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Swedbank Economic Outlook April 2011
Swedbank Economic Outlook April 2011
April 7, 2011 1
Introduction Swedbank Economic Outlook
April 7, 2011 2
Introduction Swedbank Economic Outlook
capacity constraints. Households face compared with this year. expected to grow by 4.0 % and 3.9%,
headwinds as their expenditures for respectively. This is a slight downward
Estonia’s economy picked up more
energy, food, and mortgages rise. Debt revision for next year as higher
markedly at the end of last year, with
levels in the public sector, especially inflation and taxes are putting pressure
business investment as the main
in Estonia, are lower than elsewhere, on households, and the government
driving force. Last year’s growth rate
while the private sector deleveraging has slowed in its progress with
reached 3.1% (2.8% in our January
has further to go. The Nordic-Baltic structural reforms. There is a great
forecast), and the economy is set to
economic climate is positive, following need for reforms, as the labour market
grow by 4.5% both in 2011 and 2012,
a more resolute management of the is still struggling with sluggish job
which is an upward revision of 0.3
crisis than in many other countries, creation. The opportunity to introduce
percentage point for this year. Exports
and there is a commitment to build the euro in 2014 remains, but a
support growth, and, increasingly,
institutions that can make these growing risk is the inflation outlook,
domestic demand will take over,
economies – as small, open, and which requires government action to
although household consumption will
vulnerable to outside risks – more contain price growth. An upside risk in
remain modest. Higher inflation – of
resilient to global turbulence. our forecast is that investments may
3.8% this year and 3.2% next year
increase faster than expected, as the
After an increase of 5.3% last year, – may also dampen the outlook for
capacity ceiling in many sectors has
Sweden’s GDP is now set to grow private consumption, although falling
more or less been reached.
by 4 % in 2011 (3.3% in our January unemployment will counteract this
forecast) and 2.6% in 2012 (2.5 %). trend somewhat. Already last year, the GDP growth in Lithuania for 2010
The stronger outlook is mainly due government attained a fiscal surplus exceeded our expectations and
to an upward revision of investments due to the higher economic growth. reached 1.3 %. Hence, and as
and exports; household consumption The successful adoption of the euro domestic demand is strengthening, our
is expected to grow slower due to is also contributing to the positive forecast for 2011 has been revised to
higher inflation and, this year, a faster sentiment towards the Estonian 4.2 (3.0%). In 2012, we expect GDP
rise in interest rates. The Riksbank is economy. Apart from global risks, to grow by 4.7 % (4.5 %). Our inflation
seen as hiking policy rates to 2.50 % the main risk is the labour market, forecast has been revised upwards as
(2.25%) at the end of 2011, but we still especially the combination of high international commodity prices have
expect the rate at the end of 2012 to unemployment and increasing labour increased, adding to growth risks.
be 3%. As the ECB will start raising shortages in certain sectors. An internal risk is the parliamentary
its policy rates earlier than expected, elections in 2012, which may generate
The Latvian economy has
the Swedish krona is no longer more growth-restricting propositions.
strengthened, and the recovery
expected to strengthen. Fiscal policy At the forefront is still the goal of
is broadening. By the end of last
will continue to support growth as the introducing the euro in 2014, and there
year, GDP had grown by 3.7%
government plans new tax reductions. is a policy dilemma of balancing lower
since the trough in the third quarter
With the help of privatisations and inflation with budget consolidation. The
of 2009. Exports have increased,
economic growth, the debt ratio will Lithuanian economy is moving in the
and inventories have been rebuilt.
fall to some 35 % of GDP. The main right direction, as the fiscal position is
Recently, private consumption
challenge for the government is the strengthening and growth is becoming
and investments have started to
lingering high unemployment. Despite more balanced. However, challenges
support growth. The recovery and
the positive growth outlook, we foresee remain, and the reform agenda will
the stabilising fiscal situation have
that unemployment will average 7.0% need to be kept alive.
also raised Latvia’s sovereign credit
next year – only a minor reduction
rating. During 2011 and 2012, GDP is Global developments create
opportunities for, and challenges to,
Sweden and the Baltic countries.
