Swedbank Economic Outlook - August 2012: Dancing in the egde of danger

1. Swedbank Economic Outlook
Swedbank Analyses the Swedish and Baltic Economies August 21, 2012
Dancing on the edge of danger
G
Global development
Table of Content:  The world economy is cooling, and the euro area is near recession. We have
revised downwards global GDP growth to 3% in 2012 and 3.1% in 2013,
Introduction: Laudable from 3.1% and 3.4% in our April forecast. Given that our “muddling-through”
scenario holds, growth will increase to 3.4% in 2014.
upswing – but watch out for
 The main negative forecast risk is a worsening of the crisis in the euro area,
global tumble 2 but the US’s falling off the “fiscal cliff,” a hard landing in China, and higher
commodity prices could also generate a weaker outcome. On the contrary,
Global: Imbalances hold faster crisis resolution could lead to higher growth.
Sweden
S
down global growth 4
 Real growth rates picked up significantly in the first half of 2012, driven
mainly by net exports. Domestic demand was also robust on the back of a
Sweden: External conditions better-than-expected labour market. The external slowdown, however, indi-
strain growth 7 cates that the rate of expansion will slow significantly the rest of the year.
 The sharp rise in the krona poses significant challenges for export-oriented
Estonia: Domestic economy companies and for economic policymaking. We expect the repo rate to be
kept too high, while fiscal policy will not be able to make up for the slack in
safeguards growth 12 demand in the short term. Although growth will pick up to 2.4% in 2014, fol-
lowing the 1.6% gain in 2013, unemployment will remain high, at 7.6%.
Latvia: Decent growth despite Estonia
E
the global headwinds 16  Economic growth slowed in the first half of 2012, and growth is increasingly
being generated by the domestic economy, while export growth has slowed.
Unemployment continued to decrease in the first half of 2012, to 10.8% on
Lithuania: Stronger growth
average.
after a stutter step 20
 We are raising our GDP forecast for this year from 2.7% to 3.0% due to
the better outcome for both foreign and domestic demand, and are revising
growth for 2013 downwards from 4.2% to 4.0%. Growth is expected to reach
4.3% in 2014 as global growth accelerates. Inflation will slow from 3.9% in
2012 to 2.7% in 2014. Public finances will remain solid.
Latvia
L
 The economy expanded by a remarkable 6% in the first half of 2012. Quar-
terly growth has remained at solid 1% over the last three quarters. Both
exports and domestic demand are contributing to growth, owing to robust
confidence, gains in competitiveness, and EU fund support.
 We are raising the growth forecast to 4% (2.5% before) in 2012, while keep-
ing it at 3.5% in 2013. Growth is expected to pick up to 5.2% in 2014, as
global conditions improve and local labour tax cuts support consumption.
Inflation will remain at 2.5% in 2012-2013, but rise to 3.5% in 2014 due to
rising global energy prices and strengthening domestic demand.
Lithuania
L
 In line with expectations, GDP growth has slowed this year and probably
bottomed out in the second quarter. Budget revenues continue to exceed
the plan, indicating that the goal of cutting the deficit to 3% of GDP this year
will be met. Inflation has kept declining but is likely to pick up somewhat next
year.
 Although uncertainties remain, we expect growth to reach 4.1% in 2013
(slightly lower than previously forecast) and accelerate to 4.5% in 2014.
Unemployment was volatile in the first half of this year, but is expected to
decline and reach 9.3% in 2014.
August 21, 2012 1

2. Introduction Swedbank Economic Outlook
Laudable upswing – but watch out for global tumble
Despite difficulties in the global envi- sion. In the advanced economies, pol- Germany. In addition, the credibility
ronment, Sweden and the Baltic econo- icy tools are more restricted, since poli- of the euro as a currency is at stake,
mies have so far performed better than cy interest rates cannot go much further thereby putting at risk global financial
expected in our April forecast. Distant down, the effects of quantitative easing markets and the real economy. Greece
from the epicentre of the European cri- are most likely small and temporary, may have to leave the euro area if the
sis, these countries have seen strong and the political – and, for some coun- country lacks the ability to reform and,
growth, but, in the rest of this year, ac- tries, economic – room for fiscal expan- subsequently, loses external support
tivity is expected to slow as the trade sion is lacking. We have revised the oil to finance its debt and perhaps also to
and investment climate is weakening. price in dollars per barrel downwards to obtain more debt forgiveness. Spain’s
If developments in the euro area fol- $110 and $104 for 2012 and 2013, from and Italy’s sovereign bond rates are still
low our “muddling-through scenario”, a $119 and $113 in our April forecast. In higher than what is bearable in the me-
pickup in activity is likely during 2013 2014, the oil price is seen at $111 per dium term, thus increasing the probabil-
and 2014. GDP growth is expected to barrel. The decline should support con- ity of a bailout, in addition to the already
increase from 3-4% 2012 and 2013 to sumption in oil-importing economies, existing support for Spanish banks. The
4.5-5.2% in 2014 in the Baltic countries; and disinflation should push up real permanent bailout fund, the European
growth in Sweden, meanwhile, will fall purchasing power amongst house- Stability Mechanism (ESM), is await-
from 1.8% to 1.6% next year, before holds. However, increasing food prices ing clearance from the German Con-
reaching 2.4% in 2014. is an upward inflation risk. The euro will stitutional Court, and credit ratings are
Compared with our April forecast for weaken further, thus supporting the ex- being slashed in the meantime. Even
these countries, GDP growth with few port sector, while making imports more so, working groups with their task of
exceptions has been revised up for expensive in the euro area. designing better institutions, composed
2012, while the reverse applies for of both politicians and central bankers
There are great drags on the advanced
2013. Growth will gradually pick up from in the European Central Bank (ECB),
economies from credit and fiscal aus-
2013 onwards. Sweden and the Baltic will slowly make progress during the
terity, unclear crisis management in the
countries are highly dependent on the autumn; meanwhile, financial volatility
euro area associated with increased
global economy, which, compared with remains high.
