Nordic outlook august 2010


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Nordic outlook august 2010

  1. 1. Economic recovery but higher risks, depressed key rates and Nordic Outlook bond yields Nordic countries well equipped for Economic Research – August 2010 upturn
  2. 2. Contents International overview 5 The United States 16 Japan 22 Asia 23 The euro zone 25 The United Kingdom 31 Eastern Europe 32 The Baltics 33 Sweden 35 Denmark 43 Norway 44 Finland 48 Economic data 49 Boxes Downside risks have increased 7 Stable commodity prices 8 Basel III postponed 9 Moving towards Japanese yields? 12 An unusual recovery 19 Falling unemployment even with slow growth 28 Stress tests dispel uncertainty despite shortcomings 30 Why is Sweden doing so well? 36 Major Swedish GDP revisions 38 Nordic Outlook – August 2010 | 3
  3. 3. Economic Research This report was published on August 31, 2010. Cut-‐off date for calculations and forecasts was August 27, 2010. Robert Bergqvist Håkan Frisén Chief Economist Head of Economic Research + 46 8 506 230 16 + 46 8 763 80 67 Daniel Bergvall Mattias Bruér Economist Economist +46 8 763 85 94 + 46 8 763 85 06 Ann Enshagen Lavebrink Mikael Johansson Editorial Assistant Economist + 46 8 763 80 77 + 46 8 763 80 93 Andreas Johnson Tomas Lindström Economist Economist +46 8 763 80 32 + 46 8 763 80 28 Gunilla Nyström Ingela Hemming Global Head of Personal Finance Research Global Head of Small Business Research + 46 8 763 65 81 + 46 8 763 82 97 Susanne Eliasson Johanna Wahlsten Personal Finance Analyst Small Business Analyst + 46 8 763 65 88 + 46 8 763 80 72 SEB Economic Research, K-‐A3, SE-‐106 40 Stockholm Contributions to this report have been made by Thomas Köbel, Klaus Schrüfer, SEB Frankfurt/M and Olle Holmgren, Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible for the Norwegian analysis. 4 | Nordic Outlook – August 2010
  4. 4. International overview Continued economic recovery but increased risks will also reduce the need for unconventional monetary US growth below trend for the next year policies. Strong recovery in Sweden and Germany In our judgement, the deceleration signals in the Ameri-‐ can economy will have consequences for the recovery interest policies dynamic in the coming year. Renewed weakness in both Dilemmas for Nordic central banks the labour and housing markets will block a traditional recovery dynamic. We have thus adjusted our forecast downward and expect GDP growth somewhat below trend in the US during late 2010 and early 2011. This will mean major economic strains, including persistent-‐ In recent months the world economic outlook has dete-‐ riorated, mainly due to clear signs of weakness in the American economy. Increased worries about a slowdown At the global level, however, extremely loose monetary in the United States and Asia, combined with contin-‐ policy and continued good growth capacity in many parts of the world economy will contribute to decent growth in the next couple of years. Fast-‐growing Asian markets and sharply falling interest rates, among other economies will remain an important driving force, things. The growth rate was unexpectedly strong in although some deceleration is on the way. We believe many countries during the second quarter, and the emergency response to the southern European crisis has tools to ensure an economic soft landing. In the OECD, differences in the underlying balance negative news. situation have become increasingly important. Germany -‐ and Sweden are among countries where the strength of tations have fallen. It is becoming increasingly clear the upturn has been surprising. A strong German econ-‐ -‐ omy is not enough to keep up the momentum of the nant problem for major central banks in the 32 member entire euro zone, though. There will thus be wide gaps countries of the Organisation for Economic Cooperation within the currency area as the full effects of powerful and Development (OECD). This is creating room for austerity programmes are felt in southern Europe. continued record-‐low interest rates in the next couple Global GDP growth of years. Year-‐on-‐year percentage change We expect the US Federal Reserve (Fed) and the Euro-‐ 2009 2010 2011 2012 pean Central Bank (ECB) to maintain today’s record-‐ low key interest rates throughout 2011 and to begin United States -‐2.6 2.6 2.2 2,9 cautious rate hikes only in 2012. Due to low key rates in Japan -‐5.2 2.5 1.5 1.5 -‐ Germany -‐4.7 3.3 2.1 1.8 tion expectations in the long term as well, government China 8.7 10.0 9.0 8.0 bond yields will remain at historically very low levels in the next couple of years. United Kingdom -‐4.9 1.7 2.0 2.2 Euro zone -‐4.1 1.6 1.3 1.5 There is a renewed focus on the potential for central banks to stimulate their economies by means of quanti-‐ Nordic countries -‐4.4 2.5 2.4 2.4 tative easing (QE). We expect that because of low long-‐ Baltic countries -‐15.6 0.4 4.2 4.5 their balance sheets at current levels and thus not Emerging markets 2.4 6.8 6.0 6.4 implement new QE programmes. The Basel Committee on Banking Supervision has presented a proposal which World, nominal -‐1.3 3.7 3.1 3.6 postponed, creating an economic stimulus effect that Source: OECD, SEB * Purchasing power parities Nordic Outlook – August 2010 | 5
