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Swedbank Analyses the Swedish and Baltic Economies
 
April 22, 2010April 22, 2010 1
Swedbank Economic Outlook
Glimmers of light in the tunnel
Global development
•Worldwidestimulusmeasuresandnancialsectorsupporthaveboostedcondence,andglobalgrowthstrengthens.However,thereboundisnotconvincingyetinmanyoftheindustrializedeconomies.•Weraiseourglobalgrowthoutlookto3.9%in2010and3.6%in2011.Theunwindingofthestimuluspackageswillbefeltprimarilyin2011.In
particular, Europe will lag behind, while the emerging markets will be the
mainengineofgrowthintheworld.
Sweden
•Economicactivityunexpectedlyfellbackinthelastquarterof2009,butstronglabourmarketdevelopmentsandpublicnancessuggestthattheeconomyhasreachedrmerground.•Welowerourrealgrowthforecaststo1.8%in2010and2.4%in2011.Despiteresilienthouseholdconsumption,externaldemandandinvestmentsareexpectedtolagbehind.Theeconomicpolicystancewillremainexpansive,howevernotsufciently,withthereporatereaching1.75%atend-2011.
Estonia
•Positivequarterlygrowthratesattheendof2009suggestthatthebottomofthedownturnhaspassed.Furthermore,dataindicatethattheMaastricht-criteriaforeuroadoptionhavebeenmet,andthatimprovestheprospectsofEstoniabecomingthe17thmemberofEMU.•Weexpectpositivegrowthratesof1.5%and4.5%in2010and2011,respectively.Exportswillinitiallydrivetherecovery,withdomestic
demand, boosted by increased foreign investments, taking over toward
theendoftheforecastperiod.
Latvia
•Theeconomicslowdownabatedattheendof2009,whiledomesticcostadjustmentcontinuedatfullspeed.Springof2010broughtsignsofstabilisationinthelabourmarket.•
The recession is likely to be over in early 2010 driven by export growth,
buttherecoverywillbebumpyandgrowthfragile.Weexpecttheeconomytocontractby2.5%in2010duetonegativecarry-overeffectsbeforeincreasingby4%in2011.
 
Fiscalconsolidationcontinuesas
planned, but “window of opportunities” to carry out structural reforms
mustbeusedmoreintensively.
 
Lithuania
•ThedeeprecessioninLithuaniawasmitigatedattheendof2009bystrongerthanexpectedexportperformance.Unemployment,however,continuedtoincreaseandwagesfell,dampeningdomesticdemand.•GDPisexpectedtofalloverallby2%in2010,withsteadyrecoverystartinginthesecondhalfoftheyear.In2011,weexpectrealgrowthtoreach3%.Exportswillrecover,whileprivateconsumptionwillimproveonlymodestly.Thescalsituationhasstabilizedbutremainschallenging.
Table of Content:
Introduction:Fromcrisis
to recovery – conditions for growth slowly improve 2
Global:Globalgrowth-butEuropeislaggingbehind4Sweden:Exportmarketsfalter-yethousholddemandpicksup6
 
Estonia:Economicprospects
improve 11
Latvia:Recessiontobeoverearlierthanexpected16Lithuania:Fiscalconsolidation
is rewarded 21
 
