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Swedbank Economic Outlook, January 16, 2013

Swedbank Economic Outlook, January 16, 2013

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Published by Swedbank AB (publ)
Swedbank Economic Outlook, January 16, 2013: The worst is behind us – but challenges remain
Swedbank Economic Outlook, January 16, 2013: The worst is behind us – but challenges remain

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Published by: Swedbank AB (publ) on Jan 16, 2013
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Swedbank Economic Outlook
January 16, 2013 1Swedbank Analyses the Swedish and Baltic Economies January 16, 2013
The worst is behind us – but challenges remain
Global development
The global economy cooled in the second half of 2012, but developmentshave been mixed. While growth is picking up in the US and China, Japanand the euro area are in recessions. We expect global GDP to grow by3.1 % in 2013, and by 3.4% in 2014, a slight downward revision.
Our “muddling-through” scenario is the new normal. The probability of itsbeing realised is up from 60% to 65%. Downside (20%) and upside (15%)risks are now more balanced and relate to the policy agenda. Both in the US
and in Europe, politicians are irting with disaster, but, if managed well, con
dence amongst households, companies, and nancial markets could rise
and support growth.Sweden
Following three quarters of relatively strong growth, the Swedish economyappears to have slowed sharply in the closing quarter of 2012, due to acombination of weaker external demand and increasing gloominess amongsthouseholds and companies.
The recovery will be slow in the early part of 2013 and thereafter pick up onthe back of more expansionary economic policies, stabilising external mar-kets, and a renewed willingness to spend on behalf of consumers. Growthis forecast at 1.1% in 2013 and 2.6% in 2014. Combatting rising unemploy-ment will be the main policy challenge ahead of elections in 2014.Estonia
Economic growth slowed substantially in 2012 but remained the highest in
the euro area. Increasing investment activity based on EU-nanced infra
-structure projects was the main growth driver.
Due to fragile external demand conditions in Nordic countries, export per-
formance will remain weak over the rst half of 2013. In addition, state-nanced investments are expected to be somewhat smaller than in 2012. As
a result, we are lowering the GDP growth forecast for 2013 to 3.1%. Growthis expected to pick up to 4.5% in 2014.Latvia
GDP rose by 5.6% in the rst nine months of 2012. Exports and household
spending have remained strong, while investment growth has dipped. The
improved scal stance and better chances to adopt the euro in 2014 have
led to higher sovereign ratings and cheaper government borrowing.
We expect growth to slow from 5.4% last year to 4.1% in 2013 due to weakexternal demand and tougher competition in export markets. Growth is antic-ipated to pick up to 5% in 2014, when the personal income tax is cut further,global conditions improve, and Latvia joins the euro area.Lithuania
The economy expanded in line with our forecast in 2012, and householdconsumption and exports surprised on the upside, but investments grew
slower than expected. Average annual ination decreased to 3.1% but was
slightly above our forecast. Lithuania did not formally apply to join the EMU.
We have lowered our GDP growth forecast for 2013 and 2014 to 4.0% inboth years, mainly due to a weaker outlook for main export markets and
domestic policy uncertainty. The budget decit is expected to decline further,but ination will remain the main obstacle to joining the euro area.
Table of Content:
Introduction: Hit by the weakglobal economy – but set for stronger upturn 2Global: Wanted! A clear turnaround in 2013! 4Sweden: Decent recoveryafter blow to growth 7 Estonia: Domestic economysafeguards growth 12Latvia: Resilient exports buildbase for growth 16Lithuania: Investments willdrive growth, but economicpolicy is key 20
Swedbank Economic OutlookJanuary 16, 2013 2
cial market turbulence, and a negativespiral of deleveraging, depression, and
deation. Moreover, continuing political
gridlock in the US would reduce growthmore than envisaged, and tensions be-tween China and Japan, as well in theMiddle East, could put the global econ-omy at risk.Sweden showed a quarterly growth of 
0.5-0.7% in the rst three quarters in
2012, but GDP is now estimated to haveshrunk by 0.6% in the fourth quarter; itis expected to stabilise in the begin-ning of this year. Factors contributing tothe Swedish economy’s putting on thebrakes are faltering external demandand weaker domestic activity. Thestrong krona and increasing unit labour costs are adding to the challenges. Asproduction levels fall, companies adjustemployment, and thus we foresee un-employment increasing until late 2013before falling only marginally in 2014,
to 8.2% on average. Public nances
remain relatively robust, but a lower growth forecast for 2013 and additional
spending initiatives will raise the de
-cit to just above 1% of GDP this year and next. We foresee public spendingat SEK 5-10 billion, additional to thealready budgeted increase of SEK 23billion, for 2013, and another SEK 25billion for 2014, which is an electionyear. This also means a smaller chanceof reaching the 1% surplus target over the business cycle. Monetary policy willcontinue to be expansionary, and thekrona will remain at the current stronglevel. We foresee an additional inter-est rate cut during the spring of 2013.Despite high unemployment and con-sumer price pressures being well below
the ination target, the policy interest
rate is seen as rising in early 2014. Themain reason would be the concerns of the household debt level among theRiksbank’s Executive Board members.Estonia’s GDP is estimated to havegrown by 3.0% in 2012, slightly higher than our forecast in October. Increas-ing investment activity was the maingrowth driver, while exports weakenedGlobal growth will still perform belowits potential. Fiscal and credit austerityremains a constraint, especially in Eu-rope, but also to some extent in the US.The negative effects on growth fromdeleveraging and budget consolidationcannot be compensated for by expan-sionary monetary policy and structuralreforms in the advanced economies.However, the stimulus implemented inemerging markets should support glo-bal activity, and the growth momentumin these countries is already stronger.Emerging markets – now representingmore than half of the global economy – will make up 80% of global growthin 2013, a share we foresee falling to72% in 2014 as advanced economiesstrengthen somewhat.We see a higher probability for our mainscenario at 65%, compared with 60% inOctober, since the “fat tails” in the euroarea began to decrease when institu-tional reforms gained strength. We areraising upward risks to 15% (from 5%)and lowering downward risks from 35%to 20%. Amongst the upward risks, we
