Swedbank's Global Economic Outlook, 2010 March 18

Global Economic Outlook
by Cecilia Hermansson 18 March 2010
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 1028
e-mail: ek.sekr@swedbank.se Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 1588
Magnus Alvesson, 08-5859 3341, Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897
The recovery is progressing, but the global economy still
faces major structural challenges
The global economy has entered a recovery stage, but despite all the huge
stimulus measures the rebound isn’t convincing yet. Because of temporary
factors, we are revising our global GDP growth forecast upward to 3.9% this
year (3.3%). During the second half year the pace will again slow, and in 2011
the US and Europe in particular will feel the effects as stimulus measures are
phased out. Global GDP growth is easing to 3.6% (3.5%). In 2012 we expect
demand to increase somewhat more on its own and growth to rise to 3.9%.
We give this scenario of a slow, bumpy recovery a probability of 60%. We give
a double dip, where OECD economies again shrink for several consecutive
quarters, a 20% chance, the same probability we give a scenario with a
stronger, more robust recovery.
Unconventional monetary policy has improved the situation in the credit
markets in the US, the UK and Europe. At the same time we feel there are
several disadvantages to this balance sheet policy and recommend that this
part is phased out first, followed by a fiscal tightening. Since fiscal policy has
to be tightened now in several countries in which the financial market lacks
confidence, and other mature economies will follow next year, there is good
reason for central banks to raise interest rates more cautiously. It may still
make sense to abandon a crisis-centred interest rate policy and transition to
an interest rate policy suited for a slow, rocky recovery.
Structural reforms are needed at a global, regional and national level. It is not
sufficient to provide stimulus to strengthen the world economy. The growing
soverign debt is a risk for growth, inflation and financial stability, and action
plans are needed to avoid new crises. The Eurozone must develop a new
framework, but countries must also adhere to the old rules. Reforming the
financial sector is needed, not least to avoid new imbalances in the global
economy. The world will not be the same after the crisis: It is important to
understand how new global conditions will affect our companies and
households going forward.
Cecilia Hermansson
Contents Page
1. Global economy: How should we interpret current
conditions and the future? 2
2. Risks remain complex 6
3. Major challenges for monetary policy 8
4. Difficult balancing act for fiscal policy 12
5. Structural reforms are needed at every level 14
6. Our assumptions in the forecast 17
7. Regions/countries – the divergence is growing 23
8. Consequences for our home markets 39

2 Swedbank’s Global Economic Outlook • 18 March 2010
Global GDP forecast
March Forecast January Forecast
GDP-growth (%) 2009 2010 2011 2012 2009 2010 2011
US -2.4 2.8 2.2 2.5 -2.4 2.2 2.5
EMU-countries -4.0 0.9 1.3 1.9 -4.0 1.1 1.6
of which: Germany -5.0 1.3 1.5 2.0 -5.0 1.5 1.8
France -2.2 1.5 1.8 2.2 -2.3 1.6 2.0
Italy -4.9 0.6 1.0 1.5 -4.5 0.7 1.2
Spain -3.6 -0.5 0.7 1.7 -3.6 -0.1 1.3
United Kingdom -4.8 1.1 1.6 2.2 -4.3 1.0 1.9
Japan -5.3 2.0 1.4 1.5 -5.6 1.2 1.5
China 8.6 9.5 8.8 8.0 8.0 8.5 7.8
India 6.5 7.5 7.8 8.0 6.3 7.0 7.5
Brazil -0.4 4.7 4.5 5.7 -0.5 3.5 4.5
Russia -7.9 4.3 4.5 5.0 -8.0 4.0 4.5
Global GDP -0.9 3.9 3.6 3.9 -1.1 3.3 3.5
Sources: National statistics and Swedbanks forecasts.
The countries above represent almost 70% of the global economy. World bank Atlas
weights for purchasing power parities 2008 (PPP) have been used.
1. Global economy: How should we interpret
current conditions and the future?
A recovery has begun, but isn't yet self-sustaining
The global economy began to rebound last year, but there is
still great uncertainty about the strength and longevity of the
recover. The output gaps are not shrinking in industrial
countries, and in the Eurozone they are still increasing. The
expansive economic policy that a number of countries have
pursued has helped to avoid a wide-scale depression and
financial collapse in the global economy, but it has not yet
created robust growth. A few reflections on the current situation:
The recovery that began last summer and fall is not yet convincing. World
trade growth can primarily be explained by the Asian expansion. Industrial
production in many countries is at a standstill. GDP growth has been
marginal in Europe and is lacking momentum, but more evident in the US
and Japan. Not surprisingly, emerging economies with fewer imbalances
have had the strongest development.
A large part of the recovery in more mature economies is statistical in
nature. Inventory drawdowns are slowing and inventory replenishment will
soon contribute positively to growth. In several countries imports are falling
more than exports.
Without stimulus measures, underlying demand from companies and
households would have remained weak. This is evident in Europe, where
auto sales initially rose thanks to generous government rebates and then
fell again when the stimulus was phased out.
Conclusions for growth outlook
First, underlying demand will gradually strengthen in the
absence of any new negative shocks. Inventories have to be
built back up, production will increase and capacity will be
expanded, although the latter could take time, limiting the extent
Despite huge
stimulus packages,
the recovery is far
from robust …
… but more self-
sustaining growth is
expected eventually

Swedbank’s Global Economic Outlook • 18 March 2010 3
of investment and job growth for a little while longer. The
differences between industries will be great, however. Earnings
have improved and companies with robust demand may be
willing to invest, while many others will wait longer.
Secondly, the monetary and fiscal stimulus will remain
important for a while longer. The phase-out of the stimulus, as
well as the financial market’s valuation of the process, will be a
sensitive factor for the recovery. For the sake of the recovery it
would be positive if they were retained, but countries that lack
confidence will have to begin a budget consolidation earlier.
Thirdly, debt restructuring in the private sector (including the
financial sector) will take time. A similar restructuring will have
to begin shortly in the public sector in many countries as well.
As a result this recovery does not appear to be as strong as
after previous recessions. There are differences between
countries, but even those with smaller imbalances are affected
by debt restructuring in other countries, including in the form of
weaker export markets. Consequently, no country is immune to
the long-term consequences of the financial crisis and global
recession.
We have revised our growth outlook for the global economy
upward for 2010 compared with our January forecast. The US,
Japan and emerging economies are in position for stronger
growth, primarily in the first half of 2010, while Europe continues
to trail.
GDP will rise by 3.9% this year and 3.6% in 2011, compared
with 3.3% and 3.5% in our previous forecast (higher weights
that assign emerging economies a larger share of the global
economy account for 0.1 percentage point in both years). The
phase-out of stimulus packages and debt restructurings will
have the biggest impact next year. We expect growth prospects
to improve in 2012, when underlying demand gradually
strengthens on its own.
What does this mean for those who use forecasts?
It may seem ridiculous in times like used to issue a forecast with
a decimal point, especially when forecast errors have been in
the range of several percentage points. These precise figures
should be seen as a midpoint in a wider range that provide at
least some guidance on the direction of the economy.
Experience shows that consensus forecasts are the best
indicator, since individual prognosticators are rarely or never
right over time. As a group, the chances are better, although it
is also true that forecasters collectively failed to anticipate the
recession. The following advice is for those who still want some
form of guidance:
Follow consensus projections, but keep in mind that turning points
are rarely seen in advance and that forecasters as a group usually
fail to anticipate unusual events.
It is important that
stimulus measures
are not phased out
too quickly
Every country is
affected when
economic policy is
tightened, even those
that avoid cutbacks
Consensus forecasts
are usually more
accurate over the long
term than individual
projections

Build alternative scenarios and try to figure out which one seems
most likely based on current information and experience.
Work more actively with risks. By trying to identify risks, there is a
better chance of managing operations if are realised.
Extend your time horizon. Although exact timing is difficult to
predict, the course of events seems pretty clear. This recovery
should be seen from a five-year perspective or longer, since the
structural consequences of the financial crisis have left a deep
mark on the economy.
Consider risks against the backdrop of growing tensions and that
one or more triggering factors could generate problems, e.g.,
bubbles that burst when monetary policy has to be tightened more
than expected.
The economy is all about behaviours. Reality is dynamic and
forecasts in themselves can lead to tighter or more expansive
economic policy, which in turn affects growth and proves the
forecast wrong.
Psychology is important, because of which various types of
confidence indicators have come to play a greater role for
forecasters. At the same time expectations can change rapidly, so
it is important to understand how the indicators are designed, so
that the results aren’t misinterpreted.
Various types of economic indicators
The focus on economic indicators that serve as a basis for good
forecasts has increased. This is especially true of how
expectations and sentiment are measured among households
and businesses. The various types of indicators are described
below:
1. Leading indicators
The OECD’s leading indicator includes several factors which, based on
models, have proved helpful in predicting the economy. This applies to
financial markets (equities and interest rates), new orders and the labour
market. The stock market is sometimes mentioned as a good leading
indicator, but this isn't always true. Just remember this quote from Nobel
laureate Paul Samuelson, who recently passed away: “It is indeed true that
the stock market can forecast the business cycle. The stock market has called
nine of the last five recessions.” While the stock market is an important and
early indicator, it is only one of many.
2. Early economic indicators
Though not an indicator of expectations, the Purchasing Managers’ Index
(PMI) provides an unusually quick impression of the last month. There are five
indicators that make up the purchasing managers’ index: production level,
new orders, supplier deliveries, inventory and employment level. The
Purchasing Managers’ Index includes a question on anticipated production
and thus also measures business expectations, but this is not included in the
index.
3. Indicators that measure expectations
Better examples of expectations indicators are surveys that measure
household and business expectations in the year ahead. The net figures that
are derived provide guidance whether or not sentiment is improving and in this
way can give a signal whether the economy is strengthening or weakening.
The key is to
understand the
differences between
types of indicators

