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Recovery becoming more self-sustaining Faster Nordic key rate hikes
Economic Research – February 2011
International overview Theme: A model for long-term equilibrium exhange rates (SEBEER) The United States Japan Asia The euro zone The United Kingdom Eastern Europe The Baltics Sweden Denmark Norway Finland Economic data 5 15 16 22 23 26 32 33 34 36 45 46 50 51
Boxes Risk and opportunities in North Africa “United Debt of Europe” Continued high commodity prices Falling private sector savings boosts GDP Home price drop jeopardises recovery Little risk of 1970s-style stagflation Obama rebounding China’s twelfth five-year plan, 2011-2015 ECB questioning core inflation as an indicator The Riksbank and macro supervisory rules Fiscal policy has an expansionary bias 6 8 10 17 18 20 21 25 31 41 47
Nordic Outlook – February 2011 | 3
This report was published on February 8, 2011. Cut-off date for calculations and foreasts was February 3, 2011.
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 Andreas Johnson Economist +46 8 763 80 32
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 Tomas Lindström Economist + 46 8 763 80 28
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, SEB Frankfurt/M and Olle Holmgren, Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible for the Norwegian analysis.
4 | Nordic Outlook – February 2011
The recovery is becoming more self-sustaining
Stronger momentum as the US accelerates Inflation will fall − increasing focus on resource utilisation ECB hike in September, Fed only in 2012 The Riksbank will speed up its rate hikes Long-term yields sideways next 6 months Nordic currencies will keep appreciating
ing economies have increased both their economic and political clout. Germany’s pivotal role in Europe has been further confirmed by the euro zone debt crisis and its financial consequences. The Nordic economies have also emerged stronger from the crisis, and Swedish GDP growth stands out in an international perspective. The Nordic model is again a focus of international debate.
Global GDP growth
Year-on-year percentage change In recent months, the global economic outlook has improved. US growth expectations have risen. Fiscal policy will be more expansionary in 2011, now that Congress has resolved important taxation issues. In addition, the American recovery is entering a more self-sustaining phase, despite lingering problems in the labour and housing markets. Emerging economies, especially in Asia, are continuing their strong expansion although tighter economic policies will now lead to a slight deceleration. In Europe, economic signals are more mixed. In Germany and the Nordic countries, 2011 growth will be stronger than we had previously expected. The United Kingdom is now beginning to feel the impact of tight fiscal policy. In southern Europe and Ireland, growth will be hampered by continued financial turmoil and necessary budget consolidation measures. Overall, we foresee above-trend GDP growth in the 34 countries of the Organisation for Economic Cooperation and Development (OECD). We expect GDP increases of 2.8 per cent both in 2011 and 2012, representing an upward revision of 0.5 and 0.3 percentage points. The world economy still faces a number of challenges. Sovereign debts continue to grow, and acute crises in several euro zone countries have still not been resolved. Global imbalances remain large and a restructuring of the financial system is under way, yet the world economy seems to be entering a new phase. In the corporate sector, optimism is record-high. Strong balance sheets, expansionary policies and large global growth potential dominate the picture. Given a more self-sustaining economic upturn, the focus of financial markets and economic policy makers is shifting towards more traditional economic variables such as growth, inflation and the labour market. This shift has occurred only after the American economy reached slightly firmer ground, yet the world that is now taking shape has changed in many ways. The role of the US has weakened, while China and other emerg2009
2010 2.9 4.0 3.6 10.3 1.4 1.7 2.9 1.2 2.7 7.1 5.0 4.3
2011 3.6 1.6 3.1 9.5 1.5 1.9 3.4 4.1 2.8 6.5 4.5 3.8
2012 4.0 1.6 2.5 8.5 2.5 1.8 2.6 4.7 2.8 6.5 4.6 3.9
-2.6 -6.3 -4.7 9.2 -4.9 -4.0 -4.6 -15.6 -3.5 2.6 -0.6 -1.3
Japan Germany China United Kingdom Euro zone Nordic countries Baltic countries OECD Emerging markets World, PPP* World, nominal
Source: OECD, SEB
*Purchasing power parties
In recent months, rising commodity prices have fuelled inflation worries. Our assessment is that these fears are somewhat exaggerated. Even if commodity prices remain high, inflation will fall in the course of 2011. Inflation expectations are under control, and underlying cost pressure is low in the US and Western Europe. This will help keep down inflation in the OECD countries during the next couple of years, especially in the US. In spite of this, key interest rate hikes are fast approaching. Output gaps are on their way towards closing. Financial conditions continue to normalise, including the beginnings of growth in the money supply. This indicates that central banks in the major OECD countries must soon start normalising their monetary policies to keep inflation expectations under control. We expect the European Central Bank (ECB) to begin hiking its key interest rate in September this year. A relatively small output gap, combined with the ECB’s less intensive focus on core inflation compared to variNordic Outlook – February 2011 | 5
ous other central banks, will contribute to earlier rate hikes. To some extent, the expansion of the European financial stability mechanism (ESFS/ESM) is also taking pressure off the ECB, enabling the bank to focus to a greater extent on its main task: ensuring price stability. High inflation figures will also help to persuade the Bank of England (BoE) to begin key rate hikes before the end of 2011. Because of high unemployment and a continued decline in core inflation, the US Federal Reserve (Fed) will hold off until April 2012 before beginning its rate hikes. The Nordic central banks will continue raising their key interest rates. Partly due to rapidly climbing resource utilisation, Sweden’s Riksbank will adopt a more aggressive stance during 2011. We expect it to hike the repo rate to 2.75 per cent by year-end. Norges Bank, too, will find it easier to raise its deposit rate in response to Norwegian domestic conditions once the ECB and BoE also begin hiking their key rates.
than usual (see the chart). There is still a great need for financial consolidation, especially in the household sector and especially due to lingering weaknesses in the housing and labour markets. Our forecast implies that the household savings ratio will remain at the level of some 5-6 per cent it has now reached, which is compatible with a continued draw-down in the debt ratio. In spite of this, the saving downturn in the corporate sector is sufficient to generate significant growth stimulus in the form of capital spending over the next couple of years. We thus expect GDP growth to hold up well in 2012, too, in spite of tighter economic policies.
US: Financial saving in private sector
Per cent of GDP
10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 60 65 70 75 80 85 90 95 00 05 10 15 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5
The US: Private saving now falling again
American economic signals have gradually become more optimistic since worries about a double dip recession culminated in August 2010. At first, the Fed’s quantitative easing (QE) helped restore confidence. The fiscal policy agreements reached in December were also important to the 2011 growth outlook, not least by blunting the sharp conflicts that dominated Congress last autumn. This is among the reasons why we have revised our GDP forecast for 2011 upward from 2.2 to 3.6 per cent. The change in our scenario is not only due to economic stimulus policies. Changes in private sector financial saving are normally a reliable signal that a shift is imminent, mainly in capital spending. Historical experience indicates that a downward adjustment in saving happens relatively fast once the curve has changed direction. Our forecast assumes that the downward adjustment in private saving will occur more slowly
Normal adjustment NO scenario
Emerging Asia: Growth despite tightening
The Asian emerging economies will continue to drive the world economy. Accounting for nearly one fourth of global GDP, their growth is increasingly important. Partly due to their resilience during the financial crisis, emerging markets are rather far ahead of the OECD countries in the economic cycle. One expression of this is that inflation is now climbing relatively fast, mainly due to higher food and energy prices. But core inflation has also risen in such countries as China, India and Indonesia. There is a clear trend towards higher key interest
Risks and opportunities in North Africa
In recent weeks, political unrest in North Africa has increased global uncertainty. One reason behind the unrest is a rapid rise in food prices. This is having an extra impact because food subsidies have been removed in many places. Other factors, such as high youth unemployment and widespread corruption, also play a part. Right now the situation is worst in Egypt, with its large population. The country has only limited oil production but has a pivotal security policy role as a major US ally in the Middle East. Since 1980 Egypt has had a peace treaty with Israel and has played a major role as a mediator in the Israeli-Palestinian conflict. The greatest risk ahead is consequently that the unrest will threaten to disrupt security policy stability in the region. In financial markets, North African countries have been affected via rising risk premiums and falling share prices. The crisis has also pushed up oil and wheat prices. Disruptions in vital oil shipments through the Suez Canal would have major consequences. If the protests spread to Saudi Arabia, Kuwait and the United Arab Emirates, there would be a big impact on oil prices, at least in the short term. On the other hand, experience shows that revolts and upheavals often do not necessarily result in major financial consequences. Pakistan in 1999 and Thailand in 2006 and 2010 are examples of upheavals where economic crises were avoided. There is thus a possibility that developments in Egypt might lead to democratisation and greater stability. However, no quick solution seem likely, which is one reason why the current uncertainty will continue for another while.
6 | Nordic Outlook – February 2011
rates. In India, for example, the real key rate is well into negative territory, while economic growth is nearly 9 per cent a year. Many Asian central banks seem more and more uncomfortable with excessively accommodative monetary policies. We can thus expect continued key interest rate hikes during 2011.
strong international demand will nevertheless prop up economic growth. GDP will increase by 1.5 per cent this year and 2.5 per cent in 2012.
Diverging levels of optimism
Consumer confidence, net balance
15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 90 92 94 96 98 00 02 04 06 08 10
Source: DG ECFIN
15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40
Real key rates in selected countries
Key rate Inflation Real SEB key rate forecast GDP 2011
6.5 6.5 5.8 1.0 0.1
8.4 7.0 4.6 2.2 0.0 1.5
-1.9 -0.5 1.2 -1.2 0.1 -1.2
8.5 6.3 9.5 1.9 1.6 3.6
Indonesia Euro zone Japan
United States 0.25
Swedish growth in a class by itself
The Nordic countries are continuing their strong growth. These countries are benefiting from export sectors that are well positioned to meet rising global demand for investment and intermediate goods. In additional, such fundamental factors as public finances and current account balances are in very good shape.
Source: National statistical offices, OECD, SEB
Because of their higher trend growth and earlier position in the economic cycle, the differences between nominal emerging market interest rates and those in the OECD countries will increase this year. This may exacerbate the problems connected to speculative capital inflows, including bubble tendencies in asset markets. But to a greater extent than before, many countries seem to accept currency appreciation as an element of inflation-fighting. One reason is that greater risks of rising food prices might lead to social unrest. We still foresee an Asian soft landing as the most likely scenario. Tighter economic policies will decelerate growth to more sustainable levels, which in the long term are around 6 per cent. Inflation will peak during the first half of 2011 and then decline.
GDP growth, Nordic and Baltic countries
Year-on-year percentage change 2009 Sweden Norway Denmark Finland Nordics Estonia Latvia Lithuania Baltics
Source: OECD, SEB
2010 5.7 0.1 2.3 2.7 2.9 2.7 -0.3 1.0 1.2
2011 4.7 2.7 2.6 3.5 3.4 4.5 4.0 4.0 4.1
2012 2.6 2.5 2.3 3.0 2.6 4.0 5.0 4.5 4.7
-5.3 -1.4 -4.7 -8.1 -4.6 -13.9 -18.0 -14.7 -15.6
Western Europe: Out of step
The euro zone continues to be characterised by a twospeed economy. The recovery in Germany is progressing at a rapid pace. Optimism is at record-high levels, according to the IFO sentiment index. Unemployment has fallen to its lowest level since 1992. We expect German GDP to climb by 3.1 per cent in 2011, a bit less than last year’s 3.6 per cent. Meanwhile powerful austerity programmes in southern Europe will hamper growth in the euro zone as a whole. This year, GDP will fall in Greece and Portugal and will be close to zero in Spain and Ireland. In France and Italy, growth will end up around 1½ per cent, both this year and next. Due to structural deficits in both countries, however they also have a major need for fiscal austerity measures. Overall euro zone growth will end up at 1.9 per cent this year and 1.8 per cent in 2012, somewhat higher than we believed in November. During 2011, the British economy will be hampered by fiscal tightening and by high inflation that will undermine purchasing power. The weak British pound and
The Swedish economy is now expanding very fast. We have revised our GDP growth forecast upward to 4.5 per cent in 2011, after an increase of no less than 5.7 per cent in 2010. Other Nordic countries will show more modest growth figures. Danish growth will be 2.6 per cent in 2011 and 2.2 per cent in 2012, despite a degree of fiscal tightening. In Finland, too, exports are the main driving force. GDP growth will accelerate a bit, reaching 3.5 per cent in 2011 and 3.0 per cent in 2012, among other things due to improved competitiveness. In Norway, supply-side restrictions are already starting to hamper expansion; GDP growth will thus be only 2.7 per cent in 2011 and 2.5 per cent in 2012. Rising resource utilisation in both Sweden and Norway has led to early key rate hikes and sharply appreciating
Nordic Outlook – February 2011 | 7
currencies. This will slow export growth over the next couple of years, although our calculations indicate that their currencies are still undervalued against the euro. On the other hand, competitiveness in Finland and Denmark will benefit from the appreciation of the SEK and NOK from their previously extremely low levels.
Gradual recovery in the Baltics
The three Baltic countries rebounded weakly last year after their depression-like downturn in 2008-2009. In 2011 and 2012 we expect GDP growth of 4-5 per cent, which is still above consensus. We have revised our
forecast for Estonia upward by half a percentage point to 4.5 per cent both in 2011 as well as 2012. This implies that Estonia will have the fastest growth in the Baltics during both years. With its relatively high exports as a percentage of GDP, the Estonian economy is best positioned to benefit from good external demand, especially from Sweden and Finland. Growth will continue to be driven by strong, competitive exports. Domestic demand will recover slowly. Households and businesses are still feeling the after-effects of internal devaluation and tough public
“United Debt of Europe”
Monetary cooperation in Europe is moving into a new phase. The temporary European Financial Stability Facility (EFSF), which will be replaced in 2013 by the permanent European Stability Mechanism (ESM), serves as a supranational lender of last resort. It will play a key role in dealing with the short- and mediumterm liquidity and refinancing needs of problem countries. Also of central importance is that the EFSF/ESM is re-establishing a clear delineation between euro zone sovereign debt policy and monetary policy. At their summit in late March, the European Union heads of state and government are expected to decide what powers the EFSF/ESM will have. We foresee the following decisions: 1) The lending amount guaranteed by the euro zone countries will more than double from today’s EUR 440 billion to EUR 1 trillion. That will reduce the EU’s dependence on the advice of the International Monetary Fund (IMF), but even so the IMF is still expected to play an important role for economic policy advice. 2) The EFSF/ESM will be allowed to buy government bonds in the secondary market. This will take over the role the ECB has been forced to assume to stabilise the situation. The EFSF/ESM is also expected to buy up the approximately EUR 80 billion in government securities now in the ECB’s balance sheet. 3) The EFSF/ESM will become a tool for long-term debt consolidation in crisis-hit countries with solvency problems; EFSF/ESM loans can be used to enable crisis countries to repurchase outstanding bonds that are trading today at prices sharply below face value. EU fiscal policy coordination will also intensify this year as a result of the “European semester”, a recurring process in which the fiscal positions and policies of EU countries will be reviewed before their national budget process is completed. In June, the EU summit is also expected to approve tougher standards and sanctions for the now-toothless Stability and Growth Pact. This signifies that euro zone government debt and fiscal policies will be taking a major step towards greater coordination. The new system represents something of a break with the principle that previously dominated the work of the EU: that each country should be able to pursue government debt policies that do not adversely impact other countries (in terms of interest rate effects/credibility). However, this seems to be the price that must be paid to ensure the survival of the euro. It is also consistent with the fundamental concept that the euro zone should serve as one step in the evolution of a political union. Increased oversight and demands on fiscal policy − and clearer distinctions between different policy areas − will have an impact on monetary policy. Government debt problems will be referred to national governments. Since the ECB will no longer be buying government bonds, this will increase the pressure to pursue responsible fiscal policies. The ECB can thus increasingly focus on its main task, ensuring price stability, which will strengthen its credibility. Our assessment is that on the margin, this opens the door to an earlier ECB interest rate hike. Looking ahead, confirming the ECB’s independence may also diminish the risk of rising inflation expectations and long-term yields. Such a development would be especially beneficial to such debt-burdened countries as Greece, Ireland, Portugal and Spain. But even if the EFSF/ESM gains an enlarged mandate and stronger financial muscle, the underlying problems are fundamentally national. An economy’s competitiveness and fiscal credibility must be regained by means of a sustainable structural policy and stable policy frameworks. Before this is ensured, the risks of financial volatility will persist. During the spring, we expect that both Greece and Ireland will be offered “soft” debt renegotiations in the form of lower interest rates on borrowing and extended loan maturities. Meanwhile these countries can implement a write-down of debts by repurchasing some of their outstanding debt. We also believe that Portugal and Spain will show an interest in borrowing money from EFSF/ESM. These countries must be taken care of in resolute fashion, to avoid a resurgence of mistrust.
8 | Nordic Outlook – February 2011
budget consolidation; in Latvia, budget austerity measures will continue. Unemployment will fall slowly, and at the end of 2012 it will remain far higher than before the crisis. Inflation is being pushed up by international energy and food price increases. Underlying price pressures remain low but will climb gradually.
Big labour market differences
During the downturn phase in 2008-2009, labour market trends diverged from what could be expected on the basis of GDP developments. For example, employment in the US fell significantly more sharply than in Germany, Sweden and Finland despite a milder GDP decline. In the recovery phase, this trend has become even clearer; those countries that were mainly affected by the crisis in the form of the international trade collapse have coped better than countries with more profound financial adjustment problems. One explanation is that the need for restructuring is smaller in these countries; when demand takes off again, their companies can rather easily begin to rehire. The UK is a clear exception. Despite its deep financial crisis, the downturn in the labour market has been comparatively mild.
fear of deflation caused by low resource utilisation and lack of confidence in the future. For some time, our inflation forecast has been below consensus, based on our assessment that large output gaps have dominated inflation processes. At the same time, we have deemed the deflation risk to be relatively small, since central banks seem to have retained credibility for their medium-term inflation ambitions. This has been reflected, for example, in inflation expectations and wage formation. In recent months, the risk picture has changed to some extent. Rising energy and food prices as well as tax increases in a number of countries have pushed up actual inflation. This has also contributed to a certain increase in inflation expectations.
Headline inflation will fall back in the euro zone
CPI, year-on-year percentage change
6 5 4 3 2 1 0 -1
6 5 4 3 2 1 0 -1 -2 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Actual unemployment vs NAIRU
11 10 9 8 7 6 5 4 3 92 94 96 98 00 02 04 06 08 10 12
11 10 9 8 7 6 5 4 3
Source: Eurostat, BLS, SEB
US, actual US, NAIRU
Euro zone, actual Euro zone, NAIRU
Source: OECD, SEB
These differences in the labour market situation will be increasingly important for inflation analysis and thus central bank action ahead. Because of the sharp upturn in US unemployment during the crisis, the gap between actual unemployment and established measures of equilibrium unemployment (such as non-accelerating inflation unemployment rate, NAIRU) is significantly larger than in Europe. On the other hand, there is a risk that the period of high unemployment in the US will become so lengthy that structural damage to the economy will be unavoidable and that equilibrium unemployment will end up climbing even faster than traditional estimates indicate. For example, the slide in home prices may have made it more difficult for many people to move out of homes whose mortgage loans exceed their market value. The geographic mobility that has been so important to the flexibility of the US labour market may thereby have diminished.
