The document summarizes the state of the global economy in January 2011. It finds that while the global recovery continues, growth prospects have dimmed slightly from 2010's strong rebound. Rising commodity prices and inflation are creating risks. Inflation is a growing threat, forcing companies to cut costs and limiting job and economic growth. Emerging economies continue to power the recovery, while developed nations struggle with debt and budget consolidation.

1. The Global Economy
Monthly letter from Swedbank’s Economic Research Department
by Cecilia Hermansson No. 1 • 26 January 2011
Inflation is a growing risk for the global economy
• The global recovery continues, although growth prospects have dimmed slightly
compared with last year’s strong rebound. Rising commodity prices and higher
inflation are creating greater risks for the global economy. As cost levels and
interest rates rise, it is forcing companies to further rationalise – which is
constraining jobs and economic growth.
• Expansionary monetary policy in the West is creating an illusion of greater
wealth, but doing little to accelerate the recovery in the US, for example, which
continues to struggle with its remaining structural problems. Risks rise for the
global economy when liquidity flows to emerging economies and commodity
markets. Emerging economies have to accept stronger currencies and do more
to avoid overheating. Responsibility for creating a balance in the global
economy rests with both developed nations and emerging economies.
Corporate confidence has improved early in the
Global economy continues to strengthen year, especially in Germany, though also in France
and Belgium, which is another reason for continued
The global recovery continues. Momentum will slow optimism.
slightly, however, since last year was exceptionally
strong due to inventory build-up and economic Last year GDP rose by as much as 3.6% in
stimulus from governments and central banks. The Germany and 10.3% in China, exceeding many
positive effects may linger into this year, but won't forecasters’ expectations. We have to remember,
produce quite the same growth impulses. though, that the Chinese figures were released just
three weeks after the year ended. The uncertainty
GDP growth (%) interval for China’s growth is rarely brought up in
1 5 .0
C h in a the public debate.
1 2 .5
1 0 .0
In our most recent economic report on January 13
7 .5
In d ia we revised GDP growth to nearly 4% for 2011 in
5 .0
B r a z il US PPP-weighted terms (and to slightly over 3% in
Percent
2 .5
dollar terms).
0 .0
- 2 .5 E u ro z o n e
As in earlier monthly letters, we mention that GDP
- 5 .0
Japan growth is unevenly divided between the world's
- 7 .5
countries and regions. Emerging economies are still
- 1 0 .0
R u s s ia the locomotive, while much of the West is busy
- 1 2 .5
06 07 08 09 10 reducing debt and consolidating budgets.
S o u r c e : R e u te rs E c o W in
This is especially evident when analysing industrial
On the other hand, countries such as Germany and production, which in emerging economies is already
China have such statistical overhangs that we have far beyond pre-crisis levels, but in the euro zone
had to revise growth higher for 2011. and the US remains far below previous peaks.
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46-8-5859 7740
E-mail: ek.sekr@swedbank.se Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson, +46-8-
5859 7720, Magnus Alvesson, +46-8-5859 3341, Jörgen Kennemar, +46-8-5859 7730, ISSN 1103-4897

2. The Global Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 1 • 26 January 2011
Industrial production levels (index 2000=100)) energy account for a big chunk (read emerging
220
Euro Zone
economies), and modest in more developed
200 Emerging Markets nations.
Total
USA
180
Consumer Price Index in various countries (change in %)
160 6
UK
5
140 USA
E u ro z o n e
4
120
3
100
Percent
2
80 1
00 01 02 03 04 05 06 07 08 09 10 Sweden
20 20 20 20 20 20 20 20 20 20 20 0
-1
Japan
-2
The Purchasing Managers Index points to
-3
continued industrial growth in several countries. 02 03 04 05 06 07 08 09 10
Looking at the overall picture, 20-25% of the loss in S o u r c e : R e u t e r s E c o W in
production has been recovered. Japan is an
exception, where purchasing managers are In some countries, a stronger currency could slow
reporting shrinking new orders and production, the rise in prices, but in the euro zone the problem
possibly due to the difficulty competing with a of higher international commodity prices is
relatively strong yen and possibly because of exacerbated by a weaker euro.
growing competition from China and other Asian
countries. The increase in commodity prices is partly due
purely to supply problems (climate impacts on
Purchasing Managers Index harvests and mining) and partly to stronger global
70 demand for commodities as the global recovery
65 continues. The political situation in the Middle East
60 could become an increasing supply concern.
55
50
There is also reason to expect that the quantitative
45
easing to raise inflation expectations and asset
USA
UK
prices in the US and to some extent also in Europe
40 Japan
E u ro zo n e
C h in a
is driving speculation in commodity markets.