4. Indicators that combine results with expectations
Various economic barometers usually combine outcomes with expectations.
The models could be more reliable if results accounted for two thirds and
expectations one third. It is important, however, that those who use these
indicators know what's what.
The questions companies and households are asked are
usually in the form of “more, the same, less” or “better, the
same, worse”. But you can't tell how much production has
increased by asking purchasing managers whether production
or orders have increased, remained stable or decreased. There
is a signal of the direction given. Obviously there are going to
be a lot of responses that production has increased after the
major cutbacks that have been made, but we want to see an
extended period of strength in the index this time before we feel
confident that it reflects actual industrial production, since
volume had fallen to such a low level. The same applies to
OECD leading indicator that is well ahead of industrial
production.
OECD leading indicators and OECD industrial production (%)
S o u rc e : R e u te rs E c o W in
8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 0 1 0 3 0 5 0 7 0 9
Percentagechange
-2 0
-1 5
-1 0
-5
0
5
1 0
In d u s tria l p ro d u c tio n in th e O E C D
O E C D L e a d in g
in d ic a to rs
Economic indicators and sentiment surveys are important to
forecasting, but we have to be much more cautious in how we
interpret them after such a severe recession. The most likely
scenario is that the indicators will initially overestimate on the
upside and that it will take longer for the actual data to catch up.
What fundamental economic and structural shifts do we
see today and in the future?
The global financial crisis and recession will affect the global
economy for years to come. Although it is hard to predict
exactly how, it is worth considering what changes could arise.
There is a risk, for example, that the threat of climate change
will no longer be taken as seriously if the economy declines.
The financial crisis could also give the public sector reason to
It can take longer for
hard data to catch up
to indicators

encroach on the public sector, which could hurt innovation and
productivity.
At the same time crises could lead to structural reforms. For
example, the reforms Greece will have to institute could raise its
potential growth. While it certainly can be debated whether the
crisis will lead to higher or lower potential growth, there is
probably more risk on the downside, particularly since we face a
combination of public and private debt restructuring, an
unusually weak labour market and a period of weaker
investment going forward.
Key factors before and after the financial crisis and global
recession:
Distorted GDP growth Lower potential growth (and incomes)
Great moderation Increased volatility
Strong global trade More protectionism
High debt levels Debt restructuring by businesses, households and
financial sector
Low public debt Deficits, huge debts that require consolidation (higher
taxes, lower fees) or higher inflation
Easy to borrow, low interest rates Greater focus on liquidity, higher price on
capital
Deregulation, self-regulation Increased regulation and more oversight in
financial sector
Market in driver’s seat State’s role increases (due to debt load, stimulus
packages, support for financial sector)
Excessive risk-taking by many actors greater cautiousness and better risk
management
High yield requirements More modest yield requirements
West rules Greater power in hands of emerging countries (China, India)
Euro zone monetary union More political/fiscal co-operation and new
frameworks
2. Risks remain complex
There are still many forecast risks, each of which are important,
but it is even more important to focus on how they relate to and
possibly reinforce each other. The recent financial crisis
underscored the interplay between risks and how they brought
the economy down like a stack of dominos.
Since risks are multifaceted, we have selected three alternative
scenarios for the period 2010-2012, although we are aware that
events may need a little more time to unravel. A common model
for situations involving banking crises shows that they are
followed by other crises during several years:
Banking crisis financial crisis sovereign debt crisis high
inflation currency crisis protectionism
There is uncertainty
whether potential
growth has shrunk, but
the risks are on the
downside
Risks should be
considered in the
aggregate rather
than individually

The first three steps fit well regarding this global crisis, but the
question is if we this time can avoid the three last steps in the
model.
Forecast risks
The key forecast risks (unranked) that create uncertainty are
listed below. They factor most prominently on the downside, but
could also play a role in pushing growth higher.
Debt restructuring in the private sector: How much time is needed
and how will it impact growth?
Debt build-up in the public sector: How accurate is the Ricardian
equivalence, which suggests that households will react to stimulus
measures by saving in expectation of later tax hikes? How much
budget consolidation will we see, which will slow growth? Will the
private sector be pushed aside when investment picks up? How will
the financial market react and will we see further turbulence?
Commodity prices: What will be the impact of growth and inflation in
various countries?
Protectionism: How common will it be and how much will trade and
growth be affected? Is there a risk of a structural shift in terms of
supply chains?
Political concerns in the wake of budget consolidations and
public/private debt restructurings: Will the public in Club Med
countries delay the reform process?
Euro co-operation: What happens now? Political and economic
effects? And what does the financial market think about the current
situation/outlook?
Any additional stimulus measures and their phase-out: What will be
the impact on growth, jobs, inflation and the financial market?
Is there a risk of inflation, and if so where and when? Has the threat
of deflation been averted?
China's handling of any bubbles/overheating and currency policy?
US political situation: What will happen to reforms in health care and
the financial sector? What will the loss of public confidence mean?
Currency crises, e.g., a dollar or euro collapse: How likely is it and
how would it affect growth and the financial sector?
Employment and productivity: Labour market and economic policy in
various countries: Which models will work best?
Terrorist attacks and natural disasters: What will be the impact on
growth, future confidence?
The unforeseen factor?
The three scenarios below mainly apply to OECD countries,
while we have assumed that the recovery in emerging markets
has been and will remain more V-shaped.
Scenario 1: Slow, rocky recovery
Characteristics: U-shaped curve (or one more closely
resembling Nike’s logo). Stimulus measures gradually

strengthen demand. As they are phased out, growth slows
slightly but levels off. It takes time for the wealthiest economies
to generate any growth of their own and for outputgaps to
shrink. The labour market remains weak, wage growth and
inflation are low, but the threat of deflation can be avoided.
Probability: 60%
Scenario 2: Double dip
Characteristics: W-shaped curve. A rebound is followed by a
period of shrinking economies after stimulus measures are
phased out too quickly and new shocks rattle the financial
system. Economic policy lacks much ammunition, complicating
and delaying the recovery. There is a renewed risk of deflation
and growing protectionism.
Probability: 20% (but higher in certain euro countries where
austerity measures are enacted faster)
Scenario 3: Strong, robust recovery
Characteristics: Soft V-shaped curve. Emerging countries help
to pull up their wealthier neighbours. The stimulus helps and
isn’t phased out too quickly, but it could increase the risk of
inflation further down the road. Protectionism is avoided and
regulation is reintroduced in the financial sector, but cautiously
to avoid hurting growth. Labour markets recover faster than
expected.
Probability: 20%
3. Major challenges for monetary policy
To date economic policy has focussed on avoiding a crisis. Now
the emphasis is shifting to ensuring a robust recovery. Despite
huge stimulus packages, growth has been meagre. The
problem is that fiscal policy has to be tightened this year or next
in a number of countries. What will happen to monetary policy?
Below we discuss a few important questions about central
banks:
1. What advantages and disadvantages are associated with
some of the more unconventional monetary policy
measures taken during the crisis, i.e., other than interest
rate cuts?1
Despite interest rate cuts down to zero, monetary policy was
too tight given the severity of the economic downturn and the
huge resources that have been idled. The risk of deflation
was still considered high after the crisis broke out in 2007
and worsened in the fall of 2008.
1
The unconventional monetary policy is not so unconventional as similar
measures have been taken earlier but not to the extent as during this crisis.
It is more important
than ever to
understand which
combination of fiscal
and monetary policy
is now needed

European and American central banks’ balance sheets
(thousand billion dollars and euros)
Source: Reuters EcoW in
08 09 10
thousandbillions
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
ECB
Federal
Reserve
By utilising the central bank’s balance sheet, the problem of
a weak transmission mechanism was limited, since market
prices and conditions were influenced directly. This balance
sheet policy, unlike interest rate policy, could have been
implemented instead by the government, which raises
questions of independence, co-ordination and the
delegation of responsibility (including risks) between the
central bank and government for the introduction and
phase-out of stimulus packages. There are issues of
democracy to consider as well, since it was easier for the
central bank to act than for a parliament to decide which
markets/players should receive support.
A number of major central banks have utilised credit policy
to influence the interbank and private credit markets
(increased collateral, foreign currency swaps, extended
deadlines and bond purchases), while only the Federal
Reserve and Bank of England worked with debt
management policy (buying treasury bonds). The Bank of
England has also set a target for bank reserves, and the
Swiss central bank has utilised currency policy and bought
assets in foreign currency.
Advantages: Central banks have been able to overcome the
problem of weak transmission mechanisms and influenced
bond rates and terms directly by expanding their balance
sheets. Lower bond rates, higher inflation expectations
(which is desirable if the threat of deflation is high) and a
more smoothly functioning credit market have been among
the advantages. It is hard to quantify them, especially since
some of the rate cuts have since been reversed after the
moment of surprise was over.
Disadvantages: There are concerns that inflation could arise
as a result of overly expansive balance sheets. Though this
may be overblown, since central banks have tools at their
disposal, the expectations in themselves could be important.
The US and UK also face a risk when they phase out their
Central banks have
added balance sheet
policy to their earlier
interest rate policies
Some central banks
have chosen slightly
different dishes from
the smorgasbord, but
all of them have tried
to influence interest
rates
Policy has led to lower
interest rates, but
probably to a
diminishing extent
The policy has also led
to greater uncertainty,
with new, trickier
hunting grounds for
central banks

