Nordic Outlook November 2010

Nordic Outlook Somewhat brighter growth outlook
Economic Research – November 2010 — but mounting policy challenges

Contents

International overview 5

Theme 16

The United States 18

Japan 25

Asia 26

The euro zone 29

The United Kingdom 35

Eastern Europe 36

The Baltics 37

Sweden 39

Denmark 48

Norway 49

Finland 53

Economic data 54

Boxes

Ireland the focus of new debt worries 8
Calmer commodity price trend 10
Basel III update 15
Unusually weak recovery 19
Economy vulnerable to energy price shock 20
Long-term unemployment on the way down 20
QE will push up growth a bit 21
The market is worried about inflation 22
A plan to get the deficit under control 24
A 20 per cent probability of recession 30
Watered-down sanctions when EU Stability and
Growth Pact is revised 32
Does the krona risk becoming too strong? 44

Nordic Outlook – November 2010 | 3

Economic Research

This report was published on November 24, 2010.

Cut-off date for calculations and forecasts was November 18, 2010.

Robert Bergqvist Håkan Frisén
Chief Economist Head of Economic Research
+ 46 8 506 230 16 + 46 8 763 80 67

Daniel Bergvall Mattias Bruér
Economist Economist
+46 8 763 85 94 + 46 8 763 85 06

Ann Enshagen Lavebrink Mikael Johansson
Editorial Assistant Economist
+ 46 8 763 80 77 + 46 8 763 80 93

Andreas Johnson Tomas Lindström
Economist Economist
+46 8 763 80 32 + 46 8 763 80 28

Gunilla Nyström Ingela Hemming
Global Head of Personal Finance Research Global Head of Small Business Research
+ 46 8 763 65 81 + 46 8 763 82 97

Susanne Eliasson Johanna Wahlsten
Personal Finance Analyst Small Business Analyst
+ 46 8 763 65 88 + 46 8 763 80 72

SEB Economic Research, K-A3, SE-106 40 Stockholm

Contributions to this report have been made by Thomas Köbel, Klaus Schrüfer, SEB Frankfurt/M and
Olle Holmgren, Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible for the Norwe-
gian analysis. Financial analyses are done in collaboration with Trading Strategy and SEB Enskilda Equi-
ties.

4 | Nordic Outlook – November 2010

International overview

Brighter growth outlook, but
mounting policy challenges

ƒ Fed’s stimulus programme will help During the next couple of years, we foresee no major
inflation risks in the 33 countries of the Organisation
ƒ Low inflation despite challenges for Economic Cooperation and Development (OECD),
ƒ Continued debt worries in the euro zone despite the ultra-loose monetary policies now being
pursued. Rising commodity prices and the effects of
ƒ Dilemma for Nordic central banks weaker currencies will lead to slightly higher inflation,
but deflationary forces will continue to predominate.

In recent months the world economic outlook has This means there is room for central banks in major
become somewhat brighter. Expectations of quantita- OECD countries to hold off on hiking their key inter-
tive easing (QE) by the US Federal Reserve contributed est rates for at least another year or so. In addition,
to stronger optimism, reflected among other things in the effects of quantitative easing by the Fed and other
rising share prices. Meanwhile underlying economic central banks will also help keep longer-term market
signals in the United States have been more reas- interest rates down and stimulate asset prices. Over the
suring, after major disappointments during the sum- next couple of years, fiscal policies in OECD countries
mer. Emerging economies have continued to perform will not be as contractive as we previously expected,
strongly, and worries about a hard landing in China and but ongoing debt retirement − mainly in the private
elsewhere have diminished. In Europe, too, economic sector − and lingering weaknesses in the financial sys-
signals have been positive, for example in Germany, the tem will help blunt the effects of monetary policy.
United Kingdom and various Nordic countries. At the
same time, though, uncertainty about the government On the whole, we regard a somewhat higher growth
financial crisis in southern Europe and Ireland has once forecast than previously as justified. We have raised
again increased alarmingly. both our 2010 and 2011 GDP forecast by 0.3 percent-
age points, both for the OECD and emerging markets.
Our upward revision for 2012 is somewhat smaller.
Global GDP growth
Year-on-year percentage change A low-interest environment, growth slightly above trend
in the OECD countries and continued strong growth in
2009 2010 2011 2012
developing economies will mean a relatively favourable
United States -2.6 2.7 2.2 3.4 environment for the stock market.
Japan -5.3 3.1 1.6 1.5
GDP, OECD countries
Germany -4.7 3.6 2.5 1.8 Index 2000 = 100
130.0 130.0
China 8.7 10.2 9.0 8.0
127.5 127.5
United Kingdom -5.0 1.7 2.1 2.1 20%
125.0 125.0
Euro zone -4.0 1.6 1.7 1.5 122.5 122.5

Nordic countries -4.5 2.7 2.8 2.4 120.0 120.0
117.5 25% 117.5
Baltic countries -15.6 0.9 4.0 4.5
115.0 115.0
OECD -3.3 2.5 2.3 2.5 112.5 SEB forecast 112.5
Emerging markets 2.5 7.1 6.3 6.5 110.0 110.0
107.5 107.5
World, PPP* -0.6 4.7 4.1 4.5
04 05 06 07 08 09 10 11 12
World, nominal -1.3 4.0 3.4 3.8
New crisis wave SEB's main scenario
* Purchasing power parities Rapid recovery
Source: OECD, SEB

Source: OECD, SEB
In our August report, we made the assessment that
the downside risks to our main economic scenario



outweighted the upside risks. This time, we foresee ing process in the financial system and household debt
somewhat more symmetrical risks. The probability of retirement is under way. In the US, a clear improve-
stronger economic performance has increased from 15 ment in the labour and housing markets will not occur
to 20 per cent, mainly due to changes in the US risk until well into next year. Only then can consumption
picture. provide genuine support to the economic recov-
ery. German consumers remain cautious and need the
Capital spending growth will be crucial encouragement of slightly higher pay increases ahead,
In the OECD countries, the slowing trend in the re- while tough austerity programmes will limit the poten-
covery that we foresee in late 2010 and early 2011 is tial for an upturn in British consumption.
partly connected to the waning strength of the inven-
tory cycle. In the US, this is reinforced by the fading Economic policy challenges at many
of federal fiscal stimulus measures. Debt retirement in levels
the household sector after the bursting of the housing While the economic outlook for the next couple of
bubble will hamper consumption during the next couple years seems a bit brighter, international economic
of years. An upswing in capital spending is therefore policy collaboration faces a variety of challenges and
vital in order to ensure a continued recovery. conflicts. Despite lofty ambitions − for example in the
Group of Twenty (G20) countries − when it comes to
In some respects, the situation looks rather hopeful.
coordinating economic policies in response to global
Capital spending has taken off in many countries during
imbalances, this autumn has been full of disappoint-
2010. Although upturn figures have been high because
ments. Progress at the recent G20 summit in Seoul,
fixed investment was deeply depressed in 2009, there
South Korea, was limited. In currency policy, for
are factors that point towards a sustained recovery:
example, tensions have escalated. The task of rebuild-
ƒ Non-residential fixed investment is deeply de- ing euro zone institutions is also characterised by major
pressed, even in a longer time perspective. Unlike conflicts. Meanwhile efforts are under way to reform
normal economic expansions, the capital spending the infrastructure of the financial system. International
level in the OECD countries remained rather low bodies are examining the potential for developing new
during the 2006-2007 boom. instruments to make the credit market more stable and
less pro-cyclical. Several boxes and our Theme article
ƒ Balance sheets, especially in large American corpo- discuss these issues later in this report.
rations, are much stronger than normal. This will
make larger self-financing of capital investments Current accounts
possible, facilitating the upturn while the financial Per cent of GDP
12.5 12.5
system remains relatively fragile.
10.0 10.0
ƒ Historical associations signal that capital spend-
7.5 7.5
ing growth is more dependent on the change in
5.0 5.0
capacity utilisation than on its actual level. This
2.5 2.5
indicates that a recovery in fixed investments may
0.0 0.0
begin at an earlier stage.
-2.5 -2.5
US: Non-residential fixed investments
-5.0 -5.0
As a percentage of GDP, current prices
-7.5 -7.5
14.5 14.5
99 00 01 02 03 04 05 06 07 08 09
14.0 14.0
13.5 13.5 China Euro zone Sweden
13.0 13.0 US Japan
Source: IMF
12.5 12.5
12.0 12.0
Fundamentally, the challenges are all about getting to
11.5 11.5
grips with the imbalances and systemic deficiencies
11.0 11.0
10.5 10.5
that triggered the crisis, but also easing the impact
10.0 10.0 of the somewhat uncoordinated stimulus policies
9.5 9.5 now being implemented, which themselves create new
9.0 9.0 problems.
70 75 80 85 90 95 00 05 10
Many countries face a two-dimensional challenge when
Source: US Department of Commerce
it comes to contributing to a rebalancing of the world
Although US small businesses are still suffering from economy. It is a matter of formulating fiscal, monetary
fairly restrictive credit conditions, we thus foresee and structural policies in ways that contribute to better
good capital spending growth as an important driving balance, both short- and long-term and in a national
force for economic expansion during a period when the and international perspective.
inventory cycle is losing momentum. Meanwhile a heal-



Internal rebalancing is a matter of phasing out pub- economy: overly aggressive stimulus policies in low in-
lic stimulus and aid policies as soon as more private terest rate countries or an excessively cautious commit-
investments and consumption can take over as growth ment to domestic driving forces in surplus economies.
engines. External rebalancing, for some countries, is
a matter of such steps as reducing their dependence Some of the drawbacks associated with extreme stimu-
on consumption-driven growth and increasing their lus measures have thus appeared earlier than expected.
dependence on exports. For others, such as China, it is These effects, in the form of a weaker US dollar and
the opposite: reducing dependence on exports in favour rising commodity and asset prices, do not primarily af-
of domestic demand. fect the countries that implement such measures, but
affect other parts of the world via global transmission
Mounting currency-related tensions mechanisms.
The world economic situation, with rapid growth in
The main targets of criticism are excessively cautious
many emerging economies as well as continued dif-
Chinese currency policy, on the one hand, and overly
ficult financial problems and a fragile recovery in large
aggressive stimulus programmes in the US, on the other.
portions of the OECD countries, requires a wide variety
At the G20 summit in Seoul, the US tried to launch a
of suitable political medicines. The forces driving
proposal to restrict how large a country’s current ac-
currency movements have been dominated by these
count surplus or deficit could be. A proposal to establish
cyclical differences. Currencies have appreciated in
such a restriction equivalent to 4 per cent of GDP was
countries with strong government finances and where
voted down, but the IMF will continue examining similar
the central bank has been able to withdraw part of its
ideas and will report back to the next G20 summit. It is
monetary stimulus. In many cases, these are countries
obvious, however, that international political coopera-
with large commodity exports that have benefited from
tion is not strong enough at present to resolve all the
high prices. Fundamentally, this is a trend that often
disagreements that have arisen.
contributes to better global balance, since many prob-
lem countries receive a little extra help from exports,
Emerging economies will remain the
whereas currency appreciation cools off rapidly-growing
economies.
engine
Emerging economies, especially in Asia, will continue
In recent months, however, this trend has led to more to serve as the largest engine in the world economy.
troublesome consequences, resulting in currency policy During the next couple of years GDP will increase by
tensions − sometimes described as “currency war”. One 6-7 per cent in emerging economies, compared to OECD
basic reason for this is the ultra-loose monetary policy growth close to the trend level: about 2½ per cent. As
being pursued in the US, the euro zone, Japan and a share of global GDP, Asian emerging economies have
the UK, culminating in the Fed’s quantitative easing. now climbed to just below one fourth. The proportion
Because of the “search for returns”, surplus liquidity of global exports destined for these economies has risen
migrates to countries with higher potential returns. from less than 5 per cent in 1980 to nearly 15 per cent.
This increases currency appreciation pressures in
export-dependent countries, especially in Asia. These Asian emerging economies
countries have responded by resorting to currency As a percentage of the global economy
interventions. In recent months, various countries have
also used financial regulation, tariffs and taxes to stem 1980 1990 2000 2009
the inflow of foreign capital. GDP 7.9 11.0 15.1 22.6
Exports 4.7 5.5 9.5 15.9
In the OECD, there is a milder version of the same
dilemma for countries that are now on the way towards Imports 4.6 5.7 8.3 14.5
slowly tightening their monetary policies. In the pre- Accumulated
vailing low-inflation environment, currency apprecia- direct investments 4.4 4.9 6.0 8.3
tion has helped squeeze inflation to levels perceived as NOTE: South Korea, Hong Kong, Singapore and Taiwan are
uncomfortable. Central banks are thus abstaining from classified as developed and are not included here.
normalising interest rates to the extent that domestic Sources: IMF, UNCTAD, SEB
factors would justify. This also applies to Norway and
Sweden, for example. Among the 10 largest economies, Asian emerging economies largely managed to avoid
Australia is now the only one that has not cited cur- the downturn that affected the OECD countries during
rency rate trends as a reason to slow the pace of its key the crisis years, then began a rapid recovery. This is
interest rate hikes. due to several factors. The role of intra-regional trade
has increased. Meanwhile improved macro policies and
Disunity on policy conclusions greater flexibility have made these economies more
One reason why international cooperation has seized up resilient in the face of global downturns. From a growth
this autumn is differences of opinion about what is the standpoint, the potential for “decoupling” − with dif-
fundamental reason behind the imbalances in the world ferent growth paths for emerging economies and OECD
countries − has increased.



Ireland the focus of new debt worries
Market worries about European sovereign debt Yet the underlying situation in Ireland and Portugal
problems have intensified again. Rising risk premi- is not as serious as in Greece. The two countries
ums for Ireland and Portugal have pushed up their have lower government debt and better underlying
government bond yields to levels well above those credibility. They consequently have a good chance of
prevailing before the bail-out package for Greece and avoiding defaults or debt write-downs. IMF studies
the European Financial Stability Facility (EFSF) were show that markets often overreact in crises and that
launched last spring. the upturn in yields is not due to bad fundamentals
alone. International aid also provides political leaders
Renewed market worries
Yield spread vs Germany, 10-year government bonds
with a form of backing that enables them to imple-
10 10 ment unpopular belt-tightening measures.
9 9
8 8 Ireland and Portugal are also such small economies
7 7 that the financial aid mechanisms now in place will
6 6 be able to deal with their problems. Instead, devel-
5 5 opments in Spain will determine whether the Euro-
4 4
pean debt crisis will again dominate global financial
3 3
2 2
markets. The sovereign debt problem is smaller in
1 1 Spain than in the other PIIGS countries (Portugal,
0 0 Ireland, Italy and Greece). On the other hand, Spain
Oct Jan Apr Jul Oct Jan Apr Jul Oct has a larger external debt burden if the private sector
08 09 10
France Ireland Portugal is also included. Signals of renewed economic weak-
Greece Italy Spain ness are also especially serious in a situation where
Source: Reuters EcoWin
unemployment is around 20 per cent.
The banking crisis has made the situation acute in
Ireland. Costs related to saving the banking sector Although our main scenario is that Spain will manage
will push up the Irish government budget deficit to without international help, there will be continued
more than 30 per cent of GDP this year: money that uncertainty ahead. Wider yield spreads between euro
has not yet been borrowed in the market. Excluding zone countries will probably also persist during the
bank support, the deficit is more than 10 per cent of foreseeable future. The market has learned the les-
GDP. The uncertainty surrounding Ireland’s banking son that even in the euro zone, risks must be priced
system showed to be too large for general govern- on the basis of the conditions in each respective
ment austerity programmes to calm the markets. country. European institutions also seem to need a
Ireland, EU and the IMF have now agreed on a sup- certain level of pressure from market forces in order
port package. The details are not yet known, but will to muster the strength to reform the Stability Pact
temporarily calm down market worries. Thereafter and establish a credible rule system.
though, the focus will probably shift to Portugal.

But at the same time as emerging economies have of the yuan by 4 per cent against the USD during the
shown increasing resilience, world economic integration coming year, but this is unlikely to do much to mollify
has continued to increase. This applies both to the real critics who accuse China of pursuing an excessively rigid
economy via trade flows and direct investments and to currency policy.
the financial sphere via short-term capital flows and in-
tegrated capital markets. Financial integration has been Nordic fundamentals are paying off
an important prerequisite for the rapid growth trend of The Nordic countries are continuing to benefit from
the past decade. During 2010, however, its drawbacks strong economic fundamentals, especially their low
in the form of capital flows that lead to sharply ap- sovereign debt levels. Their export structure, both in
preciating currencies and bubble tendencies in asset terms of sectors and countries, also puts them in a good
markets have become apparent. position to take advantage of the global recovery. In our
assessment, these countries will also cope well with the
In the short term, Asian countries are trying to soften appreciation of their currencies this autumn.
the impact of these phenomena by using both domestic
tightening measures and capital controls. In the long We are revising our Nordic growth forecasts upward.
term, the best medicine is to increase the role of do- In Sweden, GDP will increase by 5 per cent this year,
mestic demand in growth, thereby making these econo- significantly faster than in other EU countries. During
mies less dependent on exports and currencies. Looking the next couple of years, too, we expect GDP growth to
ahead, we expect Chinese currency policy to play some be above trend. In the other Nordic countries, growth
part in this. The pace of yuan appreciation will remain will be more subdued. Strong exports will enable the
cautious, however. We expect China to boost the value Danish economy to continue growing by more than 2



per cent a year, despite fiscal tightening. In Finland, Our assessment is that Latvia and Lithuania will join the
the economic recovery has gained strength in recent euro zone in 2014, in keeping with their ambitions.
months. We now see prospects for GDP growth of 3 per
cent in 2011. As in Sweden, this growth will be broad- More symmetrical inflation risks
based. The Norwegian economy will grow by more Rising commodity prices and the Fed’s quantitative
than 2 per cent a year, but high resource utilisation easing programme have contributed to growing uncer-
is already beginning to limit supply-side potential in tainty regarding inflation trends in the OECD countries.
Norway. Inflation expectations, measured as break-even inflation
in the index-linked bond market, have also risen − espe-
cially in the US.
GDP growth, Nordic and Baltic countries
Year-on-year percentage change A mechanistic calculation indicates that a commod-
2009 2010 2011 2012 ity price upturn might push up inflation as much as 2
percentage points, but in recent decades the impact
Sweden -5.1 5.0 3.5 2.5
of commodity prices at the consumer level has been
Norway -1.4 0.5 2.3 2.2 rather small. Low resource utilisation is one reason why
Denmark -4.7 2.2 2.2 2.1 the impact of commodity prices is unlikely to be larger
this time around. Taken together, we have adjusted CPI
Finland -8.1 2.7 3.0 2.8
inflation upward by 3-4 tenths of a percentage point
Nordics -4.5 2.7 2.8 2.4 in the US and the euro zone as a consequence of the
Estonia -13.9 2.5 4.0 4.0 commodity price increase, especially via the impact of
Latvia -18.0 -0.3 4.0 5.0 higher oil and food prices.

Lithuania -14.7 1.0 4.0 4.5 Core inflation will remain low
Year-on-year percentage change
Baltics -15.6 0.9 4.0 4.5
3.0 3.0

Source: OECD, SEB 2.5 SEB 2.5
forecast

Gradual recovery in the Baltic countries 2.0 2.0
After their extreme economic downturn in 2009, all
1.5 1.5
three Baltic countries showed positive year-on-year
GDP growth during the past two quarters. We continue 1.0 1.0
to predict a gradual export-led recovery. Meanwhile
domestic demand is beginning to thaw. The Baltics 0.5 0.5

have restored their competitiveness after success- 0.0 0.0
fully applying an internal devaluation policy, but the 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
growth of private consumption and capital spending will
Euro zone US
be sluggish due to public sector pay freezes in 2011, Source: Eurostat, BLS, SEB

high unemployment including structural problems and
continued private debt retirement. The Fed’s expansion of its balance sheet has provided
new fuel for discussion about the risk of triggering
US: The credit channel has stabilised inflation by printing money and boosting the money
Ratio, year-on-year percentage change
supply. Broad money supply aggregates have again
12 12 begun to grow, but still at a very slow pace. The credit
multiplier also seems to have started rising again but is
10 10
not far from its lows. Our conclusion is that monetary
8 8 measures are signalling lower deflation risk but that
6 6
there is still plenty of time for the Fed to withdraw li-
quidity if a real-term upturn should take off in earnest.
4 4
We have revised our overall inflation forecast slightly
2 2
upward and consider the risk picture more symmetrical
0 0 than before. But most indications are still that infla-
86 88 90 92 94 96 98 00 02 04 06 08 10
tion will remain low during the next couple of years.
M2 money supply Resource utilisation remains low in the OECD, leading to
Credit multiplier (M2/monetary base)
Source: Federal Reserve historically low pay hikes. Unit labour cost is also being
pushed down by cyclical recovery in productivity.
Overall, we expect decent annual GDP growth of
4-5 per cent in the Baltics during the next couple of Central bank stimulus nearing its end
years. Estonia is adopting the euro on January 1, 2011. In the US, the euro zone, Japan and the UK, monetary
stimulus measures remain the most important instru-



ment for safeguarding economic recovery. Low underly- from zero. The challenge for the central banks will be
ing inflation pressure and stable inflation expectations to achieve maximum impact from their stimulus meas-
will enable central banks to continue their zero inter- ures, on the one hand, while preserving their long-term
est rate policies well into 2012. credibility, on the other. Their strategy for accomplish-
ing this is to emphasise their readiness to resume
Another option is unconventional monetary policy stimulus measures using the relevant tools, but mean-
aimed at keeping the entire yield curve − in nominal while to carefully avoid spelling out their timetable
and real terms − at the lowest possible level as well as for this exit strategy.
keeping inflation expectations at a suitable distance

Calmer commodity price trend the relationship between supply and demand will not
Since the summer, commodity prices have gained new be as strained as in 2006-2008. This indicates that
upward momentum after a brief slump last spring. Saudi Arabia, with its large production reserves, will
Metals and agricultural commodities have climbed continue to have a major influence on prices. Saudi
to new record levels, measured in US dollars. The Arabia’s aim is to keep the price of Brent oil in the
fact that commodity prices, especially oil prices, are USD 70-90/barrel range. We believe that the price
rising so early in the OECD countries’ economic cycle of Brent will end up in the upper part of this range −
may pose a danger to their relatively fragile economic slightly above today’s level.
upturn. What is driving commodity prices?
Index, thousands
We see four main reasons for the rapid price move- 900 12
ments of recent months: 1) Less uncertainty about
the world economic trend. 2) Poor grain harvests 800 10
due to weather effects. 3) An increased element of 700 8
speculative trading (especially evident from grain
contracts). 4) The decline in the USD, which creates 600 6
upward pressure on prices, since commodities are 500 4
priced mainly in dollars and producers want compen-
400
sation for USD depreciation. The latter two factors 2

have been closely linked to the Fed’s QE2 measures. 300 0
Jan May Sep Jan May Sep Jan May Sep
High commodity prices 08 09 10
Index, monthly data, USD S&P GSCI Commodity index (LHS)
500 500 Baltic Dry (RHS)
Source: S&P, Baltic Exchange
450 450
400 400
Agricultural prices will be weather-driven for
350 350 another while. Most agriculturally related commod-
300 300 ity prices have soared rapidly this autumn, especially
250 250 cotton, but wheat prices have levelled off after their
200 200 sharp upturn in July-August due to extreme weather
150 150 in two major producer countries, Russia and Ukraine.
100 100 In the short term, there is a risk that the La Niña
50 50 weather phenomenon will affect agricultural produc-
00 01 02 03 04 05 06 07 08 09 10 tion into early next year, thereby pushing prices up
Agriculture Energy
further. But in a more long-term perspective, under-
Industrial metals lying supply and demand conditions point towards a
Source: HWWI
calmer price trend.

