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Economic Research – May 2010
Growth accelerating, but diﬃcult post-crisis choices ahead New focus on government debt and ﬁnancial regulations
International overview Theme: Reforming the financial infrastructure The United States Japan Asia The euro zone The United Kingdom Eastern Europe The Baltics Sweden Denmark Norway Finland Nordic key economic data
5 14 16 21 22 23 28 29 30 32 41 42 45 46
Boxes Next phase in the Greek crisis Rapid recovery or new crisis wave? The economic policies of the future Can the US double its exports in 5 years? Health care reform approved Great need for internal devaluations Public finances and long-term yields How much divergence from euro zone? Large gap between GDP and labour market Home price correction on the way 6 7 12 17 20 25 27 33 35 37
Nordic Outlook – May 2010 | 3
This report was published on May 4, 2010. Cut-off date for calculations and forecasts was April 29, 2010.
Robert Bergqvist Chief Economist + 46 8 506 230 16 Daniel Bergvall Economist +46 8 763 85 94 Ann Enshagen Lavebrink Editorial Assistant + 46 8 763 80 77 Tomas Lindström Economist + 46 8 763 80 28
Håkan Frisén Head of Economic Research + 46 8 763 80 67 Mattias Bruér Economist + 46 8 763 85 06 Mikael Johansson Economist + 46 8 763 80 93
Gunilla Nyström Global Head of Personal Finance Research + 46 8 763 65 81 Susanne Eliasson Personal Finance Analyst + 46 8 763 65 88 SEB Economic Research, K-A3, SE-106 40 Stockholm
Ingela Hemming Global Head of Small Business Research + 46 8 763 82 97 Johanna Wahlsten Small Business Analyst + 46 8 763 80 72
Contributions to this report have been made by Thomas Köbel, Klaus Schrüfer, SEB Frankfurt/M and Olle Holmgren, Trading Strategy. Stein Bruun, SEB Oslo is responsible for the Norwegian analysis
See disclaimer on page 50.
4 | Nordic Outlook – May 2010
Recovery despite imbalances and crises
Deficits creating dual-track world Inflation continuing downward Central banks will hold off another while Euro will continue to weaken Economic policy framework being reassessed
the Organisation for Economic Cooperation and Development (OECD), growth will be 2.5 per cent in 2010, or somewhat above trend. Inflation will remain low in the next couple of years. Core inflation has continued downward. Low resource utilisation and high unemployment will continue to depress wages and prices. Due to low inflation pressure, combined with worries about the resilience of the financial system, the leading OECD central banks will proceed cautiously with their interest rate hikes. By late 2011, the US Federal Reserve (Fed) and European Central Bank (ECB) key rates will stand at 2 and 2.25 per cent, respectively. Continued expansionary monetary policies will help sustain growth in 2011 as well. This will create the prospect of a further stock market upturn, which in turn will help ease the impact of earlier wealth losses on the economy. Yield curves will remain steep. Despite low inflation, long-term sovereign bond yields will be pushed a bit further upward due to large borrowing requirements and rising short-term interest rates.
The economy is now entering a new phase, where differences in underlying conditions are becoming ever clearer. The recovery is gaining strength in many places. Meanwhile the crisis in Greece and the other “PIIGS” countries (Portugal, Ireland, Italy, Greece, Spain) is highlighting the major adjustments that are still needed. In many respects, extremely low interest rates have postponed the adjustment burdens. But rapidly escalating government debts and a banking system that remains squeezed will lead to major economic policy challenges during the next couple of years. The task will be to reform the economic policy framework in order to reduce the risks that new financial crises will arise. Meanwhile governments must present and implement credible austerity programmes.
Fourth crisis phase: wheat from chaff
The economic and financial crisis of the past few years can be schematically divided into four phases. The first phase occurred from the collapse of confidence in the US mortgage loan market in July 2007 to the Lehman Brothers crash in September 2008. During that period, the impact was largely limited to affected sectors in certain countries, plus general mistrust in the banking system. The second phase from September 2008 to March 2009 was characterised by a breakdown in the interbank market, causing paralysis in international trade. The third phase is characterised by economic policy measures that are gradually beginning to restore confidence in financial markets. The Group of 20 meeting in London in April 2009 kicked off a process that restored risk appetite, leading to a stock market turnaround and rapidly falling credit spreads. A fourth phase started early in 2010. It is characterised by a focus on the sustainability of public sector commitments. The Greek crisis is the clearest example, but other countries are also affected. Financial markets are also beginning to focus more broadly on the consequences of stimulus measures and what will happen when they disappear.
Year-on-year percentage change
10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 00 01 02 03 04 05 06 07 08 09 10 11
SEB forecast 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0
Source: OECD, SEB
Our main scenario is that the recovery will continue in spite of imbalances and crises. The Asian emerging economies will remain an important engine of global growth. The American upturn is now beginning to gain support from rising employment, while the competitiveness of German exporters is benefiting from a weaker euro. Overall, we expect global growth of 4.7 per cent, both this year and next. In the 30 member countries of
Nordic Outlook – May 2010 | 5
The next phase of the Greek crisis
Many years of weak fiscal policy, combined with stimulus measures in 2008/2009 in response to the economic crisis, have pushed various countries to the edge of fiscal exhaustion. The need for credible, sustainable budget consolidation has become acute, especially in Greece. Market scepticism has led to exploding bond yield spreads against other countries. Other crisisplagued countries − Portugal and Ireland in particular − have also been hit by rising interest costs. Domestic protests against belt-tightening measures and slow, discordant international bail-out deliberations have further aggravated the situation. At this writing, our main scenario for Greece is that it will receive a bail-out loan from the IMF and its fellow euro zone countries of EUR 110 billion. In principle, this will cover 2-3 years of refinancing. It is reasonable to assume that the EU-16 will also approve a broader emergency loan programme that can be used to prevent secondary effects in other euro zone countries. The terms will be tough and unappetising enough to discourage over-utilisation. The Greek programme will be supervised and monitored by the IMF, the euro group and the ECB. It will put Greece in a kind of economic policy guardianship. Since euro zone stability is of international interest, aid from countries like Japan and China via the IMF may be discussed. It now looks as if Greece will be forced to implement an austerity programme equivalent to 10-11 per cent
of GDP. Value-added tax hikes, public sector pay cuts and bonus cuts will be key elements. Other countries will probably be forced into similar measures. There is a great risk of increasing political instability, among other things because crisis awareness is still low. Relationships between countries also risk becoming strained when domestic political interests must be balanced with international cooperation. Our assessment is that these measures will now lead to a gradual improvement. Greece can avoid default and stay in the euro zone. But the crisis will have various long-term consequences. Bond yields will remain high in Greece and some other countries. The need to restore competitiveness and fiscal balance will squeeze their economies for many years. The fundamental shortcomings in the euro system that the crisis has exposed will take a long time to repair. An alternative scenario is that Greece’s problems are so profound that necessary adjustment in the real economy will be too costly, both economically and politically. Greece may thus need to renegotiate the size and terms of its government debt. In such a situation, it is reasonable for the country to leave the euro system. But both debt haircuts and euro zone withdrawal risk triggering instability and increasing secondary problems in other countries and are a substantially worse alternative than following a tough approach.
Divergent government debt burdens
Per cent of GDP
110 100 90 80 70 60 50 40 30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 SEB forecast 110 100 90 80 70 60 50 40 30
Deep-seated problems in the PIIGS countries are hampering growth in the euro zone (see box). At present, our basic scenario is that the core countries of the euro zone will perform decently, among other things because the slide in the euro from previous high valuations will benefit their exports.
Year-on-year percentage change United States Japan China Euro zone United Kingdom Sweden Norway Denmark Finland Nordic countries Baltic countries Emerging markets OECD World, PPP* World, nominal
* Purchasing power parities
Developed economies Emerging markets
The Nordic countries
Source: OECD, SEB
So far, the fourth phase has revealed major divergences in both the financial and economic situation. In Asian countries, expansion is continuing at a rapid pace. They are benefiting both from good domestic fundamentals and an ever-larger influx of capital. The risks of new asset price bubbles are thus moving closer and closer. Those OECD countries that were primarily affected by the crisis via the international trade collapse, but avoided severe damage to their financial sector and residential market, are now rebounding more quickly. This applies, for example, to Japan, Germany and the Nordic countries (except Denmark). 6 | Nordic Outlook – May 2010
2008 0.4 -1.2 9.6 0.5 0.5 -0.2 1.8 -0.7 1.2 0.5 -0.7 6.1 0.6 3.0 2.0
2009 -2.4 -5.2 8.7 -4.0 -4.9 -4.9 -1.5 -4.8 -7.8 -4.4 -15.7 2.4 -3.5 -0.6 -1.3
2010 2011 3.6 2.8 2.4 2.2 10.5 9.0 1.5 1.8 1.5 2.0 3.0 2.7 2.0 2.3 1.5 1.8 2.6 2.7 2.3 2.4 0.1 4.2 6.8 6.4 2.5 2.4 4.7 4.7 4.0 4.0
Source: OECD, SEB
Both the US and the UK face major challenges, with a ravaged financial sector and large central government deficits. Yet US growth appears set to be relatively strong. So far, the inventory cycle and fiscal stimulus measures have served as driving forces, but now that the labour market is about to turn around and the corporate sector is in good financial shape, there are prospects of broader-based growth. In many respects, the UK has suffered substantially worse damage from the financial crisis. The weak pound will still contribute to decent growth, despite coming fiscal austerity measures. The Nordic countries are well positioned to take advantage of the international recovery, due to strong balance sheets and a favourable industrial structure.
Debt as a percentage of GDP
Households US Euro zone UK 2000 2009 62 86 47 64 63 97 Companies 2000 2009 63 75 68 100 72 110 Total 2000 2009 125 161 115 164 135 207
Source: IMF, April 2010
Gentle debt-reduction process
Households and businesses are in the process of reducing their debts, but effects and needs vary greatly between regions and sectors. For example, the debt expansion of the past decade went considerably further in the UK than in the euro zone or the US. In particular, the US corporate sector and euro zone households stand out as having increased their indebtedness relatively little in such a comparison.
The process is being driven both from the demand and supply side of the credit market. Continued consolidation requirements in the banking sector (see “Theme” article) are interacting with increased precautionary saving and the desire to adjust debts because of lower home price levels. Meanwhile the pace of debt adjustment appears to be decelerating, due among other things to the recovery in asset prices. In the US, household debts as a percentage of income have fallen moderately. Meanwhile the savings upturn has come to a halt, and we believe that the household savings ratio will not exceed 3-4 per cent over the next couple of years.
Rapid recovery or new crisis wave?
Favourable short-term growth conditions combined with the need for major reforms in the financial rule system and in economic policy make forecasting especially uncertain. Our main forecast implies a lacklustre recovery in which growth is held back to some extent by restraining forces such as less expansionary economic policies and a slimmed-down credit market. GDP growth of 2½ per cent in the OECD will result in a sluggish downturn in unemployment and lead to large structural deficits in public sector finances. consumption and capital spending to a greater degree than in our main scenario. Large output gaps at the outset and a corporate sector benefiting from exceptionally strong balance sheets are additional factors pointing towards a faster recovery, with annual GDP growth around 3½ per cent in 2010 and 2011. The risks that the world economy will be hit by a new crisis wave in the next couple of years are not negligible. There may be several reasons for such a doubledip scenario. The Greek crisis may escalate into a systemic crisis with global consequences. The underlying weaknesses in the financial system may prove larger than expected and be exposed even after very moderate interest rate hikes. The risks of policy mistakes in the normalisation process or in the shaping of a new financial rule system are also substantial. Historical experience shows that financial crises both take a long time to resolve and may appear in several waves with intervening periods of easing. Such a scenario implies a new recession in the OECD countries. In our assessment, the probability of a positive spiral is somewhat higher (25 per cent) than that of a new period of severe weakening (15 per cent). On the other hand, these risks are hardly symmetrical. A new crisis period may lead to a relatively deep slump, while upside potential is more limited.
Index 2000 = 100
125.0 122.5 120.0 117.5 115.0 112.5 110.0 107.5 105.0 04 05 06 07 08 09 10 11 125.0 122.5 120.0 117.5 115.0 112.5 110.0 107.5 105.0
New crisis wave Rapid recovery
SEB's main scenario
Source: OECD, SEB
A scenario of stronger growth during the next couple of years might be driven by a positive spiral in which good growth will result in a faster recovery in public finances, thereby reducing the need for austerity measures. In such a scenario, rising stock market prices and a brighter labour market will stimulate
Nordic Outlook – May 2010 | 7
US: Modest pace of debt retirement
Per cent of disposable income
140 130 120 110 100 90 80 70 60 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 11 9 7 5 3 1
economic growth figures we foresee in the next couple of years are hardly sufficient to bring about any rapid downturn in unemployment. Preventing unemployment from ending up permanently higher than pre-crisis levels will thus be a major challenge for economic policy in the next couple of years. The IMF is providing various advice on achieving this. In countries like the US, for example, it recommends active measures such as re-training grants to ease the impact of deep crises in specific economic sectors. In Germany, the IMF emphasises the importance of removing aid measures in an orderly way so as not to hamper the upturn. It also recommends continued macroeconomic stimulus measures in those countries that have room for this. It is clear that a pragmatic approach focusing on the special situation of different countries dominates the IMF’s recommendations.
Household debts (LHS) Household savings ratio (RHS)
Source: Federal Reserve
Our conclusion is that because of extremely low interest rates, debt reduction is occurring at such a modest pace that it can be combined with a fairly good economic recovery. To some extent, this implies postponing adjustment burdens. There is a long-term risk that interest rate hikes combined with new rule structures in the credit market may contribute to more rapid debt adjustment.
Inflation will remain low
During the past six months, Consumer Price Index (CPI) inflation in the OECD countries has climbed as the effects of earlier energy price declines have faded from the statistics. Instead, the recovery in energy prices has dominated the 12-month figures. We now expect CPI inflation to fall in most countries when the contribution from energy prices becomes more neutral.
Big differences in the labour market
The consequences of the financial crisis on the labour market have varied greatly between countries. In Germany, for example, unemployment has fallen, while it more than doubled in the US. These divergences can be explained partly by different legislation regarding the hiring and firing of employees. There are also other reasons why labour market reaction to a given GDP change has diverged from expectations based on historical associations (“Okun’s Law”). In countries where the financial system has been the most heavily damaged and where the housing market has been hard hit, domestic demand has fallen on a broad front. Labour-intensive portions of the economy have thus been affected to a greater degree than in those countries that have been affected by the crisis primarily via the collapse in world trade. The shape of crisis measures has also been of great importance. Many countries in Europe, most prominently Germany, have used various types of working hour reductions, which have propped up employment. The labour market in the Nordic countries has generally been resilient. In Denmark and Norway, unemployment has historically shown very low cyclical sensitivity, which has also been confirmed during the current crisis. In Sweden, however, such sensitivity has increased significantly in the past 20 years. This time around, though, the government’s expansionary economic policy helped keep the upturn in joblessness substantially lower than the historical connection with production indicates. In recent months, the labour market situation has been better than expected. A turnaround is finally on the way in the US, while positive surprises have continued in Germany and the Nordic countries, among others. But the
Falling rate of pay increase
Year-on-year percentage change
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 98 99 00 01 02 03 04 05 06 07 08 09 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Source: ECB, BLS
The downward trend in core inflation has continued, and right now the rate is just above 1 per cent. Low resource utilisation dominates the underlying inflation dynamic. The rate of pay increases has slowed appreciably. In the US, combined with a sharp recovery in productivity, this has led to a 5 per cent decline in unit labour costs (ULC) over the past year. In Western Europe, falling productivity has so far helped keep ULC high to a considerably greater extent, but productivity is now on the way up during the initial phase of the recovery. We thus expect core inflation to continue downward during the coming year, bottoming out at close to zero both in the US and the euro zone. Overall, this means that inflation will be well below central bank targets or comfort zones for price stability. Deflation risks will thus be a bigger headache than inflation risks in the next couple of years.
8 | Nordic Outlook – May 2010
Core inflation approaching zero
Year-on-year percentage change
3.0 2.5 2.0 1.5 1.0 0.5 0.0 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Budget-tightening will be postponed
3.0 2.5 2.0 1.5 1.0 0.5 0.0
The timing of the budget-tightening measures that must sooner or later be implemented will be important to the economic recovery process. Major fiscal programmes in 2009 provided an overall stimulus effect equivalent to 2 per cent of GDP in the G20 countries. Most stimulus measures will remain in place during 2010, but the effect on growth will be slightly negative. In 2011 we may see different patterns. A number of small countries with twin (budget and current account) deficits will be forced to make sharp cutbacks in the wake of the Greek fiscal crisis. Large countries have a greater degree of freedom in choosing ways to deal with the crisis. It is thus likely that both the US and the UK will largely postpone their belt-tightening. Stronger economic conditions will presumably also mean that they will begin revising their budget figures in the right direction, which will ease the pressure to impose austerity measures. Overall, we expect a total tightening effect equivalent to 0.5 per cent of GDP in the OECD countries as a whole.
Source: Eurostat, BLS, SEB
Inflation threats exaggerated
Despite low resource utilisation and falling core inflation, there are a few factors that will generate inflationary impulses in the next couple of years. Strong growth in Asia has already pushed up commodity prices substantially. A broader international upturn may lead to intensified competition for finite commodity resources. This may lead to a new surge in commodity prices. Economic policy will include a sizeable element of tax increases that drive up inflation. This may include value-added tax increases that are part of budget consolidation programmes and higher environmental taxes. These factors will slow the decline in inflation during the next couple of years. But since they will have a tightening effect on the world economy, it is unlikely that they will lead to a broad inflationary spiral. The risks that monetary expansion will lead to a broad inflation upturn can be analysed in a similar way. Broad measures of money supply growth are continuing to slow, which demonstrates that monetary stimulus is not leaking out into the real economy. Our conclusion is that the central banks have both the time and the instruments to withdraw excessive liquidity from the banking system before the increase in the monetary base becomes an inflation threat. If inflation should take off before resource utilisation returns to more normal levels, some form of far-reaching institutional change will be needed. Fundamentally, this is related in various ways to the mandate and credibility of central banks. Changes might be associated with temptations for some countries to solve their imbalance problems by inflating away the real-term burden of government debt. A radical change in wage formation or a trade policy collapse that leads different regions in the world economy to choose different inflation strategies might also mark the beginning of a change. Yet at present, such risk scenarios seem remote.
