Global economy resilient to political uncertainty

RECENT NEWS HEADLINES HAVE BEEN DOMINATED BY POLITICAL TURBULENCE. Above all, the deep divide in the United States Congress has helped increase economic policy uncertainty. Other factors are a degree of uncertainty about the formation of a new German government and a new wave of protests against fiscal austerity in southern Europe. Geopolitical tensions in North Africa and the Middle East are still cause for concern, especially when it comes to dealing with Syria’s chemical weapons. DESPITE THESE CONCERNS, FINANCIAL MARKET REACTIONS HAVE BEEN RATHER MODEST. By all accounts, the effects on the real economy are not especially significant. In recent weeks, we have posted country/regional reviews (Macro Updates) using incoming economic statistics and have published a new issue of Eastern European Outlook. Our main conclusion is that the data have followed our expectations in the August issue of Nordic Outlook . The biggest change concerns an upward revision in Japanese growth. As earlier, we expect global economic growth, measured in Gross Domestic Product (GDP) adjusted for purchasing power parities (PPP), to climb from 3.2 per cent in 2013 to 4.0 per cent in 2014 and 4.2 per cent in 2015. OUR FORECAST IS STILL THAT US GROWTH WILL SPEED UP DURING THE NEXT COUPLE OF YEARS and thereby serve as an important driver of the world economy. The direct effect of the October partial shutdown of US federal government operations will be to lower the annualised fourth quarter GDP figure by an estimated 0.5 percentage points. For the first time in 17 years, Congress failed to reach a budget agreement in time, accentuating the deep divisions in American politics. Although our main scenario is that a long-term budget and debt ceiling agreement can be reached early next year, the risk picture has changed. In the August issue of Nordic Outlook , we estimated that the risks to our main scenario were symmetric, with a 20 per cent probability of both a stronger and weaker economic scenario. Because of the new US political situation, we have raised the probability of a worse outcome to 25 per cent. We have also changed our estimate of when the Federal Reserve will start cutting back on its monthly securities purchases. Because of greater economic policy uncertainty and more mixed economic signals, we now expect “tapering” to be

MONDAY OCTOBER 28, 2013

announced after the Federal Open Market Committee (FOMC) meeting in March 2014. IN THE EURO ZONE, ECONOMIC INDICATORS ARE STILL POINTING TOWARDS A WEAK RECOVERY. The composite purchasing managers’ indices (PMIs) in the four largest countries – Germany, France, Italy and Spain – have converged and are now close to the expansion threshold of 50. After GDP growth of 0.3 per cent in the second quarter, we expect somewhat slower growth during the second half of 2013. Measured as annual averages, GDP will shrink by 0.5 per cent in 2013 and then increase by 0.8 per cent in 2014 and 1.7 per cent in 2015. In recent months, unemployment has been at 12.0 per cent: a historically high level, but a marginal downturn from the peak of 12.1 per cent in prior months. In several crisis-hit countries, however, lower labour force participation rather than more jobs is the reason why unemployment has stopped climbing. Inflation was measured at 1.1 per cent in September, and we expect continued low price pressure.

Global GDP growth
Y-o-y percentage change (brackets: August 2013 Nordic Outlook)

2012 2013 United States 2.8 1.6(1.6) Japan 2.0 2.0(1.9) Germany 0.7 0.5(0.5) China 7.7 7.7(7.5) India 5.1 4.7(5.0) United Kingdom 0.2 1.5(1.5) Euro zone -0.6 -0.5(-0.5) Nordic countries 1.0 0.6(0.8) Baltic countries 4.3 3.3(2.9) OECD 1.4 1.2(1.2) Emerging markets 4.9 4.8(4.8) The world, PPP* 3.4 3.2(3.2)
Source: OECD, SEB

2014 2015 3.3(3.3) 3.7(3.7) 1.9(1.4) 1.3(1.0) 1.7(1.7) 2.0(2.0) 7.4(7.4) 7.0(7.0) 5.5(5.6) 6.0(6.0) 2.3(2.3) 2.6(2.6) 0.8(0.8) 1.7 (1.7) 2,4(2.4) 2.6(2.5) 3.7(3.8) 4.2(4.4) 2.5(2.4) 2.8 (2.8) 5.3(5.3) 5.4(5.4) 4.0(4.0) 4.2(4.2)

* Purchasing power parities

EVEN THOUGH THE EURO ZONE RECESSION IS NOW OVER, the region remains a weak link in the world economy. Such figures as GDP growth, unemployment, competitiveness and public sector budget balances are moving in the right direction, but they are still at worrisome levels. Fiscal austerity and credit market disruptions will hamper euro zone economies for years to

come. The European Central Bank (ECB) will have to keep working proactively to keep interest rates and yields down in peripheral crisis-ridden countries. We are sticking to our assessment that the ECB will cut its refi rate by 25 basis points in December 2013 and offer additional lowcost Long-Term Refinancing Operation (LTRO) loans to banks. More steps will also be needed to prop up crisis-hit countries, including a further Greek debt write-down. PARTLY BECAUSE THE FED DID NOT ANNOUNCE A TAPERING OF ITS BOND PURCHASES IN SEPTEMBER, financial markets in Asia have regained some of their downturns of last summer, when India and Indonesia were especially hard hit. Meanwhile there are signs that most of the growth deceleration is now past for the region as a whole. In China, GDP growth accelerated somewhat during the third quarter, compared to the preceding quarter, reaching a year-on-year rate of 7.8 per cent. We have revised our forecast for 2013 upward and estimate that China will surpass this year’s official target of 7.5 per cent by a few tenths of a percentage point. The recent upturn has, however, largely been driven by central government infrastructure investments. Looking ahead, our assessment is that decision makers want to avoid major stimulus measures that will counteract their efforts to rebalance the economy towards consumption-driven growth. We thus believe that GDP growth will gradually decelerate during the next few quarters, among other things because of a tighter credit environment. UNLIKE CHINA, INDIA HAS BEEN HARD HIT BY FINANCIAL MARKET TURMOIL. During the past month, however, India’s currency and stock market have recovered some of their earlier downturns. One contributing factor is the reforms aimed at liberalising the financial sector that the Reserve Bank of India launched in September. Meanwhile there are also certain signs of stabilisation in growth; exports have performed strongly in recent months and industrial production has also improved. Underlying structural weaknesses remain in place, however, and the central government is hardly likely to implement any growth-promoting reforms before the spring 2014 election. Continued high inflation and budget deficits also make it difficult to launch short-term stimulus programmes aimed at economic stabilisation. THE NORDIC ECONOMIES WILL CONTINUE TO SHOW DIVERGENT PERFORMANCE. In Sweden, the second quarter GDP figure was revised downward relatively sharply, compared to the preliminary outcome. This is one of the reasons why we have adjusted our full-year forecast for 2013 downward from 1.2 to 0.8 per cent. Industrial indicators are still relatively weak while the service sector index continues to climb towards normal levels. The situation of households is more solid; consumption is being stimulated by an expansionary fiscal policy as well as by rising share and home prices. Combined with stronger international demand, we believe