financial market fragmentation, and, in
our previous forecast, will grow slower the US, the threat of falling off a “fis- As we assign a 60% probability that
in 2012, at 3.0% (3.1%), and in 2013, at cal cliff” if expenditures have to be cut our main muddling-through-scenario
3.1% (3.4%), before reaching 3.4% in and taxes increased. Business and will be realised, there are great risks
2014. This means that the global econ- consumer confidence has already been that could change the outcome sub-
omy will underperform throughout the hurt, and the willingness to invest, re- stantially. These are biased more to-
forecast horizon, increasing the output cruit, and consume is faltering. wards the negative side (35%), while
gap and also unemployment. positive risks are small (5%). Although
The euro area crisis is the main ob-
The main driving forces for the mod- still coping, the world economy is living
stacle to global growth as not only
est global growth are stimulus policies dangerously, maintaining imbalances
southern Europe, but also the UK are
in the emerging markets through lower that hold down growth. The euro area
in recession with the risk of spreading
policy interest rates and fiscal expan- crisis could become aggravated if po-
to core countries such as France and
litical consensus on how to go forward
Macro economic indicators, 2011- 2014 were not to emerge, Spain and Italy
2011 2012f 2013f 2014f
Real GDP growth, annual change in % had to seek support simultaneously,
Sweden (calender adjusted) 4.0 1.8 1.6 2.4 and/or Greece had to leave the euro
Estonia 7.6 3.0 4.0 4.3
Latvia 5.5 4.0 3.5 5.2 area. On the other hand, confidence
Lithuania 5.9 3.3 4.1 4.5 could strengthen if the euro crisis man-
Unemployment rate, % of labour force agement improved, moving towards a
Sweden 7.5 7.5 7.7 7.6 banking union, stronger fiscal coopera-
Estonia 12.5 10.5 9.8 8.7
Latvia 16.2 15.5 13.7 11.5 tion with Eurobonds, as well as accept-
Lithuania 15.4 13.2 11.5 9.3 ing that the ECB would fully become
Consumer price index, annual change in % the lender of last resort. In the US, the
Sweden 3.0 1.2 1.8 1.9
Estonia 5.0 3.9 3.1 2.7 political gridlock related to fiscal policy
Latvia 4.4 2.5 2.5 3.5 is the greatest risk, since the above-
Lithuania 4.1 2.8 3.0 3.4 mentioned threat of falling off a fis-
Current account, % of GDP
cal cliff would, if fully realised, reduce
Sweden 7.0 6.9 6.4 6.3
Estonia 2.1 -0.1 0 -0.5 GDP growth by 3-4 percentage points
Latvia -1.2 -1.6 -2.7 -3.8 in 2013. Growth in emerging markets,
Lithuania -1.6 -2.5 -3.0 -3.6
not least China, could slow more than
Sources: National statistics authorities and Swedbank.
August 21, 2012 2

3. Introduction Swedbank Economic Outlook
expected in response to the crisis in ad- 10-year government bonds at 1.4%, an to 5.2% in 2014. The risks are related
vanced economies, thus lowering glo- increase of investment spending on in- to external developments, including for-
bal growth substantially. Other upside frastructure and education would make eign demand, commodity prices, and
and downside risks include commodity economic sense. EU funds. Latvia is likely to fulfil the
prices, exchange rates, and political Maastricht criteria and adopt the euro
Estonia’s GDP expanded by 0.4% quar-
developments, including elections. in 2014. The main challenge seems to
terly and 2.0% annually in the second
be government long-term interest rates,
After contracting at the end of last year, quarter. Exports has contributed largely
while budget deficit and inflation are ex-
GDP in Sweden expanded by 0.8% and to growth, but domestically oriented
pected to be in line with the criteria.
1.4% in quarterly terms in the first two sectors are now increasingly support-
quarters of this year. Net exports ac- ing the expansion. GDP is expected After having expanded rapidly in 2011,
counted for the largest contribution to to grow by 3.0% this year, before ac- GDP in Lithuania grew by 0.4% in
growth. Going forward, growth will slow, celerating to 4.0% in 2013 and 4.3% quarterly terms and by 2.1% in annual
becoming more dependent on private in 2014. Export growth is slowing this terms the second quarter of this year.
consumption and investments. GDP is year but will benefit from a weaker euro The outcome, although weaker than
expected to grow by 1.8% this year in and relatively dynamic export markets expected, can be explained by the clos-
calendar-adjusted terms, before slow- in northern Europe – which are more ing of the oil refinery for maintenance
ing to 1.6% next year; however, quar- important to Estonia than the struggling reasons, which makes up one-fourth
terly growth in 2013 will be higher than markets of southern Europe. Inflation of Lithuanian industry output, for five
in the second half of this year. In 2014, will decelerate due to a higher base weeks. The uncertainty in the euro area
GDP growth will be above potential and lower commodity prices, which, has reduced business inventories and
growth, reaching 2.4%. Unemployment together with an improving labour mar- is having temporary negative effects on
will remain at an elevated level, reach- ket, are supporting household spend- growth. Growth is therefore expected
ing 7.6% in 2014, which is still high and ing. Public finances remain solid, with a to pick up. This year’s GDP growth of
most troublesome for the long-term un- low debt ratio of around 10%, and, after 3.3% will rise to 4.1% next year and to
employed. There is room for economic this year’s and next year’s small budget 4.5% in 2014. In line with the deeper
policy to be more expansionary, e.g., by deficits, the budget again is expected to recession in the euro area, the down-
lowering the repo rate and taxes while show a surplus in 2014. ward revision of growth from our April
increasing expenditures, but both the forecast will slow the improvements in
Latvia’s economy continued to ex-
Riksbank and the government will re- the labour market; nevertheless, unem-
pand by a brisk 1% in quarterly terms
main cautious. Thus, the repo rate will ployment is set to decrease to 9.3% in
in the second quarter. As, in annual
bottom out at the current level at 1.5% 2014 (from 15.4% last year). Inflation
terms, GDP grew by 5.1%, the continu-
before rising to 2.5% at the middle of is expected to have an upward trend,
ing recovery is also supporting a fall
2014. The Swedish krona will therefore as regulated prices are increased.
in unemployment and strengthening
remain strong and constitute a chal- Too-high inflation and long-term inter-
confidence. Both exports and domes-
lenge for export companies. Inflation est rates could postpone Lithuania’s
tic demand have so far contributed to
will remain below the target of 2%, and entry into the Economic and Monetary
growth. However, the slowing activ-
unemployment will be unnecessar- Union (EMU); another negative factor
ity of the main trading partners – and
ily high. With an eye on the election in could be the government’s reluctance
negative calendar effects – will cause
September 2014, the government will to make this an official national target.