Inflation (annual growth in %)
20.0 Export sectors are benefiting from
higher growth, but, at the same
15.0 time, competition is increasing. It
Estonia
is therefore important to continue
Lithuania
10.0 Latvia
supporting adaptation to the changing
Sweden environment, and to enhance the
5.0 employability and competence of the
labour force, in order to strengthen
0.0 competitiveness.
Cecilia Hermansson
-5.0
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11
April 7, 2011 3
Global Swedbank Economic Outlook
April 7, 2011 4
Global Swedbank Economic Outlook
second half of last year will accelerate Interest and exchange rate assumptions
annual growth to 30% this year, and for Outcome Forecast
2012 we foresee an 8% increase. 5 Apr 30 Jun 31 Dec 30 jun 31 Dec
2011 2011 2011 2012 2012
All in all, headline inflation is therefore Policy rates
increasing in most parts of the world, Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50
but most noticeably in the emerging European Central Bank 1.00 1.25 1.75 2.25 2.50
markets. Bank of England 0.50 0.50 1.00 1.50 2.00
Bank of Japan 0.10 0.10 0.10 0.10 0.10
In advanced countries, one effect of
Exchange rates
higher inflation is that central banks will
EUR/USD 1.42 1.45 1.30 1.25 1.25
start hiking policy interest rates earlier RMB/USD 6.54 6.40 6.25 6.10 5.95
than we expected in our January USD/JPY 85 87 90 95 100
forecast. Second-hand effects from Sources: Reuters Ecowin and Swedbank projections.
higher inflation and wage expectations
are creating uncertainties and demand dollar will increase.
for hikes despite a low underlying price probability of 15%, and (2) a worsened
We expect that China will allow
pressure. sovereign debt crisis has a probability
the yuan to strengthen some 5%
In Europe, policy rates will be raised per year vis-à-vis the US dollar in of 15%; and two stronger ones, where
this year, while the US Federal nominal terms, but in real terms the (3) a rebalancing of growth between
Reserve waits till next year, and appreciation will be greater as labour China and the US speeds growth
Japan postpones hikes till after the costs increase faster in China going (5% probability) and (4) the risks of
forecast period. In addition, longer- forward. overheating are ignored, and more
term market rates will show an upward stimulus in both emerging markets and
In an uncertain world, our main advanced economies creates higher,
trend due to continued growth, higher
scenario presented above may not but more unsustainable growth (15%
inflation, and the sovereign debt
be realized due to certain risks for the probability).
crisis; the increasing competition for
world economy, such as the Japanese
capital arising from the Basel III bank At this juncture, it is important for
disaster, the democratization process
regulation is another contributing policymakers to search for the optimal
in the Middle East, and the debt crises
factor. economic policy. We emphasise the
in the euro zone and the US.
A stronger US and a weaker Europe importance of consolidating budgets
Therefore, we have created four and carrying out more ambitious stress
and Japan are creating a stronger US
alternative scenarios: two weaker tests in banks in order to break the
dollar over the forecast horizon, while
ones, where (1) stagflation with low vicious circle between the sovereign
the euro and the yen will weaken. Over
growth, high unemployment, and debt crisis and the continuing fragility
time, if passivity still permeates fiscal
high inflation comes through with a of the financial sector.
policy, the risk for a larger fall in the US
At the same time, central bankers
should not rush to hike interest rates,
as domestic demand will slow due to
Public gross debt 2012 (% of GDP)
fiscal austerity. Growth risks will most
Japan
likely outweigh inflation risks in Europe,
Greece
US, and Japan in the years to come.
Italy
Emerging markets, on the other hand,
Ireland
must put in more effort to restrain
US
Portugal
overheating.
France That is the name of the game in a
Euro zone “two-speed world economy”!
UK
Germany Cecilia Hermansson
Spain
Latvia
Finland
Denmark
Lithuania
Sweden
Estonia
April 7, 2011 5
Swedbank Economic Outlook
April 7, 2011 6
Sweden Swedbank Economic Outlook
projection from 6.8% to 7.6% for 2011, Export development and the Swedish krona
20 150
still above the long-term trend of about
6.5%. This is due mainly to the better 15 145
April 7, 2011 7
Sweden Swedbank Economic Outlook
where 40% of companies surveyed bargaining agreements for more than the economic downturn, and thus
claim to have difficulties in finding 1.5 million employees, in retail and were not counted as unemployed, will
qualified personnel. Furthermore, the local governments that will run out increase the need for job creation.