Our forecast implies that Consumer Price Index (CPI) inflation will fall somewhat in the course of 2011. Although commodity prices will remain at high levels, or even continue climbing somewhat, the inflation rate will slow as the effects of the rapid price increase during 2010 disappear from the 12-month figures. In addition, underlying price pressures remain low. Because of the cyclical recovery in productivity, unit labour costs are still falling. We thus expect core inflation to keep declining in 2011, especially in the US.
Year-on-year percentage change
9 8 7 6 5 4 3 2 1 0 -1 -2 -3 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Unit labour costs
9 8 7 6 5 4 3 2 1 0 -1 -2 -3
Europe (OECD countries)
In the long term, however, we foresee growing risks of a cyclically driven acceleration in inflation: The output gap is on its way towards closing, although the situation looks different, for example, in
More symmetrical inflation risks
In recent years, discourse has alternated between two extremes: worries about monetary-driven inflation or
Nordic Outlook – February 2011 | 9
Germany and the Nordic countries, on the one hand, and the UK and the US on the other. This means that the rate of pay increases will probably accelerate next year in the OECD countries as a whole. Robust expansion in emerging economies will contribute to a continued upward trend in commodity prices, although certain temporary driving forces (such as the weather) will weaken in the short term. Real-term appreciation in the currencies of emerging market countries, for example due to faster
pay increases, will also help reduce the strength of disinflationary globalisation forces. The situation in financial markets will gradually normalise. This will be reflected by resumption in the growth of broad money supply measures. The credit multiplier also seems to have turned upward. These levels remain low and are primarily signalling a reduced deflation risk.
We have revised our overall inflation forecast a bit upward and view the risk picture as more symmetrical limit of the USD 70-80/barrel price range it had previously indicated as a suitable benchmark. In the near future, we expect a downward correction towards USD 90, since several of the short-term driving forces are fading. Looking a bit further ahead, we expect good global economic growth to help maintain oil prices at a high level around USD 90-100/barrel. Today’s situation with regard to commodity prices has certain similarities with the 1970s. At that time, an oil price shock occurred soon after the economic policy framework that had prevailed for decades (the Bretton Woods system) had collapsed. This oil price upturn was driven by a change in price strategy by the dominant oil producers (OPEC). This time around, the commodity price upturn is mainly a consequence of rapid growth and the increasing importance of emerging economies. For the OECD countries, however, the consequence is similar. The commodity price upturn is serving as an external shock and comes at a sensitive cyclical phase.
Continued high commodity prices
Commodity price increases have regained momentum. These price upturns have been driven by a number of factors. The global recovery is creating an underlying demand for commodities. Prices are also being stimulated by the weak dollar, which is connected to the Fed’s quantitative easing, as well as weather-related disruptions. Speculative trading may also have had a certain impact. We expect this price pressure to last for the rest of 2011, but the upturn will be significantly more gentle than in late 2010.
Commodity prices have continued upward
Index, monthly data, USD
550 500 450 400 350 300 250 200 150 100 50 00 01 02 03 04 05 06 07 08 09 10
550 500 450 400 350 300 250 200 150 100 50
Year-on-year percentage change
17.5 15.0 12.5 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 75 80 85 90 95 00 05 10
The La Niña weather phenomenon is continuing to drive agricultural commodity prices, with widespread weather-related disruptions since mid-2010. Late in 2010, such disruptions mainly affected Australia and South America. Agricultural prices are now around 10 per cent higher than their previous peak during the 2008 crisis. A degree of price stabilisation now seems to be occurring, among other things as an effect of the probable fading of La Niña during the first half of 2011. Looking further ahead, most indications are that agricultural prices will remain high, since demand for food is increasing at a rapid pace. Oil prices have continued to climb, and today they are around USD 100/barrel. Cold weather in the northern hemisphere, combined with greater optimism about the global economic recovery, has pushed up prices. Production disruptions and the recently unfolding crisis in North Africa have also contributed to the upturn. So far, the Organisation of Petroleum Exporting Countries (OPEC) has not done much to defend the upper
10.0 7.5 5.0 2.5 0.0 -2.5
But there are major differences, especially when it comes to economic policy preparedness. The 1970s were characterised by uncertainty and confusion in that area. In the absence of a credible inflation strategy, the oil price upturn soon spread to wage and salary increases and broad-based inflation. In the past 7-8 years, the association between commodity prices and core inflation has been much weaker. The credibility of inflation targets seems to have served as an effective obstacle, preventing upturns in commodity prices from getting a foothold in expectation scenarios.
10 | Nordic Outlook – February 2011
than before. Inflation will probably fall somewhat in 2011, but a little further ahead the cyclical forces of inflation will gain strength. The period when inflation threats could be dismissed by pointing to large output gaps seems to be on its way towards ending.
of interest rates, with reference to increased inflation risks. The ECB will raise its key interest rate in September and then once more in December, while the BoE will hold off until December. The Fed and the Bank of Japan will wait until 2012 before hiking their key rates.
Year-on-year percentage change
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 90 92 94 96 98 00 02 04 06 08 10 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 7 6 5 4 3 2 1 0 00 02
Key interest rates
6 5 4 3 2 1 0
Euro zone, M3
Source: Federal Reserve
Source: ECB, Fed, SEB
“Exit policy” discussion is reawakened
The global recovery is highly dependent on how monetary policies are crafted in the world’s five largest economies: the US, the euro zone, China, Japan and the UK. Central banks, in turn, must take into account developments related to fiscal tightening and new macro supervisory regulation, areas that enjoy priority in Group of 20 cooperative efforts during 2011. Monetary policy makers also face challenges when it comes to managing various risk factors and dilemmas. The commodity price upturn is pushing up inflation, but at the same time it is weakening the recovery and adding to political risks in many countries. Crises of confidence in sovereign finances and banks still have a troublingly high probability, among other things weakening the effectiveness of interest rate policy. Meanwhile the crisis policies of recent years have opened up new issues. In order to maintain long-term credibility, the allocation of responsibility among different fields of policy must be made clearer. In such a situation, inflation expectations are especially important to keep track of. Despite earlier enormous loosening of monetary policy and growing government debts, inflation expectations have remained at a rather stable level. The trend of money supply and credit aggregates is generally showing continued low growth figures. These are, however, expected to increase as the credit multiplier normalises, due to a better economic outlook and stronger banking systems. Given a more stable economic outlook, a more normally functioning financial system and a crisis mechanism taking shape in Europe, the question of suitable “exit policy” is becoming more topical. This issue was, in principle, removed from the agenda nearly a year ago. Later in 2011, we expect the ECB and the Bank of England to begin moving cautiously towards a normalisation
We expect the Fed to complete its programme of purchasing USD 600 billion worth of government securities by the end of the second quarter of 2011 in order to ensure the functionality of the financial market and to preserve continued low mortgage interest rates. The Bank of Japan will also continue its unconventional monetary policies. In the euro zone, the EFSF will take over the current role of the ECB in stabilising the government securities market. The Bank of England will remain inactive, however. Because of growing government debts and the need for long-term funding in the banking system, there will be very limited room for central banks to reduce their holdings of securities during the next couple of years.
Key interest rates
7 6 5 4 3 2 1 0 00 02 04 06 08 10 12
7 6 5 4 3 2 1 0
Source: ECB, Riksbank, Norges Bank, SEB
Rapidly rising resource utilisation combined with higher home prices and household debt make it likely that there will be relatively rapid key interest rate hikes in Norway and Sweden. For some time, however, Norges Bank has slowed the pace, mindful of the risks of an excessively strong Norwegian currency. Last autumn, Sweden’s Riksbank lowered its repo rate path after taking into account the international situation. Rapidly climbing resource utilisation − combined with higher home prices and rapidly growing household debt Nordic Outlook – February 2011 | 11
− throw a spotlight on risks to both price stability and financial stability. This is an argument in favour of relatively fast key interest rate hikes in Norway and Sweden. For some time, however, Norges Bank has slowed its pace, mindful that an excessively strong Norwegian currency would weaken exports and push down inflation undesirably far. Last autumn, Sweden’s Riksbank also lowered its repo rate path, among other things because of the international situation. Our forecast that the European Central Bank will begin its key rate hikes as early as September 2011 will ease the Nordic central banks’ dilemma related to excessive currency appreciation. Our assessment is that this will help bring about an upward revision in Norges Bank’s deposit rate path at its monetary policy meeting in March. We expect the bank to raise its key rate three times during 2011, which will mean a deposit rate of 2.75 per cent at year-end. After five additional hikes during 2012 rate will stand at 4.00 per cent, a level that would be relatively close to normal. Due to short-term upward revisions in our inflation forecasts and a substantially changed resource utilisation picture, we believe that Sweden’s Riksbank will raise its key interest rate at a faster pace than previously announced. We expect the bank to hike its repo rate at every monetary policy meeting during 2011; the key rate will thus be 2.75 per cent at year-end in Sweden as well. During 2012 the hikes will continue, though at a somewhat slower pace, bringing the repo rate up to 3.75 per cent at year-end. This means that the key rate will be close to what can be regarded as a neutral level. To ease the pressure on interest rate policy, additional measures are being carried out to slow household credit expansion. For example, in 2010 both countries imposed a ceiling on the loan-to-value ratio for mortgages. The two central banks have also pointed to the possibility of accelerating their implementation of the new Basel III international banking regulations. In a speech during February, Riksbank Governor Stefan Ingves stated that Sweden may either need to take extra steps or move ahead faster than other countries on the matter of macro supervisory regulations in particular.
3) Countries that are implementing further stimulus measures in 2011 and are thus postponing their problems (Japan and the US). 4) Countries with strong public finances that have the potential for expansionary fiscal policies (Norway, Sweden, many emerging economies including China).
Per cent of GDP 2010 United States* Japan Euro zone OECD * Federal deficit.
Source: European Commission, OECD, SEB
2011 9.9 -8.8 -8.0 -4.5 -6.0
2012 -7.4 -7.6 -6.5 -3.5 -4.6
2012 Gross debt 101.5 230.0 95.0 93.5 102.8
8.8 -9.4 -6.2 -7.5
United Kingdom -9.7
Partly due to the new stimulus measures in the US and Japan, the tightening effect in the OECD now looks likely to be only 0.25 per cent of GDP. Our previous estimate was 1 per cent. Next year tightening measures will be more powerful, nearly 1.5 per cent of GDP. Continued large deficits mean that problems are being postponed and that fiscal tightening will hamper the recovery for a rather long period. At the same time, we can see that incoming budget statistics often bring upside surprises in countries that have progressed relatively far in their recovery. Looking ahead, the cyclical improvement may also prove larger than expected.
Bond yield rise will slow after rebound
Different fiscal strategies
Government debts are continuing to grow, and there is a great need for continued fiscal tightening in many countries, but these needs vary considerably between countries. Simplifying a bit, we can distinguish four categories of countries with different fiscal directions and strategies: 1) Countries that have now approved very large fiscal austerity programmes in the range of 5-10 per cent of GDP. In most cases, this has occurred after heavy market pressure (Greece, Ireland, Portugal, Spain, UK). 2) Countries that have relatively large deficits but have only implemented small and probably inadequate cutbacks (France, Italy and Belgium). 12 | Nordic Outlook – February 2011
In recent months, global long-term yields have rebounded after their dramatic downturn in April-October 2010. American and German 10-year yields have risen by 1.5 and more than 1.0 percentage points, respectively, from their lows last autumn of 2.4 and 2.1 per cent, respectively. These upturns were driven by higher inflation expectations and a stronger growth outlook. Recent expectations of earlier key interest rate hikes in major OECD countries have also contributed. This is especially true of the ECB, which has been clearest in signalling its concern that rising commodity prices could spread, causing a broader upturn in inflation. The yield curve has been very steep during the past year. One year ago, the differential between 10- and 2-year US government bond yields was the widest for at least 35 years. Given the recent upturn in long-term yields, record levels are within reach again. A steep yield curve is normally an indicator of improved economic conditions; it reflects a situation in which a lingering expansionary monetary policy is combined with rising optimism and risk appetite. This interpretation is more relevant today than a year ago. At that time,
comparatively high long-term yields reflected − to a greater extent than today − a fundamental uncertainty about the sustainability of economic policies.
10-year government bond yields
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 12
7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0
key interest rate hikes. This is due, among other things, to expectations of a limited supply of Swedish government bonds (because of the balanced budget and privatisations of state-owned companies). Looking ahead, we nevertheless believe that a widening gap in key interest rates will enlarge the spread from today’s 20 or so basis points to 50 points by late 2012. For Norwegian bonds, too, wider differentials in shortterm interest rates compared to those of the ECB will mean upward pressure on the 10-year yield spread against Germany. Our forecast is that Norway’s key rate spread against the ECB will increase by 50 basis points in the next couple of years. As a result, the 10-year yield spread against Germany will climb towards 75 points by late 2012.
Source: Reuters EcoWin, SEB
Calmer trend in Nordic stock markets
One of the most important tasks of central banks during the next couple of years will be to ensure that key rate hikes do not lead to a significant upturn in long-term yields. Such a parallel upward shift in the yield curve might jeopardise the recovery. To many central banks, the reaction when the Fed began its rate hiking cycle in 1994 is still regarded as a textbook example of what to avoid. In light of our inflation forecasts and other data, however, such a development seems rather unlikely. Instead, well-justified key rate hikes may help improve the credibility of central banks and stabilise inflation expectations in a somewhat longer perspective.
Steep yield curves
Government bonds: 10-year minus 2-year yield
3 2 1 0 -1 -2 -3 -4 3 2 1 0 -1 -2 -3 -4
In recent months, the correlation between the world’s various stock markets has weakened. One new trend has been that US stock exchanges in particular have performed strongly, while stock markets in many developing countries have lost momentum and, in some cases, also fallen significantly. For example, the stock market rallies in India and Indonesia during 2010 have been followed by downturns of more than 10 per cent so far this year. In China, too, stock exchange performance has been weak. The political unrest in North Africa has reinforced the stock market downturn in emerging economies, while the impact on US and euro zone stock exchanges has been minor so far. Looking ahead, we believe there will be a cautious global stock market upturn. Because emerging economies are much further ahead in the economic cycle, and their currencies will continue to strengthen, leading stock exchanges in the US and Western Europe are likely to continue doing comparatively well.
Stock market slowdown in the EM sphere
Index 100 = juni 2007
120 110 100 90 80 70 60 50 40 30 Jul Nov 07 Mar Jul 08 Nov Mar Jul 09 Nov Mar Jul 10 Nov 11 120 110 100 90 80 70 60 50 40 30
86 88 90 92 94 96 98 00 02 04 06 08 10 US Germany Sweden
Source: Reuters EcoWin
Our assessment is thus that the yield curve will eventually become flatter. This means that we believe that international 10-year bond yields will move upward at a moderate pace. The upward pressure on long-term yields will be restrained, among other things, by CPI figures that will ease inflation worries ahead. Towards the end of 2012, German long-term yields will stand at 4.00 per cent and American ones at 4.30, an upward adjustment of 60 and 70 basis points, respectively, since our last Nordic Outlook. The spread between German and Swedish 10-year government bond yields has been rather stable at 1535 basis points in recent months, despite the Riksbank’s
US Euro zone
Emerging markets Sweden
Source: Reuters EcoWin, SEB
The Nordic stock exchanges are also entering a more mature phase. Valuations (measured as share price/ equity) have now reached their average for the past decade. For example, market capitalisation on the OMX Stockholm exchange has doubled in the past two years. In 2010, operating margins of many Nordic listed companies reached historical peaks. This limits the room
Nordic Outlook – February 2011 | 13
for new positive surprises. For Swedish companies, and to some extent also Norwegian ones, the strength of the currency is also starting to become a greater challenge. This will make it harder for the OMX Stockholm to continue outperforming exchanges in other countries during the next couple of years. Several factors nevertheless point towards a fairly strong Nordic stock market trend this year. Because of low debt, corporate transactions will increase after several years of modest merger and acquisition volume. Dividends will also be raised. The relationship between interest rates and the yields on equities will also allow room for rising share prices. We estimate that total yield on Nordic stock exchanges will be 3.6 per cent, which is higher than today’s yields on 10-year government bonds in all Nordic countries but Iceland.
at 1.45 during the third quarter of 2011. Next year the USD will regain ground as the American economic recovery progresses and as the Fed begins its key rate hikes. Towards year-end 2012, the EUR/USD rate will stand at 1.30: still a bit above our estimated long-term equilibrium exchange rate (fair value) of around 1.20.
Long-term fair values according to SEBEER
Current EUR/USD EUR/SEK EUR/NOK USD/SEK USD/NOK USD/JPY EUR/GBP EUR/CHF GBP/USD USD/CHF
Source: Reuters, SEB
Fair value 2010 1.19 8.27 7.39 6.93 6.19 120 0.71 1.44 1.68 1.20
1.36 8.82 7.82 6.47 5.73 82 0.84 1.29 1.61 0.95
Continued Nordic currency appreciation
Differences in macroeconomic fundamentals, including economic growth and government finances, will remain key driving forces in the foreign exchange market. Short-term interest rate spreads will also grow in importance, as the volatility of the FX market subsides. An increasingly vigorous world economy will continue to push up the currencies of emerging market countries. In many cases, rising commodity prices will help improve terms-of-trade, making more room for continued appreciation. This also applies to such OECD currencies as the AUD, CAD and NOK. Cyclically sensitive currencies will thus appreciate, though earlier weakening trends have been reversed in many cases. Central banks in many emerging economies have intervened forcefully to slow the appreciation of their currencies. However, we believe that many countries will, to a greater extent, accept future strengthening of their currencies as a means of keeping inflation down. This is one way of taking the edge off rising food prices and the related risks of social unrest. China’s currency policy remains cautious. Since late June 2010, when appreciation against the US dollar was resumed, the yuan has gained about 3.5 per cent. Real effective appreciation totalled about 5 per cent during 2010. We believe that the pace of appreciation against the USD will increase somewhat during 2011 in order to counter inflation and contribute to more balanced economic growth. Our assessment is that the USD/CNY exchange rate will be 6.30 at the end of 2011. As for the trend of G4 currencies, we anticipate that the euro will continue to strengthen against the USD in the immediate future. Among factors supporting the euro will be that the ECB will start its key interest rate hikes earlier than other major central banks. We also expect the strengthening of the EFSF/ESM stability mechanism to help reduce the political risk premium. This has been manifested, for example, in narrowing euro zone yield spreads. Our forecast is thus that the EUR/USD exchange rate will continue to climb, peaking
The Japanese and Swiss currencies (JPY and CHF) are among the most overvalued according to our model. As the world economic situation stabilises and the ECB and Fed begin their rate hikes, we expect the JPY and CHF to fall towards levels more justified by fundamentals. The USD/JPY rate will be 90 at the end of 2011 and 98 at the end of 2012. The Swedish and Norwegian currencies will continue to strengthen. Rapid rate hikes by the Riksbank will open a key rate gap against the ECB. The Norwegian krone will also move higher due to a widening key rate spread against the ECB. We thus expect its appreciation to continue during 2011, and the EUR/NOK rate will reach 7.60 at the end of this year. The flow situation will also push up the SEK. Strong government finances are one reason why the krona may gain a larger weighting in the foreign exchange reserves of central banks. We believe that the EUR/ SEK exchange rate will stand at 8.50 towards the end of 2011 and 8.40 towards the end of 2012. This is close to our fair value estimate of about 8.30. The large current account surplus and Sweden’s strong net external financial position support our forecast that the krona may appreciate further. On the other hand, company reports from the fourth quarter of 2010 are showing that profits are beginning to be affected by the strong currency.