This autumn’s commodity rally, which has re- Gold will continue to glitter. Gold prices reached
cently lost some steam, is thus only partially due to new nominal record highs this autumn. Here, too,
fundamental factors. We thus continue to expect a the Fed’s announcement of a new quantitative eas-
more moderate price upturn ahead, with levelling- ing round contributed to a sharp price increase, but
off tendencies later in our forecast period. Another adjusted for inflation, gold prices are nearly 30 per
indication is that this autumn, the Baltic Dry freight cent below their peak levels in the 1980s. We expect
index has shown a downward trend, ending its strong gold prices to remain high due to long-term uncer-
correlation with commodity prices in recent years. tainty about inflation or deflation, the solvency of
countries and the future currency system. World Bank
Oil is climbing towards USD 90. In their latest representatives have indicated that they are open to
monthly reports, the International Energy Agency allowing gold to regain some kind of role in a re-
(IEA) and the Organisation of Petroleum Exporting formed global currency system, and this may push up
Countries (OPEC) both adjusted their 2011 global oil gold prices further.
demand forecast slightly upward. In spite of this,



− for example by way of higher commodity prices and
Unit labour costs
wages. The low-return environment in the West is also
9 9
triggering unwanted capital inflows that lead to unde-
8 8 sirably strong currencies and increase the risks of as-
7 7 set bubbles. The room for continued interest rate hikes
6 6
is limited by appreciation pressure. In some countries,
5 5
4 4 capital controls − now an acceptable policy tool − are
3 3 one way of protecting their currency.
2 2
1
0
1
0
Slower pace of Nordic key rate hikes
-1 -1
The differences in monetary policy conditions between
-2 -2 the major OECD countries and Sweden and Norway are
-3 -3 also becoming increasingly clear. Developments in these
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 two Nordic countries show a number of similarities with
Europe (OECD countries) US certain Asian countries. Rapid domestic credit growth
Source: OECD
and a risk of housing market bubbles justify higher inte-
rest rates. But wider key rate spreads against the major
OECD countries imply currency appreciation, among
Looking ahead, central banks will emphasise that other things resulting in slower inflation. The central
expanding their balance sheets is still part of the banks in Sweden and Norway may thus indirectly be
monetary policy arsenal. Japan is closest to expanding forced to adjust their interest rates to those in other
quantitative easing, while the probability of new QE countries in order to avoid an excessively strong cur-
rounds from the Fed or Bank of England is far smaller. rency.
We expect the European Central Bank (ECB) to limit
itself to offering liquidity and accepting government Financial conditions less expansive in Sweden
securities as collateral for borrowing from the ECB. Rebase 100 = 2003:3
103 103
Tighter conditions
Key interest rates 102 102
Per cent 101 101
7 7 100 100
99 99
6 SEB 6 98 98
forecast
97 97
5 5
96 96
4 4 95 Easier conditions 95
94 94
3 3 93 93
2 2 92 92
03 04 05 06 07 08 09 10
1 1
US Sweden Euro zone
0 0 Source: SEB
00 02 04 06 08 10 12
For a long time, the situation of Norges Bank in Norway
Euro zone US
Source: ECB, Fed, SEB
has been characterised by this dilemma. In a gentler
form, it is also beginning to be true of Sweden’s Riks-
Our assessment is that the QE programmes now in bank. In its latest Monetary Policy Report, the Riksbank
place will be carried out but that unconventional adjusted its key interest rate path downward, stating
monetary policy will then be nearing its end. New more explicit references than previously to internation-
purchases of government securities will be increasingly al uncertainty and the consequences of interest rate
controversial. Because many countries regard QE as a hikes for the krona. Looking ahead, we expect the
substitute for currency intervention, new programmes Riksbank to deliver rate hikes largely in accordance
may jeopardise G20 collaboration and coordination, with the path it has now announced. This means that
thereby escalating currency policy tensions. Meanwhile we are not significantly changing our forecast from the
the justification for new monetary stimulus is dimin- last Nordic Outlook.
ishing, since market lending conditions have actually
improved, though not normalised. Growth and inflation We expect the Riksbank to hike its key rate in Decem-
risks have become more symmetrical, which points in ber and February, thus reaching a rate of 1.50 per cent.
the same direction. After that, hikes will be less frequent, mainly due to
the risks of an excessively strong krona. By the end of
Central banks in emerging economies often face a dia- 2011, the repo rate will stand at 2.25 per cent and by
metrically opposite set of problems, compared to those the end of 2012 at 3.0 per cent. Our forecast is thus
of major OECD countries. There is a risk that domestic higher than today’s prevailing market pricing.
bottlenecks will spread, boosting inflation pressures



Because of low inflation in Norway, we expect Norges Funding requirements, PIIGS countries, 2011
Bank to hold off until next summer before resuming EUR billion
rate hikes. Towards the end of 2011 the deposit rate Maturing Net Total
will reach 2.50 per cent. We expect Norway’s output loans lending (% of GDP)
gap to be closed by early 2012; for this reason we Greece 38.5 20.0 25.1
expect a slightly faster pace in the bank’s rate hikes. By Ireland 4.4 22.6 16.7
late 2012 the deposit rate will stand at 3.75 per cent. Italy 279.4 75.2 22.2
Key interest rates Portugal 26.2 13.1 22.7
Per cent
Spain 124.5 90.4 20.2
7 7
Source: Bloomberg, SEB
6 SEB 6
forecast
5 5 In the short term, the recommendations of the EU, IMF
and other bodies are also cautious − reflecting a desire
4 4
not to interrupt the fragile recovery with excessively
3 3 synchronised austerity policies. This means that coun-
2 2 tries in a position to do so are being asked to postpone
belt-tightening or even stimulate the economy.
1 1

0 0 Overall, fiscal policies appear likely to be mildly con-
00 02 04 06 08 10 12 tractive during the next couple of years. In some of the
PIIGS countries the dose of austerity is very large, and
Euro zone Norway Sweden
Source: ECB, Norges Bank, Riksbank, SEB it is also likely that further measures will be necessary.
Among major countries, only the UK has decided to
Because the two central banks will carry out relatively
implement a large austerity package. In countries like
cautious rate hikes due to the risks of strong currencies
Germany and France, very modest austerity measures
and low inflation, home prices will continue upward
are being implemented. In the US, we expect an agree-
in Norway and Sweden. This will increase the risk of
ment to extend the Bush administration’s tax cuts to be
painful corrections ahead. Certain other steps are being
reached at the last minute. In spite of this, federal fis-
taken to slow the price trend, for example the recently
cal policy will have a tightening effect equivalent to
enacted loan-to-value ceiling on mortgages in Sweden.
about 1 per cent of GDP. In Japan, the government has
Given Sweden’s strong central government finances, a announced new stimulus measures this autumn despite
policy mix that includes faster key interest rate hikes huge government debt.
and a more expansionary fiscal policy would be an
alternative, but at present the Riksbank and the gov- Net lending
ernment do not seem prepared to change their division Per cent of GDP
of responsibility in Sweden’s stabilisation policy. This 2010 2011 2012
is despite the fact that such an arrangement would be
United States -11.1 -9.7 -6.9
well in line with international discussions concerning
today’s imbalances, but also with lessons about the Japan -9.8 -9.1 -8.5
importance of not allowing lending and home prices to United Kingdom -11.4 -9.4 -7.6
expand for too long. Euro zone -6.2 -5.5 -5.0

Different fiscal strategies OECD -7.8 -6.7 -5.5
The global financial and credit crisis pushed public sec- Source: OECD, IMF, SEB
tor deficits and debts to unsustainable levels in many
countries. In the long term, major belt-tightening will Major countries are apparently not being pressured by
thus be necessary. For example, IMF calculations indi- financial markets to speed up their austerity measures.
cate that current deficits combined with demographic Interest rates have remained depressed, despite the
strains will require austerity measures in the range large supply of government securities. This will enable
of 6-9 per cent of GDP in order to stabilise govern- these countries to prop up their economies to a fairly
ment debt in the G20 countries. The severe crisis in the high degree during the next couple of years and
PIIGS countries also show that immediate measures are thereby postpone their adjustment burdens.
needed to ease acute financial mistrust.
Long-term yields sideways next six
months
Globally, government bond yields fell sharply during
the first eight months of 2010. During the spring, the
accelerating crisis in the PIIGS countries drove down



long-term yields in major OECD countries. After that, a their German equivalent at 3.40 per cent.
gloomier economic outlook in the US provided new mo-
mentum for this trend. By the end of August, the yield We expect Nordic government bond yields to climb
on 10-year German government bonds bottomed out at somewhat faster. Partly because of continued key rate
around 2.10 per cent, well below prevailing yields when hikes, the spread between Swedish 10-year bonds and
the financial crisis culminated late in 2008. German ones will widen from today’s 25 to 50 basis
points by the end of 2012. The equivalent Norwegian
With a certain time lag, American bond yields have also spread will rise from around 65 to 90 points in Decem-
fallen: from 4 per cent in April 2010 to 2.4 per cent ber 2012.
in early October. Increasingly clear signals that the
Fed was preparing new QE measures initially helped Fundamentals still controlling
give yields an extra downward push. Once the size of currencies
the stimulus programme was announced, bond yields In the past year, fundamentals have been the main driv-
bounced back upward by 40-50 basis points in both ing force in the foreign exchange market. Currencies
the US and Germany. More stable economic signals have appreciated in countries with strong govern-
in the US, combined with a normalisation of inflation ment finances and where the central bank has been
expectations, also contributed to the yield upturn. able to withdraw part of its monetary stimulus. In
The phase-out of the ECB’s liquidity measures has also many cases, these are countries with large commod-
driven yields in Germany. This has been especially true ity exports that have benefited from high prices. In
of yields on short-term bonds, but long-term yields have recent months this more or less natural trend has led to
also been affected to some extent. troublesome consequences, resulting in currency policy
tensions − sometimes described as “currency war”.
10-year government bond yield
Per cent
Looking ahead, we believe that exchange rates will
7.0 7.0
continue to be driven by growth and interest rate
6.5 6.5
SEB differentials. In this environment, the G3 currencies
6.0 forecast 6.0
(USD, EUR and JPY) and the British pound will be losers
5.5 5.5
in the immediate future. Of this group, we expect the
5.0 5.0
4.5 4.5
USD to continue to be pulled down by the Fed’s poli-
4.0 4.0
cies for another while, but we do not anticipate any
3.5 3.5
surprises. The USD is thus relatively close to bottom-
3.0 3.0 ing out. We expect the EUR/USD exchange rate to be
2.5 2.5 back above 1.40 early next year. After that, strong US
2.0 2.0 economic growth combined with lingering debt prob-
99 00 01 02 03 04 05 06 07 08 09 10 11 12 lems in the PIIGS countries will cause the EUR/USD rate
to fall again towards 1.25 or 1.30. The pound will also
US Germany
Source: Reuters EcoWin, SEB see a similar trend against the euro: further short-term
weakening, then a return to more fundamentally justi-
We do not expect bond yields to revert to their late-
fied levels of around GBP 0.80 per euro.
summer lows. Worries about a new US and global reces-
sion will gradually fade in 2011, while the upturn in Exchange rates
commodity prices will help dispel risks of deflation. Index 100 = July 2007
160 160
Yet there are reasons to expect continued low bond 150 150
yields ahead. Central banks will be pursuing very 140 140
expansionary monetary policies, and a normalisation of 130 130
key interest rates is far away in time. The Fed’s bond 120 120
110 110
purchases will also help hold down bond yields in the
100 100
US, and the Fed will also continue to be prepared to 90 90
act if an upturn in long-term yields should threaten 80 80
the economic recovery. Our forecast of a continued 70 70
decline in core inflation during much of 2011 also points 60 60
towards continued low yields. Jul Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov
07 08 09 10
EUR SEK USD
Our conclusion is that bond yields both in the US and GBP NOK JPY
Germany will remain at today’s levels until the second Source: Reuters EcoWin

half of 2011. Only when the time for central banks to
As for the USD/JPY exchange rate, the trend towards a
hike interest rates begins to move closer will long-term
stronger yen is probably close to ending. We expect the
yields climb cautiously. By the end of 2012, 10-year
USD/JPY rate to remain in the vicinity of 80 for another
US Treasury yields will stand at 3.60 per cent and



while and then gradually move towards 100 as American
Stock markets still below 2007 peaks
long-term yields slowly creep upward. Rebase 100 = 2007:7
120 120
The Riksbank’s lowering of its key interest rate path
110 110
in October contributed to a temporary reversal in
100 100
the Swedish krona appreciation trend, but we expect
90 90
this appreciation to regain its strength as the Riks-
80 80
bank delivers further key rate hikes in December and
70 70
February. We believe that because of continued good
60 60
export growth and a favourable valuation, the EUR/SEK 50 50
exchange rate will reach 9.00 during the first half of 40 40
2011 and then continue to 8.75 by the end of 2011. 30 30
Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct
The Norwegian krone has lost ground recently, since 07 08 09 10
both monetary policy and the flow outlook have wors- US Emerging markets
ened. Norges Bank has underscored its displeasure while Euro zone Sweden
Source: Reuters EcoWin, SEB
carrying out large sales of NOK on behalf of the Govern-
We see potential for a continued stock market upturn.
ment Pension Fund of Norway. In the next few months,
Low interest rates have helped boost the valuations of
the flow outlook in particular will improve. We foresee
nearly all other asset classes (commodities, bonds etc.),
a move towards an EUR/NOK rate of 8.00 by the end
but so far equities have only followed profits, without
of 2010. After that, the EUR/NOK rate will continue
any extra multiplier effect. Nordic companies also have
to 7.75 by late 2011 and 7.50 by late 2012.
relatively low valuations. Share prices of Nordic listed
Equities benefiting from low interest companies divided by carrying amount (book value) are
15 per cent below their 10-year average, according to
rates SEB Enskilda’s forecast. It is reasonable to believe that
Low interest rate policies around the world and
next year, share prices will move in such a way as to
strong balance sheets, together with decent world
bring valuations closer to the 10-year average. It should
economic growth − driven by expansive developing
be added that profits are expected to increase at a
economies − have sustained strong stock markets during
healthy pace; in 2012 an increase of about 10 per
the past year. The Fed’s QE announcement in August
cent is expected. Nordic export companies will be able
helped stock exchanges worldwide regain their upward
to continue taking advantage of increased exposure to
momentum. American share price indices have climbed
emerging markets.
more than 10 per cent since late August, but the formal
decision to launch QE2 provided no further stimulus for At the same time, there are reasons to bear in mind
the stock market; the decision was expected. various risks, included flare-ups of financial worries
in Europe. The risk of a global trade war has not been
Macroeconomic strength, combined with an advanta-
entirely averted. Another risk is that the profit growth
geous sectoral and market exposure, contributed to
expected by companies may turn out to be too high,
favourable performance on Nordic stock exchanges. In
but this is offset by a significant upside risk for company
recent weeks, share prices have moved sideways. Be-
sales growth estimates. Overall, most indications are
cause of high expectations, company earnings reports
that Nordic stock exchanges will perform strongly in
for the third quarter were not able to boost share
2011.
prices in general, despite higher profits and a surpris-
ingly strong volume trend. The appreciation of Nordic
currencies also contributed to a more subdued stock
market trend.



Basel III update
In November 2010, the G20 heads of state and gov- in order to avoid regulatory restrictions on their
ernment who met in Seoul gave the green light to operations. In addition, depending on economic and
the implementation of Basel III, based on a proposal financial circumstances, the authorities may imple-
by the Basel Committee on Banking Supervision. ment a counter-cyclical capital buffer, which may
This decision will mean a gradual phase-in of tighter vary between 0 and 2.5 per cent. If all these capital
capital adequacy rules (starting in January 2013) and adequacy requirements are fully implemented, this
new global minimum liquidity rules (starting in 2015) means that the level of core Tier 1 capital will be
by 2018. The purpose of Basel III is to strengthen the raised from 2 to a maximum of 9.5 per cent and for
resilience of the banking sector, prevent excessive Tier 1 capital from 4 to 11 per cent. The situation will
risk-taking and leveraging and reduce the pro-cyclical also include a stricter definition of what should be
effect of the financial system on the real economy. regarded as capital.

In the long term, these changes will create greater The liquidity rules are based on two measures: The
stability both in the financial system and in the real liquidity coverage ratio and the net stable fund-
economy. Because there will be increased competi- ing ratio. The first measure requires a bank to hold
tion for capital, however, it will lead to higher inter- enough liquid assets to survive 30 days of major
est rates, lower capital supply and resulting costs funding problems. The second measure is aimed at
to the real economy during the transitional period achieving a better balance between the maturities of
2012-2018. There are strong differences of opinion a bank’s assets and liabilities, that is, to ensure that
as to the magnitude of these effects, but the exten- available stable funding will be larger than the need
sion of this transition period compared to the original for such funding. In addition to these measures, a
December 2009 proposal will reduce such adverse leverage ratio will be tested, specifying that capital
effects. must exceed 3 per cent of the bank’s exposures.

In brief, Basel III will mean that the minimum require- For Nordic banks, the most significant features of
ment for the core Tier 1 capital ratio will be raised Basel III are the changes in liquidity rules. More
from 2 to 4.5 per cent of a bank’s risk-weighted as- long-term, stable borrowing via an amended borrow-
sets. The requirement for Tier 1 capital will be raised ing structure and longer maturities will increase the
from 4 to 6 per cent. In addition, banks must hold a expenses of banks. This will affect interest rates for
capital conservation buffer of 2.5 per cent of risk- borrowers as well as the profitability of the banking
weighted assets. This means that banks must have sector.
total common equity of at least 7 per cent


Theme

Greater need for new monetary system
ƒ Meagre Seoul summit but progress in 2010 The contours of a new monetary system
The world has gone without a formal international mon-
ƒ New global monetary system on agenda
etary system for nearly 40 years. The Bretton Woods
(BW) system was ended in 1971 after having been
operating since 1945. BW was a global fixed exchange
This autumn the climate of cooperation among the rate system anchored by the US dollar, and indirect by
Group of 20 countries has deteriorated. There are gold. This system also resulted in the establishment of
several reasons for this worrisome disunity. The need the International Monetary Fund. The IMF was assigned
for private and public debt retirement is hampering the the task of focusing on balance of payments problems,
domestic growth dynamic in many countries, increasing currency policy and free trade in order to promote eco-
their dependence on exports and thus tempting them to nomic growth and trade, generate income and jobs and
weaken their currencies in various ways. There is also stop competitive devaluations.
genuine disagreement among G20 countries about the
actual causes of their shared imbalances and systemic For four decades, the US dollar has remained the de
problems. Many countries have weak governments, also facto anchor in the “non-system” that followed BW.
making it harder to implement politically demanding But this question has been raised: Does the world need
belt-tightening and structural reforms. a new multilateral monetary system in order to reduce
economic imbalances and return to high and stable eco-
But on some points, the G20 summit confirmed progress nomic growth? The G20 has entrusted the IMF − during
made in recent international discussions, for example, France’s G20 chairmanship in 2011 − to present propos-
the decision to introduce new capital adequacy and als on the mechanisms for a new system.
liquidity requirements for banks (Basel III). In addition,
power relationships in the International Monetary World trade volume
Fund (IMF) have been modernised to give emerging
economies a greater say. The G20 also decided that World Trade Monitor,
concrete country-specific economic policy action plans index 100 = 2000, seasonally adjusted
should be established. This will strengthen the Mutual 250 250
Assessment Process (MAP), which will continuously World trade total
Emergning economies
evaluate countries to establish whether they are pursu- 200 Advanced economies
200
ing policies that adversely impact other countries.
150 150
G20’s 2011 focus under French leadership
Looking ahead, the G20 has identified a number of is-
100 100
sues that will dominate its work until the next summit
in Cannes late in 2011. Some of the key issues are:
50 50

1. The IMF, Bank for International Settlements (BIS) and
Financial Stability Board (FSB) will propose new tools to 0 0
91 93 95 97 99 01 03 05 07 09
reduce financial sector risk levels, based on a systemic
perspective, to be reported to G20 finance ministers Source: Netherlands Bureau for Economic Policy Analysis
and central bank governors at their next meeting.
We see four main reasons why the issue of a global
2. The IMF will examine and propose guidelines on how monetary system has been raised again:
to identify when a country is showing excessively large
current account surpluses or deficits. The American 1. A decade of rapid globalisation has made countries
proposal for quantitative restrictions on acceptable cur- highly economically and financially interdependent.
rent account surpluses or deficits (which was admittedly There is a great need for cooperation in many areas to
rejected in Seoul) is an example of the kinds of issues avoid disruptions and reduce the risk of protectionism.
the IMF will further consider.
2. Large differences in the cyclical position of coun-
3. The IMF will examine the need and possible mecha- tries and related financial and monetary policy issues
nisms for a new international monetary system. create international tensions. A new system may not
solve imbalance problems but can help ensure that


Theme

adjustments are not jeopardised by unwanted currency First steps taken towards a new system
policies or destabilising capital or currency movements. The steps towards a new international monetary
system have been halting and tentative. There is an
3. There are worries about the USD’s future stability.
obvious political dimension. Decisions may have major
4. Weaknesses in today’s system explain why some cen- consequences for capital flows, currency movements
tral banks build up excessive currency reserves. and economic growth. The advantages enjoyed today by
the US (see above) would decrease. But statements by
Reserve status: Privileges, responsibilities both the US Treasury Department and the Fed indicate
A country whose currency enjoys the privilege of re- American openness. The dominance of the dollar may
serve status has a high degree of freedom in its eco- gradually diminish in the future as alternative solutions
nomic policies. This also represents an international emerge and as other economies − such as China − gain
confirmation of its economic and political strength. The additional economic and financial clout.
United States has benefited from being able to borrow
A new international monetary system would not be
internationally in its own currency at relatively low
a BW type fixed exchange rate system anchored by
cost. Meanwhile US investments in other countries have
one currency or gold. Fixed exchange rates are old-
yielded good returns. One result is that today the US
fashioned and make adjustments difficult for countries
has a positive annual net return of USD 160 billion even
that need to undergo structural reforms. But increased
though its debts exceed its assets by USD 2.9 trillion.
currency cooperation will impact monetary policy and
Today’s international monetary system is dominated may also affect room for manoeuvre in fiscal policy.
by the US dollar in a way that is not justified by the To some extent, these steps have already been initiated
size of the US economy and financial markets. The by the IMF’s Mutual Assessment Process (MAP)
US economy accounts for 20-25 per cent of the world
China's skyrocketing currency reserve
economy, while US equity and fixed income markets ac-
USD billion
count for 30-35 per cent of global financial markets. 3000 3000

2500 2500
Current account
Per cent of GDP 2000 2000

2005 2010 2015 1500 1500
United States -5.9 -3.2 -3.3
1000 1000
Germany 5.1 6.1 3.9
500 500
Japan 3.6 3.1 1.9
Spain -7.4 -5.2 -4.3 0 0
86 88 90 92 94 96 98 00 02 04 06 08 10
Greece -7.3 -10.8 -4.0
China Japan Russia
Portugal -9.1 -10.0 -8.4 Source: Reuters EcoWin

Ireland -3.5 -2.7 -1.2
The IMF’s future may include global agreements on
Sweden 6.9 5.9 6.2 reasonable currency movements during periods of ad-
Norway 16.3 16.6 15.8 justment and the size of currency reserves, current
account balances and external financial positions. The
Denmark 4.1 3.4 2.5
US proposal to create a ceiling/floor for a country’s cur-
Finland 3.4 1.4 1.7 rent account surplus/deficit is one element of the issues
Source: IMF, WEO, October 2010 the IMF will address. The goal is to find an objective
framework the G20 can agree on for putting pressure
Yet 60-65 per cent of world currency reserves consist of on an individual country to change economic policies.
US dollars and 85 per cent of global foreign exchange Some form of sanctions will probably be needed if the
transactions have a “dollar leg”. Over 50 per cent of system is to be effective.
debts in the global banking system are USD-denomi-
nated. At times of instability, the dollar also assumes Central banks may also agree on clearer frameworks,
the role of “safe haven” currency, confirming that it greater currency cooperation and intervention aid.
remains the world’s dominant reserve currency. But this will require active participation from govern-
ments, since currency policy is often the responsibility
Among reasons for the USD’s role are lack of credible of finance ministries, not central banks. The IMF would
alternatives or confidence in one’s own currency. The continue to strengthen its role, both institutionally
world has relied heavily on the US in economic, finan- and financially, in order to reduce the need for large
cial and political terms. Worries about the US economy currency reserves. It could also serve as guarantor of a
and its major adjustment needs are raising questions new weighted reserve currency that should reasonably
about alternative reserve currencies and ways of ensur- include such major world currencies as the US dollar,
ing that global monetary stability will not be dependent British pound, euro, Japanese yen and Chinese yuan.
on one currency.