Yield on 10-year government bonds
Spread against Germany, basis points
9 8 7 6 5 4 3 2 1 0 -1 Jul Nov 08 Jan Mar May Jul 09 Sep Nov Jan Mar 10 May 9 8 7 6 5 4 3 2 1 0 -1
Source: Reuters Ecowin
Meanwhile medium-term consolidation strategies are in the process of crystallising as part of the work of the IMF and the G20 countries. Making the situation more difficult is that large deficits in the aftermath of the crisis are coinciding with ever-increasing demographic strains. The IMF has, for example, presented some fundamental principles on how the adjustment can be carried out in ways that minimise damage to the functioning of economies. Looking at the revenue side, it singles out the potential for raising real estate taxes, environmental taxes and tobacco and alcoholic beverage taxes. On the expenditure side, the IMF proposes as a target that expenditures related to the ageing of the population should be kept constant as a percentage of GDP, while other expenditures must be pushed down.
Cautious central banks
The world’s central banks now face a number of tradeoffs. The economic cycle is on the way up, making the risk picture more symmetrical and paving the way for a transition from crisis policies to more ordinary recession policies. In addition, asset prices − especially share prices − have climbed sharply. Meanwhile inflation is continuing downward and the state of the banking sector re-
Nordic Outlook – May 2010 | 9
mains very strained. Rule changes for the financial infrastructure will also mean new strains and risks.
Weak upturn in long-term yields
In an interesting way, developments in the long-term government bond market reflect the various dramatic processes that dominate the world economy. Budget deficits and a brighter economic situation are helping to push up yields, while falling inflation has the opposite effect. Meanwhile an increasing focus on country risks has led to sharper distinctions between different European countries. Yields have been pushed down in core countries led by Germany, driven by both flight to quality and greater uncertainty about the recovery. This is one of the reasons why German and American long-term yields have recently moved in different directions. German 10-year yields are at almost the same low level as during the most intensive period of the crisis, while American ones are 125 basis points higher than at the end of 2008.
Key interest rates
7 6 5 4 3 2 1 0 00 02 04 06 08 10
7 6 5 4 3 2 1 0
Bank of England
Source: ECB, Fed, SEB
Differences in economic situation and in the vulnerability of the financial sector are now leading to divergent strategies. The Asian central banks have begun monetary tightening aimed at preventing market bottlenecks and asset bubbles. The leading central banks in the OECD countries, however, continue to send out relatively gentle signals and are focusing on being careful to prop up the economic recovery. We thus anticipate that it will take until December before the Fed begins hiking its federal funds rate. Before that, it will withdraw liquidity from the market, while it will wait until mid-2011 before slimming down its balance sheet by beginning to sell off assets. The ECB will begin hiking its refi rate in March 2011. As early as this summer, however, it will begin to withdraw liquidity from the market, causing the effective overnight interbank rate (EONIA) to creep upward. The Bank of England is grappling with large fiscal imbalances, but is meanwhile encountering stronger inflationary tendencies. We thus expect the BoE to begin rate hikes at about the same time as the Fed. Central banks will then proceed cautiously, and their key rates will be around 2-2.25 per cent by late 2011. The Nordic central banks can expect a stronger economic upturn. Growth in both Sweden and Norway is relatively high, while home prices have continued upward and household indebtedness has reached record levels. Sweden’s Riksbank has now signalled that it will hike its repo rate soon. We expect that due to strong economic data and worries about rapid household credit expansion, the first rate hike will occur in July. At the end of 2010, the key rate will stand at 1.25 per cent and at the end of 2011 at 2.75 per cent. Norges Bank began raising its deposit rate as early as October 2009. Because of the risk that too wide an interest rate spread over the ECB might lead to excessively rapid krone appreciation, the Norwegian central bank is moving ahead relatively cautiously. We expect the key rate to continue upward to 3.75 per cent by the end of 2011.
10-year government bonds
7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 99 00 01 02 03 04 05 06 07 08 09 10 11
7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0
Source: Reuters EcoWin, SEB
In the immediate future, we expect long-term yields to move sideways. Concerns about Greece and its fellow PIIGS countries will continue to push down yields in other countries, while central bank key rates remain recordlow. During 2011, on the one hand, continued economic recovery and key rate hikes will lead to a slight upturn in long-term yields. On the other hand, there are also strong forces that are holding back such an upturn. Resource utilisation and inflation pressures will remain low, which will contribute to gentle central bank rate hikes. Our overall conclusion is thus that government bond yields will remain at historically low levels, despite large funding needs in both the private and public sector. In a world that is still in an economic slump, there is an underlying savings surplus, which limits the potential for rising real-term yields. We expect American 10-year Treasuries to climb by about 50 basis points to 4.10 per cent by the end of 2011, while corresponding German yields will remain at 3.40 per cent. In recent weeks, Swedish bond yields have been traded on a par with German ones. We expect stronger economic conditions and faster Riksbank key rate hikes in Sweden to gradually help open up a spread of +30 basis points by late 2011; strong Swedish public finances will
10 | Nordic Outlook – May 2010
pull in the other direction. The yield spread between Norway and Germany will remain around 70 basis points in the next few months. After that, we expect continued key rate hikes by Norges Bank to help widen the spread to 80 basis points towards year-end, after which it will fall somewhat in 2011.
have also been an important explanation, as shown by currency appreciation in commodity-producing emerging economies. In addition, the recent increase in concerns about fiscal problems has also been of great importance. The escalation of the crisis in Greece, along with its secondary effects especially on Portugal and Ireland, has continued to push down the euro. Powerful international rescue programmes are now being put in place, which will stabilise the situation in the short term. But the crisis has exposed fundamental problems in the euro system, and the necessary budget tightening will hamper growth, even in a more long-term perspective. The pain threshold for how strong a currency the euro zone can tolerate has thus been lowered. We thus believe that the euro will continue to weak. We predict that it will stand at USD 1.20 by the end of 2011. The British pound will also regain ground against the euro. By the end of 2011, the EUR/GBP exchange rate will be 0.80.
Currency movements since the EUR/USD peak
5,0% 3,0% 1,0% -1,0% -3,0% -5,0% -7,0% -9,0% -11,0% -13,0% -15,0%
Stock markets face new challenges
Share prices have continued upward in recent months after a minor slump early in 2010. Positive macroeconomic signals and indications of continued, extended support from low interest rates have helped fuel the upturn. In addition, company financial reports have been very strong. Many industrial companies have shown great skill in transitioning to larger sales in expansive markets, primarily in Asia. High margins have also contributed to a clear increase in profits, despite modest volume increases (a kind of leveraging effect).
Stock market performance
Index 100 = January 2007
150 140 130 120 110 100 90 80 70 60 50 40 Jan May 07 Sep Jan May 08 Sep Jan May 09 Sep Jan May 10 150 140 130 120 110 100 90 80 70 60 50 40
Percentage change against USD since December 3, 2009
C A D M XN
ZD TR Y C N Y R U B B R L N O K SE K
Sverige OMXS USA S&P 500
Emerging markets FTSE USD
Source: Reuters EcoWin
Looking ahead, there is potential for a good stock market performance. Valuations are relatively moderate, and continued economic recovery will strengthen the profit outlook. The order situation cited in company financial reports also indicates that a clearer upturn in volume is on the way. In Sweden, for example, we anticipate a 20 per cent profit increase in 2010. Meanwhile central banks appear likely to provide continued stimulus and have announced that their low interest rate policies will remain in place. The Greek crisis and its secondary effects pose a shortterm risk, but in order for stock markets to lose momentum for a longer period, the crisis would need to have global consequences and hamper the economic upturn in the US and Asia as well. Looking further ahead, the architecture of economic policy normalisation and the restructuring of the financial system will play a crucial role in stock market performance. Both interest rate hikes and tax hikes in the wake of budget crises will squeeze demand and profits.
The Japanese yen has carried a heavy burden in recent years. Partly due to large domestic capital surpluses, the yen has not followed the usual pattern that currencies in countries with large budget deficits have weakened. Looking ahead, however, we expect the yen to lose value against the US dollar. The USD/JPY exchange rate shows a strong correlation with US interest rates. When the Fed begins raising its key interest rate late in 2010, we believe that the USD/JPY exchange rate will move towards 110 late next year. Although the USD and GBP will regain ground against the euro and yen, we expect the serious deficit problems in the US and UK to result in depreciation against many other currencies. China’s currency strategy will be crucial in determining whether the trend towards better balance in the world economy can continue. This issue will be one of the main points in upcoming G20 discussions. We interpret recent (quiet) signals from China as meaning it is ready to resume the appreciation of the yuan against the USD, especially in light of domestic economic tightening needs. We predict that this process will begin during the next few months and that yuan appreciation will total 5 per cent this year and somewhat more next year. The Swedish krona will continue to strengthen against the euro. Strong government finances and an expansionary fiscal policy, improved export prospects and relatively early Riksbank interest rate hikes will make the krona Nordic Outlook – May 2010 | 11
Deficits, commodities driving currencies
In recent months, the driving forces in the foreign exchange market have been clear. The currencies of fastgrowing economies have been stimulated by the influx of capital and strong dynamism. Rising commodity prices
The economic policies of the future
Concurrently with the ongoing restructuring of the financial system, the IMF has also taken the initiative for a fundamental discussion on the means and ends of economic policy and what lessons can be drawn about the origins and management of the crises of the past few years. The Mutual Assessment Process (MAP) recently initiated by the G20 and produced by the IMF postulates that international economic cooperation should be based on the principle that the fiscal, monetary, currency and structural policies of an individual country must not create obstacles to the economic development of another country. The purpose of MAP is to identify inconsistencies in global economic policy and confront the largest economies with these. At the G20 summit in Canada on June 26-27, the IMF will present proposed policy options aimed at achieving better global economic coordination and more efficient economic policy instruments. A number of changes in various areas have come up for discussion, and others will follow. The next opportunity for the G20 to make decisions will be in South Korea on November 11-12.
Fiscal policy reforms
The point of departure for discussing future fiscal policy is how the international community can create a stronger framework for fiscal discipline. The G20 will probably issue recommendations in line with the EU Growth and Stability Pact that is currently in effect, for example establishing a target for bringing down general government debt to a maximum of 60 per cent of GDP over a certain period. Sweden’s fiscal framework, with surplus targets for public sector finances and expenditure ceilings, may be cited as an example of how a country can create sufficient political manoeuvring room in case of recession. Such frameworks can be supplemented with exemptions that allow a greater degree of freedom under exceptional circumstances. It would be conceivable to have rules that automatically activate economic stabilisers in case of major recessions. For example, if the decline in GDP or the unemployment rate surpasses certain predetermined levels, tax cuts and grants to households may be implemented immediately. Such temporary measures must be tailored to have the largest and fastest possible impact. The knowledge that there is a credible stimulus system may in itself reduce economic fluctuations.
Monetary policy reforms
The crude nature of the interest rate weapon and its limited ability to respond to excess indebtedness and risk-taking, as well as the accompanying system-endangering asset price bubbles, while achieving economic stability is increasingly being viewed as a problem. The question will thus be whether interest rate policy needs to be supplemented with other instruments that can influence credit volume (loan-to-value ratios, principal payment requirements or new regulations). This may also lead to calls for greater integration of macroeconomic analysis and financial oversight, which implies greater cooperation (or mergers) between central banks and regulatory authorities. The IMF has raised the question of boosting inflation targets (normally 2 per cent) in order to create a greater safety distance to the deflation point. This is a way of achieving greater manoeuvring room in interest rate policy, since the neutral interest rate is higher and the distance to the zero interest rate limit are thus greater. Higher inflation targets also increase opportunities to bring about relative wage changes, which would increase economic mobility. This question is very controversial, however, among other things because it is linked with concerns that some countries may try to inflate away their debts. The IMF continues to maintain that higher inflation targets have various advantages, but it seems unlikely that such a proposal will be presented to the G20 in Toronto or Seoul.
One basic reason why so many questions are now being opened up for discussion is that the crisis exposed a number of weaknesses in the macroeconomic framework. The basic principles that have dominated economic policy in the past 25 years, including inflation targeting, deregulated capital markets and a passive role for fiscal policy turned out not to deliver the stable high growth embodied in the concept of ”The Great Moderation”. The violence of the crash instead implies that world leaders must now assume the task of developing new regulations and principles. In that sense, the situation is reminiscent of the early 1970s, when the Bretton Woods system collapsed. This was followed by more than a decade of repeated crises before the contours of a new system began to take shape. That experience shows that it may take a long time to find a way to a new, sustainable system and that there are major risks of temporary mistakes during the reassessment process.
12 | Nordic Outlook – May 2010
an attractive alternative in the prevailing international climate and flight to safety. We thus expect the EUR/SEK exchange rate to be 9.00 as early as the end of 2010.
Krona tracks business optimism
11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 98 99 00 01 02 03 04 05 06 07 08 09 10 -60 -50 -40 -30 -20 -10 0 10 20 30
The Norwegian krone will benefit from rising oil prices, twin surpluses in the budget and current account and tighter monetary policy ahead. The strength of the krone will help push down inflation during 2010. Looking ahead, Norges Bank thus regards a somewhat weaker NOK as desirable. But in the prevailing international environment, replete with fiscal worries, it is difficult to foresee anything but continued krone appreciation. We forecast a EUR/NOK rate of 7.75 in December 2010.
EUR/SEK (LHS) Business confidence, net balance (RHS)
Source: NIER, SEB
Nordic Outlook – May 2010 | 13
Theme: Reforming the financial infrastructure
Rule changes for a squeezed credit market
Systematic timetable for rule changes Big adjustments for global financial sector Banks squeezed from many directions
There is a long list of proposed rule changes and new requirements. This work is being coordinated by the Bank for International Settlements (BIS), or Basel Committee on Banking Supervision, and the Financial Stability Board (FSB). The pace of work is very fast. The public comment period for these proposals expired in April, and continued negotiations and impact assessments will now follow. The aim is for the G20 to make a decision in late 2010 for a launch in 2012. This timetable is probably too optimistic, but it is nevertheless likely that the financial sector is already beginning an adjustment. There are strong reasons to quickly prepare for changes that will lead to new conditions for selecting a business model. This is true even if generous transition rules will apply. Among other things, these proposals deal with the following: That banks/financial institutions must have more and better capital and that capital adequacy requirements must be raised Introducing capital buffers with cyclical elements that reduce the risk of “feedback loops” in the economic and financial system Limiting the build-up of excessive leverage ratios Strengthening both short and long-term liquidity and financial buffers (liquidity coverage ratio, structural liquidity ratio) Introducing a financial sector tax The purpose of the international process is to find the lowest common denominator. But it is always possible for a country or region to introduce tougher requirements than the minimum ones that apply at the international level.
The international community is now engaged in an intensive period of discussion and decision making aimed at finding a fast, sustainable path back to global economic and financial stability. This task is a top priority of the G20 (19 countries plus the EU), a forum that represents 80 per cent of world trade and 70 per cent of the earth’s population. The work is taking place concurrently in three mutually dependent areas: Finding an optimal economic policy that can manage the aftermath of the deep crisis and look after the recovery Evaluating and reassessing the future means and ends of the economic policy that will be pursued Reforming the financial infrastructure
The potential to achieve the aims in the third point are discussed below.
New financial infrastructure − getting there
The purpose of introducing new requirements and regulations for banks and other financial institutions is to create a financial infrastructure with a higher degree of resilience and stability. Fundamental questions in this context are what functions the financial sector should have and how big it should be. Another question that decision makers are increasingly facing is whether a strategy of gradual changes is the most fruitful, or whether more far-reaching reforms are needed.
Higher cost of capital
At present it is difficult to assess the impact of the proposals on the credit market and the overall economy. There is great uncertainty about which measures will actually be enacted. The politicians have “pledged” that these proposals will not jeopardise the healing process in the financial sector and/or the economic recovery. This summer, impact assessments that examine this will be presented. Our fundamental conclusion is, however, the same as previously. Since the purpose of the proposals is to influence the balance sheets and income statements (structure and potential return) of financial institutions, it is reasonable to count on a tighter credit situation than
= Real economy
= Credit/banking market
14 | Nordic Outlook – May 2010
normal during a transitional period. In addition, the cost of capital will establish itself at a higher level than before the crisis. One reason for this is that the cost of equity for banks is normally higher than the cost of deposits.
many financial institutions need to extend the maturity of their borrowing. The process is being accelerated because central banks are reducing their quantitative easing operations, while regulators are requiring a better match between long-term deposits and lending in the banking system. Since funding with longer maturities is more expensive than today’s borrowing via central banks, this will squeeze future profitability. Also squeezing profitability is greater competition for household and company deposits and the fact that the yield curve will eventually become less steep.
Credit conditions remain squeezed
The situation in the global credit market has improved appreciably in the past year, but due to the lingering effects of the economic and financial crises and new rules/requirements, the situation is far from normal. Depressed profitability and maturing loans for the banking sector totalling about USD 5 trillion during 2010-2012 will result in major strains. The need for banks, governments and companies to refinance maturing loans (and finance new deficits) simultaneously may create upward pressure on interest rates. But a maturing loan also means that an investor needs to find somewhere to put his funds. The important question is whether, for example, the investor will demand compensation for extending the maturity of a loan and for accepting a foreign exchange or credit risk. The global banking system’s credit side has not yet been restored. Further write-downs can be expected. According to a compilation by the IMF, global write-downs realised to date total USD 1.5 trillion. Write-downs of another USD 700 billion or so are expected in the near future. The situation is the most serious in the United Kingdom, where write-downs are by far the largest in relation to the size of the economy. The euro zone, on the other hand, has a larger percentage of overall writedowns ahead.
Low credit expansion in euro zone
Year-on-year percentage change
12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 92 94 96 98 00 02 04 06 08 10
12.0 10.0 8.0 6.0
4.0 2.0 0.0 -2.0
Money supply growth (M3)
New write-downs ahead for banking sector.
900 800 700 600 500 400 300 200 100 0
US UK Eurozone
100 680 350 400 70 80 100 20 280 180
Expected writedowns, USD bn Realised writedowns, USD bn
The calculations that the IMF has recently published about the “funding gap” (estimated credit capacity minus credit demand from the non-financial sector) focus primarily on the UK, where the 2010 budget deficit is projected at about 10 per cent of GDP, while the corresponding imbalance in the euro zone and the US is only equivalent to 2 per cent of GDP. To summarise, we are drawing the conclusion that because of rule changes, underlying economic factors and self-imposed balance sheet adjustments, there will be no room for credit expansion via the banking system over the next couple of years. Conditions vary between countries, regions and sectors, but on the whole, shrinking credit volume will hold down medium-term economic growth.