that GDP growth will climb to 2.6 per cent in 2014 and further to 3.2 per cent in 2015. Despite rising employment, the jobless rate will remain high. Because of low resource utilisation along with weak inflation pressure, the Riksbank will wait until December 2014 before starting to hike the refi rate and may possibly delay its rate hikes until early 2015. THE MOMENTUM OF THE NORWEGIAN ECONOMY HAS WEAKENED SINCE EARLY 2013. In particular, household goods consumption has shown a downward trend. Meanwhile the housing market has cooled, which implies a downside risk for residential construction ahead. GDP growth looks set to end up slightly below 1 per cent in 2013, but we then expect an upturn to more than 2 per cent annually in 2014 and 2015. Unemployment (according to the Labour Force Survey) rose to 3.6 per cent during June-August, but this was due to an increase in the labour force; underlying job creation remains strong. Inflation provided a sharp upside surprise during the spring and summer. Core inflation (CPI-ATE) reached 2.5 per cent in August but then fell to 1.7 per cent in September. In this environment, Norges Bank faces a difficult balancing act. Due to concern about the strong Norwegian krone, we do not now expect an interest rate hike until September 2014. The deposit rate will stand at 2.0 per cent by late 2014 and 2.75 per cent at the end of 2015, but the risks are on the downside. GDP growth in the Nordic countries
Y-o-y percentage change (brackets: August 2013 Nordic Outlook)

Sweden Norway Denmark Finland Nordics
Source: OECD, SEB

2012 2013 1.0 0,8(1.2) 3.1 0.9(1.1) -0.4 0.5(0.4) -0.8 -0.8(-0.3) 1.0 0.5 (0.8)

2014 2015 2.6(2.6) 3.2(3.2) 2.4(2.7) 2.1(2.3) 2.0(2.0) 2.5(2.5) 1.2(1.3) 1.6(1.6) 2.4 (2.4) 2.6 (2.5)

DENMARK WILL CONTINUE ITS MODEST RECOVERY. During the second quarter Danish GDP rebounded, driven by an upturn in both domestic demand and exports. Looking ahead, there is good potential for a continued recovery. Rising real wages and a housing market turnaround will buoy private consumption. In addition, fiscal policy will shift in an expansionary direction after a few years of austerity. Despite stimulus measures, public sector finances are expected to move into surplus during our forecast period. THE FINNISH ECONOMY IS STRUGGLING WITH BOTH CYCLICAL AND STRUCTURAL PROBLEMS. This is most clearly apparent in the current account balance, which over the past decade has moved from surpluses of 8-9 per cent of GDP to deficits of 1-2 per cent. Although the economy emerged from recession in the second quarter,

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the recovery will be more lacklustre than in the other Nordic countries. Despite the weaknesses in the economy, relatively strong central government finances mean that the fixed income market has remained strongly confident in the Finnish economy. The yield spread to Germany for 10-year government bonds has been around 20-30 basis points in the past year. This represents lower yields than in Norway and Sweden, for example.
Håkan Frisén, +46 8 763 80 67, hakan.frisen@seb.se

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US economy: More political fallout
• For the first time in 17 years, the United States is on a partial government shutdown. A short shutdown would only have small macroeconomic effects. We reckon that a one week shutdown would shave off 0.1-0.3 percentage points off real fourth quarter GDP growth at an annualised rate. But uncertainty is high and the costs will accelerate with the length of the shutdown amid declining consumer and business confidence. The upshot is that the current partisan battle may resolve issues that otherwise would hang over the debt limit a few weeks from now. • Our forecast assumes no failure to extend the debt ceiling. Not increasing the debt ceiling could be disastrous indeed; it would immediately require the government to balance the budget. Spending would have to be cut by 20 per cent or 4 per cent of GDP and a recession would surely follow. Moreover the credit market could freeze, the dollar could plummet and interest rates could skyrocket. • A protracted stalemate to pass a new budget would likely delay the Federal Reserve’s tapering decision into 2014. As things now stand, however, our forecast still is for the Fed to start tapering its bond purchases in December. • We expect no long-lasting market and economic impacts, and our 2014 real GDP growth forecast is unchanged at 3.3 per cent. Bellwether macro indicators are compatible with 3 per cent real GDP growth year-on-year. Amid the fiscal wrangling, such growth rates are unlikely in the short term but will materialise in 2014, according to our forecast.

MONDAY OCTOBER 7, 2013 Mattias Bruér SEB Economic Research +46 8 763 85 06

Key data Percentage change

2012 2013 2014 2015 GDP Unemployment Inflation Core inflation
Source: SEB

2.8 8.1 2.1 2.1

1.6 7.5 1.6 1.8

3.3 7.0 1.6 1.8

3.7 6.2 2.2 2.1

Economic Insights

THE INDICATORS ARE ENCOURAGING • The trend in consumer indicators such as the Conference Board and University of Michigan indices is pointing upward, but both measures are still relatively weak by historical standards. The brinkmanship in Washington D.C. will probably affect sentiment negatively in the near term. • Since we published Nordic Outlook in August, economic data have generally surprised on the upside (Citi Surprise Index). Meanwhile the NFIB (small business) index is sitting close to its cyclical high, while the NAHB (housing market) index is at its highest level since January 2006 when housing starts were 60 per cent higher than today. • Our composite ISM index (a weighted average of the ISM manufacturing and the ISM non-manufacturing indices) is consistent with 3 per cent real GDP growth year-on-year. However, such growth rates are not expected until the second quarter of 2014, according to our forecast. • Initial claims are currently at six-year lows. A reduction in dismissals rather than stronger hiring is still driving the labour market. If the hiring pace would normalise by half, monthly payroll growth would easily exceed 300k. Furthermore, the current level of initial claims has historically been consistent with 3.5 per cent real GDP growth.

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Economic Insights

FROM DELEVERAGING TO RELEVERAGING • Consumer credit has risen for more than 20 months in a row and outstanding consumer credit has reached a new all-time high. Student debt is no longer the driving force; consumer credit excluding this segment is growing too. The current growth rate also reflects how different conditions are today compared to the massive credit growth that defined the last cycle. • The pace of household deleveraging is clearly slowing and deleveraging is now confined to the mortgage market. As a percentage of disposable income, household debt is flattening out. History suggests that a typical deleveraging phase lasts between five and seven years. Since this one began in 2008 it seems reasonable we are in a mature stage. Household wealth relative to disposable income has recovered and is now well above its 20-year average. The improvement has led to easing credit standards, which in turn should support consumer spending. Moreover, owners’ equity as a share of real estate assets has risen for six quarters in a row and its current level of 49.8 per cent is well above the recession low.