14 | Nordic Outlook – February 2011
SEBEER: A model for long-term equilibrium exchange rates
EUR/USD equilibrium at 1.20 JPY and CHF the most overvalued NOK and SEK undervalued against the euro
inflow of capital that helps strengthen its exchange rate in the short and medium term. The usual way of estimating fair values is to use traditional time series analysis on individual currencies. One way of carrying the analysis further is to estimate fair values for a panel of exchange rates simultaneously. The number of observations − and the precision of the estimates − is larger, without having to extend the estimate period as far back in time. The panel approach also makes it possible to estimate several fair values simultaneously, so the approach is internally consistent.
The economic literature includes many approaches to calculating equilibrium exchange rates (fair values). Purchasing Power Parity (PPP) emphasises the association between relative price levels in different countries and exchange rate. Other methods focus on internal and external balance conditions − with the situation related to resource utilisation and inflation rate, on the one hand, and current account balance and net external financial position, on the other, providing the basis for estimating equilibrium exchange rates. In addition to these more fundamental, theoretical approaches, there are more empirical methods based on actual historical exchange rate trends. SEB Research recently estimated such equilibrium rates (Behavioural Equilibrium Exchange Rate, BEER). The variables that proved to have the largest impact on fair values in the model that we have named SEBEER are the following: Relative prices: Long-term fair value is affected by relative price levels between countries, in keeping with the above-mentioned PPP theory. A low domestic price level relative to other countries indicates that the currency is undervalued. Terms-of-trade: Differences in world market price trends between a country’s exports and imports influence fair value. A favourable trend with faster-rising export prices strengthens a country’s fair value. Relative productivity: Differences in productivity growth influence fair value. A country with higher productivity growth than its peers can maintain a gradually appreciating currency without seeing its competitiveness undermined. Current account: In the long term, the current account balance affects the exchange rate. A surplus leads to greater demand for the currency, thereby strengthening its exchange rate. Interest-rate differentials: Differences in interest rates generate capital flows, which influence the exchange rate. A country with higher interest rates receives an
Deviation from Fair Value 2010
Deviation, per cent, vs. USD
-8% 0% 0% 8% 8% 14% 14% 22% 22% 36%
Undervalued Overvalued Source: SEB
GBP NOK SEK AUD EUR NZD DKK CAD CHF JPY
The chart shows selected results from our latest panel data estimate of nominal fair values from 1980 through 2010, stating deviations from fair value against the US dollar for the average exchange rate in 2010 (for more details, see FX Ringside, January 2011). The hard currencies of Japan and Switzerland are the most overvalued, while the British pound is the only currency in the list that is undervalued against the USD. The euro exchange rate is above its fundamental valuation; the latest estimate indicates that EUR/USD fair value is 1.20. The SEK and NOK were in balance against the USD in 2010 (SEK 6.93 and NOK 6.19) but were fundamentally undervalued against other currencies, except the pound. Estimated EUR/SEK fair value in 2010 was 8.30 and EUR/NOK fair value was 7.39. Nordic Outlook – February 2011 | 15
The United States
The US economy gears up above trend
The labour market is improving Corporate profits will continue upward The housing market is stumbling The Fed will hike its key rate in April 2012
Continued strong company profit growth
Capacity utilisation has risen at a brisk pace since it bottomed out a year and a half ago, but remains at low levels. Capital spending by businesses is now increasing 10 per cent year-on-year but is still at a historically very low level as a percentage of GDP. Meanwhile current market values relative to the replacement costs are giving companies good incentives for investments. (Tobin’s Q has continued to climb). Add strong corporate balance sheets and great optimism, both in manufacturing and service sectors. Our composite ISM purchasing managers’ index is compatible with 5 per cent GDP growth. The manufacturing ISM index currently is close to 25-year highs. In a shorter perspective, however, weaker order bookings for capital goods in recent months are evidence against an acceleration in capital spending activity. Good profitability is also helping to stimulate capital spending activity. Corporate after-tax profits are at 5.6 per cent of GDP, slightly above the historical average but far below previous peaks. A combination of rising labour costs and higher taxes will eventually push down profits. But 2011 will probably be another year of double-digit profit growth. The gap between inflation and labour costs has historically been a good indicator of which way profits are headed. This indicator points towards an increase in profits 2-3 times higher than GDP growth in current prices during 2011. Profits as a percentage of GDP will continue upward.
The US economic outlook has improved. A combination of the Federal Reserve’s ultra-loose monetary policy and a new fiscal stimulus has bolstered optimism. GDP growth in the fourth quarter of 2010 was significantly stronger than we expected in the last Nordic Outlook, and there are many indications of continued good growth figures early in 2011. Private sector financial saving has now started falling, which is usually an important signal that a recovery is becoming selfsustaining. Measured as annual averages, we foresee GDP growth of 3.6 per cent this year and 4.0 per cent in 2012, which is above consensus and a sharp upward revision for 2011. Housing market reversals and poor state government finances will nevertheless keep the recovery a few percentage points weaker than historical averages during the corresponding cyclical phase. Employment will increase by an average of about 180,000 per month this year, despite public sector cutbacks. Unemployment will fall but will remain at a high 7.8 per cent at the end of our forecast period. Large output and labour market gaps will lead to low core inflation; our inflation forecasts are below consensus. We thus anticipate that the Fed will hike its key interest rate in April 2012, later than market pricing indicates.
Strong profit growth in 2011 as well
Difference, year-on-year percentage change
8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 90 92 94 96 98 00 02 04 06 08 10 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40
Composite ISM and GDP growth
Index, year-on-year percentage change
62,5 60,0 57,5 55,0 52,5 50,0 47,5 45,0 42,5 40,0 37,5 35,0 02 03 04 05 06 07 08 09 10 11 12 SEB forecast 6 5 4 3 2 1 0 -1 -2 -3 -4 -5
Headline inflation less unit labor cost inflation (LHS) Net profits after tax (RHS)
Source: BLS, BEA, SEB
ISM Composite index (LHS)
Real GDP (RHS)
Source: ISM, SEB
Our overall forecast is that corporate capital spending will grow by 13 per cent in 2011 and 15 per cent in 2012. Its contribution to GDP growth will average 1.6
16 | Nordic Outlook – February 2011
The United States
percentage points during our forecast period, compared to 2.1 per cent for private consumption.
Exports will climb in first half of 2011
The weakening of the US dollar will lift exports during the next six months, while import figures will be kept down because an inventory build-up has already occurred. We foresee increases in exports averaging 11 per cent in 2011-12. Foreign trade will contribute positively to GDP growth during the first half of 2011, followed by a shift to a negative contribution in the second half and in 2012. The 2010 US current account balance, which stood at -3.2 per cent of GDP in 2010, is expected to approach -4 per cent of GDP by the end of 2012.
compatible with a continued decline in household debt in relation to income. The debt-to-income ratio is now at 122 per cent, according to the latest Fed statistics, a clear downturn from its peak (135 per cent in 2007). The adjustment has thus progressed quite far, and the debt service ratio has also fallen to its long-term mean. But the debt-to-income ratio is still high. Together with further home price declines, this indicates that debt retirement will continue. In the years before the home price boom, the debt ratio was below 100 per cent.
Per cent of disposable income
140 130 120 110 100 90 80 70 60 50 40 30 20 45 55 60 65 70 15.5 15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 00 05 10
Mean, debt service ratio
Consumers getting bolder
A strong Christmas shopping season helped lift consumption by 4.4 per cent annualised in the fourth quarter of 2010, the strongest figure since 2006. Several factors indicate that this positive trend will persist. Extending the Bush-era tax cuts for another two years as well as cutting the employees’ federal payroll tax in 2011 will increase room for consumption. Meanwhile the consumer confidence surveys look a bit brighter; for example the Conference Board indicator posted a heavy gain in January. We foresee a gradual return to normal confidence levels as the labour market and incomes strengthen. Looking further ahead, a stronger labour market will also help bolster household income. Given the large role of private consumption in GDP (71 per cent), this is one key explanation for our brighter economic view. Household savings adjustment has also come a long way. According to our calculations, household savings levels are close to the equilibrium justified by such factors as wealth position. We are thus expecting only a marginal additional upturn in household savings ratios during the next couple of years. Such savings behaviour is also
Household debt-to-income ratio (LHS) Household debt service ratio (RHS)
Source: Federal Reserve, SEB
Overall, we foresee an increase in consumption of 3.2 per cent this year and 3 per cent next year: more than half a percentage point below the 19942007 average. Rising petrol prices pose a downside risk for our consumption forecast, however. The upturn in oil prices does not appear to have been driven by US consumers, since the demand for oil-related products is currently falling at a 2.4 per cent year-on-year rate. Petrol has climbed from an average of USD 2.70/gallon (September) to USD 3.15/gallon today. One rule of thumb is that for every cent that petrol prices rise, household buying power shrinks by USD 1.5 billion. In other words, rising petrol prices are blunting the impact of the tax cut extension. Nevertheless, we expect that is slow compared to historical experience, but still compatible with above-trend GDP growth according to our estimates.
Falling private sector savings boosts GDP
The difference between total private sector income and expenditures, as a percentage of GDP, was recordhigh last year. Since then, the percentage has begun to fall. Expenditures are again increasing faster than income. According to the historical pattern, the private sector balance will continue falling towards the long-term average, making strong GDP growth likely over the next few years. If this adjustment continues over a four-year period (the risk scenario in the chart), our calculations indicate that GDP growth measured as annual averages will exceed 4 per cent during the next three years. But continued need for financial consolidation in the household sector as well as lingering weaknesses in the housing and labour markets implies that the adjustment may take longer than this. Our main scenario is that the adjustment will take eight years, which
Private sector balance boosts growth
Per cent of GDP
10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 60 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 65 70 75 80 85 90 95 00 05 10 15
Nordic Outlook – February 2011 | 17
The United States
real disposable income will rise at an annualised rate of 5-6 per cent in the first quarter, compared to slightly below 2 per cent in the fourth quarter. Some of the boost will be saved, thus reversing the recent drop in the savings ratio. Even so, we expect impressive consumption growth in the current quarter as well.
this year. Higher mortgage interest rates will contribute to the downturn, but their effect should not be exaggerated: a 60 basis point increase in 30-year mortgage rates from their bottom level will lower prices by about 1 per cent in a one-year time frame, according to our estimates. The steeper yield curve is positive for bank earnings, which would mean a gradual easing of credit conditions and increased new lending. But bad commercial property loans will pull down the banking system, especially the regional banks. These problems have been relegated to the future, since banks have postponed loan maturity dates and thus avoided taking losses on their balance sheets. Commercial property loans worth USD 1.5 trillion will reportedly fall due in the next four years. About half of this volume is related to loans exceeding current property value.
The housing market is stumbling
Housing investments as a share of GDP are at a deeply depressed 2.2 per cent. There is thus little risk of a further decline, but no upswing will occur until the market catches up with the oversupply of homes. Housing investments will grow by 2 per cent in 2011, accelerating to a 14 per cent rate in 2012, which will still provide a relatively small contribution to GDP growth (0.4 percentage points in 2012).
Huge investment swings
Per cent of GDP
9 8 7 6 5 4 3 2 50 55 60 65 70 75 80 85 90 95 00 05 10 15 14 13 12 11 10 9 8
The labour market is gaining strength
According to the Fed’s latest Beige Book, stronger employment growth is occurring in most parts of the United States, although the improvement is rather slow. New unemployment benefit claims have also fallen noticeably since August, which is usually a good indicator that a clear increase in employment is imminent. A cyclical slowdown in the productivity upturn is also helping increase the need for new hiring. We expect productivity to rise by 1.3 per cent this year and 2 per cent in 2012, compared to 3.5 per cent in both 2009 and 2010. Our overall assessment is that employment will increase by an average of 180,000 a month this year and by 200,000 next year, or double the 2010 level.
Source: Reuters EcoWin, SEB
According to the Case-Shiller index, home prices have fallen for five months in a row, and our assessment is that home prices will fall by an additional 5 per cent
Home price drop jeopardises recovery
The downward trend in home prices reversed during the second half of 2009, which can be explained by several factors: the Fed’s mortgage bond purchases helped push mortgage rates to record lows, while mortgage modification plans and temporary moratoriums on home foreclosures reduced supply. But the market was still too weak to sustain itself, as illustrated by the renewed price declines following the expiration of temporary tax credits for home purchases. The supply of available homes is still large: 3.6 million, or 65 per cent above the historical average. Meanwhile the “shadow supply” is significantly larger than the 8 month inventory that official figures indicate. According to Fed estimates, the actual inventory of available homes is around 24 months. In addition, every fifth household with a mortgage owes more money than its home is worth, and nearly half of bank assets are tied to the housing market. Sharper home price declines than we are expecting in our main scenario are thus the biggest risk to US economic recovery. Although home prices in real terms have fallen by one third from their 2006 peak, there is quite a way left down to the historical average.
Real home prices well above the mean
Index 1890 = 100
225 200 175 150 125 100 75 50 90 00 10 20 30 40 50 60 70 80 90 00 10
-1 std dev +1 std dev -23% +85% -33%
225 200 175 150 125 100 75 50
Source: Robert Shiller, SEB
What may prevent such sharp home price declines is that a stronger labour market will help prop up the housing market. In addition, new support measures will probably be launched if conditions get much worse.
18 | Nordic Outlook – February 2011
The United States
The tough public budget situation at the state and local levels − which account for 15 per cent of all employees − will prevent an even stronger rebound in the number of jobs. Unemployment will fall to 8 per cent by the end of 2012, in line with the Fed’s latest forecasts.
ence shows that core inflation has never risen when there has been such high unemployment. It is thus too early to write off the deflation risk completely, a view that also is supported by the low wage pressure.
Diverging employment trends
Year-on-year percentage change
4 3 2 1 0 -1 -2 -3 -4 -5 -6 90 92 94 96 98 00 02 04 06 08 10 4 3 2 1 0 -1 -2 -3 -4 -5 -6 20 15 10 5 0 -5 -10 25
Private sector capital stock drops
Year-on-year percentage change
25 20 15 10 5 0 -5 -10
25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
Source: BEA, SEB
State & local employment
Source: BLS, SEB
Yet it will be a long time before the labour market is back at a normal situation. Some 13.8 million Americans, or 9 per cent of the labour force, are unemployed. This can be compared to our estimate of equilibrium unemployment, which is 5.5 per cent. Another 11 million people are underemployed; the jobless rate is as high as 16.1 per cent according to the broadest measure (U6). Youth unemployment stands at 25.7 per cent, compared to 14 per cent in 2006. The employment-population ratio is stuck close to its 28-year low (58.4 per cent), which means that 11 million jobs will be needed in order to reach the 2007 peak. Meanwhile, among the G7 economies the US and Canada are the only two where GDP has reached fresh highs. Our conclusion is that despite faster GDP and employment growth, the labour market gap will remain large during our forecast period. In light of this, Fed Chairman Ben Bernanke recently warned that it may take 4-5 years before unemployment is back at historically normal levels.
Risks of long-term supply side disruptions
Our inflation and labour market analysis is based on a relatively optimistic picture of the American economy’s supply side in the medium term. But there are various risks that the deep recession has harmed the economy in a more lasting way. This might lead to a substantial downshift in potential growth and permanent exclusion from the labour market, for example in the form of higher equilibrium unemployment. One alarming fact is that in 2009, US capital stock decreased for the first time since the 1930s depression, indicating lower productivity growth a bit further ahead. Another potential threat has to do with rising longterm unemployment. Since many jobless people were close to the end of their benefit period, unemployment benefits were extended for another 13 months just before the end of 2010. Long-term unemployment − 6.2 million people have been out of work for at least 6 months − has both economic and social dimensions: a Congressional Budget Office (CBO) study shows that one fourth of the long-term unemployed do not return to the labour force. Those who manage to return often do not achieve their earlier productivity level, which is one reason why those who return average 20 per cent lower pay. The continued decline in home prices is another factor that may affect the supply side of the economy. Geographic mobility is one important reason why output and employment recoveries have historically been so dynamic in the US. Many households have now lost a large percentage of their residential capital. In many cases they are stuck in homes worth less than their mortgages. This will probably reduce mobility and thus slightly push up the non-accelerating inflation rate of unemployment (NAIRU). Such supply side questions will become more acute further along in the recovery. In some respects, these problems may have time to correct themselves, provid-
Large output gap means low inflation
For a long time, our take on inflation has been that the resource situation in the US economy is the most important determining factor and that both the output gap and the labour market gap are large. The trend towards low, falling core inflation will thus continue for another while. Broad measures of monetary growth have rebounded, but year-on-year rates of increase remain far below historical averages. The credit multiplier bottomed out a year ago, but the upturn since then has been modest. According to our forecasts, core inflation will bottom out at a record-low 0.5 per cent rate later this spring and then gradually accelerate. Measured as annual averages, core inflation will amount to 0.7 per cent in 2011 and 1.0 per cent in 2012. But historical experi-
Nordic Outlook – February 2011 | 19
The United States
ed that the US economy enters a more positive recovery dynamic. Otherwise fresh economic policy thinking may be required to avoid long-term damage.
Government spending for each USD of revenues
1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 55 60 65 70 75 80 85 90 95 00 05 10 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8
federal expenditures will total 25 per cent of 2011 GDP, with revenue at around 15 per cent. For every dollar that flows into the Treasury, the US government thus spends USD 1.60-1.70. During the post-war period, this figure has rarely exceeded USD 1.30. Next year we expect a slight fiscal tightening, and the budget deficit will then fall to USD 1.2 trillion, yet public sector debt will continue climbing during the next couple of years. We expect the 2012 national debt to be slightly over 100 per cent of GDP. Although credit rating agencies are beginning to show their displeasure, we do not believe that the consequences will be particularly large during the next couple of years. The dollar’s status as a reserve currency provides a degree of freedom to increase debt without incurring higher borrowing costs. But there is a limit, and further ahead the politicians will be forced to make decisions that will bolster confidence in a long-term balance, not least because more than half this public debt is in foreign hands.
Source: US Department of the Treasury, SEB
National debt approaching new heights
The contractive economic effect of private sector debt reduction has been offset by explosive growth in public sector debt. Federal debt has risen from 65 per cent of GDP in 2007 to nearly 95 per cent today. In 2010, the budget deficit was nearly USD 1.3 trillion. This year it will exceed USD 1.5 trillion or 9.9 per cent of GDP, due among other things to further tax cuts. This year’s
US hitting debt ceiling again
This spring the risks associated with the “debt ceiling” will be in focus. US national debt now totals USD 14.004 trillion: a mere USD 290 billion below the legal ceiling of USD 14.294 trillion. Most indications are that the US
Little risk of 1970s-style stagflation
The Fed’s decision to implement quantitative easing has been both praised and reviled. The most critical voices argue that stagflation − weak growth combined with high inflation, as in the 1970s − may be the outcome. In our assessment, that risk is small; our forecasts instead point towards continued very low inflation over the next couple of years. In addition, the situation today is different from that of 35 years ago in several respects: Most measures indicate plenty of idle resources in the economy today, which was not the case in the 1970s. The purpose of quantitative easing is to boost inflation to levels consistent with price stability; in the 1970s inflation was significantly higher at the outset. Unit labour cost (ULC) is the most important factor in the inflation process in developed countries. At present, ULC is still falling year-on-year. But 30 years ago, wages and salaries were rising at a faster pace than productivity justified, among other things because the labour union movement was stronger in those days. Mechanical monetary policy rules such as the Taylor rule indicate that, if anything, monetary policy is too tight today. During the 1970s, in contrast, monetary policy was too accommodative. We can also note that upturns in commodity prices quickly spread to core inflation in the 1970s, as evidenced by the high correlation between core and headline measures. In recent years, core inflation has trended downward and has not been affected by commodity-driven variations in headline inflation. The trend of underlying inflation thus seems to be driven to a greater extent by such factors as resource utilisation and long-term inflation expectations.