The United States

The Fed gives the economy a helping hand
ƒ The recovery will gradually strengthen account for most of GDP declines, are close to historic
lows as a percentage of GDP, so further declines are
ƒ The labour market is healing but the
unlikely, and 2. primarily via a weaker dollar and rising
housing market is shaky
asset values, the Fed’s renewed quantitative easing
ƒ Low inflation, but deflation threat avoided package (“QE2”) will improve growth prospects.
ƒ The Fed will hike its key rate in mid-2012 Most cyclical sectors: not much downside
Per cent of GDP
32.5 32.5
American GDP growth averaged 1.9 per cent in the
second and third quarters, compared to an average of 30.0 30.0
4.4 per cent in the two preceding quarters. Growth
27.5 27.5
will continue to sputter for another while but will
strengthen in 2011 when employment growth picks up. 25.0 25.0
Moreover, the Federal Reserve’s stimulus measures will
22.5 22.5
help consumption and corporate capital spending to
recover, despite fiscal tightening. Meanwhile exports 20.0 20.0
are benefiting from a continued weak US dollar. GDP
growth will reach 2.7 per cent this year, 2.2 per cent 17.5 17.5
50 55 60 65 70 75 80 85 90 95 00 05 10
in 2011 and 3.4 per cent in 2012. Unemployment will
fall in 2011 but inflation will remain low. The Fed will Durable goods + business inv. + inventory inv.
Source: BEA, SEB
not hike its key interest rate until mid-2012.
GDP: "Soft patch" for a year A new wave of home price declines is the biggest risk to
6 6 continued recovery. Policy mistakes may also throw our
5 SEB forecast 5 scenario off. Our forecast assumes that the federal tax
4 4 cuts now in place will be extended at the last minute.
3 3 This will limit the tightening effect of fiscal policy to
2 2 around 1 per cent of GDP in 2011. But if the prevailing
1 1 political paralysis and deep divide between congression-
0 0 al Democrats and Republicans continues, the economy
-1 -1 may suffer serious damage as early as 2011.
-2 -2
-3 -3
Composite ISM and GDP growth
Index, year-on-year percentage change
-4 -4
62.5 6
-5 -5 SEB
60.0 5
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 forecast
57.5 4
09 10 11 12
Annualised Year-on-year 55.0 3
Source: BEA, SEB 52.5 2
50.0 Note: NBER dates 1
47.5 0
Recession risk 20 per cent 45.0 -1
According to our forecast, GDP growth will remain at 42.5 -2
around 2 per cent in the next few quarters, but such 40.0 -3
a long period of low but positive growth is historically 37.5 -4
unusual. The economy usually grows above trend (2.7 35.0 -5
per cent, according to SEB’s estimates) or is in reces- 02 03 04 05 06 07 08 09 10 11 12

sion. ISM Composite index (LHS) Real GDP (RHS)
Source: ISM, SEB

Our model projections indicate that during the next six
Manufacturing sector steaming ahead
months, the recession risk is higher than usual, yet
Although the National Federal of Independent Business
lower than a month ago: about 20 per cent. The main
(NFIB) index has climbed in the past three months, it is
reasons why there will be no new recession are: 1. the
still at a depressed level. Large companies are more
most cyclical sectors in the economy, which ordinarily


The United States

optimistic: Contrary to expectations of a decline, the Higher saving is holding back
ISM purchasing managers’ index for manufacturing
consumption
rose in October. The service sector index also gained
The living standard of middle class Americans has dete-
strength. Right now our composite indicators show that
riorated in the past decade. The income of the median
GDP will increase at approximately the same rate in
household has fallen slightly in real terms. Access to
the fourth quarter as in the third. The weak dollar will
cheap loans and the accompanying inflation in asset
enable exports to help drive growth in the coming 6-9
prices nevertheless helped prop up the public mood
months, after two quarters of large negative contribu-
and sustain consumption for a long time. The financial
tions from net exports. Annual export growth will
crisis has changed the playing field. Even though a
average 12 per cent in 2010-2012, which is high in a
recovery has been under way for 15 months, household
historical perspective, but the administration’s target
confidence indicators remain depressed, especially the
last spring of doubling exports over a five-year period
Conference Board survey, which is more than 40 points
still seems distant.
below its historical average. Our consumption model,
The recovery in US industrial production is continuing which includes the above indicators, shows rather low
at a healthy pace. During the recession, 11 years of consumption growth during the next several months.
production upturn were wiped out, but after a strong Contribution to change in real GDP
surge in the past year, the industrial production index Average since Q3 2009, percentage points
is back at its 2004 level. Our forecast is that industrial 2.0 2.0
production will increase by 5.4 per cent this year, 4.1 1.5 1.5
per cent in 2011 and 5.6 per cent in 2012.
1.0 1.0
Consumers are feeling blue 0.5 0.5
Deviation from the mean, 10-year percentage change
0.0 0.0
60 20
40 15 -0.5 -0.5
10
20 -1.0 -1.0
5
0 0 -1.5 -1.5

-20 -5 Inventories Residential
-10 PCE State and local
-40 Eq and S Net exports
-15
-60 Federal
-20 Source: Reuters EcoWin, SEB
-80 -25
80 85 90 95 00 05 10 Even though the stock market has risen sharply since
Michigan (LHS)
bottoming out, enormous wealth has been wiped out:
Conference Board (LHS) on average, households have become USD 100,000
Median household income (RHS) poorer than before the crisis. This, in turn, points
Source: Michigan, Conference Board, Census Bureau, SEB

Unusually weak recovery Where we are now − a bit more than one year into the
According to a new CNN survey, more than 70 per recovery − GDP is thus usually growing at close to 7
cent of the American public believes that the reces- per cent year-on-year. Our calculations also indicate
sion is still under way. The official declaration from that private consumption growth averages 5.8 per
the National Bureau of Economic Research (NBER), cent year-on-year: three times stronger than the trend
however, is that the deepest and longest-lasting this time.
recession of the post-war period ended in June 2009.
GDP fell more than 4 per cent and the downturn
Weak recovery in historical perspective
Averages cover 9 recession/recovery cycles from 1948
lasted 18 months. The historical pattern is that GDP
7.0 7.0
grows at a rapid pace during the first three years of a
recovery, followed by a pause for breath in year four. 6.0 6.0

Another rule of thumb is “the deeper the recession, 5.0 5.0
the more powerful the recovery”. This explains why
4.0 4.0
the recoveries of the early 1990s and 2000s sput-
tered: the preceding recessions were unusually mild. 3.0 3.0
The same logic does not apply this time around; dur- 2.0 2.0
ing the first year of recovery, GDP growth has been
1.0 Year 1 Year 2 Year 3 Year 4 1.0
less than half the historical average, and forecasts
indicate continued sluggishness over the next few 0.0 0.0
years. Average GDP growth (YoY) 1 to 4 years into recovery
Comparable SEB forecasts in the current cycle
Comparable consensus forecasts in the current cycle
Source: BEA, NBER, Consensus Economics Inc.,SEB


The United States

towards a continued slight increase in saving. Our esti- The jobless rate will be 9.5 per cent in 2011 and 8.4
mate is that the household savings ratio will continue per cent in 2012, measured as annual averages.
upward to an average of 6.3 per cent in 2012.

One source of near-term concern is that many chroni- Long-term unemployment on the way
cally unemployed people are beginning to reach the down
maximum period of unemployment benefits, 99 weeks. There are still more than 6 million chronically unem-
These payments average USD 300/week. It is a close ployed people (41.7 per cent of the total), yet the
call whether Congress will approve another extension situation looks a little better than during the summer,
of these benefits. Without another extension some one when 6.8 million (46 per cent) of those without jobs
million Americans will reach the end of their benefit belonged to this category. Falling long-term jobless-
period each month from December to April. The income ness is especially positive, since the risk of being
loss will be sizeable: USD 70 billion or 0.5 per cent of pushed out of the labour market is diminishing.
GDP. Meanwhile lower transfer payments will be offset Many of the long-term unemployed lose both their
by a gain in private wages and salaries. Our overall as- willingness and ability to work (hysterisis), and this is
sessment is that household consumption will rise by an often permanent effect of a deep recession.
1.8 per cent in 2011 and 2.8 per cent in 2012. Long-term unemployment down from peak
Per cent of total unemployment, per cent
Economy vulnerable to energy price shock 50 12
45 11
Oil prices are flirting with the USD 90 level again. One
40 10
benevolent interpretation is that the upturn is due to
35 9
stronger demand in the world economy, especially in
30 8
Asia. But there are many signs that the price increase
25 7
is connected to the Fed’s new monetary stimulus
20 6
measures. Since the American central bank began to
15 5
indicate that quantitative easing was in the pipeline,
10 4
oil prices (Brent crude) have climbed by 6 per cent.
5 3
80 85 90 95 00 05 10
Rising energy costs squeeze household income in real
terms. Their ability to absorb the upturn is limited by Long-term unemployment (LHS)
all the idle capacity at the production stage and in the Unemployment rate (RHS)
Source: BLS, SEB
labour market. Oil prices reached USD 90/barrel for
the first time in October 2007, and a few months However, the downturn in long-term unemployment is
later the US recession began. The difference is that hardly due to any underlying improvement in the la-
US unemployment was 4.7 per cent in October 2007, bour market situation. Overall joblessness has moved
while it is 9.6 per cent today. Capacity utilisation in sideways in recent months. Instead, the downturn
the manufacturing sector is below 73 per cent today seems connected to the fact that more and more of
(79 per cent three years ago), and consumer confi- the long-term unemployed are approaching the end
dence is now at 50 (95 three years ago). A number of of their benefit period. This leads many of them to
factors indicate that a new recession is not imminent, accept jobs that they had previously rejected. Another
but the American economy is more vulnerable to an effect is that people lose their motivation to remain
energy price shock today than in October 2007. official job seekers, thus dropping out of the regis-
tered labour force and not being counted in unem-
Labour market beginning to heal ployment figures.
The October employment report contained a number
of bright spots. Above all, non-farm payrolls increased Home prices
significantly faster than expected and income re- Index Jan 2006 = 100
bounded. Other parts of the report indicated a poorly 110 110

functioning labour market: 1.1 million full-time jobs 105 105
100 100
have disappeared since this past summer, labour market
95 95
participation has fallen to the lowest level for a quarter
90 90
century and the percentage of people with jobs − the
85 85
indicator that many labour market experts consider
80 80
the most important barometer of the situation − is
75 75
approaching earlier lows. Employment will continue to
70 70
climb, according to our forecasts, but weak GDP growth
65 65
over the next six months will not lay the groundwork for 06 07 08 09 10
any impressive increase in job numbers. Unemployment
will remain high this winter and then start falling again. Case-Shiller 20 Existing home sales
FHFA


The United States

Companies can still ramp up production without appre-
Housing starts at rock bottom
ciably increasing their headcount. In the third quarter, Millions, annualised
productivity rose 2.5 per cent year-on-year. The rate of 2.50 2.50
increase thus remains strong, indicating that clear job 2.25 2.25
growth will not materialise for another while. Produc-
2.00 2.00
tivity will rise 3.4 per cent this year and 1.4 per cent
1.75 1.75
in 2011, according to our forecasts.
1.50 1.50
Shaky housing market 1.25 1.25
Home prices, measured by the Case-Shiller price change 1.00 1.00
index in the 20 largest metropolitan areas, have lost 0.75 0.75
ground in recent months and are now only 4 per cent
0.50 0.50
above spring 2009 lows. In the past month, the down-
0.25 0.25
turn was broad-based, with prices falling in 19 of 20
60 65 70 75 80 85 90 95 00 05 10
metro areas. Some regions have been especially hard
Source: US Census Bureau
hit: home prices in metropolitan Las Vegas and Detroit
have fallen to 1999 and 1995 levels, respectively.
QE will push up growth a bit
The Federal Reserve has decided to buy USD 600 bil- The estimated stimulus effects vary, depending on the
lion worth of government bonds over an eight-month source. Fed calculations show that bond purchases of
period. The central bank’s balance sheet will thus con- USD 500 billion are equivalent to a 50-75 basis point
tinue to swell, reaching 20 per cent of GDP, compared interest rate cut and that the 2009 QE package low-
to 6 per cent before the crisis. Having lowered the ered long-term yields by about 50 per cent. One rule
price of money (interest rates) to an absolute mini- of thumb is that an interest rate cut of 75 bps boosts
mum, the Fed is now pumping up liquidity instead. GDP by 1.2 per cent in a two-year perspective.
The impact will probably be smaller this time around,
In theory, quantitative easing (QE) can stimulate the
as the recent upturn in long-term yields also indicates.
economy in several ways: 1) lower interest rates boost
Important monetary policy channels such as the hous-
consumption and investments in interest rate-sensitive
ing market and bank lending are still out of commis-
sectors, 2) a weaker dollar benefits foreign trade, 3)
sion. Households are continuing to retire their debts
rising stock market valuations stimulate consumption
and − at least those with a good credit history − are
and capital spending via the wealth effect, 4) home
already seeing very favourable financing conditions. As
prices climb, leading to new borrowing and consump-
long as consumer demand is being squeezed, com-
tion and 5) looser monetary policy is ordinarily ac-
panies lack incentives to accelerate capital spend-
companied by easier credit conditions and an increase
ing, despite low or even negative real interest rates.
in bank lending.
Capital shortages are not a problem at present: the
Speculation about a new monetary stimulus package balance sheets of major corporations are in very good
took off after the Fed’s meeting in Jackson Hole, Wyo- shape, and banks have more than USD 1 trillion in
ming late in August, contributing to a rally in many surplus reserves.
asset classes. For example, US stock market indices
Monetary policy has an impact, but it is weaker than
have gained some 13 per cent since summer.
usual. The Fed’s QE measures will help boost growth in
the course of 2011, thereby reducing the likelihood of
Price changes in various asset classes since
a Japanese-type deflation scenario.
Jackson Hole
Core inflation comparison
Aug 27 Nov 19 Change Year-on-year percentage change
S&P 500 1,065 1,200 12.7% 3.5 3.5
3.0 3.0
Dollar index 82.9 78.5 -5.3%
2.5 2.5
10-yr Treasury bonds (%) 2.65 2.87 +22bps
2.0 2.0
10-yr TIPS (%) 1.03 0.72 -31bps 1.5 1.5
10-yr BE (%) 1.61 2.07 +46bps 1.0 1.0

Oil, USD 78.5 83.6 6.4% 0.5 0.5
0.0 0.0
Gold, USD 1,236 1,345 8.8%
-0.5 -0.5
Corp. spread 194bps 174bps -20bps
-1.0 -1.0
Source: SEB -1.5 -1.5
Japan (1989 - 2002) US (2006 - 2010)
Source:BLS, Statistics Bureau, SEB


The United States

Home prices will probably stay depressed this autumn year and 650,000 next year, measured as annual aver-
and winter. Indicators are divided: some valuation ages. By way of comparison, the historical average is
measures and indices of what households can afford 1.5 million. The large percentage of vacant units − both
(even adjusted for tighter lending conditions) show that single-family homes and rental flats − is continuing to
home prices should be rising. On the other hand, the prevent a recovery in housing construction.
large inventory of homes is pointing towards a contin- US dollar is getting cheaper
ued price squeeze; this is the indicator to which we Index, USD/EUR
have attached the most importance in recent years. 1.15 92.5
1.20 90.0
By definition, about 15 per cent of home mortgages 1.25 87.5
are problem loans, but the problems of the banking 1.30 85.0
sector are wider than this. Insufficient documenta- 1.35 82.5
tion and irregularities during foreclosure procedures 1.40 80.0
have been revealed, causing banks to announce a new 1.45 77.5
moratorium on foreclosures − providing (involuntary) 1.50 75.0
support to the housing market in the form of free hous- 1.55 72.5
ing for millions of Americans who have defaulted on 1.60 70.0
their mortgages. This stimulus totals USD 2.6 billion per 07 08 09 10
month, according to The Wall Street Journal. Most of
Dollar per euro, reversed (LHS)
this money will likely go towards other consumption. US dollar Index (RHS)

Looking ahead, the moratorium will reduce the supply
Declining dollar having little impact
of existing homes; in recent years about one third of
sales have been foreclosures. New home sales may also
on CPI
Since early summer, the dollar decline hit 14 per cent
benefit slightly, which is positive for new construction
in trade-weighted terms before reversing some of that
and GDP. Housing starts will total 600,000 units this

The market is worried about inflation that Fed policies will drive up inflation in the long
Market reactions indicate rising concern that the Fed’s term. Inflation expectations (5Y 5Y forward BE infla-
stimulus measures will lead to inflation down the tion) show an upturn of nearly 70 bps since late August
road. Since late August − when speculation about a and approached a 10-year peak a few weeks ago.
new round of QE took off − real interest rates (TIPS) According to the market deflation risks
have fallen (-31 basis points) while nominal interest have evaporated
rates have risen somewhat (+22 basis points). Like a Per cent
mirror image, inflation expectations (break-even infla- 3.5 3.5
tion) have risen by 46 bps during the same period. In 3.0 3.0
mid-October, TIPS reached a record-low 0.36 per cent.
2.5 2.5
Nominal vs real yields 2.0 2.0
Per cent
6 6 1.5 1.5

1.0 1.0
5 5
0.5 0.5
4 4
0.0 0.0
3 3 04 05 06 07 08 09 10

2 2 5y 5y forward BE inflation
1 1
However, alternative measures of inflation expec-
0 0 tations indicate that deflation remains a risk. One
04 05 06 07 08 09 10 Cleveland Fed yardstick that focuses on how the pub-
10-year TIPS ("real rate") lic perceives inflation looking ahead 10 years ahead
10-year Treasury bond ("nominal rate") has fallen to its lowest-ever level (1.53 per cent in
10-year break-even inflation
Source: Reuters EcoWin, SEB October).

This year’s downturn in long-term yields has an en- In addition, there are powerful price-lowering forces
tirely different dynamic than in 2008, when 10-year such as continued reductions in private sector borrow-
Treasury bonds fell to their lowest yield in modern ing and enormous quantities of idle resources in the
times (2.07 per cent). At that time, deflation worries economy. For example, 17.1 per cent of the labour
drove down nominal yields; expected 10-year inflation force, or 26 million Americans, are unemployed or
stood at 0 per cent according to the break-even meas- underemployed. Our conclusion is that it is too early
ure. This time around, the market seems convinced to declare an end to the danger of deflation.


The United States

movement in recent weeks. Although it still has some A Republican wind is blowing
way to go before hitting its 2008 and 2009 lows, this The Republicans achieved strong gains in the Novem-
movement has created concerns in other countries. ber 2 mid-term elections, recapturing a majority in
Rapid, sharp dollar slides have led to problems before. the House of Representatives but not in the Senate.
In the 1970s, for example, the declining dollar was one The most important question now is whether the two
reason why global inflation took off. main parties can work together. A popular adage on
Wall Street is that “political gridlock is good”, since
Meanwhile a new Fed study shows that a 10 per
it prevents the passage of new legislation affecting
cent decline in the dollar only drives up inflation
the business community − something that is hardly
by 0.3 percentage points. Among the factors limiting
true this time around, since the economy faces major
its impact are that foreign companies do not want to
structural problems. Political blockages and obstacles
lose US market share, but instead accept lower profit
to collaboration will increase the probability of a new
margins. It is thus most likely that core inflation will
recession. In the short term, the single most important
continue to be squeezed by factors mainly determined
compromise will be an extension of the George W. Bush
in the domestic market, such as rents and services.
administration’s tax cuts. Other key issues are prop-
In line with our earlier forecasts, core inflation has
erty taxation, extending the time limits on unemploy-
continued to fall. Core consumer prices are rising at
ment benefits and a flare-up of protectionism. Another
their slowest pace since records began; 0.6 per cent in
certainty is a re-working of the health care reform,
October. There are many indications that inflation will
which is the object of growing criticism. Looking further
fall somewhat further. In light of this, the Fed has cited
ahead, the structural deficit in the federal budget can-
the risk of deflation as one of the main motives for its
not be swept under the carpet.
new stimulus measures.
As a rule, the electorate has always punished or re-
Unit labour cost (ULC), one of the most important driv-
warded an incumbent president’s party on the basis of
ing forces in the inflation process, has fallen during four
how the economy is performing. We can thus assume
out of the past five quarters.
that Barack Obama will present pro-business and
Core inflation uncomfortably close to zero growth-promoting proposals between now and the 2012
Year-on-year percentage change presidential election, but the Republicans seem deter-
3.5 7 mined to sabotage the president’s plans. For example,
SEB
3.0 forecast 6
the Republican leader in the Senate, Mitch McConnell,
has repeatedly declared that his party’s highest priority
2.5 5
is to make Obama a one-term president. There is a risk
2.0 4 that this will harm the economy.
1.5 3
The tough budget situation at the state and local
1.0 2 government level will slow GDP growth by about 0.5
0.5 1 percentage points next year. In addition, the Obama
0.0 0 administration’s two-year tax cuts will likely expire,
00 01 02 03 04 05 06 07 08 09 10 11 12 along with the 99-week limit on unemployment ben-
efits. Infrastructure projects funded by the stimulus
Core CPI inflation (LHS) Fed Funds (RHS)
Core PCE inflation (LHS) package have also peaked, in our assessment. Taken
Source: BLS, BEA, SEB
together, this means that federal fiscal policy will now
Our forecast is that core inflation, measured by CPI, have a clear tightening effect on GDP growth: about
will fall from 0.9 per cent this year to 0.6 per cent in -1 percentage points in 2011.
2011. Prices will remain under control during the fol-
The federal budget deficit, which totalled more than
lowing year as well, but our assessment is that inflation
USD 1.4 trillion in fiscal 2009, will slowly shrink to USD
curves will begin to point slightly upward. Core inflation
1.3 trillion in 2010 and USD 1.26 trillion in 2011. The
will amount to 1 per cent in 2012.
deficit as a percentage of GDP will gradually decline
The Fed’s favourite yardstick is core inflation as meas- but will remain at a high 8.4 per cent in 2011. The na-
ured by the personal consumption expenditure (PCE) tional debt, which stood at 84 per cent of GDP in 2009,
deflator. According to this, core inflation will now fall will exceed 100 per cent by 2012.
below the central bank’s comfort interval. Alterna-
tive measures of underlying price pressure do not, in
principle, indicate any price pressure at all. This is why
the Fed − as it did after the previous inflation when
the dotcom (IT) bubble burst − will stick to ultra-loose
monetary policy during the foreseeable future. It will
not hike the federal funds rate until mid-2012.