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Economic Insights

SEVERAL FACTORS UNDERPINNING A REVIVAL IN CONSUMER SPENDING • It is fair to say that consumer spending is still relatively subdued, at least outside consumer durables. Consumer durables are the most interest rate sensitive category and it is interesting in its own right that durables consumption has held up well, given the upturn in bond yields. • Real disposable income growth is running below spending but is trending upward. The savings ratio has risen from 3.6 per cent in January to 4.6 per cent today. • We see several developments underpinning a revival in consumer spending. The job market is improving, especially for those with skills and education. Average hourly and weekly earnings are trending upward. Home price gains may have slowed, but the growth rates are still in double-digit terrain. According to CoreLogic, home price appreciation in the second quarter alone pushed 2.5 million homeowners out of negative equity which, in turn, is improving credit quality. • According to our forecast, real consumer spending will grow 2.7 per cent in 2014 and 3.1 per cent in 2015. In 2013 we see spending growth ending up slightly below 2 per cent.

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Economic Insights

BUSINESS INVESTMENT WEAK NOW BUT STRONGER LATER • The fundamentals for business investment are good. Profit margins are high while credit availability is improving. As a percentage of GDP business investment is still low which is suggesting a considerable upside. As far as the third quarter real GDP is concerned, it looks likely that business capital spending will post another weak figure. Core capex goods shipments – which go directly into GDP calculations – are tracking business spending growth of -3 per cent year-on-year with one month to go. Looking ahead, however, we are optimistic on business spending. One leading indicator for business spending, the three-month trend of core capital goods orders, is 8.4 per cent higher than a year ago. Meanwhile the ISM new orders index is even loftier. • Lower US energy costs relative to the rest of the world are a comparable advantage for the US manufacturing sector. Moreover, over time it should spur more energy-related investment activity. • After weak growth in 2013 (3.6 per cent according to our forecast) we see business investment growth accelerating to 10-11 per cent in 2014 and 2015.

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Economic Insights

HOUSING WILL CONTINUE TO SUPPORT THE ECONOMY • Housing starts and new home sales are well below recent peaks. While housing always peaks early in the business cycle, it is unlikely that the peak in housing is behind us since the current rate of housing starts is well below underlying demographic trends. Our forecast is for housing starts to rise to 1.6 million in 2015. Against that backdrop, we forecast real residential investment growth of 14-15 per cent annually in 2013-1015. • Higher mortgage rates have affected sales activity to a certain degree but affordability – while off its extreme levels – is still high. Mortgage refinancing activity has plunged, but that may not be too surprising since people have had plenty of time to refinance over the last couple of years. In any event, higher mortgage rates should be viewed in the context of the better labour market and in our view the housing recovery will ultimately prove resilient to higher mortgage rates. Excess supply of housing has been largely worked off and home prices gains are still in double-digit terrain. Admittedly, house price gains are slowing somewhat as lower affordability impacts demand. • We expect home price gains of 8 per cent next year and 6 per cent in 2015. Rising home prices are helping push people out of negative equity, which in turn is improving credit quality and possibly labour mobility.

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Economic Insights

THE LABOUR MARKET IS STEADILY IMPROVING • The unemployment rate has come down to 7.3 per cent. While it is true that the drop in labour force participation has pulled the unemployment rate lower, whether it is appropriate to say that the unemployment rate is declining for the “wrong reason” is debatable. According to research from the San Francisco and Boston Fed, the drop in participation is structural for the most part; 60-66 per cent of the drop in participation over the past five years is structural, according to these researchers. What this is suggesting is that the US economy may be closer to full employment than commonly acknowledged. That said, the labour market is improving, as the 2.2 million net new jobs created in the past 12 months attest. Historically, the current level of initial jobless claims is consistent with around 3.5 per cent real GDP growth. • Indeed, the downtrend in hourly earnings has reversed. Compared to a year earlier, hourly earnings rose 2.2 per cent in August – significantly above the all-time-low of 1.3 per cent last October. With wage growth picking up, the key question is whether the output gap really is as large as the Federal Open Market Committee thinks. • A mere 1.5 per cent real GDP growth rate has managed to drag the unemployment rate down eight-tenths of a percentage point in the past year. What this is again suggesting is that the potential non-inflationary speed limit may be much lower than most people assume, at least on a temporary basis. The late 1990s is the mirror image.

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Economic Insights

INFLATION STILL WELL-BEHAVED
• Inflation was 0.1 per cent month-on-month in August (below expectations) and was 1.5 per cent higher than a year earlier. Core inflation was 0.1 per cent as well and was 1.8 per cent higher than a year earlier. Our forecast is for 1.6 per cent inflation this year and the next. In 2015 we expect 2.2 per cent inflation. The consensus expects prices to increase 1.90 per cent in 2014 and 2.20 per cent in 2015, respectively. There is a dearth of qualified applicants for available jobs which, together with a very weak pace of capital formation, has led to stagnating productivity growth. This means that even low wage growth may trigger an acceleration in unit labor costs. In turn, unit labor costs command a high correlation with inflation, so this poses an upside risk to the inflation process. The dollar has weakened since the September FOMC meeting. The recent political deadlock has not been dollarsupportive either. Meanwhile inflation expectations (5Y forward BE inflation) has moved up since end-August but its current level is hardly alarming.

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Economic Insights

A RELATIVELY SHORT GOVERNMENT SHUTDOWN WILL HAVE LIMITED EFFECTS • For the first time in 17 years, the U.S. is experiencing a partial government shutdown, affecting some 800,000 federal workers. We reckon that a one week shutdown would shave off 0.1-0.3 percentage points off fourth quarter real GDP growth at an annualized rate. • In our view the government shutdown may well imply less risk of a debt limit showdown – a much more dangerous event. Having made their point, Republicans in the House will hopefully go ahead and vote to raise the debt ceiling without any drama. The key is for the shutdown to be over before the October 17 deadline when the Treasury runs out of funds. Otherwise the deadlock will bleed over into the crucial vote to raise the debt ceiling. • As we understand it, big payments for Social Security, Medicare and the like are not due until the end of October, so there may be a little more time than the above deadline suggests. Moreover the CBO estimates that October 22 is the first date the government may begin missing payments. • Failure to raise the debt ceiling would immediately require the government to balance the budget. Spending must be cut by 20 per cent or 4 per cent of GDP. If such a scenario becomes reality, at best the US economy will be pushed into recession. In such a scenario, the hope is that the Treasury will be able prioritise and manage cash flows in such a way that a default need not occur. • According to polls and media coverage, the Republicans are taking most of the blame for the partisan battle. So if they do not want to throw away the chance to capture a Senate majority in the mid-term election next year, they had better relax their hard line-stance. In any event it is hard to imagine that President Obama will sign into law any bill that defunds his signature achievement, especially since he is not running for re-election.