number of new vacancies and unfilled before May of next year. Also, the reduction in the number
positions increased throughout 2010 of people covered by the sickness
and is now back to the levels that We expect nominal wages to increase
benefit system will add to the number
prevailed prior to the crisis. However, somewhat faster in both 2011 and
of job seekers in the economy, as
the labour market gap, as measured 2012, by 2.8% and 3.3%, respectively.
will the reduction in the number of
by the number of employees in relation Productivity picked up in 2010 as
early retirees, in contrast to the early
to the long-term trend, still remains companies were able to increase
2000s, when approximately 65,000
substantial, in particular for the production by utilising idle labour. As
people per year (2003-06) entered
manufacturing sector. This reflects the new employees are hired, productivity
early retirement schemes. Finally, a
problem of matching jobs with qualified growth is set to slow in the coming
3 percentage point reduction of the
personnel in the Swedish labour years and be exceeded by nominal
unemployment rate from 8% to 5%,
market. wage growth, thus raising unit labour
excluding the underlying change to
costs. While productivity varies
Following the relatively low the labour force, will require in itself
significantly with the business cycle,
wage increases during the crisis, an additional 165,000 jobs. Thus, the
we do not expect the growth rate to
expectations are now building for main challenge for the government
reach previous years’ trend levels.
upward revisions during the coming will be to enhance the skills of those
For the medium term, investments
years. Many trade unions agreed currently unemployed, while providing
in technology and education will be
during the crisis to restrain wage the conditions for dynamic labour
necessary to provide a sustainable
development and, in the case of market development, which includes a
source of productivity and growth.
manufacturing, to reduce the number strengthening of the matching process.
of hours worked. This helped preserve Reducing the unemployment rate
Increasing vulnerabilities in
the competitiveness of production in in the medium term will also be a
household budgets
Sweden. However, starting this spring, significant challenge. We estimate that
both blue-collar and white-collar 335,000 new jobs must be created Although household consumption
workers in manufacturing will initiate between now and 2015 to bring the continued to grow at the end of last
wage negotiations. This will also set unemployment rate down to 5 %. In year, there were signs of a slowing
the benchmark for the collective- particular, the return of about 60,000 rate with real consumption growing by
people who left the labour force during 1 % in the fourth quarter, compared
with the 1.3% growth seen in the
Labour market indicators third quarter. Consumer durables
90 20
sales remained strong, while overall
80 18
16
turnover in the retail sector became
70
14
more subdued. It was, in particular,
60
12 cars sales that proved resilient, with
50
10 a growth rate of almost 40% in the
40 Lay-off
8 notifications (rs) fourth quarter of 2010. The pent-up
30
6 New vacancies demand from the sharp drop during
20 the financial crisis last year is being
4 Unfilled positions
10 2 saturated . Consumption of retail
0 0 goods continued to expand in the
Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10
fourth quarter, but growth turned
Sources: Riksbank and Public Employment Service.
April 7, 2011 8
Sweden Swedbank Economic Outlook
negative in the December- February employment and wage growth gives and commodities are temporary, these
period. a positive impulse, compared with our impulses could lead to a general
January forecast. However, growing increase in inflation if they lead to
Household nominal payroll picked
cost-of-living expenses for households, compensation both from companies,
up in 2010, but disposable income
in particular from debt servicing and in terms of maintained profit margins,
was held back by growing interest
higher inflation, together with a slowing and from employees, in the form of
costs, increasing tax payments and
momentum in purchases of consumer real wage adjustments. In March, the
flat transfers. As disposable income
durables, are dampening consumption 12-month inflation expectations of
grew by less than consumption,
growth compared with 2010. The households reached 3.1%.
households continued to draw down
growth of real disposable income is
on their savings, which fell to 10.8% The tightening of monetary policy by
expected to continue to rise in 2011,
of disposable income in 2010 from the Riksbank has contributed to a
before the growth rate dampens in
12.9% in 2009. In the first months of further appreciation of the Swedish
2012 to 1.6%. However, due to the
2011, inflation has exceeded wage krona. At the end of the first quarter
faster growth of consumption, the
increases, leading to falling real of 2011, the krona has reached the
household savings ratio will continue
wages, further straining household strongest level in trade-weighted terms
to decline.