  5. 5. International overview We are sticking to the main scenario from our economic large negative contribution to growth in the second analyses of recent years: the after-‐effects of the deep quarter, among other things due to stimulus measures crisis will hamper economies for a rather long period. and a stronger US dollar. Debt retirement in both the private and public sectors, -‐ To ensure a sustainable recovery, it will now be crucial tem, will mean slower growth for some time to come. Low interest rates may ease the adjustment, but their consumption to take over when the inventory cycle stimulus effect will be weaker than normal in today’s ceases to serve as an economic engine. The box entitled ravaged economic environment. “Recovery at a crossroads” in the November 2009 issue of Nordic Outlook discussed this take-‐over. One conclu-‐ Amid a fragile economic situation, international sion was that mid-‐2010 would be the critical period. But economic policy makers face major challenges, for the outlook is mixed. -‐ Capital spending took off in many countries early in joint European institutions. Belt-‐tightening in southern Europe will put the political system under severe strains investment level was exceptionally depressed. But there, but political authority is being questioned even there are also factors that point towards a sustained in leading industrial countries. In the US, for example, recovery. President Obama’s popularity has plunged and this -‐ autumn’s congressional election may lead to further pressed, even in a longer time perspective. Unlike restraints on the government’s ability to make and normal economic expansions, the capital spending implement decisions. In Germany, Chancellor Angela level in the OECD countries remained rather low Merkel’s position has weakened and her governing during the boom years 2006-‐07. coalition is going through a rough patch. In the UK, a new and inexperienced coalition government is facing Balance sheets, especially in large American corpo-‐ painful spending cuts. rations, are much stronger than normal. This will The ongoing slowdown trend in the global economy is system remains relatively fragile. largely due to the fading of stimulus effects from the Historical associations signal that capital spending growth is more dependent on the change in capac-‐ movements have been pivotal to the recovery in the ity utilisation than on its actual level. This indicates manufacturing sector. Since most merchandise invento-‐ ries are traded across national boundaries, this means relatively soon. One important factor that may delay an upturn is that -‐ As a percentage of GDP, current prices 14.5 14.5 ing loans. The credit market is performing sub-‐optimally 14.0 14.0 in this respect, both in the US and Europe. 13.5 13.5 US: Uniform pace of debt retirement 13.0 13.0 Per cent of disposable income 12.5 12.5 140 12 12.0 12.0 11 11.5 11.5 130 10 11.0 11.0 120 9 10.5 10.5 8 110 10.0 10.0 7 100 9.5 9.5 6 9.0 9.0 90 5 70 75 80 85 90 95 00 05 10 80 4 3 Source: US Department of Commerce 70 2 60 1 It is thus not illogical for all parts of the world economy 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 to begin their recovery with export-‐led growth. The trend in net exports, when imports are also included, is Household debts (LHS) Household saving (RHS) Source: Federal Reserve another question. Early in the crisis, the effect of international trade was to ease global imbalances. On the consumption side, the outlook is gloomier. Domestic demand, and thus imports, fell sharply in There is still a major need for debt retirement. New US countries with large domestic imbalances, such as the US. In recent months, this pattern has reversed to some than previously reported. The adjustment process is extent. For example, net US exports accounted for a thus occurring faster than expected. Given new labour 6 | Nordic Outlook – August 2010
  6. 6. International overview market disappointments and a housing sector that again cent months, and we expect a 4.7 per cent upturn this seems to be on its way down, the underlying prerequi-‐ year. Exports have recovered strongly after their sharp sites for a normal American consumption recovery are missing. In the UK, southern Europe and elsewhere, -‐ ing. In Germany and Japan, consumers are cautious In the other Nordic countries, growth will be far more despite their strong balance sheets. In Asian emerging moderate. The Danish economy is still being hampered economies, there is an impending shift towards greater by the repercussions of the housing market crash. emphasis on consumption, as illustrated by accelerat-‐ In Finland there is good potential for an export-‐led ing pay increases, but this is too lengthy a process to manufacturing upturn similar to Germany and Swe-‐ den. So far, the upturn has been modest, but a weaker economic engine. euro will contribute to an acceleration over the next few quarters. In Norway, the economy has also been Our overall conclusion is that, in part because of sub-‐ held back by an appreciating currency. A strong labour a slower growth phase during the second half of 2010 to get domestic demand moving. Because of the very mild downturn in 2008-‐09, resource utilisation is also quarters, growth will again end up below trend. The high in Norway compared to other countries, and this output gap will thus widen. At present, however, most will dampen long-‐term growth potential from the supply indications are that growth will remain well above side. recessionary levels. GDP growth, Nordic and Baltic countries Very strong recovery in Sweden Year-‐on-‐year percentage change The Nordic economies have generally shown good resil-‐ 2009 2010 2011 2012 ience against the global crisis. In Denmark, Sweden and especially Finland, GDP indeed fell sharply during 2009, Sweden -‐5.1 4.7 2.9 2.3 but the impact on domestic demand was rather minor Norway -‐1.4 0.7 2.1 2.1 and the upturn in unemployment surprisingly small. Denmark -‐4.7 1.8 1.8 2.2 central government debts are at a low level. Combined Finland -‐7.8 2.5 2.6 2.7 with sizeable current account surpluses, this is creating a favourable platform for recovery. The weakening of Estonia -‐14.1 2.0 5.0 4.0 the euro is helping to ease competitiveness problems which have hampered growth in Finland and Denmark Latvia -‐18.0 -‐1.5 4.0 5.0 to some extent. Lithuania -‐14.8 1.0 4.0 4.5 Baltics In Sweden, growth has been surprisingly vigorous in re-‐ Source: OECD, SEB Downside risks have increased As earlier, our main scenario implies a relatively slug-‐ around 25 per cent, compared to 15 per cent in the gish global recovery, with medium-‐term growth being May issue of Nordic Outlook. Conversely, the prob-‐ -‐ ability of upside