The United States

A plan to get the deficit under control
Mandatory spending accounts for 85 per cent of
federal outlays. Getting a grip on public finances and
reversing the trend towards an escalating US national
debt will thus require a comprehensive approach.
Merely trimming discretionary spending each year will
not accomplish much.

Federal government budget balance
Per cent of GDP
5.0 5.0

2.5 2.5

0.0 0.0

-2.5 -2.5

-5.0 -5.0

-7.5 -7.5

-10.0 -10.0

-12.5 -12.5
80 85 90 95 00 05 10

Source: US Department of the Treasury, SEB

Erskine Bowles, a Democrat, and Alan Simpson, a
Republican − co-chairs of the deficit commission ap-
pointed by President Obama − surprised everyone by
unveiling their personal conclusions in mid-November.
Their proposals would lead to a reduction in the fed-
eral budget deficit from USD 1.3 trillion this year to
USD 400 billion by 2015. The proposed reforms would
also slowly begin to shrink the national debt, which
now stands at USD 13.7 trillion. It remains to be seen
whether their proposals will reach Congress for a vote
later this year, since the support of least 12 of the
other 16 deficit commission members will be needed
first.

The proposals include cutbacks in the Social Security
pension and Medicare systems, raising the retirement
age and lowering defence appropriations. The tax sys-
tem would be simplified, with one attractive feature
being that tax revenue would increase, at the same
time as both income and corporate taxes would be
cut. Lower tax rates would be offset by eliminating
other tax credits and deductions. Fiscal policy would
not be affected during 2011.


Japan

Continued recovery but increased uncertainty
ƒ Record-strong yen hampering export firms have recently been strong. This is usually a sign that
corporate capital spending is about to take off.
ƒ Deflation pressure is continuing
Deflation is maintaining its grip. In September, the infla-
ƒ Bank of Japan intervention and stimulus
tion rate was -0.6 per cent, while core inflation was
-1.5 per cent for the fourth straight month. CPI will fall
by nearly 1 per cent this year. We expect 2011 inflation
After a very strong start in the first quarter of 2010,
to be close to zero.
growth decelerated noticeably in the second quarter,
then took off again in the third quarter; according to The US Fed’s quantitative easing policies and the crisis
preliminary figures, GDP climbed then by an annualised in southern Europe have contributed to a sharp rise in
3.9 per cent. Growth figures for the first and second the yen. Since January, the yen has gained some 15 per
quarters have been revised substantially upward. cent against the euro and 10 per cent against the dollar.
We expect GDP to increase by 3.1 per cent in 2010. This autumn the Bank of Japan intervened in an at-
Growth will then slow to 1.6 per cent in 2011 and 1.5 tempt to counter yen appreciation. We expect the USD/
per cent in 2012. JPY rate to stand at 88 at the end of 2011.
Sharp decline for purchasing managers' index The yen is stronger than ever against the USD
65 65 400 400
60 60
55 55 350 350

50 50 300 300
45 45
40 40 250 250

35 35
200 200
30 30
25 25 150 150
20 20
100 100
15 15
06 07 08 09 10 50 50
77 80 83 86 89 92 95 98 01 04 07 10
Total Order bookings
Export order bookings USD/JPY EUR/JPY
Source: Markit Source: Reuters EcoWin

Recent indicators are reflecting the fragility of the re- Economic stimulus measures are now in effect on a
covery. The purchasing managers’ index in manufactur- broad front. This autumn, the government presented
ing has fallen sharply from a peak of 54.7 in May to 47.2 a new fiscal stimulus programme in the form of an
in October. Order bookings are at their lowest since extra budget equivalent to USD 55 billion, equivalent
April 2009. Export order bookings have also fallen below to about 1 percent of GDP. Among other things, this
50. The slowdown is also clearly evident in hard data. stimulus will be used to prop up regional economies and
During the past three months, industrial production has small businesses. This means that central government
fallen back to its January level. Exports have also been debt will keep climbing and will reach 240 per cent of
subdued in recent months. We believe this will continue GDP by 2012.
during the first half of next year. In 2011, export growth
will end up just above 4 per cent. Early in October, the BoJ lowered its key interest rate
from 0.1 per cent to the 0-0.1 per cent range. It also
There are some positive signs in the domestic economy, unveiled an asset purchase programme equivalent
however. Unemployment fell slightly to 5 per cent in to USD 62 billion. About 80 per cent will be used for
September, helping to fuel private consumption. We purchases of government securities and the rest to buy
estimate that consumption will increase by about 2 per corporate bonds, commercial paper and exchange-
cent this year. The number of housing starts has risen traded funds (ETFs). We expect this programme to have
for four months in a row. Aside from weak figures for only a limited impact, however.
September, order bookings for the machinery industry


Asia

Global economic engine despite slower growth
ƒ Capital inflows creating tensions ated with various problems. Capital inflows generate
appreciation pressure on Asian currencies, which could
ƒ Soft landing in China
make their exports less competitive. There is also a
ƒ Continued good growth in India heightened risk of asset price bubbles and a threat of
instability if the capital flows should reverse.

A number of countries have tried to limit these inflows
Asia’s resilience during the economic crisis has further
by means of regulation or intervention in the foreign
increased the importance of that region to the world
exchange market. This autumn, growing criticism of
economy. Asian emerging countries have moved from
US monetary policy has begun to be heard in emerging
just above a 10 per cent share of global GDP in 1990 to
economies, thereby increasing the risk of more wide-
nearly one fourth in 2010. But during the third quarter,
spread measures in these countries.
their GDP growth rate decelerated, mainly as a conse-
quence of slower expansion in exports and industrial Inflation in Asia
production. Looking ahead, we expect continued de- Year-on-year percentage change
celeration, though growth will remain higher than the 12.5 12.5
global average. 10.0 10.0

So far, the strong performance of the Asian economies 7.5 7.5

has not led to any broad inflation pressure although ris- 5.0 5.0
ing food prices are pushing up consumer prices in China, 2.5 2.5
India and elsewhere.
0.0 0.0
GDP growth decelerates -2.5 -2.5
-5.0 -5.0
15.0 15.0
07 08 09 10
12.5 12.5
10.0 10.0 China Indonesia South Korea
India Malaysia Thailand
7.5 7.5 Source: Local statistical offices
5.0 5.0
2.5 2.5
0.0 0.0
China: Gradual deceleration
In China, economic growth slowed during the third
-2.5 -2.5
quarter. GDP rose by 9.6 per cent year-on-year, com-
-5.0 -5.0
pared to 10.3 per cent in the second quarter. There are
-7.5 -7.5
07 08 09 10 no signs of an economic hard landing. While it is true
that the rate of increase in exports decelerated clearly
China Indonesia South Korea
in September, neither purchasing managers’ indices,
India Malaysia Thailand
Source: Local statistical offices retail sales, industrial production nor bank lending
reflected any significant drop in activity − thereby
The main risks in Asia are connected to large-scale confirming the picture of a controlled soft landing we
capital inflows. Good global liquidity combined with described in our August report. GDP growth will reach
major differentials in interest rates and growth pros- 10.2 per cent in 2010 and decelerate to 9 per cent in
pects between Asia, on the one hand, and the United 2011. In 2012, GDP growth will be 8 per cent.
States and Western Europe on the other are the driving
forces behind this trend. During the autumn, the US The contribution of exports to growth will decrease
Federal Reserve’s quantitative easing policy and in the next couple of years, while the role of domes-
accompanying downward pressure on the dollar have tic demand will increase. There are various examples
further strengthened speculative capital flows to Asia. of China’s efforts to reduce dependence on exports
and continue its transition towards more domestically
These inflows are leading, among other things, to rising driven demand. An important element is investing in
share and property prices as well as a heavy demand for the development of China’s central and western areas,
fixed income securities. These developments are associ- which are lagging behind the more industrialised and


Asia

urbanised eastern part of the country. One example national level have risen roughly in line with disposable
is the build-up of a functioning financial system and per capita income.
improvement in rural infrastructure, thereby countering
bottleneck problems in the agricultural sector. Con- Chinese authorities have also begun to use interest rate
sumption in rural areas has been stimulated by provid- policy in order to cool down the economy. In October,
ing discounts to households for purchases of capital the central bank raised its key rate by 25 basis points to
goods. China’s five-year plan for 2011-2015 will also 5.56 per cent. This was the first rate hike since Decem-
focus on strengthening domestic demand and the “qual- ber 2007 and a reaction to rising CPI inflation in recent
ity” of growth. Central government expenditures for months. In October, the inflation rate reached 4.4 per
health care will continue to increase, reducing the need cent, which was the fastest increase since September
for households to save and thereby stimulating con- 2008 and well above the central bank’s 3 per cent tar-
sumption. A growth model based on domestic demand get for 2010. Rising food prices drove up inflation; core
rather than export growth will provide more stable inflation, which excludes food and energy, was 1.1 per
development with fewer imbalances, but GDP growth cent in September for the third month in a row. There is
will probably no longer be able to reach double-digit limited room for further rate hikes as long as developed
figures. economies keep their key interest rates at extremely
low levels, due to problems related to speculative cur-
Broad-based tightening rency flows. However, our assessment is that the central
The housing market remains hyperactive, and in a bank’s concern about the rapid increase in the inflation
number of major cities there are clear signs of over- rate will result in more interest rate hikes in late 2010
heating. At the national level, home prices continue to and early 2011. China is also considering price controls
climb rapidly, although the rate of increase has deceler- to contain inflation.
ated somewhat since this past summer. In September, China: CPI, core inflation and key rate
the year-on-year rate of increase was 9 per cent. In Per cent
some major cities, home prices have reached a level 9 9
higher than an average household can manage. 8 8
7 7
China: Slower increase in home prices 6 6
Year-on-year percentage change 5 5
25 25 4 4
3 3
20 20
2 2
15 15 1 1
10 10 0 0
5 5 -1 -1
0 0 -2 -2
00 01 02 03 04 05 06 07 08 09 10
-5 -5
-10 -10 CPI Key rate (one year interest)
-15 -15 Core inflation
Source: National Bureau of Statistics of China
-20 -20
07 08 09 10
Cautious appreciation
70 cities Shenzhen
Beijing Hangzhou Since China’s central bank resumed the appreciation
Source: National Bureau of Statistics of China of the yuan against the US dollar in June, the currency
has appreciated by a modest 3 per cent. Communica-
This autumn, the government has implemented new
tion from the bank indicates that this appreciation will
measures to cool down the housing market. It has fur-
continue at a modest pace, out of concern for Chinese
ther restricted residential loans to households by lower-
export companies. But there are good arguments for
ing the permitted loan-to-value ratio. Bank reserve
letting the currency strengthen. Such appreciation will
requirements have also been raised, and a property tax
counteract inflationary tendencies triggered by imports
will probably be introduced during 2011. The authori-
but will also help boost household purchasing power,
ties have also pledged to build housing units that even
thereby facilitating the transition to an economy more
low-income households can afford, in order to slow
based on domestic demand.
down the long-term price increases for housing.
We expect China to keep its promises of continued,
In our assessment, these measures are sufficient to
modest-paced yuan appreciation against the dollar. It
ensure that a sharp decline in home prices can be
is likely that periods of yuan appreciation will alternate
avoided. We are thus sticking to our main scenario, in
with periods of depreciation, in order to decrease the
which prices will level off. One reason for this is that
risk that “one-way bets” will boost speculative capital
in a longer-term perspective, price increases have not
inflows. Over the next 12 months we foresee an ap-
been alarmingly high. Since 1998, when China’s private
preciation of the yuan against the dollar of around 4
housing market began to develop, home prices at the
per cent and that the USD/CNY rate will then be 6.40.


Asia

The relatively slow appreciation of the yuan has ber. Changes in the weightings India uses to measure
become an important issue in the US; the House of Rep- inflation have also contributed to the slowdown. In our
resentatives approved a bill that would allow American assessment, the inflation rate will continue to deceler-
companies to demand import tariffs on imports from ate in the next few months, among other things as a
China to compensate for the weak yuan. Yet it is unlike- consequence of monetary tightening.
ly that this proposal will be implemented in practice.
Both China and US have an interest in not escalating The central bank is nevertheless continuing to express
their disagreements. And although the tone of dis- concern about developments, since inflation is far
course has occasionally been shrill, there are still signs above the desired 3 per cent medium-term rate. Since
of a desire to reach consensus. China has expressed a the bank began tightening monetary policy in March
willingness to specify a target for reduction of its trade 2010, it has raised its key interest rate by 1.5 percent-
surplus. Meanwhile, the US has chosen not to single out age points to a level equivalent to 6.25 per cent. The
China as a currency manipulator. central bank has indicated its willingness to continue
hiking interest rates, since it is beginning to view rising
Cautious yuan appreciation against the USD food prices as a structural problem associated with
6.50 6.50 excessively low supply of certain goods. Our assessment
6.75 6.75 is that the bank will hold off until the first quarter of
2011, among other things to give its earlier rate hikes a
7.00 7.00
chance to have an impact.
7.25 7.25
India: Purchasing managers' index
7.50 7.50
62.5 62.5
7.75 7.75 60.0 60.0
8.00 8.00 57.5 57.5

8.25 8.25 55.0 55.0

8.50 8.50 52.5 52.5
05 06 07 08 09 10
50.0 50.0
47.5 47.5

45.0 45.0
India: Continued good growth
Low export dependence, coupled with domestic 42.5 42.5
07 08 09 10
stimulus measures, has enabled India to weather the
economic crisis of recent years satisfactorily. Growth Manufacturing sector Service sector
Source: Markit
has been good in 2010; second quarter GDP growth
was 8.8 per cent, or somewhat higher than in the first India’s central bank exemplifies how emerging countries
quarter. Looking ahead, however, the signals are a little are actively trying to counter the effects of capital in-
more mixed. The purchasing managers’ index in the flows. This autumn, the bank intervened in the foreign
service sector has fallen in recent months, while the exchange market in order to limit the appreciation of
index for manufacturing recovered in October. The rate the rupee against the US dollar. Our assessment is that
of increase in industrial production has decelerated the rupee will stand at 42 per USD one year from
sharply since last spring, and in September the year-on- now.
year percentage change was 4.4 per cent. Key interest
rate hikes and fading stimulus effects also indicate that Unlike most other Asian emerging countries, however,
growth will slow somewhat during the second half of India is running a current account deficit. This deficit
2010. We have revised our 2010 GDP growth forecast has grown during 2010 as demand for imports has risen
a bit downward to 8.7 per cent. GDP will grow by 8.0 and is expected to reach around 3 per cent of GDP. In
per cent in 2011 and 7.0 per cent in 2012. this situation, capital inflows help facilitate the financ-
ing of the deficit, but it is a source of concern that
This year’s good harvest has helped curb food price these inflows are clearly dominated by portfolio invest-
increases. CPI inflation has consequently fallen from ments rather than direct investments and can thus be
just below 11 per cent in April to 8.6 per cent in Octo- withdrawn quickly.


The euro zone

Decent 2011, but debt reduction is burdensome
ƒ Exports will slow in 2011 and growth will Mixed indicators
level off Most leading indicators have continued to rise this au-
ƒ Ireland and Portugal are in bad shape − tumn. For example, Germany’s IFO index − which shows
financial aid required relatively strong co-variation with GDP growth − has
kept on climbing. In October the IFO reached its high-
ƒ No ECB refi rate hike until March 2012 est level since May 2007 (107.6). Respondents’ view of
current business conditions improved, while their future
expectations were also surprisingly positive despite a
In the euro zone as a whole, growth is in line with stronger euro and increased risks to global growth. This
our earlier forecasts. GDP will grow by 1.6 per cent signals that the country’s GDP growth, which reached
this year, far above the consensus view prevailing as a strong 3.9 per cent year-on-year in the third quarter
recently as this past summer. But differences within (4.3 in the second quarter), will gain further momen-
the region have widened: Germany is benefiting from tum during the rest of 2010. We expect German GDP
an exceptional export and investment surge this year, growth of almost 4 per cent year-on-year in the
while various other euro zone members − especially fourth quarter, pushing the full-year figure to 3.6 per
the PIIGS countries (Portugal, Ireland, Italy, Greece and cent.
Spain) − are burdened by competitiveness problems
IFO at three year high
and fiscal austerity measures. This two-speed euro zone Year-on-year percentage change (GDP), IFO index 2000=100
will continue in 2011 and 2012. The German economy 5.0 120
will decelerate but growth will remain somewhat 115
3.0
above trend, while the PIIGS countries will continue to 110
be weighed down by structural problems and budget 1.0 105
consolidation. Financial aid measures at the European -1.0
100
level, combined with national cost-cutting programmes, 95
-3.0 90
have indeed eased acute crisis symptoms. But the
85
problems are far from solved. Today they are especially -5.0
80
large in Ireland and Portugal. Euro zone growth will -7.0 75
reach 1.7 per cent in 2011 and 1.5 per cent in 2012, 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
somewhat above today’s consensus forecast.
GDP, Germany (LHS)
Germany in the lead, PIIGS lagging behind Current business conditions (RHS)
Composite leading index Expectations (RHS)
Source: Federal Statistics Office, IFO
112.5 112.5
110.0 110.0 However, other indicators are pointing towards a
107.5 107.5
slowdown. The purchasing managers’ index (PMI) for
105.0 105.0
102.5 102.5
the euro zone as a whole fell somewhat faster than
100.0 100.0 expected in October, reaching a level (53.4) compat-
97.5 97.5 ible with quarter-on-quarter GDP growth of about 0.3
95.0 95.0 per cent during the fourth quarter. The downturn in the
92.5 92.5 index was driven by the service sector, while manu-
90.0 90.0
facturing continued upward. Financial market players
87.5 87.5
85.0 85.0
also doubt the recovery, judging from Germany’s ZEW
00 01 02 03 04 05 06 07 08 09 10 index. However, the decline in the index unexpectedly
reversed in November; the current economic situation
Germany France PIIGS
Source: OECD
sub-index continued upward to its highest level since
July 2007 and the sub-index for the future climbed
Low inflation will enable the European Central Bank above zero.
to keep its refi rate low for an extended period in
order to support economic recovery in southern Europe. Exports will slow down
The first rate hike to 1.25 per cent will come in March The upturn in the IFO index reflects the success of Ger-
2012. The key rate will be 1.75 at the end of 2012. man manufacturers so far this year; order bookings are


The euro zone

currently increasing by about 20 per cent year-on- expect fixed investments to grow by about 4 per cent
year, while industrial production and exports will climb annually in the euro zone during 2011-2012.
more than 10 per cent for the year as a whole.
Capital spending has rebounded
The manufacturing sector is also rebounding in France Year-on-year percentage change and per cent
10 85.0
and Italy, where production will increase by nearly 5
per cent this year. In other countries, the trend is far 5 82.5
more modest. In Portugal and Spain, for example, the 80.0
0
upturn will not exceed 1.5 and 1 per cent, respectively,
77.5
while Greece will note a 5 per cent downturn. -5
75.0
-10
72.5
Industrial production -15 70.0
-20 67.5
2009 2010 2011 2012
00 01 02 03 04 05 06 07 08 09 10
Germany -16.4 9.0 4.4 4.1
Gross capital formation (LHS)
France -18.0 4.8 3.5 3.3 Capacity utilisation, manufacturing (RHS)
Source: Eurostat, DG ECFIN
Italy -18.4 4.8 2.9 2.5
Spain -16.2 0.9 1.7 3.1 As for private consumption, developments in Germany
are crucial. So far, German consumers seem to be
Greece -10.2 -5.0 -1.5 2.5
clutching their wallets tightly; in September, retail
Portugal -8.4 1.5 0.7 2.1 sales fell for the second month in a row.
Ireland -4.5 4.0 3.8 3.6 Consumer confidence is climbing
Euro zone -14.8 7.0 3.8 3.5 Index and year-on-year percentage change
5 4.0
Source: European Commission, SEB
0
3.0
Stronger domestic demand -5
2.0
To date, the economic recovery in the euro zone has -10
been driven by rising exports, especially from Germany. -15 1.0
Because of the stronger euro and a global industrial -20
0.0
cycle that is entering a more mature phase, export -25
growth will cool in 2011. To keep the recovery from -30
-1.0
losing momentum, domestic demand will have to be -35 -2.0
capable of taking over as a growth engine. 00 01 02 03 04 05 06 07 08 09 10

Rising capacity utilisation indicates that capital spend- Consumer confidence (LHS)
ing will accelerate during our forecast period: we Private consumption (RHS)
Source: DG Ecfin, Eurostat, SEB

A 20 per cent probability of recession
The probability of a renewed recession in the next Probability of recession in the next six months
six months can be calculated with the help of “probit Per cent
Probability Share
analysis”. This method clearly illustrates the major
differences in economic potential that character- Germany <5 26.8
ise the euro zone right now. It shows that over the France <5 20.3
next six months, the risk of recession is very small in
Italy <5 16.7
France, Italy and Germany while the risk of a contin-
ued recession is highly apparent in Greece (80-85 per Spain 10-15 12.9
cent risk). The risk of a recession in Portugal and Spain Greece 80-85 3.3
is 10-15 per cent. However, taking into account the Portugal 10-15 2.2
risk of recession in the United States as well, and the
links that exist between the euro zone and the US as Ireland 20-30 1.5
well as individual euro zone countries, the recession Euro zone 20 100
risks are proving generally higher. Our overall assess-
ment is that the risk of a “double dip” in the euro
Note: “Share” refers to each country’s percentage of total
zone is about 20 per cent. euro zone GDP in 2009.
Source: European Commission, SEB


