 49.3
debt (Maastricht) 5)

3) Percentage of labour force, EU-harmonised
4) Open unemployment and labour market measures (individuals aged 15-75)
5) Percentage of GDP


International economy

Slow global recovery on the way
Increased risk appetite – but historically weak
demand
Since our March forecast, the outlook has brightened thanks to
stronger future confidence among households, businesses and
players in the financial markets. On the other hand, this
optimism isn’t yet reflected in a similarly robust improvement in
the real economy.

Access to liquidity and long-term financing has improved, at the Green shoots are
same time that credit spreads have shrunk since confidence evident mainly in public
between banks rose in the aftermath of government and central sentiment and in
bank stimulus packages. Long-term market interest rates have financial and asset
risen significantly, probably as a result of increased inflation markets
concerns and government borrowing needs as well as a
growing risk appetite. Prices of oil and certain metals have risen
more than expected. Stock markets have turned higher,
especially growth markets but even in mature economies.
Households and companies have become less pessimistic
about the future.

What we are seeing in the financial markets isn't fully supported Demand is dropping
by fundamentals in the real economy. It’s more a reflection of more slowly, but it isn’t
hopes of a turnaround than any certainty that a bottom has growing yet
been reached. Confidence that the slowdown in demand has
eased is based on the purchasing managers’ index, among
other things. With few exceptions – e.g., modest growth in
China and India – there are few signs of stronger underlying
demand. On the contrary, quarterly GDP growth in mature
economies was the weakest since World War II. On average,
production fell from the previous quarter by 2.5% (or by 9.4% at
an annualised rate). Compared with the first quarter 2008, the
decline was 4.7%.

Gross domestic product (GDP) in the US, Japan and Euroland 2005-2009 (Q1)
(quarterly change on an annualised basis)

7 .5

5 .0 E u r o la n d

2 .5

0 .0

-2 .5

-5 .0 U S A

-7 .5

-1 0 .0

-1 2 .5

-1 5 .0
Japan
-1 7 .5
Q 1 Q 3 Q 1 Q 3 Q 1 Q 3 Q 1 Q 3
05 06 07 08
S o u r c e : R e u t e r s E c o W in

Sources: National statistical authorities in the US and Japan as well as
Eurostat

7


The biggest decline in mature economies in the first quarter was
in Japan, followed by Germany, the Netherlands and Austria. In
growth economies, Mexico, Hong Kong and Singapore noted
the largest production declines.

Among the BRIC economies, which have seen their stock A distinction among
markets rise since March (Brazil +78%, Russia +123%, India BRIC economies is
+84% and China +52%), GDP growth has been more mixed. In clear
countries with relatively few imbalances or problems in the
financial sector, the recession has mainly been the result of
slumping export demand or a collapse in commodity prices
(Brazil and Russia). In Central and Eastern Europe, GDP has
fallen most notably in the Baltic countries, but also in Hungary
and Slovakia. Domestic demand continues to grow in India and
China, where huge stimulus packages have already had an
impact.

Q1 GDP growth at an annualised rate
(Q1 2009 vs. Q1 2008)

8

6

4

2

0

-2

-4

-6

-8

-10

-12
China India Brazil Russia Central and
Eastern Europe

Sources: National statistical authorities, Eurostat and the Conference Board

Possible recovery in the second half of 2009
Uncertainty whether or not the economy will soon stabilise is The bottom is near and
great. Although leading indicators point to a recovery within a a slow recovery will
half-year, it is difficult to see where consistent growth in demand soon begin
will come from. We think a bottom is near, however, and that a
slow recovery will begin in 2009 and continue in 2010.

At this point US households have increased their savings ratio Even when GDP
to just over 5%, and this is expected to further increase grows again, several
(probably upwards of 7%) due to rising unemployment, difficulty underlying problems
obtaining credit and weak balance sheets. New unemployment will still remain
claims have slowed, but people are still losing their jobs.
European and Japanese households are mainly being hurt by
the weaker job market. Inventories are still being sold off,
though at a slower rate. Industrial production continues to fall
and could remain weak next year due to sluggish demand for
inputs and investment goods. Investments are expected to
continue to decline in many countries this year and next. Weak



demand is preventing companies from raising prices, leaving
them to struggle with lower profits while having to bolster their
balance sheets. This creates a further incentive to cut costs and
lay off employees.

The inventory cycle will eventually force an increase in industrial The stimulus packages
production. Moreover, monetary and fiscal stimulus programs and a turnaround in
will encourage higher asset prices and a growing risk appetite – the inventory cycle will
and eventually lead to slightly higher demand among increase production
households and businesses.

The bottom is likely to be reached during the second half of We see several
2009 and a recovery can begin, probably in the US and then in reasons why the
Europe and Japan. (China and India are already growing, but recovery will be weak
cannot drive the global economy alone.) There is a risk that the and slow
recovery could be weak, however, and could derail considering
that:
It takes time to reduce excessive debt ratios, and because a
weakened financial sector will restrict credit growth;
Overcapacity in many sectors will mean shrinking investment
volumes and stagnant credit demand;
Unemployment is rising and it will take time before job numbers
improve;
Burgeoning public debt eventually will have to be reduced with the
help of spending cuts and tax increases;
Long-term interest rates could rise as a result of growing debt in
many countries;
Economic stimulus packages can create new bubbles in asset
markets despite weak overall demand in the economy. When
commodity prices rise, growth is impacted in countries dependent
on imports of raw materials.

Instead of a clear V- or U-shaped recovery, there is a risk of a A U-shaped recovery
soft “W”. Economic stimulus plans are rarely enough to create is what we want – and
sustainable growth. The underlying problem of weak financial is possible – but the
systems and high debt ratios must be resolved first. Credit risk of a W-shaped
demand is weaker than normal, which has reduced the recovery remains high
importance of interest rates. If the health of the financial sector
continues to deteriorate, affecting credit availability, the
recovery could be undercut.

Poor growth prospects in 2009, slightly better in
2010
Since our March forecast, we have revised the GDP growth
outlook downward in Japan, Russia and Euroland, as well as in
the US, Brazil and the UK. Only China’s and India’s GDP
growth has been revised higher. The slowdown in the fourth
quarter of 2008 and first quarter this year has impacted GDP
throughout this year.