surprises has naturally diminished. Despite signs of strength in such countries as Germany, a rapid recovery in the world economy is relatively un-‐ Since last spring, the risk picture has changed in likely without support from a more dynamic American some respects. The crisis-‐ridden countries of southern economy. Europe continue to face major challenges, but the GDP OECD countries overall picture looks less threatening. With a credible Index 2000=100 bail-‐out mechanism in place and after the completion 127.5 127.5 of stress tests in the European banking system, risks 125.0 15% 125.0 122.5 122.5 that southern European problems might cause a global 120.0 120.0 recession have receded. The International Monetary 117.5 117.5 Fund (IMF) and euro zone countries have approved 115.0 25% 115.0 a second emergency loan disbursement to Greece, 112.5 112.5 another sign that the structural adaptation process has 110.0 SEB forecast 110.0 begun. 107.5 107.5 105.0 105.0 Yet the deterioration in the American economy has 04 05 06 07 08 09 10 11 12 increased the overall risks of a global recession. We New crisis wave SEB's main scenario now estimate the probability of such a scenario at Raprid recovery Source: OECD, SEB Nordic Outlook – August 2010 | 7
  7. 7. International overview Baltic countries slowly on the way up New labour market patterns The Baltic economies have now slowly begun to re-‐ In recent months, the differences in labour market bound from the deep declines they experienced after trends between various countries have become more the credit bubble burst. The three countries’ internal pronounced. In Germany and the Nordic countries, for devaluation policy appears likely to be successful. Their example, the labour market situation has begun to competitiveness has improved, mainly via pay cuts. Also improve, whereas the situation in the US is plagued by making the situation easier is that the euro, to which new disappointments. their currencies are pegged, has weakened and the Divergent employment trends currencies in several important competitor countries in Index = 100 januari 2008 Eastern Europe have appreciated. Their external bal-‐ 101 101 100 100 99 99 is coming to an end. They have also shown political 98 98 97 97 Estonia will join the euro zone on January 1, 2011. This 96 96 95 95 94 94 spread to Latvia and Lithuania. But there is a degree 93 93 of lingering uncertainty about the political situation in 92 92 91 91 90 90 89 89 Lithuania. Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 08 09 10 Looking ahead, we expect a modest growth rate of 4-‐5 Sweden US Germany Spain Source: Reuters EcoWin per cent, well below the previous trend. Continued pri-‐ vate sector adjustment needs, combined with a less ex-‐ During the economic downturn phase, the decline in pansionary credit environment, will contribute to this. employment was substantially sharper in the US than, for example, in Germany and the Nordic countries investment projects among long-‐term foreign investors. despite a milder GDP decline. In part, this followed We expect Latvia and Lithuania to have an opportunity traditional patterns coupled to such factors as how easy to join the euro zone in 2014. Stable commodity prices Oil prices will rise somewhat from current levels. Commodity prices have followed the pattern of the At present, reserve oil production capacity is rela-‐ global recovery. A turnaround came early in 2009 and tively large. Increases in demand next year will not was probably initially strengthened by China’s need to be large enough to change this. Saudi Arabia’s large -‐ ity prices have tended to level off at the same time future price strategy of the Organisation of Petroleum as global manufacturing has reached a more mature Exporting Countries (OPEC). Saudi Arabia can boost phase, or somewhat ahead of this. production and squeeze oil prices if it turns out that global growth is slowing too quickly. Iran and Iraq also High commodity prices have major potential to increase the oil supply, but Index, monthly date, USD in the prevailing uncertain political situation, it is 500 500 hardly likely that any large production changes will be 450 450 implemented. We are thus assuming that Brent oil will 400 400 350 350 continue to trade in the USD 70-‐90/barrel interval. 300 300 Agricultural commodities will level off, but there is 250 250 a risk of further upturn in the short term. Extreme 200 200 weather in two key wheat-‐producing countries, Rus-‐ 150 150 sia and Ukraine, led to a 70-‐80 per cent price spike 100 100 in July and August. Russia has decided to halt grain 50 50 00 01 02 03 04 05 06 07 08 09 10 exports during the rest of 2010, aimed at ensuring domestic supplies and counteracting price increases to Agriculture Industrial metals Energy Source: HWWI consumers. This will pose risks of a new wave of price increases and might spread to the maize (corn) and Given our scenario of continued moderate global soya markets. But in our assessment, global wheat and growth, with a slight weakening in the short term, other grain stockpiles are large enough to avoid price continued price hikes are also likely to be modest. In shocks. This is very different from several few years particular, a calmer growth dynamic in fast-‐growing ago, when low grain stockpiles led to major price Asian economies points in this direction. hikes that affected food prices worldwide. 8 | Nordic Outlook – August 2010