The euro zone

The combination of a stronger labour market, rising This autumn, the situation in Ireland has become
consumer confidence and accelerating pay hikes never- increasingly acute. This year’s budget deficit will reach
theless indicates that private consumption may soon a stunning 32 per cent of GDP due to the government’s
begin making a positive contribution to economic concerted efforts to save the banking system. Although
growth in Germany. We anticipate an increase of just much of the deficits are due to nonrecurring outlays,
above 1 per cent in both 2011 and 2012 after this year’s Ireland is in very bad shape. Rapidly rising yields on its
stagnation. In the euro zone as a whole, consumption bonds forced the government to announce EUR 6 billion
will rise by about 0.5 per cent this year and roughly 1 (3.8 per cent of GDP) in further cutbacks on November
per cent in both 2011 and 2012. 4, well before publication of next year’s budget sched-
uled for December 7. The government hopes to bring
Overall, this forecast implies that GDP growth will down the deficit to about 9.5 per cent of GDP in 2011
remain just above 1.5 per cent in 2011-2012, about and 3 per cent by 2014. We do not believe it will fully
the same as our forecast in August and slightly higher succeed in doing so. Instead, we anticipate a continued
than the consensus forecast. German GDP will grow by deficit of more than 10 per cent in 2011 and well above
3.6 per cent this year, 2.5 per cent in 2011 and just 3 per cent in 2014. There is thus a great risk that Ire-
below 2 per cent in 2012. France will grow by about land’s sovereign debt rating will be downgraded from
1.5 per cent a year throughout our forecast period, the current Aa2 (according to Moody’s), even after
Italy by around 1 per cent. Spanish GDP will shrink by Ireland’s formal request for financial support from
about 0.5 per cent this year, then show positive growth the EU and the IMF on November 21.
of more than 0.5 per cent in 2011 and above 1 per cent
in 2012. Greek GDP will fall by 4 per cent this year and Fiscal tightening, 2010-2013
by 2 per cent in 2011, with around zero growth in 2012. Per cent of GDP
10 10

More austerity required 9 9

Major fiscal austerity programmes are now being 8 8

implemented in many euro zone countries. Aside from 7 7

Greece, economic needs − and problems − now look 6 6

especially great in Ireland and Portugal. Among other 5 5

things, Greece has slashed wages and salaries and 4 4

boosted the retirement age in its public sector. Early in 3 3

November, the Portuguese parliament accepted a new 2 2

budget that includes higher banking fees, a VAT hike, 1 1

tighter expenditures and the sale of government assets.
According to Prime Minister José Sócrates, the budget Portugal Italy Spain
Ireland Greece
will enable the country to avoid “the danger zone of Source: SEB
financial market turbulence”. In Spain, sharp cutbacks
in the public sector and tax hikes are on the way. Total fiscal austerity measures during 2010-2013 cur-
rently appear likely to reach about 5 per cent of GDP
Rising 10-year yield spreads against Germany in Portugal, between 7 and 8 per cent in Ireland, just
Percentage points above 1 per cent in Italy, about 10 per cent in Greece
10 10 and about 6 per cent in Spain − and further increases
9 9
cannot be ruled out.
8 8
7 7
However, German federal tax revenue has provided
6 6
upside surprises so far this year. One effect of the
5 5
4 4
rapid upswing in the economy has been surging corpo-
3 3 rate profits and thus large tax payments from compa-
2 2 nies. The German government has been able to revise
1 1 its budget deficit forecast downward several times.
0 0 Early in November, for example, government projec-
Oct Jan Apr Jul Oct Jan Apr Jul Oct
08 09 10
tions indicated that revenue will be a full EUR 62.5
France Ireland Portugal billion larger in 2010-2012 (about 2.5 per cent of GDP)
Greece Italy Spain than according to its earlier forecast. We are sticking
to our view that Germany will meet the 3 per cent EU
These austerity measures will help ease budget deficit budget deficit ceiling as early as next year.
and sovereign debt problems, but in many countries the
situation remains serious. Government debt is continu-
ing upward towards record levels, with lasting uncer-
tainty about long-term solvency as a consequence.


The euro zone

cent since March of this year. The jobless rate appears
Budget balance and sovereign debt
unlikely to rise any higher, despite weak growth in the
Per cent of GDP
Budget Debt PIIGS countries and southern Europe. One major reason
why unemployment did not increase was the resilient
2010 2011 2012 2012
German labour market (unemployment there fell to
Ireland -32.0 -12.1 -10.6 118.2 6.7 per cent in September). The German government’s
Spain -9.8 -8.5 -7.0 78.5 system of “Kurzarbeit” allowances, which enables
Greece -10.1 -8.6 -8.0 153.5 potentially redundant employees to work fewer hours
but retain most of their normal pay, has surpassed
Portugal -8.3 -7.6 -6.1 98.1
expectations. Because companies could keep on a large
France -7.6 -7.1 -5.6 93.3 percentage of their labour force during last year’s
Slovakia -6.0 -5.2 -3.7 50.3 slump, they have now been able to ramp up production
quickly again during the upturn phase. These subsidies
Belgium -5.0 -5.0 -3.5 107.7
may have saved more than 500,000 German jobs.
Slovenia -6.0 -5.0 -3.5 49.9
Unemployment will fall in 2011-2012
Netherlands -6.0 -5.0 -3.5 75.3 Per cent
11.0 11.0
Italy -5.3 -4.7 -3.2 129.2
Austria -4.7 -4.5 -3.0 79.7 10.0 10.0

Germany -4.0 -2.3 -1.8 81.5 9.0 9.0

Finland -3.4 -2.5 -2.2 51.9 8.0 8.0
Euro zone -6.6 -5.3 -5.0 94.0 SEB
7.0 forecast 7.0

Source: European Commission, SEB 6.0 6.0

Lower unemployment in 2011-2012 5.0 5.0
00 01 02 03 04 05 06 07 08 09 10 11 12
In the euro zone as a whole, unemployment rose to 10.1
per cent in September after moving sideways at 10 per Okun's Law NAIRU
Unemployment
Source: Eurostat, OECD, SEB

Watered-down sanctions when EU Stability
and Growth Pact is revised
In September the European Commission − led by Olli fund that would save member countries from financial
Rehn, Commissioner for Economic and Monetary Policy crises like the one that hit Greece last spring, Ger-
− unveiled a series of new economic policy propos- many proposed a revision of the Lisbon Treaty so the
als aimed at correcting shortcomings in euro zone EU could not be forced to pay the cost of getting a
collaboration. The Commission presented a package of crisis-ridden country out of its problems. The reason
measures intended to harmonise and tighten surveil- is that today’s Lisbon rules forbid bail-outs, which a
lance of member countries’ fiscal policies. These permanent version of last spring’s temporary rescue
proposals are the EU’s most ambitious effort so far to fund might imply.
improve the stability and long-term growth forces in
the economies of EU member countries. France also managed to win acceptance for its
proposal to sideline the question of automatic and
For example, the Commission presented a new time- stricter sanctions against countries that mismanage
table for budget procedures, with a larger element of their public finances. This means that today’s arbitrary
advance budget surveillance, unlike the current sys- voting rules, in which a qualified majority of mem-
tem of examination after the fact. Sanctions against ber countries must vote for sanctions, will remain in
countries that violate the rules of the Pact will also be force.
tightened and made clearly more automatic.
These French and German demands imply that the Eu-
Aside from restoring fiscal stability in the euro zone, ropean Commission’s proposed new economic policy
the Commission also wants to mobilise the forces that legislation will be partly watered down. All member
drive economic growth by enacting various struc- countries − and the ECB − seem to agree that a strict-
tural reforms, for example in the labour and service er overall approach is needed, with more focus on
markets. budget discipline, debt levels, long-term sustainability
in public finances and growth-promotion policies, but
The EU summit meeting in Brussels late in October
it remains to be seen whether there is sufficient
nevertheless revealed major disagreements about
political will to actually achieve an improvement.
the allocation of power in the EU system. In re-
sponse to a proposal to create a permanent rescue


The euro zone

Yet similar systems have not prevented unemployment tract for Germany’s metalworkers, which expires in
from climbing in other euro zone countries. In France March 2012, pay will rise by 2.7 per cent year-on-year
the jobless rate now stands at 10 per cent, in Italy at starting in April 2011. Other unions are likely to make
8.3 per cent. In Spain the trend is disastrous: unemploy- similar demands, and the general recommendation by
ment stood at 20.8 per cent in September, more than German trade unions is that wages and salaries should
twice the September 2007 level. A strong tourist season increase by about 3 per cent year-on-year. This
with fewer lay-off notices nevertheless helped lower rate of pay hikes is also quite consistent with our own
Spanish unemployment in the third quarter − the first projections, which indicate pay increases of nearly 3
downturn since the second quarter of 2007. We still per cent year-on-year by the end of our forecast period
expect euro zone unemployment to end up averag- (see above chart). In Germany there seems to be rather
ing 10 per cent this year, 9.7 per cent in 2011 and 9.4 widespread acceptance of somewhat higher pay hikes
per cent in 2012 − a somewhat brighter forecast than (see the discussion below about internal devaluation).
today’s consensus view, which remains around 10 per
cent both in 2010 and 2011.
Inflation expectations just below 2 per cent
Net figure and per cent
This forecast is partly based on estimates of what level 35 4.5
30 4.0
of GDP growth is compatible with unchanged unemploy-
25 3.5
ment (see Nordic Outlook, August 2010). Our estimates 20 3.0
indicate that this growth requirement has decreased in 15 2.5
the euro zone over the past decade: from 2.3 per cent 10 2.0
5 1.5
in 1990-2000 to 0.9 per cent in 2000-2010. As the above
0 1.0
chart shows, the jobless rate will fall towards the long- -5 0.5
term non-accelerating inflation rate of unemployment -10 0.0
(NAIRU). Unemployment is now dropping faster than -15 -0.5
-20 -1.0
assumed by Okun’s Law − which relates unemployment
02 03 04 05 06 07 08 09 10
to the output gap − primarily due to the positive effects
of temporary job-sharing allowances. When these al- Households' expected price trend, next 12 months (LHS)
Break-even inflation, 2012 (RHS)
lowances are phased out, however, there is a risk that Source: DG ECFIN, Retuers EcoWin
unemployment will rebound.
Continued low inflation pressure
Pay increases will accelerate Although euro zone inflation in October, as measured
The sharp economic downturn of 2009 resulted in very
by the Harmonised Index of Consumer Prices (HICP),
limited pay demands from trade unions, which cared
came out at 1.9 per cent − somewhat higher than
more about preserving their members’ jobs than about
expected − most signs indicate continued low inflation
nominal wage and salary hikes. Pay increases in the
pressure. The October figure was pushed upward by a
euro zone manufacturing sector thus decelerated from
temporary jump in food prices. Even with oil prices at
a peak of just over 4 per cent in early 2009 nearly down
today’s level, the contribution of energy to inflation
to 1.5 per cent at present. Total hourly wage hikes have
will decline sharply in the months ahead. Capacity and
fallen from just below 3 per cent in 2009 to about 1.5
resource utilisation are also still low. Current pay agree-
per cent in 2010.
ments are low. In addition, inflation expectations are
Pay increases will accelerate in 2012 relatively restrained, though higher than a year ago.
Percentage points, year-on-year percentage change Break-even inflation is currently just below 2 per cent.
-2.0 4.5 Core inflation (HICP excluding energy and food prices) is
-1.5 4.0 also stable at around 1 per cent.
-1.0
3.5 Core inflation will bottom out early in 2011
-0.5 Per cent
3.0
0.0 4.5 4.5
0.5 2.5 4.0 4.0
1.0 2.0 3.5 3.5
SEB
3.0 forecast 3.0
1.5 1.5 2.5 2.5
2.0 2.0 2.0
1.0
00 01 02 03 04 05 06 07 08 09 10 11 12 1.5 1.5
1.0 1.0
Change in unemployment, shifted 2 years forward (LHS) 0.5 0.5
Change in total wage and salary cost in industry (RHS) 0.0 0.0
Source: Eurostat, SEB
-0.5 -0.5
-1.0 -1.0
But the economic recovery in the euro zone, especially
01 02 03 04 05 06 07 08 09 10 11 12
in Germany, will mean somewhat faster pay increases
ahead. For example, according to the collective con- HICP inflation Core inflation
Source: Eurostat, SEB


The euro zone

We expect a decline in HICP inflation to 1.7 per cent sively low key interest rate in Germany is relatively
in December this year and 1.3 per cent in June 2011. limited, though, since the need for stronger German
Measured as annual averages, HICP inflation will be 1.5 domestic demand will gradually increase as the coun-
per cent this year, 1.3 per cent in 2011 and 1.4 per try’s export recovery enters a more mature phase. Nor
cent in 2012. Energy and food will contribute 0.3-0.5 should a faster-paced domestic economy − with higher
percentage points to inflation in 2011-2012. Our infla- nominal pay increases and private consumption − be
tion forecast is somewhat higher than in August, mainly a problem for German industry, which has greatly im-
due to VAT and other tax hikes in major euro zone proved its international competitiveness throughout the
countries. Core inflation will be somewhat below 1 per past decade. An adjustment in the relative cost level
cent until the second quarter of 2012, then begin a slow between the PIIGS countries and Germany may actu-
climb towards 1.4 per cent in December 2012. ally be a positive side effect of the ECB’s continued low
refi rate, since it may smooth out savings imbalances in
Big differences in competitiveness the euro zone (private savings are too low in the PIIGS
Unit labour costs, index 2000=100
countries, too high in Germany).
150 150
145 145 ECB: Decline in long-term refinancing
140 140
135 135
EUR billion
130 130 800 800
125 125 700 700
120 120
600 600
115 115
110 110 500 500
105 105 400 400
100 100
95 95 300 300

00 01 02 03 04 05 06 07 08 09 10 11 200 200
100 100
Portugal Italy Spain
Ireland Greece Germany 0 0
Source: OECD 98 00 01 02 03 04 05 06 07 08 09 10

Short-term refinancing ("main refinancing operations")
No ECB rate hike until March 2012 Long-term refinancing
The ECB is in no hurry to raise its key interest rate, Source: ECB

which has stood at 1 per cent since May 2009. It is true
In the euro zone as a whole, the banking and financial
that the central bank has made upward adjustments in
sector is also likely to need low interest rates for some
both its growth forecast for the euro zone (1.4-1.8 per
time to come, despite certain signs of stabilisation.
cent this year, 0.5-2.3 per cent in 2011) and its infla-
Credit and money supply growth remains historically
tion forecast (1.5-1.7 per cent and 1.2-2.2 per cent,
low despite its recent upturn, and the decline in long-
respectively). However, due to a combination of great
term ECB refinancing may be a sign of weaker demand.
uncertainty about growth prospects in the next couple
of years and major budget and growth problems in the
Overnight rate still below refi rate
Per cent
PIIGS countries, the euro zone central bank will hold
5.0 5.0
off on rate hikes in order to sustain the economic
4.5 4.5
recovery in southern Europe. 4.0 4.0
Continued low credit and money supply 3.5 3.5
growth 3.0 3.0
Year-on-year percentage change 2.5 2.5
15.0 15.0 2.0 2.0
12.5 12.5 1.5 1.5
1.0 1.0
10.0 10.0
0.5 0.5
7.5 7.5
0.0 0.0
5.0 5.0 Jan May Sep Jan May Sep Jan May Sep
08 09 10
2.5 2.5 EONIA O/N Refi rate
0.0 0.0

-2.5 -2.5 We still foresee that the ECB will hike its refi rate to
99 00 01 02 03 04 05 06 07 08 09 10
1.25 per cent in March 2012. After that, there will be
Credits M3 two more hikes that same year, bringing to refi rate to
Source: ECB
1.75 per cent by the end of 2012. The European Over-
night Index Average of interbank interest rates (EONIA)
In 2011-2012 the refi rate level will thus be largely
is currently some 20 basis points below the refi rate,
tailored to the needs of southern Europe, rather than
but we expect it to coincide with the refi rate during
those of fast-growing Germany. The cost of an exces-
the first half of 2011.


The United Kingdom

British economy will weather fiscal storm
ƒ Home prices are losing ground again rates will ease the debt service burden — UK house-
holds are among the most indebted in the world — and
ƒ High inflation a headache for the BoE make more room for consumption, but at the same time
ƒ Employment rising rapidly, but jobless major public sector austerity packages will hold down
rate not yet declining income and consumption.

Home prices represent a significant downside risk.
The Nationwide index has fallen during four of the past
During the past six months the British economy has
five months. Home prices are now 10 per cent above
performed better than feared, but large government
their low (February 2009) but also 12 per cent below
austerity programmes will slow activity ahead. A weak
their peak (October 2007). Indicators predict further
pound and loose monetary policy will help maintain
price declines, and various valuation measures reveal a
decent growth, however. We predict GDP growth of 1.7
need for additional downward price adjustments.
per cent in 2010 and 2.1 per cent in both 2011 and
2012: a bit below trend, but slightly above consensus. Cumulative changes since January 2008
We foresee no further monetary stimulus, but the Bank Per cent
of England (BoE) will quickly intervene if the recovery 0 0
begins to falter. Stubbornly high inflation is giving the -1 -1
central bank a headache: CPI will increase by 3.1 per
-2 -2
cent this year and 2.6 per cent in 2011, and household
inflation expectations are pointing upward. The first -3 -3
key interest rate hike will occur at the end of 2011. -4 -4

The latest business sentiment surveys give reason for -5 -5
cautious optimism. In manufacturing, service and con- -6 -6
struction, the purchasing managers’ index is above the
-7 -7
50 mark; the first two surveys show an upward short-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
term trend. Corporate capital spending rebounded 08 09 10
earlier this year, and according to investment plans this GDP Employment Hours
Source: ONS, SEB
upturn will continue. Capital spending will grow by
an average of 8 per cent in 2011-2012. Exports are Employment is now rising rapidly. Large cutbacks in
another reason for our cautiously optimistic growth sce- public sector jobs are being offset by a strong upturn in
nario: here, too, indicators appear robust. The pound private employment. So far, about 45 per cent of job
has weakened by about 25 per cent in effective terms losses have been recovered. Part-time jobs account
since 2007, bolstering the competitiveness and increas- for the lion’s share of the upturn (65 per cent). The em-
ing the profit margins of exporters. But the pound is ployment upswing is having no significant impact on the
now fundamentally undervalued, and we expect it to jobless rate, since the labour supply is rising almost as
strengthen in the course of next year; the EUR/GBP ex- fast. Unemployment will remain at around 8 per cent
change rate will be 0.83 at the end of 2011. Exports during the next six months, then slowly decline.
will increase by an average of more than 9 per cent in
2011-2012, with foreign trade making an overall posi- Fiscal headwinds will accelerate in 2011. According to
tive contribution to the economy. the emergency budget, the government’s borrowing re-
quirement will fall by 10 per cent of GDP by 2015/2016,
Since 2009 consumption has increased rapidly in mainly via discretionary fiscal policy. The budget has
nominal terms, thanks to a decline of 4.5 percentage been well received; the UK’s sovereign credit rating
points in the household savings ratio. Brighter future no longer seems to be threatened, for example. In this
prospects, combined with higher asset values, have context, it is encouraging to note that the UK also car-
decreased the need for large household savings buffers, ried out a sharp fiscal tightening in the early 1990s, yet
but the decline in saving is probably behind us now. GDP grew by an average of 3 per cent yearly. Although
various factors now indicate that the economy can tol-
In real terms, consumption rose 1.1 per cent this year.
erate the fiscal austerity measures, the impact of such
It will accelerate slightly in 2011 and 2012. Low interest
large cutbacks is very uncertain.


Eastern Europe

Domestic demand awakening despite austerity
ƒ Moderate GDP growth Ukraine has bounced back unexpectedly fast after last
year’s 15 per cent GDP slide, with the economic upturn
ƒ Small public sector debt being driven by higher steel prices and a weak currency.
ƒ Currencies appreciating Growth will slow from 5 per cent this year to 4 per cent
in 2012, partly due to budget austerity requirements by
Ukraine’s creditor, the IMF, as well as reduced gas price
The export-led recovery of the past year in Eastern subsidies to households and businesses.
Europe − which in many places has been stronger than The region’s earlier problems with huge current account
in the West − is continuing. According to leading indica- deficits have eased greatly. Looking ahead, we expect
tors, however, the upturn in the manufacturing sector small current account deficits in most countries (and
in most countries is about to slow, due to sagging a surplus in Russia). Inflation will be low but gradu-
global growth. But there is good potential for domes- ally rise. In the short term, inflation rates in Russia and
tic demand to assume a larger role as an economic Ukraine will surge due to higher grain and gas prices.
engine. Real wages have again begun to climb, and Large budget deficits in Eastern Europe will successively
unemployment is slowly falling. Meanwhile a gradual shrink and thus help keep public sector debt at rela-
thaw in tough credit conditions is under way. Overall, tively low levels compared to Western countries.
we therefore expect GDP growth to accelerate further
in most of the region during 2011-2012 (see also SEB’s Effective exchange rates in selected
Eastern European Outlook, October 2010). countries
Index 100 = 2005
However, growth will not reach the unsustainable pace 140 140
that prevailed before the crisis. This is because growth 130 130
is less credit-driven than before and due to such struc-
120 120
tural factors as labour market and emigration problems
110 110
in the Baltic countries and the slow pace of reform
100 100
in Russia. Many countries in Eastern Europe (includ-
90 90
ing what is sometimes called Central Europe) are also
tightening their fiscal policies, if only moderately. The 80 80

picture is mixed. In Poland, for example, fiscal tighten- 70 70
ing is mainly affecting households. Hungary, however, is 00 01 02 03 04 05 06 07 08 09 10

targeted its austerity measures to businesses by means Russia, RUB Czech Republic, CZK
of “crisis taxes” in certain sectors, while planning to Poland, PLN Hungary, HUF
Source: Local statistical offices
lower household income taxes.
We are adhering to our forecast that key interest rate
Russia’s GDP, whose growth will be unexpectedly weak hikes will begin in the first half of 2011. Poland (in
this year, will increase by 4.3-5.0 per cent in 2011- Q1) and the Czech Republic will act first to ensure they
2012, sustained by high commodity prices and in the can meet their inflation targets. Given the combina-
short term also by continued expansionary fiscal policy. tion of early interest rate hikes compared to the West,
Our oil price forecast of USD 86-89/barrel in 2011-2012 relative growth advantages and relatively low public
is roughly USD 15 higher than assumed in the Russian sector debt, we predict further appreciation in most
government’s medium-term budget plan, which aims at Eastern European currencies. The Fed’s new quantita-
achieving fiscal balance by 2015. tive easing will also reinforce the trend of capital flows
Due in part to strong fundamentals in Poland, we are to high-return emerging market investments.
sticking to our above-consensus growth forecast. GDP We expect Polish zloty appreciation to 3.60 per euro by
growth will climb from 3.5 per cent this year to 4.0- the end of 2011, which probably means a slight overval-
4.5 per cent during the next couple of years. Capital uation in a long-term perspective. The Hungarian forint,
spending will be a major driving force. Since 2000, fixed squeezed earlier this year by weak budget policies and
investment has been lower than in other fast-expanding tense relations with the IMF, will gain strength and
economies, averaging only 21 per cent of GDP, which reach 260 per euro in December 2011.
means that many needs still remain unmet. Above all,
we expect growing investments in infrastructure.


