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Swedbank's Global Economic Outlook, 2010 March 18

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Swedbank's Global Economic Outlook, 2010 March 18

  1. 1. Global Economic Outlook by Cecilia Hermansson 18 March 2010 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, 08-5859 3341, Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897 The recovery is progressing, but the global economy still faces major structural challenges The global economy has entered a recovery stage, but despite all the huge stimulus measures the rebound isn’t convincing yet. Because of temporary factors, we are revising our global GDP growth forecast upward to 3.9% this year (3.3%). During the second half year the pace will again slow, and in 2011 the US and Europe in particular will feel the effects as stimulus measures are phased out. Global GDP growth is easing to 3.6% (3.5%). In 2012 we expect demand to increase somewhat more on its own and growth to rise to 3.9%. We give this scenario of a slow, bumpy recovery a probability of 60%. We give a double dip, where OECD economies again shrink for several consecutive quarters, a 20% chance, the same probability we give a scenario with a stronger, more robust recovery. Unconventional monetary policy has improved the situation in the credit markets in the US, the UK and Europe. At the same time we feel there are several disadvantages to this balance sheet policy and recommend that this part is phased out first, followed by a fiscal tightening. Since fiscal policy has to be tightened now in several countries in which the financial market lacks confidence, and other mature economies will follow next year, there is good reason for central banks to raise interest rates more cautiously. It may still make sense to abandon a crisis-centred interest rate policy and transition to an interest rate policy suited for a slow, rocky recovery. Structural reforms are needed at a global, regional and national level. It is not sufficient to provide stimulus to strengthen the world economy. The growing soverign debt is a risk for growth, inflation and financial stability, and action plans are needed to avoid new crises. The Eurozone must develop a new framework, but countries must also adhere to the old rules. Reforming the financial sector is needed, not least to avoid new imbalances in the global economy. The world will not be the same after the crisis: It is important to understand how new global conditions will affect our companies and households going forward. Cecilia Hermansson Contents Page 1. Global economy: How should we interpret current conditions and the future? 2 2. Risks remain complex 6 3. Major challenges for monetary policy 8 4. Difficult balancing act for fiscal policy 12 5. Structural reforms are needed at every level 14 6. Our assumptions in the forecast 17 7. Regions/countries – the divergence is growing 23 8. Consequences for our home markets 39
  2. 2. 2 Swedbank’s Global Economic Outlook • 18 March 2010 Global GDP forecast March Forecast January Forecast GDP-growth (%) 2009 2010 2011 2012 2009 2010 2011 US -2.4 2.8 2.2 2.5 -2.4 2.2 2.5 EMU-countries -4.0 0.9 1.3 1.9 -4.0 1.1 1.6 of which: Germany -5.0 1.3 1.5 2.0 -5.0 1.5 1.8 France -2.2 1.5 1.8 2.2 -2.3 1.6 2.0 Italy -4.9 0.6 1.0 1.5 -4.5 0.7 1.2 Spain -3.6 -0.5 0.7 1.7 -3.6 -0.1 1.3 United Kingdom -4.8 1.1 1.6 2.2 -4.3 1.0 1.9 Japan -5.3 2.0 1.4 1.5 -5.6 1.2 1.5 China 8.6 9.5 8.8 8.0 8.0 8.5 7.8 India 6.5 7.5 7.8 8.0 6.3 7.0 7.5 Brazil -0.4 4.7 4.5 5.7 -0.5 3.5 4.5 Russia -7.9 4.3 4.5 5.0 -8.0 4.0 4.5 Global GDP -0.9 3.9 3.6 3.9 -1.1 3.3 3.5 Sources: National statistics and Swedbanks forecasts. The countries above represent almost 70% of the global economy. World bank Atlas weights for purchasing power parities 2008 (PPP) have been used. 1. Global economy: How should we interpret current conditions and the future? A recovery has begun, but isn't yet self-sustaining The global economy began to rebound last year, but there is still great uncertainty about the strength and longevity of the recover. The output gaps are not shrinking in industrial countries, and in the Eurozone they are still increasing. The expansive economic policy that a number of countries have pursued has helped to avoid a wide-scale depression and financial collapse in the global economy, but it has not yet created robust growth. A few reflections on the current situation: The recovery that began last summer and fall is not yet convincing. World trade growth can primarily be explained by the Asian expansion. Industrial production in many countries is at a standstill. GDP growth has been marginal in Europe and is lacking momentum, but more evident in the US and Japan. Not surprisingly, emerging economies with fewer imbalances have had the strongest development. A large part of the recovery in more mature economies is statistical in nature. Inventory drawdowns are slowing and inventory replenishment will soon contribute positively to growth. In several countries imports are falling more than exports. Without stimulus measures, underlying demand from companies and households would have remained weak. This is evident in Europe, where auto sales initially rose thanks to generous government rebates and then fell again when the stimulus was phased out. Conclusions for growth outlook First, underlying demand will gradually strengthen in the absence of any new negative shocks. Inventories have to be built back up, production will increase and capacity will be expanded, although the latter could take time, limiting the extent Despite huge stimulus packages, the recovery is far from robust … … but more self- sustaining growth is expected eventually
  3. 3. Swedbank’s Global Economic Outlook • 18 March 2010 3 of investment and job growth for a little while longer. The differences between industries will be great, however. Earnings have improved and companies with robust demand may be willing to invest, while many others will wait longer. Secondly, the monetary and fiscal stimulus will remain important for a while longer. The phase-out of the stimulus, as well as the financial market’s valuation of the process, will be a sensitive factor for the recovery. For the sake of the recovery it would be positive if they were retained, but countries that lack confidence will have to begin a budget consolidation earlier. Thirdly, debt restructuring in the private sector (including the financial sector) will take time. A similar restructuring will have to begin shortly in the public sector in many countries as well. As a result this recovery does not appear to be as strong as after previous recessions. There are differences between countries, but even those with smaller imbalances are affected by debt restructuring in other countries, including in the form of weaker export markets. Consequently, no country is immune to the long-term consequences of the financial crisis and global recession. We have revised our growth outlook for the global economy upward for 2010 compared with our January forecast. The US, Japan and emerging economies are in position for stronger growth, primarily in the first half of 2010, while Europe continues to trail. GDP will rise by 3.9% this year and 3.6% in 2011, compared with 3.3% and 3.5% in our previous forecast (higher weights that assign emerging economies a larger share of the global economy account for 0.1 percentage point in both years). The phase-out of stimulus packages and debt restructurings will have the biggest impact next year. We expect growth prospects to improve in 2012, when underlying demand gradually strengthens on its own. What does this mean for those who use forecasts? It may seem ridiculous in times like used to issue a forecast with a decimal point, especially when forecast errors have been in the range of several percentage points. These precise figures should be seen as a midpoint in a wider range that provide at least some guidance on the direction of the economy. Experience shows that consensus forecasts are the best indicator, since individual prognosticators are rarely or never right over time. As a group, the chances are better, although it is also true that forecasters collectively failed to anticipate the recession. The following advice is for those who still want some form of guidance: Follow consensus projections, but keep in mind that turning points are rarely seen in advance and that forecasters as a group usually fail to anticipate unusual events. It is important that stimulus measures are not phased out too quickly Every country is affected when economic policy is tightened, even those that avoid cutbacks Consensus forecasts are usually more accurate over the long term than individual projections
  4. 4. 4 Swedbank’s Global Economic Outlook • 18 March 2010 Build alternative scenarios and try to figure out which one seems most likely based on current information and experience. Work more actively with risks. By trying to identify risks, there is a better chance of managing operations if are realised. Extend your time horizon. Although exact timing is difficult to predict, the course of events seems pretty clear. This recovery should be seen from a five-year perspective or longer, since the structural consequences of the financial crisis have left a deep mark on the economy. Consider risks against the backdrop of growing tensions and that one or more triggering factors could generate problems, e.g., bubbles that burst when monetary policy has to be tightened more than expected. The economy is all about behaviours. Reality is dynamic and forecasts in themselves can lead to tighter or more expansive economic policy, which in turn affects growth and proves the forecast wrong. Psychology is important, because of which various types of confidence indicators have come to play a greater role for forecasters. At the same time expectations can change rapidly, so it is important to understand how the indicators are designed, so that the results aren’t misinterpreted. Various types of economic indicators The focus on economic indicators that serve as a basis for good forecasts has increased. This is especially true of how expectations and sentiment are measured among households and businesses. The various types of indicators are described below: 1. Leading indicators The OECD’s leading indicator includes several factors which, based on models, have proved helpful in predicting the economy. This applies to financial markets (equities and interest rates), new orders and the labour market. The stock market is sometimes mentioned as a good leading indicator, but this isn't always true. Just remember this quote from Nobel laureate Paul Samuelson, who recently passed away: “It is indeed true that the stock market can forecast the business cycle. The stock market has called nine of the last five recessions.” While the stock market is an important and early indicator, it is only one of many. 2. Early economic indicators Though not an indicator of expectations, the Purchasing Managers’ Index (PMI) provides an unusually quick impression of the last month. There are five indicators that make up the purchasing managers’ index: production level, new orders, supplier deliveries, inventory and employment level. The Purchasing Managers’ Index includes a question on anticipated production and thus also measures business expectations, but this is not included in the index. 3. Indicators that measure expectations Better examples of expectations indicators are surveys that measure household and business expectations in the year ahead. The net figures that are derived provide guidance whether or not sentiment is improving and in this way can give a signal whether the economy is strengthening or weakening. The key is to understand the differences between types of indicators