growth to decelerate from 4% this year
expand fiscal policies, but with the im- Public finances are strengthening as
to 3.5% in 2013. Gradually, a better
plicit goal of continuing to lower the gov- the budget deficit is declining rapidly
global climate, labour tax cuts, and
ernment debt ratio towards 35%. With and debt will start falling next year.
catching-up effects will drive growth up
The external climate has worsened,
Manufacturing growth (index Jan 2008=100, seasonally adjusted and and the many negative risks point to
three months moving average)1/
a fragile world economy, which could
110
have an impact also on Sweden and
105
the Baltic countries. One of the great-
100
est challenges for these four countries
95 Estonia
is to avoid becoming complacent, and
Lithuania
90 instead to improve the fundamentals for
Latvia
85 Sweden growth – not least since the countries
80 Euroarea that now struggle in the euro area very
75 well could shape up and become more
70 competitive in a few years’ time!
65 Cecilia Hermansson
Sources: National
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 statistics authorities
1/ Refined petroleum products excluded from manufacturing in Lithuania
August 21, 2012 3

4. Global Swedbank Economic Outlook
Imbalances hold down global growth
Debt deleveraging, credit and fiscal continue to contribute to near stagna- confidence fell, while purchasing man-
austerity, the difficulties with the insti- tion for the region as a whole in the agers noted a decline in industrial ac-
tutional setup of the euro area, volatile coming years, but major differences will tivity. In Europe, especially, the signs
financial markets, the rebalancing of remain between a stronger Germany of a recession became more visible;
growth, the implementation of budget and the crisis-struck southern Euro- and euro area crisis management was
consolidation and structural reforms pean countries. In the US, growth pros- complicated by the elections in Greece
– the challenges the global economy pects will worsen in the second half of and escalating sovereign bond rates in
is faced with have become more de- this year because of global weakness Spain and Italy. Spanish banking prob-
manding for policymakers. Compared and the uncertainties surrounding fis- lems increased, and a bailout of banks
with our April forecast, the outlook for cal policy, including the threat of falling was agreed upon. In the US, the slow-
global growth has become weaker. No- off the “fiscal cliff”, i.e. the simultaneous down intensified in the second quarter,
tably, GDP growth for 2013 has been tax increases and expenditure cuts that and the labour market remained weak.
revised downwards. The second half are slated to take place at the end of Emerging markets experienced a slow-
of this year – and the beginning of next 2012. With lower inflation, emerging down as well, not least China, India and
year – is expected to show recession markets have room for more stimulus, Brazil, as demand from their important
or very weak growth in most advanced and economic growth will thus start to export markets fell.
economies. Except for the euro area, pick up in the next couple of quarters.
In line with weaker global economic
the global recovery is continuing, but at
Developments since our April growth, commodity prices decreased,
a slow speed, and with great risks at-
forecast thus alleviating the situation in most ad-
tached to the outlook.
As we were publishing our April fore- vanced economies and worsening the
Global growth will reach 3.0% this year, cast, sentiments started to turn nega- outlook for commodity-exporting coun-
before increasing to 3.1% next year and tive since the optimism from central tries. More recently, agricultural prices
3.4% in 2014. This means that growth banks’ liquidity injections that had per- increased due to, e.g., harsh weather
rates during our forecast horizon will re- meated the first quarter of this year be- conditions in the US and Russia, exert-
main lower than last year’s 3.5%, and gan to fade. Japan and Germany, es- ing price pressures, mainly in emerging
that growth will stay below its potential, pecially, grew stronger than expected markets.
which is around 4%. in the first quarter, while the recovery The muddling through scenario
In the euro area, the recession will last in the US continued at a modest pace. still prevails
the rest of this year. High unemploy- In the second quarter, economic growth Compared with our April forecast, the
ment, austerity and weak demand will weakened. Business and household global economy will recover at a some-
what slower speed, especially during
Swedbank’s GDP forecast - Global1/ 2013. Our main scenario, a muddling
(annual percentage change) through scenario, where global GDP
Outcome August 2012 April 2012
growth increases from 3.0% this year
to 3.1% in 2013 before reaching 3.4%
2011 2012 2013 2014 2012 2013
2014, is lower in total by 0.4 percent-
US 1.8 2.1 1.7 2.3 2.1 2.3
age point than the April forecast. One
EMU countries 1.5 -0.4 0.1 0.8 -0.5 0.4 of the main reasons for the downward
Of which: Germany 3.1 1.1 1.1 1.6 0.5 1.3 revisions is the situation in the euro
France 1.7 0.3 0.5 1.1 0.3 0.6 area, which is more troublesome than
Italy 0.4 -2.2 -1.0 0.2 -1.8 -0.3 earlier expected; this is also contribut-
Spain 0.7 -2.0 -1.2 0.3 -2.0 -0.8 ing to a weakening of activity in other
Finland 2.8 0.7 1.1 1.8 0.8 1.7
advanced economies, such as the US,
UK 0.7 0.2 1.0 1.7 0.5 1.0
UK, and Japan, as well as in most of
Denmark 0.8 0.8 1.2 1.5 0.5 1.0
Norway 1.5 3.3 2.0 2.5 2.0 2.5
the emerging markets. Apart from im-
porting European problems, the US
Japan -0.7 2.2 1.3 1.2 1.5 1.2
economy has slowed more than ex-
China 9.2 7.9 7.8 7.6 8.1 8.0
India 7.2 6.2 6.5 6.8 6.7 7.3 pected due to the fear of falling off the
Brazil 2.7 2.0 3.9 4.1 3.1 3.5 “fiscal cliff” and the political gridlock in
Russia 4.3 3.8 3.9 4.3 4.1 3.9 Congress. In India, domestic develop-
Global GDP in PPP 3.5 3.0 3.1 3.4 3.1 3.4 ments, including inadequate structural
Global GDP in US$ 2.6 2.2 2.3 2.7 2.2 2.3 reforms, have weakened the economy
Sources: National statistics and Swedbank. more than previously thought. In China
and Brazil, also, growth has weakened
more than expected.