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Economic Insights

THE FOMC IS EXPECTED TO TAPER IN DECEMBER • After convincing the market that a soft tapering was coming at its September meeting, the Fed surprisingly left the current policy unchanged. Our forecast now is for a USD 10 billion reduction in the pace of Treasury purchases at the December meeting. As for MBS, we expect no change. Our new forecast is that the program will end in September 2014. • Clearly a protracted government shutdown could easily push the tapering decision to early-2014. Twentyfour out of 41 economists foresee a Fed tapering decision at the December meeting, but the longer the partial government shutdown lasts, the bigger the chance that the decision will come early in 2014 instead. • The FOMC was criticised for its no-tapering decision last month; it was a huge surprise at the time and a blow to the claim that the central bank has improved its communication. But if we fast forward to today, Fed Chairman Ben Bernanke is being seen as something of a visionary against the backdrop of the partial government shutdown and the possibility that brinkmanship could bleed over to the debt ceiling issue. • In any event the decision at the September meeting was likely a close call. The primary reason not to taper was tighter financial conditions (especially higher mortgages, we assume). That is a bit ironic since the main reason for the tightening was that the FOMC had allowed tapering to be priced into the market. • Evidently, the FOMC is starting to feel unhappy about the (informal) 7 per cent number on the unemployment rate for stopping its current third round of quantitative easing (QE3). At the post-meeting press conference, Bernanke stated that there is “not any magic number”. Instead, what one should start focusing on more going forward is the employment rate (employment to population ratio), in our view.

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Japan: Consumption tax hike will not derail recovery
• In the first half of 2013, the Japanese economy grew at an annualised rate of 3.9 per cent (Chart 1). Export growth (Chart 2) and – more importantly – consumption growth (Chart 3) are boosting the economy. Looking ahead, our forecast is for strong growth in H2 as well – consumption decisions may well be brought forward due to the government’s decision to raise the consumption tax from 5 per cent to 8 per cent in April 2014. To counteract but not fully neutralise this tax hike, the Shinzo Abe administration has also decided on spending programmes and tax cuts. Given the current momentum in the economy, we do not expect the consumption tax hike to derail the recovery. Tokyo will host the 2020 Olympic Games which, at the margin, should add to growth as early as 2014-15. In addition, real GDP was revised sharply upwards according to the latest release. Indicators are generally suggesting an ongoing recovery. Machinery orders (Chart 4) are recovering, Purchasing managers’ indices (Chart 5) are in expansion mode and consumer confidence (Chart 6) is close to a cyclical high. Furthermore, the Bank of Japan’s quarterly Tankan Index(Chart 7) is at its strongest level since the Great Recession. For the first time in almost five years, the unemployment rate (Chart 8) fell below 4 per cent this summer. In August, however, it bounced back again to 4.1 per cent. According to our forecast, the unemployment rate will gradually decrease to 3.6 per cent in 2015. If the Abe administration is successful in keeping economic growth close to or even above 2 per cent, the unemployment rate could decline more than in our current forecast. This may well be important for inflation (Chart 9) as well, although past experience indicates that positive year-on-year growth in salaries would materialise only when unemployment is at or below 3.5 per cent.

MONDAY OCTOBER 14, 2013

Mattias Bruér
SEB Economic Research

Key data

2012 2013 2014 2015 GDP* Unemployment** Inflation*
Source: SEB

2.0 4.2 -0.0

2.0 3.9 0.3

1.9 3.8 2.2

1.3 3.6 1.5

*Percentage change, ** Per cent of labour force

Economic Insights

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China: Temporary growth rebound
• As expected, GDP growth accelerated in Q3, hitting 7.8 per cent year-on-year following growth of 7.5 per cent in Q2. (Chart 1) The rebound has been driven by stateled infrastructure spending. However, policymakers are unlikely to welcome another investment-driven surge; the rebound is expected to falter in coming quarters along with the slowdown in credit growth. We predict that GDP will grow by 7.7 per cent in 2013 and 7.4 per cent in 2014. In 2015, growth will decelerate to 7.0 per cent. • Both the official purchasing managers’ index (PMI) and the Markit/HSBC index recovered in August but levelled out in September, raising questions about the durability of the economic rebound. (Chart 2) • Exports were weaker than expected in September, falling 0.3 per cent year-on-year. Some of the weakness can be explained by an unfavourable base effect but other emerging economies also showed a similar trend. Imports rose by more than 7 per cent year-on-year. (Chart 3) Relatively strong commodity imports support the view that the economic rebound is driven by investment and infrastructure construction. • Government infrastructure investments (“mini stimulus”) explain much of the recent economic rebound, while manufacturing investment is trending downward. (Chart 4) • Industrial production and retail sales have stabilised recently. (Chart 5) • Headline inflation accelerated to 3.1 per cent in September, mainly driven by a rise in food inflation that hit 6.1 per cent. Headline inflation is not expected to rise much further; food prices are stabilising and there are no signs of price pressure elsewhere. Core inflation is still below 2 per cent. (Chart 6) • The interbank liquidity situation has improved significantly after the liquidity squeeze engineered by the central bank in early June. However, short-term rates are still above the pre-squeeze level. (Chart 7) • New bank lending was CNY787 billion in September, an increase compared to the previous month. However, the broader total social financing measure slowed, both compared to previous month and in year-on-year terms. (Chart 8) • Unlike other Emerging Market currencies, the yuan (CNY) has not been affected by Fed tapering worries. (Chart 9) A large increase in foreign exchange reserves in the third quarter indicates that China was a recipient of net capital inflows in Q3.
Key data Percentage change

FRIDAY OCTOBER 18, 2013 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2012 2013 2014 2015 GDP* Inflation* USD/CNY** 7.7 2.6 6.23 7.7 2.8 6.08 7.4 3.2 5.90 7.0 3.4 5.85

* Percentage change. ** End of period exchange rate. Source: Macrobond, National Bureau of Statistics of China, SEB.