2
 
April 22, 2010Swedbank Economic Outlook
environment.Thedirectionoftradeisshiftingtowardsfaster-growing
emerging markets, but it takes timeto change the geographical structure
ofexports.Commongoalsfor
companies in our region to enhancecompetitiveness are increasedproductivity, lower costs, a productstructure in demand, and higher value added in production through
investmentsinR&D.Sweden’seconomyisalsocharac-
terized by polarization as exports
falteranddomesticdemandpicksup.Comparedwithlastyear’sfall,theeconomyisnowrecovering.Contrary
to what normally drives the economyin an upturn, households are the maingrowth engine, supported by a slowrecovery in the labour market and
stimulusmeasures.Astheeconomy
unexpectedly shrank in the last quarter 
of2009,negativecarry-overeffectswillcauseGDPduring2010togrowslower
than previously foreseen, and reach
1.8%incalendar-adjustedterms.Net
exports will contribute marginally togrowth, and support will instead comefrom private consumption and from
companiesstartingtorestock.Asindustrialcapacityisstilllow,invest-
ment growth will remain negative thisyear, but then slowly turn positive
during2011.Netexportswillthen
contribute negatively to growth as
importsincreasefasterthanexports.DomesticdemandwillpickupevenfurtherandGDPisexpectedtogrowby2.4%.Inationpressuresarelikelytobesubdued,andtheRiksbankcan
increase the policy rate slower than
previouslyforeseen.Attheendof2011,itwillhavereached1.75%.Also,eventhoughscalpolicywillremain
expansive, the general government
budgetdecitwillnotexceed2%ofGDP.
The Baltic countries have also reacheda phase of recovery after shrinking
bysome15-25%in2008-2009.The
overall sentiment towards the region
highlevels.GlobalGDPistherefore
foreseen as growing slower in 2011,
by3.6%.
The polarization between industrialcountries and emerging marketsregarding growth, is mirrored equally
inthedifferentprospectsforination.Capacityutilisationwillstaylowinmostindustrialcountries,andinationpressuresremainweak.Asscal
policy also becomes more restrictive,central banks are expected to move
theirpolicyratesupwardsonlyslowly.Intheemergingmarkets,meanwhile,
capacity is becoming more constrainedand price pressures are buildingup, including the effects from risingcommodity prices and large capital
inows.
 
ForEurope–Sweden’sandthe
Baltic countries’ most importantexport markets – there is a need
toimprovethescalsituationwhile
avoiding anaemic growth and strains
intheeurozonecooperation.The
European export market remain crucialto Swedish and Baltic companiesin volume terms, and therefore it isimportant not to lose market sharein this prevailing weak economicWorldwide stimulus measures and
nancialsectorsupporthaveboostedcondenceamonghouseholds,companies,andnancialmarkets.As
global growth strengthens, a recoveryin Sweden and the Baltic countries is
takinghold.Theconditionsforgrowth
have improved, but many challenges
remain,bothintheshort-andlong-termperspective.
The global economic environment hasbecome brighter, and during this year 
globalGDPissettogrowby3.9%due
to inventory adjustments, improved
condence,andlargestimulus
measures from central banks and
governments.Whilemanyemerging
markets are growing strongly, industrialcountries – especially the European
ones-arelaggingbehind.Theneed
to deleverage in the private and
nancialsectors,aswellasmounting
debts in the public sector with anaccompanying risk of increasing
nancialturbulence,isposinggreatchallenges.Alreadybynextyeara
number of countries will have raisedtaxes and lowered public expenditures,
thusweakeningdomesticdemand.
Labour markets will improve, butunemployment will still remain at
Introduction
Fromcrisistorecovery–conditionsforgrowth
slowly improve
Macro economic indicators, 2008- 2011
2008 2009
2010f2011f 
RealGDPgrowth,annualchangein%
Sweden (calender adjusted)
-0.5 -4.7 1.8 2.4
Estonia
-3.6 -14.1 1.5 4.5
Latvia
-4.6 -18.0 -2.5 4.0
Lithuania
2.8 -15.0 -2.0 3.0Unemploymentrate,%oflabourforce
Sweden
6.2 8.3 9.3 9.2
Estonia
5.5 13.8 14.0 11.5
Latvia
7.5 16.9 21.5 19.5
Lithuania
5.8 13.7 16.0 15.5Consumerpriceindex,annualchangein%
Sweden
3.4 -0.3 1.4 2.2
Estonia
10.4 -0.1 0.5 1.8
Latvia
15.4 3.5 -3.0 0.0
Lithuania
10.9 4.5 1.0 1.0Currentandcapitalaccountbalance,%ofGDP
Sweden (current account)
9.6 7.2 6.2 6.5
Estonia
-8.4 7.4 8.5 8.0
Latvia
-11.5 11.8 12.4 9.7
Lithuania
-10.1 7.2 4.2 3.0Sources:NationalstatisticsauthoritiesandSwedbank
 