35
In d ia
Sweden Swedbank’s Commodity Price Index has risen by
30
over 30% since August 25 of last year, when Fed
25
06 07 08 09 10 Chairman Ben Bernanke held a speech in Jackson
S o u r c e : R e u t e r s E c o W in
Hole, Wyoming that paved the way for starting up
the printing presses.
Inflation grew in importance in 2011 Monetary policy shocks and commodity prices (excl. oil)
After the financial crisis the focus shifted to deflation 200
risks in the countries that are facing a period of debt
180
consolidation and weak domestic demand. This
isn't over yet (it took four years before Japan saw 160
deflation after its crisis in the early 1990’s), but the
140
risks are much smaller. This year the focus will
instead be on inflation risks, mainly in emerging 120
economies. There are several reasons why and
100
they are predominantly linked to commodity
markets. We and other forecasters risk this year 80
Number of months after shock --->
undervaluing both the rise in commodity prices and 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
inflation, and the effects on growth and Nixon- Dec 71 Greenspan-Bernanke- July 03 Bernanke- Dec 08
employment.
The current situation reminds Ronald McKinnon,
Commodity prices have risen significantly in the last
professor of international economics at Stanford
half year, which explains the big increase in the
University, of the monetary shock the Nixon
consumer price index in countries where food and
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3. The Global Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 1 • 26 January 2011
administration helped to cause in 1971. He has In China, authorities have taken up the fight against
warned that quantitative easing could lead to higher inflation, at the same time that they are concerned
global inflation as countries try to prevent their about tightening too much, which could threaten
currencies from appreciating too much (Europe growth. Inflation fell from slightly more than 5% in
then, Asia and Latin America now). This isn't November to 4.6% in December. Of course the
without risk for the US, either. After several years it inflation pressures faced by the public are much
too could feel the effects of inflation impulses higher than indicated by the official CPI figure.
coming back to the US from abroad.
China: Credit expansion and consumer prices
Emerging economies such as China, India and (change in %)
3 7 .5 9
Brazil face the biggest risk that inflation could put 3 5 .0 8
an end to the good times. Economic policies have 3 2 .5 C o n s u m e r p r ic e s - - - > 7
to be tightened, and higher inflation is taking a 3 0 .0 6
2 7 .5
bigger bite out of consumers’ wallets, keeping them 2 5 .0
5
4
from spending. Investors will require higher returns
Percent
Percent
2 2 .5 3
on the government bonds these countries issue. 2 0 .0 2
1 7 .5 1
Commodity-dependent companies in every country 1 5 .0 0
1 2 .5 -1
in the world have to work harder to cut costs in 1 0 .0
< - - - C r e d it e x p a n s io n
-2
order to offset higher commodity prices, which in 7 .5 -3
98 99 00 01 02 03 04 05 06 07 08 09 10
turn increases the pressure to improve productivity S o u r c e : R e u t e r s E c o W in
and limits the need for hiring new workers. Lower
profit margins could also hurt stock prices and slow
the recovery in Western credit markets. Central Important to take responsibility for prices
banks may feel forced to raise interest rates earlier We feel it is risky to maintain highly expansionary
than warranted by economic conditions otherwise. monetary policies in the West, since capital flows to
For example, the ECB is facing growing pressure to emerging economies and commodity markets, are
raise its benchmark interest rate if inflation causing imbalances.
surprises on the upside, despite that the debt crisis
in the PIIGS countries is far from over. At the same time it is important to note that
responsibility also rests heavily with emerging
It is important, however, to carefully analyse what countries, which – as their name implies – have
the higher inflation is caused by. In the UK, it is placed too much emphasis on growth and too little
largely the result of fiscal austerity measures that on avoiding an overheating. The central banks and
include higher VAT and tax rates, as well as a governments in many emerging countries have
weaker pound, which is raising import prices. These been late to tighten monetary and fiscal policy.
are temporary effects. Capital costs are generally too low and real interest
rates are often negative. This isn't responsible
In the West, many countries have to continue to economic policy.
save and consolidate their budgets, which slows
domestic demand and limits pricing pressures in the Cecilia Hermansson
labour market. It is not likely that higher commodity
prices will easily spread to other sectors and create
more price pressure for the economy as a whole.
But this uncertainty is the only thing that can get
central banks to take action.
Swedbank
Economic Research Department Swedbank’s monthly The Global Economy newsletter is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
SE-105 34 Stockholm, Sweden
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
Phone +46-8-5859 7740
completeness of the report and cannot be held responsible for any error or omission in the
ek.sekr@swedbank.se
underlying material or its use. Readers are encouraged to base any (investment) decisions
www.swedbank.se
on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-88-5859 7720. monthly The Global Economy newsletter.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 7730
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