  5. 5. Swedbank’s Global Economic Outlook • 18 March 2010 5 4. Indicators that combine results with expectations Various economic barometers usually combine outcomes with expectations. The models could be more reliable if results accounted for two thirds and expectations one third. It is important, however, that those who use these indicators know what's what. The questions companies and households are asked are usually in the form of “more, the same, less” or “better, the same, worse”. But you can't tell how much production has increased by asking purchasing managers whether production or orders have increased, remained stable or decreased. There is a signal of the direction given. Obviously there are going to be a lot of responses that production has increased after the major cutbacks that have been made, but we want to see an extended period of strength in the index this time before we feel confident that it reflects actual industrial production, since volume had fallen to such a low level. The same applies to OECD leading indicator that is well ahead of industrial production. OECD leading indicators and OECD industrial production (%) S o u rc e : R e u te rs E c o W in 8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 0 1 0 3 0 5 0 7 0 9 Percentagechange -2 0 -1 5 -1 0 -5 0 5 1 0 In d u s tria l p ro d u c tio n in th e O E C D O E C D L e a d in g in d ic a to rs Economic indicators and sentiment surveys are important to forecasting, but we have to be much more cautious in how we interpret them after such a severe recession. The most likely scenario is that the indicators will initially overestimate on the upside and that it will take longer for the actual data to catch up. What fundamental economic and structural shifts do we see today and in the future? The global financial crisis and recession will affect the global economy for years to come. Although it is hard to predict exactly how, it is worth considering what changes could arise. There is a risk, for example, that the threat of climate change will no longer be taken as seriously if the economy declines. The financial crisis could also give the public sector reason to It can take longer for hard data to catch up to indicators
  6. 6. 6 Swedbank’s Global Economic Outlook • 18 March 2010 encroach on the public sector, which could hurt innovation and productivity. At the same time crises could lead to structural reforms. For example, the reforms Greece will have to institute could raise its potential growth. While it certainly can be debated whether the crisis will lead to higher or lower potential growth, there is probably more risk on the downside, particularly since we face a combination of public and private debt restructuring, an unusually weak labour market and a period of weaker investment going forward. Key factors before and after the financial crisis and global recession: Distorted GDP growth Lower potential growth (and incomes) Great moderation Increased volatility Strong global trade More protectionism High debt levels Debt restructuring by businesses, households and financial sector Low public debt Deficits, huge debts that require consolidation (higher taxes, lower fees) or higher inflation Easy to borrow, low interest rates Greater focus on liquidity, higher price on capital Deregulation, self-regulation Increased regulation and more oversight in financial sector Market in driver’s seat State’s role increases (due to debt load, stimulus packages, support for financial sector) Excessive risk-taking by many actors greater cautiousness and better risk management High yield requirements More modest yield requirements West rules Greater power in hands of emerging countries (China, India) Euro zone monetary union More political/fiscal co-operation and new frameworks 2. Risks remain complex There are still many forecast risks, each of which are important, but it is even more important to focus on how they relate to and possibly reinforce each other. The recent financial crisis underscored the interplay between risks and how they brought the economy down like a stack of dominos. Since risks are multifaceted, we have selected three alternative scenarios for the period 2010-2012, although we are aware that events may need a little more time to unravel. A common model for situations involving banking crises shows that they are followed by other crises during several years: Banking crisis financial crisis sovereign debt crisis high inflation currency crisis protectionism There is uncertainty whether potential growth has shrunk, but the risks are on the downside Risks should be considered in the aggregate rather than individually
  7. 7. Swedbank’s Global Economic Outlook • 18 March 2010 7 The first three steps fit well regarding this global crisis, but the question is if we this time can avoid the three last steps in the model. Forecast risks The key forecast risks (unranked) that create uncertainty are listed below. They factor most prominently on the downside, but could also play a role in pushing growth higher. Debt restructuring in the private sector: How much time is needed and how will it impact growth? Debt build-up in the public sector: How accurate is the Ricardian equivalence, which suggests that households will react to stimulus measures by saving in expectation of later tax hikes? How much budget consolidation will we see, which will slow growth? Will the private sector be pushed aside when investment picks up? How will the financial market react and will we see further turbulence? Commodity prices: What will be the impact of growth and inflation in various countries? Protectionism: How common will it be and how much will trade and growth be affected? Is there a risk of a structural shift in terms of supply chains? Political concerns in the wake of budget consolidations and public/private debt restructurings: Will the public in Club Med countries delay the reform process? Euro co-operation: What happens now? Political and economic effects? And what does the financial market think about the current situation/outlook? Any additional stimulus measures and their phase-out: What will be the impact on growth, jobs, inflation and the financial market? Is there a risk of inflation, and if so where and when? Has the threat of deflation been averted? China's handling of any bubbles/overheating and currency policy? US political situation: What will happen to reforms in health care and the financial sector? What will the loss of public confidence mean? Currency crises, e.g., a dollar or euro collapse: How likely is it and how would it affect growth and the financial sector? Employment and productivity: Labour market and economic policy in various countries: Which models will work best? Terrorist attacks and natural disasters: What will be the impact on growth, future confidence? The unforeseen factor? The three scenarios below mainly apply to OECD countries, while we have assumed that the recovery in emerging markets has been and will remain more V-shaped. Scenario 1: Slow, rocky recovery Characteristics: U-shaped curve (or one more closely resembling Nike’s logo). Stimulus measures gradually
  8. 8. 8 Swedbank’s Global Economic Outlook • 18 March 2010 strengthen demand. As they are phased out, growth slows slightly but levels off. It takes time for the wealthiest economies to generate any growth of their own and for outputgaps to shrink. The labour market remains weak, wage growth and inflation are low, but the threat of deflation can be avoided. Probability: 60% Scenario 2: Double dip Characteristics: W-shaped curve. A rebound is followed by a period of shrinking economies after stimulus measures are phased out too quickly and new shocks rattle the financial system. Economic policy lacks much ammunition, complicating and delaying the recovery. There is a renewed risk of deflation and growing protectionism. Probability: 20% (but higher in certain euro countries where austerity measures are enacted faster) Scenario 3: Strong, robust recovery Characteristics: Soft V-shaped curve. Emerging countries help to pull up their wealthier neighbours. The stimulus helps and isn’t phased out too quickly, but it could increase the risk of inflation further down the road. Protectionism is avoided and regulation is reintroduced in the financial sector, but cautiously to avoid hurting growth. Labour markets recover faster than expected. Probability: 20% 3. Major challenges for monetary policy To date economic policy has focussed on avoiding a crisis. Now the emphasis is shifting to ensuring a robust recovery. Despite huge stimulus packages, growth has been meagre. The problem is that fiscal policy has to be tightened this year or next in a number of countries. What will happen to monetary policy? Below we discuss a few important questions about central banks: 1. What advantages and disadvantages are associated with some of the more unconventional monetary policy measures taken during the crisis, i.e., other than interest rate cuts?1 Despite interest rate cuts down to zero, monetary policy was too tight given the severity of the economic downturn and the huge resources that have been idled. The risk of deflation was still considered high after the crisis broke out in 2007 and worsened in the fall of 2008. 1 The unconventional monetary policy is not so unconventional as similar measures have been taken earlier but not to the extent as during this crisis. It is more important than ever to understand which combination of fiscal and monetary policy is now needed
  9. 9. Swedbank’s Global Economic Outlook • 18 March 2010 9 European and American central banks’ balance sheets (thousand billion dollars and euros) Source: Reuters EcoW in 08 09 10 thousandbillions 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 ECB Federal Reserve By utilising the central bank’s balance sheet, the problem of a weak transmission mechanism was limited, since market prices and conditions were influenced directly. This balance sheet policy, unlike interest rate policy, could have been implemented instead by the government, which raises questions of independence, co-ordination and the delegation of responsibility (including risks) between the central bank and government for the introduction and phase-out of stimulus packages. There are issues of democracy to consider as well, since it was easier for the central bank to act than for a parliament to decide which markets/players should receive support. A number of major central banks have utilised credit policy to influence the interbank and private credit markets (increased collateral, foreign currency swaps, extended deadlines and bond purchases), while only the Federal Reserve and Bank of England worked with debt management policy (buying treasury bonds). The Bank of England has also set a target for bank reserves, and the Swiss central bank has utilised currency policy and bought assets in foreign currency. Advantages: Central banks have been able to overcome the problem of weak transmission mechanisms and influenced bond rates and terms directly by expanding their balance sheets. Lower bond rates, higher inflation expectations (which is desirable if the threat of deflation is high) and a more smoothly functioning credit market have been among the advantages. It is hard to quantify them, especially since some of the rate cuts have since been reversed after the moment of surprise was over. Disadvantages: There are concerns that inflation could arise as a result of overly expansive balance sheets. Though this may be overblown, since central banks have tools at their disposal, the expectations in themselves could be important. The US and UK also face a risk when they phase out their Central banks have added balance sheet policy to their earlier interest rate policies Some central banks have chosen slightly different dishes from the smorgasbord, but all of them have tried to influence interest rates Policy has led to lower interest rates, but probably to a diminishing extent The policy has also led to greater uncertainty, with new, trickier hunting grounds for central banks