The Baltics

Gradual recovery
ƒ Competitive exports previously estimated potential rate of 6-7 per cent.
In the medium term, it is reasonable to adjust annual
ƒ Structural problems in the labour market
potential growth downward to around 5 per cent,
ƒ Stronger financial market confidence mainly due to the labour emigration wave of recent
years as well as a more balanced but weaker credit and
investment dynamic than before the crisis.
The recovery in the Baltics keeps gaining strength,
mainly as a result of competitive exports. But capital Exports will remain a growth engine
spending and consumption are now also slowly start- In the short term, exports will remain a major driv-
ing to recuperate, sustained by continued low interest ing force in GDP growth. Year-on-year and in current
rates and some improvement in real disposable house- prices, they have climbed at 30-40 per cent in recent
hold income. These developments are consistent with months. Towards the end of 2010, though, we expect
our forecasts since last winter. However, Latvia’s GDP growth to slow due to fast-fading positive base effects.
decline in 2010 is now expected to be clearly milder, Export boom
only 0.3 per cent, and the Estonian growth this year is Year-on-year percentage change, 3mma
expected to be slightly higher. 50 50

Growth is resuming 40 40

GDP, year-on-year percentage change 30 30
15 15 20 20
10 10
10 10
0 0
5 5
-10 -10
0 0 -20 -20

-5 -5 -30 -30
-40 -40
-10 -10
01 02 03 04 05 06 07 08 09 10
-15 -15
Estonia Latvia Lithuania
-20 -20
01 02 03 04 05 06 07 08 09 10
Looking ahead, weakening global demand will also lead
Estonia Latvia Lithuania to more sedate export growth. Meanwhile Baltic exports
go mainly to countries and regions with a continued
All three countries have resumed positive growth during good growth dynamic such and Germany and the Nordic
the past two quarters, measured year-on-year, after countries. Latvia and Lithuania also trade extensively
depression-like GDP declines of 14-18 per cent in 2009. with nearby Eastern European countries. The Baltics
During the third quarter, the upturn gained strength in have very little exposure to such countries as the US
Estonia while Latvia noted its first GDP increase since and the UK.
the first quarter of 2008. Short-term indicators also
Restored competitiveness is one important reason
point towards continued economic upturn. For example,
behind the export upturn. Due to a successful internal
the European Commission’s sentiment indicator − which
devaluation strategy in the past two years, the Baltics
began to rebound in spring 2009 and mainly (in Esto-
have managed to regain previously lost export market
nia’s case almost completely) followed the pattern in
shares. Monthly wages and salaries have been cut by 12
the euro zone − has kept climbing this autumn, though
per cent in Estonia and Lithuania and nearly 20 per cent
levelling-off tendencies are now beginning to appear.
in Latvia. In our assessment, private sector pay levels
Overall, we anticipate decent GDP growth in 2011- bottomed out during the first half of 2010.
2012. We expect Estonia’s GDP to rise by 4.0 per cent
annually, while Latvia’s growth will reach 4.0 and 5.0
Sluggish recovery in domestic demand
As expected, domestic demand has remained depressed
per cent respectively and Lithuanian GDP will increase
during the autumn, but there are signs that household
by 4.0-4.5 per cent. Growth will thus not reach the


The Baltics

consumption bottomed out this past summer. Labour neutral fiscal stance. Overall, we expect budget deficits
and residential market stabilisation in the past six to shrink from 8 per cent of GDP this year in Latvia and
months has contributed to this. During the correction, Lithuania to 3-4 per cent in 2012. We expect Estonia,
home prices in Latvia fell nearly 70-80 per cent from which has had by far the best public finances of the
mid-2007 peak levels. In Estonia, the downturn was three, to show a slight increase in deficits from 2 to 3
50-60 per cent, while Lithuanian home prices fell 40 per cent of GDP.
per cent. Looking ahead, we also expect consumption
to benefit from increased private sector pay, but the Improved market confidence
recovery in domestic demand will be sluggish. The main In the past year, markets have regained their confi-
reasons are that labour market improvements are ex- dence in the Baltic countries and their euro-pegged
pected to be slow and the current unwinding of private currencies. This was reinforced after the parliamentary
debt will continue during 2011. In Estonia, investments election in Latvia, where the centre-right coalition
may perhaps grow faster than we had anticipated in the government moved from minority to majority rule. Late
wake of euro zone accession on January 1, 2011. in October, Prime Minister Valdis Dombrovskis formed
a two-party coalition (previously three parties) that
Even higher unemployment controls 55 of the 100 seats in Parliament. Pricing of
Per cent credit default swap (CDS) contracts indicates that after
22.5 22.5
the Latvian election, the market has further lowered
20.0 20.0 the default risk both in Latvia and Lithuania.
17.5 17.5
Reduced risk of sovereign default
15.0 15.0
5-year CDS contracts, basis points
12.5 12.5 At present,
600 600
10.0 10.0 550 550
500 500
7.5 7.5
450 450
5.0 5.0 400 400
2.5 2.5 350 350
02 03 04 05 06 07 08 09 10 300 300
250 250
Estonia Latvia Lithuania 200 200
150 150
100 100
Structural labour market problems 50 50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
A painful economic policy of dramatic internal devalu-
10
ation and aggressive fiscal consolidation has wiped out Estonia Latvia Lithuania
earlier major economic imbalances in the Baltics, in Source: Reuters EcoWin

the form of wage inflation and import-driven current The political risks appear largest in Lithuania. The
account deficits (read more about this in SEB’s Eastern conservative-led coalition has been a minority govern-
European Outlook). In the past six months, deflation ment since last spring, and there are signals that it will
pressure has eased and sharp current account improve- ease austerity in the 2011 budget despite the large
ments have culminated. During 2011-2012 we expect public sector deficit. Apparently the government will
moderate inflation (however more accentuated in Es- rely on higher GDP growth to shrink deficits. Despite lin-
tonia) in the wake of higher private wages and salaries gering political tensions and the unpopularity of Prime
next year and small current account deficits, due to Minister Andrius Kubilius, our assessment is still that the
stronger imports. government should be able to stay together until the
2012 parliamentary election.
Remaining imbalances, with accompanying political
challenges, include sizeable structural labour market Our main scenario is that Latvia and Lithuania can
problems and continuing large public budget deficits join the euro zone in 2014. This is also consistent with
in Latvia and Lithuania. All three Baltic countries are their official ambitions. But we foresee risks of delay
grappling with labour market matching problems, high connected to budget developments, since it may be
youth unemployment and large-scale emigration. Unem- difficult for them to meet the euro zone’s budget crite-
ployment, which peaked at around 20 per cent in the rion. In order to adhere to the timetable, deficits must
first half of 2010, will gradually continue to fall and will be brought down to 3 per cent of GDP by 2012 before
still average 14-15 per cent during 2012. the EU assesses the Latvian and Lithuanian economies
in 2013.
These labour market problems will lead to persistent
fiscal deficits. Latvia will continue to tighten its budget,
an assessment based on the unexpected success of
the governing coalition in the early October election.
In Lithuania and Estonia, we anticipate a relatively


Sweden

Strong growth creating policy dilemma
ƒ Rapid GDP growth will decelerate Inflation will remain low, largely due to record-low
pay increases during 2010 and 2011, but inflation will
ƒ Exports can endure a stronger krona
rise during 2012 as pay hikes accelerate and resource
ƒ Debts and home prices pose a future risk utilisation normalises. We nevertheless believe that
ƒ The Riksbank will follow its rate path underlying CPIF inflation will remain below 2 per cent
throughout our forecast period.
ƒ Neutral fiscal policy in 2011, but
challenges ahead In the latest Monetary Policy Report, the Riksbank
adjusted its interest rate path downward, so it now
matches our August forecast. We expect that partly
Sweden’s GDP growth has surpassed expectations so far because of good economic growth and continued rapid
during 2010. We predict GDP growth of a full 5.0 per credit expansion, the Riksbank will deliver rate hikes
cent in 2010 (4.7 per cent adjusted for the number of approximately in line with our forecast. This will mean
working days). This rapid recovery is broadly based. A a key interest rate of 1.25 per cent at the end of
favourable export structure and the effects of the pre- 2010, 2.25 per cent at the end of 2011 and 3.00 at
viously weak krona have given exports an extra push. the end of 2012.
The strength of the domestic economy is diverging even
The recently re-elected Alliance government has chosen
more clearly from other countries. An expansionary
a cautious fiscal policy strategy at the beginning of
fiscal policy and low interest rates helped to rapidly re-
its second four-year term. We estimate that the sum
verse the 2009 decline in consumption. Growth will be
of new programmes, mainly those announced in this
above trend during the next couple of years, although
autumn’s government budget bill for 2011, is SEK 20-25
Sweden will eventually be affected in various ways by
billion. But when temporary local government and in-
the absence of a real overall resurgence in the OECD
frastructure spending from 2010 fade away, fiscal policy
economies. We expect GDP to grow by 3.5 per cent in
for 2011 will be largely neutral. The government has
2011 and by 2.5 per cent in 2012 (3.5 and 2.9 per cent
announced that during its term of office there will be
adjusted for the number of working days).
limited room for reforms, equivalent to SEK 40 billion.
GDP growth peaking in 2010 The government’s strategy during the next couple of
6 6 years is apparently to assert its control of the political
mid-field by being more of a caretaker than a reform-
4 4
er, but we expect it to pursue a more aggressive fiscal
2 2 policy towards the end of its term.
0 0
Policy mix may need to be re-assessed
-2 SEB forecast -2
Because of the international economic policy discourse
-4 -4 that is now under way, there will be reason to discuss
-6 -6
a suitable policy mix in Sweden. The country can boast
a balanced budget, low and falling central government
-8 -8 debt and large trade surpluses. The current account
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
08 09 10 11 12
balance is well in excess of the 4 per cent of GDP cited
Quarter-on-quarter percentage change as an acceptable level during recent G20 discussions.
Year-on-year percentage change Meanwhile the absence of a downward adjustment in
Source: Statistics Sweden, SEB
Swedish home prices diverges from almost all other
The labour market has improved faster than ex- countries. Instead, the household debt ratio has accel-
pected, even taking Sweden’s strong GDP growth into erated and home prices are continuing to climb to new
account. Looking ahead, we expect a continued upturn record levels at a rapid pace, posing obvious risks in a
in employment, though at a calmer pace. Resource uti- longer perspective.
lisation is on the rise, but the output gap will not close
during our forecast period. At the end of 2012, however, Taken together, this may be interpreted as justifying
we foresee unemployment of 7.0 per cent, only 0.5-1 a more expansionary fiscal policy, with more ag-
per cent above equilibrium level. gressive efforts to resolve important structural issues,


Sweden

especially related to taxes. Combined with a clearer Meanwhile there are several factors indicating that
normalisation of interest rates, in order to avert future Swedish exports may continue to increase at a rather
credit and home price bubbles, from an international healthy pace. Export companies are relatively profit-
perspective this would be a natural policy mix in light able, largely due to the rapid cost adjustments they
of Sweden’s situation. implemented during the crisis. The recent appreciation
of the krona has not significantly affected the profit-
Strong rebound for exporters ability estimates in the National Institute of Economic
The sharp recovery in manufacturing is largely a result Research’s Business Tendency Survey. The quarterly
of the sectoral structure of Swedish exports. The global reports of industrial companies confirm this.
downturn of 2009 had a particularly dramatic impact on
such key Swedish exports as intermediate and capital The geographic focus and sectoral structure of Swedish
goods. Since then, the recovery has been strongest in exports are also rather favourable. The fiscal tightening
these areas. This is illustrated, for example, by the measures being enacted in many European countries
trend of imports in the euro zone, the recipient of more will mainly lead to weaker demand for consumer goods,
than one third of Swedish merchandise exports. thus hurting sectors of lesser importance to Swedish
exports. Another favourable circumstance is that key
Euro zone: Merchandise imports export markets like Germany and neighbouring Nordic
Year-on-year percentage change countries are continuing to perform well, while the
50 50
share of exports destined for the PIIGS countries is
40 40
small. See the table below. Exports to the expansive
30 30
Asian market are still relatively limited according to
20 20
merchandise trade statistics, but company reports
10 10
indicate a significantly faster eastward shift in export
0 0
-10 -10
flows. Asia’s role thus seems to be larger than the of-
-20 -20
ficial statistics show. This divergence may be partly due
-30 -30
to a rapid increase in service exports to Asia; informa-
-40 -40 tion about the distribution of such exports by country
Jan May Sep Jan May Sep Jan May Sep Jan May is lacking. Increased direct investments in Asia may
07 08 09 10 contribute to higher deliveries of services from Swedish
Capital goods Intermediate goods
Consumption goods parent companies.
Source: Eurostat
Our overall assessment is that despite a stronger krona,
Swedish merchandise exports have now almost regained exports will grow at the pace of global market expan-
their pre-crisis level. This means that the recovery is sion. This will result in export growth of 7.4 per cent in
entering a more mature phase; we thus expect the rate 2011 and 5.1 per cent in 2012.
of increase to slow in 2011. Certain factors indicate
a clear deceleration. The krona is no longer providing Merchandise exports, January-August 2010
an extra stimulus for exports. This may lead to espe- Per cent
% of total Year-on-year
cially noticeable effects early next year, when a large change, %
proportion of the currency hedging contracts at Swedish Europe 72.3 10.1
companies will expire. Global overcapacity exists in EU 57.6 10.7
certain important Swedish export sectors, and this may Euro zone 37.6 10.0
also increase sensitivity to currency rate changes. Germany 10.2 11.6
Norway 10.1 7.8
Merchandise exports
Index 100 = 2008 UK 7.7 18.2
110 110 Denmark 6.6 0.4
Finland 6.2 9.3
105 105
France 5.0 6.0
100 100 PIIGS 6.4 3.4
95 95 North America 8.3 26.4
90 90
US 7.2 26.1
South America 2.4 22.8
85 85
Asia 11.8 8.9
80 80 China 3.1 10.5
75 75 Total 100 11.8
05 06 07 08 09 10 Source: Statistics Sweden, SEB

Sweden Germany
Source: Statistics Sweden, Deutsche Bundesbank


Sweden

With a certain time lag, capital spending by Swedish chasing power at a rate equivalent to 0.5-1.0 per cent
manufacturers has also rebounded from its record low annually. In addition, the stock market upturn and rising
in 2009. Although capacity utilisation has now risen, home prices will result in an increasingly strong wealth
there is still potential to boost production at many position. Household wealth has increased from 440 per
companies without expanding capacity. We thus expect cent of income in 2009 to 500 per cent in 2010.
capital spending to enter a calmer phase during 2011.
A rapid upswing in residential investments has also Household income and consumption
Percentage change
occurred during 2010. Continued home price increases
indicate that this upward trend will continue in 2011. 2009 2010 2011 2012

Gross fixed investment Consumption -0.8 3.5 2.8 2.5
Percentage change, 2009 level in Income 0.9 1.9 3.4 2.1
current prices (SEK bn)
Savings ratio 12.6 11.3 11.7 11.3
2009 2009 2010 2011 2012 Source: Statistics Sweden, SEB
Government
sector 103 6.7 -2.0 0.0 0.0
Lending to households
Housing 91 -23.4 20.0 12.0 10.0
Business sector 362 -20.5 6.3 6.2 3.6 17.5 17.5

Total 555 -16.0 7.0 6.0 4.0 15.0 15.0
Source: Statistics Sweden, SEB 12.5 12.5

10.0 10.0
Rebound in investments 7.5 7.5
Index 100 = 2005
5.0 5.0
105 105

100 100 2.5 2.5
06 07 08 09 10
95 95
Total
90 90
Housing
85 85 Consumption + other purposes
Source: Riksbank
80 80

75 75 The housing market upturn looks set to continue in the
70 70 short term. Rising interest rates and the recently en-
acted loan-to-value ceiling on mortgages will help slow
65 65
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
price increases, while rising employment and income
05 06 07 08 09 10 will pull in the opposite direction. The latest statistics
Housing Manufacturing indicate an unchanged rate of increase in mortgage
Source: Statistics Sweden
lending and home prices. Other indicators, such as the
SEB housing price index, show a continued upturn.
Strong households − risky housing
market Households continuing to increase their debts
An expansionary fiscal policy helped household income Per cent of disposable income
continue to increase at a healthy pace during the crisis 11 180

years, despite weak wage and salary income. Combined 10
160
with sharply lower mortgage interest rates, this has 9
140
made room for rising consumption. In the past year, 8

actual consumption figures have also rebounded as the 7 120

labour market has improved. In particular, auto pur- 6
100
chases have increased sharply. 5
80
4
The outlook for the next couple of years still looks 3 60
bright. Household confidence is on a par with previ- 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
ous historical highs. In the retail sector, optimism has
Sweden: Interest burden after taxes (LHS)
admittedly declined a bit, but since actual retail sales Sweden: Debts (RHS)
nevertheless rose, this downturn is probably temporary. US: Debts (RHS)
Source: Riksbank, Federal Reserve, SEB
The household savings ratio remains at a historically
high level, and stable employment and falling infla- The long-term trend will depend on whether economic
tion are contributing to stable income increases. Fiscal policy can be crafted in a way that prevents a sharp
policy is continuing to contribute positively to pur- downturn in home prices. In the August issue of Nordic


Sweden

Outlook, we discussed these questions in more detail. There is no shortage of structural challenges, however.
Various underlying factors, for example a continued Employment in the manufacturing sector fell very
moderate interest burden, a slow pace of construction sharply during 2008, and the historical pattern indicates
and the rule system in the housing market will reduce that these jobs will come back only to a limited extent.
the risks of a downturn. On the other hand, historical Expansion will instead occur in the construction sector
experience show that practically no country has been and in private services. Such a rapid structural change
able to avoid a sharp adjustment after such a dramatic may contribute to an upward shift in equilibrium un-
upturn in household debt as is now occurring in Sweden. employment from about 6-6.5 per cent, the level that
prevailed before the crisis. This means that at the end
Strong labour market recovery of 2012, unemployment will not be especially far above
Employment rebounded as early as the end of 2009. its equilibrium level.
More than two thirds of the three per cent downturn
in jobs since 2008 has now been regained. Available Employment
indicators show that this trend will continue, at least Index 100 = 2008, 3 month moving average
107.5 107.5
over the next two quarters. Unemployment has recently
105.0 105.0
also shown signs of falling, although the indicator situa-
102.5 102.5
tion is more mixed here. As economic growth gradually 100.0 100.0
decelerates, the labour market recovery will also slow 97.5 97.5
down, but in 2012 GDP will continue to grow at above 95.0 95.0
its long-term trend. This indicates that unemployment 92.5 92.5
will fall throughout our forecast period. 90.0 90.0
87.5 87.5
Labour market 85.0 85.0
Jan May Sep Jan May Sep Jan May
Percentage change
2009 2010 2011 2012 08 09 10
Total Government sector
Employment -2.1 1.0 1.7 0.7 Manufacturing Services
Construction Retail
Labour supply 0.2 1.1 0.7 0.3 Source: Statistics Sweden, SEB

Unemployment, % 8.3 8.4 7.5 7.1
Average hours worked -0.5 0.7 -0.6 -0.1
Record-low pay increases
Collective pay agreements for 2010 and 2011 were
Productivity (GDP) -2.5 3.0 2.3 2.3 signed at a time when future expectations were very
depressed. The agreements thus ended up being record-
low in terms of pay hikes. Monthly wage and salary
Structural challenges statistics show that these low agreements had a strong
Indicators of resource utilisation, such as capacity uti- impact. Pay increases are record-low even taking into
lisation in manufacturing and labour shortages accord- account that the preliminary monthly figures are always
ing to the NIER Business Tendency Survey, have quickly adjusted upward. Despite the improved labour market,
climbed from the record lows reported in late 2009. we are thus sticking to our earlier forecast that 2010
Today they stand at about the levels prevailing during and 2011 pay hikes will end up around 2.0 to 2.5 per
the previous recession in 2002-2003. These levels indi- cent, that is, well below the historical average.
cate that capacity bottlenecks are not a major obstacle Record-low pay increases
to growth and pose no threat of rising inflation. Year-on-year percentage change
5.0 5.0
Labour shortages in the business sector 4.5 4.5
Net balance
4.0 4.0
35 70
3.5 3.5
30 60
3.0 3.0
25 50
2.5 2.5
20 40
2.0 2.0
15 30
1.5 1.5
10 20
1.0 1.0
5 10 01 02 03 04 05 06 07 08 09 10

0 0 Total Business sector
00 01 02 03 04 05 06 07 08 09 10 Source: National Mediation Office

Manufacturing (LHS) Retail (LHS) In 2012, however, we expect pay increases to rise to
Services (LHS) Construction (RHS)
Source: NIER 3.5-4.0 per cent. The next wage round will occur in a
significantly stronger labour market situation. The year-


Sweden

on-year increase figures will also be affected by the clear downside risk in this forecast. Producer prices,
fact that the revision date in the earlier agreement will which ordinarily lead consumer prices by about six
occur relatively late in 2011. Uncertainty about wage months, have so far risen only moderately. Measured
formation has also increased because the Employers’ in Swedish kronor, broader commodity indices have not
Federation of the Swedish Engineering Industry (Teknik- risen very much either. In addition, short-term com-
företagen) has just withdrawn from the 1997 Coopera- modity price upturns often do not have time to affect
tion Agreement on Industrial Development and Wage the CPI and PPI trend.
Formation.
Even taking food prices into account, however, CPIF
Low inflation will end up well below the Riksbank’s target throughout
Year-on-year percentage change our forecast period. But headline CPI will exceed the
5 5
target, due to rising household mortgage interest costs.
4 SEB forecast 4

3 3
Riksbank will hike key rate as planned
In its October Monetary Policy Report, the Riksbank
2 2 adjusted its future rate hike plans downward. It not
1 1 only revised the rate path in the long term, but also
for the bank’s next interest rate policy meetings. The
0 0
Riksbank is now signalling rate hikes at two of the next
-1 -1 three meetings, thus increasing uncertainty in the short
-2 -2
term as well. But we are sticking to our forecast and
08 09 10 11 12 expect the Riksbank to hike its repo rate at the next
two meetings, that is, in December and February. In our
CPIF CPIF excl energy and food CPI
Source: Statistics Sweden, SEB judgement, third quarter growth will be stronger than
the Riksbank had forecasted, while the labour market
will strengthen and lending to households will increase.
Low inflation, but food an upside risk
After peaking late in 2009, inflation measured as CPIF Repo rate path
(CPI excluding mortgage interest expenses) has fallen. 3.50 3.50
In October it was 1.8 per cent. Low cost pressure will
3.00 3.00
mean continued weak underlying inflation over in the
next couple of years. The appreciation of the krona dur- 2.50 2.50
ing the past year will help ease inflation during the first 2.00 2.00
half of 2011. Core inflation (CPI excluding food, energy
and interest expenses) has also fallen from nearly 3 per 1.50 1.50

cent in late 2009 to less than 1.5 per cent in October. 1.00 1.00
We expect core inflation to continue downward to
0.50 0.50
about one per cent in mid-2011. After that there will be
a moderate upturn, especially because krona-related 0.00 0.00
Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov
effects will be fading.
10 11 12 13
Market pricing Riksbank Oct 2010
Food prices SEB forecast
Year-on-year percentage change Source: SEB