  8. 8. International overview employment was also sustained by special economic Rate of pay increases is stabilising policy programmes. Year-‐on-‐year percentage change 4.5 4.5 4.0 4.0 increase in a number of European countries, while remaining weak in the US, it is clear that other expla-‐ 3.5 3.5 nations for these labour market trends are needed. 3.0 3.0 One pattern seems to be that in countries with milder 2.5 2.5 rebounded faster. Because the need for restructuring 2.0 2.0 measures is smaller in these countries, when demand 1.5 1.5 takes off again, companies can rather easily begin 1.0 1.0 rehiring. 98 99 00 01 02 03 04 05 06 07 08 09 Euro zone US Source: ECB, BLS On the other hand, we see no major risks of a danger-‐ months. As long-‐term bond yields have fallen and -‐ concerns about the economy have mounted, there has ary increases has stopped falling. This will reduce the -‐ -‐ ary forces of globalisation will lose energy compared to not been especially dramatic. Rising energy and food the previous decade. The level of wages and salaries in prices have caused some upside surprises in Consumer fast-‐growing emerging economies seems to be rapidly on the way up, while currency appreciation and produc-‐ continued to fall. tivity growth potential will help narrow previously wide gaps in the cost situation. forces caused by large output gaps will dominate the in-‐ Basel III postponed During the summer, the Basel Committee for Bank-‐ study also shows that the level of the output gap has ing Supervision approved various amendments to the -‐ proposal it submitted late in 2009 for comments by interested parties. The purpose of the reform package being a consequence of rapid growth in individual years is to strengthen the resilience of the banking sector by tightening capital and liquidity requirements, and to expansion, without the presence of underlying condi-‐ thwart excessive risk-‐taking, diminish gearing effects tions related to factors such as capacity utilisation or and reduce pro-‐cyclicality. wage formation. Core inflation is continuing to fall Year-‐on-‐year percentage change leverage ratios, liquidity coverage ratios, net stable 3.0 3.0 funding ratios and management of counterparty risk. SEB The details will be presented later this year, and a 2.5 2.5 forecast formal decision is expected in November. 2.0 2.0 Generally speaking, the standards have been eased, 1.5 1.5 while the deadline for implementing them has been extended from December 2012 to January 2018. Our 1.0 1.0 -‐ 0.5 0.5 enced by last spring’s sovereign debt crisis, combined with the picture of a sluggish global economic recov-‐ 0.0 0.0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 that remains weakened. Euro zone US Source: Eurostat, BLS, SEB All else being equal, these amendments will have a positive impact on our economic scenario. A slower will continue downward in the coming year. Economic adjustment process will substantially reduce risks of poorer access to capital and higher borrowing costs, improvement in the labour market situation. The out-‐ which were inherent in the original proposal. Mean-‐ put gap will not close during our forecast period. Pay -‐ increases will thus be low and unit labour costs will also -‐ be pushed down by a recovery in productivity. stability. Nordic Outlook – August 2010 | 9
  9. 9. International overview Central banks will wait until 2012 where differences in terms of resource utilisation, the Increased worries about the economy, combined with housing markets have pointed to a substantially higher strong motives for continuing their extremely low inter-‐ key interest rate than that of the ECB. Having begun est rate policies. Due to the economic slowdown in the its rate hikes as early as October 2009, Norges Bank has gradually adopted a more cautious strategy. Due to con-‐ couple of years. The crisis-‐ridden countries of southern cern about the strong krone and the competitiveness Europe will be strongly dependent on low interest rates of Norwegian manufacturers, the bank has not wanted for a long time in order to deal successfully with imbal-‐ to open up an excessive interest rate spread over the Asymmetric risks on the growth side will also help The Riksbank is now beginning to face a similar dilem-‐ ensure that central banks will be very cautious. The ma. Resource utilisation in Sweden is admittedly lower consequences of interrupting a nascent recovery by than in Norway, but rapid economic growth is quickly raising interest rates too early may be relatively large changing that situation. Unemployment has fallen rap-‐ idly, while home prices and household borrowing have is sharply circumscribed in many countries and the continued upward as in Norway. monetary policy arsenal is also relatively exhausted. We Key interest rates thus anticipate that the central banks in major OECD Per cent countries will not begin hiking their key interest rates 7 7 until early 2012. 6 SEB 6 forecast Key interest rates 5 5 Per cent 7 7 4 4 6 SEB 6 3 3 forecast 5 5 2 2 4 4 1 1 3 3 0 0 00 02 04 06 08 10 12 2 2 Euro zone Norway Sweden Source: ECB, Norges Bank, Riksbank, SEB 1 1 In some respects, the Nordic central banks are playing 0 0 00 02 04 06 08 10 12 a pioneering role when it comes to learning from the mistakes that preceded the crisis and then applying the Euro zone US Source: ECB, Fed, SEB new guidelines that are emerging from the international A long period of extreme low interest rate policy entails monetary policy discourse. What the major countries certain potential risks. Asset prices may once again be mainly perceive as problems in the distant future is pumped up to unsustainable levels. Economic players starting to be fairly urgent in the Nordic countries. may also be given an inaccurate picture of the normal Minutes of Riksbank policy-‐making meetings show major disagreements of principle within the Executive Board, allocation. In addition, the banking system may become which the bank does not try to hide either. too dependent on liquidity supplied by central banks, Our scenario is that the Riksbank will hike its key inter-‐ with a more poorly functioning interbank market as a est rate at each monetary policy meeting until Febru-‐ consequence. The postponed launch of Basel III com-‐ ary 2011, when the rate will reach 1.50 per cent. After plicates the situation of the central banks, eliminating that, rate hikes will be more cautious. An international instruments for controlling credit growth and asset prices that might have eased the pressure on interest stronger krona may be arguments for a more cautious rate policy. strategy. At year-‐end 2011 the repo rate will be 2.25 At present, the potential problems of low interest rate per cent, and at the end of 2012 it will be 3.0 per cent. policy are relatively minor in relation to the macroeco-‐ Our forecast is thus lower than the Riksbank’s rate path nomic risks of raising interest rates. but higher than market expectations. Norges Banks deposit rate will remain at 2.00 per cent Policy dilemma in Norway and Sweden up until the second quarter 2011. A closing output gap The differences in the conditions surrounding major OECD central banks and the central banks in Norway gradual hikes. At the end of 2011 we see the deposit and Sweden are becoming increasingly clear. For a rate at 2.75 per cent and at the end of 2012 at 3.75 per long time, Norges Bank has had to deal with a situation cent. 10 | Nordic Outlook – August 2010