Looking ahead, the debit side of banks will also be more in the spotlight. After two years of serious liquidity crisis,
Nordic Outlook – May 2010 | 15
The United States
Inflation will continue to fall
Increasingly broad-based but fragile recovery Households postpone their saving adjustment Employment increasing, but jobless rate will remain high Fed will hike its key interest rate in December
62.5 60.0 57.5 55.0 52.5 50.0 47.5 45.0 42.5 40.0 37.5 35.0 98 99 00 01 02 03 04 05 06 07 08 09
ISM indicates stronger growth
Index, year-on-year percentage change
6 5 4 3 2 1 0 -1 -2 -3 -4
The American economic recovery is continuing. The upturn has gradually broadened and stands on increasingly firm ground. Yet GDP growth during the first quarter, 3.2 per cent on an annualised basis, was somewhat weaker than we anticipated in our February forecast. GDP growth will end up at 3.6 per cent this year and 2.8 per cent next year. The growth contribution from inventory build-up and fiscal stimulus is fading, which is being offset by stronger final domestic demand. Employment is moving towards an upturn, but the jobless rate will decline only slowly to just below 9 per cent at the end of 2011. This, combined with a continued decline in core inflation, will help persuade the Federal Reserve to hold off on hiking its key interest rate until December this year. By the end of 2011, the federal funds rate will be a low 2.0 per cent.
ISM Composite index (LHS)
Real GDP (RHS)
Source: ISM, Department of Commerce
Because of strong company balance sheets and a low initial level of fixed investments, we expect a decent upturn in capital spending − especially in 2011 − despite low capacity utilization. It is still remarkable, however, how differently large companies and small businesses view the future. The gap between the National Federation of Independent Business (NFIB) small business index and the ISM, which is dominated by large companies, is the widest since small business surveys began in 1974. There are several reasons for this difference. Small businesses are dependent on bank loans for their funding, while large companies have access to the global capital market. Large companies can also benefit from a strong upturn in exports, while the depressed construction industry is having a considerably larger downward effect on the NFIB index. This gap is a warning signal, since the NFIB index actually has a slightly higher correlation with GDP than the ISM index, viewed over the past 30 years. Current NIFB index levels are consistent with a GDP growth rate of around zero.
Fiscal stimulus and inventories are boosting GDP
6 5 4 3 2 1 0 -1 -2 Q2 Q3 09 Q4 Q1 Q2 10 Q3 Q4 Q1 Q2 11 Q3 Q4 SEB forecast 6 5 4 3 2 1 0 -1 -2
Inventory contribution Net effect of stimulus
Source: CBO, Recovery.gov, SEB
Small firms are lagging behind
65 60 55 50 45 40 35 30 86 88 90 92 94 96 98 00 02 04 06 08 10 15 10 5 0 30 25 20
Big companies happy, small ones hesitant
All the important confidence indicators have rebounded from their lows. The ISM purchasing managers’ index for manufacturing is now approaching historical peaks, with especially high levels for the “Production” and “New orders” sub-indices. In recent months the ISM purchasing managers’ index for services has also climbed sharply. Given this broadening of optimistic expectations, our composite ISM index indicates GDP growth of 3½-4 per cent. The US business sector has clearly been able to take advantage of a combination of credit market easing, a relatively weak dollar and strong Asian demand.
ISM Manufacturing (LHS)
Source: ISM, NFIB
16 | Nordic Outlook – May 2010
The United States
Higher consumption despite weaker income
Household consumption rose significantly faster than expected in the first quarter, even though disposable income actually fell in real terms. The upturn reflects an unexpected fall in the household savings ratio. Wealthbased savings models indicate that the savings ratio should climb substantially from today’s levels. But over the past two decades, such models have generally overestimated the savings ratio. There are many signs that the Fed’s low interest rate policy will help this pattern to persist during the next couple of years. Our forecast for this period is thus no longer based on a sharp upturn in savings. The savings ratio will amount to 3 per cent this year and then rise moderately to 3.6 per cent in 2011, measured as annual averages. Weak income growth will nevertheless restrain private consumption. The labour market recovery looks set to follow the pattern of the two most recent economic upturns: employment growth will be considerably slower than the usual scenario during the period 1950-1983, when fast-growing employment laid the groundwork for a sharp upturn in consumption during the first year of recovery. In addition, tax hikes are likely in 2011. Our overall forecast is that real disposable income will grow by a low 1 per cent this year and 3 per cent in 2011.
Consumption will grow more strongly than disposable income this year, and the opposite will be true in 2011. Consumption growth will end up just below 2½ per cent both this year and next. Household confidence indicators remain at historically very low levels. This supports a cautious consumption forecast. Consumer confidence is compatible with consumption growth of 1-1½ per cent this year: well below our forecast.
Household balance sheets on the mend
9.5 Long-run average 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 Liquid assets = deposits, credit market instruments 5.0 and corporate equities 4.5 4.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25
Total assets to liabilities (LHS) Liquid assets to liabilities (RHS)
Source: Federal Reserve
Household balance sheets will remain an obstacle to growth in the longer term as well. Because of household debt retirement, combined with the stock market
Can the US double its exports in 5 years?
A few months ago, the Obama administration established a foreign trade target: a doubling of US exports in five years. The background of this National Export Initiative is that US household consumption will probably show weak growth for some time to come, so foreign trade must shoulder a larger part of the burden. The US would thereby also contribute to a better global trade balance. Today consumption accounts for near-record levels (71 per cent) of American GDP, while exports are equivalent to less than 12 per cent: a level that seems to ensure chronic current account deficits. Viewed in a historical perspective, this is a tough target: exports have indeed previously doubled in five years, but usually high inflation has helped puff up the figures. According to established theory, exports are determined by relative prices and income trends in the countries one trades with. It is thus possible to design an export model with real, trade-weighted exchange rates and global GDP as explanatory variables. Assuming that global GDP grows according to our forecasts, our estimates indicate that a real-term weakening of the dollar by nearly 30 per cent during a 5-year period is required in order to double exports. Such a large decline in the US currency has not occurred, however, since the Bretton Woods system was buried in 1971. The 26 per cent decline in the dollar during 1985-1990 comes the closest.
Doubling US exports in 5 years
5-year percentage change, index
225 200 175 150 125 100 75 50 25 0 -25 75 80 85 90 95 00 05 10 15 60 70 80 90 100 110 120 130 140
US exports (LHS) SEB model: US exports (LHS) Trade weighted real exchange index (RHS)
Source: IMF, Fed, Census Bureau, SEB
Our conclusion is that this target is unrealistic. The aggressive “weak dollar” policy that would be required would be very difficult for other countries to accept, especially in a situation where many countries need to rely on fairly strong exports in order to emerge from the economic crisis.
Nordic Outlook – May 2010 | 17
The United States
upturn, the ratio between household (liquid) assets and liabilities looks healthier than a year ago. But this ratio still has a long way to go before reaching its long-run average.
Housing market shaky once again
The housing market is normally the sector that rebounds first when monetary policy eases. But despite recordlow interest rates, the Fed’s purchases of mortgage bonds and government subsidies to home buyers, housing statistics have been a disappointment over the past six months. The National Association of Home Builders (NAHB) index of construction industry confidence rose to 19 in April but this is the same level as in September 2009 and is far below the 50 mark that indicates growth. Another 5 to 6 million foreclosures are in the pipeline, which means that the “shadow supply” of homes is considerably larger than the 8-9 months of inventory that the official figures indicate. The supply situation is holding down both prices and new construction. Housing starts will total 620,000 this year and 850,000 in 2011, measured as annual averages. The S&P/Case-Shiller home price index, the main price measure that the market focuses on, has climbed eight out of the last nine months in seasonally adjusted terms. Without seasonally adjustments, however, it has fallen for five months in a row. Meanwhile, alternative measures such as the FHFA and Loan Performance home price indices have turned downward again. By year-end, we expect the S&P/Case-Shiller index to remain close to current levels, but the risk is on the downside. This spring, before bouncing back in March, home sales weakened to new lows and this points towards continued depressed prices.
162,000. We expect business sector employment to continue rising during the rest of 2010. Cutbacks during the economic crisis were forceful; this is reflected by far higher sustained US productivity growth than in Western Europe, for example. The need to rehire employees is thus likely to become apparent relatively soon, but due to the moderate production upturn, during the coming year we expect private sector employment growth not to exceed an average of 130,000 jobs per month, or less than 1½ per cent on an annualised basis. During the spring nearly a million people are working on short-term contracts for the 2010 Census, which is temporarily driving up public sector employment. This effect totalled 48,000 in March. Public sector employment is nevertheless being undermined by the poor financial health of state and local governments, indicating a continued need for employee cutbacks. State and local government employees total around 20 million people and thus represent about 15 per cent of the US labour force, compared to fewer than 3 million federal jobs. Overall, the employment upturn will not be enough to push down the jobless rate especially far. We expect US unemployment to average 9.5 per cent this year and 8.9 per cent in 2011. Hours worked will increase by less than 2 per cent in the coming year. Continued high unemployment will contribute to a clear wage and salary squeeze. In the past year, average hourly wages have risen by 1.8 per cent, which is lower than the rate of increase in the Consumer Price Index during the same period. This pay squeeze will continue during our forecast period. In 2010, hourly wages in the private sector will go up by 1.6 per cent and in 2011 by 1 per cent: the lowest rate of increase in recent decades.
A double-dip in home prices?
Rebase 2005:1 = 100
120 115 110 105 100 95 90 85 80 75 05 06 07 08 09 10 120 115 110 105 100 95 90 85 80 75
Inflation will continue to fall
A recurring pattern in American economic cycles is that inflation declines well into the economic upturn. In 87 per cent of cases, core inflation is lower one year into the recovery, compared to when the recession ended. In 75 per cent of cases, core inflation is also lower after two years. Idle capacity seems to dominate price formation. This occurs primarily by squeezing unit labour cost (ULC). The historical association between ULC and inflation is also strong; the correlation is 0.82. As a comparison, the correlation between commodity prices and inflation is 0.33. ULC fell by no less than 5.9 per cent on an annualised basis in the fourth quarter of 2009. Year-on-year, the change in ULC was a record-low -4.7 per cent. Core inflation continued downward this past winter and is now at the low point of the previous cycle: 1.1 per cent in November 2003. However, conditions are different today from six years ago. At the end of 2003, unemployment was 5.8 per cent and capacity utilisation in manufacturing was 75 per cent (not 70 per cent like today); idle capacity is thus considerably larger at present.
Loan Performance S&P Case-Shiller 20 Existing-home sales, median price
Source: OFHEO, S&P, NAR
For the Fed, developments in the housing market have undoubtedly been a disappointment. During the past six months, the central bank has expressed hopes that a turnaround is imminent and highlighted early indications that the trend has been moving in the right direction.
Employment is rebounding
Employment has rebounded at a faster pace than we had anticipated. In March, the number of jobs rose by
18 | Nordic Outlook – May 2010
The United States
Unit labor cost relative to inflation
Year-on-year percentage change
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 50 55 60 65 70 75 80 85 90 95 00 05 10 82% correlation 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0
growth in M2 has fallen below 1.6 per cent, compared to 8 per cent a year ago.
MZM now below the zero line
Year-on-year percentage change
40 35 30 25 20 15 10 5 0 -5 80 84 86 88 90 92 94 96 98 00 02 04 06 08 10 40 35 30 25 20 15 10 5 0 -5
Unit labour cost
Our forecast is that core inflation will fall from 0.9 per cent this year to 0.5 per cent in 2011. Consumer Price Index inflation will also fall after a temporary energydriven upturn. Altogether, we expect inflation to end up at 1.5 per cent this year and 0.7 per cent next year.
Source: Federal Reserve
Further decline in core inflation
Year-on-year percentage change
6 5 4 3 2 1 0 -1 -2 98 99 00 01 02 03 04 05 06 07 08 09 10 11
6 5 4 3 2 1 0 -1 -2
In addition, the decline in bank lending is continuing. This decline is currently more than 8 per cent year-onyear, which means that we are still in the midst of the steepest downturn in at least 40 years. The Fed has underscored that it is keeping an eye on the development. In our assessment, monetary curves must begin to point upward before interest rate hikes begin to make sense.
Bank lending keeps falling
Year-on-year percentage change
20 15 10 5 0 -5 20 15 10 5 0 -5 -10 75 80 85 90 95 00 05 10
Source: US Department of Commerce, SEB
Fed will hike key interest rate in December
Despite overwhelmingly positive signals regarding output and the labour market, the Federal Reserve has communicated a continued dovish message. Market expectations on the timing of the Fed’s first rate hike have thus gradually been pushed back. In various contexts, members of the Federal Open Market Committee have expressed irritation at the market’s attempts to determine the timing implied by the policy formulation that the Fed will maintain its key interest rate at a low 0-0.25 per cent ”for an extended period”. Instead the Fed has tried to describe what changes in the economic situation might catalyse a shift in monetary policy. These primarily include changes in resource utilisation, inflation trends and inflation expectations. Given both our forecast and the Fed’s current picture of the economic situation, no interest rate hike is imminent. One important reason for the Fed’s caution is probably that the transmission mechanism still works poorly. The monetary base is currently increasing at around 20 per cent on an annualised basis. Meanwhile broad measures of money supply are continuing to fall; for the first time in 15 years, MZM growth is now below zero. Year-on-year
Source: Federal Reserve
In the same way as after the last recession, when the dotcom (IT) bubble popped, persistent concerns about deflation may cause the Fed to remain passive. Core inflation, measured using a personal consumption expenditures (PCE) deflator − the measure that the Fed focuses on − is generally a bit lower than core inflation based on the CPI. Core PCE inflation will thus probably fall below 1 per cent, the lower limit of the Fed’s comfort zone, this year. Because of such low inflation figures, the Fed may raise its key interest rate later than we have forecasted. In addition, the central bank’s own measure of underlying price pressure, where the currently most volatile components are excluded, is at record-low levels. In spite of this, we are sticking to our forecast that the Fed’s first key rate hike will occur in December 2010 and that the federal funds rate at the end of 2011 will be 2 per cent. Meanwhile preparations are under way to pave the way for a normalisation of monetary policy. This year it is mainly a matter of testing the tools for with-
Nordic Outlook – May 2010 | 19
The United States
drawing liquidity. The arduous task of slimming the balance sheet by selling assets will not begin until 2011 at the earliest.
Sharp moderation in underlying inflation
Year-on-year percentage change
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 84 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 04 06 08 10
The higher yield caused by rising government debts, large budget deficits and acerbic announcements from rating agencies thus have to be weighed against the squeeze on yields resulting from continued low capacity utilisation and a falling trend of inflation.
Health care reform approved
Congress finally voted in favour of President Obama’s health care plan. According to the Congressional Budget Office (CBO), the plan will cost an estimated USD 940 billion over a 10-year period. It will provide coverage to 32 million Americans who lack medical insurance today. Its costs will be funded with the help of new taxes on high income earners, fees on health care companies and cuts in Medicare. The health care reform is a major success for the administration. It signifies that in the future, Barack Obama may be counted as one of the few presidents who reshaped American society. But its impact in the form of GDP growth and budget deficits will be very small during the next couple of years. Not until 2012 will the reform help lower the federal deficit.
Fed central tendency: core PCE inflation in 2010
FRB Cleveland, Median FRB Cleveland, 16% trimmed-mean
Source: Cleveland Fed
Fading stimulus effects
Our assessment of fiscal policy has not changed significantly since February; stimulus measures will contribute 1 percentage point of GDP to growth this year and -0.8 per cent in 2011. The federal budget deficit, which totalled USD 1.4 trillion in fiscal 2009 (9.9 per cent of GDP), will reach close to USD 1.6 trillion this fiscal year and USD 1.4 trillion next year. Federal debt, which stood at 84 per cent of GDP in 2009, will be just below the 100 per cent mark at the end of our forecast period. The difficulties of managing such a high debt level will mean that the country’s sovereign credit rating may be in danger a few years from now. The risk that the US may lose its AAA status has increased “substantially”, according to Moody’s ratings agency. One common rule of thumb is that government bond yields rise by about 50 basis points if their credit rating is downgraded by one step.
Debt to GDP ratios *
Per cent of GDP
130 120 110 100 90 80 70 60 50 40 30 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
130 120 110 100 90 80 70 60 50 40 30
20 | Nordic Outlook – May 2010
Record-fast export recovery Unemployment below 5 per cent Bank of Japan will raise key rate in 2011
GDP growth will reach nearly 2.5 per cent this year, half a percentage point higher than our February forecast and above the consensus view. Exports will increase by 6-7 per cent, capital spending by more than 4 per cent and private consumption just above 2 per cent. Next year, growth will total more than 2 per cent, also an upward adjustment from our February forecast. The economic rebound is pulling the labour market with it; unemployment peaked at 5.6 per cent last year and fell unexpectedly to 4.9 per cent in January 2010. The downturn occurred faster than anticipated and we foresee a continued downturn, albeit at a fairly slow pace. The jobless rate will average just below 5 per cent this year and about 4.5 per cent in 2011. Deflation pressure will continue in Japan but will be somewhat less powerful. CPI inflation bottomed out at -2.5 per cent in October 2009 and is now at about -1 per cent (negative inflation 13 months in a row). We expect rather small movements ahead, and CPI inflation will average -0.6 per cent in 2010. Next year, decent GDP growth and an improved labour market will help inflation climb above zero again. The government’s many stimulus packages since 2008 have contributed to the economic turnaround but have further exacerbated Japan’s precarious fiscal situation. The total cost of these measures is equivalent to nearly 7 per cent of GDP, allocated over 2008-2010. The general government budget showed a deficit of about 10 per cent of GDP last year, and the economic turnaround is not strong enough to generate any improvement over the next couple of years. The economic turnaround has persuaded the government, following the lead of Finance Minister Naoto Kan, to declare its support for a formal inflation target. The Bank of Japan has expressed doubts, however, on grounds that such a target risks shifting decision makers’ focus from imbalances in the economy and in the financial system. This discussion will hardly affect interest rate decisions in the near future, though. We expect the BoJ to hike its key interest rate during the second half of 2011, but it cannot be ruled out that the bank will act earlier if growth or inflation should prove faster. The yen will gradually weaken during our forecast period. In September the USD/JPY rate will be 95 and in December 2011 it will be 110. The EUR/JPY rate will be 123 in December 2010 and 132 in December 2011.