budgets. In addition, mortgage rates at 120 since the year 2000. Besides
(three months) rose to almost 4% at Reducing inflation expectations higher Swedish short-term interest
the end of last year from 1.5% at the without curtailing growth rates, the appreciation of the krona
end of 2009. is also driven by strong economic
The Riksbank raised in its February
growth and solid public finances. We
The household debt level has meeting, as expected, the main policy
anticipate a further strengthening of
continued to rise, and the share of rate to 1.50 %. Also, the policy path
the krona in the first half of 2011 as
income spent on debt service has was revised upwards, according to
the Riksbank raises interest rates.
likely reached its low point. Debt as which the Riksbank expects the policy
In second half of 2011 and in 2012,
a share of disposable income rose to rate to marginally exceed 3% by the
when we foresee a tightening of
171% at end-2010, a record level and end of 2012.The main arguments
monetary policy in Europe and the
also high in international comparisons. for tightening monetary policy are
US, we expect the Swedish krona to
We expect household debt to continue the growing underlying inflationary
weaken somewhat in trade-weighted
to increase, although at a slower rate. pressures and increased resource
terms. The US dollar is expected to
However, as interest rates rise, interest utilisation. Indeed, headline inflation
strengthen more significantly against
payments as a share of disposable increased to 2.5% in February,
the euro as the US economy improves,
income will continue to grow, and the exceeding the Riksbank’s and most
while the krona is expected to be
liquidity situation of households will others’ expectations. It was mainly
stable against the euro during 2012
become more strained. Increasing energy and food prices that lead
as the Swedish economy continues
debt-service costs, compounded to the increase, but a revision of
to outperform the Eurozone, while the
by rising energy costs and elevated the methodology also contributed.
European Central Bank raises policy
inflation rates, are thus likely to Underlying inflationary pressures
rates faster than the Riksbank.
dampen consumer spending. (CPIF) grew by 1.3%.
We expect monetary policy rates to
We expect growth in private Rising inflation expectations are
be raised more rapidly during 2011
consumption to slow in real terms in emerging as a growing risk to
than we forecast in January, but also
2011 and 2012 to 2.8% and 1.9%, maintaining price stability. Although it
that the rate of policy rate hikes will
respectively. An improved labour can be argued that largely externally
slow in 2012. For the remainder of the
market outlook with continued strong induced price increases for energy
current year, we foresee an additional
four hikes, while in 2012 we expect the
Household savings and consumption (real change in %) Riksbank to raise rates only twice. The
8.0 14.0
immediate task of the Riksbank will
6.0 12.0 be to dampen inflation expectations,
Disposable
which would serve not only to reduce
10.0
4.0 income nominal demands in the upcoming
Consumption
8.0 wage negotiations, but also to limit
2.0
Savings ratio (% pressures to increase prices in retail.
6.0
of disp. income) However, as the demand pressure
0.0
4.0 will ease and unemployment rates
-2.0 2.0
remain relatively high, we expect
that the Riksbank will slow down the
-4.0 0.0
rate increases in 2012, and that the
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Sources: SCB and Swedbank projections.
April 7, 2011 9
Sweden Swedbank Economic Outlook
repurchase rate will reach 3.0% at the Interest rate and currency outlook
end of the year. Outcome Forecast
2011 2011 2011 2012 2012
Still a role for active fiscal policy 5 Apr 30 Jun 31 Dec 30 Jun 31 Dec
Government finances are improving
Interest rates (%)
rapidly, and the budget deficit is Policy rate 1.50 1.75 2.50 2.75 3.00
estimated to have been limited to 10-yr. gvt bond 3.28 3.30 3.30 3.40 3.50
0.3% of GDP in 2010. The actual Exchange rates
outcome was better than budgeted EUR/SEK 9.00 8.85 8.90 8.90 8.90
on the revenue and expenditures USD/SEK 6.32 6.10 6.85 7.12 7.12
sides. Central government tax TCW (SEK) 1/ 120.6 118.7 122.1 122.5 122.9
revenues exceeded the budget by Sources: Reuters Ecowin and Swedbank.