9


Global GDP growth (%), 2007-2008, with forecasts for 2009-2010
June forecast March forecast
GDP growth (%) 2007 2008 2009 2010 2008 2009 2010
USA 2.0 1.2 -2.7 1.2 1.2 -2.0 0.7

EMU countries 2.6 0.8 -4.5 0.1 0.8 -2.5 0.3
Of which Germany 2.6 1.1 -6.0 0.2 1.1 -3.0 0.3
France 2.1 0.7 -3.5 0.3 0.7 -2.1 0.6
Italy 1.4 -0.6 -4.2 0.2 -0.6 -2.4 0.4
Spain 3.7 1.1 -3.5 -0.3 1.1 -2.8 -0.1
UK 3.0 0.8 -4.0 0.2 0.8 -3.0 -0.2

Japan 2.4 -0.2 -6.5 0.4 -0.2 -3.3 0.5
China 13.0 9.0 6.5 7.5 9.0 6.0 6.8
India 9.3 5.3 5.0 6.0 5.3 4.5 5.2

Brazil 5.4 5.3 -1.0 2.0 5.3 1.8 3.0
Russia 8.1 6.0 -6.0 1.0 6.0 -2.2 2.0

Global GDP 4.9 2.9 -1.6 2.2 2.9 -0.4 2.0

Sources: National statistical authorities and Swedbank

Forecast risks and structural issues
1. Two years is probably too short of a forecast horizon
Even if GDP growth for 2010 looks decent at around 2.25%, it is Far to go before we
considerably lower than average global growth in the last two see sustainable growth
decades of around 3.5% per year. Not until 2011 or 2012 at the
earliest will GDP in mature economies return to the 2008 level
we saw before the recession. Available resources in the global
economy will continue to grow in upcoming quarters. Getting
back to 3.5% will take a while. The production gap won’t be
closed for a very long time.

It is easy to be blinded by the potential of a turnaround during Closing the output gap
the forecast period, but the long-term strength of the recovery is more interesting
during and beyond the forecast period is actually of greater than the impending
interest. How is growth potential affected by the recession, turnaround
financial crisis and slowdown in globalisation? A W-shaped
recovery could stretch significantly beyond 2009-2010.

2. The importance of confidence cannot be underestimated
At the same time that forecast risks are still leaning toward the Increased optimism
downside, there are factors that could give a quick boost to the is decisive to an
global economy. The economic stimulus packages are a economic rebound
positive uncertainty. A growing risk appetite among investors
and improvement in confidence indicators are also an important
initial step in a recovery. We believe, however, that there is a
risk that confidence could fall again if the real economy can't
keep pace with the upswing in the financial and asset markets.



3. Are the economic stimulus packages having an impact?
Until now interest rate cuts and increased liquidity have mainly
led to stronger confidence in the financial markets, an increased
risk appetite and upward pressure on commodity prices. There
are signs of improvement in the housing market and retail
sector owing to lower mortgage rates.

When interest rates essentially reached bottom, the central Too early to determine
banks in a number of countries chose to buy bonds and utilise the effect of
quantitative easing to further reduce long-term rates, add quantitative easing
liquidity to the system and raise inflation expectations. It is still
too early to tell the impact of this easing on the real economy.
Interest rates have begun to rise again – maybe because the
stimulus measures are working – as markets normalise and risk
appetites grow. There is also the possibility that higher interest
rates are due to worries about rising inflation, a scenario that
could become reality if the stimulus packages are not phased
out quickly enough after a rebound.

Fiscal stimulus packages are also gradually impacting labour The likelihood of
markets, investments and consumption. There is a risk – and Ricardian equivalence
Europeans seem especially suspicious – that these measures is greater in Europe
could ultimately lead to higher taxes and/or spending cuts and than the US
that households, in keeping with the Ricardian equivalence
proposition, are already reducing their spending and increasing
their precautionary savings. There would seem to be less of a
risk of such behaviour in the US, where the hope is that growth
will surpass the long-term rate within a couple of years so that
deficits are eliminated “automatically.” Structural imbalances
may limit growth, however, requiring substantial budget
cutbacks.

Even if the stimulus packages don't have quite the effect we It is important to phase
had hoped, they will at some point lead to higher, though not out stimulus measures
yet sustainable, growth. In a couple of years the programs will in time, but also to
instead lead to slower growth when they have to be phased out. make sure that the
If the recovery is not “assured,” there is the risk of a setback. recovery is assured
This is what happened in Japan. New stimulus measures would first
then be needed to get the activity going again. The growing
public debt burden in many countries such as the US and
Japan is limiting opportunities for expansive economic policy.

4. Are concerns about deflation and inflation overblown?
We face a choice. On the one hand, the stimulus measures Before the recovery
could be phased out too quickly, or prove insufficient, which feels stable, we will
would drag the global economy back into recession with the risk have to face deflation
of deflation. On the other hand, the stimulus packages could be risks
kept in place too long, sparking inflation expectations. Even if
the risk of dangerous deflation and inflation is overblown,
deflation remains a concern until the recovery is assured.

11


Households in the world's three largest economies (the US, Consumers won’t
Japan and Euroland) are unlikely to contribute to inflation at the contribute to inflation in
consumer price level in the years ahead. Balance sheets need the short term …
tweaking. Jobs and salaries are developing weakly. Businesses
are contributing to deflationary pressures by reducing costs,
laying off staff and generally cutting back. The only dynamic
component of demand right now is government spending.
Expectations of high inflation by the financial markets stem not … but expansive fiscal
only from growing borrowing needs and public debt, but also policy and commodity
higher commodity prices. There is probably a bigger chance prices are question
that corporate earnings come under pressure, however, than marks
that consumer prices will rise rapidly.

5. What is happening to the global imbalances?
The US current account deficit has shrunk both in absolute
terms and as a share of GDP as exports have outperformed
imports (or at least not performed as badly). The same applies
to Central and Eastern Europe. The opposite is true in the
Middle East and Russia in 2009 due to lower oil prices. China’s
current account surplus has grown in both absolute and relative
terms since the crisis worsened, which means that exports are
still outpacing imports despite huge stimulus measures.
Euroland reported a current account surplus through 2007, but
now faces a deficit.

Current account balance as share of GDP in a number of countries/regions 2000-
2009

25.0
Euroland
20.0 Central and Eastern Europe
Middle East
China
15.0 Germany
USA
10.0

5.0

0.0

-5.0

-10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: IMF

The question is whether current account balances will revert to If interest in financing
the old pattern after the recession is over. Oil-producing the US current account
countries are likely to see higher surpluses once oil prices rise deficit declines, a
again. Whether the US current account deficit increases will structural shift in
depend on interest in financing it in the medium term. If interest domestic savings will
wanes, domestic savings will have to increase for the deficit to be needed
shrink. China’s surplus could continue to grow, but that will also
be affected by whether it is serious about stimulating domestic
demand. Changes in China’s exchange rate policy would also
help.