Core inflation heading down
Year-on-year percentage change
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 70 75 80 85 90 95 00 05 10 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5
All items less food and energy
Source: Reuters EcoWin, SEB
20 | Nordic Outlook – February 2011
The United States
Treasury will hit the debt ceiling in April or May. Raising this ceiling is not exactly unusual: it has been raised 74 times since 1962, and 10 times since 2001. The last time was a year ago. But occasionally this issue has led to political conflicts, including this time around. When the Treasury reaches the federal debt ceiling, it is prohibited from issuing further debt securities before Congress has approved an increase in the ceiling. This will apparently become an important tool in efforts to push through other reforms; this may include taking a closer look at the proposals of President Obama’s deficit commission. House Republicans are now reportedly also pushing for USD 50 billion in budget cuts this year. The pension reform issue may also come up.
in that case, further stimulus may be called for. New estimates from the Fed indicate that quantitative easing is effective: its bond purchases in recent years will boost inflation by one percentage point and generate 3 million jobs by 2012, according to the Fed’s models. Measures aimed at actively shrinking the Fed’s balance sheet − reversing quantitative easing − will probably not be launched during our forecast period. Leaving QE in place for a few years is a cornerstone of the Fed’s calculations. To summarise, our assessment is that the US central bank will hold off before making its first interest rate hike in April 2012 and that the federal funds rate will stand at 1.75 at the end of our forecast period. This implies that the Fed will hold off somewhat longer than the market has now priced in, but normalise rates more rapidly. Changes in the Fed’s voting system may have an effect on the detailed formulation of US monetary policy. Each year five regional Fed presidents are entitled to vote, according to a rotating timetable, with the head of the New York Fed always included. Judging from recent speeches, this year’s Federal Open Market Committee is slightly more hawkish than last year, since Richard Fisher (Dallas Fed) and Charles Plosser (Philadelphia Fed) will vote on the FOMC while Thomas Hoenig (Kansas City Fed) has left. But although interest rate hawks get a lot of media coverage, they are a clear minority and do not set the tone of the FOMC. Instead we believe that possible shifts in the positions of Chairman Ben Bernanke, the New York Fed’s William Dudley and Vice Chair Janet Yellen will be decisive.
Debt ceiling will soon be reached
Per cent of GDP, USD trillion
95 90 85 80 75 70 65 60 55 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Current debt ceiling 15 14 13 12 11 10 9 8 7 6 5 4
Federal debt, percent of GDP (LHS) Federal debt, trillion (RHS)
Source: US Department of the Treasury, BEA, SEB
The Fed will hike its key rate in a year
In our assessment, after the Fed completes the USD 600 billion in bond purchases it has announced, it will stop making such purchases. What may disrupt this scenario is if core inflation approaches zero, or if economic growth turns out to be much weaker than we believe;
With less than two years left until the 2012 presidential election, our assessment is that Barack Obama’s chances of being re-elected are relatively good. His approval rating is admittedly still rather weak; only around 50 per cent of the population thought the president was doing a good job in mid-January. But the experience of recent decades indicates that public opinion figures can shift rapidly. Bill Clinton was in a similar position in the spring of 1995 yet still managed to be re-elected by a wide margin in 1996. Ronald Reagan had very weak public approval ratings early in 1983, but won a landslide victory in the 1984 election. George Bush, both father and son, enjoyed far better support in the 1991 and 2003 opinion polls respec-
tively, but George H.W. lost and George W. won by the narrowest possible margin. Early in 1979, Jimmy Carter was roughly where Obama is today, but he failed to be re-elected. Our conclusion is that the economic situation in the period leading up to the election decides the matter. If our forecasts of decent growth and falling unemployment prove correct, Obama is likely to be re-elected in 2012. The economy helped both Reagan and Clinton but sank Carter and the elder Bush. Obama has also shown considerable willingness to compromise and has taken various steps towards the political centre, which appear to be smart moves.
Nordic Outlook – February 2011 | 21
Recovery losing momentum
Clear deceleration in growth this year Exports gaining traction, but weak domestic demand Fiscal weakness requires tax reform
Headline CPI inflation has crept up to zero in recent months, but core inflation remains negative. There are no signs that the inflation rate will start climbing to any great extent. We expect CPI inflation to be weakly positive both in 2011 and 2012.
Continued deflation pressure
A sharp recovery in exports and industrial production in the first half of 2010 lifted Japan’s GDP by around 4 per cent for the full year, but the fourth quarter as well as early 2011 appear to have been weak. We predict GDP growth of 1.6 per cent both in 2011 and 2012. The purchasing managers’ index in the manufacturing industry is just above 50, and leading indicators are faltering. Consumer confidence is at its lowest level for nearly two years, which is also reflected in weak retail sales. We expect consumption growth to average around 1 per cent in 2011-2012. Industrial production has risen in the past two months, but only after it had fallen for five straight months. According to the Bank of Japan’s latest Tankan survey, the competitive position of the manufacturing sector deteriorated during the fourth quarter of 2010. Weak order bookings indicate a continued decline in capital spending. Residential construction remains at a low level, but rents for office space have rebounded.
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 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5
Source: Statistics Bureau, Ministry of Internal Affairs and Communication
Exports are taking off again
Index 100 = 2000
190 180 170 160 150 140 130 120 110 100 90 80 70 00 01 02 03 04 05 06 07 08 09 10 190 180 170 160 150 140 130 120 110 100 90 80 70
Government efforts to highlight public debt problems and Japan’s need for tax reform have dominated domestic policy. The newly appointed economic and fiscal policy minister, Kaoru Yosano, wants to launch quick improvements in government finances. The issue gained new urgency when Standard & Poors downgraded Japanese sovereign debt to AA-. Prime Minister Naoto Kan continues to underscore the need to reform the tax system; high government debt and budget deficits make change vital. In December, the government approved a cut in corporate tax to 35 per cent. It has invited the opposition for talks on raising the sales tax from the current 5 per cent. This would risk hurting already weak retail sales. Making all reform efforts more difficult is the record-low public confidence in the government. The Bank of Japan will keep its key interest rate unchanged in the 0.00-0.10 per cent interval until the third quarter of 2012, while retaining its credit facility and asset purchase fund. The government has also made clear its willingness to intervene again in the foreign exchange market if the yen continues to appreciate. We expect the USD/JPY rate to stand at 90 at the end of 2011 and 98 at the end of 2012.
Source: Ministry of Finance, METI
After a slump, exports have clearly recovered in recent months. The negative impact of yen appreciation during 2010 (4 per cent in effective terms) is being offset by stronger demand in China and the US. Annual export growth will average around 5 per cent in 2011-12. The labour market improvement last summer and early autumn has slowed. Unemployment will remain at around 5 per cent during the next couple of years.
22 | Nordic Outlook – February 2011
Good growth but rising inflation
More acceptance of currency appreciation Continued monetary tightening in China Risk of overheating in India
Differences in interest rates and growth outlook compared to the US and Western Europe are continuing to generate large capital flows into the region. This risks causing macroeconomic imbalances and price bubbles for assets like real estate and equities, which in turn may threaten financial stability. To counter such tendencies, Asian countries have intervened in foreign exchange markets. Rising inflation seems to be making countries willing to allow more currency appreciation than before. Rapid pay increases in many countries are also speeding the pace of real appreciation.
GDP growth in Asian emerging countries decelerated during the third quarter of 2010, but there are many indications of stabilisation in the fourth quarter. Exports and industrial production show continued good growth in most of these economies, despite noticeable appreciation in many currencies. During 2011 and 2012 we expect continued strong growth, but it will slow somewhat because rising inflation and large capital inflows will force governments to keep tightening their economic policies. Inflation pressure in the region has increased in recent months. Rising food prices play a crucial role, since food accounts for a very large share of CPI in developing economies. There are major risks of discontent and protests against high food prices, not least in China. So far, however, there are few signs of a broad inflation upturn in the region, although core inflation has begun rising in China, Indonesia and elsewhere.
China: Continued strong growth
During the fourth quarter of 2010, GDP rose by 9.8 per cent, which was somewhat higher than expected. For 2010 as a whole, growth ended up at 10.3 per cent. We are revising our 2011 growth forecast slightly upward to 9.5 per cent and expect growth of 8.5 per cent in 2012. The purchasing managers’ index in manufacturing fell somewhat in December but still indicates good growth. Industrial production has stabilised at year-on-year growth of around 13 per cent. Retail sales have been strong, and in December the increase was around 19 per cent. Export growth decelerated in the second half of 2010; in December the year-on-year rate of increase was 18 per cent, the lowest since December 2009.
Inflation is rising in Asia
12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 07 08 09 10 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0
Export and import growth is slowing
Year-on-year percentage change
100 75 50 25 0 -25 -50 00 01 02 03 04 05 06 07 08 09 10 100 75 50 25 0 -25 -50
South Korea Malaysia
Source: National statistical offices
Many Asian countries have begun taking steps to prevent inflation expectations from soaring. We expect China to continue tightening monetary policy in 2011. India will be forced to hike interest rates further to tackle inflation, which has taken off again. South Korea raised its key rate in January. Indonesian inflation is now well above target and core inflation has also climbed significantly. Key rate hikes are being supplemented by other actions. For example, Indonesia and China have raised their bank reserve requirements to slow credit expansion. Steps have been taken to increase food supply, while food price controls are being considered.
Source: National Bureau of Statistics
Import growth has also decelerated, but in the past months the rate of increase in imports has been higher than that of exports. We expect this trend to persist. It reflects the increasing importance of domestic consumption and is shrinking China’s large trade surplus. This surplus fell from USD 196 billion in 2009 to USD 183 billion in 2010, but the politically sensitive trade
Nordic Outlook – February 2011 | 23
surplus against the US remains at a high level. It was USD 25.6 billion in November. Chinese authorities have expressed a desire to see the surplus continue shrinking in 2011.
Calmer housing market trend
As expected, home price increases have continued to slow. In December the year-on-year increase in the 70 largest cities of China was 6.4 per cent, or half the growth rate of last spring. The measures that the authorities have undertaken to cool down the market thus seem to have had an effect. Sharply increased construction will probably lead to a further slowdown. A property tax has been launched on a trial basis in Chongqing and Shanghai. According to the new five-year plan, more than 15 million residential units will be completed before the end of 2012. Overall, we thus believe that home prices will level off during the latter part of 2011.
communicated clearly that monetary policy needs to be normalised. The current key interest rate of 5.81 per cent is still well below the long-term average of 7.5 per cent. For example, a deposit rate of 2.75 per cent means that real interest on household bank savings is clearly negative. This indicates significant room for further rate hikes. On the other hand, excessively aggressive rate hikes risk worsening the problem of speculative foreign exchange inflows. Our assessment is thus that the Chinese authorities will need to use different tools in their tightening policy. Key interest rate hikes will be combined with increases in reserve requirements and stricter controls on currency inflows. We predict three additional interest rate hikes during the first half of 2011, bringing the key rate to around 6.5 per cent. While monetary policy is being tightened, fiscal policy will be less expansionary. China’s currency appreciation will contribute to economic policy tightening. Since late June, when the appreciation of the yuan against the US dollar was resumed, the yuan has strengthened by around 3.5 per cent. Real effective appreciation totalled around 5 per cent during 2010. Although appreciation has accelerated early in 2011, China rejects the demands of other countries for a radically faster appreciation rate, and we expect this cautious policy to continue. However, we expect the appreciation rate to increase somewhat in 2011 in order to counter inflation, help slow export growth and support domestic consumption by making imports cheaper. Our assessment is that the USD/CNY rate will be 6.30 by the end of 2011 and 6.00 by the end of 2012. This represents an appreciation of 4-5 per cent annually.
Tightening in response to rising inflation
Inflation is continuing upward. In November, CPI inflation reached 5.1 per cent, its highest level since July 2008, but in December inflation slowed to 4.6 per cent. Higher inflation was mainly caused by rising food prices; food inflation reached 9.6 per cent in December. Core inflation, which excludes food and energy, also climbed and was 1.5 per cent in November. Inflation expectations rose significantly in the fourth quarter of 2010. The December inflation rate decline is largely explained by base effects, and we expect inflation to remain high in the next few months.
Food prices driving up inflation
25 20 15 10 5 0 -5 05 06 07 08 09 10 25 20 15 10 5 0 -5
The yuan appreciated during 2010
6.50 6.75 7.00 7.25 7.50 7.75 8.00 8.25 8.50 05 06 07 08 09 10 110 105 100 95 130 125 120 115
Source: National Bureau of Statistics
China is now tightening its monetary policy to counter the inflation upturn. On Christmas day, the central bank raised its key interest rate by 25 basis points to 5.81 per cent − the second such hike in 2010. Several other tightening measures have been implemented. The bank reserve requirement was raised six times during 2010 and once again in January 2011 and now stands at 19 per cent for most banks. The new 2011 lending target for banks has also been lowered compared to 2010. We expect China to continue its monetary tightening during the first half of 2011. The central bank has
Real exchange rate (RHS)
Source: BIS, Reuters Ecowin
Exchange controls clearly loosening
Strict currency controls are now being loosened as part of a long-term strategy to give the yuan a larger global role. For example, Chinese companies will be allowed to use yuan to start operations abroad by acquiring and merging companies. Chinese export companies will also be allowed to keep their foreign revenue in accounts at foreign banks. However, foreign investments in China will remain strictly regulated, decreasing the motivation for foreign companies to hold yuan.
24 | Nordic Outlook – February 2011
India: Inflation accelerating again
India’s growth remains strong, and during the third quarter GDP rose by 8.9 per cent. Industrial production growth is slowing, however. In November the upturn was only 2.7 per cent year-on-year, the slowest since May 2009. But the figures have been highly volatile in recent months, and some observers are beginning to question the quality of the statistics. Other indicators are showing continued good growth. The composite purchasing managers’ index is just above 55, indicating continued expansion. Leading indicators have risen at a robust rate and provide a similar picture. A favourable trend in the agricultural sector is also contributing to strong growth. We expect GDP growth of 8.5 per cent in 2011 and 7.5 per cent in 2012. India’s high inflation rate slowed in November, but rebounded in December to 8.4 per cent. Inflation is thus far above the central bank’s medium-term target of 3 per cent.
As expected, the falling inflation rate in November persuaded the Reserve Bank of India to hold off on any interest rate hike in December, but late in January it hiked its key rate by 0.25 percentage points to 6.5 per cent. The key rate has thus been raised 1.75 percentage points from its low in April 2009, but in real terms it is well into negative territory. The inflation surge in December surprised the central bank, and several rate hikes will probably be needed to keep inflation expectations from soaring. Unlike other Asian countries, India is running current account and trade deficits. The trade deficit has been large for a long time. In December, however, it fell to its lowest level in three years because exports increased while imports were the lowest in 14 months. Also worth noting are the liquidity problems in the banking sector. A combination of strong growth, tighter monetary policy, low seasonal central government expenditures and several large companies being floated in the stock market contributed. India’s banks have begun competing for liquidity by raising their deposit interest rates. For a long time, the central bank viewed the tighter liquidity situation as a welcome strengthening of the monetary policy transmission mechanism. In December 2010, however, the central bank made the assessment that the liquidity situation was problematic and took action. In addition, higher government spending is expected to contribute to better liquidity in the next several months. Since last autumn, the currency has stabilised against the US dollar after a period of appreciation. We expect that the rupee will stand at 43 per USD by the end of 2011.
India: Inflation and key interest rate
12 10 8 6 4 2 0 -2 05 06 07 08 09 10 11 12 10 8 6 4 2 0 -2
Key interest rate
Source: Ministry of Commerce and Industry, Reserve Bank of India
China’s twelfth five-year plan, 2011-2015
China has been using five-year plans since the 1950s. These plans are now called “guidelines”, reflecting the fact that are increasingly dominated by general objectives instead of detailed quantitative targets for different economic variables. A preliminary version of the twelfth five-year plan has already been unveiled, but the final version will not be approved until March. The main theme of the new plan is that China is aiming at a strategic change in its growth model. The focus will be on generating higher “quality” growth rather than merely generating rapid growth. Consumption will enjoy priority by means of decreased household saving, while exports and capital spending will be less important than before. The plan is also expected
to emphasise greater equality, environmental protection and investments in strategic industries. The following specific areas will have high priority: health care infrastructure construction of homes for low-income households environmental protection and energy efficiency reduced carbon dioxide emissions more equitable income distribution
Nordic Outlook – February 2011 | 25
The euro zone
Germany in the lead, amid widening gaps
Growth nearly 2 per cent despite continued problems in southern Europe HICP will fall, but inflation risks have risen Stability Fund will narrow ECB’s role Refi rate hikes will begin in September
to high energy and food prices. Although it will probably fall, inflation will remain a source of concern for the European Central Bank (ECB) as resource utilisation in several countries moves back towards normal levels. With the EFSF assuming a larger role in sustaining growth in southern Europe, the ECB can focus more on its inflation-related task. We believe that the ECB will hike its refi rate to 1.25 as early as September 2011, then raise it again in December and four times in 2012. The refi rate will be 1.5 per cent in December 2011 and 2.5 per cent in December 2012.
Euro zone GDP growth was 1.7 per cent in 2010, higher than last autumn’s consensus. Germany, benefiting from a powerful upswing in exports and capital spending, recorded the currency area’s highest GDP growth (3.6 per cent), and Greece the lowest (-4.1). Overall, the recovery will continue this year. As in 2010, Germany will be the main growth engine; leading indicators such as the IFO index are signalling GDP growth just above 3 per cent this year, but continued weak performance in southern Europe will widen the gap in the euro zone. The Greek economy will shrink about 3 per cent this year. Spain is on the brink of recession. In the euro zone as a whole, growth will reach 1.9 per cent this year and 1.8 per cent in 2012, somewhat higher than we believed in November.
Large differences in growth rates
Decent growth in 2011-2012
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 04 05 06 07 08 09 10 11 12
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0
The German economy is continuing to show strength. Last year’s export and capital spending upturn, which was reflected among other things in a three-year high for the IFO index, will continue in 2011. The “business conditions” sub-index was still around 110 in January and the “expectations” sub-index, which provided upside surprises late in 2010, also remains high. Given the close co-variation between the IFO index and GDP growth, dynamic growth seems set to continue during early 2011. Because of an improving labour market, private consumption is also starting to climb. We predict that German growth will end up at 3.1 per cent this year and 2.5 per cent in 2012, above the consensus forecast.
Widening gap in the euro zone
112.5 110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 112.5 110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 87.5 85.0 00 01 02 03 04 05 06 07 08 09 10
Quarter-on-quarter, annualised Year-on-year percentage change Growth indicator (Euroframe)
Source: Euroframe, Eurostat, SEB
Italy, Portugal and Spain carried out successful sovereign bond issues in January, slightly easing short-term concerns about their budget and debt problems, but these problems are far from solved. The risk premium is unsustainably high in several countries, which puts pressure on European politicians to act. The temporary European Financial Stability Facility (EFSF) will play a central role in the future, partly because of an expanded mandate. Inflation as measured by the Harmonised Index of Consumer Prices (HICP) rose to 2.4 per cent in January, due
Several indicators illustrate the gaps in economic performance between different parts of the euro zone. German order bookings are currently increasing at about 20 per cent year-on-year and output by around 10 per cent, twice as fast as in Italy and France. Elsewhere in southern Europe, manufacturing sector performance is even weaker.