SEK 58 billion, mainly on account 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).
of value-added and capital gains
taxes. Spending came in lower by government coalition also intends in construction and in parts of the
an amount of approximately SEK 20 to further reduce public sector debt services sector risk a spillover into
billion. The main source of saving is from the already low level of 40.3% of increasing wage drift, which, in turn,
found in spending on labour market GDP in 2010. In early 2011, a stake could fuel rising inflation expectations.
programmes, following the better-than- in Nordea was sold, generating about These developments could mean that
expected labour market developments. SEK 20 billion. However, the recent monetary policy needs to be raised
blocking by a parliamentary majority of faster than otherwise would have
The relatively strong macroeconomic
the privatisation of four mainly state- been the case, in effect applying the
development expected over the next
owned companies will limit the inflow brakes to an economy that is being
couple of years provides room for
of capital; as a result, we believe that accelerated by fiscal policy. In order
further fiscal policy initiatives. The
overall privatisation revenues for 2011 to balance the structural reforms
government has indicated that, in
and 2012 will amount to SEK 40 billion. implied by the general lowering of
addition to the lowering of tax rates on
tax rates, which essentially spurs
pensions and on restaurant meals that We expect that, following two years
consumption, the government should
is already in the budget, it intends to of deficits, the public sector will reach
also consider lowering corporate
continue to pursue reductions of the surpluses of 0.4% in 2011 and 0.5% in
tax rates and capital gains taxes.
income tax, although there have been 2012. This will put the public sector on
This would stimulate an increase
disagreements within the government the track of meeting the medium-term
in private sector savings and
coalition as to how much the top rates surplus target over the business cycle.
provide financing for investments.
should be lowered. We expect that the In addition, the margin of spending
An additional benefit would be a
government will in the spring budget under the expenditure ceilings would
withdrawal of some stimulus through
bill propose additional spending of allow for further expenditure increases.
a corresponding stepwise lowering
about SEK 10 billion in 2011, primarily We expect public debt to continue to
of interest deductions on mortgages,
to strengthen the labour market and decline, falling to 35.2% of GDP in
which would also serve to reduce
to support education. For 2012, we 2012.
the pressure on the housing market.
expect the government to implement
The key challenge for fiscal policy However, the key role for fiscal policy
the fifth step in the reduction of
over the next two years will be in at this stage of the economic recovery
income taxes, as pledged during the
providing direct support in order to would be to improve the functioning
election campaign in 2010, at an
alleviate bottlenecks and structural of the labour market. By alleviating
estimated cost of SEK 15 billion. The
impediments. Labour shortages some of the structural impediments
to increased employment, through
Household debt burden improved matching and better skills
12.0 200
enhancement, the government would
simultaneously contribute to lowering
10.0 180
unemployment while reducing inflation
8.0 160
pressures stemming from labour
Debt (% of GDP, rs)
shortages and the increasing potential
6.0 140 for growth.
Interest expenditures
(% of disp. inc.)
4.0 120
Magnus Alvesson
2.0 100
Jörgen Kennemar
April 7, 2011 10
Swedbank Economic Outlook
April 7, 2011 11
Estonia Swedbank Economic Outlook
April 7, 2011 12
Estonia Swedbank Economic Outlook
April 7, 2011 13
Estonia Swedbank Economic Outlook
and other inputs have decreased. durables), as they were somewhat general government budget managed
However, this process is about to end influenced by the widespread talk of a to reach a surplus in 2010 (0.1%
(in 2009, labour costs did decrease post-euro price surge. of GDP). This above-expectations
on average 16%, and total costs improvement was partly supported
The currency changeover has had
decreased on average approximately by faster economic activity at the end
different effects on spending. On
19%, while in 2010 labour costs of the year, which, in turn, increased
the one hand, the uncertainty of the
decreased on average 6.2% and total tax revenues. At the same time, tight
changeover has reduced consumers’
costs grew by 7.5%). control over expenditures remained in
willingness to consume while they
place throughout the year. In addition,
We have raised slightly our inflation allow themselves to become more
Estonia has been very successful
expectations for this year as well comfortable with the new value
in the carbon credit market (AAU),
as for the next, to 3.8% and 3.2%, of exchange. On the other hand,
thereby adding about 1% of GDP in
accordingly. The impact of tax since consumers tend to look at
nontax revenues last year. However,
increases on inflation diminished last nominal values of prices, they might
it should be stressed that, as these
year and will fade away in the first half be tempted to consume more as
revenues will transfer into investment
of this year, thus leaving world price the prices on the price tags are
expenditures mostly in 2011 but also
movements as the main contributor considerably lower than they were
in 2012, the deficit will rise during this
to inflation developments. However, before. We assume, however, that
period; our forecasts point to deficits of
labour shortages risk becoming an households will cut back on their
-1.2% and -0.3% of GDP, respectively.
additional cost-push factor via wage consumption for several months at the
In addition, the goal of balancing the
increases, as companies will tend beginning of this year, spending mostly
budget will be constrained by the
to transfer their costs into consumer on necessities, while they take time
resumption of payments to pension
prices. to familiarise themselves with the new
pillars, which were temporarily
currency.