Economic Insights

CHARTS ON THE CHINESE ECONOMY

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India: Signs of stabilisation but little scope for major improvement
• GDP growth decelerated to 4.4 per cent year-on-year in the second quarter; weaker than expected (Chart 1). The deceleration was widespread but there were signs of stabilisation in Q3. We have revised our already below-consensus forecast downward; we expect GDP to climb 4.7 per cent in 2013 and 5.5 per cent in 2014. In 2015, growth will accelerate to 6.0 per cent. • New central bank governor Raghuram Rajan has launched a reform package focusing on financial sector liberalisation. India has been hard hit by worries about Fed tapering, with substantial negative effects on the rupee and the stock market, but central bank reforms have stabilised financial markets for the time being. (Chart 2) However, the government has not done its part, having introduced extended food subsidies and a land acquisition bill that could increase the time taken to acquire land. • In August, the purchasing managers’ index (PMI) in manufacturing fell below 50 for the first time since 2009 but recovered somewhat to 49.6 in September. (Chart 3) • Industrial production shows signs of stabilisation, increasing slightly year-on-year in July and August. (Chart 4) • Car sales have edged up recently, increasing 0.7 per cent year-on-year in September. (Chart 5) • Exports have recently performed strongly, increasing more than 10 per cent year-onyear for three consecutive months. Imports have performed poorly, falling more than 18 per cent year-on-year in September. (Chart 6) The diverging trends for exports and imports pushed the trade deficit to its lowest level for 30 months in September. • The current account deficit widened in Q2. (Chart 7) However, the recent marked improvement in the trade balance is expected to decrease the deficit in Q3. • Wholesale price index (WPI) inflation has accelerated in recent months; hitting a seven-month high of 6.5 per cent in September. A substantial increase in food price inflation has contributed. CPI inflation remains elevated, at around 10 per cent. (Chart 8) • The Reserve Bank of India (RBI) hiked its key interest rate by 25 basis points to 7.5 per cent in September. (Chart 9) We expect another rate hike before year-end.
Key data Percentage change

WEDNESDAY OCTOBER 16, 2013 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2012 2013 2014 2015 GDP* Inflation (wholesale)* USD/INR** 5.1 7.5 54.9 4.7 5.9 65.0 5.5 6.0 60.0 6.0 6.0 55.0

* Percentage change. ** End of period. Source: Macrobond, Ministry of Commerce and Industry, SEB.

Economic Insights

CHARTS ON THE INDIAN ECONOMY

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Euro zone: Out of recession but slow recovery
 After six quarters of recession, euro zone GDP finally grew again in the second quarter of 2013. We foresee a positive trend in GDP, current account, government deficits and unemployment, but very troubling levels of these variables will hold back demand. The euro zone is on a less unstable footing, and the intensity of the crisis is lower, but it is far from over. We see stabilisation at the moment; recovery is still a bit ahead of us.  Developments so far since the August issue of Nordic Outlook are in line with our forecast. Following the 0.3 per cent quarter-on-quarter growth in the second quarter of 2013, we expect zero q/q growth in the third quarter and 0.2 per cent in the fourth. The fourth quarter of 2013 will be the first with positive year-on-year growth figures. GDP will decline by 0.5 per cent in 2013 and increase by 0.8 per cent in 2014 and 1.7 per cent in 2015.  The European Central Bank has promised to do “whatever it takes” to save the euro, but positive data showing that the euro zone has left its recession behind has had a favourable effect on financial markets. Since the start of 2013, government bond yields have continued to fall in the crisis-hit GIIPS countries. We expect that partly due to weak growth, low inflation, politicians not moving fast enough with reforms and problems associated with a still weak banking sector in southern Europe, the ECB will cut its refi rate by 25 basis points in December and that further LTRO lending is likely. GDP forecasts Per cent
2012 Euro zone France Germany Italy Spain
Source: SEB

TUESDAY OCTOBER 8, 2013

Daniel Bergvall
SEB Research +46 8 763 85 94

Key data Percentage change 2013 -0.5 0.2 0.5 -1.7 -1.4 2014 0.8 0.8 1.7 0.6 0.4
GDP* Unemployment** Inflation* Government deficit***
Source: Eurostat, SEB

2012 2013 2014 2015 -0.6 11.4 2.5 -3.7 -0.5 12.1 1.5 -2.9 0.8 12.0 1.0 -2.5 1.7 11.5 0.9 -1.9

-0.6 0.0 0.7 -2.8 -1.9

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insights

INDICATORS, CONSUMPTION AND GDP  Indicators support the view that we will see a continuous but slow improvement. For the big four (Germany, France, Italy and Spain), composite purchasing managers’ indices are close to the expansion threshold of 50. In manufacturing, the situation seems a bit brighter, with PMIs for the big four converging just above 50 (except that France is just below 50). Since May, there has also been continuous improvement in the European Commission’s Economic Sentiment Indicator (ESI). In August, the euro zone ESI rose to 95.2 from 92.5 in July. The different strengths of the economies are more visible in the ESI than the PMI, with Germany at a higher level than France, Italy and Spain. Also, the ESI is currently above its historical average in Germany but below it in France.  Consumer confidence has improved in France, Italy and Spain, although the figures are still clearly below Germany. In August, the increase in retail sales excluding autos was just above zero and vehicle registration was still falling (as it has been in all months of 2013 except July).  Germany’s IFO business sentiment index has trended higher since April. Even if we expect growth in the second half of 2013 to be weaker than the strong figure for the second quarter, Germany will outperform most of its euro zone partners in 2014 and 2015.

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Economic Insights

LABOUR MARKET AND INDUSTRY  The labour market is still weak and unemployment has been stable at a historically high 12 per cent since the start of 2013. One positive sign is that the number of unemployed fell for the third straight month in August, although by only 5,000 people, with over 19 million unemployed (12 per cent, unchanged since July). On the negative side, employment continued to fall during the first quarter of 2013 (-1,0 per cent) and there are signs that decreased labour force participation is contributing to unemployment not reaching even higher levels.  There is still a mixed picture in the labour market, with German unemployment showing strength (a historically low 5,2 per cent in August, by Eurostat’s definition), in France levelling out at 11 per cent and in Spain and Italy just over 26 and 12 per cent respectively. Ireland’s jobless rate seems to have peaked and but is only marginally down during 2013, underscoring that making unemployment fall will be a long, drawn-out process for crisis-ridden countries.  In the second quarter of 2013, capacity utilisation improved but industrial production remained weak. In July, industrial production continued to fall but an improvement in manufacturing sector confidence indicators (both the European Commission measure and PMI) is signalling that performance will improve during the rest of 2013.  Portugal and Spain have seen their exports grow surprisingly strongly in recent months: a positive sign that internal devaluations are paying off, but it is still too early to say that this is an improving trend.

