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Macro Update: The world economy is muddling through

Macro Update: The world economy is muddling through

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Published by SEB Group
Recent global economic signals have been mixed and economic conditions have generally continued to weaken in most places. This is especially true for Sweden, where the GDP forecast for 2012 have come down substantially, writes SEB’s economists in wrap-up of recent Macro Updates for selected economies around the world.
Recent global economic signals have been mixed and economic conditions have generally continued to weaken in most places. This is especially true for Sweden, where the GDP forecast for 2012 have come down substantially, writes SEB’s economists in wrap-up of recent Macro Updates for selected economies around the world.

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Published by: SEB Group on Oct 23, 2012
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This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith andare based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance onthis document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact theNew York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securitiesand Futures Authority for the conduct of investment business in the UK.
The world economy is muddling through
23 OCTOBER 2012
Economic conditions have generally continuedto weaken in most places, but the United States has seenvarious bright spots in the economy, especially in thelabour and housing markets. Most of the new centralbank stimulus programmes since this past summer havebeen forceful and far-reaching, contributing to greaterrisk appetite in financial markets. For example, theEuropean Central Bank’s Outright Monetary Transaction(OMT) bond-purchasing programme has pushed downsovereign yields and helped to ease the acute crisis in theeuro zone. This has created a bit more manoeuvringroom for crisis management in other fields, such asstructural policy and deeper fiscal policy cooperation.
has been reported in our Macro Updates ofrecent weeks. The adjustments in our main forecastcompared to the August issue of
Nordic Outlook 
aresmall. We have revised our US and euro zone forecastsmarginally downward, while making a somewhat largerdownward revision for Japan. We have also lowered ouroutlook for India and Japan somewhat for 2012. Theoverall impact of these changes on the global economy issmall. We have revised our (PPP weighted) global GDPgrowth forecast downward by one tenth of a percentagepoint for both 2012 and 2013. We thus expect worldeconomic growth to end up at 3.2% in 2012 and 3.5 % in2013. Our assessment is that the risk picture hasmarginally improved, thanks to a more stable euro zonesituation and a further reduction in the risk of a hardlanding in China. Yet we are choosing to stick to ourassessment in August that the probability of a recessionscenario is 20%. We also estimate that the probability ofa faster recovery is 20%.
Recent data have come in somewhatstronger than expected, but GDP growth looks set toremain around 2% in the third quarter. This is in line withour August forecast. Our GDP forecast for 2012 thusremains unchanged at 2.2%, while we have revised our2013 forecast downward by one tenth of a point to 2.1%.We expect GDP to grow by 2.6% in 2014. The FederalReserve’s commitments to a third round of quantitativeeasing (QE3) with no time limit and to keeping its keyinterest rate at the current low level until at least mid-2015have further decreased recession risks. We believe that thesestimulus measures must remain in place for a rather long time.It is true that unemployment has fallen rapidly in recentmonths, but other labour market measures are considerablygloomier, and the “substantial” improvement that the Fed isseeking is far from materialising.
Global GDP growth
Year-on-year percentage change (brackets: August
Nordic Outlook 
2011 2012 2013 2014
 United States 1.8 2.2 (2.2) 2.1 (2.2) 2.6 (2.6)Japan -0.7 2.2 (2.6) 0.8 (1.5) 1.4 (1.5)Germany 3.1 0.8 (0.8) 0.9 (1.0) 1.6 (1.5)China 9.3 7.7 (7.8) 8.0 (8.0) 8.2 (8.2)India 6.8 5.5 (5.8) 6.0 (6.0) 6.5 (6.5)United Kingdom 0.8 -0.3 (-0.4) 1.3 (1.4) 1.6 (1.6)Euro zone 1.4 -0.5 (-0.4) 0.1 (0.2) 0.9 (0.9)Nordic countries 2.4 1.5 (1.7) 1,8 (1.9) 2.2 (2.2)Baltic countries 6.4 3.6 (3.1) 3.7 (3.8) 4.2 (4.4)
OECD 1.7 1.3 (1.4) 1.5 (1.7) 2.1 (2.2)
Emerging economies 6.2 4.9 (5.0) 5.3 (5.3) 5.8 (5.8)
The world, PPP*
3.8 3.2 (3.3) 3.5 (3.6) 4.1 (4.1)
Source: OECD, SEB
* Purchasing power parities
President Barack Obama has lost his lead inpublic opinion surveys, which instead now indicate a deadheat. But incumbent presidents often tend to surge nicely inthe final stretch. Recent labour and housing market upturnswill also enable the Democrats to argue that the economicsituation has improved, though at a slow pace. So we stillbelieve that Obama will be re-elected. Our GDP growthforecast assumes that the US can largely avoid the “fiscal cliff”and that fiscal headwinds will be limited to 1.5% of GDP in2013. A review of various conceivable congressional andpresidential election outcomes shows that the risk of seriousfiscal paralysis is actually worst if Obama wins the election.This is because we consider it likely that that Republicans willretain their majority in the House of Representatives. Yetregardless of the election outcome, we believe that a solutionwill be reached before the end of the first quarter of 2013.
fter theEuropean Central Bank launched its new Outright Monetary
Economic Insights