6. Keep an eye on the US and the dollar!
China, with its huge dollar reserves, is worried about the US Interest in US
government's finances, the risk of higher inflation in the US and government securities is
a weaker dollar. Interest among foreigners in financing the US already slowing –
twin deficits has decreased significantly in Asia and Europe of Geithner may have to
late. Americans, on the other hand, are buying more foreign resort to new measures!
securities, speeding up the dollar’s decline. The budget deficit is
estimated at 13% of GDP this year and is expected to remain
sizable in 2010. Treasury Secretary Tim Geithner may have to
issue bonds denominated in yen, euro or renminbi to attract
foreign buyers, similar to the Carter bonds in 1978.

7. Decoupling – true or false?
No country has been unaffected by the slowdown in global There are two sides to
demand and the financial crisis. So logically there is little basis decoupling
for a decoupling between OECD members and emerging
markets, for instance. On the other hand, there are countries
that entered the crisis in a stronger position by avoiding their
own imbalances. Those whose exports have been hurt for
economic reasons (lower commodity prices and temporarily
weaker demand) are likely to handle a recovery better than
countries with structural problems in certain sectors (e.g., autos
and financials). In this sense, a decoupling cannot be ruled out
when the global economy bounces back.

8. Where are the world's new growth engines?
Without the financial and real estate sectors as growth engines, New growth engines
globalisation could stagnate and growth potential could be will be developed more
affected for a while. New drivers of global growth have to come easily if a structural
about organically, preferably other than through public transformation is
investment. The service sector will continue to account for a accepted
growing share of production and jobs in many countries. Other
important growth engines include utilities, transportation and
other infrastructure. Public-private partnerships are becoming
increasingly common as well. Moreover, environmental and
climate threats are leading to new investment in technology and
businesses. Such investments are tied to many different areas:
energy, transports, housing construction, tourism, etc. These
sectors also have the potential to raise productivity through
efficiency improvements and innovations.

In their rhetoric, China and Japan have stated that they have to
focus more on domestic demand. The same may eventually
apply to other major exporters such as Taiwan, South Korea,
Germany and Sweden. While this doesn't mean that the export
sector won't remain essential, their economic policies can
concentrate more on domestic wealth building, business and
demand for private services.

Cecilia Hermansson

13

Foreign trade

Substantial decline in foreign trade
Weak global economy is limiting exports
The downturn in Swedish exports has worsened since our
March forecast. Results for the first quarter of 2009 indicate that
export volume shrunk by no less than 16.2% on an annual
basis after dropping by slightly over 7% in the fourth quarter of
2008. This is more severe than we had predicted in March and
is the largest decline since World War II. The financial crisis and
its impact on the real economy have hurt global conditions more
than expected. This is especially true of the European market,
the buyer of more than three fourths of Sweden's exports. At
the same time, the types of goods Sweden exports, with a large
concentration of investment goods, is a disadvantage when
global investment is sharply lower.

Goods exports account for the largest decline, down slightly
over 20% in volume compared with the same quarter last year.
This is being driven primarily by lower demand for investment
Auto exports are down
goods such as machinery and passenger cars. Since the first
50% since 2008
quarter of 2008 the value of auto exports has dropped by half.
Today auto products account for only 8% of exports, against
13% last year. Exports of raw materials such as forest products
and minerals have also dropped substantially, while electronics
noted a surprisingly positive trend during the first three months
of 2009. As trade in goods falls, demand for services is affected
as well. In the first quarter service exports dropped by 2.5% on
an annual basis compared with the same period last year.

What can we expect for the rest of 2009? In our latest
international economic outlook, growth prospects for 2009 have
been revised downward by just over one percentage point
compared with our March forecast. We expect the global
economy to shrink by around 1.5% this year. For Swedish Low capacity utilisation
exporters this means that their global market will drop by 6-7%, in the global economy
more than we projected in March. Low capacity utilisation in the is hurting Swedish
global economy implies continued weak demand for inputs and exporters
investment goods, suggesting that Swedish exports will shrink
by more than the estimated global growth rate. Improving
economic indicators such as the purchasing managers’ index
are a sign that the sharp decline in exports is slowing, however.
Even if we assume that exports stabilise during the second half
of the year, average overall export volume will fall by as much
as 14.0% in 2009 compared with the previous year.

We expect Swedish export opportunities to be limited next year A growing global
as well. If the global economy grows by just over 2% in 2010 as markets and lower unit
expected, the market for Swedish exporters will increase by a labour costs in 2010
modest 1.5%. With a relatively well-diversified export structure will improve export
and competitive companies, however, Sweden could see opportunities for
exports slightly outpace estimated market growth. Unit labour Swedish industry
costs are expected to fall in 2010 when productivity growth
picks up, at the same time that wage increases slow. The weak


Foreign trade

krona is also making Swedish companies more competitive
relative to competing countries.

Global demand for raw materials and input goods is expected to
increase slightly faster in 2010, not least due to an anticipated
inventory build-up in industry. This helps Swedish raw materials
producers, which account for 20% of goods exports. Investment
goods are under pressure from overcapacity and weak
investment conditions. Not until 2011 do we expect global
demand for input goods to rise in pace with improving capacity
utilisation worldwide. In 2010 we don’t anticipate a repeat of this
year’s 50% drop in Swedish passenger car exports, which is
expected to reduce total goods exports by upwards of 8 Swedish exports are
percentage points. Sweden is less dependent on passenger car expected to rise by
exports than Germany and Japan. This is an industry that will 2.5% in volume next
continue to face pressure from overcapacity in 2010. The year, below the long-
telecom sector, which accounts for 14% of Sweden's exports, term trend
offers great growth potential that Swedish companies can
capitalise on. This is especially true of emerging economies in
Asia, though there is a risk that the global financial crisis could
delay telecom investments. Service exports are expected to rise
in 2010, partly through increased foreign spending in Sweden
due to the weak krona. Overall, we expect total exports to rise
by 2.5% in volume in 2010, making it the third weakest year in
the past decade. On average, Swedish exports have risen by
5.8% per year during this period.

Industrial slowdown is affecting import demand
The exceptional slowdown in Swedish industry is clearly
reflected in imports of goods and services. Major cutbacks in
production and inventories by Swedish industry, along with
fewer investments, are greatly reducing imports. During the first
quarter of the year goods imports fell by 14.8% on annual basis
after having dropped by 5.2% in the fourth quarter last year.
Service imports, which last year grew by 12.8% on an annual
basis, fell by just over 6% during the first three months of 2009.