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Economic Insights

INFLATION, FINANCIAL AND MONETARY INDICATORS  Inflationary pressure is still low and the euro zone inflation rate in September (flash estimate) was 1.1 per cent, down from 1.3 per cent a month earlier. We expect inflation pressure to remain subdued both in the near term and over the next couple of years, given an expected slow economic recovery, high unemployment and low wage pressure. We foresee HICP inflation of 1.5 per cent in 2013, 1.0 per cent in 2014 and 0.9 per cent in 2015. Low inflation makes debt adjustment more complicated.  Even though the general economic outlook is getting more stable, developments are fragile and events that fuel uncertainty are keeping the heat up. Political turbulence in countries like Portugal and Italy, as well as when and where we will see additional support and easing of the debt burden, are examples. The road ahead will be bumpy, affecting financial markets and growth negatively, but we do not believe that developments will be severe enough to create a situation similar to 2008-2009.  The ECB’s current stand-by policy will come under increasing pressure, due to low and falling inflation, repayment of earlier Long-Term Refinancing Operation (LTRO) loans that will reduce surplus liquidity and weak bank lending. No new policy measures have been announced, but continued verbal interventions will not be enough. We expect the ECB’s policy to change and continue to forecast that it will cut the refi rate at its December 2013 meeting by 25 bp to 0.25 per cent. In addition, additional LTRO loans may be necessary if liquidity drops further. Surplus liquidity close to EUR 200 bn has been associated with a rise in the Euro Overnight Index Average (EONIA), which the ECB does not want to see.  Bank lending to non-financial corporations is continuing to fall. Declining GDP combined with weak indicators make companies hesitant about capital investment decisions, reducing the demand for new loans. Cross-border banking flows are falling, and even though ECB’s refi rate is low, lending rates to small and medium-sized enterprises (SMEs) diverge, with higher rates in southern and eastern euro zone members than in northern ones. This is a pressing issue, especially since such countries as Spain, Portugal and Italy have a larger share of employment in SMEs than Germany, France or Finland.  Getting rid of the debt overhang. IMF research has shown that in previous deleveraging processes, growth and inflation − not reducing nominal debt − have been the main drivers. The outlook for the euro zone indicates that these factors will not contribute much in the near term, making the process more painful.

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United Kingdom economy: Recovery on firm footing

WEDNESDAY OCTOBER 9, 2013 Mattias Bruér SEB Economic Research

• After near zero growth last year, the UK economy has recovered in style this year. Real GDP has risen 1 per cent in the first half of the year and indicators suggest even stronger momentum in the second half of the year, which is why we are maintaining our above-consensus view from the August issue of Nordic Outlook. After a 1.5 per cent real GDP increase this year, our forecast is for a pick-up to 2.3 per cent in 2014 and to 2.6 per cent in 2015. Meanwhile the Bloomberg consensus is 1.3 per cent, 2.0 per cent and 2.4 per cent in 2013-2015 (Chart 1). • Our activity indicator (Chart 2) points to 1 per cent quarter-on-quarter growth in Q3, thus exceeding the 0.7 per cent quarterly rise in Q2. Moreover, the CIPS/Markit surveys (Chart 3) on manufacturing, services and construction are all at healthy levels, suggesting a broad-based recovery. Meanwhile consumer confidence (Chart 4) has climbed to its highest level since before the Great Recession. • After having stagnated – deflated in real terms – for three years, British home prices (Chart 5) have increased 5-6 per cent in nominal terms since last October. Real earnings (Chart 6) are still falling, but consumer spending growth (Chart 7) has rebounded, accounting for about half of the real GDP growth seen thus far in 2013. Meanwhile the savings ratio (Chart 8) has fallen anew below its historical average and household deleveraging (Chart 9) has levelled out – developments which the better tone of the housing market may well partly explain. • Productivity (Chart 10) has completely stagnated since 2007. While some of the shortfall may well be permanent in nature, the output gap (Chart 11) is estimated at 4 per cent of GDP in 2013, which is the widest for at least 30 years. A pick-up in productivity in the years ahead means that above-trend GDP growth is unlikely to translate into particularly strong employment growth (Chart 12) although near-term employment indicators (Chart 13) are positive. Meanwhile our forecast is for the unemployment rate (Chart 14) to drift slowly downward and hit 7 per cent late in 2015 – at which point the Bank of England will consider raising interest rates. Inflation (Chart 15) has been above target since November 2009 but will be close to target in 2014-2015. One factor worth keeping an eye on, however, is money growth (Chart 16) which is no longer falling.
Key data Percentage change

2012 2013 2014 2015 GDP* Unemployment** Inflation* 0.2 8.1 2.8 1.5 7.9 2.6 2.3 7.6 2.3 2.6 7.3 2.0

* Percentage change, ** Per cent of labour force, Source: SEB

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Economic Insights

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Sweden: Slow start, but recovery on track
• Lower GDP in 2013. We have lowered our growth forecast for this year to 0.8 per cent (from 1.2 per cent in Nordic Outlook) after the downward revision to second quarter flash GDP. Forward-looking indicators are mixed but suggest that the recovery is largely on track, though monthly growth metrics remain weak, indicating downside risks for Q3 GDP. • Manufacturing sector indicators are mixed, while households have clearly become more optimistic, supported by fiscal policy and house prices. • Steady increase in employment. The labour market continues to be stronger than implied by GDP, with growing employment and stable unemployment. Some indicators even suggest that employment growth could be accelerating. • Inflation will remain subdued. Tendencies towards higher inflation during the summer reversed in September and our forecast that CPIF will remain below the Riksbank’s target throughout the forecasting period is unchanged. Lower energy prices mean that CPIF will also be below the Riksbank’s forecast in the short run. • Lower government borrowing. Privatisation of Nordea will lower the central government borrowing requirement by SEK 40bn. Tax revenue has also been stronger than expected. The National Debt Office will thus reduce nominal bond issuance in 2014. • The Riksbank will remain on hold for most of next year due to low inflation and capacity utilisation, combined with continued expansionary policy from international central banks. We expect a first key interest rate hike in December next year and a repo rate of 1.75 per cent at the end of 2015. Market pricing is approaching our forecast.

WEDNESDAY OCTOBER 16, 2013 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Key data

2012 2013 2014 2015 GDP* GDP working day adjusted* Unemployment** CPI* CPIF* Government savings***
Source: SEB

1.0 1.3 8.0 0.9 1.0 -0.2

0.8 0.8 8.1 0.0 0.9 -1.5

2.6 2.7 8.0 1.0 1.3 -1.8

3.2 3.0 7.5 2.0 1.6 -1.3

* Percentage change ** Per cent of labour force *** Per cent of GDP

Economic Insights

BUSINESS SENTIMENT AND PRODUCTION • Manufacturing sentiment is mixed, with a rising purchasing Managers’ index (PMI) but a more moderate upturn according to the National Institute of Economic Research (NIER) survey. Hard data are lagging, with continued sluggish industrial production and merchandise exports being weak up to August. We expect exports and production to recover going into Q4, in line with the upturn in PMI, but see downside risks for Q3 GDP. • Sentiment in the service sector improved in September, despite a decline for the manufacturing sector. The economic sentiment indicator (a weighted average between business and consumer sentiment) clearly suggests that GDP will grow again in the second half of this year. • A marked recovery for housing starts indicates that residential investment will rise again going forward. Capital spending in the manufacturing sector is, however, expected to remain weak throughout 2013.
Swe: GDP and economic sentiment
3 2 1 0 -1 -2 -3
GDP, % q/q (RHS) Economic sentiment (NIER)