August 21, 2012 4

5. Global Swedbank Economic Outlook
This main scenario, almost 80% driven Purchasing Managers' Index (PMI) for manufacturing
by growth in the emerging markets, 65
is given a probability of realisation of 60
60%. Towards the end of the forecast
55
horizon, the advanced economies’ con-
tribution to global growth is expected 50 China
to have increased only to almost 30%. 45
Euroarea
Japan
This means that the world economy will
US
40
still be running at “two speeds,” with a
high dependence on emerging markets’ 35
maintaining vigorous growth.
30
One of the driving forces for the recov- 25 Source:
Ecowin Reuters
ery in the main scenario is more stimu- Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
lus from policymakers in the emerging
the room for economic policy measures by large energy import bills and a slow-
markets. Central banks have started
is limited, and increasing food (and oil) down in export growth.
to lower policy interest rates and will
prices are still a risk. Besides quantita-
continue to do so; however, the room GDP growth in the US slowed from 1%
tive easing and lower policy rates, struc-
for manoeuvre is limited as disinflation in quarterly terms at the end of last year
tural reforms could increase medium-
could come to a stop with the increase to 0.5% and 0.4%, respectively, in the
term growth and in the short run at least
in food prices, and because of the ca- first and second quarters of this year.
strengthen confidence. Reducing the
pacity constraints resulting from the in- In line with the lacklustre growth seen
euro area’s institutional deficit needs
adequacy of reforms in the past. There in the first half of this year, investments,
to be at the top of the agenda, in order
is also room for expansive fiscal policy, recruiting, and income growth have
to create expectations that the euro will
e.g. in China, but the large amount of slowed. Unemployment will remain ele-
remain the region’s single currency. In
stimulus seen in 2008-2009 will not be vated, and, with inflation falling, the de-
the US, agreeing on fiscal policy is the
repeated as the risk for a new inflation- mands on the Federal Reserve to ease
most important, both from a short- and
ary pressures is by no means negligi- monetary policy further by introduc-
a longer-term perspective.
ble. ing a new round of quantitative easing
The effects of a loose monetary policy has risen, and we foresee that such a
In the advanced economies, driving
in the advanced economies are fad- measure will be taken in early autumn.
forces for growth include a lower oil
ing, and the changes to policy interest We do not foresee the US actually fall-
price, as well as lower overall infla-
rates will be marginal going forward. A ing off the “fiscal cliff”, but do foresee
tion, which will support real growth in
weaker euro supporting the export sec- some drag on growth, once decisions
consumption. Even if the oil price has
tor in the euro area is probable, while have been taken after the election has
again started to rise, the concern about
the dollar – in line with a stronger re- produced a new Congress. GDP growth
Iran has declined, while the recovery is
covery – will continue to strengthen. is expected to fall from 2.1% this year to
slowing and, thus, the demand for oil is
China will be more wary of a too strong 1.7% the next, before recovering to a
dampening. Our price assumption has
appreciation of the renminbi against the modest 2.3% in 2014.
been revised down to $110 and $104
dollar, as exports and investments are
per barrel for 2012 and 2013, from $119 In the euro area, GDP was unchanged
still seen as the most important driving
and $113, respectively. In 2014, we in the first quarter, after contracting by
forces for growth; however, the willing-
see, although with great uncertainty, 0.3% in the fourth quarter of last year.
ness to consume will play a larger role.
the price coming back to $111 as de- In the second quarter, GDP fell by 0.2%
In Japan, the yen will weaken, as the
mand picks up. Inflation is falling, but and will keep falling during 2012, before
current account balance is challenged
growth slowly comes back next year.
Interest and exchange rate assumptions Inflation, at present at 2.4%, will fall
Outcome Forecast below 2% next year, and the European
17 aug 31 Dec 30 Jun 31 Dec 30 Jun 31 dec Central Bank (ECB) will lower the policy
2012 2012 2013 2013 2014 2014 rate to 0.5% in the autumn. Other tools
Policy rates are seen as workable only when politi-
Federal Reserve, USA 0.25 0.25 0.25 0.25 0.25 0.50 cians begin taking their responsibilities
European Central Bank 0.75 0.50 0.50 0.50 0.50 0.50 seriously, i.e., purchases of Spanish or
Bank of England 0.50 0.50 0.50 0.50 0.75 1.00
Italian sovereign bonds will be possi-
Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.10
ble only if and when governments re-
Exchange rates
quest support bailout funds and fulfil the
EUR/USD 1.23 1.16 1.18 1.20 1.22 1.25
conditions set up by the bailout funds.
