Swedbank Economic Outlook
April 7, 2011 1Swedbank Analyses the Swedish and Baltic Economies April 7, 2011
A more balanced growth going forward
Global development
The global recovery is on despite Japan’s disaster, the Middle East’spolitical turmoil, and the euro zone’s debt crisis. Global GDP increasedby 4.7% last year and will settle in at 4% this year and next as economicpolicies tighten.
A backlash can still happen. Important challenges are rising commodityprices, overheated emerging markets, unsustainable sovereign debts,and fragile banks in many advanced countries, causing
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nancial instabilityand new recessions.Sweden
The Swedish economy responded vigorously to the stabilising globalconditions and growth reached 5.3% last year, amongst the highest in theadvanced economies. In particular, employment picked up strongly but alarge number of unemployed are having dif
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culties
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nding jobs.
We expect investments to be the main driver of growth in 2011 and 2012,while household consumption is set to fall back as prices and interestrates are rising. Real economic growth is projected at 4% in 2011 and2.6% in 2012. Monetary and
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scal policy will continue to provide support,although the Riksbank is gradually reversing its stance. The maineconomic policy challenge remains the labour market.Estonia
In 2010, the Estonian economy grew by 3.1%, driven mainly by exports.Towards the end of the year, domestic demand started contributing, andboth investments and private consumption showed positive annual growthrates in the fourth quarter. The successful euro adoption and strong
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scalposition added to the positive picture.
In 2011 and 2012, we expect the Estonian economy to grow by 4.5%.Domestic demand will gradually replace exports as the main source ofgrowth, with investments as the main factor. Private consumption willrecover only slowly due to modest wage developments, increasing prices,and lingering unemployment.Latvia
The recovery in Latvia has continued to strengthen and widen. By the endof 2010, GDP had grown by 3.7% since the trough in the autumn of 2009.Economic growth and a more stable
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scal situation have helped raiseLatvia’s sovereign credit ratings.
Somewhat disappointing post-election
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scal and structural policies willweigh down on growth, as higher taxes are undermining private spending.We still expect 4% economic growth in 2011 but are lowering the forecastfor 2012 to 3.9% (4.2% before). Export growth is expected to slow due tocapacity constraints, but investments will pick up.Lithuania
Recovery accelerated in the
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nal quarter of 2010, when GDP grewannually by 4.6% and boosted last year’s growth to 1.3%. Overall in 2010,only inventories had a positive impact on growth, but in the last quarterboth investments and household consumption gave support.
We expect this pace to continue this year and in 2012, and raise our GDPforecast to 4.2% and 4.7%, respectively. Recovery will be much morebalanced as investments and household consumption will continue tocontribute to growth. Due to global developments, in
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ation will be higher, jeopardising EMU entry. Budget consolidation is also a challenge.
Table of Content:
Introduction: The recoverytakes hold – but headwindsare picking up 2Global: In
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ation and sovereigndebt endanger the globalrecovery 4Sweden: Households shift to alower gear 6 Estonia: Recovering domesticdemand supports economicgrowth 11Latvia: Stronger recovery, butlack of reforms cuts into futuregrowth 15Lithuania: Growth acceleratesand it’s more balanced 19
Swedbank Economic OutlookApril 7, 2011 2
supportive of growth in Sweden andthe Baltics, the headwinds facingthe global economy are building up.The higher commodity prices riskcreating both higher in
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ation andnegative growth prospects. In theemerging markets, overheating riskswill increase, and, in certain advancedeconomies, policy rates may beraised earlier than expected, despitethe negative growth impact from the