  10. 10. 10 Swedbank’s Global Economic Outlook • 18 March 2010 stimulus packages, as the independence of their central banks from the government and fiscal policy could be in jeopardy. Balance sheet policy is more difficult to calibrate and communicate. One example is that the Fed is considering using the interest rate it pays on its reserves as its benchmark rate instead of the fed funds rate. Such a policy could create an uneven playing field for private players, since certain markets will have advantages over others. Some players are becoming dependent on the support. Central banks are taking on a political role as well as risks that eventually may have to be addressed by the government. 2. How and when should monetary stimulus measures be phased out? Due to the disadvantages of this balance sheet policy, it should be phased out as soon as credit markets are working more smoothly and the transmission mechanism is stronger. Some unconventional measures phase out automatically when certain types of liquidity support are no longer needed. Collateral could again become a priority, as it was before the crisis. Greater cautiousness is required with respect to mortgage backed securities (MBS), where the housing and credit markets could be significantly affected by a drawdown or a slowdown in purchases of treasury bonds, which would also affect fiscal policy. In this case the biggest challenges are in the US and the UK. For macroeconomic reasons, the quantitative easing should not be extended to avoid expectations of rapidly rising inflation. For microeconomic reasons, the quantitative easing will have to be ended to avoid disruptions to the market due to central bank interference. If desired, interest rate policy can be managed independently of balance sheet policy, but should lag slightly behind and be co-ordinated with fiscal policy. In countries where budget consolidation is needed immediately because the financial market demands it (parts of the euro zone), the ECB can be slightly more cautious when and at what rate it raises interest rates. In countries where fiscal austerity is not needed and there is a risk of new imbalances, rate hikes have to start sooner and the central bank should take quicker action. When interest rates were cut, there was co-ordination between central banks. When rates are now raised, there is good reason to again co-ordinate across national borders. In countries without any imbalances, early rate hikes would raise the value of their currency, which in turn would lead to large capital injections that destabilise the economy. Monetary policy has to be better co-ordinated with fiscal policy as well. Some will phase out automatically But there are macro and micro reasons to actively end the easing Monetary policy could be better co-ordinated with fiscal policy, but also across national borders
  11. 11. Swedbank’s Global Economic Outlook • 18 March 2010 11 3. What lessons has the financial crisis taught monetary policymakers? There is much central banks can learn, but three things are especially important. The first lesson is that low, stable inflation is not enough to create macroeconomic stability. The second lesson is that it is not enough to supervise individual institutions. The financial sector has to be monitored from a system-wide perspective. The third lesson is that financial crises involve both liquidity and solvency (the liquidity aspect was especially undervalued). 4. How big is the risk that expansive monetary policy will contribute to new imbalances and financial crises? The risk that expansive economic policy in the short run will create new bubbles in countries where imbalances have been large and debt restructuring is needed is small, but it is growing the longer that stimulus measures remain in place. On the other hand, stimulus policy is exported through fixed exchange rates and so-called carry trades with strong capital inflows to emerging economies, which could overheat and find themselves with new asset bubbles. The fact that it takes time it takes to change regulations and oversight given inter alia the three lessons above means that new imbalances can be created in the OECD zone after a period of stimulus, a more robust recovery and a growing risk appetite. 5. Is price stability still the most important monetary policy target? How should it be measured and how high should the inflation target be? Monetary policy will have to change after this financial crisis. Greater effort will be needed to co-ordinate price stability with financial stability. Whether consideration should be given to asset prices will have to be evaluated. The money supply and monetary base are more important indicators in the US. (The ECB already included them in its analysis.) Economists from the IMF, including chief economist Olivier Blanchard, suggest that a inflation target of 4% would be more effective than a inflation target of 2%. The argument is that monetary policy can respond more aggressively to economic shocks, that wages and prices are more easily adjusted in real rather than nominal terms, and that inflation more easily erodes the massive public and private debt. The issue of redistribution still has to be discussed, since higher inflation shifts the benefits from savers to borrowers. Pensioners in particular are concerned about keeping inflation low, and considering demographics, low inflation is desirable. The shorter the maturity of government bonds, the greater the incentive for governments to maintain low inflation. Only the UK, with an average maturity of 14 years, may benefit The risk of new risk imbalances is greatest in emerging countries A higher inflation target could be attractive from an academic perspective ...
  12. 12. 12 Swedbank’s Global Economic Outlook • 18 March 2010 from higher inflation. The US (4.8 years) does not have the same incentive. Carlo Cottarelli from the IMF claims that higher inflation will do little to help with the restructuring of public debt. With 6% inflation, the public debt in OECD countries would only be 8 percentage points lower in 2014 as a share of GDP (at 86.5%) than if inflation remained at 2%. Creating sustainable inflation expectations has taken time. It is not possible to raise inflation just a bit. Higher and more volatile interest rates can be a result. The confidence in governments and central banks can disappear. Practitioners in central banks should thus avoid upsetting current expectations, especially during the sensitive period that the global economy now faces with regard to both fiscal policy and the need for better regulation/oversight of the financial system. Co-ordinating policy to manage price stability and financial stability should instead be the priority. 4. Difficult balancing act for fiscal policy After the financial crisis we are now seeing a period of debt restructuring in the private sector. At the same time public debt is growing. The IMF projects that public debt as a share of GDP will rise by 35% in OECD countries between 2007 and 2014, to 120%. Without consolidation measures, the debt ratio could rise to 300% in the next decades. Even if the stimulus period has been rather short, debt restructuring in the public sector is not far behind. Government finances in the euro zone are no worse than in Japan, the US or the UK. There are countries around the Mediterranean (“Club Med,” as they are known), however, whose national debt will fall between 80% and 120% in 2010. This group also includes Ireland and Belgium. Spain has a high deficit as a share of GDP, but not yet such a high national debt. Only the Nordic and Baltic countries have relatively low debt levels. Except for Latvia and Lithuania, deficits are also modest in these countries. The budget situation is also somewhat better in Netherlands and Germany. … but shouldn't be an alternative for practitioners Sovereign debt ratios are set to increase substantially
  13. 13. Swedbank’s Global Economic Outlook • 18 March 2010 13 Public finance in the EU, Japan and the US 0 50 100 150 200 250 -16 -14 -12 -10 -8 -6 -4 -2 0 Japan USA UKIreland Greece Spain France Portugal Eurozonen Belgium Italy Germany Finland Sweden Government debt ratio (%) Budget balance,% av GDP While Spain's budget deficit has risen mainly as a result of the recession, the US, the UK and Greece had such structural problems that their public finances would have worsened anyway even if the financial crisis hadn't broken out. This year the US budget deficit will reach nearly 1.5 trillion dollars, but even in ten years deficits will still be around 1 trillion dollars despite some budget consolidation as health care and pension costs continue to rise. In the euro zone, many countries also have to reform their pension systems, which haven't sufficiently adjusted to demographic changes. In their 2010 article, “Growth in a Time of Debt,” Kenneth Rogoff and Carmen Reinhart state that when debt rises to more than 90% of GDP, growth slows (the median by 1 percentage point all else being equal). Even if the level isn't exact and doesn't apply the same way in every country, there is reason for concern, especially since the majority of OECD members are already at or near that level. On the other hand, they do not find clear evidence that higher debt will lead to higher inflation in more developed countries. The US has chosen to stimulate its economy even more. According to its latest budget, the stimulus represented 1.8% of GDP in the next two years. Japan has also taken measures. The US has the dollar as its reserve currency, while Japan’s debt is financed by the Japanese population at still-low interest rates. At the same time there are countries that must and have already begun to tighten their belts. The first one was Ireland, and since then the budget consolidation process has begun in Greece, Spain and Portugal. The UK is expected to tighten after its election, regardless of who wins, but possibly more quickly with a Conservative victory. Financial markets will push for an early tightening, since the rising interest rate differential relative to German government bonds is causing higher financing costs as well as concerns of a government default. If this were to happen, creditworthiness Some countries had problems even before the financial crisis A debt ratio of over 90% slows growth, but doesn't automatically drive up inflation Some countries are introducing additional stimulus measures ... … while others are being forced to phase them out