26 | Nordic Outlook – February 2011
The euro zone
It thus appears likely that the euro zone will continue to show wide gaps during 2011-2012. In France, GDP growth will reach 1.7 per cent this year and 1.5 per cent in 2012. Italy will grow by 1.3 and 1.5 per cent, respectively. Spain, which is teetering on the brink of recession, will grow by less than 0.5 per cent this year and a bit above 1 per cent in 2012, but the Greek economy will shrink again (-2.9 per cent) for the third year in a row and move sideways in 2012. Ireland, in turn, will grow by 0.5 and 1.1 per cent in 2011-2012.
consumer confidence indicate that consumption will increase somewhat. In Germany, a slight acceleration in the rate of pay increases will contribute to this. Overall, we believe that euro zone private consumption will increase by 0.8 per cent this year and just above 1 per cent in 2012: a cautious rebound in consumption, viewed in a historical perspective.
Consumer confidence is climbing
Index and year-on-year percentage change
5 0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 00 01 02 03 04 05 06 07 08 09 10
-5 -10 -15
Year-on-year percentage change 2009 Germany France Italy Spain Greece Portugal Ireland Euro zone
Source: Eurostat, SEB
2010P 3.6 1.6 1.1 -0.2 -4.1 1.3 -0.7 1.7
2011 3.1 1.7 1.3 0.4 -2.9 -1.0 0.5 1.9
2012 2.5 1.5 1.5 1.2 0.0 1.0 1.1 1.8
-20 -25 -30 -35
-4.7 -2.5 -5.1 -3.7 -2.3 -2.6 -7.6 -4.0
Consumer confidence (LHS) Private consumption (RHS)
Source: DG ECFIN, Eurostat
Major belt-tightening in 2011-2014
The euro zone’s problem countries are now carrying out conspicuous cost-cutting measures to bring down their budget deficits. Greece unveiled its austerity package as early as last spring (including pay cuts and a higher retirement age in the public sector). Last autumn the Irish government launched a package including higher value-added taxes, lower minimum wages, 25,000 fewer public sector jobs and a new pension system, while keeping the corporate tax at a low 12.5 per cent. The Irish budget package is expected to total about 10 per cent of GDP during the period 2011-2014. Ireland’s political crisis has deepened in recent weeks, including Prime Minister Brian Cowen’s resignation as head of the Fianna Fail party. A new election will be held on February 25. The Green Party, Cowen’s coalition partner, terminated collaboration in January, even though the Greens have accepted the main features of his budget consolidation programme. The opposition has criticised portions of Ireland’s international loan agreement and proposed improvements in borrowing conditions. We do not believe the loan agreement is in danger, although some adjustments may occur after a probable change of government. Experience from other countries (such as Latvia) indicates that the entire political system normally accepts existing international agreements, despite a domestic debate climate that can sometimes be uncompromising. Last autumn’s austerity budget in Portugal, including VAT hikes and the sale of government assets, increased that country’s total belt-tightening measures to nearly 6 per cent of 2011-2013 GDP. Spain’s tightening measures − targeting generous severance pay for dismissed employees and reforming the pension system − will not be enough, according to the OECD, which also wants various changes in the country’s tax legislation. Spanish
Stronger domestic demand
So far, the recovery has been driven by rising exports, while the contribution from domestic demand has been small. To prevent the recovery from running out of steam when the market for manufactured goods enters a more mature phase later this year, domestic demand will have to take over as a growth engine. This will also happen, though at a leisurely pace. Low interest rates and rising capacity utilisation point towards an acceleration in gross fixed investments this year, and we predict an annual upturn of about 4 per cent in capital spending during 2011-2012.
Accelerating capital spending
Year-on-year percentage change and per cent
10 5 0 -5 -10 -15 -20 00 01 02 03 04 05 06 07 08 09 10 85.0 82.5 80.0 77.5 75.0 72.5 70.0 67.5
Gross capital formation (LHS) Capacity utilisation, manufacturing (RHS)
Source: Eurostat, DG ECFIN
Private consumption will also accelerate a bit this year, despite conspicuous fiscal tightening measures in various crisis countries. Positive signs, such as more aggressive hiring plans, falling unemployment and rising
Nordic Outlook – February 2011 | 27
The euro zone
banks are sitting on dangerously large credit risks (nearly EUR 180 billion, according to Moody’s credit rating agency). This has led many observers to begin speculating that Spain may also need to seek an EU bail-out. The country’s weakest savings banks, or “cajas”, have especially large problems and there are plans for a government takeover. The government has said it is willing to resort to further belt-tightening if the budget deficit does not improve as expected. We believe Spain will be forced to launch further austerity packages during the spring, increasing its total belt-tightening measures to nearly 7 per cent of 2011-2014 GDP.
also contributed to the budget improvement. As earlier, we expect Germany to meet the Maastricht criterion of a budget deficit below 3 per cent of GDP as early as this year; the deficit will reach 2.1 per cent of GDP this year and 1.5 per cent in 2012. In the euro zone as a whole, the budget deficit will total 4.5 per cent of GDP this year and 3.5 per cent in 2012.
Successful bond issues, but Spain in risk zone
Market worries about suspended payments and about more countries being forced to request help from the EU and IMF refuse to go away. Long-term yield spreads against Germany have admittedly fallen somewhat in recent weeks, but they remain at very high levels. It has not helped that Greece and Ireland have already accepted loans of EUR 110 and 85 billion, respectively, and have also unveiled tough austerity programmes.
Fiscal tightening, 2010-2014
Per cent of GDP
11 10 9 8 7 6 5 4 3 2 1 11 10 9 8 7 6 5 4 3 2 1
Yields on 10-year government bonds
Spread against Germany, percentage points
10 9 8 7 6 5 10 9 8 7 6 5 4 3 2 1 0 Apr Jul 09 Oct Jan Apr Jul 10 Oct Jan 11
4 3 2 1 0 Oct Jan 08
Total belt-tightening in Greece, Ireland, Italy, Portugal and Spain will end up at 4-5 per cent of GDP during 2011-2014. Lower public sector expenditures will account for most austerity measures: about 3 per cent of GDP, compared to less than 1.5 per cent of GDP in higher taxes. One reason why aggregate belttightening is not higher is that Italy, the largest country in the group, has not yet announced any major austerity ambitions.
Source: Reuters EcoWin
Per cent of GDP Germany France Italy Spain Greece Portugal Ireland Euro zone
Public budget balance, selected countries
2009 -3.0 -7.5 -5.3 -11.1 -15.4 -9.3 -14.4 -6.3 2010P -3.6 -6.8 -4.4 -8.9 -9.5 -7.1 -32.0 -6.2 2011 -2.1 -5.5 -3.8 -7.0 -7.6 -5.7 -9.1 -4.5 2012 -1.5 -3.5 -3.3 -6.2 -6.1 -4.7 -8.0 -3.5
In January 2011, Italy, Portugal and Spain managed to finance their deficits in the capital markets. Generally speaking, these countries have found it easier to obtain financing for shorter maturities. This can be regarded as a sign that the market is increasingly focusing on long-term solvency problems. Although the bond issues went smoothly and were oversubscribed, the calm in financial markets is only temporary. We expect that as early as this spring, Portugal will be forced to throw in the towel and ask for emergency loans from the EU and the IMF. It cannot be ruled out that Spain will also need help. We thus anticipate that additional countries will need to take further steps to regain market confidence. Larger countries such as Italy and France will probably need to carry out belt-tightening programmes to avoid the spread of mistrust.
Source: European Commission, SEB
In Germany, the budget situation has improved. The public deficit (according to the Maastricht definition) reached 3.6 per cent of GDP in 2010, lower than most observers had expected. This was mainly because the rapid upswing in the economy led to rising company profits and thus higher tax payments from the corporate sector. The gradual strengthening of the labour market
Unemployment will fall slowly
Euro zone unemployment rose somewhat in 2010, from 9.9 per cent in January to 10.0 per cent at year-end. This is the highest level in 12 years. Average unemployment did not climb more because the German labour market resisted the upward trend. A combination of a rapid upswing in the German economy and the govern-
28 | Nordic Outlook – February 2011
The euro zone
ment’s allowance system to encourage job-sharing helped push down unemployment from 7.3 per cent in January to 6.7 per cent at year-end (according to the European Commission’s harmonised measure), its lowest level since 1992.
a year. This means that it will remain as high as 18 per cent in 2012. As indicated in the chart below, the euro zone is approaching its long-term non-accelerating inflation rate of unemployment (NAIRU). At the end of 2012, we expect the unemployment gap (the difference between actual unemployment and NAIRU) to be about 0.5 percentage point. The jobless rate will fall faster than assumed by “Okun’s Law”, which relates unemployment to the output gap, partly due to temporary job-sharing allowances. But when these allowances are phased out, there is a risk that unemployment will rebound somewhat, thus falling more slowly than we are now forecasting. Growth is large enough to cause unemployment to fall, according to our estimates of what GDP growth is normally required to keep unemployment at a constant level (see Nordic Outlook, August 2010). These estimates indicate that the growth requirement has fallen somewhat during the past decade in the euro zone as a whole, from about 2.3 per cent in 1990-2000 to about 1 per cent in 2000-2010.
Unemployment will creep downward in 2011-2012
11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 00 01 02 03 04 05 06 07 08 09 10 11 12
Germany's labour market has resisted the trend
Unemployment, per cent
22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 00 01 02 03 04 05 06 07 08 09 10 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0
There are wide disparities in the euro zone, despite similar allowance systems in other countries. In France, for example, unemployment remained stable at just below 10 per cent last year, and in Italy it rose from 8.3 per cent in January to 8.7 per cent at year-end. The Spanish labour market is in even worse shape; early in 2007 the jobless rate was 8 per cent, in November 2010 it was a full 20.6 per cent. But last year’s strong tourist season, with fewer dismissal notices, contributed to a degree of stabilisation during the summer and autumn. Employment rose by 0.4 per cent between the second and third quarter.
11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0
Employment on the way up
Year-on-year percentage change and net index
3.0 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
Source: Eurostat, OECD, SEB
Continued pay squeeze in southern Europe
The upturn in unemployment over the past few years is continuing to squeeze wages and salaries. Total hourly wage costs in the euro zone, which rose by 3.5 per cent as recently as 2008, ended up at a low 1.5 per cent increase last year. The pressure on wages in southern Europe will continue during the next couple of years. The need for internal devaluation in southern Europe, i.e. restoration of competitiveness either by lowering relative pay or improving relative productivity levels, is in the 20-30 per cent range. Public sector pay cuts in various countries have been justified on the basis of fiscal arguments, but these measures will also lead to a pay squeeze in the private sector. Low pay agreements that extend into 2012 in various other euro zone countries also indicate that wage and salary costs will again increase slowly this year. In Germany, however, some tendencies in the opposite direction are discernible. The stronger labour market has led to calls for higher pay, but so far no higher new
Employment (LHS) Expected employment (RHS)
Leading indicators, such as company hiring plans as measured by the European Commission, point towards a continued slow improvement in the labour market. We believe that euro zone unemployment will fall to an average of 9.8 per cent this year and 9.5 per cent in 2012. This represents a small upward adjustment compared to our November forecast. In Germany, France and Italy, we expect a downturn in the same range as the euro zone average, that is, around 2-3 tenths of a percentage point per year. Spanish unemployment will probably fall about one percentage point
Nordic Outlook – February 2011 | 29
The euro zone
agreements have been concluded. The collective contract for Germany’s metalworkers, which provides for pay hikes of 2.7 per cent year-on-year, runs until March 2012. This spring the chemical industry will negotiate new pay agreements, and considering the recovery in this sector it is likely that these agreements will end up somewhat higher. We expect wages and salaries to increase by about 2.5 per cent in Germany this year and by more than 3 per cent in 2012. In the euro zone, pay increases will reach about 1.5 per cent this year and about 2 per cent in 2012.
HICP inflation soon below 2 per cent again
Year-on-year percentage change
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 10 11 12
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0
Low pay increases this year, higher in 2012
Percentage points, 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 12 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
Source: Eurostat, SEB
HICP inflation will now slow as the contribution from energy and food prices (more than 1 percentage point in December) fades during the second quarter. In addition, current pay agreements as well as capacity and resource utilisation remain low in the euro zone as a whole. Inflation expectations have admittedly risen somewhat, but are still rather restrained (“break-even inflation” is now at 1.9 per cent). We expect HICP inflation to fall gradually to 1.5 per cent next December. Measured as annual averages, HICP inflation will reach 2.0 per cent this year and 1.4 per cent in 2012. Core inflation will be relatively stable in the 0.8-1.1 per cent range during the rest of this year, then rise towards 1.5 per cent in late 2012.
Change in unemployment, shifted 2 years forward (LHS) Change in wage and salary cost in manufacturing (RHS)
Source: Eurostat, SEB
Inflation back below 2 per cent
Higher energy and food prices drove up HICP inflation to 2.4 per cent in January. The inflation rate was 2.2 per cent in December, and the average rate for the year ended up at 1.6 per cent. Underlying inflation (HICP adjusted for energy and food) totalled 1.1 per cent in December, making the full-year figure 1.0 per cent.
Inflation expectations just below 2 per cent
Net balance and per cent
35 30 25 20 15 10 5 0 -5 -10 -15 -20 02 03 04 05 06 07 08 09 10 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0
Higher taxes driving up inflation in southern Europe
Year-on-year percentage change
5 4 3 2 1 0 -1 01 02 03 04 05 06 07 08 09 10 5 4 3 2 1 0 -1
Households' expected price trend, next 12 months (LHS) Break-even inflation 2012 (RHS)
Source: DG ECFIN, Reuters EcoWin
ECB will hike repo rate in September
The euro zone’s relatively high HICP inflation at present exceeds the ECB’s target: inflation close to but not above 2 per cent. This caused ECB President JeanClaude Trichet to express concern about continued rising inflation after the bank’s interest rate meeting on January 13. The ECB’s analyses now point out that only in late 2011 will inflation again creep below 2 per cent, but Trichet emphasised that the bank has not revised its opinion that this trend is consistent with price stability in a policy-relevant time horizon. He indicated, however, that medium-term risk (balanced at present) may increase if administrative prices and taxes rise faster.
Euro zone excl. southern Europe
Source: Eurostat, SEB
The upturn in energy and food prices, combined with higher value-added taxes in several countries in southern Europe, drove inflation higher than elsewhere in the euro zone. Greece raised VAT in two stages, from 19 to 23 per cent, Ireland from 21 to 22 per cent. In Portugal, VAT was increased to 23 per cent (from the previous 21). Further ahead, adjustment needs in southern Europe will restrain wage increases and domestic demand, contributing to a deceleration in inflation relative to other euro zone countries in 2011 and 2012. 30 | Nordic Outlook – February 2011
The euro zone
The ECB also shares our assessment that the macroeconomic recovery will continue in the euro zone as a whole. Leading indicators are climbing higher, and decent global economic growth promises continued export success. In addition, loose monetary policy and a better-functioning banking and financial sector are helping domestic demand to speed up, which will mean more balanced growth in 2011-2012. However, at the same time credit and money supply growth remains historically low despite its recent upturn, which indicates that demand is still relatively modest.
and the ongoing economic recovery in the euro zone as a whole, we thus expect the ECB to hike its key interest rate to 1.25 per cent in September this year, then raise it again in December and four times in 2012. The refi rate will stand at 1.5 per cent in December 2011 and at 2.5 per cent in December 2012. The fact that Trichet is leaving his post in November may have some significance to monetary policy next year, although the change should not be exaggerated since there are six people on the ECB’s Executive Board and all 23 central bank presidents participate in the monetary policy decisions. The main candidates for the ECB presidency are Lorenzo Bini Smaghi, Mario Draghi and Axel Weber. Bini Smaghi is already an Executive Board member, while Draghi and Weber belong to the ECB Governing Council. In a speech on January 19, Bini Smaghi underscored the importance of well-founded inflation expectations and toned down core inflation and output gaps in inflation analysis. He thus seems rather concerned about current high spot inflation (which can of course pull up inflation expectations) and has less faith in in the inflation-squeezing effect of low (and difficult-to-measure) capacity and resource utilisation. Draghi is usually more cautious in his monetary policy statements and often tries to avoid conflicts with politicians. Considering the current interplay between fiscal and monetary policy in the euro zone, this indicates that he is somewhat more dovish than Bini Smaghi. Weber, who heads Germany’s central bank and can certainly be regarded as the favourite for the ECB presidency, is viewed as one of the more hawkish members of the ECB Governing Council. He often warns of the risks of high spot inflation and also voted against the ECB’s decision to buy Greek government bonds in May last year. Thus the change of ECB president in November this year, if anything, seems likely to mean a somewhat more hawkish euro zone central bank.
Refi rate will be hiked in September
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 08 09 10 11 12 13
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, SEB
As the EU strengthens the EFSF crisis fund and expands its mandate, the division of labour between euro zone fiscal and monetary policy will become clearer. The EFSF expansion will be a response to clearer demands that countries with high budget deficits must implement forceful countermeasures in the form of budget cutbacks and reforms. This means that the role of the ECB in helping sustain the economic recovery in southern Europe will diminish and that the central bank can focus more attention on its inflation-related tasks. In light of high spot inflation
ECB questioning core inflation as an indicator
In recent weeks, leading representatives of the European Central Bank have begun to question core inflation as a reliable measure of inflation, against the backdrop of commodity price developments and expected price developments for imported goods from emerging economies. To date, central banks have toned down the impact of commodity prices on monetary policy if they have been judged as a) temporary, b) not leading to secondary effects on other categories of goods and c) not affecting inflation expectations. The question that the ECB is now wondering about is whether or not higher global/imported inflation is part of a larger trend and should therefore play a larger role in Western monetary policy. This new problem is fundamentally connected to the expected large differences between the growth of developed economies and developing economies. If global commodity and energy prices rise at the pace of global economic growth − about 4 per cent annually − the impact on the domestic economy is 1.2 per cent (assuming a consumption basket consisting of about one third imported goods). This allows room for domestic cost pressure of around 1 per cent, if the overall inflation target has been set at about 2 per cent. It should normally be possible to offset higher inflation in other countries by means of a depreciation of their currencies. At present, that is not happening. The currencies of many emerging economies are under appreciation pressure. Consequently, domestic cost pressure should preferably rise by less than 1 per cent. In the euro zone, both CPI and underlying inflation are already not only above 1 percent, but above 2 per cent. This may thus be an argument for the ECB to start normalising the key rate.
Nordic Outlook – February 2011 | 31
The United Kingdom
High inflation causes policy dilemma
Fiscal headwinds will slow GDP growth Falling home prices, unhappy consumers No key interest rate hike until November
will grow by more than 5 per cent this year and 7.5 per cent in 2012, or less than in our November forecast. Austerity programmes will lead to major declines in public sector investments. The pound is sharply undervalued, according to our calculations. The weak currency combined with better growth in key export markets will lift exports.