stimulus packages, as the independence of their central
banks from the government and fiscal policy could be in
jeopardy. Balance sheet policy is more difficult to calibrate
and communicate. One example is that the Fed is
considering using the interest rate it pays on its reserves as
its benchmark rate instead of the fed funds rate. Such a
policy could create an uneven playing field for private
players, since certain markets will have advantages over
others. Some players are becoming dependent on the
support. Central banks are taking on a political role as well
as risks that eventually may have to be addressed by the
government.
2. How and when should monetary stimulus measures be
phased out?
Due to the disadvantages of this balance sheet policy, it
should be phased out as soon as credit markets are working
more smoothly and the transmission mechanism is stronger.
Some unconventional measures phase out automatically
when certain types of liquidity support are no longer
needed. Collateral could again become a priority, as it was
before the crisis. Greater cautiousness is required with
respect to mortgage backed securities (MBS), where the
housing and credit markets could be significantly affected by
a drawdown or a slowdown in purchases of treasury bonds,
which would also affect fiscal policy. In this case the biggest
challenges are in the US and the UK.
For macroeconomic reasons, the quantitative easing should
not be extended to avoid expectations of rapidly rising
inflation. For microeconomic reasons, the quantitative
easing will have to be ended to avoid disruptions to the
market due to central bank interference.
If desired, interest rate policy can be managed
independently of balance sheet policy, but should lag
slightly behind and be co-ordinated with fiscal policy. In
countries where budget consolidation is needed
immediately because the financial market demands it (parts
of the euro zone), the ECB can be slightly more cautious
when and at what rate it raises interest rates. In countries
where fiscal austerity is not needed and there is a risk of
new imbalances, rate hikes have to start sooner and the
central bank should take quicker action.
When interest rates were cut, there was co-ordination
between central banks. When rates are now raised, there is
good reason to again co-ordinate across national borders.
In countries without any imbalances, early rate hikes would
raise the value of their currency, which in turn would lead to
large capital injections that destabilise the economy.
Monetary policy has to be better co-ordinated with fiscal
policy as well.
Some will phase
out automatically
But there are macro
and micro reasons to
actively end the easing
Monetary policy could be
better co-ordinated with
fiscal policy, but also
across national borders

3. What lessons has the financial crisis taught monetary
policymakers?
There is much central banks can learn, but three things are
especially important. The first lesson is that low, stable
inflation is not enough to create macroeconomic stability.
The second lesson is that it is not enough to supervise
individual institutions. The financial sector has to be
monitored from a system-wide perspective. The third lesson
is that financial crises involve both liquidity and solvency
(the liquidity aspect was especially undervalued).
4. How big is the risk that expansive monetary policy will
contribute to new imbalances and financial crises?
The risk that expansive economic policy in the short run will
create new bubbles in countries where imbalances have
been large and debt restructuring is needed is small, but it is
growing the longer that stimulus measures remain in place.
On the other hand, stimulus policy is exported through fixed
exchange rates and so-called carry trades with strong
capital inflows to emerging economies, which could
overheat and find themselves with new asset bubbles.
The fact that it takes time it takes to change regulations and
oversight given inter alia the three lessons above means
that new imbalances can be created in the OECD zone after
a period of stimulus, a more robust recovery and a growing
risk appetite.
5. Is price stability still the most important monetary policy
target? How should it be measured and how high should
the inflation target be?
Monetary policy will have to change after this financial crisis.
Greater effort will be needed to co-ordinate price stability
with financial stability. Whether consideration should be
given to asset prices will have to be evaluated. The money
supply and monetary base are more important indicators in
the US. (The ECB already included them in its analysis.)
Economists from the IMF, including chief economist Olivier
Blanchard, suggest that a inflation target of 4% would be
more effective than a inflation target of 2%. The argument is
that monetary policy can respond more aggressively to
economic shocks, that wages and prices are more easily
adjusted in real rather than nominal terms, and that inflation
more easily erodes the massive public and private debt. The
issue of redistribution still has to be discussed, since higher
inflation shifts the benefits from savers to borrowers.
Pensioners in particular are concerned about keeping
inflation low, and considering demographics, low inflation is
desirable.
The shorter the maturity of government bonds, the greater
the incentive for governments to maintain low inflation. Only
the UK, with an average maturity of 14 years, may benefit
The risk of new risk
imbalances is greatest
in emerging countries
A higher inflation target
could be attractive
from an academic
perspective ...

from higher inflation. The US (4.8 years) does not have the
same incentive.
Carlo Cottarelli from the IMF claims that higher inflation will
do little to help with the restructuring of public debt. With 6%
inflation, the public debt in OECD countries would only be 8
percentage points lower in 2014 as a share of GDP (at
86.5%) than if inflation remained at 2%.
Creating sustainable inflation expectations has taken time. It
is not possible to raise inflation just a bit. Higher and more
volatile interest rates can be a result. The confidence in
governments and central banks can disappear. Practitioners
in central banks should thus avoid upsetting current
expectations, especially during the sensitive period that the
global economy now faces with regard to both fiscal policy
and the need for better regulation/oversight of the financial
system. Co-ordinating policy to manage price stability and
financial stability should instead be the priority.
4. Difficult balancing act for fiscal policy
After the financial crisis we are now seeing a period of debt
restructuring in the private sector. At the same time public debt
is growing. The IMF projects that public debt as a share of GDP
will rise by 35% in OECD countries between 2007 and 2014, to
120%. Without consolidation measures, the debt ratio could rise
to 300% in the next decades. Even if the stimulus period has
been rather short, debt restructuring in the public sector is not
far behind.
Government finances in the euro zone are no worse than in
Japan, the US or the UK. There are countries around the
Mediterranean (“Club Med,” as they are known), however,
whose national debt will fall between 80% and 120% in 2010.
This group also includes Ireland and Belgium. Spain has a high
deficit as a share of GDP, but not yet such a high national debt.
Only the Nordic and Baltic countries have relatively low debt
levels. Except for Latvia and Lithuania, deficits are also modest
in these countries. The budget situation is also somewhat better
in Netherlands and Germany.
… but shouldn't be
an alternative for
practitioners
Sovereign debt ratios
are set to increase
substantially

Public finance in the EU, Japan and the US
0
50
100
150
200
250
-16 -14 -12 -10 -8 -6 -4 -2 0
Japan
USA
UKIreland
Greece
Spain
France
Portugal
Eurozonen
Belgium
Italy
Germany
Finland Sweden
Government debt ratio (%)
Budget balance,% av GDP
While Spain's budget deficit has risen mainly as a result of the
recession, the US, the UK and Greece had such structural
problems that their public finances would have worsened
anyway even if the financial crisis hadn't broken out. This year
the US budget deficit will reach nearly 1.5 trillion dollars, but
even in ten years deficits will still be around 1 trillion dollars
despite some budget consolidation as health care and pension
costs continue to rise. In the euro zone, many countries also
have to reform their pension systems, which haven't sufficiently
adjusted to demographic changes.
In their 2010 article, “Growth in a Time of Debt,” Kenneth Rogoff
and Carmen Reinhart state that when debt rises to more than
90% of GDP, growth slows (the median by 1 percentage point
all else being equal). Even if the level isn't exact and doesn't
apply the same way in every country, there is reason for
concern, especially since the majority of OECD members are
already at or near that level. On the other hand, they do not find
clear evidence that higher debt will lead to higher inflation in
more developed countries.
The US has chosen to stimulate its economy even more.
According to its latest budget, the stimulus represented 1.8% of
GDP in the next two years. Japan has also taken measures.
The US has the dollar as its reserve currency, while Japan’s
debt is financed by the Japanese population at still-low interest
rates.
At the same time there are countries that must and have
already begun to tighten their belts. The first one was Ireland,
and since then the budget consolidation process has begun in
Greece, Spain and Portugal. The UK is expected to tighten after
its election, regardless of who wins, but possibly more quickly
with a Conservative victory.
Financial markets will push for an early tightening, since the
rising interest rate differential relative to German government
bonds is causing higher financing costs as well as concerns of a
government default. If this were to happen, creditworthiness
Some countries had
problems even before
the financial crisis
A debt ratio of over
90% slows growth, but
doesn't automatically
drive up inflation
Some countries are
introducing additional
stimulus measures ...
… while others are
being forced to phase
them out

would be downgraded, loan losses would increase in the
banking system, and a new liquidity and solvency crisis would
arise that could spread throughout the region. The weaker euro
should be seen in light of these concerns.
Given the need for a more robust recovery, it is actually too
early to tighten fiscal policy. The example of Japan’s VAT hike
in 1998 is scaring others off. For small euro members with large
imbalances, there are few alternatives, however. The important
thing is to restore confidence. Any loan guarantees that Greece
receives from other euro zone members are mainly a way to
reduce its funding costs. Greece will still need an effective
austerity package to reduce its deficit from 12.7% of GDP to
8.7% next year and 3% in 2012.
All countries with large imbalances have to avoid a rapid rise in
bond rates. For one thing, higher budget deficits can be the
trigger. Secondly, the phase-out of the quantitative easing could
also contribute to higher interest rates.
Sweden and Finland managed to consolidate their budgets
fairly quickly during the 1990s. According to the IMF, it took
seven years to implement an austerity package corresponding
to 13.3% of GDP. Stronger global demand, a weaker currency
and gradually falling interest rates in the wake of stronger
confidence probably made it easier than it is today when global
demand is limping along. Euro members will only benefit if the
euro continues to weaken against other currencies, and interest
rates are already relatively low.
Governments will need to change their tools, just like central
banks had to in order to get inflation expectations down. There
is a need for political processes that guarantee deleveraging
during good times instead of bad. There is also a need for
independent fiscal policy institutions that can make it possible
for politicians to avoid irresponsible fiscal policy.
The key is to immediately begin tightening in countries where
needed. Others have to announce that a consolidation is
coming next year. In the meantime balance sheet policy from
central banks has to be phased out and a cautious tightening of
interest rate policy begun. Considering the major fiscal
challenges they face, central banks may have to ease off a little.
It is important, however, not to create any new bubbles in asset
markets either in their own countries or emerging economies
that are taking in increasing capital inflows as a response to low
interest rates and low yields in the West.
5. Structural reforms needed at every level
Thus far central banks and governments have tried various
types of medicines to treat the patient. This has worked to some
extent, but additional measures are probably needed to figure
out why the patient became sick (stop smoking, begin
exercising, etc.). In other words, the fiscal and monetary
stimulus must be combined with structural reforms. Otherwise
In reality, it's too early
to tighten right now
… but it's important to
avoid higher interest
rates
It should have been
easier for Sweden to
consolidate than it will
be for Greece
Now the stimulus must
be complemented by
structural reforms