  10. 10. International overview The acute crisis in southern Europe last spring led to a adjustment needs. in earlier recommendations from the OECD and IMF, for Low bond yields example, has been to focus on credible medium-‐term The decline in long-‐term bond yields has been very programmes, but implementation could be delayed sharp, and yields are now exceptionally low. American 10-‐year government bond yield has fallen from 4.0 per obvious that many countries lacked such room for cent in April to 2.60 per cent, while equivalent German manoeuvre. Large-‐scale austerity packages became bonds have now declined to an exceptionally low level necessary, especially in southern Europe. In France and of 2.25 per cent. Germany, however, austerity measures are rather small. There have been several driving forces behind this As a result, the total dose of austerity in the euro zone yield trend: concerns about economic growth, falling will be no more than about 1 per cent of GDP annually in 2010-‐12. key interest rates. The search for safe investments has been better than expected. and growing government debts on both sides of the probably be reduced to less than 3 per cent of GDP as -‐ early as 2011. The government had previously aimed at ing the economic crisis, savings in the OECD countries achieving this level only in 2013. As for the effects of the austerity packages in southern Europe, it is too ear-‐ the increased public sector borrowing requirement and ly to draw any reliable conclusions. The improvements helped squeeze interest rates. -‐ The box below discusses how asymmetric downward suade the IMF and EU institutions to approve a second disbursement of emergency loans. Most of the success lead to long-‐term uncertainty about the ability of cen-‐ in stopping the bleeding has been on the expenditure tral banks to normalise monetary policy. We expect this uncertainty to help keep long-‐term yields depressed, collection have yielded smaller results so far. especially in the coming year. German 10-‐year yields Given more pessimistic economic prospects, we are will bottom out at about 2.20 per cent around year-‐end not likely to see further belt-‐tightening in the major 2010 and remain below 2.50 per cent well into next OECD countries during the coming year. In the UK, the year. Only when it begins to be apparent that central new government has admittedly decided to deal with banks can actually begin interest rate hikes do we be-‐ Japan, however, new stimulus measures are the focus will remain depressed, however. At the end of 2012, of attention, although in our judgement such measures German 10-‐year government bond yields will stand at will hardly be implemented. 3.20 per cent and American ones at 3.50 per cent. Net lending Per cent Per cent of GDP 7.0 7.0 2010 2011 2012 6.5 6.5 SEB United States -‐10.9 -‐8.2 -‐5.9 6.0 forecast 6.0 Japan -‐9.8 -‐9.1 -‐8.5 5.5 5.5 5.0 5.0 United Kingdom -‐11.4 -‐9.4 -‐7.6 4.5 4.5 Euro zone -‐6.2 -‐5.5 -‐5.0 4.0 4.0 3.5 3.5 OECD -‐7.8 -‐6.7 -‐5.5 3.0 3.0 2.5 2.5 Source: OECD, IMF, SEB 2.0 2.0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 weakly tightening effect in the next couple of years. US Germany Source: Reuters EcoWin, SEB that government debt will continue to grow. The sharp Cautious stock market valuations downturn in government bond yields in major countries The stock market has recently reacted negatively to signals of an American economic slowdown. Surpris-‐ force belt-‐tightening either. Not even threats of down-‐ ingly strong company earnings reports have not been grading by credit rating agencies are likely to change enough to offset this. There are both threats and the picture. Given continued weak economic condi-‐ opportunities ahead. The ‘simple’ phase when the tions, high private saving and supportive central banks stock market was driven upward by positive surprises Nordic Outlook – August 2010 | 11
  11. 11. International overview in sales and improved leading indicators is over. The sons why they may continue to do so. SEB Enskilda’s next phase will be characterised by a maturing mar-‐ company analyses indicate a 56 per cent increase ket for industrial products, with major macroeco-‐ nomic challenges, especially in the US. Companies Nordic countries and 17 per cent next year. Strong growth in key Nordic markets, Germany and Asia rather than cost savings, in order for share prices to continue rising. of years. Low company valuations also allow room for good share price increases. Shares on the Nordic So far the stock exchanges in the Nordic and Baltic exchanges are now trading at a price-‐earnings ratio countries have generally performed better than ex-‐ -‐ changes elsewhere this year. There are several rea-‐ Moving towards Japanese yields? The key interest rates set by central banks are at exceptionally low levels. But bond yields are also low for a rather long time. The market’s assessment historically very low, with American 10-‐year Treasuries of what should be viewed de facto as a normal key yielding 2.6 per cent and equivalent German bonds 2.2 interest rate will probably move downward