EUR/GBP 0.79 0.77 0.76 0.75 0.75 0.75
RMB/USD 6.36 6.30 6.20 6.08 5.98 5.85 Until then, financial market instability
USD/JPY 79 80 83 88 90 90 and fear will continue, and the prob-
August 21, 2012 5

6. Global Swedbank Economic Outlook
Two-year government bond yields (in percent)
and the euro in relation to the US dollar Downward risks are abundant
8 1.55 We have given a probability of 60% to
7 1.5 our main scenario, while arguing that
6 downward risks are much larger (35%)
1.45
Germany
than upward risks (5%). Among the
5
1.4 risks that would cause the outcome to
4 Spain
1.35 become more negative, we find the fol-
3 EUR/USD
(rhs) lowing: 1) increased financial market
1.3
2 instability and a spreading crisis in the
1
1.25 euro area, with the any of the adverse
0 1.2 scenarios for the euro described above
materialising; 2) a fall off the fiscal cliff,
-1 1.15
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 reducing US GDP growth by some
Source: Reuters Ecowin
3-4%, driving the US into recession; 3)
ability that Italy and Spain will have to Japan’s quarterly growth reached 1.3% much higher commodity prices due to
request support increases as interest in the first quarter of this year; this was drought and/or geopolitical tensions,
rates keep rising – a probability that is unexpectedly strong and driven by limiting the room for manoeuvre for
higher than 50%. As Germany also is consumer spending. Growth slowed to monetary policy makers, especially in
experiencing a slowdown of economic 0.3% in the second quarter. Despite the the emerging markets; 4) a hard land-
activity, the need for policy measures need for public reconstruction that will ing in China and a stalling of growth
becomes stronger, and a weaker euro increase GDP going forward, private in other emerging markets, which are
may at least give some relief to export investment is slowing and exports are more affected by the crisis in the ad-
sectors. GDP in the euro area is fore- struggling because of the strong yen vanced economies; and 5) political
seen to fall by 0.4% this year, before and the decelerating Chinese growth. risks in connection with upcoming elec-
growing by a marginal 0.1% next year The Bank of Japan will resume buy- tions in the US, Germany, and Italy, and
and 0.8% in 2014. ing assets, but fiscal policy will not be with the transfer of power in China.
adjusted to fix medium- and long-term
In our main scenario, the euro area re- Amongst the risks that would improve
threats. GDP will grow by 2.2% this
mains intact, with all 17 countries part the outlook, we find the following:1)
year, before falling to 1.3% next year
of the currency union. Institutions are confidence building and crisis manage-
and 1.2% in 2014. Deflation is coming
strengthened as an answer to the un- ment improving in the euro area, thus
back, but at least the yen might depre-
stable financial markets and the crisis. shortening the recession and stabilising
ciate while the more negative current
The mechanisms for banking and fiscal financial markets; 2) lower commodity
account trend continues.
cooperation slowly improve, also open- prices due to improved supply condi-
ing up an enhanced role for the ECB as GDP growth in Brazil and India – and, tions; 3) a consumption boom in Ger-
lender of last resort. In a second sce- to a lesser extent, in China and Russia many in line with lower unemployment
nario, Greece leaves the euro area; the – has been revised downwards, taking and inflation; 4) more stimulus in the
probability of this happening is close to into account the weakening demand emerging markets, driving up growth;
50%. In a third scenario, all the south- from advanced economies. The ques- and 5) an improvement in the political
ern European countries leave the euro, tion is whether potential growth in these process for enacting fiscal measures in
thus strengthening the currency union countries will also be lower going for- the US, creating confidence, and thus
for the countries that remain. In a fourth ward, as capital inflows for investments strengthening the growth outlook.
and less probable scenario, the euro are slowing, capacity has not been
The global outlook remains uncertain,
area is dismantled, as the basis for co- built, and reforms are lacking. China
not least for 2013 and even more so for
operation disappears; Germany finding is the exception; here, investments, at
2014, as political and economic devel-
the price of bailing out countries that least in the short term, may be too large
opments are likely to change the pic-
do not sufficiently reform their econo- in relation to demand. The rebalancing
ture. The challenges facing, especially,
mies to be too high. The second, third, is continuing. This means that the out-
the advanced economies are vast, and
and fourth scenarios have side-effects look for growth below 8% is actually a
less probable developments but with
that would be very costly, not only for positive development – if the authorities
large consequences, i.e.“fat-tail” out-
Europe, but for the global economy at do not try to boost investments again,
comes, cannot be excluded. Sweden
large. This – and the goal of further in- increasing the risk for a hard landing
and the Baltic countries may not be
tegrating Europe – is the reason why at a later stage – and instead focus on
at the centre of these challenges, but,
politicians will continue to work to re- consumption, while maintaining exports
as open and export-dependent econo-
alise the first scenario, although the as much as possible. For an extended
mies; they will not be spared should the
challenges to keep the currency union discussion on country developments,
outcome become more negative.
together continue to grow. read the Swedbank Global Outlook,
published August 21st. Cecilia Hermansson
August 21, 2012 6

7. Swedbank Economic Outlook
Sweden: External conditions strain growth
Economic growth in Sweden was sur- We expect the main drag on Swedish the krona to remain relatively strong.
prisingly strong in the first half of 2012. growth in the near term to be a weak- In the last year of our forecast period,
Following an annual growth of 1.5% in er external demand. We have revised 2014, we expect growth to continue to
the first quarter (calendar-day adjust- downwards our global outlook from the increase, reaching 2.4%, but the combi-
ed), the second-quarter rate of expan- April forecast, and this slowdown will nation of weak external conditions and
sion was estimated at 2.3%. According have a negative impact on economic a continued strong krona will be a chal-
to these preliminary numbers, growth activity in Sweden for the remainder lenge to Swedish export companies.
in Sweden was broad based, with net of 2012. This development will be re-
The main risk to our forecast, and to
exports accounting for the largest con- inforced by the sharply stronger krona.
the Swedish economy, is a worsening
tribution to GDP. The positive devel- Thus, we expect the reduction of unem-
of the crisis in the euro area. This would
opment was mirrored in other sectors ployment to be protracted. Household
entail significantly lower growth rates
as well. Demand for labour picked up, consumption will take over as the main
in the euro area and deepen the mis-
but, due to a large increase in the la- driver of growth, while investments will
trust in the ability of southern European
bour supply, the unemployment rate fall back after the large increase in the
countries to stabilise their economies.
increased in line with our expectations. first quarter. Overall, we expect GDP
Such a worsening would have ripple ef-
Households benefitted from employ- growth of 1.8% for the whole year.