We expect Swedish import demand to decrease further in 2009.
Industrial production is not expected to rise until next year at
the earliest, when global demand and Swedish exports slowly Falling investments,
begin to climb. Low capacity utilisation among businesses a weak krona and
means that investments will decline substantially, especially in lower consumer
2009. A weak krona is holding imports down. Higher household spending are keeping
savings is another factor why imports are expected to fall faster imports in check
than exports in the quarters ahead. A similar trend occurred
during the recession at the start of the decade and after the
financial and real estate crisis in the early 1990s.

Not until next year do we see import demand rising in Sweden,
after industrial production levels off. A projected increase in
imports of nearly 1% in 2010 is expected to come partly from an
inventory build-up in industry after a period of major cutbacks.
Our expectation that 2011 will be a better year growth-wise

15

Foreign trade

presumably will also force industry to add to inventories of raw
materials and input goods.

In summary, net exports will have more of an adverse effect on
GDP in 2009 than we had forecast in March. The major slide in
exports in the first quarter is the main reason why. In Net exports are
subsequent quarters we expect imports to be weaker than expected to contribute
exports, due not least to lower investment and higher import positively to GDP in
prices. As a result, net exports could have less of a negative 2010 after three years
effect on GDP. For 2010, we expect foreign trade to provide a as a negative
positive contribution to GDP as exports slowly rebound. contributor

Net exports’ contribution to GDP, export and import growth (%)

4

2

0

-2

-4

-6

-8

-10 Exports
Imports
-12 Net exports
-14

-16
2008 2009 2010

Auto industry’s importance to Swedish economy
Autos have been harder hit by the global recession than any
other industry in Sweden. During the first quarter production fell
by slightly over 60% on an annual basis. This is leaving its mark
on the Swedish economy, with a risk that a recovery could be
slowed. The auto industry contributed an estimated 1.3
percentage points to the 6.5% decline in GDP during the first
three months. Production was down 24% for industry as a
whole, but excluding autos the downturn was 18%.

An estimated 75,000 people are directly employed by the
Swedish auto industry, equal to around 11% of all industrial
jobs or slightly over 1.5% of the labour force. This represents an Sweden’s dependence
increase from 2005, when the share was 9% of industrial jobs. on the auto industry is
Among European countries, only Slovakia and Germany have a among the highest in
larger share of their workers in the industry. Including Europe
subcontractors, the figure is considerably higher. In Sweden the
auto industry employs an estimated 140,000-185,000 people, or
between 3% and 4% of the total workforce.


Foreign trade

Autoworkers as % of manufacturing workforce, 2005

Slovakia
Germany
Sweden
Czech Rep.
France
Belgium
Spain
Austria
UK
Hungary
Ireland
Poland
Romania
Italy
Netherlands
Portugal
Finland
Denmark

0 2 4 6 8 10 12 14 16

Source: Nutek

The export value of auto products represented about 14% of
Sweden's total goods exports in 2008. The industry is also a big
buyer of goods and services, and a growing share of its
production value is supplied by other industries. Purchases
have trended higher in recent years in connection with
specialisation and growing competition. Investments in research
and development have therefore become increasingly important
to stay competitive. Today the auto industry accounts for 16%
of Sweden's total R&D expenditure, as well as about 12% of the
total value-added generated by Swedish industry.

The risk is that the dramatic downturn in the auto industry will
spread to other sectors of the economy. The most vulnerable The downturn in
are corporate services and retail/wholesale. The detrimental the auto industry
conditions faced by the industry could also impact R&D. This is spreading to the
underscores the vulnerability of the Swedish economy, where service sector
more than two thirds of R&D is concentrated in a few large
corporations.

Production volume by industry, Q1 2009, annual rate %

Other electrical industry 14.7
Office equipment/computers 8.7
Electrical/optical equipment 5.7
Chemicals 1.9
Foods and beverages -2.5
M edical, precision/optical instruments -13.1
Other manufacturing -17.4
Non-metallic mineral products -18.1
Pulp and paper -21.3
Wood and wood products -22.6
Coke and petroleum products -24.3
Rubber and plastics -25.6
Fabricated metal products -26.2
Other transport equipment -28.2
Textiles -30.1
M ining and quarrying -32.7
Basic metals -33.3
M achinery and equipment -41.5
Ferrous and non-ferrous metals -47.4
Transport equipment -57.0
Source: Statistics Sweden

17

Foreign trade

The slump in the auto industry is not only economic but also Increased need for
structural. Global overcapacity and a shift in demand to more transformation in
environmentally friendly products are creating great challenges business
for automakers around the world. Suppliers to the industry that
are at risk of losing their business have already begun to target
other sectors, including utilities, energy, infrastructure and
environmental technology. Increased R&D investments to
develop new products may eventually create new jobs and help
to reduce the impact of climate change. The Swedish
shipbuilding and textile crises in the 1970s are a clear example
of the structural changes that the Swedish business sector has
undergone from time to time.

Jörgen Kennemar


Investments

Investments plunge
Investments are down four quarters in a row
A sliding investment trend from last year intensified in the first The dramatic decline
quarter of 2009.1 The decline was driven mainly by private in investments
investment, which fell by slightly over 17% compared with the pummelled GDP
same quarter last year. Housing investment also fell in the first quarter
substantially, by 24%. Inventories continued to shrink during the
quarter, contributing 1.2 percentage points to the GDP decline.
The exception was public investment. Municipalities in particular
have been busy with construction and road projects. Investment
here grew by 17%, while state investment fell by just over 3%
compared with the same period of 2008. Despite rising public
investment, fixed gross expenditure, including inventory, was
the main reason for the GDP decline in the first quarter.

Change in gross investments and investments in certain sectors
50 4

40 3

30 2
Annual real change in percent

20 1

Period change in percent
10 0

0 -1

-10 -2

-20 -3

-30 -4

-40 -5

-50 -6

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
04 05 06 07 08 09
Gross Fixed Capital Formation (SA, RHS) Gross Fixed Capital Formation, Machinery
Gross Fixed Capital Formation, Construction Gross Fixed Capital Formation, Manufacturing
Source: Reuters EcoWin

Economic growth in 2004-2007 produced huge investment Past investment and
volumes, which are now shrinking at a rapid pace. At the same low capacity utilisation
time domestic and external demand is falling, as a result of are causing a
which businesses are facing major cutbacks in production protracted adjustment
capacity. Private sector investment reached 13.5% of GDP in
2008, the highest level in two decades. Inventory build-up was
also high until mid-2008. The changes needed to adapt to
current economic conditions will be dramatic, and probably will
be protracted as well. As demand shrinks, companies are now
beginning to slash production and meeting remaining demand
by reducing their inventories.