April 22, 2010 3Swedbank Economic Outlook
Introduction
fromnancialmarkets,international
organisations, and rating institutes has
improved.Thepoliticalenvironment
in each country has supported theprocess of budget consolidation
anddeleveraging.Theprospects
of maintaining the exchange rates
xedtotheeurohavestrengthened,
and Estonia is expected to join the
eurozonein2011.Theobjectives
of Latvia and Lithuania are to follow
suitin2014.Withaglobalrecovery
and these countries’ adherence to
scalconsolidationandreforms,
the prospects for achieving these
objectiveswillimprove.
Estonia’s economy is expected to grow
by1.5%thisyear,and4.5%thenext.Initially,netexportswillcontributeto
growth, but slowly domestic demandwill take over as the growth engine, inparticular due to inventory adjustment
andEU-fundedinvestments.The
expected euro membership may also
enhanceforeigndirectinvestments.
Private consumption will remainsluggish but gradually pick up in 2011
inthelightofimprovedcondence,
lower unemployment, and slightly
higherwages.ThisimpliesashortdeationperiodinthecaseofEstonia,
and, with increasing labour costs,
thechallengeistocreatesufcient
competitiveness by enhancingproductivity so that the export sector 
developspositivelyalsoinalonger-termperspective.Fiscalpolicyis
expected to remain prudent, butincreasingly the government will need
toworkonlong-termissues,includingefciencyofthepublicsector,thetax
system, and the level of ambition for 
publicservices.
Latvia’s recession seems to be over,but the recovery is expected to be slow
andfragile.GDPwillstarttopickup,
but in annual terms it will shrink by
2.5%thisyearduetocarryovereffects.
Then, higher exports will graduallystrengthen investments and inventory
build-up,thusgeneratinggrowthof4%in2011.Competitivenesshas
increased as unit labour costs have
declinedbymorethan20%overthe
last year, and the adjustment is set
tocontinue,althoughmoreslowly.
The unemployment rate seems tohave peaked in April, but the decline
willbeslow.Thescalsituationis
developing according to plan, and the
budgetdecitwillsqueezeinbelowthetargetof8.5%ofGDPthisyear.Atotalconsolidationofsome7%ofGDPisstillnecessarytocutthedecittothe2012targetof3%ofGDP,inorderto
achieve the goal of euro adoption in
2014.
Lithuania’s recession became lessdeep during last year due to stronger 
exportgrowththanexpected.Going
forward, the carryover effects will result
inanegativegrowthrateof2%this
year despite quarterly improvements,but a more robust annual growth of 
3%willensuein2011.Netexports
will contribute positively to growthboth years, and gradually domesticdemand will strengthen as prospectsfor investments improve, mainly
duetoEUstructuralfunds.The
internal devaluation is set to continue
aswageswilldecreasefurther.Unemploymentwillstabiliseonahigh
level, thus encouraging a new wave
ofemigrationamongtheyoung.We
do not foresee any strong rebound of consumer spending during the forecast
period.Publicnanceshavebeen
stabilised, and the government hasagreed to a plan with the European
Commissiontoreachadecitof3%ofGDPin2012.Asthedecitisseenat8%thisyear,theroadtoeuroadoptionin2014isstilllong,butnotunachievable.Forecastrisksarebalancedasthe
possibilities of reaching higher growthin Sweden and the Baltic countriesare more or less equal to the risks
ofexperiencinglowergrowth.The
main areas of uncertainty include the
globalrecovery.Eveniftheriskfor
a double dip has decreased, it has
nottotallydisappeared.Commodity
prices, exchange rates, interest rates,and equity prices are just a few of the
factorsthatcouldinuencegrowthandinationprospectsinourhomemarkets.Domestically,risksare
geared towards the labour market
andthescalsituation,aswellas
balance sheets of households and
companies.Therisksseenapartdo
not seem serious as such, but together they could change the forecast
substantially.Remainingchallengesinourregionaremany,notleastinthemedium-andlong-termperspective.Globalisation
is continuing, increasing competitionand at the same time providing new
growthopportunities.Demographywill
lead to a decrease in labour supply,putting pressures on the welfare
systems.Sweden’spotentialgrowthratewillbedifculttomaintain,unless
productivity is enhanced by structural
reforms.TheBalticcountriesmust
work hard on the reform agenda tocontinue their convergence with the
restoftheEU,asthenancialcrisisandrecessionhaveslowedgrowth.In
particular, investments must again beable to strengthen without dependence
onEUstructuralfunds.Avoidingtaxevasionintheregionisanotherissue.Developingataxsystemthatisbothefcientandeffectiveismuchneededtoensurethatpublicnancesbecome
sustainable and are in line with welfare
goals.CeciliaHermansson
Export volumes (change in %)
-20-15-10-5
0
5
10
15
SwedenEstoniaLatviaLithuania
2008 2009
20102011
Sources:NationalstatisticsauthoritiesandSwedbank.
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