fects on global growth and on Swedish
ment and wage growth, but neverthe- In 2013, as global conditions improve, exports. In addition, given the prelimi-
less showed some restraint in raising underlying quarterly growth will pick up nary nature of the second-quarter GDP
spending. Instead, savings increased (although the annual growth rate, at estimates, there is a nonnegligible risk
and borrowing slowed. 1.6%, will be lower than in 2012). The that the past growth numbers will be re-
Recent macroeconomic data give a improvement in the labour market will vised downwards, thereby altering the
mixed picture. The purchasing manag- lag, however, and we foresee the un- growth path of the Swedish economy.
ers’ index for manufacturing indicates employment rate in early 2013 gradu-
Challenging export conditions
stagnation, while the index for serv- ally increasing to reach 7.8%, before
going forward
ices points to a continued growth in the falling to around 7.5% in the end of
services sector. The economic tenden- 2014. Structural unemployment will re- After a sharp fall at the end of last year,
cy indicator, while declining in recent main a major concern, although we ex- export volumes recovered faster dur-
months, has shown an upward trend pect there will be some government ini- ing the first six months of 2012 than we
for consumer confidence. This sug- tiatives to address this. The monetary expected in our April report. This was
gests that the underlying conditions for policy rate will, in our view, be kept too mainly driven by exports of services
the Swedish economy are still sound, high, since resource utilisation in Swe- and nondurables, while weak global in-
although vulnerability – in particular, to den is still low and price increases will vestment activity led to a decline in the
external shocks – is high. fall short of the inflation target over the exports of investment goods, such as
forecast horizon. This will also cause telecommunications products and vehi-
cles. In total, export volumes increased
Key Economic Indicators, 2011 - 2014 1/ by nearly 2% at an annual rate in the
2011 2012f 2013f 2014f first six months, with exports of serv-
Real GDP (calendar adjusted) 4.0 1.8 1.6 2.4 ices growing by 3.2%, compared with
Industrial production 6.7 -3.5 1.8 3.0 1.7% for exports of goods. A limited ex-
CPI index, average 3.0 1.2 1.8 1.9 posure to the crisis-struck countries in
CPI, end of period 2.3 1.0 2.0 1.8 southern Europe – less than 4% of total
CPIF, average 2/ 1.4 1.1 1.7 1.6
exports - and relative strong demand
CPIF, end of period 0.5 1.6 1.6 1.5
from the Nordic countries and Germany
Labour force (15-74) 1.2 0.4 0.4 0.4
explain why Swedish exports have so
Unemployment rate (15-74), % of labor force 7.5 7.5 7.7 7.6
far avoided a slowdown in 2012. An ad-
Employment (15-74) 2.1 0.4 0.2 0.5
Nominal hourly wage whole economy, average 2.6 3.3 3.0 3.2
ditional factor is the diversification of
Nominal hourly wage industry, average 2.8 3.4 2.8 3.2 exports to emerging markets.
Savings ratio (households), % 9.7 10.3 10.0 9.9 Another important structural change is
Real disposable income (households) 3/ 3.0 2.7 2.3 2.5 that services have gradually increased
Current account balance, % of GDP 7.0 6.9 6.4 6.3 their share of total exports, from 20%
General government budget balance, % of GDP 4/ 0.1 0.2 0.0 0.2 at the beginning of the 1990s to nearly
General government debt, % of GDP 5/ 38.4 37.3 36.2 35.5 one-third last year. Although the servic-
Sources: Statistics Sweden and Swedbank. es trade is still significantly smaller than
1/ Annual percentage growth, unless otherwise indicated. the goods trade, its rate of growth has
2/ CPI with fixed interest rates.
3/ Based on short-term earnings statistics accelerated due to globalization and
4/ As measured by general government net lending.
5/ According to the Maastricht criterion.
August 21, 2012 7

8. Sweden Swedbank Economic Outlook
specialisation. This adds to the diversi- Trade balances in exports and imports of goods and services, SEK billions
fication of Swedish exports and reduc-
50
es the vulnerability to changes in the
global investment cycle. Furthermore, 40
the increase of services input in indus-
Trade balance in
trial production has been important for 30 services
strengthening the competitiveness of,
Trade balance in goods
and raising value added in, exports. 20
In the second half of 2012, we expect
10
export growth to slow due to the re-
newed weakness in the global industry 0
and the significantly stronger krona.
In addition, the temporary boost from -10 Source:
Statistics Sweden
1981 1983 1985 1987 1990 1992 1994 1996 1999 2001 2003 2005 2008 2010
postponed export deliveries and unex-
pectedly large increases in merchant- ucts is expected to be modest, both in cast an export growth of 1.5% during
ing1 is unlikely to be repeated. For mature and in emerging markets. 2013. For 2014, we expect Swedish ex-
2012, we thus foresee an annual export That the krona is appreciating when port volumes to grow by 3.3%, mainly
growth of 1.2%, which, although an up- global demand is worsening is unu- driven by a modest pickup in global de-
ward revision of our April forecast, is sual for Swedish exporters and will be mand. This export growth is below the
largely a result of the stronger outcome a challenge to Swedish competitive- long-term trend, which was 4.6% during
in the first half of the year. ness. Historically, the Swedish krona the latest decade. The surplus in the
normally depreciates when external current account balance is expected to
In our updated global outlook, world
demand weakens. However, due to the decrease in 2013-2014 due to a strong
market growth for Swedish exporters
extraordinary developments in Europe, krona, which, together with robust do-
is expected to be somewhat faster next
we cannot expect the krona to adjust mestic demand, will stimulate growth in
year than in 2012 (4.6% compared with
to the weaker demand, and Swedish imports.