The Japanese economy is doing better than expected. Exports of goods and services, which fell by nearly 25 per cent last year despite a fourth-quarter lift, have continued to climb thanks to higher demand from China and other Asian countries. Exports to China rose by a full 30 per cent in the fourth quarter and will continue upward this year. Total exports have not increased so fast since 1980, but this is occurring from a low level, at present about 20 per cent below that of a year ago.
Tankan Survey: Take-off in manufacturing
40 20 0 -20 -40 -60 -80 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan 06 07 08 09 10 40 20 0 -20 -40 -60 -80
Housing and construction Retail sales
Source: Bank of Japan
The surge in exports represents a shot in the arm for the entire economy; manufacturing is benefiting from higher auto and electronics sales, the retail sector from falling unemployment and rising consumer confidence. The manufacturing rebound is more powerful than in other countries, both because last year’s decline was deeper and Asia is now growing faster than other parts of the world economy. We expect industrial production to rise by 15-20 per cent this year and nearly 10 per cent in 2011. Retail sales have also turned around quickly, rising more than 4 per cent year-on-year in February. The central bank’s Tankan Survey nevertheless shows that the housing and construction industry is still grappling with major problems. The reason, as earlier, is that deflationary forces in the Japanese economy make it advantageous to postpone investments and durable goods purchases.
Nordic Outlook – May 2010 | 21
Continued strong growth
China will grow 10.5 per cent this year, India 8 per cent Fiscal and monetary tightening Inflation under control in China
above zero. Looking ahead, we expect inflation to climb somewhat, reaching 3.0-3.5 per cent in 2010-2011. We foresee encouraging prospects for good Chinese economic performance ahead. Several policy tools, the same ones employed to stimulate the economy, will need to be used. With the aid of fiscal belt-tightening (starting next year), a higher key interest rate and currency appreciation, growth will decelerate to a level compatible with a controlled inflation rate. Yuan appreciation will begin late in the second quarter and be about 5 per cent this year and somewhat more in 2011. When this occurs, it will be an important signal that the authorities view domestic demand as more robust and not so dependent on stimulus programmes. Belt-tightening and base effects will slow growth, starting in the second half of 2011. GDP growth will thus not exceed 10.5 per cent in 2010 and 9.0 per cent in 2011. Reforms in education, health care and pension systems will enable households to reduce their precautionary saving. Rising private consumption could thus decrease the Chinese economy’s dependence on exports.
The 2009 global recession pulled down growth in Asian emerging countries to its lowest level in eight years, but these economies have shown better resilience than the West. China and India were among the countries that managed to maintain a relatively good growth rate, driven by sharply expansionary fiscal and monetary policies. Because of their strong balance sheets, many Asian countries had room to respond to the economic crisis with vigorous fiscal policies. The average stimulus in 15 Asian developing countries is equivalent to 7.5 per cent of GDP over the years 2008-2010 (India about 4 per cent and China about 14 per cent), compared to less than 3 per cent of GDP in the G7 countries. In Asia the recovery began as early as the second half of 2009. Signals from a number of countries now indicate good growth. The challenge ahead will be to ensure that the recovery in domestic demand can survive on its own power, without support from stimulus measures.
Inflation in China and India
15.0 12.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 Jan May Sep 07 Jan May Sep 08 Jan May Sep 09 Jan 10
China growing strongly
China’s GDP growth bottomed out as early as the first quarter of 2009. Because of rapid growth after that, strengthened by stimulus-driven domestic demand and exports, growth reached 8.7 per cent in 2009. In the first quarter of 2010, GDP was up by 11,9 per cent, in line with our February forecast. Our assessment that the GDP will rise at a 12 per cent rate in the first half thus remains in place. There are many indications of continued good growth. Leading indicators are at pre-crisis levels and consumer confidence has strengthened. Output data also show strong performance. Industrial production rose by 18.1 per cent in March; retail sales and capital spending in manufacturing have recovered. Because of the rapid increase in domestic demand, China’s trade balance during March was negative for the first time since 2004. The risk of overheating has persuaded Chinese authorities to tighten economic policy since last autumn, mainly by placing limits on lending; M2 money supply and lending by the banks are now expanding more slowly. So far, however, the upturn in inflation has been moderate, despite rising economic activity. CPI inflation is now around 2.5 per cent, while core inflation is slightly 22 | Nordic Outlook – May 2010
10.0 7.5 5.0 2.5 0.0 -2.5
Source: Reuters EcoWin
India: Good growth but high inflation
India has also weathered the crisis well, but fiscal expansiveness has swelled already large public sector deficits to around 10 per cent of GDP this year and next. Industrial production has been growing since the fourth quarter of 2009 by more than 10 per cent year-on-year. Meanwhile inflation has climbed above 10 per cent. Certain price controls have been imposed, and the central bank has raised its reserve requirements for banks and hiked its key interest rate. Further rate hikes plus fiscal tightening measures are expected to slow price increases ahead as the economy cools off. We expect GDP to grow by 8.0 per cent in 2010 and 7.0 per cent next year.
The euro zone The euro zone
Imbalances hampering recovery
Indicators continuing upward, decent growth Inflation will keep falling Major differences in cost situation ECB will not hike refi rate until March 2011
positioned, since the weaker euro and the recovery in Asia and the United States are now stimulating the export sector. Altogether, we believe that GDP growth will reach 1.5 per cent this year and 1.8 per cent in 2011, a small downward adjustment compared to our February forecast and below trend growth this year. This is nevertheless a relatively optimistic forecast, compared to the consensus view. GDP will rise about 0.2-0.3 per cent in the first quarter compared to the fourth quarter of 2009 and then accelerate somewhat during the rest of 2010.
Euro zone economic growth slowed more rapidly than expected late in 2009. GDP levelled off completely between the third and fourth quarter. Nor has 2010 started off convincingly. German industrial production in February was weak, especially with respect to consumer goods, while retail sales figures have provided downside surprises, but these disappointments are probably partly a consequence of the cold winter weather, which has hampered construction and other activities. The government budget crisis in some of the “PIIGS” countries (Portugal, Ireland, Italy, Greece and Spain) is also contributing to greater uncertainty. In particular, the situation in Greece reveals important shortcomings in the entire euro system. Market scepticism about Greece’s ability to deal with its situation remains very high, despite domestic austerity programmes and international aid efforts. There is also lingering concern that other countries will suffer similar problems and that the final bill for the euro zone as a whole will be so high as to affect the growth potential of the whole region.
Decent growth in spite of everything
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 04 05 06 07 08 09 10 11
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0
Quarter-on-quarter, annualised Year-on-year percentage change Growth indicator (Euroframe)
Source: Euroframe, Eurostat, SEB
IFO index continuing upward
Year-on-year percentage change (GDP), index 2000=100
5.0 3.0 1.0 -1.0 -3.0 -5.0 -7.0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 120 115 110 105 100 95 90 85 80 75
Germany will grow fastest in the euro zone − by 1.8 per cent this year and 2.0 per cent in 2011 − a marginal downward adjustment. France will end up around the euro zone average both this year and in 2011, with Italy growing by just below 1 per cent this year and somewhat faster in 2011. Household consumption will increase by only 0.2 per cent this year in the euro zone. This is partly because the German bonus for scrapping old cars has been phased out, with fewer car purchases in 2010 as a consequence. Capital spending will rebound by about 1.5 per cent, following last year’s slide of about 11 per cent. Exports of goods and services will recuperate faster, with an upturn of more than 4 per cent this year. Since imports will increase by 4 per cent, the GDP contribution from net foreign trade will be neutral this year (-0.8 percentage points in 2009).
GDP (LHS) Business conditions (RHS)
Source: Federal Statistics Office, IFO
Decent growth this year
But meanwhile there are signs that the economic recovery will continue, though at a leisurely pace. Various important leading indicators have continued upward. The ESI sentiment indicator from Eurostat (the EU’s statistical office) and Germany’s IFO business sentiment index, for example, point to continued growth momentum well into the autumn. The German economy is favourably
Southern Europe hampering growth
The crisis in southern Europe is continuing (see also “International overview”). After negotiations with the EU and IMF on the recently unveiled aid package, Greece has pledged to carry out austerity measures equivalent Nordic Outlook – May 2010 | 23
The euro zone
to more than 10 per cent of GDP, with the aim of bringing down the deficit to less than 3 per cent of GDP by 2014. The package is sizeable enough to give Greece a chance to implement the necessary belt-tightening, but meanwhile it is too early to declare an end to the emergency before these measures are actually in place and lower budget deficits begin to be reported. What has been announced to date is that Greece’s budget consolidation programme includes lower wage and salary payments in the public sector, a hike in value-added tax and a higher retirement age. This has triggered protests, and there is still a risk that the government will not have the stamina to implement all these measures. After Greece, Portugal is the country that runs the greatest risk of being hit by market instability. Large government budget and current account deficits, combined with limited political experience of belt-tightening programmes, make this small economy highly vulnerable. After that comes Spain, whose extremely high unemployment and weak real estate market provide fertile ground for market scepticism to emerge.
Greece, Portugal and Spain are in the worst shape
Budget balance on vertical axis, current account balance on horizontal axis (% of GDP, 2009)
0.0 Finland -2.5 Cyprus -5.0 Malta Italy Slovenia Belgium -7.5 Slovakia France -7.5 Austria Luxembourg Germany -2.5 0.0 Finland
unemployment of nearly 20 per cent: almost double the 2007 figure. Youth unemployment is as high as 30 per cent. The labour market situation has made Spanish households uncertain, which is apparent from their high level of precautionary saving (the household savings ratio is now at 18 per cent).
Positive signs in the labour market
Year-on-year percentage change and net balance
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 00 01 02 03 04 05 06 07 08 09 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40
Employment (LHS) Expected employment (RHS)
Source: Eurostat, European Commission
We anticipate that unemployment will peak at 10.3 per cent this summer in the euro zone, then slowly fall next autumn and winter. It will end up averaging 10.2 per cent this year and 9.9 per cent in 2011.
Pay increases will decelerate
Low capacity and resource utilisation is holding down pay and inflation. The OECD estimates that the output gap in the euro zone is as large as 4.5 per cent. The unemployment gap − the difference between actual unemployment and the non-accelerating inflation rate of unemployment (NAIRU) − is around 2 percentage points. These measures are admittedly more uncertain than usual, after last year’s abrupt economic deceleration. There is a risk that productive resources − both labour and capital − will be squeezed out when the wheels of production spin more slowly (dismissals, early retirements, disposal of old capital equipment, cancelled investments etc.). This indicates that capacity and resource utilisation may perhaps be somewhat higher than the official figures indicate.
Portugal Spain Greece Ireland
-15.0 -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0
Source: Eurostat, IMF, SEB
Unemployment will peak soon
Overall euro zone unemployment rose to 10 per cent in January, after having stood still at 9.9 per cent for three months in a row. The upturn during 2009 was slower than expected, which was very much related to a favourable trend in Germany, where unemployment fell and levelled off at 7.5 per cent during the autumn and winter. A number of EU countries have systems that pay government allowances − “Kurzarbeit” in Germany − enabling employees who would otherwise be laid off to work fewer hours but keep most of their regular pay. This form of job sharing has served as a bridge over the economic crisis. Since businesses have been able to retain employees, they are now ready to ramp up production quickly once the economy turns around. In Germany, this allowance system has probably saved more than 500,000 jobs. Yet unemployment has continued upward in other euro zone countries, despite measures to stimulate jobs. It now stands a bit above 10 per cent in France and at 8.5 per cent in Italy. In Spain, the trend is disastrous, with 24 | Nordic Outlook – May 2010
Pay increases decelerating further
Percentage points and year-on-year percentage change
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 00 01 02 03 04 05 06 07 08 09 10 11 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Change in unemployment, shifted two years forward (LHS) Change in total wage and salary cost in industry (RHS)
Source: Eurostat, SEB
But regardless of this, today’s levels are extreme, which has an impact on the actions of both sides in the labour market. Employers cite continued profitability problems, while employees and trade unions seem to be focusing
The euro zone
more on preserving jobs than on boosting wages and salaries. Overall euro zone labour costs in the manufacturing and service sectors, which rose by 4.5 per cent year-onyear late in 2008, have actually slowed a bit more quickly than expected. In December 2009 the rate of increase was 2.2 per cent, and there are now many indications that labour cost increases will decelerate further to about 1 per cent in 2011.
Core inflation will continue downward
Inflation in the euro zone, as measured by the Harmonised Index of Consumer Prices (HICP), rose unexpectedly to 1.4 per cent in March from 0.9 per cent the month before. One reason was a rapid increase in energy prices due to the cold weather early in 2010, but this burst of
inflation will subside in the coming months. This is why we now predict a falling inflation path: the rate of HICP inflation will be 1.1 per cent in October 2010, then fall to 0.7 per cent in December and bottom out at a low 0.3 per cent in April 2011. Measured as annual averages, HICP inflation will be 1.1 per cent this year and 0.8 per cent next year. Underlying inflation will gradually fall from today’s 1 per cent to zero in December this year. As capacity and resource utilisation cautiously rise, it will then climb slowly, ending up between 0.2 and 0.9 per cent during 2011. In terms of annual averages, underlying inflation will be 0.6 per cent this year and 0.5 per cent in 2011.
Great need for internal devaluations
One fundamental reason for the tensions that now characterise the euro zone is the large differentials in the cost increase situation, mainly between Germany and the PIIGS countries. Since 2000, the accumulated effects of higher pay increases and lower productivity growth on competitiveness have totalled around 50 per cent in Greece and about 35-40 per cent in the other PIIGS countries. Taking into account that at the turn of the millennium, Germany probably started with a higher cost level than the PIIGS countries, the trend is somewhat less dramatic, but a reasonable estimate is that the need for adjustment is in the 2030 per cent range.
yet begun; despite large budget and current account deficits, the country had higher inflation than the euro zone average.
Budget balance, central government debt, current account and inflation deviation, 2009
Budget Greece Ireland Spain France Portugal Slovakia Slovenia -13.6 -14.3 -11.2 -7.5 -9.4 -6.8 -5.5 -6.0 -5.3 -3.4 -3.3 -2.2 Debt 115.1 64.0 53.2 77.6 76.8 35.7 35.9 96.7 115.8 60.9 66.5 73.2 44.0 15.0 CA ΔHICP -11.2 -2.9 -5.1 -1.5 -10.1 -3.2 -0.3 -0.3 -3.4 5.2 1.4 4.8 1.4 5.7 1.1 -2.2 -0.5 -0.2 -1.1 0.4 0.6 -0.3 0.4 0.5 0.1 -0.1 1.2 0.0 ΔCore 0.9 -2.8 -0.6 0.0 -0.9 0.3 0.1 0.7 0.3 0.0 0.3 -0.1 0.8 0.6
Major deterioration in competitiveness
Trend of unit labour costs, index 2000=100
160 150 140 130 120 110 100 90 00 01 02 03 04 05 06 07 08 09 10 11 160 150 140 130 120 110 100 90
Belgium Italy Austria Germany Finland
Budget balance, debt and current account (CA) are measured as a percentage of GDP, inflation deviation (ΔHICP, ΔCore) as the difference between actual inflation (HICP and core inflation) in each country and the euro zone average. Source: European Commission, IMF, SEB
Weak competitiveness has increasingly resulted in macroeconomic imbalances. Big budget and current account deficits − “twin deficits” − plague a number of countries. A degree of adjustment in the cost situation now appears to have begun. A number of countries with deficits show a lower inflation rate than average, both in terms of HICP and underlying inflation rate. For example, Irish HICP inflation was 2.2 percentage points below the euro zone average last year and core inflation was a full 2.8 percentage points lower. In Portugal the corresponding figures were 1.1 and 0.9, in Spain 0.5 and 0.6. In Greece, the adjustment has not
Countries that previously had high inflation thus seem to have begun a “real depreciation”. When prices increase more slowly (or fall faster) than in other countries, competitiveness improves. More aggressive fiscal austerity works in the same direction, but in a historical perspective, the task of bringing about such large cost changes within the euro system looks like a very tough task. Internal devaluations on this scale are likely to entail a protracted deflationary trend, with large political strains that many countries are not prepared for. Nordic Outlook – May 2010 | 25
The euro zone
Core inflation will bottom out late in 2010
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 01 02 03 04 05 06 07 08 09 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0
Source: Eurostat, SEB
At present, however, the interest rate puzzle is not so difficult, since other factors also justify low interest rates: GDP growth is below trend, inflation is below target, credit and money supply growth are low, and inflation expectations are low and stable. In addition, the Euro Overnight Index Average of interbank interest rates (EONIA) is still about 70 basis points below the refi rate. This means that the ECB can begin tightening interest rates without touching its key rate. We expect EONIA to stay at its current level until mid-2010, then gradually be raised toward the refi rate. The first refi rate hike will come in March next year; the refi and EONIA rate will then be raised to 1.25 per cent. The refi rate will be 2.25 per cent at the end of 2011.
ECB in no rush to raise key interest rate
The euro zone’s growing mountain of debt and the specific problems of Greece have put the European Central bank in a delicate situation. The central bank can lend to Greek commercial banks on favourable terms and approve the use of Greek government securities as collateral, despite the country’s poor credit rating. The risk that additional countries (for example Portugal and Spain) will have problems cannot be ruled out either, and this poses further demands on the ECB’s precision in timing interest rates. Raising the refi rate too early might kill economic recovery in the region.
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5
Low credit and money supply growth
Year-on-year percentage change
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 99 00 01 02 03 04 05 06 07 08 09
Overnight interest rate still below refi rate
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan Apr Jul 08 Oct Jan Apr Jul 09 Oct Jan Apr 10 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Source: Reuters EcoWin
26 | Nordic Outlook – May 2010
The euro zone
Public finances and long-term yields
The association between a country’s public sector finances and bond yields has been in the spotlight during recent months; the bigger a country’s budget and central government debt problems are, the higher its yields will be, especially for longer maturities. For example, yields on ten-year Greek sovereign debt are currently around 10 per cent and on German debt around 3. Such large spreads are directly connected to the risk of defaults. But even given more normal central government budget and debt levels, there is an association that has to do with the relation between savings and investments in the economy as a whole. If savings decline compared to investments, for example as a consequence of an expansionary fiscal policy, yields go up. This explains why countries with large current account surpluses (i.e. high national savings) often have low yields. Long-term yields are also affected by economic and inflation prospects: the stronger economic growth and inflation are, the higher both key interest rates and long-term yields will be.