Private consumption set to suspended during the crisis.
increase, but remains weak Nevertheless, the continuing growth
The parliamentary elections held on
in prices will have a dampening
We are of the opinion that private 6 March showed continuing support
effect on the cautiously recovery in
consumption growth will stay at a low for the current coalition despite the
consumption. Many households feel
level at the beginning of this year and austerity measures introduced during
confident enough about the economy,
then gradually accelerate to 3.2% on the recession. The new coalition
as well as the labour market, to
average in 2011 and 4% in 2012. The (formed by the same two parties as
increase spending amidst rising
reasons for this forecast lay mostly the previous one) agreement includes
prices. At the same time, there are
in price and income developments, strict rules on future fiscal policies as
households (including the long-term
but also in deleveraging and the high the budget balance requirement will
unemployed and the discouraged) that
savings rate: accordingly, spending be added to the budget law.1 The tax
are still suffering under the conditions
will remain modest as consumers’ burden will be reduced through lower
brought on by the recession; these will
purchasing power grows at a slow labour taxes; however, major tax
be even more budget constrained and
pace. changes will not take effect until 2013
forced to cut their spending, especially
or later.
The growth in confidence, together because prices of most necessities
with the more positive trends in the have grown, wage growth will be
labour market, has encouraged modest, and inflation expectations
Annika Paabut
people to spend more. The currency continue to be high.
Elina Allikalt
changeover definitely has had an effect
Fiscal policy stability reached
as well – people used their remaining
kroons for consumption (especially According to preliminary estimates, the
60
40
Consumer confidence
20 Unemployment fears
Savings
0
Inflation 1 The budget balances in 2011 and 2012
-20 Major purchases will be exceptional as they are affected by
higher investment expenditure due to AAU
-40 trades. The new coalition agreement fore-
sees a balance or surplus being reached
-60 again in 2014 and beyond.
2007 2008 2009 2010 2011 Source: DG ECFIN.
April 7, 2011 14
Swedbank Economic Outlook
April 7, 2011 15
Latvia Swedbank Economic Outlook
April 7, 2011 16
Latvia Swedbank Economic Outlook
end. However, as expected, a rebound Despite an anticipated slowdown in have not yet incorporated the effect
in employment in the middle of the productivity growth, real wage growth of such a plan on our outlook, as it is
year lost momentum in the fourth is still expected to be broadly in line still unclear what particular measures
quarter of 2010. We are lowering our with productivity gains. As a result, could be included in it. The current,
job-seekers’ rate forecast for 2011- companies will avoid a deterioration in somewhat simplistic, suggestions
2012 based on the better situation competitiveness. include agreements with social
in 2010, but we are not altering our partners to contain wage growth.
Inflation driven by taxes and
employment forecast. Job creation We believe that there are two other
commodity price growth
will remain slow, and the more rapid broad areas where action should be
decrease in unemployment will not Taking into account the stronger-than- undertaken.
support economic growth more than expected global commodity price
First, inflation inertia should be
was projected in our previous forecast, growth and the additional tax rises
reduced, including improvements
as it will be due to emigration and a planned for July of this year1, we are
in competition – for instance, by
lower participation rate. raising our average consumer price
strengthening the Competition Council,
index (CPI) inflation forecast for 2011
There are both positive and negative by making the price-setting mechanism
to 4.2%. This is mostly supply-side
risks to our labour market forecast. On more transparent, by expanding the
inflation, owing to increasing costs
the one hand, several large investment voucher system in the public sector
of businesses. Producer prices for
projects may boost employment. to improve cost efficiency and quality,
locally sold production were steadily
On the other hand, there is a risk and by making public procurements
rising during 2010, implying upward
of larger emigration (not least as more transparent. Second, energy
pressures also for consumer prices.