see higher condence, as policy chal
-lenges are addressed and stimulusprogrammes in emerging markets givea more positive impact. Amongst thedownward risks, we see increased tur-bulence in the euro area, as problemsin Spain and Italy worsen again with
widening interest rate spreads, nan
-Sweden and the Baltic countries onaverage performed better in 2012 thanenvisaged in our October forecast.Growth is estimated at around 3% inEstonia and Lithuania, and to havereached almost 5.5% in Latvia and justabove 1% in Sweden. Our estimationfor the fourth quarter of last year, how-ever, is that growth slowed in the Balticcountries and that the GDP level fell inSweden.Except in Latvia, GDP growth has beenrevised down for 2013. GDP will con-tinue to grow by just above 3% in Esto-nia and just above 1% in Sweden, whilereaching 4% or slightly above in Latviaand Lithuania. We see somewhat lower growth in the global economy as well.Prospects look somewhat better in theUS and in China, while recessions stillprevail in the euro area and Japan.Towards summer, we expect activityto start to grow slowly also in the euroarea, thus strengthening external de-mand for Swedish and Baltic compa-nies’ products.In 2014, therefore, when the globaleconomy is expected to grow by 3.4%in our main “muddling-through” sce-nario, growth is foreseen to reach justabove 2.5% in Sweden, and 4-5% inthe Baltic countries – relatively strongupturn compared with many other Eu-ropean countries.
Hit by the weak global economy – but set for stronger upturn
Macro economic indicators, 2011- 2014
20112012e2013f2014Real GDP growth, annual change in %Sweden (calender adjusted) rate, % of labour forceSweden7. price index, annual change in %Sweden3. account, % of GDPSweden7. National statistics authorities and Swedbank.
Swedbank Economic OutlookJanuary 16, 2013 3Introduction
markedly; this also had a negative im-pact on external balances. In 2013,domestic demand will again be themain supporter of growth. Since state-
nanced investment will cool somewhat
and companies remain cautious aboutinvesting in the subdued external cli-mate, our GDP forecast for next year has been lowered to 3.1%, from 3.7%in October. In 2014, we project GDPgrowth to reach 4.5% as external de-mand improves. In early 2013, privateconsumption will slow as risk aversion
picks up and ination rises, mainly due
to higher electricity prices; however, itwill strengthen thereafter in line withlower unemployment and decreas-ing consumer price pressures. Wagegrowth has so far been subdued, but,due to labour supply constraints, itcould increase faster than productivitygrowth and thereby hurt competitive-
ness. Public nances remain solid, and
the external debt burden continues toease.We estimate that, after growing by5.5% in 2011, Latvia’s GDP increasedby 5.4% in 2012. Surprisingly strongexports despite weakening growth of trading partners, and decreased importpropensity contributed to higher net ex-ports. Employment has strengthened,and unemployment has continued
to decrease; also ination has come
down, supporting a somewhat stronger growth in private consumption than en-visaged. We expect GDP growth to coolto 4.1% in 2013, still stronger than ex-pected in October, due to a larger carryover from 2012. Supported by strong-er external demand, local labour tax
cuts, and higher condence amongst
households and companies, growth isexpected to pick up and reach 5.0% in
2014. Improved scal balances – andgood chances of fullling the Maastricht
criteria and introducing the euro in 2014 – have led to higher sovereign creditratings. Government bonds issued inDecember were thus issued at their historically lowest yield, making possi-ble an early repayment of the full IMFemergency loan. While forecast risksare mainly external, domestic risks canbe linked to capacity constraints and astalling of reforms.Lithuania’s estimated growth rate in2012, at 3.3%, is unchanged from our October forecast. However, while do-mestic demand seems to have beenweaker than projected, net exportscontributed positively to growth as ex-ports surprised on the upside. Invest-ments, especially, – including invento-ries – were hit by the dampened exter-nal climate, while private consumptionsurprised on the upside. Going forward,we have lowered our GDP forecastfor 2013 marginally to 4.0%, but moresubstantially for 2014, as it is seen toremain at 4.0% (4.5% in October). Themain reasons for lower forecast aremore cautious investment and recruit-ment by companies, as external con-cerns carry over into domestic concernsabout stagnating reforms and policy un-certainty. Thus, unemployment will notfall below 10% in 2014, as earlier en-
visaged. While public nances are im
proving and the decit continues to fall
towards 2% of GDP – which would sup-port European Monetary Union (EMU)
membership – the ination outlook is
more uncertain, as electricity prices aswell as the minimum wage will rise. Inany event, Lithuania has not formallyapplied for EMU membership. Unlessthe Lithuanian government sets a clear accession date and applies measuresto guard price stability, membershipmay have to be postponed until 2017or later.Sweden and the Baltic countries willcontinue to grow despite the weaker global economic climate, but growth willbe below potential, and structural ef-fects on the economies will be stronger,especially in the manufacturing sector.In these circumstances, to implementreforms that create better fundamentalsfor growth is the best our countries cando. Even if the investment climate hascooled, this may be exactly the righttime to invest – both in the private andpublic sectors.
Cecilia Hermansson
Interest rates, 2-year government bonds (percent)
Source:Reuters EcoWin-25-20-15-10-50510152025200620072008200920102011201220132014
Export growth (annual real change in percent)
Sources:Nationalstatistics authorities

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