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scal side. The sovereign debt crisisin the advanced countries is causinguncertainties with regard to growth, thebanking sector, and political stability.Portugal is the third euro countryrequesting a rescue package, whileSpain is likely to make it through thecrisis without external support. Therisk of an unorderly restructuringof Greek and Irish sovereign debtshould also not be neglected. Theeuro zone is, despite problems withcrisis management, struggling toimprove the debt situation, while theUS is not. If the US postpones its moreambitious plans for medium-term
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scalconsolidation much longer, there wouldbe risks for worldwide
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nancial marketturbulence and new recessions.We have assumed that the EuropeanCentral Bank (ECB) will start hikingpolicy interest rates this spring, whilethe Bank of England (BOE) will waituntil autumn. These actions aresooner than in our previous forecast.The US Federal Reserve is stillexpected to wait to make monetarypolicy less expansionary until nextyear, but already this summer it willend quantitative easing (QE2) withoutputting in place any new easing. Thedollar will strengthen vis-à-vis theeuro. The Bank of Japan (BOJ) willnot change its policy rates during theforecast period, and will try to weakenthe yen.The risks facing Sweden and the Balticcountries are mainly related to globaldevelopments. Domestic risks includepolitical developments, the reformprocess, the labour markets, andUS$8 to US$98 for next year. Thismeans higher in
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ation and interestrates in many countries. While thedemocratization process in the MiddleEast has recently contributed to thehigher oil price, the global recoveryand the expansionary monetary policyare other important factors explainingthe upturn.In 2011 and 2012, the “two-speedworld economy” continues, withglobal growth of 4% both years. Thisis a slight upward revision due to thefaster recovery last year. Emergingmarkets will continue to make up themajor share of global growth, whileadvanced countries still struggle withstructural problems involving labour,credits, and housing. Fiscal austeritywill slow demand growth, especially inEurope, while the US and Japaneseconsolidation plans have beenpostponed. In Japan, the combinedeffect of the earthquake, the tsunami,and nuclear power accident explainsthe change in the government’s
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scal position. The disaster will slowgrowth this year, but increase it nextyear as reconstruction speeds up.Although Japan will be severely hit bythe disaster, the effects on the globaloutlook will most likely be only mildlynegative.Even if external demand is stillSweden and the Baltic countriesbene
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ted from strong global tailwindsduring last year, and the recoveryhas gained momentum, resulting inGDP growth of some 4-4.5% in allfour countries this year. As stimulifrom economic policy worldwide areabating, growth in external demand isslowing. Still, exports remain importantfor growth, not least as it spursinvestments and employment.Headwinds, however, are pickingup due to higher commodity prices,which increase in
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ation and interestrates. While households will becomemore supportive of growth in the Balticcountries although in
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ation holdsback developments somewhat, theirimportance will decline in Sweden ashigher costs for energy and mortgageswill slow consumption. GDP growth inthe Baltic countries will stay at around4-4.5 % or rise slightly in 2012, whileSweden’s growth declines to 2.6%,which is still above trend growth.Since our January forecast, globalrecovery has continued. Last year’sglobal GDP is seen to have beensomewhat stronger than expectedat 4.7% (4.6% in January). Mostimportant, commodity prices haverisen further, and our assumptionregarding the oil price has been raisedUS$20 to US$105 for 2011, and by
Introduction
The recovery takes hold – but headwinds arepicking up
Macro economic indicators, 2009- 2012
200920102011f2012fReal GDP growth, annual change in %Sweden (calender adjusted)-5.35.34.02.6Estonia-13.93.14.54.5Latvia-18.0-0.34.03.9Lithuania-14.71.34.24.7Unemployment rate, % of labour forceSweden8.38.47.37.0Estonia13.816.913.512.7Latvia16.918.715.513.9Lithuania13.717.815.513.5Consumer price index, annual change in %Sweden-0.31.33.42.0Estonia-0.13.03.83.2Latvia3.5-1.14.22.6Lithuania4.51.33.22.5Current account, % of GDPSweden 6.95.96.05.7Estonia7.36.85.74.9Latvia8.63.60.0-2.5Lithuania4.31.8-1.0-1.7Sources: National statistics authorities and Swedbank.