as the per cent. By way of comparison, a Japanese 10-‐year period of low interest rates is extended. In addition, it is reasonable to assume that new regulatory tools between 1 and 2 per cent for the past 13 years. for dealing with such problems as pro-‐cyclical forces Above we discussed the forces that have pushed down banks to maintain low interest rates and to instead long-‐term yields to these levels. One crucial question devote monetary policy energy to price stability. is how long they will last, and to what extent today’s interest rates in the Western world are abnormally low Japan’s average GDP growth since the early 1990s is or completely normal. This can be analysed in terms 1.2 per cent. Even if we assume that growth moves of normal key interest rates and the normal steepness higher, for example close to 2 per cent, there is still of the yield curve. reason to believe that continued imbalances justify a lower real interest rate than 2 per cent. If we also The level of a normal key interest rate can be based on the level of the real interest rate plus for example 1 per cent, the normal key interest rate expectations. A proxy for the real interest rate is will be pushed down further. In a medium-‐ term per-‐ long-‐term GDP growth. Given the need to adjust spective, the normal key interest rate might be in the imbalances, there is reason to expect lower growth 1.5-‐2.5 per cent interval. potential, which will push down the real interest rate. is based on the level of the low. Given asymmetric negative risks for both growth normal key interest rate. The historical average for the steepness of the yield curve (10-‐year yield minus the key interest rate) has been about 130 basis points. interest rate. Japanese interest rate squeeze environment may justify lowering the risk premium. Short-‐ and long-‐term interest rates in US and Japan If in our example we assume that this premium is 10 10 9 9 halved, the differential between the key interest rate 8 8 and the low-‐term yield will be about 100 basis points 7 7 6 6 (130 minus 25 basis points). 5 5 4 4 Based on this reasoning, long-‐term bond yields would 3 3 be at 2.5-‐3.0 per cent. Arguments that the market 2 2 1 1 will adjust expectations of a normal key interest rate 0 0 88 90 92 94 96 98 00 02 04 06 08 10 year perspective, where the elements of similarities  Japan:  10-­year  government  yield with the Japanese situation may be clear. What may  Japan:  Key  interest  rate  US:  Key  interest  rate be regarded as abnormally low interest rates, viewed  US:  10-­year  government  yield in a historical perspective, may be rather normal Source: Reuters EcoWin interest rates viewed in a future perspective. Given exceptionally low key interest rates during the 12 | Nordic Outlook – August 2010
  12. 12. International overview low their historical average. Worth adding is that the rates). In the short term, uncertainty about the ratio between share prices of listed companies and global economic recovery will dominate the for-‐ their book values is 25 per cent below its 10-‐year eign exchange market, but we believe that market average. positioning is now more neutral than for a long time, which will restrain movements in the future. We thus Stock market indices, 2010 see various reasons why the trend towards smaller Spain (MadSE) Japan (Nikkei 225) continue. Norway U.K. (FTSE100) The risk aversion evident in the market over the past USA (S&P500) few months has led to heavy demand for defensive Germany (DAX) currencies like the JPY and CHF. Shrinking interest Sweden rate spreads against the US and euro zone will lead Finland to continued upward pressure on these currencies, Denmark Iceland (OMX) but the Swiss central bank has not repeated its Lithuania (OMX) foreign exchange market interventions of last spring, Estonia (OMX) despite an ever-‐stronger CHF. Nor do we regard this Latvia (OMX) as likely in the future. In Japan, the issue of inter-‐ -‐30 -‐20 -‐10 0 10 20 30 40 50 vention is heating up. Our assessment is that if the USD/JPY exchange rate approaches its historical low of just under 80 (in 1995), this will be critical in The yield on listed shares in the Nordic countries determining whether the Bank of Japan intervenes in during the next couple of years looks set to be at the foreign exchange market. almost 4 per cent, or twice the yield on 5-‐year go-‐ vernment bonds. This also illustrates the exchange’s Overall, our forecast implies small movements in cautious valuations. But valuation analyses are leading currencies during the coming year. The EUR/ not better than the forecasts that are used in the USD exchange rate may again fall below 1.20 in the next six months, driven by continued low risk ap-‐ have rebounded above their previous record levels petite in the world economy, then rise somewhat. in 2007/2008. The uncertain macroeconomic envi-‐ In the long term we expect the EUR/USD rate to be ronment raises the question of whether this pace at levels around 1.20-‐1.30. The US economy will admittedly remain weak and continue to show ex-‐ focus again on fundamental valuations, a number of ternal trade imbalances, but on the other hand the basic questions about future developments must be euro system is facing long-‐lasting uncertainties and answered. quandaries. The yen will gain some strength against P/E ratios in Nordic exchanges the USD in the short term but will then decline as 35.0 35.0 the interest rate spread between Japan and other countries widens again in the future. 30.0 30.0 EUR and USD 25.0 25.0 Real effective exchange rates. Index 100 = average 1980-‐2010 140 140 20.0 20.0 130 130 15.0 15.0 120 120 10.0 10.0 110 110 100 100 5.0 5.0 90 90 0.0 0.0 96 98 00 02 04 06 08 10 12 80 80 70 70 1980 1985 1990 1995 2000 2005 2010 Fair valuations, more stable currencies In the past year, the foreign exchange market has USD EUR Source: Bank of England undergone a normalisation process after major tur-‐ The question of further quantitative easing by cen-‐ tral banks is a source of uncertainty in the foreign crisis. Many currencies have again reached more exchange market. If the Fed or Bank of England were neutral levels, based on long-‐term valuation mod-‐ to expand their balance sheets further, it would els. Today the G3 currencies (EUR, USD and JPY) are weaken the dollar and pound, but this is not our close to historical average levels in trade-‐weighted, main scenario at present. Nordic Outlook – August 2010 | 13