1
Statistics Sweden’s revised, seasonally adjusted volume data show that the
slowdown in investment began in the second quarter last year. This coincides
with the gradual economic slowdown.

19

Investments

Change in business investment and capacity utilisation in Swedish industry

20 90.0
15 87.5
10 85.0
5 82.5
Percent

Percent
0 80.0
-5 77.5
-10 75.0
-15 72.5
-20 70.0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

G Fixed Capital Form
ross ation (annual change)
Capacity Utilization Manufacturing Sector (SA, RHS)

Investments continue to shrink
Against the backdrop of the substantial decline in domestic and Investment cutbacks in
foreign demand and the expansion in production capacity in 2009 will continue in
recent years, we expect investments to continue to fall during 2010
the forecast period. For 2009 we expect investments to drop by
12.3%, then continue to shrink in 2010, but at a slower pace,
4.3%. Given current overcapacity and weak demand, it will take
a while before production levels reach the capacity ceiling and
investment needs grow again.

Businesses have shown much less willingness to invest. In Industrial companies in
Statistics Sweden’s investment survey in May, industrial particular are planning
companies indicated they plan to slash their investments by to reduce investments
slightly over 20% in 2009. Other industries such as energy and
transportation are not quite as pessimistic, while the
construction sector is forecasting that investments will fall by
half. We see fixed expenditure in the business sector declining
by slightly over 14% in 2009. In 2010 we expect companies to
continue to adjust their production capacity and investments to
drop by 8%. Lower investments will be most evident in the auto
industry, where cutbacks of 25% are planned in 2009,
according to the survey. The inventory downturn cycle is
expected to continue in 2009 following the major build-up from
2006 to mid-2008. With demand uncertain, companies will want
to cut inventories to a minimum. We expect this to reduce GDP
by just over 0.8 percentage points in 2009. For 2010 we see a
slight inventory build-up, adding 0.3 percentage points to
growth.

We don’t anticipate a turnaround in housing investments Housing investments
anytime soon. Prices are expected to fall, and the impact of are falling despite
rapidly rising unemployment on income security will lead to government subsidies
greater cautiousness in new housing construction. Falling and lower interest
interest rates and the introduction of government subsidies for rates
renovations and additions will soften the blow, but are unlikely


Investments

to reverse the trend. Leading indicators such as construction
permits point to a rapid decline in housing construction. We
project a drop of slightly over 22% in 2009 and a further
slowdown in 2010 with essentially stagnant housing
investments.

Public investment is compensating somewhat for cutbacks by Public investment is
businesses, but with municipalities facing tight budgets and the easing the downturn
government showing restraint, any increases are likely to be slightly
small. The government’s spring fiscal policy bill, which included
a slight increase in investment and higher municipal
appropriations, provides the flexibility to launch major
investment projects ahead of schedule and capitalise on lower
production costs. As a whole, we expect public investment to
rise by 8% in 2009.

Despite a gloomy start to the forecast for 2009-2010, most of Risks are still
the risks are on the downside. Global economic conditions significant
remain uncertain. A further downturn would delay any industrial
capacity increases. Public finances are also shadowed by
uncertainty, and the government is showing restraint given the
major fiscal risks it faces in the next two years. The slowdown in
investments could ease if the global economy recovers more
quickly in the latter half of 2009 and 2010.

Magnus Alvesson

21

Labour market

Deep decline in labour market
Since we released our March forecast, there have been a
number of signs that the Swedish labour market is rapidly
deteriorating. This is especially evident by the number of
layoffs, which remains high despite levelling off slightly in April Production cutbacks in
and May. The number of available jobs is half that of last year. the Swedish economy
The major production contraction in the Swedish economy has have not yet fully
not yet been fully felt by the labour market. In the first four impacted the labour
months of the year the number of employed workers decreased market
by an average of 55,000 or 1.2% compared with the period a
year earlier. The number of hours worked also fell slightly
(1.5%). Companies are primarily eliminating temporary
positions as the economy worsens.

Employment growth and unemployment, 15-74 year-old workers

9
8 Open umemployment, % of
workforce
7
6
5
4
Employment growth, %
3
2
1
0
-1
-2
-3
May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar
06 07 08 09

Manufacturing industry accounts for the largest job losses in
both absolute and relative terms. In the private service sector,
on the other hand, the number of jobs increased until March Industry accounts for
before shrinking by 40,000 in April, compared with 47,000 in the largest share of job
industry. The worsening job market is placing increasing losses
pressure on government finances and forcing municipalities and
county councils into efficiency gains. First-quarter data show
that municipalities are slashing personnel, even if this is partly
due to privatisations.

The major production cutbacks in the private sector and
continued weak economic conditions are expected to lead to Low production levels
more layoffs during the second half of the year and in 2010. signal more layoffs
Production volume in the goods-producing sector has dropped
to the lowest level since late 2004. For service businesses,
production has decreased in recent quarters, though at a more
modest pace.


Labour market

Production volume for goods- and service-producing sectors, 2000=100

135
Index=2000
130 Private service companies

125

120

115 Goods producers

110

105

100

95
00 01 02 03 04 05 06 07 08


The private service sector has also begun to feel the effects of
the recession. Its dependence on industry has grown
substantially in recent decades due to specialisation and The service sector’s
service outsourcing by industrial companies. Continued weak dependence on
conditions will eventually require efficiency improvements by industry is growing
B2B service providers, which in recent years have had low
productivity growth. Increased household savings is expected to
lead to fewer new jobs in the retail sector at the same time that
the industry's profitability is under pressure from a weak krona
and lower domestic demand.

Worsening labour market conditions are placing municipalities
and county councils under growing economic pressure. In 2008 More layoffs are
one out of every five municipalities reported a budget deficit, a expected among
figure expected to rise in the next two years. Increased state municipalities and
subsidies to municipalities and county councils and higher county councils
municipal taxes probably won't be enough to hold off further
layoffs in the public sector in the next two years.

As a whole we expect job losses of 3% this year, a downward
revision from our March forecast of 2.75%. Next year we see
the number of jobs declining by 2.5%, more than we had
previously forecast partly due to a larger-than-expected
production decline this year and lower global market growth for A total of 260,000 jobs
Swedish exports in 2010. In total we expect the loss of slightly are expected to be lost
over 260,000 jobs in 2009/2010, or nearly 6%, a faster decline in 2009/2010
than in the recession of the early 1990s. Goods-producing
sectors account for the biggest losses in absolute terms.