Germany, Austria, and Switzerland efficiency should be improved to hold
The rising inflation aggravates social
will open their labour markets in May back an increase in public utilities’
problems (as first-necessity items
2011). The population census begun tariffs. Furthermore, taxes that
become more expensive, hitting poorer
in March 2011 is likely to reveal a directly hit CPI (like value added or
households harder) and poses risks to
smaller population and labour supply excise tax) must not be raised before
competitiveness.
than current figures suggest, and thus the euro entry. Social agreements
possibly also a smaller number of With private consumption recovering between the government and social
employed and unemployed. slowly and inflation expectations partners are possible, but for this clear
strengthening, we do not expect communication is necessary about
Increased productivity provides
a rapid decrease in inflation rates how the budget consolidation is done,
grounds for wage growth, especially
in 2012. We forecast average CPI about which reforms are pursued,
in manufacturing, where productivity
inflation of 2.6% in 2012, which as well as how and when they are
now exceeds the real wage level by
implies a 12-month average inflation implemented. The government should
over 10% (using 2005 as a reference
rate exceeding 2% at the beginning then follow the agreement strictly to
year). Structural imbalances in the
of 2013. Unless action to hold build trust in its policy.
labour market (like skills mismatches)
back inflation is undertaken by
make wage growth possible despite Sluggish household
the government, there is a risk of
high unemployment. We forecast consumption growth
exceeding the Maastricht inflation
nominal wages to grow, mostly on the
criterion for introducing the euro in The disappointing post-election fiscal
resumption of bonus schemes in 2011,
2014. The Minister of Finance recently policy (see below) is forecast to
as well as on an increase in the official
announced a need to create a plan for undermine economic growth through
minimum wage at the beginning of this
reducing inflation some time soon. We smaller household consumption.
year. Inflation will nearly eliminate the
Higher taxes in the middle of this
gain in purchasing power, however. 1 For example, higher value added tax for
year and inflation due to global
natural gas, excise for fuel and natural gas.
factors are expected to reduce the
Employment, productivity and wages, %
average quarterly growth of household
30 60 consumption in 2011, although annual
growth stays the same. Due to a
20 40
Change in statistical overhang, the more modest
employment, thsd (rs) quarterly growth of consumption in
10 20
FTE* productivity, yoy 2011 will be reflected in a lower annual
0 0 figure for 2012, even though the same
Real gross wage, yoy
quarterly dynamics will be in play as in
-10 -20
our January forecast.
-20 -40
* FTE - employment in The increase in employment and
full-time equivalent
-30 -60
wages will support consumption;
1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBL. however, improvements are expected
April 7, 2011 17
Latvia Swedbank Economic Outlook
April 7, 2011 18
Swedbank Economic Outlook
April 7, 2011 19
Lithuania Swedbank Economic Outlook
April 7, 2011 20
Lithuania Swedbank Economic Outlook
1.6% this year and accelerate to 2.0% another, albeit not popular, alternative. higher housing costs), as well as by
growth in 2012. The high structural higher food, gas, and fuel prices.
Household consumption is Retail trade confidence was positive
unemployment implies slower job
recovering beginning in the middle of last year,
creation, but, due to increasing
investments and labour productivity, We revised upwards the forecast but unexpectedly plunged in January.
its impact on potential GDP growth of household consumption growth, The main reason behind this drop
will remain muted. Some sectors (e.g., which is expected to increase by 2.5% was the unfulfilled expectations of
transportation and manufacturing) are this year and 4.5% in 2012. The real retailers about holiday-season sales
already signalling their lack of labour growth of the wage bill this year is and possible overstocking. This will
force, some of which emigrated during expected to increase by only 1.6%, have some temporary negative effects
the severe contraction of 2009. i.e., not enough to justify consumption on first quarter growth, but they
growth. However, negative real interest are expected to be temporary. The
Another reason behind the persistence planned increase of pensions in 2012
rates may discourage savings this
of unemployment is the high will additionally boost confidence and
year and, together with decreasing
unemployment trap,1 which, according partially offset the negative effects of
unemployment, will prompt the
to the latest available data, increased higher inflation.