Swedbank Economic OutlookApril 7, 2011 3Introduction
capacity constraints. Households faceheadwinds as their expenditures forenergy, food, and mortgages rise. Debtlevels in the public sector, especiallyin Estonia, are lower than elsewhere,while the private sector deleveraginghas further to go. The Nordic-Balticeconomic climate is positive, followinga more resolute management of thecrisis than in many other countries,and there is a commitment to buildinstitutions that can make theseeconomies – as small, open, andvulnerable to outside risks – moreresilient to global turbulence.After an increase of 5.3% last year,Sweden’s GDP is now set to growby 4 % in 2011 (3.3% in our Januaryforecast) and 2.6% in 2012 (2.5 %).The stronger outlook is mainly dueto an upward revision of investmentsand exports; household consumptionis expected to grow slower due tohigher in
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ation and, this year, a fasterrise in interest rates. The Riksbank isseen as hiking policy rates to 2.50 %(2.25%) at the end of 2011, but we stillexpect the rate at the end of 2012 tobe 3%. As the ECB will start raisingits policy rates earlier than expected,the Swedish krona is no longerexpected to strengthen. Fiscal policywill continue to support growth as thegovernment plans new tax reductions.With the help of privatisations andeconomic growth, the debt ratio willfall to some 35 % of GDP. The mainchallenge for the government is thelingering high unemployment. Despitethe positive growth outlook, we foreseethat unemployment will average 7.0%next year – only a minor reductioncompared with this year.Estonia’s economy picked up moremarkedly at the end of last year, withbusiness investment as the maindriving force. Last year’s growth ratereached 3.1% (2.8% in our Januaryforecast), and the economy is set togrow by 4.5% both in 2011 and 2012,which is an upward revision of 0.3percentage point for this year. Exportssupport growth, and, increasingly,domestic demand will take over,although household consumption willremain modest. Higher in
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ation – of3.8% this year and 3.2% next year – may also dampen the outlook forprivate consumption, although fallingunemployment will counteract thistrend somewhat. Already last year, thegovernment attained a
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scal surplusdue to the higher economic growth.The successful adoption of the eurois also contributing to the positivesentiment towards the Estonianeconomy. Apart from global risks,the main risk is the labour market,especially the combination of highunemployment and increasing labourshortages in certain sectors.The Latvian economy hasstrengthened, and the recoveryis broadening. By the end of lastyear, GDP had grown by 3.7%since the trough in the third quarterof 2009. Exports have increased,and inventories have been rebuilt.Recently, private consumptionand investments have started tosupport growth. The recovery andthe stabilising
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scal situation havealso raised Latvia’s sovereign creditrating. During 2011 and 2012, GDP isexpected to grow by 4.0 % and 3.9%,respectively. This is a slight downwardrevision for next year as higherin
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ation and taxes are putting pressureon households, and the governmenthas slowed in its progress withstructural reforms. There is a greatneed for reforms, as the labour marketis still struggling with sluggish jobcreation. The opportunity to introducethe euro in 2014 remains, but agrowing risk is the in
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ation outlook,which requires government action tocontain price growth. An upside risk inour forecast is that investments mayincrease faster than expected, as thecapacity ceiling in many sectors hasmore or less been reached.GDP growth in Lithuania for 2010exceeded our expectations andreached 1.3 %. Hence, and asdomestic demand is strengthening, ourforecast for 2011 has been revised to4.2 (3.0%). In 2012, we expect GDPto grow by 4.7 % (4.5 %). Our in
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ationforecast has been revised upwards asinternational commodity prices haveincreased, adding to growth risks.An internal risk is the parliamentaryelections in 2012, which may generatemore growth-restricting propositions.At the forefront is still the goal ofintroducing the euro in 2014, and thereis a policy dilemma of balancing lowerin
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ation with budget consolidation. TheLithuanian economy is moving in theright direction, as the
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scal position isstrengthening and growth is becomingmore balanced. However, challengesremain, and the reform agenda willneed to be kept alive.Global developments createopportunities for, and challenges to,Sweden and the Baltic countries.Export sectors are bene
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ting fromhigher growth, but, at the sametime, competition is increasing. Itis therefore important to continuesupporting adaptation to the changingenvironment, and to enhance theemployability and competence of thelabour force, in order to strengthencompetitiveness.
Cecilia Hermansson
-5.00.05.010.015.020.0Jan-07Sep-07May-08Jan-09Sep-09May-10Jan-11
Inflation (annual growth in %)
EstoniaLithuaniaLatviaSweden
Source: Reuters Ecowin
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Swedbank Economic Outlook April 2011
Swedbank analyses theSwedish and Baltic Economies.
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