The number of hours worked is expected to fall more than the
number of jobs, especially in 2009. Extraordinary measures
were taken by several unions and employer confederations this
spring to slow job losses and keep unemployment in check. The
agreements, which expire in March 2010, provide the option to
reduce work hours and slash incomes by up to 20%. This has
been widely accepted by labour market parties and means that
the total number of hours worked is likely to decrease by about

23

Labour market

4.5% for the full year 2009. For 2010 we project that the number
of hours worked will drop by slightly over 2.5%.

Change in number of employed workers in 2009-2010, thousands

20

0

-20

-40

-60

-80

-100

-120

-140

-160
Goods producers Industry Construction Service sector State Municipalities

High unemployment and expanded labour market
measures
The labour supply was higher during the first four months of the
year than the same period of 2008 despite a rapidly worsening
job market, which generally reduces the supply of available
workers. Besides demographic factors, the labour supply is
being affected by the structural changes the government has
implemented in recent years. Lower unemployment
compensation and tougher rules on sick leave have increased
the incentive to participate in the workforce. The number of
long-term sick leave absences has trended lower and is
expected to continue to do so through the forecast period.

Changes in labour market programs are also helping to
maintain the workforce participation rate. Much of the
The number of people
government’s action plan to fight rising unemployment consists
participating in
of training. These measures are expected to grow from 90,000
labour market measures
participants in 2008 to 210,000 next year. In all, 4.5% of the
will rise to 4.5% of the
working population will be involved in labour market initiatives
workforce next year,
within one year, 80,000 more than we predicted this spring.
against 2.7% in our
Since most of them are included in the workforce, the decrease
March forecast
in the labour supply was limited to around 30,000 workers in
2009/2010, significantly fewer than in previous recessions.

The modest decrease in the labour supply at the same time that
Open unemployment
the employment rate fell by over 260,000 means that open
will begin to decrease
unemployment will rise to over 11% of the working population in
in late 2011
2010, against nearly 9% this year. Not until late 2011 do we
expect open unemployment to decline.


Labour market

Recession is limiting wage increases
Rapidly rising unemployment and a shrinking labour shortage
are slowing wage increases in Sweden. Contracts signed in
2007, which resulted in 3.3% annual increases, are limiting the
wage slide, however. We expect total nominal wages in the High unemployment
Swedish economy to rise by an average of 3% in 2009. The and continued weak
rate of increase will further slow when a majority of the economic growth
contracts from 2007 expire in early 2010. Shrinking job numbers are limiting possible
and unemployment of over 10% will lead to significantly lower increases in next
collective agreements than before. Expectations of future wage year's wage
increases have been significantly revised downward, negotiations
particularly short-term. In a survey by Prosperas, wages are
expected to rise by nearly 2.5%, while in the longer term there
are fewer revisions. We anticipate that nominal wages,
including wage drift, will rise by 2.2% for the economy as a
whole.
Wage expectations for the Swedish economy

4.25

4.00

3.75

3.50
n
ir
n
ä 3.25
r
ö
f
-
%
3.00

2.75

2.50

2.25
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Wage expectations 1 year Wage expectations 2 years Wage expectations 5 years
Source: Prospera, EcoWin

Higher productivity and falling labour costs
Production in the private sector has dropped substantially in the
last two quarters, particularly in industry. The biggest decline
has been in the auto sector, where production fell by over 60%
in the first quarter 2009 on a year-over-year basis. Auto
production is now the lowest since 1999! Service companies
are also cutting production, though much more modestly.

It takes time, however, for companies to adapt their personnel
to lower production volumes, partly for legal reasons. As a
result, productivity will continue to trend lower. The Q1 result
was –5.2%, making it the ninth consecutive negative quarter.

Next year we expect corporate layoffs to lead to higher Productivity growth in
productivity growth, at the same time that production slowly the Swedish economy
begins to rebound. The biggest gains during the forecast period will rise by upwards of
are expected in the goods-producing sector. An estimated 3% in 2010
productivity increase of around 3% is predicted for the economy
as a whole in 2010, compared with a decrease of 0.5% this year
(calendar-adjusted).

25

Labour market

Given our forecast of low nominal wage increases and stronger Low nominal wage
productivity growth, unit labour costs for the economy as a increases and higher
whole should fall by 1% in 2010 after rising by slightly over 3% productivity are leading
in 2009 and 5% in 2008. This means that the Swedish export to falling unit labour
industry is in a good position to strengthen its competitive costs
position, provided that costs do not increase faster than in our
most important competitor-countries.

Jörgen Kennemar


Household finances

Households save like never before
Uncertainty about labour market and asset prices
is affecting households’ willingness to spend
Since we published our most recent economic outlook in March, Swedish households
we have gotten a clearer picture of Swedish households’ have cut back on their
reactions to the current recession. Consumer spending has spending faster than
dropped on an annual basis for three consecutive quarters. anticipated
Household savings reached a record-high level of slightly over
16% of disposable income in the first quarter. Despite fairly
decent income gains in real terms, concerns about a weaker
economy and the financial crisis, along with the impact on the
Swedish labour market and their net worth, have encouraged
households to tighten their belts.
Household confidence in the Swedish economy, their personal finances and the
labour market (net figure – higher minus lower)
100
Households’ view of their own finances

75

50

25

t
0

-25

-50 Households’ view of the Swedish economy
Unemployment expectations
-75
00 01 02 03 04 05 06 07 08 09

Source: National Institute of Economic Research and Swedbank

Since the beginning of the year households have become less Households are more
pessimistic about the Swedish economy. At this point more pessimistic than
people expect conditions to improve in the next year than to normal, but to a
worsen. Expectations with regard to their personal finances in slightly lesser extent
the year ahead remained relatively stable, though at a lower
level than in recent years. Labour market expectations
improved slightly in May despite significant concerns about
jobs. Still, a majority expect higher unemployment. Not since
1991-1993 has this figure been as high as in the first five
months of the year.

The slight improvement in household confidence is mainly the
result of the Riksbank’s rate cuts. Last fall household margins
were under more pressure, but mortgage costs have gradually
dropped since then, leaving more money for savings or other
consumption. This is more evident in sales of consumables than
durable goods, which remain low due to worries about higher
unemployment.

27

Household finances

One way to study household finances is to look at the interest The interest coverage
coverage ratio, i.e., households’ interest expense in relation to ratio has fallen
disposable income. When the repo rate rose, households felt significantly since last
pinched financially. The situation has since eased considerably year
for households with mortgage loans. The interest coverage ratio
is expected to fall from 6.5% in 2008 to 4.5% this year and
slightly lower in 2010.