To determine how yields with different maturities are affected by budget deficit and debt levels, we have estimated yield equations for the 16 euro zone countries between 1980 and 2009. The table shows, among other things, that a one percentage point increase in the budget deficit (measured as a share of GDP) increases the ten-year yield by 0.50 percentage points (50 basis points). The corresponding effect on five- and two-year yields is 47 and 45 points. No effect from debt level can be found. The table also shows that a one percentage point increase in GDP growth raises the ten-, five- and two-year yield by 12, 19 and 15 points, respectively. This result is quite consistent with studies from the IMF, which are related to the United States, however. Estimates of the slope of the yield curve are presented in the lower table. A one percentage point rise in the budget deficit boosts the 10yr-3m curve (ten-year yield minus three-month yield) by 13 basis points, the 5yr-3m curve by 10 points and the 2yr-3m curve by 7 points. This time debt level also has an impact. A one percentage point higher debt ratio leads to 4, 2 and 2 point steeper yield curves. These results are also consistent with other studies.
Public finances and long-term yields in the euro zone
10 year Bond yields GDP growth Budget deficit Central government debt 12 50 19 47 15 45 5 year 2 year
10yr-3m Yield curves GDP growth Budget deficit Central government debt 20 13 4
5yr-3m 2yr-3m 22 10 2 25 7 2
The table shows by how many hundredths of a percentage point (basis points) yields with different maturities (10, 5 and 2 years) and yield curves (10yr-3m, 5yr-3m, 2yr-3m) are affected when GDP growth, the budget deficit and central government debt are one percentage point higher. Source: SEB
Nordic Outlook – May 2010 | 27
The United Kingdom
Decent growth despite major imbalances
Weak pound buoys exports Further tightening after the election Bank of England hikes in December
The British economy is on its way up despite major imbalances. After six quarters of falling GDP, the economy grew by a modest 0.3 per cent in the latest two quarters. We foresee GDP growth of 1.5 per cent this year and 2.0 per cent in 2011, which is below trend. The purchasing managers’ index in manufacturing reached a 15-year high during the spring, but other indicators such as Bank of England (BoE) surveys are not as optimistic. A 25 per cent drop in the pound since mid-2007, combined with the surge in global demand is, however, still helping drive exports and manufacturing. Industrial production will increase by 2.5 per cent this year and 4 per cent in 2011. Exports will increase by 6 per cent in 2010 and accelerate to 8.3 per cent growth in 2011. The current account balance (-2.7 per cent of GDP in 2007) will keep improving to 0.2 per cent of GDP in 2011. Capital spending fell by about 20 per cent in 2009, far more than in previous recessions. Such a large downturn may impede underlying economic dynamism. But the manufacturing upturn means that fixed investment will recover and grow by 1 per cent this year and 8 per cent in 2011. Unemployment reached a 14-year high of 8.2 per cent in January and will slowly fall to 7.5 per cent by the end of 2011. Tighter fiscal policy in combination with households being the most heavily indebted in the G7 hamper consumption. The UK parliamentary election is being held on May 6, two days after Nordic Outlook appears. It appears likely that the result will be a minority government (due to a “hung Parliament”) for the first time since 1974. Recent Liberal Democrats successes in public opinion polls seem to be creating a new situation in British politics: three almost equally large parties. Regardless of the election outcome, the government will face exceptional challenges. The British economy is struggling with deeper imbalance problems than other leading economies. According to IMF estimates, for example, the UK has a funding gap (credit supply minus demand) of a full 10 per cent of GDP, while both the US and the euro zone are near balance. This credit gap exists largely because UK public finances are in miserable shape. The government budget deficit will end up close to 12 per cent of GDP this year and slightly below 10 per cent in 2011, the highest in the G7 countries. Central government debt is expected to reach 100 per cent of GDP in 2014, according to the IMF. We expect the new government to approve fiscal tightening measures immediately after the election that will hold back domestic demand. Unless the new government is able to produce a credible plan for restoring fiscal order, the UK’s sovereign credit rating will be threatened with downgrading as early as autumn. This is clearly indicated by market pricing: 5-year credit default swap contracts for the UK are trading well above AAA-rated France and Germany, but below AA-rated Italy. The UK has probably not suffered even worse market mistrust due to the size of its economy plus past experience which indicates that in the end, the country usually displays a talent for dealing with its problems.
5-year CDS contracts Unless the new government is able to produce a credBasis points ible plan for restoring fiscal order, the UK’s sovereign 275 275 credit rating will be threatened with downgrading as 250 250 225 225 early as autumn. This is clearly indicated by market 200 200 pricing: 5-year credit default swap contracts for the 175 175 UK are trading well above AAA-rated France and Ger150 150 125 125 many, but below AA-rated Italy. The UK has probably 100 not suffered even worse market mistrust due to the 100 75 75 size of its economy plus past experience which indi- 50 50 25 cates that in the end, the country usually displays a 25 0 0 talent for dealingOct Jan problems. Oct Jan Apr with its Apr Jul Jan Apr Jul
United Kingdom Germany
The Conservatives have proposed an 80-20 allocation between spending cuts and tax hikes. We expect a value-added tax hike of nearly two percentage points in 2011, pushing up CPI, yet our inflation forecast indicates mild price increases. Inflation will reach 2.8 per cent in 2010 and 1.3 per cent in 2011.
Tightening measures will lower demand, but offsetting this is that the BoE will move slowly and cautiously with its key interest rate hikes: the first hike will come in December, and in December 2011 the key rate will be a low 2.0 per cent. Partly due to low mortgage loan rates, home prices have rebounded fast. According to the Nationwide index they are up 9 per cent in the past year, despite indications that residential properties are clearly overvalued.
28 | Nordic Outlook – May 2010
Eastern Europe Easten Europe
On track for recovery
Export-led economic turnaround Reduced imbalances Continuing currency appreciation
Baltics) that we cover, only Poland will reach its trend growth rate in 2011. In Poland − the only EU country with positive GDP growth last year and perhaps with the best economic fundamentals in the Eastern European region − the economy will expand by 3.5 per cent this year and 4.5 per cent in 2011. Russia will recover from deep recession and reach annual growth of 5 per cent. Ukraine’s GDP will increase by a moderate 3.5 and 4.5 per cent, respectively, after last year’s 15 per cent slide. Adjustment of earlier imbalances is continuing, especially in countries that previously struggled with large current account deficits. Inflation is decelerating, although its downturn will be slowed somewhat in the short term by higher oil prices. Because of lower inflation, Poland can hold off on its first key interest rate hike until the second half of 2010 and Russia can continue to cut interest rates somewhat. Budget deficits will remain large this year but will then decrease, due to some fiscal tightening and higher growth. Public sector debts will continue to climb but are moderate or low compared to the West. In light of these developments, the market confidence that the region has regained during the past year rests on stable ground. The appreciating trend in Eastern European currencies will continue, among other things due to relatively better GDP growth than in the West. Risks of declining global risk appetite as well as conflicts related to austerity policies may trigger some reversals, but central bank interventions to counteract excessive currency appreciation, such as Poland’s unusual action during April, only have a short-term market impact. The recent presidential election in Ukraine and parliamentary election in Hungary, as well as approaching parliamentary elections in Slovakia and the Czech Republic plus an earlier-than-scheduled presidential election in Poland, are a source of some uncertainty in making GDP and currency forecasts. The prospects of greater political stability in Ukraine have improved. In Hungary, a new centre-right government is expected to shift to more growth- and reform-oriented policies. The Hungarian economy is now also in better shape, since the budget deficit has been squeezed to a more sustainable level and IMF aid is no longer needed. As for Slovakia, the Czech Republic and Poland, we foresee no changes in political direction.
Even Eastern Europe − the region that was hardest hit by the global credit crisis and recession − has begun a gradual economic upturn in the past six months. However, this turnaround is limited to exports and industrial production, which in some places have increased more strongly than in the West. The upturn is occurring from low levels after major declines in preceding years. Forward-looking indicators rebounded during the spring and summer of 2009, and this process was primarily driven by greater optimism in the manufacturing sector. The EU’s sentiment indicator (80 per cent based on company surveys and the rest on households) continued to strengthen this past winter and has thus not been affected by increased concerns about the euro zone recovery.
Sentiment indicators pointing upward
130 120 110 100 90 80 70 60 50 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 130 120 110 100 90 80 70 60 50
Poland Czech Republic
Source: European Commission
We are revising our growth outlook for Eastern Europe a bit upward, despite downward revisions for the euro zone, but most Eastern European economies are continuing to display dual tendencies. The recovery is being driven by competitive export sectors. Russia and Ukraine are also benefiting from high, though stabilising commodity prices, but consumption and investments will be weighed down for another while by rising unemployment, weak wage and salary growth, fiscal tightening and low capacity utilisation. Lending is slowly thawing; in Poland, the first positive signs are now evident. During 2010-2011, the Eastern Europe region will not bounce back to the inflated growth figures that prevailed before the crisis. Of the six countries (including the
Nordic Outlook – May 2010 | 29
Growth will return gradually
Estonia on its way into the euro zone Latvia is lagging behind New hesitation about Lithuanian austerity
est rate declines in local currencies will only marginally ease the process of debt reduction, since an absolute majority of the loan amount is in foreign currencies, primarily euros. The retail sector remains depressed, although signs of bottoming out are beginning to be apparent. In addition, base effects contributed to noticeably smaller negative year-on-year figures during the first quarter of 2010. The real estate markets are also showing clear signs that the worst may be over. We expect domestic demand, both consumption and capital spending, to slowly begin reawakening towards the end of 2010.
A gradual export-led recovery in the Baltic countries is now on the way, following an exceptionally deep downturn. In recent months, exports and industrial indicators have continued to climb. Estonia and Lithuania noted positive quarterly GDP growth in the second half of 2009, while the upturn will begin only in the spring of 2010 in Latvia. Earlier upward revisions in our GDP forecasts for Estonia and Lithuania have thus gained traction. The light is visible at the end of the tunnel, as also indicated by upgrades of all three countries by international credit rating agencies. Exports rose 15-25 per cent year-on-year (fastest in Estonia), according to trade data for February. The recovery has been stronger than in most Western European countries, a sign that internal devaluations in the Baltics, whose purpose is to regain lost competitiveness by cutting pay, are bearing fruit. A weaker euro also boosts exports.
The slide in imports, combined with decently resilient exports, has led to sharply improved external balances in recent years. Earlier extreme current account deficits − at most 22.5 per cent of GDP in Latvia in 2007 − have been replaced by surpluses. A shift in capital flows caused by the crisis in the foreign-dominated banking system has also contributed to the turnaround. Stronger exports and weak imports will mean that current account surpluses will continue this year. Next year, however, we expect a modest deficit in Estonia, since imports will experience an upswing. The recession has also helped to dampen inflation dramatically. In two years, the Baltics have moved from very high to non-existent inflation or to deflation, largely due to sharp wage and salary cuts. We believe that 2010 will be the last year of the pay-cutting process, but deflation pressure will linger in Latvia and to some extent also in Lithuania. In Estonia, inflation will increase to an average of 2 per cent a year, from around zero last year. We expect real effective exchange rates for Baltic currencies to continue falling due to lagging wage effects on inflation, a weaker euro and currency appreciation in nearby countries such as Poland, Russia and Sweden. Easing economic imbalances have further underscored our belief that the three countries’ currency pegs against the euro will survive, meaning there will be no devaluations. There are some lingering currency risks related to Latvia and Lithuania, where weakened governments may have difficulty pushing through necessary fiscal tightening measures in 2011 as well. But given our view that the economic recovery is beginning to take hold, these risks are small.
Year-on-year percentage change, current prices
50 40 30 20 10 0 -10 -20 -30 -40 06 07 08 09 50 40 30 20 10 0 -10 -20 -30 -40
Source: Reuters EcoWin
The European Commission’s composite monthly business and household survey rebounded in the spring of 2009. But these improvements − which have become clear in Latvia and Lithuania only recently − are still very much driven by the manufacturing sector, while consumption is lagging behind. Households continue to be squeezed by pay cuts, budget austerity and high, growing unemployment. In Estonia, joblessness seems set to culminate soon at around 16 per cent, but in Lithuania and Latvia it will peak only late in 2010. This past winter’s large inter-
30 | Nordic Outlook – May 2010
Questions about inflation in Estonia
We expect Estonia’s GDP to increase by 2 per cent in 2010 and 5 per cent in 2011, after last year’s 14 per cent decline. A high ratio of exports to GDP and heavy dependence on the expansive Nordic economies will benefit the recovery. Estonia’s expected euro zone accession in January 2011 also strengthens its growth prospects, via somewhat higher investments. Our main scenario (which we raised to a 90 per cent probability in the March issue of Eastern European Outlook) is that Estonia will meet all Maastricht criteria − such as price stability, public finance and currency stability − during the evaluation that the European Commission and the ECB will perform in May and that the EU summit early in the summer will give Estonia the green light. Last year’s budget deficit was 1.7 per cent of GDP, well below the 3 per cent Maastricht limit. This year we expect it to end up around 2.5 per cent. Estonia also has a tradition of strong budget figures, which is likely to influence the evaluation. The most recently reported 12-month inflation average until March 2010 was -0.7 per cent. This meets the criterion that inflation may not exceed 1.5 percentage points above the three EU countries with the lowest inflation. There is one small catch, however. The Maastricht criteria are partly flexible. For example, a country must show credible, sustainable low inflation. On that point, Estonia’s phase-in of low inflation is not as reassuring as, for example, Slovakia’s before it joined the euro zone in 2009 (see chart). We also predict rising inflation in Estonia the rest of 2010, with an annual average of 2 per cent.
GDP downturn during the depression-like period 20082010 will thus end up exceeding 25 per cent. Next year, however, a decent recovery will occur and GDP will grow by 4 per cent. Fiscal austerity will then ease, while the labour market will improve somewhat. Budget consolidation remains a top Latvian government priority. The deficit was 9 per cent of GDP last year, or below the 10 per cent ceiling that international creditors had stipulated in their bail-out loan programme. We believe that Latvia will barely meet the 8.5 per cent ceiling in 2010 and the 6 per cent deficit limit in 2011, but the political risk related to belt-tightening policies has increased since last winter after one party left the fiveparty coalition. A minority government is thus running the country as the autumn parliamentary election draws closer. Since individual opposition parties have, in practice, declared their support for the austerity programme, however, we find it hard to foresee a post-election change of political course.
Latvia's manufacturing sector
Production, 3-month moving average
115 110 105 100 95 90 85 80 75 70 65 01 02 03 04 05 06 07 08 09 20 15 10 5 0 -5 -10 -15 -20 -25 -30
Year-on-year percentage change (RHS) Level, index 100 = 2005 (LHS)
Source: Reuters EcoWin
Inflation in Estonia and Slovakia
Year-on-year percentage change
17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 00 01 02 03 04 05 06 07 08 09 10 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5
Lithuanian growth but political worries
The Lithuanian economy will grow by 1 per cent this year and 4 per cent in 2011, after falling by 15 per cent in 2009. A broad-based export recovery will initially sustain growth. Public finances are strained but are improving, due to a strong commitment by the government and the president to fiscal austerity. In recent months, however, the government’s position has weakened. Due to political tensions it no longer has a parliamentary majority, but we do not foresee an imminent government crisis. The budget deficit was 8.9 per cent of GDP in 2009, or somewhat better than expected, and may shrink to 8 per cent in 2010.
Source: Reuters EcoWin
Although our main scenario is that Estonia will be approved as a euro zone member, there is a risk that Greekrelated market turbulence will lead to extra caution. In such a situation, the European Council and the Ecofin Council may come to the conclusion that Estonia is not yet in sufficiently balanced shape after the crisis to be accepted as a euro zone member. The sustainability issue as regards inflation could be utilised to say no.
Latvia has a long way to go
After last year’s 18 per cent slide, Latvia’s GDP will continue to fall by 2.8 per cent this year. The accumulated Nordic Outlook – May 2010 | 31
Exports will lift GDP growth
Growth of 3 per cent in 2010 More jobs but continued high unemployment Core inflation will continue to fall Key rate hikes will drive EUR/SEK to below 9.00 Fiscal expansion regardless of election result
A recovery in the Swedish economy is now on the way. Although the national accounts recorded a GDP decline during the fourth quarter of 2009, we can see how the signals of a recovery are broadening. Expansionary economic policies will continue. Households and businesses are very optimistic. Export figures are about to take off, while company reports confirm rising international demand. An unexpectedly rapid stabilisation in the labour market is contributing to a recovery in private consumption. We expect a strong rebound in the first half of 2010, leading to a GDP increase of 3.0 per cent in 2010 and 2.7 per cent 2011 (calendar adjusted: 2.7 per cent in 2010). The GDP forecast is unchanged compared to Nordic Outlook in February. Employment has turned around, and the jobless rate is now close to peaking. Inflation will nevertheless remain low. The 2010 wage round seems likely to result in somewhat lower pay increases than expected, and the risk of major disruptions in the remaining negotiations is small. Low resource utilisation will also restrain wage drift in the near future. Meanwhile rising productivity and krona appreciation will help keep core inflation down. We thus expect the core inflation (CPIF excluding energy and food) rate to bottom out below 1 per cent early in 2011. Strong economic signals in the coming months will help persuade the Riksbank to hike its repo rate in July. Partly due to a rapid increase in lending to households, the bank’s key rate hikes will occur at a faster pace than those of the European Central Bank (ECB), but low inflation and continued relatively low resource utilisation will help ensure that the key rate remains low. By the end of 2010, it will stand at 1.25 per cent and by the end of 2011 at 2.75 per cent. Public finances have continued to provide positive surprises. The central government budget deficit appears likely to be 1.0 per cent of GDP in 2010 and 0.6 per cent of GDP in 2011. This has given fiscal policymakers greater room for manoeuvre. During 2011 we expect a dose of stimulus measures totalling SEK 20 billion, equivalent to 0.6 per cent of GDP. The outcome of the September 2010 parliamentary election is still uncertain. Many key initiatives will come during the election campaign, but the dividing lines between the two main government alternatives have become clearer and follow a classic left-right pattern. The redgreen block (Social Democrats, Left Party and Greens) is focusing to a greater extent than the most recent Social Democratic government, which lost the 2006 election, on social welfare issues and tax hikes. Meanwhile the emphasis of the incumbent centre-right Alliance (Moderates, Centre, Liberals and Christian Democrats) is on continuing current efforts to strengthen incentives to work. Downside risks are primarily related to the problems of the euro zone. A deep crisis that has secondary effects on the global financial system and hampers the recovery of world trade would have major consequences for Sweden. Historical comparisons, however, show that on many occasions Sweden has had substantially higher growth than the euro zone.