  14. 14. 14 Swedbank’s Global Economic Outlook • 18 March 2010 would be downgraded, loan losses would increase in the banking system, and a new liquidity and solvency crisis would arise that could spread throughout the region. The weaker euro should be seen in light of these concerns. Given the need for a more robust recovery, it is actually too early to tighten fiscal policy. The example of Japan’s VAT hike in 1998 is scaring others off. For small euro members with large imbalances, there are few alternatives, however. The important thing is to restore confidence. Any loan guarantees that Greece receives from other euro zone members are mainly a way to reduce its funding costs. Greece will still need an effective austerity package to reduce its deficit from 12.7% of GDP to 8.7% next year and 3% in 2012. All countries with large imbalances have to avoid a rapid rise in bond rates. For one thing, higher budget deficits can be the trigger. Secondly, the phase-out of the quantitative easing could also contribute to higher interest rates. Sweden and Finland managed to consolidate their budgets fairly quickly during the 1990s. According to the IMF, it took seven years to implement an austerity package corresponding to 13.3% of GDP. Stronger global demand, a weaker currency and gradually falling interest rates in the wake of stronger confidence probably made it easier than it is today when global demand is limping along. Euro members will only benefit if the euro continues to weaken against other currencies, and interest rates are already relatively low. Governments will need to change their tools, just like central banks had to in order to get inflation expectations down. There is a need for political processes that guarantee deleveraging during good times instead of bad. There is also a need for independent fiscal policy institutions that can make it possible for politicians to avoid irresponsible fiscal policy. The key is to immediately begin tightening in countries where needed. Others have to announce that a consolidation is coming next year. In the meantime balance sheet policy from central banks has to be phased out and a cautious tightening of interest rate policy begun. Considering the major fiscal challenges they face, central banks may have to ease off a little. It is important, however, not to create any new bubbles in asset markets either in their own countries or emerging economies that are taking in increasing capital inflows as a response to low interest rates and low yields in the West. 5. Structural reforms needed at every level Thus far central banks and governments have tried various types of medicines to treat the patient. This has worked to some extent, but additional measures are probably needed to figure out why the patient became sick (stop smoking, begin exercising, etc.). In other words, the fiscal and monetary stimulus must be combined with structural reforms. Otherwise In reality, it's too early to tighten right now … but it's important to avoid higher interest rates It should have been easier for Sweden to consolidate than it will be for Greece Now the stimulus must be complemented by structural reforms
  15. 15. Swedbank’s Global Economic Outlook • 18 March 2010 15 the problems will arise again and OECD countries will not be able to meet the growing competition from emerging countries. Structural reforms are needed at the global and regional level, as well as nationally and locally. The common denominator is that institutions have to be created that can handle changing demands. The reason could be demographics, globalisation or technological developments, factors that require changes in economic policy, e.g., in our welfare systems. Among the most important reforms needed at the global level is the transformation of the financial sector. Some experts feel it is enough to reform the financial sector at the national or regional level. However, better co-ordination and institutional frameworks are probably needed at the global level as well. Some issues such as balancing growth between countries/regions, currency policy, the system of capital controls and early warning systems for imbalances, are better handled globally. Little has been done to date, but thorough analyses are needed before regulations can be amended. Overly or inaccurately regulated markets are impeding growth, while under-regulated or inaccurately regulated markets add to instability. There are no miracle medicines against bubbles, but better regulations and supervision could at least limit the problems somewhat. There are five areas where reform efforts are currently being introduced: 1) specific regulations (what will be regulated?), 2) the structure of oversight and regulation (who will be monitored and how much?), 3) the financial sector’s conduct, bonuses and risk management, 4) the fiscal implications of the financial sector and moral hazards, and 5) structural reforms that separate the bank’s role as an intermediary from that as a speculator. In the years ahead regulation and oversight will be tightened, and it is important that it is done smartly. Other areas that require stronger institutions are trade policy, climate policy and poverty. The important thing is to realise that all these areas are inter-related. Climate change is increasingly an issue of how resources are divided between countries, and who will pay the bill to address environmental damage. The most important reform needed at the regional level, i.e., the EU level, is the further integration of product, financial and labour markets. There are good opportunities for specialisation and sharing the burden within the region, but they are not being taken advantage of at this point. The EU is falling behing in the global “growth league”. The euro zone also has to create a better framework for co- operation in the event of crises that also creates a better balance between countries. The divergence between countries around the Miditerranean and Germany is not only because of EMU, even though low It is important to strengthen institutions It's hard to find the right level of regulation and oversight Many issues are inter- related and need stronger institutions, especially climate change
  16. 16. 16 Swedbank’s Global Economic Outlook • 18 March 2010 interest rates may have aggrevagated the problem. There have been several signs of increasing imbalances, and most are related to weaker competitiveness: Loss in market share Strong increase in wages Inflexible labour markets Weak productivity developments Negative ranking in World Bank’s “ease of doing business” Large deficits in current accounts and budgets It is not Germany being too competitive, but many other countries being too little competitive. The Lisbon Agenda will have to be amended even though it is new. The EMU is a political reality, and for euro countries there is no alternative. A new framework is needed for the euro zone that incorporates crisis management and restores confidence in the Stability and Growth Pact. The financial markets have found holes in the existing framework that need fixing. An European Monetary Fund (EMF) would take a long time to build up, so it cannot be used in the current situation. Therefore, it is not a solution in the short term. In addition, it sounds akward to push for stricter rules and then support those who break the rules. Like the Stability and Growth pact, it is difficult to enforce sanctions and to make them realistic. In the short run, the euro members must agree on loans and loan guarantees in order to manage the crisis situation. In the longer term, the Eurozone must choose between 1) the Maastricht union where the cooperation is about a monetary union, and there is a risk that countries may leave the union including Germany, and 2) the transfer union where there is fiscal cooperation and more political steering involved, and with the risk of increased budget undisciplin and less incentives to solve own problems. Even if it could take a long time, it seems as if the second model will be more likely in some form. The most important reform needed at a national and local level is to strengthen the labour market through better wage formation, training and investments in entrepreneurial ventures that create jobs. Better national and local welfare solutions have to be designed as well to adjust for demographic changes and increased competition from emerging economies and other regions. It is critical to make the local market as attractive as possible for the inflow of labour, as well as investments. The EMU will not collapse, but the crisis is creating the need for new frameworks
  17. 17. Swedbank’s Global Economic Outlook • 18 March 2010 17 6. Our assumptions in the forecast Policy developments in financial and other asset markets are hard to predict in a standard forecast. We address interest rates, currencies, oil prices, etc. as assumptions in our Global Outlook. Here we discuss how we arrived at these assumptions. Politics As usual, there will be a number of parliamentary and presidential elections during the forecast period. In addition to those mentioned below, a considerable number of regional elections are scheduled in France, Russia and Italy in the near future. It is hard to predict growth effects and incorporate them in our forecasts. If future confidence increases after the election of a new government, people will be more willing to spend, and vice versa. We consider the elections in the UK, Latvia, the US (Congressional election) and Greece to be especially important to their development. In all these countries the financial crisis has had a huge impact and imbalances continue to create problems. In the UK, a conservative government which seems most likely at the moment, may speed up budget consolidation and sharpen the rules on regulation a bit more than the present government. In the short run, growth may be hampered, but in the longer run it may reverse to positive effects. We have assumed neither positive nor negative growth effects and instead treat political conditions as a neutral factor owing to the considerable uncertainty, even though this might not be the case. 2010 April Presidential election in Austria May Parliamentary election in the UK (must be held before 3 June) June Parliamentary election in the Netherlands July Upper house election in Japan September Parliamentary election in Sweden October Parliamentary election in Latvia October Parliamentary and presidential election in Brazil October Presidential election in Poland November Congressional election in the US 2011 March Parliamentary election in Finland May Presidential election in Latvia June Parliamentary election in Belgium September Parliamentary election in Greece October Parliamentary election in Poland November Parliamentary election in Denmark December Parliamentary election in Russia 2012 January Presidential election in Finland March Presidential election in Russia March Parliamentary election in Spain June Presidential election in France July Presidential election in India October Parliamentary election in Canada November Presidential election in the US In countries where the financial crisis has had the biggest impact, elections will be especially important
  18. 18. 18 Swedbank’s Global Economic Outlook • 18 March 2010 Central banks’ policy rates Since the last forecast there have been no changes in policy interest rates from major central banks. The Fed has raised its discount rate and announced that it will stop buying Mortgage Backed Securities (MBS) in April. The ECB has stopped issuing fixed-rate loans on a 12-month basis. The Bank of England has announced that it will not extend its quantitative easing for the time being, while Japan has shown little interest in quantitative easing at all, and the government is more focussed on a weaker yen. Consumer price developments will be weak in industrial countries, but slightly rising over the next few years. We expect the CPI to reach around 1.5% in the euro zone and between 1 ½ % and 2% in the US and 2-2 ½ % in the UK this year. The CPI will increase even slower during 2011, and we do not expect inflation to rise to worrisome levels in 2012. In Japan the CPI will fall in 2010 and 2011 before rising slightly in 2012. In China, Russia and India, inflation will be uncomfortably high. As was the case in our previous forecast, we assume that central banks will launch a period of rate hikes during the second half of this year and next year (Japan will wait a little longer). The rate increases will be modest, however, due to the increased complexity of fiscal policy. The growth we are seeing in the first half of 2010 is primarily the result of the upswing in the inventory cycle and stimulus measures. Policy rates S o u rc e : R e u te rs E c o W in 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 Percent 0 1 2 3 4 5 6 7 U S A E u ro la n d U K J a p a n Since underlying demand is expected to remain weak, as will inflation pressures, we expect the benchmark rate hikes in major economies to be lower than previously projected. Interest rate assumptions 2010-2012 Outturn Outlook 17/3/2010 30/6/2010 31/12/2010 30/6/2011 31/12/2011 2012 (average) Federal Reserve, USA 0.25 0.25 0.50 1.50 2.25 3.00 Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.25 ECB 1.00 1.00 1.00 1.25 1.75 2.75 Bank of England 0.50 0.50 0.75 1.25 2.25 2.75