Severe December weather contributed to a dramatic fourth quarter reversal in the British economy; GDP fell by 0.5 per cent quarter-on-quarter. We believe this downturn was temporary. Loose monetary policy and a weak pound, combined with stronger international demand, will sustain decent growth despite the large budget-tightening programmes now being launched. GDP will grow by 1.5 per cent this year and 2.5 per cent in 2012. Rapid price increases − inflation will peak at 4.1 per cent this summer − are creating some credibility problems for the Bank of England, but we do not believe interest rate hikes are imminent. The BoE will raise its key rate in November 2011. Market pricing indicates a hike as early as this summer. The fiscal austerity package will restrain growth, and the budget deficit will shrink from nearly 10 per cent of GDP in 2010 to 6.5 per cent in 2012. Fiscal policy will lower GDP more than 1 percentage point per year, our calculations show. The emphasis is on lower public spending, but other key elements of the package are higher VAT and employer fees. Budget consolidation will enable the UK to keep its top credit rating even though gross public debt will reach 95 per cent of GDP in 2012. Fast-rising prices are undermining purchasing power and squeezing consumption. Food prices are rising by nearly 6 per cent year-on-year and petrol prices are close to record levels, helping explain why consumer confidence has fallen sharply from last year’s peak. But no pricewage spiral is likely: Year-on-year pay hikes are at a historically low 2.1 per cent. The freeze in public sector pay will also contribute to low wage pressure ahead, and consumption will be hampered by a resumption of the home price downturn. Home prices will fall 5 per cent in 2011 and level off in 2012, countering the wealth effect of rising share prices; broad British indices gained over 10 per cent last year. Consumption will rise 1 per cent in 2011 and 2 per cent in 2012. The purchasing managers’ index in the manufacturing sector rose in January to its highest level since the survey began some 20 years ago (62.0). Meanwhile indicators in both the service and construction sectors are weaker, and manufacturing is a mere 13 per cent of the economy. Overall, we believe capital spending
Consumers are feeling blue
Net balance, index
20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 92 94 96 98 00 02 04 06 08 10 65 60 55 50 45 40 35
Consumer confidence (LHS) PMI manufacturing (RHS)
Source: DG ECFIN, Markit, SEB
Traditional measures of resource utilisation make early interest rate hikes unlikely. Unemployment rose to 7.9 per cent in December and will stay above 8 per cent in the next six months. At the end of 2012, it will stand at 7 per cent, compared to our 6 per cent estimated nonaccelerating inflation rate of unemployment (NAIRU). The industrial production index is 11 percentage points below its 2007 peak, indicating that there are idle resources in manufacturing as well. We estimate that the output gap in the economy is about 4 per cent. Various factors are pushing up spot inflation. Food and energy prices are each contributing 0.6 percentage points and VAT hikes 0.5. The weakening of the pound in recent years has also helped push up inflation rates. We expect inflation to fall slightly below target by the end of 2012 when these factors are neutralised. Inflation expectations have not been significantly affected. It is true that households have raised their expectations a bit, but “break-even” inflation remains subdued. Despite the fact that the rate-setting committee is split, with two votes for a hike at the January meeting, we predict that the BoE will hold off on rate hikes until late this year. In the course of 2012 the central bank will hike its key rate to 2 per cent, in relative harmony with the ECB. In that environment, the pound will recover some lost ground. The EUR/GBP exchange rate will stand at 0.84 by the end of 2011 and 0.78 by the end of 2012.
32 | Nordic Outlook – February 2011
Faster pace despite currency appreciation
Exports continue to benefit from Germany Moderate tightening will slow growth a bit More interest rate hikes are on the way
price increases, the government will further postpone the shift to tighter fiscal policy that the IMF and others are calling for, but monetary policy will soon begin to be tightened. The repo rate was cut from 13 per cent to 7.75 per cent during the crisis. It will now be raised to stem inflation and money supply growth. Inflation will reach nearly 9 per cent this year and then slow in 2012.
The recovery in Eastern Europe continues at a healthy pace. In 2011-2012 growth will accelerate further in most countries but will not reach unsustainable pre-crisis levels. We are revising our forecasts a bit upward due to stronger international demand. Russia and Ukraine will also benefit from higher commodity prices. This year exports will again strongly support growth. The region is mainly benefiting from the positive outlook in Germany, which buys 20-30 per cent of Polish, Hungarian and Czech exports, for example. Eastern European exports are in general competitive and will not be jeopardised by the moderate currency appreciation pressure we foresee this year. Stronger currencies and the need for interest rate hikes due to rising inflation may be a dilemma for some countries, such as the Czech Republic, but the Russian and Polish central banks have signalled their willingness to let their currencies appreciate, within reasonable limits. Domestic demand will gradually recover. Consumption will grow, aided by rising wages and slowly falling unemployment after last year’s turnarounds. The strict credit environment is also starting to ease. Generally speaking, households can tolerate the moderate fiscal tightening that such countries as Poland, the Czech Republic and Ukraine have started to launch. But there is some downside risk in consumption estimates if higher energy and food prices erode purchasing power. Public debt is relatively low or moderate, diminishing the risk that financial turmoil will force further belttightening such as in the PIIGS countries. Hungary may again be under pressure, however. In December its credit rating was lowered by Moody’s due to insufficient action to deal with a large structural budget deficit. Of the larger Eastern European economies, we expect Russia to grow fastest. GDP will increase by 4.6 per cent in 2011 and 5.0 per cent in 2012 − forecasts that are above consensus. High prices for oil and other commodities (more than half of exports) will result in good export revenue and fuel continued growth in domestic demand. In the past six months, bank lending has also begun to recover. Due to recent commodity
Russia: Exports and oil prices
Index 100 = 2000, current prices in USD
700 600 500 400 300 200 100 0 00 01 02 03 04 05 06 07 08 09 10 700 600 500 400 300 200 100 0
Oil prices (Brent)
Source: Federal State Statistics Service
In Poland, growth will remain broad-based, with capital spending as an ever-stronger factor. GDP will increase by 4.5 per cent in 2011 and 4.8 per cent in 2012. Another challenge will be the government’s handling of its large budget deficit and debt. If the latter exceeds the constitutional limit, this will trigger further fiscal austerity measures. Meanwhile monetary policy is being tightened. As expected, the central bank raised its key interest rate in January, to 3.25 per cent, due to concerns that energy and food price-driven inflation will spread. We expect more rate hikes in March, May and September, with the key rate reaching 4 per cent late in the year. Because underlying inflation is calm, Poland will eventually gain control of its price surges. Since global risk appetite remains relatively good, we foresee generally stronger currencies. The Polish zloty will strengthen and the EUR/PLN exchange rate will reach 3.60 at the end of 2011. The rouble rebounded late in 2010 after earlier weakening due to renewed and unexpected capital outflows, a process we now believe is over. The rouble, which is as dependent on risk appetite as some of the other Eastern European currencies, will continue to strengthen to 33 in December 2011 against its USD-EUR basket because of rising commodity prices and higher interest rates.
Nordic Outlook – February 2011 | 33
Continued recovery at a moderate pace
Export boom driving growth Gradual upturn in domestic demand Major challenges in the labour market External forces pushing up inflation
These export surges are due to both improved competitiveness and a favourable geographic position. In the past 2-3 years, the Baltics have regained lost market share with the help of 10-20 per cent pay cuts, a process that we believe is now over in the private sector. Also favouring Baltic exports is the fact that the most important markets − Russia, Germany, Sweden, Finland and Poland − have shown expansive growth in the past year. Appreciating competing currencies has also helped. The improvement in competitiveness is now largely over, but the Baltics continue to benefit from good economic conditions in key markets.
During the past year, the Baltic countries have begun a gradual recovery after their depression-like downturns in 2008-2009. Their growth continues to be driven by dynamic exports. Since last autumn, domestic demand has begun to thaw, but these upturns are being hampered because households and businesses are still feeling the after-effects of internal devaluations and tough public budget austerity. Latvia will continue tightening its fiscal policy this year. Fourth quarter figures indicate that last summer’s export-driven economic turnaround, when all three countries moved back into positive year-on-year growth, is gaining a more solid foothold. The European Commission’s forward-looking sentiment survey for the Baltics has climbed further, consistent with movements and levels in the euro zone, though Latvia has shown a somewhat weaker increase. For 2010 as a whole, we predict that Estonia will show GDP growth of 2.7 per cent, while we expect Latvia to report zero growth. Lithuania has reported plus 1.3 per cent. In 2011-2012 we expect Estonia’s GDP to increase by 4.5 per cent a year. Latvia’s growth will reach 4.0 and 5.0 per cent, respectively, while Lithuanian GDP will grow by 4.0-4.5 per cent. Our forecasts, which remain somewhat above consensus, have been adjusted upward by half a percentage point yearly for Estonia but are otherwise unchanged. With exports playing a large role in the economy, Estonia (with exports of about 65 per cent of GDP in 2009, compared to 55 per cent in Lithuania and 44 per cent in Latvia) will enjoy relatively larger support from the improved global outlook. Estonia has also been successful with its budget consolidation, while Latvia and Lithuania are still grappling with large deficits. This is contributing to greater uncertainty in forecasting their growth, especially in Latvia.
Year-on-year percentage change
25 20 15 10 5 0 -5 -10 -15 -20 -25 04 05 06 07 08 09 10 25 20 15 10 5 0 -5 -10 -15 -20 -25
Source: Local statistical offices
Household consumption in the Baltics bottomed out last summer, but the recovery since then has been hesitant. Retail sales volume remains low.
Index 100 = 2005, 3-month moving average
180 170 160 150 140 130 120 110 100 90 80 70 60 04 05 06 07 08 09 10 180 170 160 150 140 130 120 110 100 90 80 70 60
Sharp upturn in exports
The upturn in Baltic exports is dynamic. During the third quarter of 2010, year-on-year export growth was 15-25 per cent, led by Estonia. More recent statistics using current prices also indicate continued export acceleration in Estonia and Lithuania late last year. 34 | Nordic Outlook – February 2011
Source: Local statistical offices
Consumption growth continues to be hampered by private debt adjustment and high, though gradually declining unemployment. Meanwhile households will be helped by continued low interest rates (even after
the ECB’s coming rate hikes, which indirectly also affect Lithuania and Latvia). Public sector pay has been frozen this year, but private wages and salaries are rebounding at a moderate pace, resulting in somewhat stronger real disposable income. Latvian households will, however, continue to be squeezed by fiscal tightening. Notably, Estonian households feel considerably greater confidence in the future than Latvians and Lithuanians do, according to the EU’s monthly sentiment surveys. Capital spending by companies remains weak. So far only Lithuania has shown a year-on-year increase (+15 per cent in the third quarter of 2010), though from a very low level. Looking ahead, rising capacity utilisation in the manufacturing sector and continued gradual recuperation in housing markets point towards a gradual increase in capital spending. Lending to households and businesses is still declining year-on-year, though signs of stabilisation were discernible late in 2010. The demand for credit is expected to weaken in 2011 as well. A gradual recovery in domestic demand will lead to higher imports. Combined with a shift in flows from foreign-owned banks and companies, which are again making profits, this will help turn the unusual current account surpluses of recent years into moderate deficits.
It is difficult to foresee any broad price pressures emerging in the short term. We expect private sector pay to increase at a moderate pace. The three economies are also characterised by low resource utilisation, making it difficult for companies to make price increases stick. This year the inflation picture will thus continue to be dominated by developments on the commodity side. We are raising our inflation forecasts and expect Estonia to show 4.0 per cent inflation in 2011 as a whole, while Lithuania’s price increases will be limited to 3.5 per cent and Latvia’s to 2.5 per cent. The inflation impact of Estonia’s transition to the euro on January 1 will probably be small, but we expect them to be somewhat higher than the 0.1-0.3 per cent that Estonia’s Ministry of Finance foresees as a consequence of companies rounding off their prices upward. We believe that some companies will take the opportunity to raise prices for other reasons.
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 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
Major challenges in the labour market
Unemployment remains high, although it fell from peaks of around 20 per cent in the first half of 2010 to 15-18 per cent late in 2010. During the overheated period 2006-2008, unemployment bottomed out at 4-5 per cent after having previously been around 10 per cent. The modest upturn in domestic demand indicates that the labour market improvement will be slow. All three Baltic countries show structural problems such as a poor match between labour supply and demand, high youth unemployment and a large-scale emigration wave during the crisis years. Labour market issues will thus remain pivotal challenges for policy makers.
Source: Local statistical offices
Stabilisation in public finances
Inflation has resumed and accelerated, but this is largely due to the international wave of higher energy and food prices plus administrative hikes including value-added and excise taxes. In addition, there are large statistical base effects in the calculations, since 2009 was dominated by deflation. During 2010, for example, Estonia’s year-on-year inflation rate increased from -1 per cent in January to 5.4 per cent in December. The change in the core inflation rate was considerably calmer, from -1.5 per cent to 1.3 per cent. There were similar trends in Lithuania and Latvia, although year-on-year core inflation in those countries is still below zero.
Government budgets are moving in the right direction after the tough fiscal consolidation programmes of recent years. During the recession, Estonia managed to maintain the stability of its public finances, including very low debt. We expect its 2011 deficit to be 1.5 per cent of GDP. The 2011 budget includes somewhat higher increases in expenditures than in revenue. We expect Lithuania’s deficit to shrink from about 8 per cent of GDP in 2010 to below 6 per cent in 2011. This will be achieved by freezing expenditures, but without new cutbacks. Latvia’s budget deficit will shrink from 8.5 per cent of GDP in 2010 to 5.5 per cent in 2011. To achieve this goal, which was set in consultation with Latvia’s international creditors, the IMF and EU, this year the Latvian government is carrying out continued tightening measures equivalent to 2 per cent of GDP. Both Lithuania and Latvia are aiming at achieving budget deficits of no more than 3 per cent of GDP in 2012 so they can qualify to join the euro zone by 2014. Our view is that these targets are within reach in budget terms, but that the Maastricht inflation criterion may turn out to be a threat, especially in Lithuania.
Nordic Outlook – February 2011 | 35
Continued strong growth
Exports can tolerate a stronger krona Resource restrictions becoming visible Inflation risks ahead Riksbank rate hike at every 2011 meeting Surprisingly strong public finances
companied by a more broad-based upturn in inflation towards the end of our forecast period. Upward revisions in inflation forecasts, in a situation where the economy is growing rapidly and the output gap is on its way towards closing, make it likely that the Riksbank will hike its key rate at a faster pace than it has announced to date, in order to achieve more normal interest levels. The European Central Bank will already begin its rate hikes during 2011. This will also diminish the risk of excessively large interest rate spreads over other countries. We expect the Riksbank to raise its repo rate at every monetary policy meeting during 2011, bringing the rate to 2.75 per cent at the end of the year. During 2012 repo rate hikes will continue, though at a somewhat slower pace, reaching a year-end level of 3.75 per cent.
The Swedish economy is continuing to grow rapidly. We have adjusted our 2011 GDP growth forecast upward to 4.7 per cent. This implies a slight deceleration compared to the record 5.7 per cent (5.4 per cent adjusted for the number of working days) in 2010, but growth will still be at about the level of other peaks during the past 20 years. Next year, growth will slow to 2.6 per cent (3.0 adjusted for working days), which is still above the long-term trend. Looking ahead, growth will be driven to a greater extent by domestic demand. Capital spending will soar, while consumption will be supported by a strong labour market and a good wealth position. Export growth will be relatively good but will slow down somewhat. The labour market situation improved faster than expected late in 2010. We now believe unemployment will drop below seven per cent as early as this year, falling further to 6.4 per cent at the end of 2012. At that time, it will be close to its equilibrium level.
Indicators for capacity utilisation
2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 03 04 05 06 07 08 09 10 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
Continued strong GDP growth
8 6 4 2 0 -2 -4 -6 -8 Q1 Q3 08 Q1 SEB forecast 8 6 4 2 0 -2 -4 -6 -8
Riksbank, RU indicator
Source: Riksbank, SEB
Quarter-on-quarter percentage change Year-on-year percentage change
Source: Statistics Sweden, SEB
International price upturns on food and energy have caused inflation to climb above 2 per cent. We expect inflation to fall somewhat. Inflation excluding interest rate changes (CPIF) will stay somewhat below 2 per cent during most of 2011. Accelerating wage and salary increases in 2012 will nevertheless probably be ac-
Robust growth and rapidly rising resource utilisation have changed the conditions for economic policy. We thus cannot rule out the possibility that the Riksbank must make even more radical revisions in its strategy of raising key interest rates at a slow pace until 2013. Rate hikes of 50 basis points may thus be possible in mid-2011. We are not choosing to include this in our main scenario, since the tightening effects of monetary policy are reinforced by various factors. The gap between the key rate and short-term mortgage rates widened in recent months as a consequence of rule changes and higher risk premiums. In addition, the appreciation of the krona has a tightening effect. More expansive fiscal policy, on the other hand, may justify additional rate hikes. We expect a continued improvement in central government finances, which will help intensify the debate on the value of further
36 | Nordic Outlook – February 2011
government debt reductions. The good economic situation increases the importance of reforms to improve the supply side of the economy. The Moderate Party’s cautious fiscal strategy and continued emphasis on incentives to work and on further earned income deductions will probably be increasingly challenged by its Alliance coalition partners. In a situation of declining support in public opinion surveys, these parties will intensify their struggle to push through their own signature issues, especially in tax policy. We thus expect to see broader proposals in the field of taxation, as well as more proposals on the public spending side.
to go before reaching krona exchange rates that will hamper the growth of the export industry.
Profitability and exchange rate
40 30 20 10 0 -10 -20 -30 -40 98 99 00 01 02 03 04 05 06 07 08 09 10 -15 -10 -5 0 5 10 15 20 25
Manufacturers strong, despite the krona
Exports have now almost completely regained their 2008 and 2009 decline. Confidence indicators are also pointing to continued strong growth during early 2011; expected output and order bookings, for example, are at their highest level of the 21st century. Combined with a stronger international economic situation, this is why we are adjusting our 2011 export growth forecast upward. But because of continued krona appreciation and ever-higher capacity utilisation, export growth will slow from 10.5 per cent in 2010 to 9 per cent this year and 5 per cent in 2012.
Manufacturing, profitability assessment (LHS) TCW, % y/y, reversed scale (RHS)
Source: NIER, Reuters EcoWin
Higher capital spending by industry in 2011
Capital spending by Swedish manufacturers was unchanged in 2010, despite a rapid increase in production. Low capacity utilisation at the outset limited the need for fixed investments to a greater degree than expected. Late in 2010, however, capacity utilisation climbed rapidly and is now somewhat above its historical average, according to the National Institute of Economic Research’s Business Tendency Survey. The Statistics Sweden survey in October showed that companies were planning to increase their capital spending by 10 per cent this year.
Index 100 = 2008
110 105 100 95 90 85 80 75 05 06 07 08 09 10 110 105 100 95 90 85 80 75
Gross fixed investment
Year-on-year percentage change
30 20 10 0 30 20 10 0 -10 -20 -30 00 01 02 03 04 05 06 07 08 09 10
Source: Statistics Sweden, Deutsche Bundesbank
-10 -20 -30
So far, however, there are few indications that the krona exchange rate will be a major problem for Sweden’s competitiveness, although some companies will experience squeezed margins. Our calculations also show that the krona remains undervalued (see the Theme article). Historically, demand has been significantly more important to manufacturers’ profitability than the exchange rate, as the chart below indicates. During the past year, profitability has improved, even though the krona has appreciated substantially from its earlier weak levels. A strong recovery in manufacturing productivity is among the factors that have blunted the cost impact of the stronger krona. Companies implemented tough efficiency-raising measures during the economic crisis, and employment in the manufacturing sector shrank by nearly 15 per cent (100,000 people). The subsequent recovery has occurred with a very limited increase in employment. This is one reason why we still have a way
Source: Statistics Sweden
Normally, companies have a tendency to overestimate their capital spending needs in early surveys, but this time around the rapid upturn in capacity utilisation, combined with a historically low capital spending level, indicates that the increase will instead exceed corporate plans. We are thus expecting capital spending by manufacturers to grow by 13 per cent this year and then continue upward at a rapid pace in 2012 as well. Residential investments have gained back their downturn during the crisis. Rising home prices and a low level of residential investments compared to other countries make a continued upturn likely. Record-
Nordic Outlook – February 2011 | 37
high increases in the number of housing starts in 2010 indicate that new construction will accelerate further in 2011. But total residential investments will be held down by a levelling-off of renovation, following a doubling in 2010 after the government introduced a temporary tax deduction for home renovations and repairs. Altogether, capital spending will increase by nearly 10 per cent this year and by 4 per cent in 2012.