Exports are reviving
The sharp upturn in sentiment indicators is now starting to be reflected to some extent by actual data. Industrial production is still bumping along the bottom, but both exports and orders are on their way up. Merchandise exports increased by 6 per cent year-on-year in the first quarter of 2010. Order bookings indicate further acceleration ahead. According to international indicators as well as quarterly earnings reports, international trade is now in the midst of a fairly strong recovery phase.
NIER foresees continued export upturn
20 15 10 5 0 -5 -10 -15 -20 -25 -30 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 50 40 30 20 10 0 -10 -20 -30 -40 -50
Merchandise exports, year-on-year % change, 3-mo avg (LHS) Orders, Economic Tendency Survey, net balance (RHS)
32 | Nordic Outlook – May 2010
Our forecast is that exports will grow by 7 per cent both this year and next, or roughly in line with long-term trend growth. The risks in this forecast are on the upside. Swedish economic recoveries are normally characterised by faster growth, and the earlier deep downturn also means that there is extra large potential for a rebound. Production and order levels according to the National Institute of Economic Research’s Economic Tendency Survey and the purchasing managers’ index are also consistent with stronger exports than our forecast. On the other hand, there is greater uncertainty about the recovery in the euro zone.
increase this year, mainly due to infrastructure projects. Our overall forecast is that after last year’s sharp decline, fixed investments will climb by 3 per cent in 2010 and by 5 per cent in 2011.
Gross fixed investments
Percentage change, 2009 level in current prices (SEK bn)
2009 2009 2010 2011 Government sector Housing Business sector Total
Source: Statistics Sweden, SEB
102 78 351 531
7 -21 -19 -15
2 8 3 3
0 12 6 5
Early upturn in capital spending
According to Statistics Sweden’s latest fixed investment survey, manufacturers are planning to increase their investments as early as this year, despite low capacity utilisation. We have thus made an upward adjustment in our forecast of capital spending in manufacturing. Businesses admittedly tend to exaggerate their investment needs early in the year, but on the other hand historical experience indicates that they underestimate these needs at the beginning of a recession. In addition, housing investments look set to regain a large proportion of last year’s downturn. For example, the National Board of Housing, Building and Planning expects a 50 per cent increase in housing starts during 2010 and 2011. Public sector investments will continue to
A sharp inventory draw-down helped lower Sweden’s GDP growth rate by nearly 3 percentage points at most in mid-2009. During the fourth quarter, however, inventories shifted to a positive growth contribution. Most indications are that this trend is continuing. We expect inventories to level off in 2010. This will result in a positive gross GDP contribution of one percentage point, but due to large import content, the net effect on production will be substantially smaller. Changed inventory behaviour in other countries will nevertheless also stimulate growth via rising Swedish exports.
How much divergence from euro zone?
The profound economic problems of the euro zone raise a question: To what extent will economic growth in Sweden be adversely affected? Swedish GDP growth shows strong co-variation with other countries. Its correlation with the euro zone is somewhat higher than with the US (0.91 compared to 0.82). The difference is smaller than the export structure indicates. Only 6 per cent of Swedish merchandise exports go to the US, while the euro zone buys 40 per cent. Sweden’s direct exposure to the crisis-plagued PIIGS countries is small, however; only 7 per cent of its merchandise exports go to these countries. Over the past 15 years, the difference in Swedish and euro zone growth has varied between -1 and +2 percentage points. During the period 2002-2006, Swedish GDP growth was about 1.5 percentage points higher than euro zone growth. In light of this, the forecasted growth differential of just over 1 percentage point per year in 2010 and 2011 does not appear especially remarkable.
Growth differential, Sweden and euro zone
Year-on-year percentage change, 4-quarter moving average
2.0 1.5 1.0 0.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Statistics Sweden, Eurostat
High correlation for growth
GDP, year-on-year percentage change
7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Euro zone US Sweden
7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5
0.0 -0.5 -1.0 -1.5 -2.0
Source: Reuters Ecowin
Our conclusion is that a weak economic trend in the euro zone is not incompatible with fairly strong growth in Sweden. Only if the fiscal crisis in southern Europe leads to severe disruptions in the global financial system that block a recovery in global trade will Sweden’s economic upturn be seriously jeopardised.
Nordic Outlook – May 2010 | 33
Ash clouds will mean lower GDP growth
Air traffic in large parts of Europe more or less stood still for a week in April due to clouds of ash from the Icelandic volcano Eyjafjallajökull. We estimate that this will lower GDP in Sweden and the euro zone by 0.2-0.3 per cent in the second quarter of 2010. Assuming no recurrence of the ash problem, the downturn will be temporary and its full-year effect will be very small. The aviation industry accounts for about one per cent of GDP, which means that the direct effect on output due to grounded aircraft is still less than a tenth of a percentage point. In addition, an estimated 1-2 per cent of the labour force was prevented from travelling to their workplaces during portions of this period. Transport problems also led to certain production disruptions in other sectors, for example by causing a shortage of input goods. If new ash clouds should drift in over Europe and cause more long-lasting disruptions in aviation, the effect on growth could be considerably larger. However, historical experience shows that production disruptions caused by natural disasters, strikes or the like almost never have any decisive impact on economic trends.
30 28 26 24 22 20 18
Strong increase in new car registrations
120 115 110 105 100 95 90 85 80 75 00 01 02 03 04 05 06 07 08 09 10
Thousands of new car registrations (LHS) Retail sales, index (RHS)
Source: Statistics Sweden
Household income and consumption
Percentage change 2008 2009 2010 2011 Consumption Income Savings ratio, % of income
Source: Statistics Sweden, SEB
-0.2 2.7 11.6
-0.8 2.1 13.9
2.9 0.7 12.1
2.6 2.3 11.8
Large swing in inventory contribution
21 20 19 18 17 16 15 14 13 12 98 99 00 01 02 03 04 05 06 07 08 09 10 11 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0
Employment has turned around
In recent months, employment has turned around surprisingly. Such indicators as the number of lay-off notices, new openings posted with the Public Employment Service and NIER Economic Tendency Surveys have also been very strong. This shows that the employment upturn is not a temporary statistical anomaly. We thus expect the improvement to consolidate. The number of jobs will increase by an average of 0.3 per cent this year and 0.6 per cent in 2011. Moderate GDP growth is a downside risk for our forecast, but the indicators are compatible with an even stronger upturn in the coming months.
Inventories relative to GDP, index (LHS) Contribution to year-on-year GDP, % points (RHS)
Source: Statistics Sweden, SEB
Employment has turned around
4650 4600 4550 4500 4450 4400 4350 4300 05 06 07 08 09 10 11
Auto purchases lifting consumption
Strong household optimism has begun to be reflected in rising consumption. Retail sales were admittedly been a bit weaker than expected during the latest quarter, yet new car registrations have climbed sharply since mid2009. We expect auto purchases to increase more than 30 per cent this year, which will boost total consumption by more than one percentage point. Households are showing underlying financial strength, so we are sticking to our forecast that consumption will rise nearly 3 per cent this year, despite a downward adjustment in income growth. The combination of rising asset prices, a stronger labour market and a high initial household savings ratio is more important than short-term income fluctuations.
Number of jobs, thousands (LHS) Unemployment, per cent (RHS)
9.0 8.5 8.0 7.5
7.0 6.5 6.0 5.5
S ource: S tatistics S eden, S B w E
Due to a rising influx into the labour market, unemployment has continued to climb despite the upturn in the number of people with jobs. However, we expect unemployment to peak during the next quarter and then
34 | Nordic Outlook – May 2010
slowly decline again. By late 2011 the jobless rate will still be 2.5 percentage points higher than when the upturn began late in 2008.
We foresee productivity growth of 2.4 per cent in 2010 and 2.2 per cent in 2011. This is admittedly higher than the long-term trend, but it still represents the recovery of only a small portion of the decline in recent years.
Percentage change 2008 2009 2010 2011 Employment Labour supply Unemployment, % Average hours worked Productivity (GDP)
Source: Statistics Sweden, SEB
Pay increases a bit lower than expected
1.1 1.2 6.2 0.1 -1.4 -2.1 0.2 8.3 -0.2 -2.2 0.3 1.0 8.9 0.2 2.4 0.6 0.4 8.8 -0.2 2.2 The 2010 wage round has faced major challenges. The economic crisis has hit the manufacturing sector hard, while the demand in many other sectors has been sustained in part by economic stimulus measures. This has put the traditional wage-setting role of manufacturing in question.
Large gap between GDP and labour market
The sharp decline in output has had surprisingly little impact on the labour market. The rise in unemployment has been much smaller than the GDP downturn indicates, and this is reflected in falling productivity. An international comparison by the IMF shows that there are very large differences between countries in this respect. While unemployment has doubled in the US, it has not climbed at all in Germany, despite a larger GDP decline than in the US. The IMF’s analyses of “Okun’s Law”, which describes the relationship between GDP and unemployment, points to a number of interesting explanations with relevance to Sweden. One conclusion is that to a greater extent than in other countries, the trend in Sweden is a break with the historical pattern. One common feature is that countries that have been affected by the economic crisis primarily via the global trade decline have often noted large drops in GDP but relatively little growth in unemployment. In countries with a damaged financial market and a housing market collapse, the consequences for labour-intensive portions of the economy have been much worse. Swedish government economy policy largely succeeded in preventing the crisis in the manufacturing sector from spreading to the whole economy. This is a major reason for the relatively moderate labour market downturn. Another factor is that many companies viewed the unprecedented drop in production as temporary and thus chose not to reduce their workforce. In addition, there was a certain degree of organised working hour reductions, though this has not been nearly as widespread as in Germany, for example. Recent developments in Sweden, with falling GDP in the fourth quarter of 2009 but employment that had already begin to rise, are nevertheless difficult to understand even in light of the above analyses. The charts show that the upturn in employment during the past six months has been in line with the turnarounds in 1997 and 2005 and not so much weaker than during 1994. But the differences in GDP growth during these periods are striking. GDP growth was nearly 3 percentage points weaker in 2009 than during the other periods.
GDP growth during recent quarters thus contrasts sharply with other data about the economic trend. This applies not only to the labour market but also to the trend of public sector finances, company financial reports and confidence indicators for both households and businesses. Our conclusion is that there is a fairly high probability that the GDP figures will be revised.
GDP at turning points
104 103 102 101 100 99
Source: Statistics Sweden, SEB
104 1993Q3 = 100 103 2005Q1 = 100 102 101 100 99
1997Q1 = 100
2009Q1 = 100 1 year
Employment at turning points
102.0 101.5 101.0 May 1997 = 100 100.5 100.0 99.5 Sep. 2009 = 100 100.5 100.0 99.5
102.0 May 2005 = 100 101.5 101.0
March 1994 = 100
Source: Statistics Sweden, SEB
Nordic Outlook – May 2010 | 35
After a sluggish start, in which the Metal Workers’ Union and the Association of Engineering Industries were unable to reach a collective contract for months, an agreement between the Association of Graduate Engineers and the Association of Engineering Industries broke the ice. After that, several agreements were achieved at a rather fast pace. So far, they have covered periods of 18-24 months, somewhat shorter than the 3-year contracts that have been standard over the past decade.
Krona a downside risk for inflation
Core inflation, defined as CPIF (CPI with a fixed interest rate) excluding food and energy, showed an upward trend throughout 2009, driven by a weak krona and falling productivity. At the end of 2009, core inflation stood at a full 2.7 per cent. In the past six months or so, however, the krona has regained 75 per cent of its decline. With the customary time lag, the stronger krona is now beginning to have an impact on the inflation process, and core inflation has now fallen to 2.1 per cent. This shift in inflation has been broad-based; for example, service inflation fell clearly during the first quarter. We expect the core inflation rate to fall below one per cent by early 2011. The risks are also on the downside, as indicated among other things by a record-large 4.4 percent decline in producer prices of domestic consumer goods in March. Food prices also have the potential for downside surprises. The upside risks for CPI inflation come mainly from international price increases for energy and other commodities plus domestic environmental tax hikes. Lagging effects from the weak productivity increases of recent years are also conceivable.
Agreements reached to date. Pay hikes in %, thousands
2010 Manufacturing Distributive trades Construction Local gov., white-collar
2011 1.8 2.0 2.3 1.6
Employees 250 100 80 127
1.1 2.4 1.6 2.3
With some variations, these agreements provide pay increases equivalent to 1.5 per cent in 2010 and 2.0 per cent in 2011, or somewhat lower than we had anticipated. But many of them specify an increase in mid-2011, about six months before they expire. This creates a risk of accelerated pay increases in 2012, since the yearly average then will be affected by two pay hikes. There is little risk that future agreements will be significantly more generous than those already signed. We are thus sticking to our assessment in the February issue of Nordic Outlook that annual pay hikes will end up averaging 2 per cent in 2010 and 2011. This forecast assumes that wage drift will be low in the persistently weak labour market that will prevail in the next couple of years. The uncertainty about the future wage process was amplified by the fact that the dominant Association of Swedish Engineering Industries (“Teknikföretagen”) just terminated the 1997 Industry Agreement (“Industriavtalet”). However, this will probably not affect the remaining negotiations this year.
Large divergernces in lending
Year-on-year percentage change
20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 03 04 05 06 07 08 09 10 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5
Total lending Lending to business
Lending to households
Source: Statistics Sweden
Riksbank will hike its repo rate in July
The Riksbank is now moving towards raising its key interest rate from a crisis level to a more normal recessionary level. The central bank’s April forecast is signalling that a first rate hike is most likely in September. We are sticking to our forecast that the first hike will be in July. This is because we expect a high first quarter GDP figure and continued strong signals in the labour market. Rapidly increasing household lending, with the accompanying risks of unsustainable price escalation in the housing market, also seems to be an increasing focus of the Riksbank’s analysis. After July, we expect gradual hikes in the key rate. In December the repo rate will be 1.25 per cent. During 2011 the key rate will continue upward to 2.75 per cent. This means that the Riksbank will be raising the repo rate at a considerably faster pace than the ECB will raise its refi rate. As indicated in the table below, there are various reasons for this: higher growth, room for
Lower core inflation
Year-on-year percentage change
3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 jan maj sep 08 jan maj sep 09 jan maj sep 10 jan maj sep 11
Source: Statistics Sweden, SEB
3,5 SEB forecast 3,0 2,5 2,0 1,5 1,0 0,5 0,0
CPIF excl energy and food
36 | Nordic Outlook – May 2010
expansionary fiscal policy and livelier housing lending and housing markets. We expect the ECB during the second half of this year begin a normalisation of monetary policy by withdrawing liquidity, causing the Euro Overnight Index Average of interbank interest rates (EONIA) to begin rising.
Faster key rate hikes in Sweden
Repo rate vs refi rate, per cent
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 00 02 04 06 08 10 5.0 4.5 SEB forecast 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Outlook for monetary policy
Year-on-year percentage change in indicators Sweden Euro zone GDP, 2010 (forecast) Employment, 2010 (forecast) Budget deficit, 2009 Home prices, Q4 2009 Lending to households, Q1 2010 Lending to businesses, Q1 2010
Source: Riksbank, ECB
2.7 0.3 -0.8 6.0 9.3 -5.0
1.5 -0.2 -6.3 -3.0 1.8 -2.4
Source: Reuters EcoWin
Looking further ahead, we foresee various reasons why the key rate will be at a rather low level. Inflation will be low, and our forecast for CPIF during next year is considerably below the Riksbank’s forecast. In addition, resource utilisation will be low during the next couple of years. Tighter lending rules, which the Swedish Financial
Home price correction on the way
While home prices in most countries have fallen in recent years, in Sweden they have climbed to new record levels. In the OECD countries, home prices have fallen by an average of 10-15 per cent. In the hardest hit countries, such as the United States, the downturn has been around 30 per cent. Structural factors like high household savings and a low supply of new homes can partly explain the resilience of Swedish home prices. Most important, however, is the exceptionally strong transmission mechanism from monetary policy. Most households are taking advantage of today’s extremely low adjustable mortgage rates, which are providing them with loans that are far cheaper than in any other country (except for Norway). posable income in 2011, far higher than earlier record levels, but this interest burden is likely to be manageable. The chart below illustrates a scenario in which the interest rate is gradually normalised over the next five years, while starting in 2012, debts grow at the pace of disposable income. Interest expenses will then double as a share of income from 3 to almost 7 per cent, still a bit below their levels around 1990. In addition to generally rising interest rates, most indications are that changes in international regulations will intensify the upturn in household borrowing costs by making funding for mortgage institutions more expensive. Moreover, the Swedish Financial Supervisory Authority plans to introduce a mortgage loan ceiling in the range of 75-90 per cent of market value in July 2010, which among other things is likely to increase households’ rate of loan principal payments. It seems likely that we will see some correction in home prices when interest rates begin to be raised. It is too early to determine whether this will be large enough to have macroeconomic consequences. This will depend largely on how far prices have time to surge over the next few months and how carefully the changes in interest rates and rule systems are implemented. In its latest stability report, the IMF singled out the Swedish housing market as one of very few overvalued asset markets in the world, which is undoubtedly a warning signal.
Household debts and interest burden
Per cent of disposable income
190 180 170 160 150 140 130 120 110 100 90 80 11 10
9 8 7 6 5 4 3
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Interest burden after taxes
Source: Statistics Sweden, Riksbank, SEB
Viewed from the standpoint of household debt and interest burdens, it is difficult to draw any clear conclusions about the trend of home prices. Household debts as a percentage of income are now rising rapidly and are projected to reach 180 per cent of dis-
Nordic Outlook – May 2010 | 37
Supervisory Authority is about to push through, will contribute to higher household and business lending rates, which will marginally reduce the need for key rate hikes. Due to the structural changes in the credit market, we are sticking to our assessment that the neutral key rate level needs to be adjusted further downward to 3.75 per cent. In the next few months, however, it is unlikely that the Riksbank will announce any additional change in its view of this after making a downward adjustment to 4.0 per cent from 4.25 per cent in February.
today should stand at about SEK 9.40 per euro. Using our forecasts of interest rate differentials and the economic situation, the models points to a further shift to SEK 9.00 by the end of 2010. An important driving force for the krona is the continued improvement in the performance of industry. We expect the krona to strengthen to SEK 9.00 per euro at the end of 2010, which is at the lower end of the rather narrow interval that prevailed during 20022007. One reason the krona why will reach such strong levels is the prevailing systemic crisis in the euro zone. We expect a sideways movement against the US dollar and a slight weakening to SEK 7.50 per USD in mid-2011.