  19. 19. Swedbank’s Global Economic Outlook • 18 March 2010 19 Bond rates Slowly increasing GDP growth and higher inflation also place upward pressure on long-term bond rates. We expect the increases to be modest in our main scenario, however. One risk is that the market will become increasingly concerned about the financial situation in the US and the UK, which may accelerate the upward trend. Another risk is the phase-out of the quantitative easing, which could result in higher bond rates. In the next 2 to 3 years bond rates should climb to some 5%. Long-term bond rates (the US, the UK, Germany, Japan) Source: Reuters EcoW in 06 07 08 09 10 Procent 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 UK USA Japan Germ any In the euro zone interest rate differentials between countries with large imbalances (budget, current account) and Germany rose substantially last year and have retreated only slightly since. While Greece’s austerity package and the euro zone's indication that it will provide financial support for Greece are reducing the differential, it is still high and is hurting the country's ability to finance its debt. We expect interest rate differentials to fall slightly as support measures are spelled out, but they will not return to pre-crisis levels. There is considerable uncertainty about bond rates, but the trend is upward Interest rate differentials have begun to shrink, and for this to continue will require indications of support
  20. 20. 20 Swedbank’s Global Economic Outlook • 18 March 2010 Interest rate spreads within the euro zone against the German 10year government bond (%) S o u rce : R e u te rs E co W in ja n 0 7 m a j se p ja n 0 8 m a j s e p ja n 0 9 m a j s e p ja n 1 0 Percent -1 .0 -0 .5 0 .0 0 .5 1 .0 1 .5 2 .0 2 .5 3 .0 3 .5 4 .0 G re e ce Ita ly B e lg iu m F ra n c e S p a in P o rtu g a l S w e d e n Credit markets Credit markets are working more smoothly, but still there are many companies with difficulty obtaining a credit. Interest rate differentials between interbank rates and treasury bills have returned to levels from before the financial crisis. It has become easier for large companies to find funding, since the corporate bond market is working more smoothly at the same time that the equity market has strengthened thanks to an improving risk appetite and relatively good earnings in many companies following cost cuts. For small and medium-sized enterprises in many countries the difficulties are much greater. This also applies to households in the US, for example, who aren't finding conditions any better either. Regional banks will face problems as loan losses from residential and commercial real estate continue to rise. Credit demand is lower, while debt restructurings continue. We assume that the credit tightening will continue in 2010 and part of 2011 before gradually easing when the situation in the banking sector further improves. Demand for new credit will remain low for several years in countries where the financial crisis has been especially severe. Currency markets The US dollar has risen in value by about 5% against the euro since the beginning of the year. Consequently, the downward trend in the dollar we saw last year has been broken. One reason is the turbulence in the euro zone and higher growth and interest rate prospects for the US economy. We expect the dollar to continue to rise against the euro throughout the period, but the pace will slowly ease. The main beneficiaries of improving conditions in credit markets are large companies For small companies the situation is tougher We expect the dollar to continue to rise against the euro …
  21. 21. Swedbank’s Global Economic Outlook • 18 March 2010 21 The euro, yen and yuan against the US dollar (index August 2007 =100) S ource: R euters E coW in 98 99 00 01 02 03 04 05 06 07 08 09 10 70 80 90 100 110 120 130 140 150 160 170 Y en against the U S dollar E uro against the U S dollar Y uan against the U S dollar The yen is expected to slide against the dollar partly as a result of Japan's weaker finances and higher interest rate differentials, and partly because the yen is again becoming a funding currency for carry trades. The government is trying to actively weaken the yen through various pronouncements, but whether this will be effective remains to be seen. We expect the yuan to remain tied to the dollar for a few more quarters. Not until late in the year or in 2011, when exports and job prospects improve more sustainably, do we see a slow appreciation in the yuan against the dollar. External pressures will not speed up an appreciation, it may even be the other way around. Exchange rate assumptions 2010-2012 Outturn Outlook 17/3/2010 30/6/2010 31/12/2010 30/6/2011 31/12/2011 2012 (average) EUR/USD 1.37 1.35 1.30 1.25 1.22 1.20 RMB/USD 6.83 6.83 6.83 6.60 6.40 6.00 USD/JPY 90 98 105 112 115 115 Commodity markets Swedbank’s commodity price index fell by 3.6% in USD in February. The underlying trend remains upward, however, due to improving economic conditions, especially in emerging countries. A stronger dollar could slow the pace of recovery, however. We expect metal prices to continue to rise, as will the price of oil and to a lesser extent food prices. We assume a price of 75 dollars per barrel this year, 80 dollars in 2011 and 90 dollars in 2012. This represents a decrease of 5 dollars in 2010 and 10 dollars in 2011 compared with our January forecast. The main reasons are the more stable commodity price trend we have seen thus far this year and the stronger dollar. … and the yen as well … … while it will take longer before it weakens against the yuan We have revised our oil price projection downward
  22. 22. 22 Swedbank’s Global Economic Outlook • 18 March 2010 Commodity price developments Source: Reuters EcoW in 00 01 02 03 04 05 06 07 08 09 Index 50 100 150 200 250 300 350 400 450 Food price index Com m odity price index - excluding energy Com m odity price index - total Equity markets Stock prices posted their biggest gains in 2009 in emerging economies such as China, India and Russia. At the start of 2010 stocks have traded sideways in practically every market. The Greek crisis and weak government finances in many countries have been a concern, as has the uncertainty regarding China's policies, which are overly expansive and may be contributing to an overheated economy. Two other uncertainties that could affect stocks are financial regulation and exchange rates. In emerging economies there is a risk that bubbles will form. We expect stocks to continue to rise, but that volatility will be high with somewhat larger swings up and down than before. Stock exchange developments in the US, Japan, India, China, Russia and Europe Source: Reuters EcoW in 06 07 08 09 10 Index 50 100 150 200 250 300 350 400 Russia Japan China (Shanghai) India (M um bai USA (S & P 500 Big swings in stocks, but risk appetite will rise as concerns ease
  23. 23. Swedbank’s Global Economic Outlook • 18 March 2010 23 Real estate markets In countries where housing prices rose substantially during the 2000’s (Spain, UK, US, Ireland) prices fell for several years before beginning to stabilise or even rise slightly last year (US and UK). Ireland has not yet stabilised and appears to be the country facing the longest period of price corrections. Sweden and Norway haven’t seen prices drop all that much, and in fact they are again now rising to new peak levels. We could see a correction during the forecast period, while the trend will probably be cautiously upward in countries where prices have now fallen for several years. The phase-out of stimulus measures is critical, not least in the US, which still faces a major problem with commercial real estate, where prices trail by about 16 months. In other words, commercial real estate prices have yet to hit bottom. House price developments in some selected countries (Index 2000 =100) 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 7 5 1 0 0 1 2 5 1 5 0 1 7 5 2 0 0 2 2 5 2 5 0 S D K S P U S A U K N IR L 7. Regions/countries – divergence is growing We summarise our economic outlook for the US, Japan, China, India and Europe below. We will discuss the countries in our neighbouring region around the Baltic Sea later in our Baltic Sea Region Report. Compared with our projection a year ago, emerging economies, especially China and India, have grown faster than expected. At the same time we were too optimistic about what to expect in industrial countries. Although we predicted that GDP would fall, it did so more severely than we had thought. We now expect the divergence to further increase and have adjusted our estimates for emerging economies upward more than other countries, at the same time that fiscal consolidation is restricting GDP growth in the US, Europe and to some extent Japan. Factors that contribute to decoupling between industrial countries and emerging market economies are among the latter: sound fundamentals, strong fiscal position, the external position and large surpluses in the current account, stable The trend in housing prices should be upward in countries where corrections have been made The income gap between East and West is gradually shrinking
  24. 24. 24 Swedbank’s Global Economic Outlook • 18 March 2010 currencies, a recovery in commodity prices, higher potential growth and a better situation on the financial markets. Stimulus contributes to these countries being able to use domestic demand as a growth engine. Before the crisis, growth was export driven. If growth momentum is lacking in the industrial countries, and the economic policy is less expansionary, there is a risk that also emerging markets will loose growth in the years to come. Economic policy is focussed on supporting consumption in the US and exports in China. This means little has changed that would help to better balance global growth. Imbalances are shrinking, however. The US current account deficit is now down to around 3% of GDP. China's surplus is still substantial. In addition to a different currency policy, it needs greater structural reform to strengthen private consumption and reduce the incentives to save among the Chinese. This will take time, and until then new imbalances have been built up. The US – Unusually many obstacles along the road As we had predicted, the US economy grew in the third quarter of 2009 after four consecutive quarters of shrinking GDP. The growth rate further increased in the fourth quarter. The most important reasons for the gains are the economic stimulus, which strengthened consumer spending, as well as inventory investment and increased spending on IT, which are having a positive impact. Net exports have not been as important as they were earlier in the year. Economic issues at the state level and the lower defence spending contributed to lower public spending in the fourth quarter, contrary to what might have been expected given the political objectives. Contribution to US GDP growth (annual rate) Based on GDP growth, the recession seems to have come to an end. Jobs are still being lost, however, though not as much as previously expected. It will take a few more quarters before the NBER officially declares that the recession was over in early 2010. What is most likely to happen in the US economy in the years ahead and what will drive growth? The US is growing strongly mainly due to temporary factors