3.9%) but slower than we forecast in
the spring. A low utilisation rate in the companies will instead have to raise Rebound in investments was
business sector, a high unemployment productivity or adjust costs to maintain temporary
rate, and budget consolidations in sev- competitiveness. Thus, the business Gross fixed investments increased by
eral OECD countries will dampen global sector’s competitiveness is expected to 6.6% annually in the first half of 2012,
investment activity after the strong re- come under pressure in 2012. For next which was significantly stronger than
bound in 2010-2011. The weakest per- year and for 2014, we foresee a decline we expected. In the private sector, ex-
formance will be in the euro area, but in unit labour cost growth as productiv- cluding residential, the growth rate was
the emerging markets will also be af- ity in the economy is picking up. The even more pronounced, driven by large
fected by the slow growth in the OECD krona will, however, remain relatively investments in the energy sector and in
region. The global demand for heavy strong. This will in particularly affect ex- private services. Growth in industry in-
trucks and telecommunications prod- port of commodity products like wood vestments was modest and in line with
and metal, but services with main costs the weak growth in goods exports and
1 The values of production and exports that comprises in Sweden will also struggle. Export declining production. A decrease in the
purchases and sales made by Swedish enterprises of
companies with a large import content number of housing starts during 2011
products that have been manufactured and then sold
abroad without having been imported to Sweden. will be less affected. Overall, we fore- has led to a sharp drop in real estate
Swedbank’s GDP Forecast – Sweden investments so far in 2012. Public in-
Changes in volume, % vestments, however, picked up, mainly
2011 2012f1/ 2013f1/ 2014f1/
on account of municipalities. Volatil-
Households' consumption expenditure 2.0 1.9 (1.3) 2.7 (2.5) 2.8
ity in gross fixed investments is high,
Government consumption expenditure 1.8 1.1 (0.6) 0.8 (0.9) 1.1
Gross fixed capital formation 6.3 3.6 (0.1) 2.4 (2.6) 3.3 and factors such as a mild winter have
private, excl. housing 5.0 8.2 (2.6) 3.0 (4.0) 3.8 boosted investments in buildings. Post-
public 1.5 0.4 (-1.8) 1.6 (0.4) 2.4 poned investments from last year also
housing 15.1 -7.5 (-6.2) 1.1 (-0.2) 2.2 spilled over to 2012, and we do not be-
Change in inventories 2/ 0.7 -0.7 (-0.4) 0.0 (-0.1) 0.0 lieve the growth rate from the first six
Exports, goods and services 6.9 1.2 (-1.3) 1.5 (2.6) 3.3 months is sustainable. Early warnings,
Imports, goods and services 6.3 0.4 (-1.1) 2.9 (2.0) 3.4 such as dampened imports of invest-
GDP 3.9 1.6 (0.2) 1.6 (2.2) 2.3 ment goods, decelerating credit growth
GDP, calendar adjusted 4.0 1.8 (0.5) 1.6 (2.2) 2.4 in the business sector, and heightened
Domestic demand (excl. inventories) 2/ 2.6 1.8 (0.8) 2.0 (1.9) 2.2 uncertainties about the global econo-
Net exports 2/ 0.7 0.4 (-0.2) -0.5 (0.4) 0.1
my, signal a slowdown in investment
Sources: Statistics Sweden and Swedbank.
1/ The figures from our forecast in April 2012 are given in brackets.
activity. However, due to a significantly
2/ Contribution to GDP growth. stronger investment performance in the
August 21, 2012 8

9. Sweden Swedbank Economic Outlook
first half of the year, the annual growth Unit labour cost and productivity (annual change in %)
7 5
rate for the whole year has been re-
vised upwards to 3.6%. 6 4
For next year, we foresee a further 5
3
slowdown in investment growth to 4
2
2.4%. The stronger krona and mod- 3 Unit labour cost
1
est global demand will squeeze profit 2 Productivity (rhs)
margins and returns on investments. In 0
1
2014, when global growth is expected -1
0
to improve slightly, we forecast Swed-
-2
ish investment growth to pick up. The -1
investments in energy are expected to -2 -3 Source: Statistics Sweden
and Swedbank calculations
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
continue to grow in line with the goal to
increase investment by SEK 300 billion
due to a weakening external demand. tion with a strengthened krona, we an-
over a 10-year period. Investments in
Digging deeper into the numbers, ticipate that relative unit labour costs
housing will also increase during 2013-
one can see it was primarily the pub- for Swedish companies will grow by
2014, although from a low level. Fun-
licly financed sectors that added to the 3.0% in 2012 compared with 0.9% in
damentally, there is a need for more in-
payroll, while manufacturing and retail 2011. Swedish competitiveness will re-
vestment in housing. A growing popula-
trade reduced employment. Public ad- main challenged also in 2013 and 2014
tion, particularly in the large cities, and
ministration and education were strong, due to the still-strong krona, although
a lack of housing in 60 percent of the
and it is a worrying sign that employ- growth in unit labour costs will deceler-
municipalities mean there is still a large
ment decreased in business-cycle- ate to 2.1% in 2013 and 0.7% in 2014,
underlying need for new houses. Fur-
dependent sectors. Also, in terms of when productivity growth strengthens.
thermore, infrastructure investments
growth has been amongst the lowest hours worked, the underlying data do When the economy gradually improves
in European countries. The govern- not paint as positive a picture. Over- in 2013, we expect the unemployment
ment has indicated that new investment all, hours worked were unchanged in rate to decline, even if the average an-
measures will be in the budget for next the second quarter, after increasing by nual rate still increases to 7.7% from
year, but it is still uncertain how far- 1% in the first. This is a notable slow- 7.5% in 2012. The improvement in the
reaching they will be. down compared with 2011, when hours labour market will continue, but we ex-
worked increase by an average of 2.3% pect unemployment to remain above
The private sector lags in job
in the first half of the year. Again, it was 7% (seasonally adjusted) by the end of
creation
the private sector that reduced its la- 2014. External conditions are expected
The Swedish labour market performed bour demand. Within the private sector, to improve and domestic demand is
well during the first half of 2012, and producers of services raised labour in- supported by stable public finances.
employers have been able to meet the put, reinforcing the picture that manu- As 2014 is an election year, we should
surprisingly strong growth in labour facturing and retail trade are seeing a see intensifying efforts to bring down
supply. This means that the unemploy- slowdown in demand and/or a growing unemployment, and, together with a
ment rate has developed approximately need to improve productivity. more stable environment, this should
as expected, and it reached 7.5% in support employment growth. The main
Productivity in the Swedish economy
June (seasonally adjusted). However, challenge in the medium term will be to
picked up during the first half of 2012.
for the remainder of the year, unem- reduce structural unemployment. The
However, the wage increase, in par-
ployment rates will remain stubbornly long-term unemployment rate remains
ticular in the industry sector, has been
high as employment creation will slow high, at 30% of all unemployed, which
faster than expected, and, in combina-
is almost 20% higher than during 2006-
Employment change Q2 2012 - Q2 2011 1/
2008.