the problems will arise again and OECD countries will not be
able to meet the growing competition from emerging countries.
Structural reforms are needed at the global and regional level,
as well as nationally and locally. The common denominator is
that institutions have to be created that can handle changing
demands. The reason could be demographics, globalisation or
technological developments, factors that require changes in
economic policy, e.g., in our welfare systems.
Among the most important reforms needed at the global level is
the transformation of the financial sector.
Some experts feel it is enough to reform the financial sector at
the national or regional level. However, better co-ordination and
institutional frameworks are probably needed at the global level
as well. Some issues such as balancing growth between
countries/regions, currency policy, the system of capital controls
and early warning systems for imbalances, are better handled
globally.
Little has been done to date, but thorough analyses are needed
before regulations can be amended. Overly or inaccurately
regulated markets are impeding growth, while under-regulated
or inaccurately regulated markets add to instability. There are
no miracle medicines against bubbles, but better regulations
and supervision could at least limit the problems somewhat.
There are five areas where reform efforts are currently being
introduced: 1) specific regulations (what will be regulated?), 2)
the structure of oversight and regulation (who will be monitored
and how much?), 3) the financial sector’s conduct, bonuses and
risk management, 4) the fiscal implications of the financial
sector and moral hazards, and 5) structural reforms that
separate the bank’s role as an intermediary from that as a
speculator. In the years ahead regulation and oversight will be
tightened, and it is important that it is done smartly.
Other areas that require stronger institutions are trade policy,
climate policy and poverty. The important thing is to realise that
all these areas are inter-related. Climate change is increasingly
an issue of how resources are divided between countries, and
who will pay the bill to address environmental damage.
The most important reform needed at the regional level, i.e., the
EU level, is the further integration of product, financial and
labour markets. There are good opportunities for specialisation
and sharing the burden within the region, but they are not being
taken advantage of at this point. The EU is falling behing in the
global “growth league”.
The euro zone also has to create a better framework for co-
operation in the event of crises that also creates a better
balance between countries.
The divergence between countries around the Miditerranean
and Germany is not only because of EMU, even though low
It is important to
strengthen institutions
It's hard to find the
right level of regulation
and oversight
Many issues are inter-
related and need
stronger institutions,
especially climate
change

interest rates may have aggrevagated the problem. There have
been several signs of increasing imbalances, and most are
related to weaker competitiveness:
Loss in market share
Strong increase in wages
Inflexible labour markets
Weak productivity developments
Negative ranking in World Bank’s “ease of doing business”
Large deficits in current accounts and budgets
It is not Germany being too competitive, but many other
countries being too little competitive.
The Lisbon Agenda will have to be amended even though it is
new. The EMU is a political reality, and for euro countries there
is no alternative. A new framework is needed for the euro zone
that incorporates crisis management and restores confidence in
the Stability and Growth Pact. The financial markets have found
holes in the existing framework that need fixing.
An European Monetary Fund (EMF) would take a long time to
build up, so it cannot be used in the current situation. Therefore,
it is not a solution in the short term. In addition, it sounds
akward to push for stricter rules and then support those who
break the rules. Like the Stability and Growth pact, it is difficult
to enforce sanctions and to make them realistic.
In the short run, the euro members must agree on loans and
loan guarantees in order to manage the crisis situation. In the
longer term, the Eurozone must choose between 1) the
Maastricht union where the cooperation is about a monetary
union, and there is a risk that countries may leave the union
including Germany, and 2) the transfer union where there is
fiscal cooperation and more political steering involved, and with
the risk of increased budget undisciplin and less incentives to
solve own problems. Even if it could take a long time, it seems
as if the second model will be more likely in some form.
The most important reform needed at a national and local level
is to strengthen the labour market through better wage
formation, training and investments in entrepreneurial ventures
that create jobs.
Better national and local welfare solutions have to be designed
as well to adjust for demographic changes and increased
competition from emerging economies and other regions. It is
critical to make the local market as attractive as possible for the
inflow of labour, as well as investments.
The EMU will not
collapse, but the crisis
is creating the need for
new frameworks

6. Our assumptions in the forecast
Policy developments in financial and other asset markets are
hard to predict in a standard forecast. We address interest
rates, currencies, oil prices, etc. as assumptions in our Global
Outlook. Here we discuss how we arrived at these assumptions.
Politics
As usual, there will be a number of parliamentary and
presidential elections during the forecast period. In addition to
those mentioned below, a considerable number of regional
elections are scheduled in France, Russia and Italy in the near
future. It is hard to predict growth effects and incorporate them
in our forecasts. If future confidence increases after the election
of a new government, people will be more willing to spend, and
vice versa.
We consider the elections in the UK, Latvia, the US
(Congressional election) and Greece to be especially important
to their development. In all these countries the financial crisis
has had a huge impact and imbalances continue to create
problems. In the UK, a conservative government which seems
most likely at the moment, may speed up budget consolidation
and sharpen the rules on regulation a bit more than the present
government. In the short run, growth may be hampered, but in
the longer run it may reverse to positive effects.
We have assumed neither positive nor negative growth effects
and instead treat political conditions as a neutral factor owing to
the considerable uncertainty, even though this might not be the
case.
2010
April Presidential election in Austria
May Parliamentary election in the UK (must be held before 3
June)
June Parliamentary election in the Netherlands
July Upper house election in Japan
September Parliamentary election in Sweden
October Parliamentary election in Latvia
October Parliamentary and presidential election in Brazil
October Presidential election in Poland
November Congressional election in the US
2011
March Parliamentary election in Finland
May Presidential election in Latvia
June Parliamentary election in Belgium
September Parliamentary election in Greece
October Parliamentary election in Poland
November Parliamentary election in Denmark
December Parliamentary election in Russia
2012
January Presidential election in Finland
March Presidential election in Russia
March Parliamentary election in Spain
June Presidential election in France
July Presidential election in India
October Parliamentary election in Canada
November Presidential election in the US
In countries where the
financial crisis has had
the biggest impact,
elections will be
especially important

Central banks’ policy rates
Since the last forecast there have been no changes in policy
interest rates from major central banks. The Fed has raised its
discount rate and announced that it will stop buying Mortgage
Backed Securities (MBS) in April. The ECB has stopped issuing
fixed-rate loans on a 12-month basis. The Bank of England has
announced that it will not extend its quantitative easing for the
time being, while Japan has shown little interest in quantitative
easing at all, and the government is more focussed on a weaker
yen.
Consumer price developments will be weak in industrial
countries, but slightly rising over the next few years. We expect
the CPI to reach around 1.5% in the euro zone and between 1
½ % and 2% in the US and 2-2 ½ % in the UK this year. The
CPI will increase even slower during 2011, and we do not
expect inflation to rise to worrisome levels in 2012. In Japan the
CPI will fall in 2010 and 2011 before rising slightly in 2012. In
China, Russia and India, inflation will be uncomfortably high.
As was the case in our previous forecast, we assume that
central banks will launch a period of rate hikes during the
second half of this year and next year (Japan will wait a little
longer). The rate increases will be modest, however, due to the
increased complexity of fiscal policy. The growth we are seeing
in the first half of 2010 is primarily the result of the upswing in
the inventory cycle and stimulus measures.
Policy rates
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9
Percent
0
1
2
3
4
5
6
7
U S A
E u ro la n d
U K
J a p a n
Since underlying demand is expected to remain weak, as will
inflation pressures, we expect the benchmark rate hikes in
major economies to be lower than previously projected.
Interest rate assumptions 2010-2012
Outturn Outlook
17/3/2010 30/6/2010 31/12/2010 30/6/2011 31/12/2011 2012 (average)
Federal Reserve, USA 0.25 0.25 0.50 1.50 2.25 3.00
Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.25
ECB 1.00 1.00 1.00 1.25 1.75 2.75
Bank of England 0.50 0.50 0.75 1.25 2.25 2.75

Bond rates
Slowly increasing GDP growth and higher inflation also place
upward pressure on long-term bond rates. We expect the
increases to be modest in our main scenario, however. One risk
is that the market will become increasingly concerned about the
financial situation in the US and the UK, which may accelerate
the upward trend. Another risk is the phase-out of the
quantitative easing, which could result in higher bond rates. In
the next 2 to 3 years bond rates should climb to some 5%.
Long-term bond rates (the US, the UK, Germany, Japan)
06 07 08 09 10
Procent
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
UK
USA
Japan
Germ any
In the euro zone interest rate differentials between countries
with large imbalances (budget, current account) and Germany
rose substantially last year and have retreated only slightly
since. While Greece’s austerity package and the euro zone's
indication that it will provide financial support for Greece are
reducing the differential, it is still high and is hurting the
country's ability to finance its debt. We expect interest rate
differentials to fall slightly as support measures are spelled out,
but they will not return to pre-crisis levels.
There is considerable
uncertainty about bond
rates, but the trend is
upward
Interest rate
differentials have
begun to shrink, and
for this to continue
will require indications
of support