Households’ interest expense as share of disposable income, %

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20

Source: National Institute of Economic Research and Swedbank

The main factor affecting household consumption is disposable Households as a group
income. This includes the impact of inflation, interest rates, are reporting unusually
fiscal policy, jobs and wages. We expect the decline in the low income gains –
number of hours worked to reduce real disposable income by 4 and some people have
percentage points this year, at the same time that fiscal policy it even worse
(income tax credits and increased transfers to households), low
inflation and interest rates contribute positively to real income.

Contribution to households’ real disposable income, percentage points

12.0
4.6
10.0

8.0
6.2
3.3 3.6
6.0
0.8
3.6
1.2 3.3
4.0 1.4
1,3
2.0 1.3
1.6

0.0

-2.0

-4.0

-6.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Factor income Public transfers Taxes and fees Private transfers

Source: Statistics Sweden, National Institute of Economic Research and
Swedbank


Household finances

Real disposable income is expected to rise by 0.8% this year
and 1.3% next year as the decline in the number of hours
worked eases. We expect the government to introduce further
stimulus measures to help households (mainly seniors and the
unemployed), though it is also trying to hold spending in check,
so the effects will be relatively small compared with previous
years.

Despite that households as a group have seen their incomes Households may have to
rise in real disposable terms during the recession and financial save more to give their
crisis, they are cutting their spending and saving more. One net worth a boost and
reason is that their financial net worth has decreased at the reduce debt
same time that debt ratios continue to rise. Even if interest rate
cuts contribute to a slower correction in household balance
sheets, we can expect increased savings to gradually replace
the lost wealth. Uncertainty about both the labour market and
housing market is contributing to further cautiousness.

Households’ financial net assets and debt in relation to disposable income (%)

Financial net wealth and debt as % of disposable income
250% 250%
Financial net wealth ratio

200% 200%

150% 150%
Debt ratio

100% 100%

50% 50%

Financial net wealth ratio excl.tenant ownership
rights and insurance technical reserves
0% 0%
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: Statistics Sweden and Swedbank

Household spending could follow W-shaped trend
Indications are that households will maintain, or slightly
increase, their short-term spending on everyday items and
services. There is still some cautiousness about durable goods
such as cars and home furnishings. We also expect foreign
travel to be replaced by more vacations at home, at the same
time that the weak krona is raising interest in travel to Sweden
among foreigners. As a result, the net difference between
foreigners’ consumption in Sweden and Swedes’ consumption
abroad will also contribute negatively to spending data.

Once the effect of lower interest rates begins to subside and
unemployment rises to even higher levels, there is a risk that

29

Household finances

consumer spending could again slow. As a result, we are likely
to see a W-shaped spending curve during the forecast period.

Households’ disposable income in real terms, savings ratio and consumption
trend with forecast for 2009-2010 (%)

15 15

12 12

9 9

6 6

3 3

0 0

-3 -3
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real disposable income Private consumption
Household savings ratio Savings ratio, excl. collective pensions


This year we expect household consumption to fall by 1.6%
before rising weakly by 0.6% next year as confidence improves
slightly and economic conditions brighten. Savings will rise from
11.9% relative to disposable income (savings ratio) to 14% this
year and stabilise at just over 14% next year before the ratio
retreats once again in 2011.

Housing market could also see W-shaped curve
Lower interest rates and significantly improved household Unemployment could
buying power according to Swedbank’s latest Housing Index slow the housing
mean that housing prices could potentially increase slightly in market
the short term. When the labour market further weakens during
the second half of 2009, there is a risk that prices could fall
again. As with consumer spending, there is therefore a risk of a
W-shaped curve in housing prices.

Cecilia Hermansson


Fiscal policy

Restraint, but big deficits are still expected
Public finances are worsening quickly as the recession grows. Rapid turnaround
This is to be expected. Sweden's finances are cyclically in public finances
sensitive because of the country’s high taxes and extensive
transfer systems (automatic stabilisers). In addition, recessions
require fiscal stimulus measures, which further add to projected
deficits.

We expect the impact of automatic stabilisers to be significant in The recession
the years ahead. A recent study by the OECD shows that automatically
Sweden has among the highest automatic stabilisers, and increases deficits
estimates show that the public sector's budget shrinks by
approximately 0.7 percentage points of GDP when economic
growth falls by 1 pp2. The biggest impact is on the revenue side,
mainly because tax revenue falls as unemployment rises, and
consumer spending decreases. Unemployment also leads to
higher costs in the form of compensation payments. Against this
backdrop, we estimate that the slower economic growth
reduced the public sector's financial savings by about 2.5 pp of
GDP in 2009. With a slight recovery in growth in 2010, we
expect financial savings to improve by about 0.2 pp.

Relatively extensive stimulus measures have already been A major stimulus
announced in 2009. In addition to the SEK 30 billion reduction package has already
in financial savings in the budget for 2009, appropriations in the been presented for
spring fiscal policy bill increased by a total of slightly over SEK 2009
14 billion. The largest item was an extra contribution to
municipalities of about SEK 7 billion, though this will affect the
2010 budget year, while the cost of labour market programs will
increase by nearly SEK 3 billion. This is in addition to a
decrease in revenue of about SEK 5 billion mainly due to
construction subsidies for renovations and additions and
stimulus measures for “new start jobs.” In total, the fiscal
stimulus, excluding the effects of worsening macroeconomic
conditions (as indicated above), corresponds to about 1.5% of
GDP. This does not include an increase in pension outlays
corresponding to about 1% of GDP to assist a growing number
of retirees.

The budget forecast for 2010 is more uncertain. The Further spending
government has signalled its commitment to more conservative increases in sight
spending to ensure the stability of public finances. Furthermore, in 2010
it wants the flexibility to implement additional stimulus measures
if the recession worsens and its extensive guarantee and
lending programs are called upon. The government has already
announced a stimulus package worth SEK 10 billion more than
in 2009. With the economic downturn deeper than expected
and 2010 being an election year, we feel it is likely that fiscal
stimulus measures will increase by an additional SEK 30 billion
(1% of GDP). Among other things, the government has
indicated that it may offer further assistance to seniors and

2
Including labour market programs (Flodén, 2009).

31

Fiscal policy

partly compensate retirement investors for a recent reversal of
profit distributions by insurers. Measures to slow unemployment
may also receive renewed attention, including more training
programs. Moreover, in 2010 the surplus in the retirement
pension system is expected to shrink by another 0.3% of GDP,
while the municipal sector can expect a deficit of 0.4% of GDP.