  13. 13. International overview Commodity-‐producer currencies with relatively high exchange rate will reach 9.00 at the end of 2010. valuations are extra sensitive to the global slow-‐ After that, we foresee room for a slight further ap-‐ down. Yet the trend towards appreciating currencies preciation, with the EUR/SEK rate standing at 8.75 in emerging economies will continue, driven by such by late 2011. factors as the search for higher returns. The economic policy framework Since June, when China’s central bank resumed Both the European Union (EU) and the Group of 20 the appreciation of the yuan against the USD, the (G20) countries are continuing their efforts to improve Chinese currency has strengthened by less than 1 per cent. Worries about have contributed to this caution. In addition, the European Commission presented a proposal on June CNY has strengthened by more than 5 per cent in the 30 for strengthening economic policy coordination. Its past year in trade-‐weighted terms as a consequence overall purpose is to strengthen budget discipline in the of the USD recovery. However, we expect an increase in the pace of appreciation to about 5 per cent, resulting in a USD/CNY exchange rate of 6.00 by the 1. Macroeconomic surveillance (warning system: score-‐ end of 2012. This forecast is nevertheless dependent on the movements of the USD against other curren-‐ on debt levels 4. Wider sanctions 5. Economic policy cies; Chinese authorities are very likely to keep close coordination track of the yuan’s movements in terms of a trade-‐ weighted basket. Adjustments to the imbalances -‐ in real exchange rates will also occur by means of gration. The basic idea is to enable the Commission rapid wage increases in China. The ongoing internal revaluation process will thus determine the size of making in a way that does not challenge the sovereignty nominal changes in the exchange rate. of national parliaments on budget policy issues: by SEB EUR/SEK model means of collaboration in the form of problem analysis, 12.0 12.0 consistency tests and recommendations. 11.5 11.5 Already under way is an equivalent Mutual Assessment Process (MAP) for the G20 countries, which will be 11.0 11.0 coordinated by the IMF. MAP is a key element of the G20 10.5 10.5 sustainable and balanced economic growth at global 10.0 10.0 level. The G20 meeting in Seoul on November 11-‐12 will provide an important opportunity to gauge the level of 9.5 9.5 potential coordination and the pace of reform. 9.0 9.0 07 08 09 10 The economic crises have also fuelled an intensive international debate concerning the role of central Regression Actual Source: Reuters EcoWin, SEB banks. This debate is being pursued within the G20 and other forums under IMF leadership. There seems to be The Swedish krona and the Norwegian krone have a consensus that price stability will remain the overall recently demonstrated great stability. Underlying economic strength and rising key interest rates have risks should be integrated into goal formulation to a prevented the weakening that normally occurs in greater extent. troubled times. Looking ahead, we expect the two currencies to continue trending higher. By year-‐end 2012 the EUR/NOK exchange rate will be 7.80. In continue to lie outside of interest rate policy. This will the short term, however, we see reasons for a slight require new instruments with a clearer macroeconomic weakening of the krone to 8.20 per euro at the close connection. These will mainly consist of regulations and of 2010, among other things because Norges Bank is continuing its cautious strategy of emphasising the systemic crises and reducing pro-‐cyclical elements in risks of an excessively strong currency. lending. Concrete examples are capital requirements that are both constant and variable over time, forward-‐ The strengthening of the Swedish krona also risks looking reserves for loan losses and liquidity ratios. being halted by international worries, as well as by increased political uncertainty related to the The UK has taken a major step by placing its regula-‐ September 19 parliamentary election. We neverthe-‐ tory authority under the umbrella of the central bank. less expect such effects to be very short-‐lived, and Within the Bank of England, an independent Financial we are sticking to our forecast that the EUR/SEK 14 | Nordic Outlook – August 2010
  14. 14. International overview Policy Committee (FPC) is now being established along-‐ side the existing Monetary Policy Committee (MPC). The FPC will oversee economic developments and identify macro trends that may threaten economic and Our conclusion is that the interesting reform task in the area of economic-‐policy is continuing, but that its ambi-‐ tions and pace seems to have been lowered. A fragile economic situation, but also the weakened authority of political leaders in many countries, is contributing to this. Nordic Outlook – August 2010 | 15