15.0 50
In our judgement, even in a longer perspective the
12.5 40
Riksbank will deliver key rate hikes roughly in line with
10.0 30
its latest rate path. Rapid credit growth, rising home
7.5 20
prices and gradually increasing resource utilisation all
5.0 10
point towards continued interest rate hikes. New regu-
2.5 0 lations, such as the recently introduced loan-to-value
0.0 -10 ceiling on mortgages, as well as restrictions on bank
-2.5 -20 lending due to the new Basel III capital adequacy rules,
-5.0 -30 will reduce the need for rate hikes. Another argument
97 98 99 00 01 02 03 04 05 06 07 08 09 10 against larger rate hikes is that in its latest report, the
PPI, food (LHS) Commodity prices (RHS) Riksbank explicitly discussed the risks of an excessively
CPI, food (LHS) rapid krona appreciation as a consequence of the way
Source: Statistics Sweden, The Economist
major central banks in the OECD countries are keeping
their key interest rates close to zero. As indicated by
We have adjusted our inflation forecast slightly upward
our conclusions in the box below, however, we do not
since August, mainly due to rising food prices next year.
regard rate hikes of the magnitude announced by the
We expect the upturn in Sweden to be consistent with
Riksbank as any major threat to the external balance of
that in the euro zone, 3-4 per cent, but we foresee a


Sweden

the Swedish economy. Taken together, we expect a repo
10-year yield spread vs Germany
rate of 2.25 per cent in December 2011 and 3.00 per
Basis points
cent at the end of 2012. 100 100

Wider long-term yield spread 75 75
The spread between 10-year Swedish government bond
50 50
yields and their German equivalents has risen to about
30 basis points, the highest level since 2005. The most 25 25
important reason for this upturn is that strong economic
signals have made the Riksbank’s plans to raise its key 0 0

interest rate more credible, while the ECB’s refi rate -25 -25
will remain unchanged. Our Swedish repo rate forecast
for 2011 is above market expectations, indicating that -50 -50

the spread will continue to widen ahead. Offsetting this 98 99 00 01 02 03 04 05 06 07 08 09 10 11

is Sweden’s strong Model Actual
Source: SEB

Does the krona risk becoming too strong?
The latest Monetary Policy Report focused on the risk far from the average of the past 10-15 years that it
that the krona may become too strong if the Riksbank would radically alter Sweden’s competitiveness situ-
hikes its repo rate while the ECB and other major cen- ation. Estimates of long-term equilibrium exchange
tral banks in the OECD countries leave their key rates rates based on prices and labour costs also indicate
unchanged. Relevant questions are: In what respects, that even at these levels, the krona will be underval-
and at what levels, will the strengthening of the krona ued.
become a problem?
Net external position
Trade balance and current account Per cent of GDP
Per cent of GDP 5 5
10 10
0 0
8 8 -5 -5

6 6 -10 -10
June 2010
4 4 -15 -15

-20 -20
2 2
-25 -25
0 0
-30 -30
-2 -2
94 96 98 00 02 04 06 08 10 -35 -35
99 00 01 02 03 04 05 06 07 08 09 10
Goods and services Services
Source: Statistics Sweden
Goods Current account
Source: Statistics Sweden, Riksbank
Our conclusion is that the rate hikes indicated by
the Riksbank’s interest rate path will not lead to a
For a long time, Sweden has been running large cur- strengthening of the krona that will cause any serious
rent account surpluses. These have been relatively problems to the Swedish economy.
stable, even at times when the export industry has
Exchange rates
been in crisis. There may be good reasons to run large
13 160
current account surpluses, for example to offset ear-
12 155
lier periods of deficits and to pay down external debt.
USD/SEK
The long period of surpluses has gradually improved 11 150

Sweden’s external position, which has now achieved a 10 EUR/SEK 145
balance. It is thus difficult to see any problem if this 9 140
large current account surplus continues to shrink. For
8 135
example, the surplus is also well above the 4 per cent
7 130
of GDP that has been discussed within the G20 as ac-
ceptable. 6 125

5 TCW 120
According to our forecast, the krona will continue
4 115
strengthening to about 120 in trade-weighted TCW
98 00 02 04 06 08 10
terms. This implies a somewhat stronger krona than
the peaks of the past decade, but a level still not so


Sweden

government finances, which means that the supply of ing upturn was 35 per cent of GDP. During our forecast
sovereign bonds will be limited. Our model for the yield period, we expect Sweden’s gross central government
spread against Germany − which takes into account key debt to fall to 30 per cent of GDP. If we also take the
rates, economic growth and government finances − indi- asset side (for example government owned companies
cates that the spread is now close to a reasonable level and the pension systems buffer funds) into account, the
for 2011, but we expect it to widen by another 15 basis country’s general government net financial position is
points to 50 towards the end of next year. already positive at present.

New krona appreciation phase on the way Falling debt
The krona has regained the entire downturn that oc- Per cent of GDP
curred during the crisis, and the EUR/SEK exchange rate 80 80

is now in the middle of the 9-9.50 interval it occupied 75 SEB 75
70 forecast 70
during 2004-2007. The same is true of the USD/SEK
65 65
rate, although it has been significantly more volatile. In
60 60
recent weeks, however, the krona has lost ground. This
55 55
is due to several factors: 1) The Riksbank’s downward
50 50
adjustment of its rate path, which was partly intended
45 45
to blunt the rapid appreciation of the krona. 2) The 40 40
market has apparently had a long position in Swedish 35 35
kronor, which SEB’s client survey in the Scandie Views 30 30
report confirmed. 3) The USD has regained ground, 94 96 98 00 02 04 06 08 10 12
which often drives the krona weaker against the euro
Maastricht debt Debt
as well. 4) The period from mid-November to early Source: Eurostat, Swedish National Debt Office, SEB

December has a negative seasonal pattern for the SEK,
probably due to the allocation of PPM Swedish pension In its autumn budget bill, the government unveiled
fund capital to foreign assets. When this period is over, reforms totalling about SEK 13 billion in 2011. Includ-
assuming that the Riksbank is continuing to tighten its ing programmes outlined in the spring 2010 budget bill
monetary policy in accordance with our own forecast, and our assumptions about further measures in the 2011
the upward trend for the krona should resume. We spring budget bill, we reach a total of SEK 20-25 billion
estimate that the EUR/SEK exchange rate will be 9.15 in expansionary measures during 2011 (equivalent to 0.7
at the end of this year and 9.00 at the end of the first per cent of GDP). Despite these new measures, overall
quarter of 2011. fiscal policy will be neutral in 2011. This is because
temporary crisis aid in the form of local government
There are strong reasons to forecast continued krona and infrastructure grants will disappear.
appreciation in the long term. The relative gap in
economic performance is wider than for many years, Public finances
Per cent of GDP
bolstering arguments for an unusually large difference
in monetary policies. At present, the likelihood that the 2009 2010 2011 2012
ECB will raise its key interest rate during 2011 is very
Revenue 52.3 51.3 50.8 50.9
small. In addition, the krona seems weak in a long-term
perspective, despite its appreciation during the past Expenditures 53.3 51.8 50.7 50.1
year. In an international environment in which most Net lending -1.2 -0.5 0.1 0.8
countries would like to weaken their currency, there is
Gen. gov’t gross debt 41.7 37.9 35.5 32.8
a higher probability that this long-term undervaluation
will be important. Central gov’t debt 38.3 35.4 32.7 30.0
Borrowing req., SEK bn 176 3 -10 -47
We expect the EUR/SEK rate to stand at 8.75 late in
2011 and 8.60 late in 2012. The corresponding USD/SEK
rates will be 6.73 and 6.77. The central government borrowing requirement has
continued to provide downside surprises during the past
Continued strong public finances 3-4 months, although not to the same extent as earlier
Strong public finances at the beginning of the crisis
in the year. Once again, tax revenue has been surpris-
enabled Sweden to pursue an expansionary fiscal policy
ingly high.
without jeopardising its credibility. After major budget
deterioration between 2007 and 2009, we now expect We are also assuming that the government will sell
the budget balance to be relatively close to zero during SEK 25 billion worth of state-owned assets per year, as
our forecast period. announced. The parliamentary situation makes ap-
proval of new privatisations unlikely, but Parliament
Central government debt rose by about 4 per cent of
has already approved the divestment of the govern-
GDP between 2008 and 2009 − a very modest upturn
ment’s holdings in the telecom group TeliaSonera and
compared to the 1990s crisis, when the correspond-


Sweden

the banking group Nordea. These holdings are sufficient that took effect in the mid-1990s makes the situation
to generate SEK 25 billion per year throughout the easier for a minority government, since the opposition
government’s current four-year term of office. Overall, must join forces and present a common counterpro-
we expect a very small budget deficit of SEK 3 billion in posal in order to defeat a government budget bill. It
2010 and surpluses of SEK 10 billion in 2011 and SEK 37 is highly unlikely that the Social Democrats, Left Party
billion in 2012. Looking ahead, there should also be a and Green Party would join with the right-wing populist
discussion of whether the Riksbank needs its entire ex- Sweden Democrats to defeat the government’s budget
tra currency reserve buffer once the crisis has faded. In bill. The Red-Green coalition (Social Democrats, Left
any case, we estimate that some of the nearly SEK 100 Party and Greens) that campaigned jointly against the
billion (equivalent to about 3 per cent of GDP in 2010) Alliance in the autumn 2010 election has now collapsed,
that the National Debt Office borrowed on behalf of the and the Social Democrats are undergoing their own
Riksbank will be paid back, but that this will occur after crisis. However, the government may have problems
2012. We also believe that the Swedish government’s implementing other bills without negotiating in advance
lending to Iceland and Latvia, nearly SEK 10 billion, will to gain support from one or more opposition parties.
not be implemented.
Challenges later in the government’s
Forecasts of the central government term
borrowing requirement The government’s orderly administration of its finances,
SEK billion
despite international instability, has contributed to
2010 2011 2012 the strong confidence it enjoys among the voters. For
SEB 3 -10 -47 as long as possible, the government will remind them
National Debt Office, November 5 -18 -78 that the crisis is not over and that caution is needed in
National Institute of Economic Sweden’s reform ambitions. Such a policy will make it
Research (NIER), September 21 22 22 easier to stay in control of the political mid-field. Yet
National Financial Management the government will certainly need to show its cards
more clearly later in its four-year term. Given such a
Authority (ESV), August 21 0 -25
strong public sector balance sheet, the debate about
Ministry of Finance, October 27 -6 -47
what is a suitable level of central government debt will
Source: National Debt Office, NIER, ESV, Government probably reappear. In addition, international discourse
Offices, SEB about global imbalances includes recommendations
that countries like Sweden with large current account
From reformist government to surpluses and low national debts should pursue a more
caretaker expansionary policy. In a situation of persistent high un-
After its 2006 election victory, the Alliance government employment, it will then be especially difficult for the
quickly started pushing through an ambitious reform government to argue that Swedish public finances must
programme. Its focus was to strengthen the incentives show surpluses over an economic cycle.
to work, for example by means of earned income tax
credits and reforms of unemployment insurance and In the budget bill for 2011, Finance Minister Anders Borg
other transfer payment systems. presented a number of reforms that will enjoy priority
if room for further spending becomes available. This list
The Alliance’s promises for its new term of office were will serve as a good guide to what may later emerge on
noticeably more cautious. In the 2011 budget bill, its the political agenda. It includes corporate tax cuts, re-
reform measures are scattered among many fields, moval of a 5 per cent extra income tax on the affluent
but with some emphasis on funding for local govern- that was imposed as an austerity measure in the 1990s,
ments and tax cuts for pensioners. During the rest of its lower employer payroll fees and venture capital deduc-
four-year term, the government has signalled relatively tions (a study commission will examine these taxes and
modest reforms totalling SEK 40 billion, or a bit above give advice on what to prioritise).
1 per cent of GDP. This will be allocated among vari-
ous fields, with the most costly reform being additional The government’s choice of strategy will determine the
earned income tax credits, an increase in the break- political frontlines for a fairly long time to come. The
point for paying national income tax and lower VAT on choice between tax cuts and improvements in the busi-
restaurant meals. Compared to the Alliance’s reform ness climate, on the one hand, or a clear commitment
ambitions in the run-up to the 2006 election, the list to health and welfare issues, on the other, will create
seems limited and defensive; the government is shifting tensions. The government will either open itself up to
from a reformist role to a caretaker role. criticism from some elements of the business commu-
nity or to attacks from the opposition, which argued
The Alliance will be ruling as a minority government during the 2010 election campaign that the government
during this term, which is one of the reasons behind had a hidden tax-cutting agenda.
its more defensive policies. But the importance of this
situation should not be exaggerated. The budget law


Sweden

Internal tensions within both the four-party Alliance field, thus opening up their left flank to the Left (for-
government and the opposition also play a part. The merly Communist) Party. The risk in such a strategy may
Moderate Party, which dominates the governing coali- be that more traditional leftist voters will view it as an
tion, apparently has the most to gain from a strong fo- acceptance of elements of the Alliance’s non-socialist
cus on fiscal responsibility. If the signature issues of the policies. There will also a greater focus on the Green
smaller Alliance parties must constantly be sacrificed Party. In keeping with its rules, this party will be elect-
because of tight government finances, tensions within ing two new spokespersons in 2011. During the current
the government are likely to increase − especially if Parliament, the Alliance government will undoubtedly
there is a continued trend towards growing dominance seek support from the Greens on a number of occasions.
by the Moderates in public opinion surveys. Will the Greens move towards the middle or the left?
The political landscape seems about to be reshaped in a
Meanwhile the deep crisis within the Social Democratic way that has not occurred for many years.
Party makes it difficult to assess how the political oppo-
sition will shape its policies. The announced departure
of party chair Mona Sahlin and internal conflicts are
likely to paralyse the party during the coming months.
Yet in our judgement, the process of self-examination
after their heavy election losses in September 2010 will
persuade the Social Democrats to take a step back to-
wards the middle in order to capture the political mid-


Denmark

Decent growth despite budget tightening
ƒ Growth is reverting to a calmer path Exports will keep growing at a healthy pace in 2011
but somewhat more slowly than in 2010, due to weaker
ƒ Good exports that are more competitive
global demand and this autumn’s krone upturn following
ƒ No increase in key rate spread until 2012 earlier depreciation. Meanwhile Danish exporters can
now tolerate a fair degree of currency appreciation,
since wage and salary growth has been brought down to
After an unusually strong second quarter, we are adjust- a more modest level in recent years, similar to that of
ing our 2010 Danish growth forecast upward from 1.8 to competitor countries in Europe. Demand is also solid in
2.2 per cent, but are sticking to our view that growth two major export markets, Germany and Sweden.
will remain modest at just above 2 per cent yearly in
2011-2012 − mainly due to fiscal tightening. Sluggish upturn in domestic demand
Slower growth expected after strong Q2 Domestic demand has begun to recover this year and
Year-on-year percentage change and index will continue rising at a leisurely pace. Consumption
7.5 120 will benefit from continued gradual improvement in
the labour and housing markets, but wage and salary
5.0 110
growth will remain modest. Next year, household spend-
2.5 100 ing will be affected by the three-year budget consolida-
tion that the government announced last spring. This
0.0 90
overall programme is equivalent to 1.5 per cent of
-2.5 80 GDP and includes lower indexing of pensions and other
-5.0 70
transfer payments, as well as cancellation of some
previously planned tax cuts. Corporate capital spending
-7.5 60 is rising, but sentiment surveys and capacity utilisation
94 96 98 00 02 04 06 08 10
signal no great needs. The construction industry is also
Real GDP, quarterly data (LHS) battered after the sharp downturn of recent years. Pub-
EU monthly sentiment indicator (RHS) lic sector investments will be postponed due to budget
Source: Statistics Denmark, DG ECFIN
austerity.
The second quarter GDP increase, 3.7 per cent
Headline inflation has recently jumped to about 2.5
year-on-year, was largely due to temporary effects.
per cent, but core inflation has been calm. The upturn
A hard-to-assess inventory contribution accounted for
is mainly due to base effects and higher energy and
2.1 percentage points. The second quarter of 2009 was
food prices. In the short term, food prices will probably
also extremely weak, providing a low base. Declining
continue upward, partly for global reasons, but over
sentiment indicators this autumn, after an earlier long
time inflation will cool. Consumer price increases will
period of upturns, also signal a slowdown ahead. We
average about 2 per cent annually in 2011-2012.
expect the GDP growth rate to fall below 3 per cent.
More competitive exports this past year After a rapid, dramatic deterioration, the budget deficit
Real effective exchange rate, index 100 = 2005 will total about 5 per cent of GDP this year. Austerity,
107.5 107.5 smaller unemployment outlays and other factors will
shrink the deficit to 3 per cent in 2012.
105.0 105.0

102.5 102.5 As expected, the central bank has left its key lending
rate unchanged at 1.05 per cent, but this autumn it
100.0 100.0
has adjusted other key rates a bit upward in response
97.5 97.5 to rising European market interest rates. This is aimed
at keeping the krone exchange rate stable. Over the
95.0 95.0
next year, the spread against the ECB’s key rate will
92.5 92.5 remain at an extremely low 5 basis points. Continued
robust current account surpluses will allow this, without
90.0 90.0
weakening the krone against the euro. Only in 2012,
94 96 98 00 02 04 06 08 10
once the ECB starts hiking its repo rate, will there be a
gradual normalisation of the spread towards 20 bps.


Norway

Above-trend growth in 2011
ƒ Growth is accelerating again 2.0 per cent in October. Moreover, interest rates are
still at low levels and Norges Bank now seems intent on
ƒ Broad-based growth in domestic demand keeping policy rates unchanged to mid-2011.
ƒ Core inflation to trend higher by mid-2011
Consumption of goods and home prices
ƒ Norges Bank to pause until next June 6-month percentage change
6 12.0
5
The outlook for the Norwegian economy is broadly 4 8.0
3
unchanged from the August Nordic Outlook. For 2010
2 4.0
the forecast for 0.5 per cent growth in overall GDP is 1
slightly lower due to a sharp drop in oil and gas produc- 0 0.0
tion in the third quarter − exaggerated by maintenance -1
at some fields − suggesting a more marked drop in such -2 -4.0
exports. Overall growth should be 2.3 per cent next -3
-4 -8.0
year and ease to 2.2 per cent in 2012.
01 02 03 04 05 06 07 08 09 10
Momentum in mainland GDP − excluding oil/gas and Consumption of goods (LHS)
shipping − is stronger: while we are leaving our forecast Home prices (RHS)
Source: Statistics Norway, Norwegian Association of Real Estate Agents
unchanged at 1.6 per cent for the current year, growth
should accelerate to 2.9 per cent in 2011 and 2012, Growth in private consumption should pick up from
approximately 0.5 per cent above trend. 2.8 per cent in 2010 to 3.5 per cent in 2011 and
3.3 per cent in 2012. The forecasts are slightly above
Private consumption recovering the expected increase in households’ real disposable
Signs of accelerating economic activity have accu- income of approximately 3 per cent on average in 2010-
mulated in recent months. The recovery in domestic 12. The household savings ratio is thus set to decline
demand is becoming more broadly based, in line with slightly, but at 7.9 per cent as of the second quarter, it
our expectations. In particular, private consumption was well above its long-term average. A possibly larger
rebounded in the third quarter following a surprisingly decline in the savings ratio is an upside risk to our fore-
soft trajectory over the first half of the year. In the cast for private consumption.
previous Nordic Outlook, we attributed the “consump-
tion conundrum” first and foremost to higher inflation, However, household debt remains very elevated com-
driven by sharply higher electricity prices over the pared to income. Although credit growth to households
winter, which squeezed real disposable income. Based has yet to show acceleration on the back of low interest
on solid fundamentals, we thus expect consumption to rates, its year-on-year growth of slightly above 6 per
regain strength going forward. cent is still stronger than that of income. Our forecast
thus assumes some debt consolidation when Norges
Momentum accelerated over the summer, as seen in Bank re-starts its rate hiking cycle.
the monthly indicator for consumption of goods, which
rose by 1.1 per cent between the second and the third Unemployment about to peak
quarter, following a slight decline over the first half of Unemployment is still at rather low levels, even though
the year. This development mirrors the improvement in the improvement in the labour market situation −
consumer confidence, with the quarterly index rising to which started in late 2009/early 2010 − seems to have
its highest level since late 2007, slightly above the long- tapered off. Registered unemployment increased rather
term average. In addition, home prices have regained markedly in September and October to 3.0 per cent
strength by rising 4.1 per cent in the six months to of the labour force in seasonally adjusted terms, the
October, while a slowing in the year-on-year rate to 6.2 highest in almost five years. The recent increase does
per cent was due to base effects. not reflect a similar turn to the worse. Rather, some of
the labour market programmes that were added when
The squeeze on household real income has eased as the financial crisis hit have been scaled back. Including
inflation has moderated, with the year-on-year rate on people enrolled in such programmes, overall registered
consumer prices slowing from 3.4 per cent in March to


Norway

unemployment has thus been stable recently and is below its long-term average. Positively, the capital
lower than a year ago. spending outlook among manufacturers has become
gradually less pessimistic, according to the latest Busi-
Employment and unemployment
ness Tendency Survey from Statistics Norway. Although
5 6.5
the investment intentions indicator is not back in posi-
6.0
4 tive territory, it hints that the downturn has come to an
5.5
3
end. In contrast, capital spending in the utility sector
5.0 looks set to grow strongly, as indicated by Statistics
2 4.5 Norway’s latest investment survey.
1 4.0
3.5 Moreover, construction orders have showed a strong
0 improvement over the past few quarters and hous-
3.0
-1 ing starts have trended higher as well, suggesting that
2.5
residential investment has turned the corner. The same
-2 2.0
94 96 98 00 02 04 06 08 10
is the case for capital spending in the private service
sector, which accounts for the lion’s share of non-oil
Employment, year-on-year percentage change (LHS) business investment.
LFS unemployment rate (RHS)
Source: Statistics Norway
Housing starts and orders
Moreover, unemployment according to the Labour Force 1200 120

Survey declined slightly from 3.6 per cent in the second 110
1100
quarter to 3.4 per cent in the third, due to a marginal 100
1000 90
decline in the labour force. Meanwhile, employment
80
was unchanged for the quarter and up a modest 0.4 per 900
70
cent over the past year. This rather small gain reflects 800 60
the fact that employment did not decline much during
700 50
the downturn, as the public sector added workers and
40
the private sector, except manufacturing and construc- 600
30
tion, was somewhat reluctant to reduce its workforce.
500 20
Although we foresee somewhat stronger employment 99 00 01 02 03 04 05 06 07 08 09 10
growth, it will broadly match the increase in the labour
force, and the LFS unemployment rate should average Housing starts, 1,000 sqm (LHS)
Orders, new residential buildings, 2Q earlier (RHS)
3.4 per cent in 2011 and 3.3 per cent in 2012. Source: Statistics Norway

Capital spending is turning the corner We expect residential investment to grow by a solid
Steep declines in non-oil business and residential fixed 10 per cent in 2011 and almost as much in 2012,
investment have weighed heavily on growth in the past although the level will still be almost 20 per cent below
couple of years, dropping almost 30 per cent from the its 2007 peak. Meanwhile, non-oil business investment
final quarter of 2007 until the second quarter of 2010. should be up more than 5 per cent next year.