The worsening state of Sweden’s public finances will remain an Downward revision
issue for years to come as deficits and public debt grow. This of financial savings
isn't necessarily alarming. Sweden's debt is manageable, and
we feel that the level in question is appropriate given current
circumstances. In all, we expect negative financial savings
equivalent to 2.5% of GDP in 2009 (or SEK 75 billion). This is a
downward revision of 0.5 pp compared with our previous
forecast. For 2010 we expect total negative financial savings of
4.1% of GDP, or about SEK 125 billion. Macroeconomic
conditions are significantly worse this year as well, and there is
still a need for fiscal stimulus.

Due to the severity of the recession, the regulations governing The regulatory
Swedish budget policy are being put to the test. To strengthen framework is being
budget discipline and ensure the long-term sustainability of put to the test
Sweden's financial position, the goal is to maintain a 1% surplus
of GDP over the business cycle. The Riksdag sets three-year
spending caps as a framework. The surplus target is calculated
over several years, so a large deficit in one or two years isn't
problematic if it can be compensated by tighter fiscal policy in
the medium term. Swedish fiscal policy is also tied up by
membership in the Stability and Growth Pact, according to
which the deficit may not exceed 3% of GDP. Under certain
circumstances the limit can be lowered. Given current
conditions, with negative growth in a number of member states,
larger deficits are considered acceptable.

Public sector financial savings and debt as % of GDP
5.0 75

70
2.5
65
Percent of GDP

Percent of GDP

0.0
60

-2.5 55
50
-5.0
45
-7.5
40

-10.0 35
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

General Governm Balance
ent General Governm Debt (RHS)
ent


Fiscal policy

Public sector debt is difficult to forecast right now. A number of Government debt
one-time effects are impacting debt levels in 2009. Moreover, is growing
the National Debt Office will increase funding in foreign
currency by the equivalent of SEK 100 billion to strengthen the
Riksbank’s currency reserves. This will increase the public
sector’s consolidated gross debt by approximately 3 pp of GDP.
The Riksbank has stated that these resources will be needed
during the current financial crisis. This means that the national
debt will grow to nearly 50% of GDP, though this is still
significantly below the Maastricht Treaty limit of 60%.

Magnus Alvesson

33

Monetary policy and financial markets

Inflation, interest rates and exchange rates
Consumer prices are falling this year
In our March forecast we predicted that the CPI would fall by
0.6% this year before rising by 1.2% next year. Now in June the
picture has changed slightly. The CPI forecast has been revised
to -0.4% and 1.1% for 2009 and 2010. Gas prices explain why
inflation will be less negative despite a sustained downturn in
the real economy.

The Riksbank’s rate cuts – and to some extent lower food and
energy prices – are an important reason why consumer prices
are falling from a year earlier. Weaker demand and low
resource utilisation are relieving pricing pressures on
consumers, which in terms of CPI with constant interest rates
(CPIX) will mainly impact next year.

Even though mortgage rates are expected to hit bottom in the The CPI with constant
early summer, the rate cuts will curb the CPI for a few more interest rates will fall
months. Not until December do we expect inflation to return. from 1.7% in 2009 to
The CPIX is more consistent, fluctuating between 1% and 2% 1.2% in 2010 and
during the forecast period. In late 2010 the CPIX will reach remain below the
1.3% at an annual rate, significantly below the inflation target of inflation target
2%.

Outcome and forecast for CPI and CPIX (at constant interest rates) (%)

5.0
CPI
CPIX
4.0
CPI Swedbank
CPIX Swedbank
3.0

2.0

1.0

0.0

-1.0

-2.0
Jul Sep Nov Jul Sep Nov Jul Sep Nov Jul Sep Nov Jul Sep Nov Jul Sep Nov
Jan 05 Mar Maj Jan 06 Mar Maj Jan 07 Mar Maj Jan 08 Mar Maj Jan 09 Mar Maj Jan 10 Mar Maj


Since the CPI is falling mainly due to rate cuts and the effects of
last year’s big jump in energy and food prices, we do not see an
imminent risk of deflation. As the global economy recovers,
albeit at a slow pace, inflation expectations will rise.


Monetary policy and financial markets

Monetary policy will remain expansive
An easing of the financial crisis, higher inflation expectations By the end of the
and improving economic conditions beyond the forecast horizon period we expect the
will allow the Riksbank to begin a period of gradual hikes in late Riksbank to launch a
2010 in order to normalise interest rates. Worries that an period of rate hikes…
extended period of unusually low rates could lead to new
bubbles in asset prices suggest that rates should be normalised
more quickly if possible. We feel it would be positive if the
Riksbank and other central banks gave greater consideration to
financial stability in their monetary policy.

In our economic outlook the production gap in both the global … but with inflation
economy and Sweden will be bridged slowly. If the recovery expectations rising,
continues into 2011 and 2012, there is a chance we will come monetary policy will
closer to maximising growth potential. A repo rate of 1% is continue to support
negative in real terms if inflation expectations rebound to 2%. the economy
There is still considerable support from monetary policy at this
level, given that lending is normalising.

Although the Riksbank can still influence interest rates by The likelihood of a
buying bonds on the market (so-called quantitative easing), we quantitative easing
feel that the likelihood of its doing so has decreased. As a small has decreased slightly
country with limited impact on the global bond market, Sweden
has little chance of influencing long-term interest rates. If
anything, its purchases of bonds with shorter maturities could
have an effect if rates continue to rise despite the weak
economy.

Interest rates and currency outlook
Outcome Forecast ---> ---> ---> --->
8 June 2009 30 Aug 2009 31 Dec 2009 30 June 2010 31 Dec 2010
USA
Fed Funds 0,125 0,25 0,25 0,25 1,00
10yr Gov Bond 3,80 3,60 3,40 3,40 3,80

EMU/Germany
Repo rate 1,00 1,00 0,50 0,50 0,75
10yr Gov Bond 3,69 3,4 3,20 3,10 3,50

Sverige
Repo rate 0,50 0,50 0,50 0,50 1,00
10yr Gov Bond 3,77 3,60 3,40 3,40 3,90

FX

EUR/USD 1,38 1,43 1,47 1,39 1,34
EUR/SEK 10,89 10,60 10,10 9,80 9,70
USD/SEK 7,85 7,41 6,87 7,05 7,24

TCW (SEK) 144 139 133 130 130
Source: Swedbank

The US and European central banks are also expected to begin
a period of rate hikes in late 2010. Long-term interest rates
should retreat after rising temporarily because of the growing
risk appetite in the financial markets, but then increase again
next year when economic and inflation expectations improve.

35

Swedbank Economic Outlook June 2009

Swedbank Economic Outlook June 2009

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Swedbank Economic Outlook June 2009