Interest rate spreads within the euro zone against the German
10year government bond (%)
S o u rce : R e u te rs E co W in
ja n
0 7
m a j se p ja n
0 8
m a j s e p ja n
0 9
m a j s e p ja n
1 0
Percent
-1 .0
-0 .5
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
3 .0
3 .5
4 .0
G re e ce
Ita ly
B e lg iu m
F ra n c e
S p a in
P o rtu g a l
S w e d e n
Credit markets
Credit markets are working more smoothly, but still there are
many companies with difficulty obtaining a credit. Interest rate
differentials between interbank rates and treasury bills have
returned to levels from before the financial crisis. It has become
easier for large companies to find funding, since the corporate
bond market is working more smoothly at the same time that
the equity market has strengthened thanks to an improving risk
appetite and relatively good earnings in many companies
following cost cuts.
For small and medium-sized enterprises in many countries the
difficulties are much greater. This also applies to households in
the US, for example, who aren't finding conditions any better
either. Regional banks will face problems as loan losses from
residential and commercial real estate continue to rise. Credit
demand is lower, while debt restructurings continue. We
assume that the credit tightening will continue in 2010 and part
of 2011 before gradually easing when the situation in the
banking sector further improves. Demand for new credit will
remain low for several years in countries where the financial
crisis has been especially severe.
Currency markets
The US dollar has risen in value by about 5% against the euro
since the beginning of the year. Consequently, the downward
trend in the dollar we saw last year has been broken. One
reason is the turbulence in the euro zone and higher growth
and interest rate prospects for the US economy. We expect the
dollar to continue to rise against the euro throughout the period,
but the pace will slowly ease.
The main beneficiaries
of improving conditions
in credit markets are
large companies
For small companies
the situation is tougher
We expect the dollar to
continue to rise against
the euro …

The euro, yen and yuan against the US dollar (index August 2007 =100)
S ource: R euters E coW in
98 99 00 01 02 03 04 05 06 07 08 09 10
70
80
90
100
110
120
130
140
150
160
170
Y en against the U S dollar
E uro against the U S dollar
Y uan against the U S dollar
The yen is expected to slide against the dollar partly as a result
of Japan's weaker finances and higher interest rate differentials,
and partly because the yen is again becoming a funding
currency for carry trades. The government is trying to actively
weaken the yen through various pronouncements, but whether
this will be effective remains to be seen.
We expect the yuan to remain tied to the dollar for a few more
quarters. Not until late in the year or in 2011, when exports and
job prospects improve more sustainably, do we see a slow
appreciation in the yuan against the dollar. External pressures
will not speed up an appreciation, it may even be the other way
around.
Exchange rate assumptions 2010-2012
Outturn Outlook
17/3/2010 30/6/2010 31/12/2010 30/6/2011 31/12/2011 2012 (average)
EUR/USD 1.37 1.35 1.30 1.25 1.22 1.20
RMB/USD 6.83 6.83 6.83 6.60 6.40 6.00
USD/JPY 90 98 105 112 115 115
Commodity markets
Swedbank’s commodity price index fell by 3.6% in USD in
February. The underlying trend remains upward, however, due
to improving economic conditions, especially in emerging
countries. A stronger dollar could slow the pace of recovery,
however. We expect metal prices to continue to rise, as will the
price of oil and to a lesser extent food prices. We assume a
price of 75 dollars per barrel this year, 80 dollars in 2011 and 90
dollars in 2012. This represents a decrease of 5 dollars in 2010
and 10 dollars in 2011 compared with our January forecast. The
main reasons are the more stable commodity price trend we
have seen thus far this year and the stronger dollar.
… and the yen
as well …
… while it will take
longer before it
weakens against
the yuan
We have revised
our oil price projection
downward

Commodity price developments
00 01 02 03 04 05 06 07 08 09
Index
50
100
150
200
250
300
350
400
450
Food price index
Com m odity price index - excluding energy
Com m odity price index - total
Equity markets
Stock prices posted their biggest gains in 2009 in emerging
economies such as China, India and Russia. At the start of
2010 stocks have traded sideways in practically every market.
The Greek crisis and weak government finances in many
countries have been a concern, as has the uncertainty
regarding China's policies, which are overly expansive and may
be contributing to an overheated economy. Two other
uncertainties that could affect stocks are financial regulation
and exchange rates. In emerging economies there is a risk that
bubbles will form. We expect stocks to continue to rise, but that
volatility will be high with somewhat larger swings up and down
than before.
Stock exchange developments in the US, Japan, India, China, Russia and Europe
06 07 08 09 10
Index
50
100
150
200
250
300
350
400
Russia
Japan
China
(Shanghai)
India (M um bai
USA (S & P 500
Big swings in stocks,
but risk appetite will
rise as concerns ease

Real estate markets
In countries where housing prices rose substantially during the
2000’s (Spain, UK, US, Ireland) prices fell for several years
before beginning to stabilise or even rise slightly last year (US
and UK). Ireland has not yet stabilised and appears to be the
country facing the longest period of price corrections.
Sweden and Norway haven’t seen prices drop all that much,
and in fact they are again now rising to new peak levels. We
could see a correction during the forecast period, while the
trend will probably be cautiously upward in countries where
prices have now fallen for several years. The phase-out of
stimulus measures is critical, not least in the US, which still
faces a major problem with commercial real estate, where
prices trail by about 16 months. In other words, commercial real
estate prices have yet to hit bottom.
House price developments in some selected countries (Index 2000 =100)
9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9
7 5
1 0 0
1 2 5
1 5 0
1 7 5
2 0 0
2 2 5
2 5 0
S
D K
S P
U S A
U K
N
IR L
7. Regions/countries – divergence is growing
We summarise our economic outlook for the US, Japan, China,
India and Europe below. We will discuss the countries in our
neighbouring region around the Baltic Sea later in our Baltic
Sea Region Report.
Compared with our projection a year ago, emerging economies,
especially China and India, have grown faster than expected. At
the same time we were too optimistic about what to expect in
industrial countries. Although we predicted that GDP would fall,
it did so more severely than we had thought. We now expect
the divergence to further increase and have adjusted our
estimates for emerging economies upward more than other
countries, at the same time that fiscal consolidation is restricting
GDP growth in the US, Europe and to some extent Japan.
Factors that contribute to decoupling between industrial
countries and emerging market economies are among the
latter: sound fundamentals, strong fiscal position, the external
position and large surpluses in the current account, stable
The trend in housing
prices should be
upward in countries
where corrections
have been made
The income gap
between East and
West is gradually
shrinking

currencies, a recovery in commodity prices, higher potential
growth and a better situation on the financial markets. Stimulus
contributes to these countries being able to use domestic
demand as a growth engine. Before the crisis, growth was
export driven. If growth momentum is lacking in the industrial
countries, and the economic policy is less expansionary, there
is a risk that also emerging markets will loose growth in the
years to come.
Economic policy is focussed on supporting consumption in the
US and exports in China. This means little has changed that
would help to better balance global growth. Imbalances are
shrinking, however. The US current account deficit is now down
to around 3% of GDP. China's surplus is still substantial. In
addition to a different currency policy, it needs greater structural
reform to strengthen private consumption and reduce the
incentives to save among the Chinese. This will take time, and
until then new imbalances have been built up.
The US – Unusually many obstacles along the road
As we had predicted, the US economy grew in the third quarter
of 2009 after four consecutive quarters of shrinking GDP. The
growth rate further increased in the fourth quarter.
The most important reasons for the gains are the economic
stimulus, which strengthened consumer spending, as well as
inventory investment and increased spending on IT, which are
having a positive impact. Net exports have not been as
important as they were earlier in the year. Economic issues at
the state level and the lower defence spending contributed to
lower public spending in the fourth quarter, contrary to what
might have been expected given the political objectives.
Contribution to US GDP growth (annual rate)
Based on GDP growth, the recession seems to have come to
an end. Jobs are still being lost, however, though not as much
as previously expected. It will take a few more quarters before
the NBER officially declares that the recession was over in early
2010.
What is most likely to happen in the US economy in the years
ahead and what will drive growth?
The US is growing
strongly mainly due
to temporary factors

We anticipate a relatively strong trend during the first half year,
although the cold weather has initially slowed growth. During
the second half year, when the effects of the stimulus subside
and inventory investment contributes less to growth, the growth
rate will weaken. For the year as a whole it should fall in the
range of 2.5-3%, compared with about half that on an annual
basis during the second half year. Underlying domestic demand
will remain weak at the same time that a stronger dollar means
that net exports will not provide as much of a boost as we saw
at the beginning of last year.
What are the key factors why the US economy hasn’t
rebounded to a growth rate of 3-4% as it did after previous
receessions? We estimate the potential growth has fallen to 3%
or thereabouts. To absorb a growing working-age population,
the market will have to generate around 100-125,000 jobs (net).
If we exclude the national census, which will give upwards of 1
million people temporary work, the economy will not be able to
replace the lost jobs in the labour market.
Here follows the five most important reasons why the US is
recovering more slowly than usual in this dynamic economy:
Labour market and household income
While the number of new jobs is not shrinking as much as
before (-36,000 in February) and employment numbers are
stabilising, there are an array of concerns. Recruitment plans
are cautious. The labour supply is decreasing more than in
previous recessions. Long-term unemployment (over 6 months)
accounts for about 40% of the jobless figure. And the weak
housing market is making it difficult for people to move to areas
where work is available. As a result, the labour market has
become less dynamic. If those who are involuntarily working
only part-time are included, the numbers look even worse.
Nearly 17% of the workforce has seen their buying power
diminish, and that doesn't include those who are working full
time but are receiving lower salaries and benefits.
US labour market
S o u r c e : R e u te r s E c o W in
8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0
Procent
- 5 .0
- 2 .5
0 .0
2 .5
5 .0
7 .5
1 0 .0
1 2 .5
U n e m p lo y m e n t
E m p lo y m e n tL a b o u r s u p p ly
Growth will slow again
during the second half
year
The risk is that
the US job market has
become less dynamic