allocation of a larger fraction of
to 86% and is well above the EU
disposable income to consumption. The main growth in household
average of around 75%. Due to low
A shift in this perception is already consumption will be in nonnecessities,
minimal and average net wages,
evident in the changing structure of as well as durable and leisure goods.
which sometimes are very close to
household deposits – more than 45% This trend is already visible now –
or below unemployment benefits,
of all household deposits are held in in the first two months of 2011, the
some unemployed have opted
their current accounts, compared with annual retail growth rate reached
out of official employment and are
36% during the height of the crisis, and 18.7% – the fastest growth rate since
participating in the unofficial labour
55% during booming years. early 2008; even retail trade, except for
market. Liberalising the labour market
could help solve at least some of In 2009, the gross household savings motor vehicles, was accelerating, and
these structural problems. Current rate (gross savings as a share of annual growth in February reached
propositions to increase the minimum gross disposable income) spiked to 6.1%. Although annual household
wage from LTL 800 to LTL 900 would 7.9% after being negative in 2007 credit growth has remained negative,
slightly reduce the unemployment trap and 2008, reaching the highest rate we expect slightly better lending
but could further retard the creation since Statistics Lithuania started conditions this year, and especially in
of workplaces, as a majority of the keeping records in 1995. It probably 2012.
approximately 300,000 unemployed stayed around this level in 2010 but Inflation will weigh on
are unskilled. Reducing social will decline somewhat this year and purchasing power…
benefits to the long-term unemployed, next, thus supporting the recovery in
household consumption. Average annual inflation last year
especially to those who refuse to
remained low (1.3%) but accelerated
participate in public works, would be
Consumer confidence started in the last quarter. The current pace of
increasing at the beginning of 2010 price growth will continue for the rest
1 The unemployment trap measures the but has been stalling since last of 2011, and average annual inflation
percentage of gross earnings that are
August. The slower improvement in will be 3.2% this year.
„taxed away" through higher tax and social
security contributions and the withdrawal of expectations may have been caused
unemployment and other benefits when an by the longer and colder winter (and The current growth of prices was
unemployed person returns to employment. caused by only three groups of
products in the Lithuanian consumer
Labour market, % basket, which became dearer because
20 4
of the adverse developments in
15
17.8
2
international markets – prices of oil,
15.5
13.7 13.5
gas, wheat, sugar, and other food
Unemployment rate (ls)
10 11.4 0 products are much more expensive
Labour productivity (ls)
8.3 than they were a year ago. Of the
5 -2 Net real wage (ls)
5.6
4.3
5.8 three groups, food and non-alcoholic
Employment, yoy (rs)
0 -4 beverages make up 26.6% of the CPI
basket; housing, water, electricity, and
-5 -6 gas account for 12.9%; and transport
expenditures – 11.5%. The prices of
-10 -8
2004 2005 2006 2007 2008 2009 2010 2011f 2012f
Sources: Statistics other products had negative impact on
CPI growth.
April 7, 2011 21
Lithuania Swedbank Economic Outlook
It is still hard to expect a quick Retail trade sales (% yoy), consumer and retail trade confidence
recovery in the real growth of 30 45
household consumption because of
20 30
the higher inflation, which will have a
negative impact on purchasing power. 10 15
12 60
Others
10 50
Housing
8 40 Transport
Food
6 30
CPI growth
4 20
Av.deposit interest rate
2 10 Household credit, yoy (rs)
0 0
-2 -10
Source: Statistics
2007 2008 2009 2010 2011 Lithuania, Swedbank.
April 7, 2011 22
Swedbank Economic Outlook
Sweden
Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se
Group Chief Economist
Chief Economist, Sweden
Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se
Senior Economist
Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se
Senior Economist
Anna Ibegbulem +46 8 5859 7740 anna.ext.ibegbulem@swedbank.se
Assistent
Estonia
Annika Paabut +372 888 5440 annika.paabut@swedbank.ee
Acting Chief Economist
Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee
Senior Economist
Latvia
Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv
Deputy Group Chief Economist
Chief Economist, Latvia
Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv
Senior Economist
Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv
Senior Economist
Lithuania
Nerijus Mačiulis +370 5 258 2237 Nerijus.Maciulis@swedbank.lt
Chief Economist, Lithuania
Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt
Senior Economist
April 7, 2011 23
Swedbank Economic Outlook
Disclaimer
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April 7, 2011 24