Rising bond yields
Yields on 10-year Swedish sovereign bonds are at the level of German bonds and are lower than in all the other euro zone countries. The reason is Sweden’s very strong public finances, with central government debt as a percentage of GDP likely to fall as early as next year. The Riksbank’s key rate hikes will have the opposite impact. Our forecast implies that Sweden’s repo rate at the end of 2011 will be 75 basis points higher than the key rate in the euro zone. We thus believe that the yield spread against Germany will rise to 10 basis points at the end of 2010. This means that the 10-year government bond yield will be 3.20 per cent at the end of 2010 and 3.70 per cent at the end of 2011.
Unexpectedly strong public finances
The economic crisis has adversely affected Swedish public finances. After several years of high surpluses − peaking at 3.8 per cent of GDP in 2007 − the outcome for 2009 was a deficit of 0.8 per cent of GDP. But the impact of the recession on the budget balance has not been as powerful as one would normally expect. One reason for this is that the downturn has been concentrated in the export and manufacturing sectors, which has helped soften its effects on the labour market. As a result, unemployment insurance expenditures and similar costs have been kept down, while income tax and payroll tax revenue has been affected to a relatively small extent, given the magnitude of GDP decline. The government managed to take advantage of its good finances at the outset of the recession, letting automatic stabilisers operate at full throttle while also enacting discretionary stimulus measures. In 2010, the active dose of stimulus programmes is equivalent to just over 1 per cent of GDP. Sweden is one of the few EU countries that will move through the crisis without needing to implement austerity programmes to stay below the EU Stability and Growth Pact’s deficit ceiling of 3 per cent of GDP.
EUR/SEK rate below 9.00
Sweden’s improved fiscal and economic situation has led to a significant recovery for the krona. The krona is now only 5 per cent weaker against the euro than it was in 2007, and in trade-weighed TCW terms the difference is even smaller. There are many indications that the krona will continue to strengthen as the economic recovery progresses. The Riksbank will raise its key interest rate at a faster pace than the ECB, but also compared to most other central banks. A more pronounced export upturn will also help push up the krona. Higher interest rates combined with calmer financial markets usually favour “carry trade” investments, which involve buying currencies where the central bank is raising its interest rate.
Per cent of GDP Revenue Expenditures Net lending General gov’t gross debt Central gov’t debt Central gov’t borrowing requirement, SEK bn
Source: Statistics Sweden, SEB
2008 2009 2010 2011 52.6 50.2 2.5 38.3 33.7 -135 52.7 53.5 -0.8 42.3 37.6 176 51.7 52.8 -1.0 39.6 35.7 46 51.5 52.1 -0.6 39.0 35.2 42
Krona tracks business optimism
11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 98 99 00 01 02 03 04 05 06 07 08 09 10 -60 -50 -40 -30 -20 -10 0 10 20 30
EUR/SEK (LHS) Business confidence, net balance (RHS)
Source: NIER, SEB
Our models for the krona, which have worked well in recent years indicate that the EUR/SEK exchange rate 38 | Nordic Outlook – May 2010
In recent months, upside surprises have continued. The 2009 budget outcome was better than expected, which will also affect public sector financial forecasts. Even though we now expect a somewhat more expansionary fiscal policy this year and next than we did in the February issue of Nordic Outlook, we are revising our forecast of public finances upward. We expect a total fiscal stimulus dose equivalent to just over 1 per cent of GDP this year and 0.6 per cent in 2011. The deficit will bottom out this year at 1.0 per cent of GDP and improves to -0.6 per cent of GDP 2011. Correcting for the effects of the economic situation, net lending is above zero. Central government debt has also been affected surprisingly little by the crisis. The upturn was only 3 per cent of GDP, compared to an increase of about 30 percentage points during the 1990s crisis. This year, debt will again drop below 40 per cent of GDP.
lead of 10-20 percentage points. The gap then narrowed somewhat; in September the difference shrank to single digits. The final outcome gave the Social Democratic government and its parliamentary partners a somewhat wider margin of victory than according to the last public opinion surveys. As expected, the Alliance government’s spring fiscal policy bill did not reveal so much about its future policies. But it focused on two important voter categories: pensioners will get a tax cut in 2011, and families with children will benefit from an increase in the supplement for large families starting on July 1, 2010. Instead, the two main governing alternatives are now focusing on preparations for the autumn parliamentary election. Both blocks are working with common platforms that will be unveiled this spring and summer. In late April, the red-green block presented a number of proposals and a common shadow budget, which provide an indication of its common platform. But neither block will show all of its cards now; they will present initiatives and make election promises aimed at attracting important voter categories prior to the September election. The election tactics of the Social Democrats − the dominant party in the red-green block − are shaped largely by the incumbent government’s actions. In the two elections in recent decades where the Social Democrats regained power (1982 and 1994), competence in governing and budget responsibility were key weapons in their campaign. In those elections, the party cited its decades-long experience in governing Sweden and was able to criticise the incumbent non-socialist government for having allowed budget deficits to explode. This time around, it will be considerably harder to use such arguments. The Social Democrats will be campaigning for the first time with the ambition of creating a coalition government together with two parties (the Left Party and the Greens) with no experience at all in government. The Swedish economy is also strong in an international perspective. Although the real economy has shown poor growth in recent years, it will be difficult for the opposition to convincingly blame the government for this in the election campaign. The government will likely be able to cite good international reviews of its fiscal management skills. In light of this, the opposition will probably rely more on classic left-right issues as weapons in order to gain power. To a greater extent than the last Social Democratic government (2002-2006), for example, the red-green block will focus on social welfare issues and vulnerable groups, in the hope that a sufficient number of centrist voters and middle-income earners will not vote their pocketbook. The block will call for further tax cuts for pensioners and the reversal of various Alliance reforms in the social insurance system. On the revenue side, at least one step in the earned income tax credit reform will be reversed. A new wealth tax will be introduced and environmental taxes raised.
Forecasts of the central government borrowing requirement
SEK billion SEB National Debt Office, March National Institute of Economic Research (NIER), March National Financial Management Authority (ESV), March Ministry of Finance, April 49 63 10 8 39 36 2010 46 53 2011 42 37
Source: National Debt Office, NIER, ESV, Government Offices, SEB
Central government finances are the most cyclically sensitive in the public sector. Last year’s central government borrowing requirement was SEK 176 billion, which represented a shift of more than SEK 300 billion compared to the preceding year. This year, the requirement will fall sharply. These large fluctuations are partly explained by one-time effects that drove up the borrowing requirement by SEK 100 billion in 2009, primarily money provided to the Riksbank in order to increase its foreign exchange reserve (about SEK 95 billion). In 2010 and 2011, central government borrowing requirement is expected to be just over SEK 40 billion.
Sharper dividing lines before the election
The red-green opposition is still slightly ahead of the Alliance government in public opinion polls as the autumn parliamentary election draws closer. The gap is not so wide, however, and the election campaign is only in its warm-up phase. Looking back at recent elections, at the same stage in 2006 the Alliance (then in opposition) had a lead of 3-5 per cent. Then its lead shrank, and just before the election public support for the two blocks was relatively even, although most observers predicted a victory for the Alliance. In March 2002 (six months before the election) the leftist block had a comfortable
Nordic Outlook – May 2010 | 39
The differences between the blocks with regard to demand-oriented and supply-oriented policies will thus be extra clear. The leftist block generally has greater faith in demand-oriented policies. The Alliance, however, has focused on supply side policies during the current parliament (2006-2010): primarily in an effort to boost the labour market participation rate through earned income tax credits and lower compensation levels in social insurance systems. At the same time, the Alliance has protected key social, health care and other public services by providing extra grants to local and regional governments. If the Alliance remains in power, further steps to strengthen incentives to work, for example through additional earned income tax credits, will remain an important element of its policies, but it will probably also focus on pensioners and other groups that have been hard hit by the economic crisis. Regardless of which side wins the election, we expect the budget bill for 2011 to include about SEK 20 billion
in reforms, and possibly somewhat more in case of a redgreen victory. This will mean a continued expansionary fiscal policy in 2011, equivalent to 0.6 per cent of GDP. A situation in which the right-wing populist Sweden Democrats make it into Parliament and gain a kingmaker role between the main blocks would mean increased short-term uncertainty about economic policy, thus giving rise to an extra risk premium related to interest rates and exchange rates. In a longer perspective, an agreement between parties from the two main blocks may provide greater stability and continuity in policymaking. The strong support enjoyed by the current fiscal policy framework will also help strengthen stability in the short and long term.
40 | Nordic Outlook – May 2010
Competitiveness is recovering Consumption is gradually climbing Low interest rate and yield spreads
The Danish economy passed its low point last autumn, aided in part by stimulus measures aimed at households. Quarter-on-quarter and seasonally adjusted GDP rose 0.2 per cent in the fourth quarter, the second consecutive quarter of modest growth. The strong dynamic in other Nordic countries will contribute to a decent export upturn ahead. Earlier competitiveness problems will also diminish because of restrained pay increases and a weaker krone that will benefit important Danish exports outside the euro zone, for example to Sweden and Norway. in a row but are still down year-on-year. Partly because home sales have recuperated significantly, we believe that residential prices will continue to recover, buoyed by continued low interest rates. Unemployment looks set to peak by this summer at 4.5 per cent, six months sooner and half a percentage point lower than our earlier estimate. In surveys, both the manufacturing and service sectors are now showing balanced employment plans, though expansion will take time. Given continued below-trend economic growth, we find it hard to foresee more than a marginal decline in unemployment during the coming year. The upturn in joblessness has not been as sharp in Denmark as in many other countries, indicating relatively low cyclical sensitivity in the labour market. This is something the IMF also highlighted in its latest World Economic Outlook, which studied this link over the past 20 years in a number of countries. The inflation rate quickly climbed above 2 per cent this winter, largely due to higher energy prices and temporary tax hikes, for example on alcoholic beverages and tobacco. The weaker krone will push up inflation a bit this year, but low pay increases and fading one-off effects eventually promise a slowdown. We predict HICP inflation of 2.1 per cent in 2010. The large budget deficit means fiscal tightening is necessary, but given the still fragile recovery, we believe that the government will postpone this to 2011-2012, though the 2011 election makes our fiscal forecast extra uncertain. The central bank will keep the spread between its lending rate and the ECB’s refi rate at a low 5 basis points. Next year there will be gradual normalisation of spreads as the lending rate is adjusted upward in response to ECB hikes. The spread against 10-year German sovereign bonds shrank somewhat this winter to about 30 points. Given relatively low public debt, it should be possible to halve this spread by year-end. The question of Danish euro zone accession seems distant. We expect no referendum during our forecast period, but the turbulence surrounding Greece and the euro do not seem to have had any negative impact on public opinion. In Statistics Denmark’s March survey, the Yes side’s lead (including respondents who say “maybe yes”) had admittedly shrunk to 51.4-47.4 per cent, compared to 54.2-42.7 in December 2009.
Competitiveness is improving
Real effective exchange rate, index 100 = 2005
107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0
Meanwhile the inventory cycle is contributing positively to growth, but recovery remains sluggish. The fall in home prices and construction investments after earlier overheating are restraining the upturn in domestic demand. Initially, consumption will rise at a leisurely pace. We expect households to remain thrifty for a while. The household savings ratio, which was extremely low a couple of years ago, rose in the fourth quarter to 6.5 per cent, its highest since 2001. We expect GDP to grow by 1.5 per cent this year and 1.8 per cent in 2011, after falling by nearly 5 per cent last year. Important to the recovery are stabilisation tendencies in the housing and labour markets. Prices for flats are now higher year-on-year for the first time in three years, according to the Association of Danish Mortgage Banks. House prices have risen two quarters
Nordic Outlook – May 2010 | 41
Recovery will gain momentum in 2010
Mainland GDP growth 2.3 per cent in 2010 Inflation will continue to trend lower Cautious normalisation of monetary policy
Private consumption lost steam over the winter. This is hard to explain amid solid fundamentals, except for the unusually cold weather and the fact that electricity prices (a large item in monthly household expenses) jumped fully 50 per cent in the six months to March. Although real income growth will be moderate in 2010, the high savings ratio should support consumption. With unemployment showing signs of peaking soon and with Norges Bank hiking its key rate at a slower pace, we still expect private consumption to climb 4.5 per cent in 2010. Meanwhile we have revised our forecast for 2011 a bit upward to 3.7 per cent.
The Norwegian economy continues to expand, but the recovery has been slower than expected so far. The 0.3 per cent quarter-on-quarter growth rate in mainland GDP (excluding oil/gas and shipping) in the fourth quarter of 2009 was surprisingly low, and growth in the previous quarters was revised lower. In 2009 as a whole, mainland GDP fell 1.5 per cent, the weakest full-year outcome in 20 years. Given this slow momentum, we are revising our 2010 forecast for mainland GDP downward from 2.9 per cent to 2.3 per cent, which nonetheless implies accelerating expansion during the year, while still expecting growth of 3 per cent in 2011. Overall GDP should grow by 2.0 per cent and 2.3 per cent in 2010 and 2011, respectively.
Investment on the mend
Oil sector investment has been a key downside risk for growth and oil companies cut their investment forecast for 2010 in Statistics Norway’s first quarter survey. Taking into account last years survey compared to the outcome and this years price development, the survey suggest at oil sector investments declining 3-5 per cent in volume 2010, a reversal after a 6.4 per cent increase in 2009. The negative demand impulses in the rest of the economy from such a decline will be rather muted (though suppliers to the oil industry will struggle). As investment forecasts have historically tended to be revised upward as projects under consideration are added we believe that the investment outlook is somewhat better that the survey predicts; investment in at least one oil field is likely to come on stream and higher oil prices might persuade oil companies to ramp up capital spending plans. Non-oil private investment has been depressed in recent years. Business investment plunged 14.5 per cent from 2008 to 2009, while residential investment has declined for ten consecutive quarters, with the end-2009 level 35 per cent below the peak in mid-2007. However, increasing new residential orders during 2009 to the highest level in almost two years and recovering housing starts in early 2010 well above the 2009 average suggest a recovery in residential investment going forward. Norges Bank’s recent lending survey showed banks continuing to report higher credit demand from non-financial corporations. Non-oil capital spending by businesses will rebound later, but the first quarter manufacturing investment survey suggested that the trough is about to be passed.
Private consumption accelerating
The recovery has been led by non-oil final domestic demand, which moved into year-on-year growth by end2009. Private consumption was up a robust 3.4 per cent for the year. It was supported by very strong growth in real disposable income, which was up 4.8 per cent from 2008 to 2009 (almost half of it due to lower net interest expenses) and by an even stronger 6.0 per cent yearon-year in the fourth quarter. With income running well ahead of spending, the household savings ratio more than doubled to 7.5 per cent in 2009 and stood at 9.9 per cent by year-end, twice its 20-year average.
Strong income supports consumption
% change (4Q) 10 8 6 4 2 0 -2 -4 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Private consumption (LHS) Real disposable income excl. share dividends (LHS) % change (4Q), 2Q average 10 8 6 4 2 0 -2 -4
Unemployment levelling off
The Norwegian labour market fared better than most during the recession. While employment turned abruptly from an average growth rate of 3.3 per cent in 2006-08
42 | Nordic Outlook – May 2010
(far above trend) to a 0.6 per cent decline in 2009, the increase in the labour force slowed markedly as well, denting the impact on unemployment. In fact, according to the Labour Force Survey measure, unemployment rose from a 21-year low of 2.4 per cent during most of 2008 to a still low 3.3 per cent in the fourth quarter of 2009 and held steady in early 2010.Morover, registered unemployment including those in labour market programmes trended marginally lower over the winter.
The manufacturing wage agreement has been copied for other blue-collar workers in the private sector, but overall labour cost growth will be stronger, since increases for white collar workers (in manufacturing and elsewhere) and in Norway’s large public sector are likely to continue being higher. In all, we forecast 3.5 per cent wage and salary growth in 2010. Some acceleration is likely as the recovery continues and the labour market improves.
Unemployment shows signs of peaking
% of labour force 8 7 6 5 4 3 2 1 0 % of labour force 8 7 6 5 4 3 2 1 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 LFS unemployment rate, 3 mth. average Registered unemployed
Core inflation to bottom out by summer
Sharply higher electricity prices this winter pushed up CPI inflation from 0.6 per cent last October to 3.4 per cent in March. However, CPI-ATE core inflation (excluding taxes and energy) has eased steadily from its cyclical high of 3.3 per cent last June to 1.7 per cent, the lowest year-on-year rate since late 2007, with a broad-based slowdown in domestic and import price increases.
Core inflation heading lower
% change (12M) 6.0 4.5 3.0 1.5 0.0 % change (12M) 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 95 97 99 01 03 05 CPI excl. taxes and energy Core CPI domestic goods and services Core CPI imported consumer goods 07 09
We are a bit hesitant to say joblessness has peaked just yet, while awaiting any signs of a turnaround in employment. Nonetheless, the LFS unemployment rate seems to be topping out slightly lower than expected. It should average 3.4 per cent in 2010 and be broadly unchanged in 2011 as a growing labour force matches higher employment.
-1.5 -3.0 -4.5
Wage growth decelerating further
Economy-wide wage and salary growth slowed from 6.3 per cent in 2008 to 4.1 per cent in 2009, the lowest rate in three years. It looks set to decelerate further in 2010. The trend-setting negotiations for blue-collar workers in manufacturing led to a contract calling for 3 per cent wage growth in 2010, down from 3.9 per cent in 2009 and the slowest since 1994. However, the 3 per cent rate is based on certain assumptions for wage drift (local pay). In 2009, wage drift turned out higher than expected and as corporate profitability improves we might see a similar development this year.