Real estate market and private wealth
For households that expected to retire on the appreciated value
of their homes, the financial crisis was a wake-up call. Part of
their wealth has been restored, but real wealth is still less than it
once was. Before the crisis, equity in housing was around 60%
but now it has fallen to 38% (up from the bottom at 35%).
The housing market has shown signs of recovery, but can it be
sustained? The stimulus has been a positive factor, but
uncertainty is growing since some of the measures will be
phased out, e.g., central bank purchases of mortgage bonds
will end in late March. The spike in the chart below was due to
tax rabates. Housing prices rose on a monthly basis in June-
December of last year, but the increase was small and was
affected by the many foreclosure sales. Price levels remain
below their peak of July 2006 by about 30% in nominal terms.
The number of foreclosure sales is expected to increase this
year and exceed the total number in 2008 and 2009. About
25% of borrowers live in homes worth less than their
mortgages.
US housing market
9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9
Numberof(millions)
0
1
2
3
4
5
6
7
8
S a le s o f e x is tin g h o m e s
R e s id e n tia l c o n ts tru c tio n
S a le s o f n e w h o m e s
Commercial real estate remains a major uncertainty in terms of
both economic development and loan losses in the financial
sector (particularly for smaller banks). About 75% of five-year
loans on underwater properties were taken out in 2005 and will
mature this year. The corresponding share of loans that mature
in 2010-2014 (1,400 billion dollars) is estimated at 50%. New
commercial real estate construction has fallen and will continue
to do so. GDP growth has already slowed because of this, but
the effect could be even greater. Commercial real estate prices
have lost about 40% since peaking in 2007, and appear to be
lagging after the housing market by about 16 months.
Without the stimulus,
the housing market
would have weakened
even more
Commercial real estate
represents a major risk
for regional banks

Credit market
According to the Federal Deposit Insurance Corporation (FDIC),
slightly over 700 American banks were in the danger zone last
year. Non-performing loans make up of 8% of total loans, and
the share will continue to increase. Part of the problem is
related to commercial real estate, as noted above. Consumer
credit increased slightly in January for the first time in a year,
but it is too early to say whether the credit market has eased.
According to central bank surveys, bank lending continues to
decline, which is restricting growth. Large companies are
borrowing in the bond market, while smaller companies are
more dependent on bank capital. At the same time the National
Federation of Independent Business (NFIB) is indicating that
small and medium-sized enterprises are not especially
interested in borrowing right now, since they have been greatly
impacted by weak demand.
Debt restructuring in the private sector
Debt restructuring is taking time in the private sector. Debt in
the credit market as a share of GDP fell in 2009 from about
375% to 350%, but will drop faster when GDP rises again. In
the household sector total debt as a share of disposable income
is dropping from 130% to 120%. Consumer credit has
decreased as well, but only marginally thus far. There is good
reason to expect further debt restructuring that keeps consumer
spending in check. The household savings rate has increased,
but could need to rise even more to restore lost wealth.
American houshold debt as share of income
60 65 70 75 80 85 90 95 00 05 10
0.15
0.16
0.17
0.18
0.19
0.20
0.21
0.22
0.23
0.24
0.25
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
C onsum er credit (rhs)
Total debt (lhs)
Finances at federal and state level
In 2010 federal revenue will barely reach 15% of GDP, while
expenditures are about 25%. This means that the budget deficit
will continue to grow and is expected to exceed 10% of GDP.
Even if there is little budget consolidation during the forecast
period, the increased debt could affect financial markets, e.g.,
Lower supply and
demand for loans is
impeding growth
Debt restructurings
continue to impede
growth

the dollar and interest rates. From a long-term perspective the
problems are even bigger, since federal spending on health
care and pensions is rising at the same time as interest
expenses. The growth assumption of about 3-4% that serves as
the basis of our long-term calculations is also too optimistic.
A more acute problem is the weak economy in many states,
which is offsetting the impact of the fiscal stimulus. For
example, it is difficult to implement infrastructure projects when
unemployment insurance is paid through federal loans that
have to be repaid, which further limits growth.
A stronger dollar is slowing the recovery
Because growth prospects are slightly stronger in the US than
the euro zone, and because of the growing tension affecting the
euro, it is likely that the dollar will continue to strengthen, which
could hurt net exports. At the same time inflation is being held in
check. Even if China allows the yuan to appreciate, it will only
do so slowly. President Obama’s goal of doubling exports within
five years seems optimistic, especially when the dollar is likely
to rise in the years ahead.
What factors are benefitting the US?
Corporate investments in new technology, especially IT.
High productivity growth, which generates profit and
holds inflation down at the same time that it provides a
foundation for job growth once demand improves.
There remains the possibility that additional stimulus
packages may be introduced for small businesses,
households and the housing market to keep growth
going. A fiscal consolidation will probably have to be put
for now, while monetary policy is cautiously becoming
less expansive.
Our conclusion is that the US economic recovery will continue,
but slow slightly in the second half of the year. The rebound and
stimulus measures are nevertheless generating GDP growth of
2.8%, but next year when the stimulus and inventory investment
have done their part we expect GDP to rise a more modest
2,2%. In the absence of a major budget consolidation, there is
the possibility of slightly stronger growth prospects in 2012 of
around 2.5%, but forecast risks are growing, not least with
regard to the financial and commodity markets, reform policy
and market developments.
Japan – Riding China’s growth wave
Japan’s economy shrunk by just over 5% last year. In 2008
GDP fell by 1.2%. That makes this the most severe recession
since World War II. The second and fourth quarters of last year
The impact of the
stimulus is offset by
problems at the state
level
A stronger dollar is
also slowing growth
Trade with
neighbouring countries
is stimulating growth

showed signs of growth, however, and a recovery is being
helped by strong development in Asia. Exports are the main
growth engine. In real terms private consumption has also risen,
partly as a result of the government's initiatives to support
greener, more energy efficient car purchases.
GDP-growth in Japan (%)
Source: Reuters EcoWin
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
-15.0
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
Japan, GDP, annualized (Q/Q*4)
Japan, GDP (Y/Y)
Large companies are the biggest beneficiary of growth in China
and the rest of Asia, while smaller companies are more reliant
on the domestic market. The service sector is still relatively
sluggish. As a result the labour market has not markedly
improved. Unemployment has fallen marginally to just over 5%,
mainly as the result of a smaller labour supply.
Prime Minister Hatoyama and his party, DPJ, won the
parliamentary election in August last year. In December the
budget was presented for 2010. Social insurance expenditures
have risen by 10%, while the investment budget, which is
smaller, has been cut by 20%. More expansive fiscal policy,
even though Japan already has the highest government debt
among mature economies, requires that interest rates remain
low for a long time to come.
In December consumer prices fell by 1.7%, compared with the
same month last year. Deflation has returned and according to
Masaaki Shirakawa, Governor of the Bank of Japan is the result
of globalisation and lower import prices and profit margins, at
the same time that wages have fallen for an extended period
and domestic demand is now decreasing substantially as a
consequence of the global recession. Despite pressure from the
government, the Japanese central bank has utilised quantitative
easing sparingly. Instead the focus has been on measures that
raise demand and future confidence. The country's new finance
minster, Naoto Kan, is trying to get the yen to weaken, which
would stimulate exports and reduce the deflation problem.
Deflation is again a
major challenge for
the central bank and
government

Given that economic policy is expected to be strongly expansive
during the forecast period and that emerging countries in Asia
continue to develop strongly, there is an opportunity for decent
growth of around 2% this year. After some of the stimulus and
recovery have had their impact, we expect GDP growth to reach
around 1.5% in 2011 and 2012. Deflation will continue in both
2010 and 2011, but could ease in 2012 after demand improves
for a while. The global market is a risk, as are requirements
from outside the country (e.g., rating agencies are signalling
that they want to downgrade the country’s credit worthiness)
that fiscal policy must be tightened. Our expectations of a
weaker yen are also a major uncertainty.
China – Slow, less expansive economic policy
China’s lowest GDP growth during the global recession was
6.1% in the first quarter of last year. Since then a V-shaped
recovery has pushed the growth rate higher. In the fourth
quarter GDP jumped as much as 10.7%. Growth has been
driven by stronger exports and investment, higher consumption
in the wake of the stimulus and rapid credit growth. Economic
policy is and has been strongly expansive, with low interest
rates, strong incentives for banks to lend and a currency tied to
the expansive monetary policy in the US.
There are several indicators that show that the Chinese
economy is developing strongly. In February exports rose by
46% on an annual basis (base effects are important to the size
of the upswing) and imports increased nearly as much due to
higher commodity prices and quantities. Industrial production
rose by slightly over 20% in January-February on an annual
basis. Auto sales are another indicator of strong growth,
climbing nearly 100% on average for January and February on
an annual basis. The real estate market is overheated in some
parts of the country, but at a national level the price increase is
slightly over 10% on an annual basis. Inflation has risen quickly
in recent months to the current level of 2.7%. Although the trend
may be worrisome, the level is hardly so as yet.
In an address to the national congress on 5 March, Chinese
Premier Wen Jiabao said that no major policy changes were in
the pipeline. Monetary policy will remain expansive, the
renminbi is essentially stable and fiscal policy is proactive. The
growth target is still 8%. In the months ahead interest rates and
reserve requirements will be raised (as happened in January),
but it is unlikely that there will be much in the way of austerity
measures. Monetary policy will probably become slightly less
expansive. Credit growth of nearly 20% is still expected this
year, down from 70% in January. As a result, lending volumes
will continue to rise, but not as much as before.
Measures that increase consumption will be in place by the end
of the year. On the other hand, there is a risk that health care
The wheels of the
Chinese economy
are rolling along
Some indicators are
pointing to excessive
growth
Economic policy will
remain the same or
change in small steps