Orders have recovered Oil sector investment will probably decline somewhat
Index 100 = 2005 more in 2010 than previously expected. However, Sta-
175 175 tistics Norway’s most recent survey saw oil companies
expecting record-high investment in 2011, and we still
150 150 expect a 5 per cent growth rate next year.

125 125 Exports have underperformed so far
While domestic demand is on the rise, the volume of
100 100 exports of non-oil goods has continued to be surprisingly
soft. Following an initial strong rebound last summer as
75 75 the global economy turned, such exports have remained
broadly unchanged so far in 2010, according to foreign
50 50
trade statistics.
99 00 01 02 03 04 05 06 07 08 09 10

Manufacturing orders Construction orders One might suspect that a somewhat stronger currency is
partly to blame, as the Norwegian krone has averaged
Capital spending in the manufacturing sector is likely to some four per cent higher in trade-weighted terms than
decline further between 2010 and 2011. While manu- a year earlier. In addition, the fact that wages continue
facturing production on a quarterly basis has risen since to rise faster than among trading partners − which has
mid-2009, reaching 4.1 per cent year-on-year as of the been the case for years − adds to the loss of competi-
third quarter of 2010, capacity utilisation is still well tiveness.


Norway

However, the lacklustre trend in non-oil exports owes slowing from 2.6 per cent at end-2009 to 2.1 per cent
a lot to plunging exports of electricity and a decline according to our calculation. Meanwhile, core import
for refined oil products and non-transportation invest- prices in October were 1.4 per cent lower than a year
ment goods. Other than that, exports have risen in line earlier.
with what one would expect considering the recovery in
Core inflation very benign
export markets in general and in manufacturing produc-
tion, in particular since intermediate goods make up a
6 6
lot of such exports.
5 5

4 4
Merchandise exports excluding oil/gas,
3 3
ships etc.
2 2
Per cent of total exports
1 1
2000 2010* Year-on-year
0 0
change, %*
-1 -1
Europe 77.3 66.9 8.4
Sweden 12.7 10.7 15.0 -2 -2
99 00 01 02 03 04 05 06 07 08 09 10
Germany 11.7 8.5 3.3
UK 10.7 8.1 19.0 CPI CPI-ATE
Denmark 7.3 4.9 -3.3
France 6.1 4.5 12.8 To a large extent, the decline in imported inflation re-
Italy 3.0 1.7 -3.6 flects the previous appreciation of the Norwegian krone
PIGS 5.7 5.2 3.3 by more than 10 per cent, using the import-weighted
US 8.4 9.8 31.0 index, between late 2008 and early 2010. The price in-
Asia 9.8 17.2 -3.8 dex for imported goods suggests that the downtrend in
China 0.8 3.9 -11.1 core import prices has further to run in the near term,
Japan 3.9 2.8 22.5 but also that a trough is likely before long. Such a signal
Total 8.5 is also coming from the fact that the import-weighted
NOK index is slightly weaker at present than a year ago.
* Jan-Aug.
Source: Statistics Norway, SEB Strong NOK has dented imported inflation
Manufacturing export orders were up 15 per cent in Year-on-year percentage change
6.0 -20
the year to the third quarter, but this strong gain was
affected by the rise in commodity prices, since orders 4.5 -15
are measured in nominal terms. Nonetheless, according 3.0 -10
to the quarterly Business Tendency Survey, which saw 1.5 -5
manufacturing sentiment rising to a three-year high,
0.0 0
exports orders increased in both the second and the
third quarter and manufacturers’ expectations were -1.5 5

the most optimistic in almost five years. In addition, in -3.0 10
a recent report from Norges Bank’s regional network, -4.5 15
export firms reported a marked pickup in production 99 00 01 02 03 04 05 06 07 08 09 10 11
and expected output to expand at about the same pace
Core CPI, imported prices (LHS)
in the near term. NOK import-weighted, 6-month earlier (RHS)
Source: Statistics Norway, SEB
In all, real exports of non-oil goods probably expanded
5 per cent from 2009 to 2010, but mostly due to the Concerning the downtrend in domestic inflation, some
high entry level going into the current year. Our fore- of it reflects markedly slower wage and salary growth
cast for 3.5 per cent growth in 2011 thus implies an in recent years, from more than 6 per cent in 2008 via
accelerating trend. 4.5 per cent in 2009 to approximately 3.5 per cent in
the current year. Other than that and the currency ef-
Core inflation at a trough fect, it is hard to pin the downshift in core inflation to
Core inflation has been surprisingly soft so far in 2010. any similar weakening in demand, while wage growth is
The year-on-year rate on the CPI-ATE measure − ex- likely to drift higher in the next couple of years.
cluding indirect taxes and energy − slowed from 2.4 per
cent last December to a four-year low of 0.9 per cent in Norges Bank: It is all about inflation
September before inching up to 1.0 per cent in October, Since early summer, core inflation has fallen short of
well below the 2.5 per cent medium-term target. The Norges Bank’s expectations. The October Monetary Pol-
downshift has been rather broad-based between do- icy Report sent a clear message that the 2.00 per cent
mestic and import prices, with core domestic inflation deposit rate, raised most recently in May, is unlikely to


Norway

be hiked until inflation shows a trough and starts trend- the near term has been hampered by weak flows and a
ing higher again. A lower inflation forecast was the key dovish Norges Bank.
reason why the bank again revised its optimal rate path
downward, although less than the substantial revisions It is very likely, though, that the period of NOK weak-
in the two previous reports. ness against the euro will soon end. After passing the
expected positive EUR/NOK seasonality in late Novem-
Norges Bank’s new inflation forecast implies that the ber/early December, a number of factors support our
inflation target will not be met until the second half of forecast of the EUR/NOK exchange rate returning below
2013. Accordingly, while the previous Monetary Policy 8.00 in the first half of 2011.
Report implied a hike in the deposit rate around the
turn of the year, the new one extends the pause until Firstly, the flow outlook is gradually improving: Norges
next summer, with two hikes before the end of 2011 Bank will refrain from selling NOK in December as usual
and a 3.50 per cent key rate by end-2012. (due to more illiquid markets). In 2011 on average, we
estimate that Norges Bank will only sell NOK 150 million
Norges Bank's rate path per day (vs. the current NOK 800 million/day), accord-
8 8 ing to the 2011 budget. With regard to flows, we also
7 7 expect continued foreign interest in buying Norwegian
equities, with the foreign ownership rate on the Oslo
6 6
Stock Exchange gradually increasing towards 36-38 per
5 5 cent (versus 35.3 per cent at present).
4 4
Secondly, our expectations of a more broad-based
3 3
recovery and continuing rate normalisation by Norges
2 2 Bank should support the NOK in 2011. The fact that
1 1 Norges Bank will not lift key rates until mid-2011 is fully
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 discounted by markets. Hence, monetary policy will be
very neutral for the currency and flows will continue to
Norges Bank's deposit rate
Optimal rate path, MPR 3/10 be the most important factor for the NOK. We reiterate
Optimal rate path, MPR 2/10 our forecasts of EUR/NOK at 8.00 by end-2010 with a
Source: Norges Bank
further decline towards 7.80 in the first half of 2011.
SEB’s forecast for the CPI-ATE index is only slightly
Exchange rate, EUR/NOK
above that of Norges Bank. The trough is mostly likely
10.0 10.0
behind us, but any accelerating trend in core inflation
is unlikely before next summer. However, we do foresee 9.5 9.5
a somewhat stronger pick-up thereafter. Core inflation
should average 2.2 per cent in 2012, with core domestic 9.0 9.0
prices rising approximately 3 per cent while imported
8.5 8.5
inflation should be slightly above zero.
8.0 8.0
In addition to still-low core inflation, Norges Bank’s
room to manoeuvre on key interest rates will still be
7.5 7.5
constrained by monetary policy elsewhere. Much of
the core CPI shortfall relative to the bank’s forecast so 7.0 7.0
far in 2010 has been due to imported deflation, under- 02 03 04 05 06 07 08 09 10
scoring its focus on the exchange rate. However, by
SEB regression EUR/NOK spot
mid-2011 the recovery in the Norwegian economy will Source: SEB

be well established and growth abroad firmer as well,
while core inflation should have started to trend higher. The Norwegian 10-year government bond yield is
expected to climb somewhat in the near term, in line
Hence, we expect the deposit rate to be hiked 25 with the German bond yield. The spread vs. Germany
basis points next June, followed by another hike in has tightened from historically high levels lately to 66
October, lifting it to 2.50 per cent by the end of 2011. bps and is expected to remain stable in the near term.
Moreover, with the output gap closed by early 2012 We expect Norges Bank to resume its rate hikes as of
according to Norges Bank’s projection and with core in- mid-2011, resulting in a wider key interest rate spread
flation rising a bit faster in our forecast, the rate hiking vs. the ECB. This should lead to a gradually widening of
cycle should accelerate, with the deposit rate ending the 10-year spread, reaching 90 bps in 2012.
2012 at 3.75 per cent.

NOK to regain strength in 2011
The long-term outlook is still strong for the NOK. How-
ever, as we concluded in the previous Nordic Outlook,


Finland

Rapid export rebound, faster economic growth
ƒ Leading indicators climbing higher offs and did not need to terminate these employees.
Another important factor is that more people are leav-
ƒ Unemployment will continue downward
ing the labour force than joining it; pensioners make up
and pay increases will accelerate by 2012
a rapidly growing share of the population. We expect a
ƒ Budget deficit below 3 per cent in 2011 continued decline in joblessness to below 8 per cent in
December 2010 and just above 7 per cent in December
2011. Measured as annual averages, it will be 8.4 per
The Finnish economy is continuing to recover. GDP cent this year, 7.7 per cent in 2011 and 7.4 per cent in
rose 3.4 per cent year-on-year in the second quarter, 2012, about the same as our August forecast.
mainly due to a rapid rebound in merchandise and
service exports, which rose 6.1 per cent year-on-year The labour market improvement has not yet affected
(-5 per cent in the first quarter), but also due to a 2.7 wage formation, which was held back by rapidly ris-
per cent rise in private consumption. Capital spending unemployment in 2008-2009. Total pay increases
ing remains lower than one year ago but is now also slowed from 3.3 per cent year-on-year in the first
increasing. The rapid improvement in the economy is quarter of 2010 to 2.3 per cent in the third quarter.
reflected by most leading indicators. Retail sales have We expect a cautious rebound in the first half of 2011,
strengthened rapidly so far in 2010, and the con- but hourly wage increases will remain below 3 per cent
struction, manufacturing and service sectors have throughout our forecast period. HICP inflation has been
all experienced clear improvements. Labour market relatively stable between 1.3 and 1.6 per cent so far
prospects have also brightened; hiring plans have risen this year (1.4 per cent in September). We expect infla-
rapidly, and unemployment has continued to fall. tion to accelerate somewhat later in the winter, due in
part to high energy and food prices. Inflation will climb
Overall economic performance is quite consistent with a bit more in the first quarter of next year. Measured as
our August forecast. We expect GDP growth of 2.7 annual averages, HICP inflation will reach 2.1 per cent
per cent this year, a cautious upward revision of 0.2 in 2011 and 2.0 per cent in 2012.
percentage point since August, 3.0 per cent in 2011
and 2,8 per cent in 2012. Our growth forecast is well A favourable pre-crisis economic situation, with low
above the prevailing consensus (2.1 per cent in 2010 government debt and both budget and current account
and 1.8 per cent in 2011) but in line with the Finnish surpluses, helped keep the Finnish economy stable
central bank’s latest forecast in November. despite its record 8 per cent GDP slide last year. The
Service sector leading the upturn fiscal deficit − which will stand at 3.4 per cent of
Index GDP this year, the strongest budget in the whole euro
70 70 zone − will decrease to 2.5 per cent next year and
2.2 per cent in 2012. Public debt as measured by the
50 50
Maastricht criteria will grow from 47 per cent of GDP
30 30
this year to just above 50 per cent in 2012, a cautious
10 10 increase compared to many other euro zone countries.
-10 -10
Despite this improvement, Finland needs a long-term
-30 -30 budget consolidation programme and an economic and
-50 -50 structural policy plan. This will be the task of the next
-70 -70 government after the April 2011 parliamentary election.
00 01 02 03 04 05 06 07 08 09 10

Construction sector Service sector
Manufacturing sector
Source: DG ECFIN

Unemployment has continued downward since peaking
at 8.9 per cent early in 2010. In September it stood at
8.1 per cent. Unemployment did not climb higher last
year largely because companies used short-term lay-


Economic data

DENMARK
Yearly change in per cent
2009 level,
DKK bn 2009 2010 2011 2012
Gross domestic product 1,660 -4.7 2.2 2.2 2.1
Private consumption 817 -4.3 1.9 2.2 2.6
Public consumption 492 3.4 0.8 0.3 0.5
Gross fixed investment 312 -14.1 -3.0 4.0 5.5
Stockbuilding (change as % of GDP) -2.4 1.0 0.0 0.0
Exports 784 -10.2 7.0 5.8 5.0
Imports 727 -13.2 5.5 5.7 6.0

Unemployment (%) 3.6 4.2 4.0 3.5
Consumer prices, harmonised 1.1 2.2 2.1 2.1
Wage cost 3.1 2.3 2.1 3.0
Current account, % of GDP 4.2 3.7 3.0 2.5
Public sector financial balance, % of GDP 3.6 -5.2 -3.5 -3.0
Public sector debt, % of GDP 41.4 44.0 46.0 48.0

FINANCIAL FORECASTS Nov 18 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12
Lending rate 1.05 1.05 1.05 1.05 1.65 1.95
10-year bond yield 2.81 2.85 3.00 3.25 3.50 3.60
10-year spread to Germany, bp 11 15 15 15 20 20
USD/DKK 5.47 5.36 5.36 5.73 5.87 5.87
EUR/DKK 7.46 7.45 7.45 7.45 7.45 7.45

NORWAY
2009 level,
NOK bn 2009 2010 2011 2012
Gross domestic product (Mainland Norway) 1,732 -1.4 1.6 2.9 2.9
Private consumption 956 0.2 2.8 3.5 3.3
Gross fixed investment 467 -9.1 -5.2 4.9 4.2
Stockbuilding (change as % of GDP)
Exports 1,008 -4.0 -0.5 1.1 2.0
Imports 638 -11.4 6.7 3.8 4.5

Unemployment (%) 3.2 3.5 3.4 3.3
Consumer prices 2.1 2.4 1.4 2.2
CPI-ATE 2.6 1.4 1.6 2.2
Wage cost 4.5 3.5 3.7 4.0

Deposit rate 2.00 2.00 2.25 2.50 3.25 3.75
10-year bond yield 3.33 3.40 3.65 3.95 4.20 4.30
USD/NOK 5.98 5.76 5.65 5.96 6.02 5.91
EUR/NOK 8.16 8.00 7.85 7.75 7.65 7.50


Nordic key economic data

SWEDEN
2009 level,
SEK bn 2009 2010 2011 2012
Gross domestic product, working day adjusted -5.0 4.7 3.5 2.9
Private consumption 1,516 -0.8 3.5 2.8 2.5
Gross fixed investment 555 -16.0 7.0 6.0 4.0
Stockbuilding (change as % of GDP) -41 -1.5 1.7 0.2 0.0
Exports 1,507 -12.4 11.0 7.4 5.1
Imports 1,294 -13.2 12.7 7.2 5.2

Unemployment (%) 8.3 8.4 7.5 7.1
Employment -2.1 1.0 1.7 0.7
Industrial production -19.1 10.0 7.0 4.0
Consumer prices -0.3 1.2 2.0 2.1
CPIX 1.9 2.0 2.4 1.6
Wage cost 3.4 2.0 2.3 3.9
Household savings ratio (%) 12.6 11.3 11.7 11.3
Real disposable income 0.9 1.9 3.4 2.1
Trade balance, % of GDP 3.5 2.5 2.8 2.8
Central government borrowing, SEK bn 176 3 -10 -47
Public sector financial balance, % of GDP -1.2 -0.5 0.1 0.8

Repo rate 1.00 1.25 1.50 2.25 2.50 3.00
3-month interest rate, STIBOR 1.58 1.65 1.90 2.65 2.90 3.40
10-year bond yield 2.95 3.00 3.25 3.50 3.75 3.90
USD/SEK 6.87 6.58 6.47 6.73 6.81 6.77
EUR/SEK 9.37 9.15 9.00 8.75 8.65 8.60
TCW 126.6 123.4 121.1 119.7 118.6 118.1

FINLAND
2009 level,
EUR bn 2009 2010 2011 2012
Gross domestic product 171 -8.1 2.7 3.0 2.8
Private consumption 94 -2.4 2.3 2.4 2.5
Gross fixed investment 34 -14.5 0.9 6.3 6.1
Exports 62 -20.5 5.8 6.6 5.3
Imports 57 -18.1 4.2 6.8 6.0

Unemployment (%) 8.2 8.4 7.7 7.4
Wage cost 4.0 2.8 2.4 2.9
Public sector financial balance, % of GDP -2.5 -3.4 -2.5 -2.2


International key economic data

EURO ZONE
2009 level,
EUR bn 2009 2010 2011 2012
Public consumption 1,975 2.4 1.3 0.9 1.1
Gross fixed investment 1,773 -11.3 0.2 4.2 3.9
Exports 3,259 -13.1 9.3 5.8 5.3
Imports 3,140 -11.8 9.5 5.9 5.5

Unemployment (%) 9.4 10.0 9.7 9.4

US
2009 level,
USD bn 2009 2010 2011 2012
Public consumption 2,934 1.6 1.1 0.4 -0.3
Gross fixed investment 1,638 -18.4 3.8 8.4 12.6
Exports 1,690 -9.5 11.5 9.9 13.7
Imports 2,116 -13.8 14.1 9.7 11.4

Unemployment (%) 9.3 9.7 9.5 8.4
Consumer prices -0.3 1.6 1.2 1.6

LARGE INDUSTRIAL COUNTRIES
2009 2010 2011 2012
GDP
United Kingdom -5.0 1.7 2.1 2.1
Japan -5.3 3.1 1.6 1.5
Germany -4.7 3.6 2.5 1.8
France -2.5 1.5 1.4 1.5
Italy -5.1 1.0 0.9 1.3

Inflation
United Kingdom 2.2 3.2 2.6 1.9
Japan -1.3 -0.9 0.1 0.3
Germany 0.2 1.1 1.4 1.5
France 0.1 1.6 1.7 1.9
Italy 0.8 1.6 1.7 1.9

Unemployment (%)
United Kingdom 7.7 7.9 7.6 7.4
Japan 5.1 5.1 5.2 5.1
Germany 7.5 7.8 7.2 6.9
France 9.5 10.1 9.8 9.6
Italy 7.8 8.4 8.1 7.8


International key economic data

EASTERN EUROPE

2009 2010 2011 2012
GDP, yearly change in per cent
Estonia -13.9 2.5 4.0 4.0
Latvia -18.0 -0.3 4.0 5.0
Lithuania -14.7 1.0 4.0 4.5
Poland 1.7 3.5 4.0 4.5
Russia -7.9 3.7 4.3 5.0
Ukraine -15.1 5.2 4.4 4.2

Inflation, yearly change in per cent
Estonia 0.2 2.7 3.0 4.0
Latvia 3.3 -1.2 1.3 1.5
Lithuania 4.2 1.0 2.0 3.0
Poland 3.5 2.7 2.9 2.9
Russia 11.7 6.8 7.5 7.4
Ukraine 15.9 9.5 10.9 10.1

FINANCIAL FORECASTS

Nov18 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12
Official interest rates
US Fed funds 0.25 0.25 0.25 0.25 0.50 1.00
Japan Call money rate 0.10 0.10 0.10 0.10 0.10 0.50
Euro zone Refi rate 1.00 1.00 1.00 1.00 1.50 1.75
United Kingdom Repo rate 0.50 0.50 0.50 0.75 1.25 2.00

Bond yields
US 10 years 2.90 2.90 3.10 3.35 3.40 3.60
Japan 10 years 1.07 1.10 1.20 1.50 1.70 1.90
Germany 10 years 2.70 2.70 2.85 3.10 3.30 3.40
United Kingdom 10 years 3.40 3.45 3.60 3.80 3.90 4.00

Exchange rates
USD/JPY 84 81 84 88 95 100
EUR/USD 1.36 1.39 1.39 1.30 1.27 1.27
EUR/JPY 114 113 117 114 121 127
GBP/USD 1.60 1.62 1.60 1.57 1.55 1.59
EUR/GBP 0.85 0.86 0.87 0.83 0.82 0.80

GLOBAL KEY INDICATORS
Yearly percentage change
2009 2010 2011 2012
GDP OECD -3,3 2.5 2.3 2.5
GDP world -0,6 4.7 4.1 4.5
CPI OECD 0,1 1.4 1.2 1.4
Export market OECD -11,5 8.8 6.6 7.8
Oil price, Brent (USD/barrel) 61,9 79.1 86.0 89.0


Finland
St: Petersburg
Norway
Moskva Russia
Sweden
Estonia

Latvia
New York Denmark
Beijing
Lithuania
Dublin
Shanghai
London New Delhi
Poland
Germany
Warsaw
Ukraine
Luxembourg
Kiev

Singapore
Geneve

Nice

São Paulo

SEB is a leading Nordic financial services group. As a relationship bank, SEB
in Sweden and the Baltic countries offers financial advice and a wide range
of financial services. In Denmark, Finland, Norway and Germany the bank’s
operations have a strong focus on corporate and investment banking based on
a full-service offering to corporate and institutional clients. The international
nature of SEB’s business is reflected in its presence in 20 countries worldwide.
On 30 September 2010, the Group’s total assets amounted to SEK 2,254bn while
its assets under management totalled SEK 1,343bn. The Group has about 17,000
employees, excluding the German retail operations. Read more about SEB at
www.sebgroup.com.
With capital, knowledge and experience, we generate value for our customers −
a task in which our research activities are highly beneficial.
Macroeconomic assessments are provided by our Economic Research unit.
Based on current conditions, official policies and the long-term performance of
the financial market, the Bank presents its views on the economic situation −
locally, regionally and globally.
One of the key publications from the Economic Research unit is the quarterly
Nordic Outlook, which presents analyses covering the economic situation in the
world as well as Europe and Sweden. Another publication is Eastern European
Outlook, which deals with the Baltics, Poland, Russia and Ukraine and appears
twice a year.
SEMB0052 2010.11

www.sebgroup.com

Nordic Outlook November 2010

More Related Content

What's hot

Viewers also liked

Similar to Nordic Outlook November 2010

More from The Benche

Recently uploaded

Nordic Outlook November 2010