The decrease in imported inflation from 1.8 per cent year-on-year in the second quarter of 2009 to -0.3 per cent this March reflects the strong appreciation of the Norwegian krone since last summer, which will push down such prices further. Core domestic inflation is 2.6 per cent on average in the first quarter but should trend lower in the near term as well. We expect core inflation to bottom out at 1.3 per cent by summer and average 1.7 per cent for all of 2010 (versus 2.1 per cent in 2009). Absent a further marked currency appreciation, core inflation should move up next year with the 2011-average at 2.1 per cent.
Wage growth and unemployment
% change (YoY) 10.5 9.0 7.5 6.0 4.5 3.0 1.5 0.0 87 89 91 93 95 97 99 01 Annual wages (LHS) LFS unemployment rate (RHS) 03 05 07 09 11 % of labour force 0 1 2 3 4 5 6 7
Lower non-oil budget deficit
The government made use of Norway’s very sound fiscal position (due to abundant revenue from the petroleum sector) to provide a massive boost to the economy in 2009, with further − though much smaller − stimuli included in its budget for 2010. As a result, the non-oil budget deficit was expected to swell to NOK 154 billion this year, representing a structural (or cyclically adjusted) deficit NOK 45 billion above what the “fiscal policy rule” allows: this rule implies that the structural non-oil budget deficit over an economic cycle should correspond to 4 per cent of the Government Pension Fund Global. The revised 2010 budget to be unveiled May 11 will show a much smaller non-oil deficit due to higher tax revenue Nordic Outlook – May 2010 | 43
and slower spending increases, among other things because of lower-than-expected unemployment. There will be no tightening measures. The overall budget surplus will also be boosted by higher oil prices. Cyclical factors will improve the budget in 2011, along with reversals of last year’s “crisis” measures. Even with only a small real fiscal tightening, the structural non-oil deficit should thus be much closer to the fiscal policy rule’s 4 per cent limit than the 5.7 per cent outcome in 2009.
Norges Bank foresees slower rate hike cycle
Norges Bank hiked its key deposit rate by 25 basis points last October and December to 1.75 per cent. The March Monetary Policy Report was surprisingly dovish, lowering the optimal rate path by some 30bp by end-2010 and more than 50bp on average in 2011. The projected end2011 level was lowered from 4.00 per cent to 3.50 per cent.
Norges Bank deposit rate and rate path
Level, % 10 9 8 7 6 5 4 3 2 1 0 Level, % 10 9 8 7 6 5 4 3 2 1 0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Norges Bank deposit rate Optimal rate path, MPR 1/10 Optimal rate path, MPR 3/09
Norges Bank’s modus operandi of avoiding further NOK appreciation links monetary policy with economic developments elsewhere: the pace of adjustment will be constrained by how quickly, or more precisely, how slowly the ECB will act. However, Norway is in quite a different position from the euro zone, with only a small negative output gap, an unemployment rate one third as high, stronger wage growth and no need for the severe fiscal tightening faced by a number of (peripheral) euro zone countries, which might imply very low key rates for longer. Keeping the key interest rate well below neutral for an extended period risks fuelling domestic inflationary pressure in the medium term. Indeed, simple rules presented in the bank’s Monetary Policy Report, based on the output gap and inflation relative to target, suggest that the deposit rate should already be above 3 per cent: only after putting external interest rates into the equation did the rules align with the bank’s rate path.
Stronger NOK is denting inflation
% change (12M) 6 4 2 0 -2 -4 -6 99 00 01 02 03 04 05 06 07 08 09 Core CPI imported consumer goods (LHS) NOK import-weighted index, 6 mth. earlier (RHS) 10 % change (12M), reversed -20 -15 -10 -5 0 5 10 15 20
According to Norges Bank, inflation and capacity utilisation “may for a period of time” be lower than expected, but the changes to the bank’s forecasts for growth and inflation were comparatively modest: the trough for core CPI was put somewhat lower, but from mid-2011 the trajectory was the same as previously, with inflation in line with the 2.5 per cent medium-term target by mid-2012. Hence, the sharply lower rate path was first and foremost due to a stronger NOK than previously expected and lower global interest rate expectations. Norges Bank thus emphasised that hiking its key interest rate too far ahead of its peers “may entail a risk of a considerably stronger-than-projected krone, resulting in inflation that is too low.” The central bank’s fixation with the exchange rate is understandable, since import prices make up approximately 30 per cent of the core CPI basket. The appreciation of the NOK since last summer has already slowed imported inflation markedly, and any further strengthening of the currency might put core inflation too far below target.
Consequently, we now expect more gradual rate hikes and foresee the deposit rate at 2.50 per cent by end2010 and 3.75 per cent by end-2011. Our forecasts are slightly above Norges Bank’s, but imply below-“neutral” real rates by the end of next year.
44 | Nordic Outlook – May 2010
Leading indicators climbing higher Above-trend growth, despite dock strike Pay increases decelerating
facturing jobs has slowed, and such sectors as construction, information and communications technology (ICT) and transport even reported rising employment early this year. The jobless rate, now just above 9 per cent, will nevertheless keep rising for another few months, then level off at around 9.5 per cent by mid-year. After that it will slowly fall, reaching an annual average of 8.8 per cent in 2011, still well above the non-accelerating inflation rate of unemployment (NAIRU), which is about 7.5 per cent according to the OECD. Low resource utilisation in the economy as a whole will subdue pay and price hikes. Total pay hikes decelerated to just below a 3 per cent rate in the fourth quarter of 2009. We expect further declines in 2010-2011. Pay increases will average just above 2 per cent this year and next.
Finland was hit very hard by last year’s global economic slowdown. GDP declined by a full 7.8 per cent, the largest downturn in the entire OECD. Exports fell 25 per cent and gross fixed investments by nearly 15 per cent, while the downturn in private consumption was less than 2 per cent.
Service sector leading the upturn
70 50 30 10 -10 -30 -50 -70 00 01 02 03 04 05 06 07 08 09 10 70 50 30 10 -10 -30 -50 -70
Increased activity early in 2010
90.0 85.0 80.0 75.0 70.0 16 14 12 10 8 6 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Construction sector Manufacturing sector
Source: DG ECFIN
But today things look better; leading indicators, especially in manufacturing and services, are climbing higher and the construction sector has revived despite the cold weather early this year. Consumer confidence is also continuing upward, which is already becoming noticeable in rising retail sales. The upswing in the euro zone, China, Russia, Sweden and the US, which together buy about 60 per cent of Finnish exports, is benefiting the recovery. But early 2010 was not problem-free. A protracted dock workers’ strike − which paralysed about 60 per cent of the paper and forest product industry and halted 80 per cent of foreign trade − will lower GDP growth at least 0.5 percentage points this year. Despite the strike, GDP will grow by 2.6 per cent this year, a marginal upward revision of our February forecast. Thanks to a weaker euro, exports will rise by more than 6 per cent. Capital spending will rise by about 3 per cent and private consumption by nearly 1.5 per cent. The economy will grow by 2.7 per cent in 2011. The upturn in output will also help the labour market, though with a time lag. Last year’s rapid drop in manu-
Capacity utilisation in manufacturing (LHS) Unemployment (RHS) NAIRU according to OECD (RHS)
Source: DG Ecfin, OECD, Statistics Finland
Lower value-added tax and interest rates drove down national CPI late in 2009, helping slow CPI to a record-low zero per cent for the full year. In March 2010, however, CPI inflation rose by a surprising 0.5 per cent year-onyear, largely related to higher energy prices due to the cold weather. CPI inflation will end up just above 1 per cent this year and somewhat higher in 2011. Eurostat’s harmonised inflation measure (HICP), which excludes interest expenses, will be higher: nearly 2 per cent this year and 2-2.5 per cent in 2011. Favourable conditions at the outset, including low government debt and both budget and current account surpluses, will help preserve the stability of the Finnish economy, despite last year’s GDP decline. The deficit will reach a modest 3 per cent of GDP in 2010 and 2.5 per cent in 2011, keeping sovereign debt below 50 per cent of GDP in 2011.
Nordic Outlook – May 2010 | 45
Nordic key economic data
Yearly change in per cent 2009 level, DKK bn 1,660 817 492 312 784 727 2008 -0.7 -0.2 1.5 -4.9 0.4 2.4 3.0 1.8 3.6 4.4 2.2 3.6 33.0 Jun 10 1.05 3.20 20 5.64 7.45 Sep 10 1.05 3.20 20 5.73 7.45 2009 -4.8 -4.3 2.5 -13.2 -2.4 -10.3 -13.2 3.5 1.1 3.1 4.1 3.6 39.0 Dec 10 1.05 3.25 15 5.96 7.45 2010 1.5 1.8 1.3 -3.5 0.5 3.0 1.7 4.4 2.1 2.3 2.5 -5.5 43.0 Jun 11 1.65 3.40 15 6.21 7.45 2011 1.8 2.2 0.6 3.0 0.0 4.0 4.3 4.2 1.8 2.1 2.0 -4.0 46.0 Dec 11 2.50 3.55 15 6.21 7.45
Gross domestic product Private consumption Public consumption Gross fixed investment Stockbuilding (change as % of GDP) Exports Imports Unemployment (%) Consumer prices, harmonised Wage cost Current account, % of GDP Public sector financial balance, % of GDP Public sector debt, % of GDP FINANCIAL FORECASTS Lending rate 10-year bond yield 10-year spread to Germany, bp USD/DKK EUR/DKK
Apr 29 1.05 3.20 20 5.63 7.44
Yearly change in per cent 2009 level, NOK bn Gross domestic product 2,278 Gross domestic product (Mainland Norway) 1,737 Private consumption 952 Public consumption 489 Gross fixed investment 470 Stockbuilding (change as % of GDP) Exports 1,004 Imports 638 Unemployment (%) Consumer prices CPI-ATE Wage cost 2008 1.8 2.2 1.3 4.1 1.4 0.5 0.9 2.2 2.6 3.8 2.6 6.3 2009 -1.5 -1.5 0.0 5.2 -7.9 -1.9 -4.3 -9.7 3.2 2.1 2.6 4.1 2010 2.0 2.3 4.5 2.8 -1.6 0.4 1.4 4.4 3.4 2.8 1.7 3.5 2011 2.3 3.0 3.7 2.2 3.8 0.1 1.6 4.7 3.4 1.8 2.1 3.8
FINANCIAL FORECASTS Sight deposit rate 10-year bond yield 10-year spread to Germany, bp USD/NOK EUR/NOK
Apr 29 1.75 3.65 65 5.92 7.83
Jun 10 2.00 3.70 70 5.87 7.75
Sep 10 2.25 3.70 70 5.88 7.65
Dec 10 2.50 3.90 80 6.20 7.75
Jun 11 3.00 3.95 70 6.50 7.80
Dec 11 3.75 4.05 65 6.50 7.80
46 | Nordic Outlook – May 2010
Nordic key economic data
Yearly change in per cent 2009 level, SEK bn Gross domestic product 3,156 Gross domestic product, working day adjusted Private consumption 1,467 Public consumption 834 Gross fixed investment 616 Stockbuilding (change as % of GDP) 5 Exports 1,711 Imports 1,477 Unemployment, (%) Unemployment, (%) (EU definition) Employment Industrial production Consumer prices CPIX Wage cost Household savings ratio (%) Real disposable income Trade balance, % of GDP Current account, % of GDP Central government borrowing, SEK bn Public sector financial balance, % of GDP Public sector debt, % of GDP FINANCIAL FORECASTS Repo rate 3-month interest rate, STIBOR 10-year bond yield 10-year spread to Germany, bp USD/SEK EUR/SEK TCW Apr 29 0.25 0.55 2.98 -2 7.25 9.60 129.6 Jun 10 0.25 0.55 3.05 5 7.20 9.50 128.4 2008 -0.2 -0.5 -0.2 1.4 2.6 -0.3 1.8 3.0 4.6 6.2 1.1 -3.8 3.4 2.7 4.3 11.6 2.7 4.0 9.5 -135 2.5 38.3 Sep 10 0.75 1.10 3.05 5 7.15 9.30 126.1 2009 -4.9 -4.7 -0.8 2.1 -15.3 -1.5 -12.5 -13.4 6.5 8.3 -2.1 -19.0 -0.3 1.9 3.4 13.9 2.1 3.6 7.2 176 -0.8 42.3 Dec 10 1.25 1.65 3.20 10 7.20 9.00 123.0 2010 3.0 2.7 2.9 1.0 3.0 1.2 6.8 9.2 6.4 8.9 0.3 4.0 1.2 2.0 1.9 12.1 0.7 3.3 6.0 46 -1.0 39.6 Jun 11 1.75 2.15 3.45 20 7.50 9.00 123.8 2011 2.7 2.7 2.6 0.9 5.0 0.2 7.1 7.9 6.4 8.8 0.6 7.0 1.9 1.0 2.2 11.8 2.3 3.0 5.5 42 -0.6 39.0 Dec 11 2.75 3.15 3.70 30 7.42 8.90 122.5
Yearly change in per cent 2009 level, EUR bn 171 94 43 34 62 57 2008 1.2 1.3 2.4 -0.2 -0.4 6.6 6.6 6.4 3.9 5.6 3.1 4.2 34.2 2009 -7.8 -1.8 0.8 -13.4 -0.9 -24.4 -22.3 8.2 1.6 3.9 1.3 -2.2 44.0 2010 2.6 1.3 1.5 2.9 0.3 6.1 5.1 9.2 1.9 2.3 2.1 -3.0 47.1 2011 2.7 1.8 1.5 4.3 0.0 6.4 5.9 8.8 2.2 2.2 2.4 -2.5 49.7
Gross domestic product Private consumption Public consumption Gross fixed investment Stockbuilding (change as % of GDP) Exports Imports Unemployment (%) Consumer prices, harmonised Wage cost Current account, % of GDP Public sector financial balance, % of GDP Public sector debt, % of GDP
Nordic Outlook – May 2010 | 47
Nordic key economic data
Yearly change in per cent 2009 level, EUR bn 8,979 5,170 1,975 1,773 3,259 3,140 2008 0.5 0.4 2.1 -0.9 -0.1 0.8 0.9 7.5 3.3 9.5 2009 -4.0 -1.0 2.3 -10.8 -0.1 -12.8 -11.4 7.5 3.3 9.6 2010 1.5 0.2 1.4 1.4 0.2 4.1 4.0 10.2 1.1 9.5 2011 1.8 0.9 1.7 3.3 0.0 4.9 4.4 9.9 0.8 9.3
Gross domestic product Private consumption Public consumption Gross fixed investment Stockbuilding (change as % of GDP) Exports Imports Unemployment (%) Consumer prices, harmonised Household savings ratio (%)
Yearly change in per cent 2009 level, USD bn 14,454 10,236 2,959 1,708 1,680 2,1230 2008 0.4 -0.2 3.1 -5.1 -0.3 5.4 -3.2 5.8 3.8 2.6 2009 -2.4 -0.6 1.8 -18.4 -0.6 -9.6 -13.9 9.3 -0.3 4.3 2010 3.6 2.4 0.6 2.7 1.3 11.1 8.5 9.5 1.5 3.0 2011 2.8 2.3 0.2 8.4 0.2 8.2 7.9 8.9 0.7 3.6
Gross domestic product Private consumption Public consumption Gross fixed investment Stockbuilding (change as % of GDP) Exports Imports Unemployment (%) Consumer prices Household savings ratio (%)
LARGE INDUSTRIAL COUNTRIES
Yearly change in per cent 2008 GDP United Kingdom Japan Germany France Italy Inflation United Kingdom Japan Germany France Italy Unemployment (%) United Kingdom Japan Germany France Italy
48 | Nordic Outlook – May 2010
2009 -4.9 -5.2 -5.0 -2.2 -5.1
2010 1.5 2.4 1.8 1.5 0.9
2011 2.0 2.2 2.0 1.7 1.2
0.5 -1.2 1.3 0.3 -1.3
3.6 1.4 2.8 3.2 3.5
2.2 -1.3 0.2 0.1 0.8
2.8 -0.6 0.9 1.3 1.5
1.2 0.2 0.9 1.5 1.8
5.9 4.0 7.3 7.8 6.7
7.9 5.1 7.5 9.5 7.8
7.8 4.9 7.8 10.3 8.5
7.5 4.6 7.6 10.0 8.2
Nordic key economic data
2008 GDP, yearly change in percent Estonia Latvia Lithuania Poland Russia Ukraine Inflation, yearly change in per cent Estonia Latvia Lithuania Poland Russia Ukraine -3.6 -4.6 2.8 5.0 5.9 2.1 2009 -14.1 -18.0 -15.0 1.7 -7.9 -15.1 2010 2.0 -2.8 1.0 3.5 5.0 3.5 2011 5.0 4.0 4.0 4.5 5.0 4.5
10.6 15.3 11.1 4.2 14.1 25.2
0.2 3.3 4.2 3.4 11.7 15.9
2.0 -3.2 0.0 2.5 7.0 12.0
3.0 1.6 2.0 2.7 7.5 9.0
29 Apr Official interest rates US Japan Euro zone United Kingdom Bond yields US Japan Germany United Kingdom Exchange rates USD/JPY EUR/USD EUR/JPY GBP/USD EUR/GBP Fed funds Call money rate Refi rate Repo rate 0.25 0.10 1.00 0.50 Jun 10 0.25 0.10 1.00 0.50 Sep 10 0.25 0.10 1.00 0.50 Dec 10 0.50 0.10 1.00 0.75 Jun 11 1.50 0.10 1.50 1.50 Dec 11 2.00 0.50 2.25 2.00
10 10 10 10
years years years years
3.73 1.29 3.00 3.99
3.73 1.35 3.00 4.00
3.65 1.40 3.00 4.10
3.75 1.50 3.10 4.30
4.00 1.50 3.25 4.45
4.10 1.65 3.40 4.50
94 1.32 124 1.53 0.86
95 1.32 125 1.53 0.86
95 1.30 124 1.51 0.86
98 1.25 123 1.49 0.84
105 1.20 126 1.46 0.82
110 1.20 132 1.50 0.80
GLOBAL KEY INDICATORS
Yearly percentage change GDP OECD GDP world CPI OECD Export market OECD Oil price, Brent (USD/barrel) 2008 0.6 3.0 3.5 2.9 97.2 2009 -3.5 -0.6 0.1 -12.9 61.9 2010 2.5 4.7 1.4 7.0 77.9 2011 2.4 4.7 0.9 6.9 75.0
Nordic Outlook – May 2010 | 49
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