and educational spending could decrease. Fiscal policy is likely
to be neutral rather than expansive. Moreover, there are no
major liberalisation proposals that would make migration legal
within the country. Nor have any other, more structural
measures been announced. One consequence of the financial
crisis is that the stimulus and other measures have made state-
owned enterprises more important. Small companies, on the
other hand, have been left with an unlevel playing field, and
some have been wiped out.
The transition toward higher consumption and investment in the
service sector/domestic market and reduced dependence on
exports will take time. The figures for 2009 are not yet shown in
the diagram below, but we can assume that export share
decreased at the same time that investment share increased
significantly and the consumption share was slightly higher. The
investment share is reported to have increased to 45% last
year.
National account components’ share of GDP(%)
S ou rce: R eu ters E co W in
78 80 82 84 86 88 90 9 2 94 96 98 00 02 04 0 6 08
CNY
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
C onsum ption
Investm ent
P u blic consu m ption
E xports
One way to speed up the transition to higher domestic demand
would be to allow the renminbi to appreciate against the dollar.
This would also offset the impact of any future inflation threat
(inflation is likely to double by the end of the year, exceeding
the 3-4% level the government is comfortable with). For China,
its currency is a strategic tool in trade policy rather than a
monetary tool. Not until it sees a more sustainable improvement
in exports based on stronger underlying international demand
that eases pressure on the Chinese labour market will the
government consider loosening the link to the dollar. We expect
this to happen no sooner than the end of the year or early next
year. Strong exports of late must be followed up by equally high
numbers in order to see a change sooner.
GDP is expected to increase by 9.5% this year before slowing
to 8.5% in 2011 and 8% in 2012. Less stimulus money and
lower base effects will reduce the growth rate to the target level
the government has set. Risks include an overheated economy
China wants to decide
when to allow the yuan
to appreciate

in the form of rapidly rising consumer and asset prices. China
also has to be worried about growing protectionism in other
countries as a response to its currency and trade policy.
India – Exceeding expectations thus far
In our forecasts last year we overvalued the importance of the
weak monsoon rains to economic growth. In our Asian Outlook
from 20 January we revised our growth forecast upward to 7%
and in 2010 and 7.5% in 2011. India’s strong development as a
result of stimulus measures, increased capital inflows and
growing domestic demand has now given us reason to revise
our forecast upward by an additional half percentage point. As a
whole, India has handled the financial crisis and global
recession well.
Although the monsoons have adversely affected the agricultural
sector, measures to strengthen the labour market in rural areas
have helped to raise the rate of consumption. Growing
confidence among businesses and households is contributing
to this. Spending on capital goods, especially cars and IT-
related equipment, is strong. The improved performance of the
financial market has made it easier for businesses to obtain
credit, which in turn has been positive for the investment climate
and earnings.
One problem for many households is rapidly rising consumer
prices. Even though wholesale prices, which are important to
monetary policy, have not risen as quickly, the prices customers
pay in both urban and rural areas have cut into their buying
power. Major bottlenecks in the food supply chain are driving up
prices, which monetary policy cannot effectively offset. The
weak monsoon rains complicate an already difficult situation,
but as the agricultural sector becomes stronger, the problem of
inflated food prices will subside. The Indian central bank intends
to reduce inflation to 4-5% in 2011/2012.
Inflation developments in India
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9
Percent
-5 .0
-2 .5
0 .0
2 .5
5 .0
7 .5
1 0 .0
1 2 .5
1 5 .0
1 7 .5
2 0 .0
C P I a g ric u ltu ra l w o rk e rs
C P I in d u s tria l w o rk e rs
W h o le s a le p ric e s
There is considerable
strength in the
domestic service
sector
High inflation is a
problem, especially for
those who buy a lot of
food

India’s fiscal situation gives us some cause for concern. The
national debt has increased to over 80% of GDP and the
budget deficit as a share of GDP was in the double digits in
2008 and 2009. There is a risk that this will remain the case in
2010. The budget consolidation being planned is overly
cautious, especially considering that growth appears to be
relatively sustainable. Large capital inflows are causing the
rupee to appreciate despite the offsetting effects of inflation and
fiscal policy. A stronger currency can be helpful in that it will
help to keep inflation in check. On the other hand, it can also
slow exports. We expect only a small appreciation to be
allowed. Capital inflows are also affecting stock prices, which
are not rising as much as last year, however. Avoiding bubbles
in asset markets is also in the government's interest.
Structural reforms aren't high on the agenda of either the
parliament or the coalition government led by Manmohan Singh.
To achieve consistently high GDP growth will require a more
ambitious reform policy that makes the economy more
competitive. We expect that stronger global and domestic
demand will benefit the country's growth, so that it reaches 7.5-
8% in the years ahead. The budget situation and overheated
product and asset markets are the biggest risks.
EU & euro zone – Wrestling with internal tensions
Europe has lagged behind the US and Japan thus far in the
recovery. In the fourth quarter of 2009 the euro zone grew by
only 0.1% compared with the previous quarter. Germany’s GDP
was unchanged at the same time that the region’s confidence
indicators fell slightly. This year French households have also
begun to cut back on their spending.
Three key factors are affecting development: 1) the end of the
“wreck rebate,” which affected the fourth quarter of 2009 and
the first quarter this year, 2) the impact on growth of the cold
weather at the start of the year, and 3) growing concern about
Greece’s financial crisis and its spread in the euro zone.
The previously strong euro relative to the dollar may have also
hurt exports, though we should see the opposite trend going
forward since the euro has weakened in the wake of the Greek
crisis. The inventory cycle has not contributed as much to
growth as in the US, either, and the impact may lag behind.
In the euro zone, the “Club Med” countries previously
accounted for a large share of the region's consumption. But
now that they are facing financial problems and have to tighten
their belts more than other economies, there is a risk that
domestic demand will decelerate, since Germany is unlikely to
take the baton. German households have seen their buying
power stagnate, while businesses are becoming more
competitive by cutting labour costs. At the same time euro zone
India will have to begin
a budget tightening
next year
There are several
reasons why Europe
is recovering more
slowly

economies are not dynamic enough. Considering the resistance
that exists, it is not strange that the recovery has been slower
and less impactful than in the US. It's a structural phenomenon.
GDP-growth in the Euro zone (%)
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9
Percent
-7 .5
-5 .0
-2 .5
0 .0
2 .5
5 .0
7 .5
S p a in
F ra n ce
Ita ly
G e rm a n y
E u ro a re a
U n ite d K in g d o m
We expect GDP growth in the euro zone to remain weak at
around 1–1.5% in 2010-2011 due to the phase-out of economic
stimulus measures and budget consolidation in several
countries. Even if the European Central Bank doesn't begin to
raise interest rates until next year, some of the measures it took
to alleviate the crisis will be eliminated, resulting in higher
capital costs.
The risks facing the euro zone include the banking sector and
new loan losses as the economy continues to develop
sluggishly at the same time that economic policy is tightened. In
contrast to our main scenario, the region’s handling of budget
deficits and its financing are also creating turbulence in financial
markets.
Individual countries in EU/euro zone:
1. Germany
Although the global recovery has benefitted German exporters,
it has not compensated for weak domestic demand. In the
fourth quarter of 2009 GDP stagnated after having reported
relatively decent gains in the second and third quarters.
Investments are being impacted by excess capacity that still
remains in industry. The construction sector reported weak
activity, which may have also been the result of the cold
weather. The end of the wreck rebate affected consumption,
which fell for the second consecutive quarter.

Business climate and industrial production (index)
9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0
Netbalance
8 0
8 5
9 0
9 5
1 0 0
1 0 5
1 1 0
Index2005=100
8 0
8 5
9 0
9 5
1 0 0
1 0 5
1 1 0
1 1 5
1 2 0
B u sin e s s c lim a te a cc o rd in g to IF O -->
< --In d u s tria l p ro d u c tio n , to ta l
The outlook for the German economy includes a weak recovery
during the forecast period. Higher demand from North America
and Asia is helping exports at the same time that imports are
not rising as quickly. Households will benefit from lower income
taxes and better social insurance in 2010, but are still expected
to remain cautious due to the weak labour market and slowly
rising inflation, which is holding their buying power in check.
Lower purchases of imported capital goods are strengthening
net exports. A weaker euro is expected to contribute to this
trend.
The labour market has not weakened as much as might have
been expected, which is due to state subsidies to companies
that retain jobs and reduce hours. We expect, however, that
companies will have to cut labour costs to restore their
competitive strength. Unemployment will continue to rise, which
is impeding GDP growth and complicating fiscal policy.
After balancing its budget in 2008, Germany reported a deficit
of 3.2% of GDP in 2009. Due to weak GDP growth and the
stimulus package, we anticipate that deficits will exceed 5% of
GDP in 2010 and 2011. The overall impact on growth and
public finances of the tax cuts that have been approved is
difficult to determine. Germany’s goal is to cut the deficit to 3%
by 2013 and limit its structural budget deficit to 0.35% of GDP
by 2016. In addition, the federal states must balance their
budgets by 2020.
An expansive economic policy and stronger demand from non-
European countries will help the economy to grow during the
forecast period, but GDP growth of 1.3%, 1.5% and 2% in 2010,
2011 and 2012, still is just a modest improvement. Risks
include weak confidence among households and businesses,
price and labour market trends, more turbulence in the euro
zone, and the need to more quickly tighten economic policy.
Households are
benefitting from further
stimulus measures, but
are keeping a tight grip
on their purse strings
The German labour
market will continue
to weaken
Fiscal problems are
reasonable compared
with many other euro
countries