Household income and consumption
Year-on-year percentage change 2009 Consumption Income Savings ratio -0.8 1.6 12.9 2010 3.5 0.9 10.6 2011 3.3 2.7 10.1 2012 2.5 2.8 10.4
Gross fixed investment
Source: Statistics Sweden, SEB
Percentage change, 2009 level in current prices (SEK bn) 2009 2009 2010 2011 2012 Government sector Housing Business sector Total 101 87 362 4.2 -23.3 -18.7 2.5 21.0 2.6 0.0 19.0 11.5 -0.5 7.0 4.5 4.0
Lending to households will slow
Source: Statistics Sweden, SEB
Looking a bit ahead, the rapid upturn in home prices and household debt in recent years constitutes the biggest risk in the Swedish economy. After a brief slowdown in 2008, household borrowing has accelerated and debt is now close to 180 per cent of disposable income, a high level in an international comparison. Meanwhile home prices have continued climbing in a way that diverges sharply from trends in other countries. In the latest issues of Nordic Outlook, we have discussed these risks in detail. There are several factors underlying current developments, for example structurally low home construction, exceptionally low mortgage interest rates and strong growth in employment and income. Meanwhile, international experience indicates that as a rule, a debt expansion as rapid as that occurring in Sweden is followed by a significant correction.
Continued consumption boom
Private consumption rose by 3.5 per cent during 2010. Partly due to a rapid recovery in auto purchases, the upturn was on a par with the highest levels of the past 20 years. With such a strong upturn in consumption, Sweden is diverging sharply from other industrialised countries. The large impact of earlier interest rate cuts, an expansionary fiscal policy, the labour market recovery and strong increases in household wealth are the most important factors behind this. Yet 2010 was an off-year in terms of income growth: the contribution from tax cuts was relatively small, while wage and salary amounts rose moderately. Because of higher employment and continued tax cuts, the deceleration will be temporary. Our forecast for 2012 is based on the assumption that Parliament approves a further stage in the earned income deduction reform equivalent to SEK 12 billion and taking effect in January 2012.
Households continuing to increase their debts
Per cent of disposable income
11 10 9 8 7 6 5 4 190 180 170 160 150 140 130 120 110 100 90 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Households savings ratio
Per cent of disposable income
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 94 96 98 00 02 04 06 08 10 12
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5
Interest burden after taxes (LHS)
Source: Riksbank, SEB
Total Excl collective retirement saving Financial savings, excl collective retierment saving
Source: Statistics Sweden, SEB
Household savings rose steeply during the crisis but fell in 2010. Our forecast implies that the savings ratio will level off during 2011 and 2012 and that saving will remain high in a historical perspective.
Short-term signals from the housing market are mixed. During the latter part of 2010, there was a slight deceleration in both home prices and lending to households, but SEB’s home price indicator remains at high levels. A strong labour market and rising incomes are continuing to drive the upturn. The most likely scenario is that loan volume and home prices will continue to increase this year, but that the pace will slow markedly when rising mortgage rates and the recently enacted ceiling on loan-to-value ratios begin to have a clearer impact. Historically, accelerations and slowdowns in household loans have normally coincided with shifts in monetary policy. This has occurred even in situations where the economic cycle and the labour market have been
38 | Nordic Outlook – February 2011
moving in opposite directions. But thus pattern is not equally clear for home prices.
Lending to households
16 15 14 13 12 11 10 9 8 7 6 99 00 01 02 03 04 05 06 07 08 09 10 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Productivity is continuing to recover strongly, which is normal in this cyclical phase, yet the 2012 level will still be about 2 per cent below the long-term trend. In this respect, current developments differ from the 1990s economic crisis. At that time, long-term productivity capacity was hurt by a sharp upturn in equilibrium unemployment, while productivity quickly exceeded its previous trend level. This time around, it looks as if there is a risk of long-term damage occurring mainly on the productivity side.
Indicators of resource utilisation
45 40 35 30 25 20 15 10 5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 90.0 87.5 85.0 82.5 80.0 77.5 75.0 72.5 70.0
Year-on-year percentage change (LHS) Repo rate, per cent (RHS)
Source: Statistics Sweden, The Riksbank
Labour market stronger than expected
Employment rebounded as early as the end of 2009, and the downturn in jobs during the crisis has now largely been regained. Over the past six months, unemployment has fallen about one percentage point. Short-term indicators such as hiring plans in the Economic Tendency Survey and the number of newly listed job openings at the government employment service have also continue to strengthen. For example, hiring plans are now higher than they were in 2007, when employment rose at record speed. We expect unemployment to continue downward and to drop below 7 per cent as early as the end of 2011.
Labour shortages, business sector (LHS) Capacity utilisation, per cent (RHS)
Supply restrictions approaching
Because of the rapid recovery, assessments of resource restrictions will become crucial earlier than expected, both in forecasting and in shaping economic policy. Such indicators as labour shortages and capacity utilisation have climbed rapidly and in many cases are now above historical averages. Many factors indicate that equilibrium unemployment may have shifted upward from the approximately 6-6.5 per cent that prevailed before the crisis. For example, manufacturing employment fell very sharply during 2008 and will probably bounce back only to a limited extent. Instead, expansion is occurring in the construction sector and in the private service sector. This may create adjustment problems for those who lost their jobs in industry and must look for new jobs.
Percentage change 2009 Employment Labour supply Unemployment, % Average hours worked Productivity (GDP) -2.1 0.2 8.3 -0.6 -2.7 2010 1.0 1.1 8.4 0.9 3.3 2011 2.1 0.6 7.3 -0.2 2.7 2012 1.1 0.4 6.6 -0.3 2.1
Source: Statistics Sweden, SEB
Year-on-year percentage change
Unemployment is falling
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 02 03 04 05 06 07 08 09 10 11 12
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 01 02 03 04 05 06 07 08 09 10
4.5 4.0 3.5 3.0 2.5 2.0 1.5
4650 4600 4550 4500 4450 4400 4350 4300
Source: Statistics Sweden
Unemployment, per cent (LHS) Employment, thousands (RHS)
Source: Statistics Sweden, SEB
If we assume that equilibrium unemployment is now 6.5-7 per cent, resource utilisation should be in balance
Nordic Outlook – February 2011 | 39
as early as the end of 2011. This is not necessarily a binding restriction on long-term growth. Over time, equilibrium unemployment may be pushed down. This may occur as a consequence of lasting high demand for labour or as a consequence of structural reforms enacted by economic policy maker. Nevertheless, the previous picture of major resource gaps in the Swedish economy has radically changed in a short period.
fallen again. We thus expect CPIF (CPI without interest rate changes) to drop below 2 per cent early in 2011. The upturns in petrol and food prices will not be reversed in the same way, however. Instead we expect food prices to continue climbing. CPIF inflation will end up close to the Riksbank target in 2011 as a whole, significantly higher than forecasts showed only one quarter ago. Core inflation (CPIF excluding food and energy) fell to 1.2 per cent in December. A combination of continued low pay increases and a stronger krona indicates make it likely that core inflation will remain low during 2011, but a broader upturn in inflation driven by rising resource utilisation and higher pay is not so far away. We expect a gradual rise in core inflation during 2012, eventually threatening to climb above the Riksbank’s target beyond our forecast horizon.
Higher pay increases in 2012
The 2010 wage round took place at a time when the labour market outlook appeared grim. This was one reason why collective agreements were reached at historically low levels, which are now reflected in the incoming wage and salary statistics. The rate of increases is record-low, even taking into account that as a rule, preliminary monthly figures are later adjusted upward. We expect total wage and salary increases in 2011 to be only 2.5 per cent, despite the improvement in the labour market.
Year-on-year percentage change
5 4 SEB forecast 5 4 3 2 1 0 -1 -2 08 09 10 11 12
Year-on-year percentage change
4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Employees' organisations, 2y Employers' organisations, 2y Employees' organisations, 5y Employers' organisations, 5y
Source: Statistics Sweden
4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75
3 2 1 0 -1 -2
CPIF excl energy and food
Source: Statistics Sweden, SEB
The collective agreements for white-collar employees in industry expire in September, but there are signals indicating that they will be extended to get back into phase with blue-collar agreements. This implies that coordinated wage and salary negotiations for industrial employees will be carried out in early 2012. The wage round will occur amid a relatively strong labour market and a favourable profit situation: Another part of the picture is that an accelerated rate of pay increases in Germany might also affect Sweden. We have thus adjusted our forecast for average pay increases in 2012 upward to nearly 4 per cent. The yearly average will also be pushed up by the fact that the revision date in the existing agreements is at the end of 2011. It is notable, however, that pay expectations among labour market parties are relatively low in a longer perspective, according to a recent Prospera survey.
Headline CPI inflation will be significantly higher than CPIF inflation, due to rapidly rising household mortgage interest expenses. The weight of mortgage interest with short refixing periods will probably be adjusted upward in Statistics Sweden’s calculation model, and that will make the impact of interest rate hikes even larger than we had previously anticipated.
Riksbank in a hurry
Growth, labour market and inflation trends will probably lead to interest rate hikes being implemented at a faster pace than the Riksbank has announced to date. During 2011, we now expect inflation to be quite close to the Riksbank’s target, which in the short term will make rate hikes seem less uncomfortable; forecasts had previously indicated inflation well below target. Commodity price increases will admittedly result in transitory inflation surges, but will still probably cause greater worries about secondary effects. Experience from both the earliest years of the 21st century and from 2007-08 indicates that central banks in Europe, and not least the Riksbank, have reacted in such a way. Meanwhile falling unemployment and rising capacity utilisation will lead to a shift in the Riksbank’s analysis of underlying inflation pressure.
Higher inflation, both shortand long-term
Inflation unexpectedly rose to 2.3 per cent late in 2010 due to higher energy and food prices. Rising electricity prices because of cold winter weather in December were one important factor, but electricity prices have
40 | Nordic Outlook – February 2011
Mortgage rates up more than repo rate
Changes since Jan 1, 2010
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan Apr Jul 10 Oct Jan Apr Jul 11 Oct Jan Apr Jul 12 Oct 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
This might in turn raise the rate path which to some extent mirrors the Board’s average view. We also believe that the need for interest rate hikes will become even clearer in the course of 2011. Our forecast is thus that the Riksbank will raise its repo rate at every monetary policy meeting this year, and we foresee a repo rate of 2.75 per cent at the end of 2011. After that, we believe that rate hikes will continue to 3.75 per cent at the end of 2012.The Riksbank will thus reach a level that we believe corresponds to a neutral interest rate after the changes that occurred in the wake of the financial crisis. During the coming year, the risks in this forecast are mainly on the upside. Given strong economic growth, an output gap that is on its way towards closing, and increases in household debt, it is possible that the Riksbank will be forced to more fundamentally re-assess its strategy of gradual normalisation of the repo rate during a three-year period. Hikes of 50 basis points may thus be considered on some occasions later in 2011, in order to achieve a neutral interest rate within a reasonable period. At present we are not choosing an aggressive repo rate path as our main scenario, due to various factors that help intensify the impact of key rate hikes in Sweden. Higher risk premiums for mortgage bonds, combined with the Swedish Financial Supervisory Authority’s new rules for bank funding of mortgage loans have already led to an increase in mortgage loan rates of about 50-75
Mortgage rate, 3-month refixing
The risks of excessively large divergences from the key interest rates of other countries have also diminished. A recent upturn in market interest rates reflects, among other things, expectations of earlier rate hikes by the ECB and the US Federal Reserve. This weakens one important justification for the Riksbank’s lowering of its repo rate path last October. We expect that in the February issue of its Monetary Policy Report, the Riksbank will raise the repo rate path in such a way that the repo rate at the end of our forecast period will again end up at 3.8 per cent (compared to 3.45 per cent in the latest forecast). It is also likely that stronger global economic conditions and higher international interest rates will help reduce the disagreements within the Riksbank’s Executive Board.
The Riksbank and macro supervisory rules
As early as the autumn of 2009, the Riksbank began to “shout for help” from the government, the Financial Supervisory Authority and others on the question of alternatives to interest rate hikes in order to prevent the emergence of mortgage loan and home price bubbles. The interest rate weapon is, after all, a blunt instrument. There is a risk that interest rate hikes aimed at influencing household debt will having undesired side-effects, for example on corporate financing costs, and end up in conflict with the bank’s main task of achieving its inflation target. This Swedish debate, which has intensified in the past six months, is taking place concurrently with discussions in the Group of Twenty (G20) and other international forums regarding macroeconomic supervisory rules. Sweden has now enacted a ceiling on the loanto-value ratio for home loans (October 1). But there are more potential tools in the policy makers’ kit: mandatory mortgage principal payments, cash reserve requirements and/or countercyclical capital requirements (Basel III) for banks, limits on bank lending, less generous interest deductions, changes in capital gains tax deferment and stamp duty and payment protection requirements in case of unemployment, illness and the like. Preliminary statistics indicate that the debate in itself and the measures implemented so far may have had a certain cooling-off effect on the credit market, but the question is how lasting this will be in an otherwise favourable macro environment. The Riksbank’s dilemma − how to ensure price stability and financial stability with only a single policy tool − has diminished to some extent as inflation risks have increased, due to stronger economic growth. The need for Swedish macro supervisory rules remains, and international proposals for tools will be presented, probably late in 2011. Our assessment is that the Financial Supervisory Authority will choose to move forward slowly with new measures. Time is needed to study various proposals. Changes in the tax system, for example, should not be short-term. Instead they should preferably be made while taking a long-term perspective. There is, furthermore, uncertainty about the effectiveness and the side-effects of various measures. Introducing new rules on a broad front while interest rates are rising may create too strong a cooling-off effect and lead to an undesired credit contraction and falling home prices.
Nordic Outlook – February 2011 | 41
points more than the repo rate hikes. In addition, tightening effects via the currency are larger than normal when many other central banks are leaving low key interest rates unchanged.
12 11 10 9 8 7 6 5 96 98 00 02 04 06 08 10 160 155 150 145 140 135 130 125 120 115 110
Yield spread to Germany will slowly widen
The yield differential against Germany on 10-year government bonds has been relatively stable in recent months, despite the Riksbank’s key rate hikes. The spread has been in the 15-35 basis point interval, or somewhat below our earlier forecast. This is partly because expectations of ECB rate hikes have risen almost as much as in the case of the Riksbank. In addition, the very limited supply of Swedish government bonds has presumably limited upward pressure on yields. Looking ahead, we believe that a widening gap in key interest rates will be more important than the difference in the volume of government securities available. The spread will thus continue to widen slowly over the next couple of years. We expect a spread of 40 basis points at the end of 2011 and 50 points at the end of 2012. This means that the yield on a 10-year government bond will climb to 4.0 per cent in December 2011 and 4.5 per cent at the end of 2012.
TCW Index, 1992NOV18=100 (RHS) EUR/SEK (LHS)
Source: Reuters EcoWin
Spread vs Germany
1.5 1.0 0.5 0.0 -0.5 -1.0 05 06 07 08 09 10 11 12
0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5
Another argument for continued appreciation is that in a long-term perspective, the krona still seems undervalued. Our estimate of equilibrium levels (see the Theme article), for example, indicates that the fair value against the euro is SEK 8.30. Sweden continues to report large current account surpluses and has begun to build up a positive net external balance, which supports the picture of an undervalued currency. We believe that at the end of 2011, the EUR/SEK exchange rate will stand at 8.50 and the USD/SEK rate will be 6.07. In TCW terms, the krona will reach 114.4, its strongest level since 1996.
Public finances will surprise
Net lending by the Swedish public sector fell by a total of 4.5 percentage points of GDP between 2007 and 2009. Last year there was some improvement, and as early as this year we expect stronger economic conditions to lead to a slight surplus. Relatively moderate pay increases will hold down income growth to some extent this year, which will be the most noticeable in the local and regional government sector.
Repo rate spread (LHS) 10-year government yield (RHS)
Source: Reuters EcoWin
Per cent of GDP
Krona heading towards new heights
The krona continued to strengthen early in 2011. Its levels against the euro and in trade-weighted TCW terms are the strongest since 2000. In spite of this, we believe that the krona will continue to appreciate. Economic growth will remain higher in Sweden than in both Europe and the US during 2011. Meanwhile the Riksbank will hike its key interest rate, while the first ECB rate hike will not occur until late this year. The key interest rate spread is a very important explanation for short-term exchange rate movements, according to our models. We also expect the flow situation to benefit Sweden. Strong government finances attract investors, including other central banks. Switzerland, for example, recently decided to add the krona to its foreign exchange reserve.
2009 Revenue Expenditures Net lending Gen. gov’t gross debt Borrowing req., SEK bn 52.2 53.2 -1.0 41.9
2010 51.2 51.0 0.2 37.6 33.7 1
2011 49.7 49.0 0.7 33.5 30.2 -39
2012 49.4 48.4 1.0 30.8 27.5 -48
Central gov’t debt 37.2 176
Source: Statistics Sweden, SEB
The central government borrowing requirement improved sharply between 2009 and 2010, but more than half of this SEK 175 billion improvement is explained by onward lending to the Riskbank in 2009 aimed at strengthening its foreign exchange reserve. The change
42 | Nordic Outlook – February 2011
late last year was somewhat stronger than expected, and according to preliminary figures from the National Debt Office the central government borrowing requirement in 2010 was only SEK 1 billion. In addition to the sale of shares in Nordea of just below SEK 20 billions we believe that decisions Parliament has already made will be sufficient to enable the government to divest an additional SEK 20 billion worth of state-owned companies this year and SEK 25 billion in 2012. Due to parliamentary resistance, however, the government’s privatisation plans may need to be adjusted in some respects. The marginal borrowing requirement in 2010 will be replaced by surpluses of SEK 39 billion in 2011 and SEK 48 billion in 2012. Central government debt fell as a percentage of GDP during 2010, and we expect this figure to continue downward to 30 per cent of GDP in 2012. Last autumn the government’s budget bill proposed SEK 13 billion worth of reforms in 2011. Reforms approved previously plus our assumptions about further fiscal stimulus in 2011 will mean that total programmes in 2011 will amount to some SEK 20-25 billion (equivalent to about 0.7 per cent of GDP). In spite of this, fiscal stimulus will be neutral this year, since temporary crisis-related government grants to local governments will meanwhile disappear. In 2012 we expect fiscal policy to be weakly expansionary, with reforms equivalent to SEK 20 billion or 0.7 per cent of GDP.
The government is fast approaching a fiscal crossroads between a tight budget and further reduction of central government debt, or a commitment to tax cuts or higher health and welfare spending. Regardless of what the government does, it will attract criticism from either the business community or the opposition. The electoral success of the dominant Moderate Party has also led to tensions within the Alliance coalition. In the future, the much smaller Liberal Party, Christian Democrats and Center Party will demand more follow-through on their own proposals, to avoid being marginalised; their demands will increase the worse these parties do in opinion polls. The focus on budget discipline during the crisis that characterised the election campaign has faded, and Sweden is in a better fiscal situation. This may help give the smaller Alliance coalition parties a chance to push through some of their signature issues. We can thus expect tougher battles ahead within the government when it comes to crafting economic policy. The policy positions of the coalition parties, especially regarding taxes, have become clearer in recent months. The Moderates are continuing to pursue a policy of strengthening incentives for people to work and they want to enact further earned income deductions, which the other three parties seem relatively indifferent to. The Liberal Party has underscored the importance of abolishing the extra 5 per cent income tax on the affluent imposed as an austerity measure in the 1990s, while the Center prioritises improvements in the situation of businesses, for example by lowering employer payroll fees. The Christian Democrats seem to be moving towards more vigorously pursuing their signature issues in family and elder care policy. We expect reforms in the tax area to be broader with less focus on earned income tax credits compared to the past.