  25. 25. Swedbank’s Global Economic Outlook • 18 March 2010 25 We anticipate a relatively strong trend during the first half year, although the cold weather has initially slowed growth. During the second half year, when the effects of the stimulus subside and inventory investment contributes less to growth, the growth rate will weaken. For the year as a whole it should fall in the range of 2.5-3%, compared with about half that on an annual basis during the second half year. Underlying domestic demand will remain weak at the same time that a stronger dollar means that net exports will not provide as much of a boost as we saw at the beginning of last year. What are the key factors why the US economy hasn’t rebounded to a growth rate of 3-4% as it did after previous receessions? We estimate the potential growth has fallen to 3% or thereabouts. To absorb a growing working-age population, the market will have to generate around 100-125,000 jobs (net). If we exclude the national census, which will give upwards of 1 million people temporary work, the economy will not be able to replace the lost jobs in the labour market. Here follows the five most important reasons why the US is recovering more slowly than usual in this dynamic economy: Labour market and household income While the number of new jobs is not shrinking as much as before (-36,000 in February) and employment numbers are stabilising, there are an array of concerns. Recruitment plans are cautious. The labour supply is decreasing more than in previous recessions. Long-term unemployment (over 6 months) accounts for about 40% of the jobless figure. And the weak housing market is making it difficult for people to move to areas where work is available. As a result, the labour market has become less dynamic. If those who are involuntarily working only part-time are included, the numbers look even worse. Nearly 17% of the workforce has seen their buying power diminish, and that doesn't include those who are working full time but are receiving lower salaries and benefits. US labour market S o u r c e : R e u te r s E c o W in 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 Procent - 5 .0 - 2 .5 0 .0 2 .5 5 .0 7 .5 1 0 .0 1 2 .5 U n e m p lo y m e n t E m p lo y m e n tL a b o u r s u p p ly Growth will slow again during the second half year The risk is that the US job market has become less dynamic
  26. 26. 26 Swedbank’s Global Economic Outlook • 18 March 2010 Real estate market and private wealth For households that expected to retire on the appreciated value of their homes, the financial crisis was a wake-up call. Part of their wealth has been restored, but real wealth is still less than it once was. Before the crisis, equity in housing was around 60% but now it has fallen to 38% (up from the bottom at 35%). The housing market has shown signs of recovery, but can it be sustained? The stimulus has been a positive factor, but uncertainty is growing since some of the measures will be phased out, e.g., central bank purchases of mortgage bonds will end in late March. The spike in the chart below was due to tax rabates. Housing prices rose on a monthly basis in June- December of last year, but the increase was small and was affected by the many foreclosure sales. Price levels remain below their peak of July 2006 by about 30% in nominal terms. The number of foreclosure sales is expected to increase this year and exceed the total number in 2008 and 2009. About 25% of borrowers live in homes worth less than their mortgages. US housing market S o u rc e : R e u te rs E c o W in 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 Numberof(millions) 0 1 2 3 4 5 6 7 8 S a le s o f e x is tin g h o m e s R e s id e n tia l c o n ts tru c tio n S a le s o f n e w h o m e s Commercial real estate remains a major uncertainty in terms of both economic development and loan losses in the financial sector (particularly for smaller banks). About 75% of five-year loans on underwater properties were taken out in 2005 and will mature this year. The corresponding share of loans that mature in 2010-2014 (1,400 billion dollars) is estimated at 50%. New commercial real estate construction has fallen and will continue to do so. GDP growth has already slowed because of this, but the effect could be even greater. Commercial real estate prices have lost about 40% since peaking in 2007, and appear to be lagging after the housing market by about 16 months. Without the stimulus, the housing market would have weakened even more Commercial real estate represents a major risk for regional banks
  27. 27. Swedbank’s Global Economic Outlook • 18 March 2010 27 Credit market According to the Federal Deposit Insurance Corporation (FDIC), slightly over 700 American banks were in the danger zone last year. Non-performing loans make up of 8% of total loans, and the share will continue to increase. Part of the problem is related to commercial real estate, as noted above. Consumer credit increased slightly in January for the first time in a year, but it is too early to say whether the credit market has eased. According to central bank surveys, bank lending continues to decline, which is restricting growth. Large companies are borrowing in the bond market, while smaller companies are more dependent on bank capital. At the same time the National Federation of Independent Business (NFIB) is indicating that small and medium-sized enterprises are not especially interested in borrowing right now, since they have been greatly impacted by weak demand. Debt restructuring in the private sector Debt restructuring is taking time in the private sector. Debt in the credit market as a share of GDP fell in 2009 from about 375% to 350%, but will drop faster when GDP rises again. In the household sector total debt as a share of disposable income is dropping from 130% to 120%. Consumer credit has decreased as well, but only marginally thus far. There is good reason to expect further debt restructuring that keeps consumer spending in check. The household savings rate has increased, but could need to rise even more to restore lost wealth. American houshold debt as share of income S ource: R euters E coW in 60 65 70 75 80 85 90 95 00 05 10 0.15 0.16 0.17 0.18 0.19 0.20 0.21 0.22 0.23 0.24 0.25 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 C onsum er credit (rhs) Total debt (lhs) Finances at federal and state level In 2010 federal revenue will barely reach 15% of GDP, while expenditures are about 25%. This means that the budget deficit will continue to grow and is expected to exceed 10% of GDP. Even if there is little budget consolidation during the forecast period, the increased debt could affect financial markets, e.g., Lower supply and demand for loans is impeding growth Debt restructurings continue to impede growth
  28. 28. 28 Swedbank’s Global Economic Outlook • 18 March 2010 the dollar and interest rates. From a long-term perspective the problems are even bigger, since federal spending on health care and pensions is rising at the same time as interest expenses. The growth assumption of about 3-4% that serves as the basis of our long-term calculations is also too optimistic. A more acute problem is the weak economy in many states, which is offsetting the impact of the fiscal stimulus. For example, it is difficult to implement infrastructure projects when unemployment insurance is paid through federal loans that have to be repaid, which further limits growth. A stronger dollar is slowing the recovery Because growth prospects are slightly stronger in the US than the euro zone, and because of the growing tension affecting the euro, it is likely that the dollar will continue to strengthen, which could hurt net exports. At the same time inflation is being held in check. Even if China allows the yuan to appreciate, it will only do so slowly. President Obama’s goal of doubling exports within five years seems optimistic, especially when the dollar is likely to rise in the years ahead. What factors are benefitting the US? Corporate investments in new technology, especially IT. High productivity growth, which generates profit and holds inflation down at the same time that it provides a foundation for job growth once demand improves. There remains the possibility that additional stimulus packages may be introduced for small businesses, households and the housing market to keep growth going. A fiscal consolidation will probably have to be put for now, while monetary policy is cautiously becoming less expansive. Our conclusion is that the US economic recovery will continue, but slow slightly in the second half of the year. The rebound and stimulus measures are nevertheless generating GDP growth of 2.8%, but next year when the stimulus and inventory investment have done their part we expect GDP to rise a more modest 2,2%. In the absence of a major budget consolidation, there is the possibility of slightly stronger growth prospects in 2012 of around 2.5%, but forecast risks are growing, not least with regard to the financial and commodity markets, reform policy and market developments. Japan – Riding China’s growth wave Japan’s economy shrunk by just over 5% last year. In 2008 GDP fell by 1.2%. That makes this the most severe recession since World War II. The second and fourth quarters of last year The impact of the stimulus is offset by problems at the state level A stronger dollar is also slowing growth Trade with neighbouring countries is stimulating growth
  29. 29. Swedbank’s Global Economic Outlook • 18 March 2010 29 showed signs of growth, however, and a recovery is being helped by strong development in Asia. Exports are the main growth engine. In real terms private consumption has also risen, partly as a result of the government's initiatives to support greener, more energy efficient car purchases. GDP-growth in Japan (%) Source: Reuters EcoWin 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 -15.0 -12.5 -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5 10.0 Japan, GDP, annualized (Q/Q*4) Japan, GDP (Y/Y) Large companies are the biggest beneficiary of growth in China and the rest of Asia, while smaller companies are more reliant on the domestic market. The service sector is still relatively sluggish. As a result the labour market has not markedly improved. Unemployment has fallen marginally to just over 5%, mainly as the result of a smaller labour supply. Prime Minister Hatoyama and his party, DPJ, won the parliamentary election in August last year. In December the budget was presented for 2010. Social insurance expenditures have risen by 10%, while the investment budget, which is smaller, has been cut by 20%. More expansive fiscal policy, even though Japan already has the highest government debt among mature economies, requires that interest rates remain low for a long time to come. In December consumer prices fell by 1.7%, compared with the same month last year. Deflation has returned and according to Masaaki Shirakawa, Governor of the Bank of Japan is the result of globalisation and lower import prices and profit margins, at the same time that wages have fallen for an extended period and domestic demand is now decreasing substantially as a consequence of the global recession. Despite pressure from the government, the Japanese central bank has utilised quantitative easing sparingly. Instead the focus has been on measures that raise demand and future confidence. The country's new finance minster, Naoto Kan, is trying to get the yen to weaken, which would stimulate exports and reduce the deflation problem. Deflation is again a major challenge for the central bank and government