Total Still some hesitation among
households
Construction
Household consumption continued
Public adm
to recover in the first half of 2012, but
Education there are signs of hesitation in con-
sumers’ sentiments and willingness to
Health
spend. In the first quarter, the rebound
Retail in consumption continued, with 2.1%
Industry annual growth, but slowed again in the
second quarter to 0.8%. In particular,
-20000 -15000 -10000 -5000 0 5000 10000 15000 20000 25000 30000
households drew down on purchases of
1/ Not all sectors are inlcluded in the chart
Source: Statistics Sweden durables, such as cars, but retail trade
August 21, 2012 9

10. Sweden Swedbank Economic Outlook
was also affected. Instead, expendi- holds. In July, the consumer confidence marginally, reflecting increased worries
tures on housing, something that can- indicator (NIER) rose and is now above concerning euro area developments.
not easily be affected by households the historical average. In particular, For the majority in the Board, the debt
in the short run, provided the biggest households’ view of their own economy buildup amongst households was still
boost to overall spending. This sug- is improving, while the outlook on the a major concern, and, as the Swedish
gests that consumers were somewhat Swedish economy is less upbeat. How- economy was performing surprisingly
more cautious than the headline growth ever, the perceived risk for unemploy- well, they saw no immediate reason to
numbers indicated. ment did not show much of an improve- let up. A minority of two Board mem-
Household income has developed sol- ment during the first half of the year, bers continued to argue for a cut in the
idly on the back of robust employment which could hold back households’ will- repo rate of 50 basis points and for a
growth and increasing wages. We ex- ingness to spend. lower repo rate path since inflation will
pect, however, that unemployment, Given the stronger-than-expected con- fall short of the inflation target and re-
although lower than we previously sumer spending so far in 2012, we are source utilisation was still weak.
forecast, and the slow growth in hours revising upwards the annual growth The recent sharp appreciation of the
worked will limit income developments rate to 1.9%. This is still quite modest Swedish krona increases the chal-
in the remainder of 2012. On the other by historical standards, but the uncer- lenges for monetary policy. The krona
side, pension payments are set to in- tainty that characterises, in particular, has been at its strongest against the
crease in real terms in both 2012 and economic developments in Europe, euro since the beginning of the last
2013, which will boost spending power, in addition to many households’ still- decade. As worries grow concerning
before contracting in 2014. Thus, a vulnerable financial position, is likely the increased turmoil in the euro area,
dampening in hours worked and wage to dampen spending. Together with the many investors are looking for alter-
increases in 2013 will reduce overall strong income growth, this is causing native currencies to spread risks; this
real disposable income growth to 2.3% the savings ratio to increase from 9.7% includes other central banks that are
from 2.7% in 2012, before increasing of disposable income in 2011 to 10.3% trying to offset appreciation pressures.
again in 2014 to 2.5%. in 2012. As the underlying growth mo- In trade-weighted terms, the krona is
Household savings, according to the mentum strengthens in 2013, an im- also stronger, but to a lesser extent.
financial accounts, showed a strong in- proved labour market will boost house- Nonetheless, the index value of 117.7
crease in the first quarter of 2012, and, hold consumption. We therefore expect recorded at the end of July implies the
together with a deceleration in credit a real growth in private consumption of strongest krona in more than 10 years.
growth, the decrease in households’ 2.7% in 2013, to be followed by an ex- The main short-term impact from the
net wealth slowed. Approximately 80% pansion of 2.8% in 2014. The main lim- krona appreciation on inflation is lower
of the increase in savings was due to iting factor will be households’ indebt- prices for imported goods. Thus, we ex-
valuation changes, stemming mainly edness, but, given the improvement of pect inflationary pressures to be lower
from the stock market recovery, but the economy, we expect the savings than previously anticipated. However,
growth in bank deposits was also high. ratio to continue to decline. the stronger-than-anticipated growth
At the same time, credit expansion to A stronger krona complicates and improved labour market we wit-
households slowed, especially mort- monetary policy nessed in the spring should counteract
gage borrowing. This suggests that the The Riksbank kept the repo rate un- this, and we are reducing our average
households’ financial situation was re- changed at 1.50% on July 4th and, at inflation forecast (with fixed mortgage
covering in the early half of the year and the same time, the majority of the Ex- rates—CPIF) only marginally down, to
it provides grounds for robust growth in ecutive Board reinforced the message 1.6%, in 2012. As the euro area econo-
consumption going forward. that, barring a deepening of the euro mies stabilise next year, we expect the
Recent confidence indicators confirm crisis, no easing was in the cards. How- Swedish krona to weaken somewhat
an improved sentiment among house- ever, the repo rate path was lowered but to remain strong in historical terms.
This will have a negative impact on the
Credit to households (annual growth in %)
competitiveness of Swedish compa-
14
nies. Thus, we expect export growth
12 to dampen and its contribution to eco-
nomic growth to decline. It would also
10
reduce inflationary pressures further
8 out in the forecast period. For 2014, we
6
forecast the CPIF to increase by 1.5%,
which is significantly below the Riks-
4 bank’s inflation target.
2 Seen in isolation, the strengthening
of the Swedish krona would argue for
0
Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 Sep-11 a looser monetary policy to offset dis-
Source: Statistics Sweden
August 21, 2012 10