3 2 1 0 -1 -2 -3

01 02 03 04 05 06 07 08 09 10 11 12 13

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Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET • Household sector confidence is recovering, climbing to its highest levels since 2011 during the summer. The upturn should continue going forward, supported by international recovery and a gradually improving labour market. Strong real income growth fuelled by low inflation and tax cuts, together with strong household savings and balance sheets, will open the way for a consumption boom as confidence returns. Retail sales and car registrations have accelerated during the summer. • Home prices are rising again. Prices have increased over the last 4-5 months, and short-term indicators suggest a continued upward trend over the next 6-12 months. Lending to households is also accelerating, but only marginally. This could be an effect of macroprudential policies, with a loan-to-value ceiling of 85 per cent and increased demands for principal payments on mortgage loans. • Employment continues to trend higher, while unemployment is stable. Job creation plans in the NIER survey even suggest a possible acceleration, although this is at odds with the weak GDP growth. Unemployment is expected to decline from the middle of next year. Recent developments suggest downside risks to this forecast. Household income and consumption
Year-on-year percentage growth 2012 Consumption Income Savings ratio, % of disp. income 11.5 11.8 12.2 10.8
Source: Statistics Sweden, SEB

2013 2.0 2.9

2014 2.7 2.8

2015 3.0 1.7

1.6 3.3

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Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK • Inflation remains subdued. Faint signs of rising inflation pressures were reversed in September with core CPIF (ex food and energy) declining below 1 per cent y/y again after a temporary increase in August. Low international inflation and moderate wage increases over the next 3 years indicate that CPIF inflation will stay below the Riksbank target through-out the forecasting period. CPI inflation is predicted to gradually increase to 2.5 per cent y/y driven by higher mortgage interest rate costs due to expected rate hikes from the Riksbank in 2015. • The Riksbank expected to stay on hold, until December next year. Inflation below target, low capacity utilisation and continued expansionary policy from international central banks will exert downward pressure. Financial stability considerations is an upside risk, although the new macro prudential framework means that it has become less likely that this will trigger a rate hike. We expect a first hike in December and two more hikes in 2015. • Stronger tax revenues and Nordea privatisation lowers government borrowing requirement. National debt office is expected to lower 2013 borrowing requirement forecast by SEK 50-60bn, where SEK 40bn is explained by privatization. Borrowing ex privatisation and re-lending (mainly for the Riksbank currency reserve) is trending gradually higher (see chart), but is expected to turn-over as growth accelerates.

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Norway: growth pause should prove transitory
 Momentum in the Norwegian economy has downshifted quite markedly since early 2013: sequential growth in mainland GDP – excl. oil/gas and shipping – was a lacklustre 0.2% in Q2 and the year-on-year rate slowed to 1.7%. The September report from Norges Bank’s regional network suggested continued well below-trend growth over summer.  Domestic consumption of goods has been particularly weak and is in for a second sequential decline in Q3 (and more than in Q2). In addition, the housing market has cooled quite a bit, putting downside risks to residential investment going forward. Investment growth in the petroleum sector is downshifting, leaving smaller demand impulses to the rest of the economy next year. However, a gradual recovery at the main export markets in Europe and the marked depreciation of the NOK exchange rate in recent months should lift non-petroleum exports in 2014.  According to Norges Bank’s regional network, the slowing on the supply side has centred on moderating activity among suppliers to the petroleum sector, construction and within retail trade. Manufacturing faces crosscurrents from moderating investment growth in the petroleum sector and what we expect to be positive demand impulses from abroad.  Inflation has been choppy recently, posting a sharp upside surprise in summer but cooling more than expected in September: through the noise, the trend has shifted upwards.  In all, we now see mainland GDP expanding 1.8% in 2013 and 2.4% in 2014, a downward revision of 0.3%-point from the August Nordic Outlook, first and foremost due to slower growth in private consumption which nonetheless should pick up somewhat in 2014. Overall GDP growth has been cut accordingly to 0.9% this year and 2.4% for 2014.  The September Monetary Policy Report presented a more balances outlook for policy rates, and Norges Bank is likely to broadly stick to its current assessment at the two remaining meetings this year. While we still expect the 1.50% key rate to be lifted by mid2014, subsequent moves might be more cautious than expected as Norges Bank seems more eager to keep the NOK exchange rate on the weak side.

TUESDAY 22 OCTOBER 2013

Stein Bruun
SEB Norway +47 21 00 85 34

Erica Blomgren
SEB Trading Strategy +47 22 82 72 77

Norges Bank’ network sees below-trend growth
Year-on-year percentage change, index
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 10 11 Mainland GDP, % change year-on-year (LHS) Regional network output indicator, index (RHS) Output expectations 6 mth ahead, index (RHS) 12 13 4 3 2 1 0 -1 -2

Key data Percentage change

2012 2013 2014 2015 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 3.1 3.4 3.2 0.8 1.2 14.4 0.9 1.8 3.5 2.2 1.6 11.5 2.4 2.4 3.5 2.1 2.1 10.2 2.1 2.6 3.7 2.3 2.3

* Per cent of labour force, ** General government, per cent of GDP, forecast 2013-14 MoF (October 2013) Source: SEB

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION  Domestic consumption of goods has been surprisingly soft so far in 2013. Following a surge at the start of the year, such only inched up in Q2 and is set to have showed a marked sequential decline in Q3. Part of the weakness owes to a weather-related plunge in spending on electricity, but the underlying trend remains sluggish as seen in retail sales. While spending on services and abroad should have held up (approx. half the total), overall private consumption was broadly unchanged on the quarter in Q2 and we have cut the forecast for 2013 from 3.0% to 2.5% and sliced the forecast for next year to 2.8%.  The downshift in private consumption has been much sharper that what fundamentals would suggest. Growth in households’ real disposable income was thus a very solid 3.7% year-on-year and thus well ahead of the 2.2% gain in consumption. However, growth in real income was dented in Q3 by much higher inflation. Meanwhile, consumer confidence has eased only slightly on the quarterly survey.  Momentum in manufacturing production – excl. energy and mining – has held up surprisingly well though showed signs of moderating in August. The red-hot investment goods sector is set to slow as growth in petroleum sector investment moderates markedly in 2014, but intermediate goods should be boosted by reviving foreign demand.

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Economic Insights

LABOUR MARKET AND INFLATION  Labour market indicators have been mixed recently. In seasonally adjusted terms, registered unemployment has gained in every month but two so far in 2013, though the rate remains rather low at 2.7% in September. Meanwhile, the LFS unemployment rate increased to 3.6% on average in June-August which, however, was due to a jump in the labour force. In fact, after stalling in the second quarter, LFS employment somewhat surprisingly increased by an above-trend 0.8% in June-August from the previous three-month period to be up 1.6% year-on-year.  Core inflation posted a massive upside surprise in summer by lifting from 1.4% on average in Q2 to 2.5% in August on the ex. taxes and energy measure (CPI-ATE). We always saw part of the lift as transitory though the downward correction to 1.7% in September proved steeper than expected. Through the noise, however, the underlying trend has shifted upwards, led by rents and domestically-produced goods. The depreciation of the NOK in recent months suggests upward pressure on prices for imported goods going into 2014.  The housing market has cooled markedly. In September, existing home prices were at par with the January level and the year-ago rate slowed to 2.6%, a sharp slowing from average annual gains of 8% in 2010-12. Existing home sale has yet to show any similar cooling, but prices are pressured by rising supply (up 21% year-on-year).