Transaction (OMT) sovereign bond-purchasingprogramme in September, the crisis entered a less acutestage. Yields on Spanish and Italian government debthave fallen. We also anticipate that Greece will finallyreceive the next instalment in its bail-out package eventhough its negotiations with the EU/ECB/IMF troika arestill dragging on. Looking further ahead, however,Greece’s future in the euro zone is very uncertain.
Recentpurchasing managers’ index (PMI) and economicsentiment indicator (ESI) readings nevertheless pointtowards a decline in GDP during the third quarter. Butthese indicators have been overly pessimistic aboutgrowth in recent quarters. The latest final hard dataprovide a brighter picture. While the labour marketindeed continues to deteriorate, this trend is in line withexpectations. Exports are still increasing at a decentpace, and any negative impact from the latest euroappreciation is not yet visible. Industrial production hasremained resilient, providing an upside surprise inAugust, with retail sales also surpassing expectations.The tough fiscal austerity measures now beingimplemented in many euro zone countries, along withinflation well above the ECB’s target, neverthelesscontinue to restrain consumption. Uncertainty about theeuro zone will continue to contribute to caution amongboth households and businesses. Companies are holdingoff on capital spending while awaiting a more permanentsolution to the euro zone crisis. Overall, this means thateconomic growth will remain very subdued during 2013and 2014. Germany, whose economy looks set to avoidrecession but remain weak, will provide some support togrowth.
China’s economic growth rate hasslowed for the seventh consecutive quarter, but so farthe policy response to this cooling trend from Chineseauthorities has been very limited. The reason is probablythat the big leadership shift expected this November hasled to more cautious economic policies. The rebound ineconomic activity expected during the second half of 2012 hasthus not materialised. Compared to the August issue of
Nordic Outlook 
, we have revised our 2012 GDP forecast for Chinasomewhat further downward to 7.7%, but there are positivesignals that reinforce our assessment that China can avoid ahard landing. The PMI has stopped weakening, and consumerconfidence has shown some improvement. Exports weresurprisingly strong in September, although a weak importtrend points towards the continued absence of any clearimprovement in domestic demand.
These proposed reforms are a step in theright direction but are not far-reaching enough to change thepicture of an Indian economy that is grappling with majorstructural problems. Both domestic demand and exportremain weak, and the economic growth rate is now lower thanduring the 2008-2009 financial crisis. We expect India’s GDPto grow by a weak 5.5% this year, a downward revision ofthree tenths of a point compared to August. Because of ourdownward revisions for China and India, we now expect GDPgrowth in the emerging market sphere to reach 4.9% in 2012,compared our 5.0% forecast in August.
GDP growth, Nordic countries
Year-on-year percentage change (brackets: August
Nordic Outlook 
2011 2012 2013 2014
Sweden 3.9 0.8 (1.3) 1.5 (1.5) 2.5 (2.5)Norway 1.4 3.4 (3.7) 2.6 (2.7) 2.2 (2.3)Denmark 1.0 0.5 (0.5) 1.4 (1.4) 1.7 (1.7)Finland 2.7 0.3 (0.6) 1.3 (1.6) 2.0 (2.0)
Nordic countries 2.4 1.5 (1.7) 1.8 (1.9) 2.2 (2.2)
Source: OECD, SEB
This isespecially true of
, where we have lowered our GDPforecast for 2012 from 1.3% to 0.8%. The downturn inSwedish manufacturing indicators has accelerated, partly dueto the strong krona. Signs of weakening in the labour marketare now also increasingly evident. Growth prospects in
have declined slightly as well, and we are adjustedour 2012 GDP forecast downward from 3.7 to 3.4%. Norwaystill stands out, however, with GDP growth that is far higherthan other Nordic and Western European countries. In
, the economy is hampered by listless externaldemand, and we have lowered our GDP growth forecast. Wehave not changed our forecasts for
, where weexpect GDP growth to reach 0.5% in 2012. Danishunemployment is climbing, and private consumption growthremains weak.
Håkan Frisén
, +46 8 763 80 67, hakan.frisen@seb.se
Andreas Johnson
, +46 8 763 80 32, andreas.johnson@seb.se
US economy: Fiscal cliff in focus
11 OCTOBER 2012
US real GDP growth in Q2 was revised to an annualized rate of only 1.3% from 1.7%previously. While still sluggish, economic activity appears to have accelerated inSeptember with ISM manufacturing and ISM non-manufacturing both improving andemployment better than expected.
Q3 real GDP is currently tracking 2% growth,largely in line with our previous forecast in
Nordic Outlook 
published in
Regarding Q4 and early 2013 we believe downside risks have increased in recent months.
There is an appreciable risk of temporarily “falling off the fiscal cliff”.
At the sametime,
core capital goods orders are decreasing, suggesting
potentially slower capex
.Moreover exports are stagnating while the inventory cycle is probably also turningnegative.
On the one hand, the Fed has initiated open-ended QE3 which, assuming the fiscal cliff isavoided, should help the economy expand by 2.0-2.5% in 2013 before accelerating in2014. On the other, even if most Bush administration tax cuts are extended and mostspending cuts under the “sequester” postponed,
we should still expect fiscal drag ofapproximately 1.5 percentage points in early 2013,
with, for example, the USD 126bnpayroll tax cut probably expiring around the turn of the year.
Mattias BruérSEB Economic Research
+46 8 763 85 06
Key data
Percentage change
2011 2012 2013 2014
GDP 1.8 2.2 2.1 2.6Unemployment 9.0 8.1 7.7 7.0Inflation 3.1 2.2 1.9 1.4Core inflation 1.7 2.1 1.8 1.3
Source: SEB

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