  30. 30. 30 Swedbank’s Global Economic Outlook • 18 March 2010 Given that economic policy is expected to be strongly expansive during the forecast period and that emerging countries in Asia continue to develop strongly, there is an opportunity for decent growth of around 2% this year. After some of the stimulus and recovery have had their impact, we expect GDP growth to reach around 1.5% in 2011 and 2012. Deflation will continue in both 2010 and 2011, but could ease in 2012 after demand improves for a while. The global market is a risk, as are requirements from outside the country (e.g., rating agencies are signalling that they want to downgrade the country’s credit worthiness) that fiscal policy must be tightened. Our expectations of a weaker yen are also a major uncertainty. China – Slow, less expansive economic policy China’s lowest GDP growth during the global recession was 6.1% in the first quarter of last year. Since then a V-shaped recovery has pushed the growth rate higher. In the fourth quarter GDP jumped as much as 10.7%. Growth has been driven by stronger exports and investment, higher consumption in the wake of the stimulus and rapid credit growth. Economic policy is and has been strongly expansive, with low interest rates, strong incentives for banks to lend and a currency tied to the expansive monetary policy in the US. There are several indicators that show that the Chinese economy is developing strongly. In February exports rose by 46% on an annual basis (base effects are important to the size of the upswing) and imports increased nearly as much due to higher commodity prices and quantities. Industrial production rose by slightly over 20% in January-February on an annual basis. Auto sales are another indicator of strong growth, climbing nearly 100% on average for January and February on an annual basis. The real estate market is overheated in some parts of the country, but at a national level the price increase is slightly over 10% on an annual basis. Inflation has risen quickly in recent months to the current level of 2.7%. Although the trend may be worrisome, the level is hardly so as yet. In an address to the national congress on 5 March, Chinese Premier Wen Jiabao said that no major policy changes were in the pipeline. Monetary policy will remain expansive, the renminbi is essentially stable and fiscal policy is proactive. The growth target is still 8%. In the months ahead interest rates and reserve requirements will be raised (as happened in January), but it is unlikely that there will be much in the way of austerity measures. Monetary policy will probably become slightly less expansive. Credit growth of nearly 20% is still expected this year, down from 70% in January. As a result, lending volumes will continue to rise, but not as much as before. Measures that increase consumption will be in place by the end of the year. On the other hand, there is a risk that health care The wheels of the Chinese economy are rolling along Some indicators are pointing to excessive growth Economic policy will remain the same or change in small steps
  31. 31. Swedbank’s Global Economic Outlook • 18 March 2010 31 and educational spending could decrease. Fiscal policy is likely to be neutral rather than expansive. Moreover, there are no major liberalisation proposals that would make migration legal within the country. Nor have any other, more structural measures been announced. One consequence of the financial crisis is that the stimulus and other measures have made state- owned enterprises more important. Small companies, on the other hand, have been left with an unlevel playing field, and some have been wiped out. The transition toward higher consumption and investment in the service sector/domestic market and reduced dependence on exports will take time. The figures for 2009 are not yet shown in the diagram below, but we can assume that export share decreased at the same time that investment share increased significantly and the consumption share was slightly higher. The investment share is reported to have increased to 45% last year. National account components’ share of GDP(%) S ou rce: R eu ters E co W in 78 80 82 84 86 88 90 9 2 94 96 98 00 02 04 0 6 08 CNY -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 C onsum ption Investm ent P u blic consu m ption E xports One way to speed up the transition to higher domestic demand would be to allow the renminbi to appreciate against the dollar. This would also offset the impact of any future inflation threat (inflation is likely to double by the end of the year, exceeding the 3-4% level the government is comfortable with). For China, its currency is a strategic tool in trade policy rather than a monetary tool. Not until it sees a more sustainable improvement in exports based on stronger underlying international demand that eases pressure on the Chinese labour market will the government consider loosening the link to the dollar. We expect this to happen no sooner than the end of the year or early next year. Strong exports of late must be followed up by equally high numbers in order to see a change sooner. GDP is expected to increase by 9.5% this year before slowing to 8.5% in 2011 and 8% in 2012. Less stimulus money and lower base effects will reduce the growth rate to the target level the government has set. Risks include an overheated economy China wants to decide when to allow the yuan to appreciate
  32. 32. 32 Swedbank’s Global Economic Outlook • 18 March 2010 in the form of rapidly rising consumer and asset prices. China also has to be worried about growing protectionism in other countries as a response to its currency and trade policy. India – Exceeding expectations thus far In our forecasts last year we overvalued the importance of the weak monsoon rains to economic growth. In our Asian Outlook from 20 January we revised our growth forecast upward to 7% and in 2010 and 7.5% in 2011. India’s strong development as a result of stimulus measures, increased capital inflows and growing domestic demand has now given us reason to revise our forecast upward by an additional half percentage point. As a whole, India has handled the financial crisis and global recession well. Although the monsoons have adversely affected the agricultural sector, measures to strengthen the labour market in rural areas have helped to raise the rate of consumption. Growing confidence among businesses and households is contributing to this. Spending on capital goods, especially cars and IT- related equipment, is strong. The improved performance of the financial market has made it easier for businesses to obtain credit, which in turn has been positive for the investment climate and earnings. One problem for many households is rapidly rising consumer prices. Even though wholesale prices, which are important to monetary policy, have not risen as quickly, the prices customers pay in both urban and rural areas have cut into their buying power. Major bottlenecks in the food supply chain are driving up prices, which monetary policy cannot effectively offset. The weak monsoon rains complicate an already difficult situation, but as the agricultural sector becomes stronger, the problem of inflated food prices will subside. The Indian central bank intends to reduce inflation to 4-5% in 2011/2012. Inflation developments in India S o u rc e : R e u te rs E c o W in 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 Percent -5 .0 -2 .5 0 .0 2 .5 5 .0 7 .5 1 0 .0 1 2 .5 1 5 .0 1 7 .5 2 0 .0 C P I a g ric u ltu ra l w o rk e rs C P I in d u s tria l w o rk e rs W h o le s a le p ric e s There is considerable strength in the domestic service sector High inflation is a problem, especially for those who buy a lot of food
  33. 33. Swedbank’s Global Economic Outlook • 18 March 2010 33 India’s fiscal situation gives us some cause for concern. The national debt has increased to over 80% of GDP and the budget deficit as a share of GDP was in the double digits in 2008 and 2009. There is a risk that this will remain the case in 2010. The budget consolidation being planned is overly cautious, especially considering that growth appears to be relatively sustainable. Large capital inflows are causing the rupee to appreciate despite the offsetting effects of inflation and fiscal policy. A stronger currency can be helpful in that it will help to keep inflation in check. On the other hand, it can also slow exports. We expect only a small appreciation to be allowed. Capital inflows are also affecting stock prices, which are not rising as much as last year, however. Avoiding bubbles in asset markets is also in the government's interest. Structural reforms aren't high on the agenda of either the parliament or the coalition government led by Manmohan Singh. To achieve consistently high GDP growth will require a more ambitious reform policy that makes the economy more competitive. We expect that stronger global and domestic demand will benefit the country's growth, so that it reaches 7.5- 8% in the years ahead. The budget situation and overheated product and asset markets are the biggest risks. EU & euro zone – Wrestling with internal tensions Europe has lagged behind the US and Japan thus far in the recovery. In the fourth quarter of 2009 the euro zone grew by only 0.1% compared with the previous quarter. Germany’s GDP was unchanged at the same time that the region’s confidence indicators fell slightly. This year French households have also begun to cut back on their spending. Three key factors are affecting development: 1) the end of the “wreck rebate,” which affected the fourth quarter of 2009 and the first quarter this year, 2) the impact on growth of the cold weather at the start of the year, and 3) growing concern about Greece’s financial crisis and its spread in the euro zone. The previously strong euro relative to the dollar may have also hurt exports, though we should see the opposite trend going forward since the euro has weakened in the wake of the Greek crisis. The inventory cycle has not contributed as much to growth as in the US, either, and the impact may lag behind. In the euro zone, the “Club Med” countries previously accounted for a large share of the region's consumption. But now that they are facing financial problems and have to tighten their belts more than other economies, there is a risk that domestic demand will decelerate, since Germany is unlikely to take the baton. German households have seen their buying power stagnate, while businesses are becoming more competitive by cutting labour costs. At the same time euro zone India will have to begin a budget tightening next year There are several reasons why Europe is recovering more slowly
  34. 34. 34 Swedbank’s Global Economic Outlook • 18 March 2010 economies are not dynamic enough. Considering the resistance that exists, it is not strange that the recovery has been slower and less impactful than in the US. It's a structural phenomenon. GDP-growth in the Euro zone (%) S o u rce : R e u te rs E co W in 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 Percent -7 .5 -5 .0 -2 .5 0 .0 2 .5 5 .0 7 .5 S p a in F ra n ce Ita ly G e rm a n y E u ro a re a U n ite d K in g d o m We expect GDP growth in the euro zone to remain weak at around 1–1.5% in 2010-2011 due to the phase-out of economic stimulus measures and budget consolidation in several countries. Even if the European Central Bank doesn't begin to raise interest rates until next year, some of the measures it took to alleviate the crisis will be eliminated, resulting in higher capital costs. The risks facing the euro zone include the banking sector and new loan losses as the economy continues to develop sluggishly at the same time that economic policy is tightened. In contrast to our main scenario, the region’s handling of budget deficits and its financing are also creating turbulence in financial markets. Individual countries in EU/euro zone: 1. Germany Although the global recovery has benefitted German exporters, it has not compensated for weak domestic demand. In the fourth quarter of 2009 GDP stagnated after having reported relatively decent gains in the second and third quarters. Investments are being impacted by excess capacity that still remains in industry. The construction sector reported weak activity, which may have also been the result of the cold weather. The end of the wreck rebate affected consumption, which fell for the second consecutive quarter.