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Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS  Norges Bank’s September Monetary Policy Report presented a more balanced rate outlook: the rate path was lifted slightly and the bank now sees the first rate hike around next summer. We don’t expect a change in policy at the October and December meetings. The bank’s growth forecasts have yet to be proven too cautious and inflation to remain close to target. Any change in a hawkish direction should thus come in the March MPR at the earliest.  One might suspect that the low rate path reflects the bank’s intention to keep the NOK on the weak side. We expect the bank to become even more determined to prevent the currency from strengthening (by keeping rate spreads stable) as authorities have increased focus on non-oil exporters’ weak competitiveness. While a hike is still expected next summer, we now see a 25bps hike in September as most likely (previously June), while subsequent hikes should be very gradual. Our 2.00% and 2.75% forecasts for end 2014/2015 may prove too aggressive.  The long-term potential for the NOK is still positive given its attractive valuation and its unique fiscal position. However, fundamentals are fading as a driver for the NOK and considering Norges Bank’s persistent unwillingness to do anything that might strengthen the NOK, we have trimmed our bullish long-term NOK view to forecast EUR/NOK at 7.70 by end-2014. In the short-term, the krone will remain volatile and highly sensitive to negative data.
Norges Bank nudged the rate path higher
Per cent
7 6 5 4 3 2 1 0 05 06 07 08 09 Norges Bank deposit rate Optimal rate path, MPR 2/13 10 11 12 13 14 15 Optimal rate path, MPR 3/13
Source: Norges Bank, SEB

Factors behind revisions to rate path in MPR 3/13
Percentage point
7 6 5 4 3 2 1 0 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 13 14 14 14 14 15 15 15 15 16 16 16 16 Prices Interest rates abroad Exchange rate Lending margins, premiums Capacity utilisation Net change MPR 3/13 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6

Source: Norges Bank

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Finland: Slow recovery due to structural weaknesses
• After four quarters of falling quarterly GDP, Finland left the recession behind with 0.2 per cent growth in the second quarter of 2013. The outlook continues to be weak and the recovery is lagging behind the other Nordic countries. Exports have been weak and the earlier resilient household sector is at present also showing weaknesses. • The economy is not only troubled by cyclical factors, but it has also become increasingly clear that some problems are more deeply rooted and structural. The export ratio has fallen 10 percentage points compared to the pre-crisis level, terms-of trade have fallen and unemployment is expected to decrease only slowly. The current account has trended from 8 to -2 per cent of GDP in 10 years. • We expect growth to be 0.3 per cent each quarter compared to the previous quarter during the second half of 2013 and after that a slight continued improvement. Overall, GDP will fall by 0.8 per cent in 2013, a downward revision compared to our previous forecast. In 2014 and 2015 GDP will grow by 1.4 and 1.6 per cent, respectively.
Key data Percentage change

THURSDAY OCTOBER 17, 2013

Daniel Bergvall
Economic Research +46 735 23 52 87

2012 2013 2014 2015 GDP Unemployment* Inflation -0.8 7.7 3.2 -0.8 7.9 2.2 -2.2 1.2 7.7 1.9 -2.0 1.6 7.5 1.8 -2.0

Government fiscal balance** -2.2
* Per cent of labour force, ** Per cent of GDP Source: SEB

Economic Insights

WEAK MANUFACTURING, LABOUR MARKET IMPROVING ONLY SLOWLY, CONSUMERS GETTING MORE WORRIED • Manufacturing production has fallen every month in 2013 compared with a year earlier (current prices) and exports have fallen most months. Confidence among manufacturers improved early in 2013 but has since fallen and is at a low level. Improved international demand will help exports in 2014 and 2015, but in the near term we expect continued weak performance for manufacturing output and exports. • Capital spending fell during the first half of 2013 by 1.8 per cent compared to the same period 2012. Capacity utilisation is again falling. Together with a weak manufacturing sector, the outlook for investments is also weak. Investments will fall by 1.0 per cent in 2013. • Domestic demand held up in 2012 but has fallen so far in 2013 (-0.3 per cent in the first and second quarters). Consumer confidence has improved, but households are under pressure from a weak labour market, government belt-tightening and low wage increases. Consumption is expected to fall as an annual average in 2013. • Unemployment fell 0.5 percentage points in six months to 7.7 per cent in August, despite weak growth. Given falling vacancies and a generally weak outlook for the economy, we do not expect more than a levelling out at above 7.5 per cent unemployment in the near term.

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Economic Insights

FALLING INFLATION, BAK LENDING GETTING WEAKER, CURRENT ACCOUNT STUCK IN DEFICIT • Inflation has fallen more than expected. After peaking at 3.5 per cent late in 2012, boosted by tax hikes, it stood at 1.8 per cent in September 2013. Changes in indirect taxes will also push up inflation in 2014-2015, although to a lesser extent. As an annual average, inflation will fall to 2.2 per cent in 2013 and continue downward to just below 2 per cent in 2014 and 2015. • Demand for new loans is falling, especially for households. This development is not surprising, given that nonfinancial companies face falling demand and a rising amount of idle capacity. Household consumption of durable goods is especially weak, and the housing market is flat. • Government finances are in a relatively good position, especially in a euro zone context. Still, the present deficit, weak outlook and the underlying pressure of an ageing population will continue to force the government into belt-tightening. The general government balance is expected to come out below the Maastricht limits, but poor economic performance risks undermining the effects of previously approved reforms, with additional cost-saving measures having to be implemented. • Yields on government bonds have increased during 2013 in line with international developments, and the yield spread to Germany has been relatively stable at 20-30 basis points. The government’s attempts to reduce the public deficit are good for maintaining confidence in financial markets. The downside is that they also reduce demand.

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Economic Insights

For more in-depth analysis and comments, please follow the links
Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: NOR: Fiscal budget with a marginal expansionary twist NOR: Core inflation shows a sharp downward correction Momentum in manufacturing production slowing NOR: Manufacturing PMI suggests healthy momentum NOR: Sluggish private consumption in Q3 Unemployment creeps higher, employment turns up Norges Bank with a more balance policy rate outlook NOR: Growth continuous to run at a soft below-trend pace NOR: Norway moves to the right NOR: Norges Bank to take notice of sharp lift in inflation NOR: Record-high oil investment, slower growth in 2014 NOR: Growth has slowed to well below trend Oct 14, 2013 Oct 10, 2013 Oct 7, 2013 Oct 1, 2013 Sep 30, 2013 Sep 27, 2013 Sep 19, 2013 Sep 13, 2013 Sep 10, 2013 Sep 10, 2013 Sep 5, 2013 Aug 20, 2013

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