  15. 15. The United States Recovery continuing, but at a slower pace Faster debt retirement Many signs of deceleration Aside from slower GDP growth and a lukewarm labour New labour and housing market slump market, various indicators have weakened in recent Sustained upturn in capital spending lower than at the beginning of 2010. The ISM purchasing managers’ index for manufacturing has fallen during the Fed will not hike its key rate until 2012 past few months, while the service sector index has lev-‐ elled off, but both indices remain well above 50, which The American economic recovery is now becoming retail sales, which recovered strongly early this year but have stagnated during the past months. contribution from the inventory cycle diminishes. The improvement in the labour market has slowed in Small firms are lagging behind Index recent months, and the housing market has become 65 30 time home buyers has expired. GDP rose 1.6 per cent 60 25 in the second quarter on an annualised basis, a clear 55 20 50 higher imports provided a strong negative contribution 15 45 to growth and inventory build-‐up also slowed, compared 10 40 showed strong growth, however. 35 5 Yet the low Federal Reserve key interest rate is still 30 0 86 88 90 92 94 96 98 00 02 04 06 08 10 propping up the economy. We thus believe that the recovery will continue, but at a slower pace than esti-‐ ISM Manufacturing (LHS) NFIB (RHS) Source: ISM, NFIB mated in our May forecast. forecast is on the downside. The slowdown has opened small businesses. While the ISM, which is dominated the way for the Fed to provide further economic stimu-‐ by large companies, continues to show a rather bright lus by expanding its balance sheet and postponing key picture of the situation, the National Federation of In-‐ rate hikes until 2012. dependent Business (NFIB) index of small business senti-‐ Slower GDP growth Quarterly percentage change, annualised loans and that depressed construction companies weigh 5 5 heavily in the NFIB index. 4 4 3 3 Higher saving holds back consumption 2 2 The latest national accounts show substantially weaker 1 1 consumption and higher saving than the previously 0 0 -‐1 -‐1 savings ratio was 6.1 per cent, an upward revision of SEB forecast -‐2 -‐2 several percentage points. A higher level of saving indi-‐ -‐3 -‐3 cates a faster pace of adjustment in household balance -‐4 -‐4 sheets. In the long term this will set the stage for a -‐5 -‐5 sustainable recovery in consumption, but over the next Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 couple of years we believe that the need to pay down 09 10 11 12 Source: BEA, SEB debts will cause the savings ratio to continue upward a bit, thereby holding back consumption. 16 | Nordic Outlook – August 2010
  16. 16. The United States Our current assessment is that the savings ratio will accelerated their home purchases to take advantage of the tax credit. Once this effect has faded, the number . This is also of home sales transactions will stabilise. During 2011 we consistent with our model projections, which have sig-‐ thus expect slightly rising home prices. nalled for some time that the savings ratio will rise to The housing market recovery decelerates a level closer to the average for the past 50 years. We Index 2004:1 = 100 thus believe that overall consumption will increase 140 140 135 135 downward revision compared to our assessment in 130 130 the last Nordic Outlook. 125 125 120 120 Uniform pace of debt retirement 115 115 110 110 Per cent of disposable income 140 12 105 105 11 100 100 130 10 95 95 120 9 90 90 110 8 04 05 06 07 08 09 10 7 100  S&P  Case-­Shiller  20  FHFA 6 Source: OFHEO, Standard & Poor's 90 5 80 4 The July issue of the Fed’s Beige Book points out that 3 the commercial real estate market remains weak. 70 2 Assessments of future trends ranged from continued 60 1 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 decline in activity to weak growth, but one bright spot is that corporate capital spending on commercial real Household debts (LHS) Household saving (RHS) estate appears to have stabilised. Source: Federal Reserve Housing market unsteady again Company capital spending a bright spot Despite record-‐low interest rates, pushed down partly One bright spot during the recovery this year is capital by the Fed’s mortgage bond purchases, and a subsidy in spending by businesses, which has climbed sharply in the form of a USD 8,000 federal tax credit to home buy-‐ 2010. During the second quarter, the annualised in-‐ ers, the housing market recovery has not really taken crease was 17.6 per cent. This growth in capital spend-‐ off in earnest. In May 2010, the S&P/Case-‐Shiller home ing focused on machinery and software. Commercial price index was only some 5 per cent higher than when real estate investments were stable. The sharp increase it bottomed out one year earlier. The number of home during the second quarter was partly a consequence of sales and housing starts are also at historically very low earlier very depressed levels. Our assessment is thus levels. In July the number of housing starts was only that capital spending growth will slow during the rest 546,000, less than one third of the July average from of the year, but in a longer perspective there are fac 2003 to 2005. Despite the low number of homes being tors that indicate good capital spending growth. In a historical perspective, the capital spending ratio in the months. In July, inventory rose to 12 months. Such a business sector remains very low. Meanwhile companies high level will help hold prices and new construction down. Because the home buyer tax credit expired at stronger than during any previous economic downturn. the end of April, both residential construction and the Capacity utilisation and company capital spending number of contracted home sales have weakened mark-‐ Per cent edly during the past few months. Mortgage applications 90.0 40 are at a record low. The National Association of Home 87.5 30 85.0 20 also declined. 82.5 10 80.0 0 77.5 in the housing market. We anticipate that the rapid -‐10 75.0 decline in the number of sales will drive down prices 72.5 -‐20 during the next few months. Housing market activity 70.0 -‐30 will also be hampered by the slow recovery in the la-‐ 67.5 -‐40 70 75 80 85 90 95 00 05 10 bour market, but low mortgage rates should be able to  Capacity  utilisation  (LHS) mortgage rate has decreased from around 5 per cent  Company  capital  spending,  annualised  Q  growth  (RHS) Source: BEA, Federal Reserve in April to just below 4 per cent. Many households also Nordic Outlook – August 2010 | 17