2. France
France’s economic slowdown in 2009 was relatively modest
compared with many other countries in Europe. Its GDP fell by
2.2%, against nearly 5% in Germany, Italy, the UK and Sweden.
One difference is that French households have seemed to be
willing to spend more. The housing market has not collapsed
and banks have not needed rescuing.
The acceleration in GDP growth at the end of the year must be
due to temporary factors such as wreck rebates and inventory
investment. In contrast, net exports contributed negatively.
Growth prospects include a recovery, with GDP rising slightly
more than Germany’s due to stronger domestic demand.
France’s companies could benefit a weaker euro, which could
also alleviate the slowdown in investments. Another factor
positively affecting investments is the government’s tax rebates
for French companies in certain areas, which are expected to
raise profit margins by 1 percentage point.
The labour market continues to weaken, but not as much as
before, especially in the service sector, where the number of
temporary jobs is now increasing. A clearer turnaround in the
labour market may take time, and consumer buying power is
expected to grow slower this year than last. Inflation is rising
slowly, while underlying inflation may even fall slightly due to
relatively weak demand, which is making it more difficult for
companies to pass on price increases to the next level.
France’s government has decided to continue to stimulate the
economy, despite that the budget deficit reached nearly 8% of
GDP last year. This year the deficit is rising toward 8.5% of
GDP due in part to the tax rebates. Not until 2011 will a
consolidation begin, probably by reducing spending on social
insurance and health care, among other things. The measures
seem insufficient if the goal is to reach the Stability and Growth
Pact’s target of 3% of GDP. The government’s plans to reform
the pension system could be important in the longer term.
GDP is expected to rise by 1.5% this year, 1.8% in 2011 and
2.2% in 2012. Risks include global demand, price and
employment trends, and turbulence that increases France’s
interest rate differential relative to German government bonds
and raises financing costs, so that the budget has to be
consolidated faster.
3. Italy
The Italian economy fell by 1% in 2008 and nearly 5% in 2009.
Growth was negative in the fourth quarter of last year as well.
Only public spending contributed positively to growth.
Consumer buying power has decreased, and consumption even
more so, which has led to a higher savings ratio.
Households, banks
and the housing
market have helped
to maintain growth
The government’s
tax rebates for local
companies can lead to
increased investment
and job growth
France’s government
has to be clearer about
its budget situation

Industry has continued to downsize. Due to considerable
overcapacity, we expect investments and employment to further
decline before eventually bouncing back. Italian companies are
hurt by their weak competitiveness and have a lot to gain from a
depreciation of the euro. Initiatives are needed, however, to
increase innovation and strengthen labour productivity.
Italy's national debt is high, having already reached 114% of
GDP. This puts it in Club Med, although the trend during the
crisis has been better than in neighbouring countries. After
preliminarily reporting a deficit of 2.7% of GDP in 2008, the
deficit grew to 5.3% in 2009. It is expected to stabilise at around
this level through 2011.
Slow growth, which we estimate at 0.5%, 1% and 1.5% for the
three forecast years, is clearly a risk for the government. In
addition, the financial market’s friendly attitude toward Italian
government bonds may change if the turbulence in the euro
zone were to grow, which would increase interest rate
differentials and financing costs for the government’s high debt.
Unemployment in some Euro zone countries (% of labour force)
94 96 98 00 02 04 06 08
Procent
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
S pain
France
Italy
G erm any
4. Spain
Spain’s GDP has shrunk for six consecutive quarters. The
global recession is a contributing factor, but the Spanish
economy has its own imbalances that must be addressed: high
levels of debt in the private sector, overcapacity in housing after
a construction boom and a downward correction in housing
prices.
We expect GDP to decline in 2010, but that a weak recovery
could begin during the second half of the year driven by strong
public spending as well as the export sector. On the other hand,
investments will continue to shrink for a while at the same time
that households cautiously begin to increase their spending in
2011, when conditions in the labour market stablise. The
housing market has not yet hit bottom and prices will continue
Competitive weakness
is a problem that can
be alleviated
Spain is wrestling with
both a global and
internal crisis

to fall. The banking sector may be affected more adversely than
before, since the construction and real estate sector are facing
more adjustments.
Weak real estate and labour markets are complicating fiscal
conditions. Structural reforms are needed to increase flexibility
in the labour market, where wage stagnation is an issue. Unlike
Greece, Spain posted a budget surplus before the crisis.
Unemployment of around 20% will mean lower revenue and
higher expenditures, however. The deficit as a share of GDP is
expected to exceed 11% this year. To keep costs down and
finance the growing national debt (currently 55% of GDP), an
action plan has been presented that will cut the deficit to 3% of
GDP by 2013. Measures to improve conditions in the slightly
longer term include reforms of the labour market and pension
system.
GDP is expected to shrink by 0.5% this year before growing by
0.7% in 2011 and 1.7% in 2012. Factors that are holding growth
in check include the budget consolidation, debt restructuring in
the private sector and weak tourism, which is slowing growth in
the service sector. Risks include global developments, the
government’s belt tightening and the financial market’s
valuation of Spain's commitments.
5. UK
After having shrunk for six quarters, GDP grew by 0.3% in the
fourth quarter of 2009. The construction sector seems to have
stabilised, while manufacturing has benefitted from a weaker
pound and the global recovery. The British economy is still
wrestling with debt restructurings of the private sector and a
weak financial sector.
The parliamentary election that must be held before 3 June
represents a growth risk, since the Conservatives, who are
expected to win, have announced that they will tighten the
government's finances faster and more than the sitting
government. A budget deficit of around 14% of GDP is creating
uncertainty in the financial markets. The ten-year government
bond has risen over 4%, and its upward trend has been sharper
than in the US and Germany.
We nevertheless expect the Bank of England (BoE) to begin a
period of discount rate hikes later in the year, but that the trend
will slow. Inflation has risen, but mainly due to temporary factors
such as a VAT increase and higher energy prices. Although a
further drop in value for the pound could create uncertainty, we
expect domestic inflation pressures to remain under control.
The BoE has opted not to extend its quantitative easing, but
that more government bonds could be purchased later. Despite
a substantial increase in the monetary base, the money supply
continues to rise very slowly.
Conditions in the British economy reflect this uncertainty. We
have revised GDP growth upward marginally this year to 1,1%
since the pound has weakened more than previously expected.
Weak labour and real
estate markets are a
concern
A new government
may be willing to
speed up the budget
consolidation
BoE is taking a calmer
approach to discount
rates

On the other hand, we have revised growth prospects
downward for 2011 by from 1.9 % to 1.6% against the backdrop
of the budget consolidation process as well as austerity
measures in the rest of Europe, which could hurt British export
prospects. The UK expects to reach a more “normal” growth
rate of 2.2% in 2012, but the critical factor here, in addition to
global demand, is domestic economic policy.
8. Consequences for our home markets
Following is a summary of some of the implications of global
development for our home markets:
• Companies and households can expect global demand to
rise, but not consistently. Salaries and incomes will grow
weaker than during the years before the crisis.
• Growth will be higher in the emerging economies, than in
more mature countries that are first wrestling with less
expansive economic policy and then austerity measures.
2011 could be a difficult year, especially since many
European countries are facing an acid test.
• Companies should focus on increasing their market share in
emerging markets, where activity is high, but not ignore
opportunities to gain share in European markets that have
historically been a strong foothold. There are volumes here
that companies shouldn't miss out on.
• Sweden will not have to tighten its belt to the same extent as
many other European countries. On the other hand, jobs and
the government's finances may be hurt by weaker
development in export markets.
• Polarisation in the Swedish economy has increased due to
the recession, and this means that jobs and wages will vary
depending on where demand is found. Given the economic
conditions we now face, it is even more important to maintain
high flexibility, so that jobs and companies aren't wiped out
unnecessarily.
• Globalisation is a reality, and competition from emerging
countries is growing. For companies in our home markets,
the key is to increase value-added through innovation,
because it is easy to copy most things, but not creativity.
More investment in education, occupational training and
research & development (R&D) are needed to become more
competitive.
• Sweden belong to countries where imbalances could still rise
to the expansioary economic policy during the crisis. The
debt ratio in the Swedish household sector is increasing and
credit quality is rising fast, as are housing prices. It could be
hard to maintain a monetary policy that differs significantly
based on the rest of the world and the output gap. This is
why monetary policy has to be complemented by more

stringent regulation. It will not be possible to wait for global or
regional regulation as domestic conditions demand that
measures are taken earlier.
• Sweden and the Baltic countries should closely follow the
possible structural changes in the EMU. Next Swedish
referendum will deal with an entirely different institution than
the last referendum did.
Cecilia Hermansson
Swedbank
Economic Research Department
SE-105 34 Stockholm, Sweden
Telephone +46-8-5859 1588
ek.sek@swedbank.se
www.swedbank.se
Legally responsible publishers
Cecilia Hermansson, +46-8-5859 1588.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 1478
ISSN 1103-4897
Swedbank, Global Economic Outlook is published as a service to our customers.
We believe that we have used reliable sources and methods in the preparation of
the analyses reported in this publication. However, we cannot guarantee the
accuracy or completeness of the report and cannot be held responsible for any
error or omission in the underlying material or its use. Readers are encouraged to
base any (investment) decisions on other material as well. Neither Swedbank nor its
employees may be held responsible for losses or damages, direct or indirect, owing
to any errors or omissions in Swedbank’s Global Economic Outlook.

Swedbank's Global Economic Outlook, 2010 March 18

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Viewers also liked

Viewers also liked (8)

Similar to Swedbank's Global Economic Outlook, 2010 March 18

Similar to Swedbank's Global Economic Outlook, 2010 March 18 (20)

More from Swedbank

More from Swedbank (20)

Recently uploaded

Recently uploaded (20)

Swedbank's Global Economic Outlook, 2010 March 18