  35. 35. Swedbank’s Global Economic Outlook • 18 March 2010 35 Business climate and industrial production (index) S o u rce : R e u te rs E co W in 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 Netbalance 8 0 8 5 9 0 9 5 1 0 0 1 0 5 1 1 0 Index2005=100 8 0 8 5 9 0 9 5 1 0 0 1 0 5 1 1 0 1 1 5 1 2 0 B u sin e s s c lim a te a cc o rd in g to IF O --> < --In d u s tria l p ro d u c tio n , to ta l The outlook for the German economy includes a weak recovery during the forecast period. Higher demand from North America and Asia is helping exports at the same time that imports are not rising as quickly. Households will benefit from lower income taxes and better social insurance in 2010, but are still expected to remain cautious due to the weak labour market and slowly rising inflation, which is holding their buying power in check. Lower purchases of imported capital goods are strengthening net exports. A weaker euro is expected to contribute to this trend. The labour market has not weakened as much as might have been expected, which is due to state subsidies to companies that retain jobs and reduce hours. We expect, however, that companies will have to cut labour costs to restore their competitive strength. Unemployment will continue to rise, which is impeding GDP growth and complicating fiscal policy. After balancing its budget in 2008, Germany reported a deficit of 3.2% of GDP in 2009. Due to weak GDP growth and the stimulus package, we anticipate that deficits will exceed 5% of GDP in 2010 and 2011. The overall impact on growth and public finances of the tax cuts that have been approved is difficult to determine. Germany’s goal is to cut the deficit to 3% by 2013 and limit its structural budget deficit to 0.35% of GDP by 2016. In addition, the federal states must balance their budgets by 2020. An expansive economic policy and stronger demand from non- European countries will help the economy to grow during the forecast period, but GDP growth of 1.3%, 1.5% and 2% in 2010, 2011 and 2012, still is just a modest improvement. Risks include weak confidence among households and businesses, price and labour market trends, more turbulence in the euro zone, and the need to more quickly tighten economic policy. Households are benefitting from further stimulus measures, but are keeping a tight grip on their purse strings The German labour market will continue to weaken Fiscal problems are reasonable compared with many other euro countries
  36. 36. 36 Swedbank’s Global Economic Outlook • 18 March 2010 2. France France’s economic slowdown in 2009 was relatively modest compared with many other countries in Europe. Its GDP fell by 2.2%, against nearly 5% in Germany, Italy, the UK and Sweden. One difference is that French households have seemed to be willing to spend more. The housing market has not collapsed and banks have not needed rescuing. The acceleration in GDP growth at the end of the year must be due to temporary factors such as wreck rebates and inventory investment. In contrast, net exports contributed negatively. Growth prospects include a recovery, with GDP rising slightly more than Germany’s due to stronger domestic demand. France’s companies could benefit a weaker euro, which could also alleviate the slowdown in investments. Another factor positively affecting investments is the government’s tax rebates for French companies in certain areas, which are expected to raise profit margins by 1 percentage point. The labour market continues to weaken, but not as much as before, especially in the service sector, where the number of temporary jobs is now increasing. A clearer turnaround in the labour market may take time, and consumer buying power is expected to grow slower this year than last. Inflation is rising slowly, while underlying inflation may even fall slightly due to relatively weak demand, which is making it more difficult for companies to pass on price increases to the next level. France’s government has decided to continue to stimulate the economy, despite that the budget deficit reached nearly 8% of GDP last year. This year the deficit is rising toward 8.5% of GDP due in part to the tax rebates. Not until 2011 will a consolidation begin, probably by reducing spending on social insurance and health care, among other things. The measures seem insufficient if the goal is to reach the Stability and Growth Pact’s target of 3% of GDP. The government’s plans to reform the pension system could be important in the longer term. GDP is expected to rise by 1.5% this year, 1.8% in 2011 and 2.2% in 2012. Risks include global demand, price and employment trends, and turbulence that increases France’s interest rate differential relative to German government bonds and raises financing costs, so that the budget has to be consolidated faster. 3. Italy The Italian economy fell by 1% in 2008 and nearly 5% in 2009. Growth was negative in the fourth quarter of last year as well. Only public spending contributed positively to growth. Consumer buying power has decreased, and consumption even more so, which has led to a higher savings ratio. Households, banks and the housing market have helped to maintain growth The government’s tax rebates for local companies can lead to increased investment and job growth France’s government has to be clearer about its budget situation
  37. 37. Swedbank’s Global Economic Outlook • 18 March 2010 37 Industry has continued to downsize. Due to considerable overcapacity, we expect investments and employment to further decline before eventually bouncing back. Italian companies are hurt by their weak competitiveness and have a lot to gain from a depreciation of the euro. Initiatives are needed, however, to increase innovation and strengthen labour productivity. Italy's national debt is high, having already reached 114% of GDP. This puts it in Club Med, although the trend during the crisis has been better than in neighbouring countries. After preliminarily reporting a deficit of 2.7% of GDP in 2008, the deficit grew to 5.3% in 2009. It is expected to stabilise at around this level through 2011. Slow growth, which we estimate at 0.5%, 1% and 1.5% for the three forecast years, is clearly a risk for the government. In addition, the financial market’s friendly attitude toward Italian government bonds may change if the turbulence in the euro zone were to grow, which would increase interest rate differentials and financing costs for the government’s high debt. Unemployment in some Euro zone countries (% of labour force) S ource: R euters E coW in 94 96 98 00 02 04 06 08 Procent 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0 S pain France Italy G erm any 4. Spain Spain’s GDP has shrunk for six consecutive quarters. The global recession is a contributing factor, but the Spanish economy has its own imbalances that must be addressed: high levels of debt in the private sector, overcapacity in housing after a construction boom and a downward correction in housing prices. We expect GDP to decline in 2010, but that a weak recovery could begin during the second half of the year driven by strong public spending as well as the export sector. On the other hand, investments will continue to shrink for a while at the same time that households cautiously begin to increase their spending in 2011, when conditions in the labour market stablise. The housing market has not yet hit bottom and prices will continue Competitive weakness is a problem that can be alleviated Spain is wrestling with both a global and internal crisis
  38. 38. 38 Swedbank’s Global Economic Outlook • 18 March 2010 to fall. The banking sector may be affected more adversely than before, since the construction and real estate sector are facing more adjustments. Weak real estate and labour markets are complicating fiscal conditions. Structural reforms are needed to increase flexibility in the labour market, where wage stagnation is an issue. Unlike Greece, Spain posted a budget surplus before the crisis. Unemployment of around 20% will mean lower revenue and higher expenditures, however. The deficit as a share of GDP is expected to exceed 11% this year. To keep costs down and finance the growing national debt (currently 55% of GDP), an action plan has been presented that will cut the deficit to 3% of GDP by 2013. Measures to improve conditions in the slightly longer term include reforms of the labour market and pension system. GDP is expected to shrink by 0.5% this year before growing by 0.7% in 2011 and 1.7% in 2012. Factors that are holding growth in check include the budget consolidation, debt restructuring in the private sector and weak tourism, which is slowing growth in the service sector. Risks include global developments, the government’s belt tightening and the financial market’s valuation of Spain's commitments. 5. UK After having shrunk for six quarters, GDP grew by 0.3% in the fourth quarter of 2009. The construction sector seems to have stabilised, while manufacturing has benefitted from a weaker pound and the global recovery. The British economy is still wrestling with debt restructurings of the private sector and a weak financial sector. The parliamentary election that must be held before 3 June represents a growth risk, since the Conservatives, who are expected to win, have announced that they will tighten the government's finances faster and more than the sitting government. A budget deficit of around 14% of GDP is creating uncertainty in the financial markets. The ten-year government bond has risen over 4%, and its upward trend has been sharper than in the US and Germany. We nevertheless expect the Bank of England (BoE) to begin a period of discount rate hikes later in the year, but that the trend will slow. Inflation has risen, but mainly due to temporary factors such as a VAT increase and higher energy prices. Although a further drop in value for the pound could create uncertainty, we expect domestic inflation pressures to remain under control. The BoE has opted not to extend its quantitative easing, but that more government bonds could be purchased later. Despite a substantial increase in the monetary base, the money supply continues to rise very slowly. Conditions in the British economy reflect this uncertainty. We have revised GDP growth upward marginally this year to 1,1% since the pound has weakened more than previously expected. Weak labour and real estate markets are a concern A new government may be willing to speed up the budget consolidation BoE is taking a calmer approach to discount rates
  39. 39. Swedbank’s Global Economic Outlook • 18 March 2010 39 On the other hand, we have revised growth prospects downward for 2011 by from 1.9 % to 1.6% against the backdrop of the budget consolidation process as well as austerity measures in the rest of Europe, which could hurt British export prospects. The UK expects to reach a more “normal” growth rate of 2.2% in 2012, but the critical factor here, in addition to global demand, is domestic economic policy. 8. Consequences for our home markets Following is a summary of some of the implications of global development for our home markets: • Companies and households can expect global demand to rise, but not consistently. Salaries and incomes will grow weaker than during the years before the crisis. • Growth will be higher in the emerging economies, than in more mature countries that are first wrestling with less expansive economic policy and then austerity measures. 2011 could be a difficult year, especially since many European countries are facing an acid test. • Companies should focus on increasing their market share in emerging markets, where activity is high, but not ignore opportunities to gain share in European markets that have historically been a strong foothold. There are volumes here that companies shouldn't miss out on. • Sweden will not have to tighten its belt to the same extent as many other European countries. On the other hand, jobs and the government's finances may be hurt by weaker development in export markets. • Polarisation in the Swedish economy has increased due to the recession, and this means that jobs and wages will vary depending on where demand is found. Given the economic conditions we now face, it is even more important to maintain high flexibility, so that jobs and companies aren't wiped out unnecessarily. • Globalisation is a reality, and competition from emerging countries is growing. For companies in our home markets, the key is to increase value-added through innovation, because it is easy to copy most things, but not creativity. More investment in education, occupational training and research & development (R&D) are needed to become more competitive. • Sweden belong to countries where imbalances could still rise to the expansioary economic policy during the crisis. The debt ratio in the Swedish household sector is increasing and credit quality is rising fast, as are housing prices. It could be hard to maintain a monetary policy that differs significantly based on the rest of the world and the output gap. This is why monetary policy has to be complemented by more
  40. 40. 40 Swedbank’s Global Economic Outlook • 18 March 2010 stringent regulation. It will not be possible to wait for global or regional regulation as domestic conditions demand that measures are taken earlier. • Sweden and the Baltic countries should closely follow the possible structural changes in the EMU. Next Swedish referendum will deal with an entirely different institution than the last referendum did. Cecilia Hermansson Swedbank Economic Research Department SE-105 34 Stockholm, Sweden Telephone +46-8-5859 1588 ek.sek@swedbank.se www.swedbank.se Legally responsible publishers Cecilia Hermansson, +46-8-5859 1588. Magnus Alvesson, +46-8-5859 3341 Jörgen Kennemar, +46-8-5859 1478 ISSN 1103-4897 Swedbank, Global Economic Outlook is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s Global Economic Outlook.

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