Approaching a political crossroads
The government’s reform programme for its 2010-2014 term of office is less extensive and more back-loaded than its 2006-2010 programme. After the 2006 election, the new Alliance government quickly started pushing through reforms; today we are seeing a more caretakerlike government. However, the strong economy will allow the government room to spend more aggressively on reforms than the SEK 40 billion, or a bit above 1 per cent of GDP, it has signalled for its four-year term. A strategy of moving cautiously at the beginning of this term, so that it can spend more aggressively as the 2014 election approaches, may also encounter problems. For reasons of stabilisation policy, the government’s fiscal offensive should be launched at a relatively early stage.
Nordic Outlook – February 2011 | 43
Is there an optimal government debt level?
During the crisis years 2008-2009, Sweden’s central government debt was largely unchanged as a percentage of GDP. A margin upturn of 3 per cent of GDP can be compared to the 35 per cent increase in the 1990s. Because of improved economic conditions, central government debt is expected to fall to 30 per cent of GDP in 2012. Given the government’s assumptions of strong growth and budget surpluses in 2013 and 2014, this debt will fall even further and in 2014 it will reach its lowest level in 40 years: 21 per cent of GDP. Such a trend will probably trigger an increasingly heated debate on government debt. Is it reasonable to prioritise further debt reductions at the expense of urgent tax cuts or expenditure reforms?
perience shows that a severe crisis can lead to a rapid debt increase, totalling 30-40 per cent of GDP. Once central government debt moves a bit above 100 per cent of GDP, interest payments may become so large that a primary balance (balance minus the interest item) is not sufficient to stabilise the debt ratio. To avoid this, the debt level should not exceed 70-75 per cent of GDP in a normal economic situation. The Maastricht criterion: A public debt of 60 per cent of GDP (or falling debt) is one of several targets for the euro zone countries. This debt corresponded to the average level in the countries affected during the preparations for the the euro in the early 1990s. A 60 per cent level can also be derived with the help of the deficit criterion and an assumption of a 5 per cent annual trend level of nominal GDP growth. Given a deficit of 3 per cent of GDP, the debt ratio will converge at 60 per cent of GDP in the long term. The need for benchmark interest rates in financial markets: Sovereign borrowing fulfils purposes that are not directly connected to financing. The interest rate on government borrowing is used as a benchmark rate for pricing other financial instruments. There is also a demand for safe investments in the national currency; Basel III rules may boost this demand. In addition, there are reasons to maintain a government borrowing function and a liquid market for government securities. This requires an outstanding debt portfolio of a certain size. The downside pain threshold is difficult to estimate but can be assumed to be between 20 and 30 per cent of GDP. Should the government build up assets? In 2009 the Swedish central government’s net financial debt was 13 per cent of GDP and it is expected to decrease in the future. A build-up of public wealth has no intrinsic value. Excessively high government saving may lead to squeezing out effects. Private sector saving and wealth accumulation can instead benefit from a certain level of government debt.
Per cent of GDP
80 75 70 65 60 55 50 45 40 35 30 25 94 96 98 00 02 04 06 08 10 12 SEB forecast 80 75 70 65 60 55 50 45 40 35 30 25
Source: Eurostat, Swedish National Debt Office, SEB
It is difficult to find any clear criterion for what is an optimal level of public debt. One general principle, however, may be that debt should be at a level that ensures the long-term sustainability of fiscal policy and enough fiscal manoeuvring room to soften the impact of economic fluctuations. Otherwise there are reasons both for and against public debt. Low debt means lower interest payments, which implies that a larger percentage of tax revenue can be used for government operations or tax cuts. Meanwhile it should be possible for macroeconomically profitable investments to be financed by borrowing. In addition, net public debt should be taken into account by including assets. A number of different criteria for the level of public debt may be discussed: High debt may slow growth: IMF studies show that growth begins to be adversely affected when debt exceeds 90 per cent of GDP. The explanation for this is that the interest burden of such high debt levels forces the enactment of taxes that lead to efficiency losses. Households and businesses may also tend to increase their saving for reasons of caution in case of such high public debt, since there is growing uncertainty about the future economic policy rules of the game. Risk of a snowball effect: One criterion is that a debt increase during a recession will not lead to a situation where fiscal credibility problems become acute. Ex-
The international crisis shows the value of good public finances and low government debt. Sweden’s central government debt is low in a historical and international perspective. It is well below the levels where there is obvious direct damage and risk to the economy. Taking into account the strong net financial position of the Swedish government and the functioning of the money market, there are hardly any reasons to push down the central government debt from a level of 30-35 per cent of GDP. Since Sweden has a high tax burden, internationally speaking, where certain taxes may be strategic for competitiveness, and since infrastructure investments have been neglected for a long time, there are strong arguments for not prioritising further decreases in central government debt.
44 | Nordic Outlook – February 2011
Good 2011 growth due to exports, weak krone
Continued strong exports Domestic demand still a vital force driving GDP growth No increase in key rate spread until 2012
and Norway especially. The sector is also benefiting from favourable currency rate trends, with the Swedish krona and Norwegian krone continuing to appreciate and the euro likely to weaken again in the future. For some years, wages and salaries have grown more in line with those of European competitor countries instead of faster, as previously. As a result, Denmark can now take advantage of currency depreciation in a clearer way.
Denmark’s economic recovery is continuing, and growth is accelerating despite the three-year public budget consolidation that has now begun. Stronger international growth will continue to stimulate exports. We are adjusting our GDP growth forecast upward from 2.2 to 2.6 per cent in 2011 and are also making a slight upward revision to 2.3 per cent in 2012. GDP growth in 2010 was 2.3 per cent, according to preliminary estimates. The upturn was driven by a decent improvement in private consumption and by a sizeable inventory contribution. This year we expect capital spending to provide additional support. Exports will continue to increase at a good pace, and combined with stronger domestic demand this will also push important growth higher. This means that net exports will continue to provide small growth contributions. Forward-looking indicators strengthened late in 2010. Changes in consumer confidence, which is somewhat above its historical average, have been moderate for some time, but the purchasing managers’ index in manufacturing advanced sharply above the 60 level to 62.8. This puts the index close to its historical highs of 65-70. The main reason is strong order bookings.
The Danish krone is weakening
Effective exchange rate, index 100=2005
107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 87.5 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Källa: Reuters EcoWin
107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 87.5
Private consumption grew by an estimated 2 per cent last year. A continued moderate upturn is expected. In 2010, tax cuts helped bolster household income, but in 2011-2013 income will instead be undermined by fiscal austerity. Growing employment and a continued gradual housing market improvement will provide support, however. The inflation rate climbed from 0.5-1.0 per cent in late 2009 to 2.8 per cent in December 2010, but this was largely due to rising energy and food prices as well as base effects. Core inflation trended in the opposite direction during the same period, moving from above 1.5 per cent to just over 1 per cent, though with a weak upward trend more recently. We predict a continued slow upturn in underlying inflation, but HICP inflation will end up at a relatively high 2.4 per cent average for 2011 and then fall towards 2 per cent. Due to fiscal austerity and higher growth, the budget deficit will shrink from about 5 per cent of GDP in 2010 to 2.5 per cent in 2012, faster than the government’s planned 3.5 per cent. Meanwhile the central bank will raise its key interest rate from an extremely low level, shadowing the ECB completely this year but hiking the key rate somewhat faster in 2012. This means that the unusually low 5 basis point spread will be normalised over time towards 20 points.
New orders push manaufacturing PMI upward
Net balance, above 50 positive
80 70 60 50 40 30 20 00 01 02 03 04 05 06 07 08 09 10
80 70 60 50 40 30 20
High order inflow to companies indicates that exports in particular will pick up renewed speed. Other indicators signal that domestic demand is recovering at a leisurely pace. The export sector will gain extra momentum due to the improved growth outlook in Germany, Sweden
Nordic Outlook – February 2011 | 45
Growth in mainland GDP above trend Uncomfortably high household debt Norges Bank hiking slightly faster
in 2010, and should accelerate slightly in 2011. The quarterly growth rate in consumption of goods (half the total) gathered steam in the fourth quarter, building on the marked acceleration of the previous quarter. However, retail sales showed a noticeable pullback in December but the drop should prove temporary. Part of the pullback was due to a weather-related 20 per cent surge in electricity prices from November to December (up 38.3 per cent year-on-year) as measured in the consumer price index. The negative effect on household spending in general should carry over into early 2011 as the heating bill that households received in January was much, much higher. It looks as if consumption will repeat the soft patch of early 2010. At that time, an even sharper spike in electricity prices was instrumental for declining private consumption of goods over the first four months of the year, while the subsequent sharp drop in such prices helped revive consumption. The same is likely to happen this time around as rather strong fundamentals eventually reassert themselves. Our forecast of 3.7 per cent consumption growth in 2011 is above that for real disposable income, implying a lower saving ratio. However, there is a risk that the ratio might decline further, since its 7.5 per cent level in the third quarter of 2010 was well above the 5 per cent long-term average.
The recovery in the Norwegian economy has gathered pace. Nonetheless, overall GDP performed a lot worse than expected; production in the oil sector plunged in the third quarter due to maintenance at a number of fields. Production has snapped back, but overall GDP was broadly unchanged last year. However, excluding oil, gas and shipping, growth in mainland GDP accelerated to 2.5 per cent year-on-year by the third quarter of 2010, and anecdotal evidence suggests continued above-trend broad-based growth. First, consumer confidence and manufacturing sentiment are the highest since 2007 when growth was surging. Second, contacts in Norges Bank’s regional network saw output in late 2010 expanding at the fastest clip in two years and expectations were lifted in the January update on improved prospects for construction and the service industry. Finally, the economic policy mix is favourable: fiscal policy will be broadly neutral for growth in 2011 and key interest rates remain well below “normal” levels.
Mainland GDP and Norges Bank's network
7 6 5 4 3 2 1 0 -1 -2 -3 03 04 05 06 07 08 09 10 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5
Household debt at elevated levels
The high level of household debt is a potential risk in the medium to long term. Very low interest rates have so far not fuelled a credit boom: the year-onyear increase in credit to households accelerated only modestly in 2010 from 6.1 per cent in June to 6.5 per cent at year-end. Nonetheless, credit growth is running ahead of disposable income, which increased 5.6 per cent year-on-year on average for the first three quarters of 2010, implying a further rise in the household debt ratio. The gross debt-to-income ratio steadied at 193 per cent in 2009 after having risen sharply over the previous ten years, and looks set to surpass 200 per cent during the current year. While structural differences and very high public sector savings in the Government Pension Fund Global help explain a higher debt-to-income ratio than among peers, the level looks unsustainably high. Moreover, borrowing by households might show a more marked acceleration, to the extent home prices continue rising.
Mainland GDP, year-on-year percentage change (LHS) Norges Bank regional network output indicator, index (RHS)
Source: Statistics Norway, Norges Bank
Growth in mainland GDP will pick up from 1.9 per cent in 2010 to 3.1 per cent in 2011 and 3.2 per cent in 2012. In addition, overall GDP will be lifted by markedly higher oil sector investment in 2011 and should expand 2.7 per cent but decelerate slightly in 2012.
Private consumption strong but choppy
Stronger private consumption has so far been the main engine of the recovery, rising 3.5 per cent 46 | Nordic Outlook – February 2011
Households' gross debt
Per cent of disposable income
210 200 190 180 170 160 150 140 130 120 110 90 92 94 96 98 00 02 04 06 08 10 12
Norges Bank's forecast
210 200 190 180 170 160 150 140 130 120 110
The strong price surge since mid-2010 is not surprising, since demand is running well ahead of supply. Housing starts bottomed out in mid-2009, but new construction has picked up only modestly and is still running well below the ten-year average and what demographics suggest. At the same time, the supply of existing homes for sale has trended markedly lower and is only slightly higher than in 2006, when the housing market was redhot. Meanwhile, homebuilders reported a sharp jump in sales of new homes in the final quarter of 2010.
Existing home prices and housing starts
30 25 20 15 10 5 0 -5 -10 -15 98 99 00 01 02 03 04 05 06 07 08 09 10 15.0 35.0 30.0 25.0 20.0 40.0
Source: Norges Bank
Home prices are rising sharply
The trend of home prices has changed noticeably. Since their low in late 2008, seasonally adjusted existing home prices have risen every month but two and were up 7.6 per cent in January compared to one year earlier. While the increase was not as rapid as in late 2009, prices were up almost 14 per cent at an annual rate over the six months to January. This level is recordhigh in nominal terms. Moreover, prices are up markedly relative to household disposable income: some 20 per cent above the long-term average.
Existing home prices, year-on-year % change (LHS) Housing starts, 12 month aggregate (RHS)
Source: Statistics Norway, Norwegian Association of Real Estate Agents
Fiscal policy has an expansionary bias
Norway’s fiscal policy is guided by the “fiscal policy rule”, stating that the structural − or cyclical-adjusted − non-oil budget deficit over time shall correspond to the expected 4 per cent real return on the Government Pension Fund Global (GFPG, the sovereign wealth fund). The oil-adjusted deficit surpassed the limit in 2009 and 2010 as the government met the cyclical downturn with a more expansionary fiscal policy, letting automatic stabilisers work as the rule implies. However, “over-spending” was less than assumed in the original budget proposals, due to higher revenue and slower spending growth, which was not caused by active budget measures. In 2011, the structural non-oil budget deficit should be in line with the rule, if not slightly lower. Politicians like to term any reduction relative to the 4 per cent limit as a “sounder” or tighter fiscal policy, but the reality may differ. Hence, while the adjusted non-oil budget deficit was unchanged as a share of the GPFG from 2009 to 2010, fiscal policy actually added to domestic demand. Likewise, the budget proposal for 2011 saw the adjusted deficit declining from 4.7 per cent to 4.2 per cent of the GPFG, but the fiscal policy effect was estimated to be only marginally negative. The GPFG is expected to grow faster than nominal GDP in the next few years, implying that the fiscal
7000 6000 NOK bn (start of year) 5000 4000 3000 2000 1000 0 02
Non-oil budget deficit and GPFG
250 225 200 175 150 125 100 75 50 25 04 06 08 10 12 14 16 18 20 NOK bn
Government Pension Fund (LHS) Structural non-oil budget deficit, current prices (RHS) Structural non-oil budget deficit, 2001 prices (RHS)
Source: Ministry of Finance
policy rule will work in an expansionary direction if the cyclically adjusted non-oil deficit is kept at − or not too far below – 4 per cent of the Fund. Assuming a 5.5 per cent average annual growth rate in mainland GDP (marginally less than the 2000-09 average) and that the GPFG grows as projected by the Ministry of Finance, the fund will increase from almost 150 per cent of mainland GDP in the third quarter of 2010 to about 185 per cent in 2015. In other words, the non-oil budget deficit might increase in both nominal and real terms. This “inhibited” expansionary effect, although not necessarily very strong, puts Norway in quite a different position from the multi-year tightening of fiscal policy going on in much of Europe.
Nordic Outlook – February 2011 | 47
With growing imbalances between supply and demand, and still-low interest rates adding to the upward pressure, the strong rise in existing home prices will eventually fuel an accelerating trend in housing starts. Residential investment started to grow again in early 2010 and should rise 9-10 per cent in both 2011 and 2012.
the year to the fourth quarter of 2010 was surprisingly weak and included declining exports of machinery and transportation equipment in addition to food, while exports of chemical products rose sharply. Real exports of traditional goods should nonetheless have recorded a rather solid 5 per cent growth rate for all of 2010. However, the trajectory is weaker going into 2011, and while momentum should pick up, fullyear growth will likely moderate to 3.5 per cent.
Business investment about to rebound
Norwegian manufacturing output has trended up since mid-2009, and manufacturing confidence in the final quarter of 2010 was at the highest level since early 2007. The indicator is well above its long-term average, suggesting above-trend growth in production as well.
Exports of traditional goods
Year-on-year percentage change
20 15 20 15 10 5 0 -5 -10 -15 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Manufacturing production and sentiment
10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 30 24 18 12 6 0 -6 -12 -18 -24
10 5 0 -5 -10 -15
Exports traditional goods, volume Export prices traditional goods
Source: Statistics Norway
Manufacturing prod, y/y % change, 3 m average (LHS) Manufacturing sentiment, % of labour force, 2Q earlier (RHS)
Source: Statistics Norway
The advance was fuelled by rising order backlog and stronger production expectations (at a four-year high), but was uneven among sectors. Producers of intermediate and consumer goods reported a further acceleration in production and order flow and were the most optimistic about the outlook. Producers of capital goods continued to languish but reported improving domestic orders, a development that should gather steam because oil companies plans a very marked increase in capital spending this year. Capacity utilisation in manufacturing is still below the long-term average. Nonetheless, manufacturers have steadily upped their capital spending expectations, signalling at least stabilisation if not modest growth following a very deep slump. Moreover, investment intentions among Norges Bank’s regional network continued to recover in late 2010. Of particular importance were the almost six-year high capital spending expectations in the private service sector. In all, non-oil business investment should be up 5.5 per cent in 2011 and almost as much in 2012.
While exports have disappointed in volume terms, export prices were up strongly in 2010 as well, rising 8 per cent overall and by more than 6 per cent for traditional goods. With import prices declining slightly, Norway enjoyed improving terms-of-trade, as was the case in five of the previous eight years.
Core inflation to trend moderately higher
The jump in CPI inflation to an eight-month high of 2.8 per cent in December should prove temporary, since it was fuelled by surging electricity prices. For all of 2010, overall inflation accelerated a bit to 2.5 per cent. However, core inflation on the CPI-ATE measure − excluding taxes and energy − slowed from 2.6 per cent in 2009 to 1.4 per cent, almost evenly split between lower domestic inflation and imported inflation turning to disinflation, reflecting the previous appreciation of the NOK.
Core inflation remains at low levels
Year-on-year percentage change
5 4 3 2 1 0 -1 -2 -3 -4 -5 99 00 01 02 03 04 05 06 07 08 09 10 5 4 3 2 1 0 -1 -2 -3 -4 -5
Exports languish while prices rise fast
Merchandise exports excluding oil/gas and ships etc. turned around strongly in mid-2009, but have since disappointed. They declined a bit more than 2 per cent in volume terms from the third to the fourth quarter of 2010, according to foreign trade statistics. The decline was exaggerated by a very sharp drop in exports of food (reflecting problems in fish farming). However, the 2.8 per cent decline in real exports of traditional goods in
CPI-ATE CPI-ATE domestic goods and services CPI-ATE import consumer goods
Source: Statistics Norway, SEB
48 | Nordic Outlook – February 2011
Inflation often lags the economic cycle, but the 1.0 per cent year-on-year rate on the CPI-ATE in the final three months of 2010 should mark the trough. In the near term, core inflation should creep modestly higher, mainly driven by higher food prices. In a slightly longer term, the effect on import prices from previous NOK strength should wane: according to foreign trade statistics, the year-on-year change in prices for imported goods has already turned from sharply negative for most of 2010 to unchanged in the fourth quarter. Rising wages should start adding to inflation in 2012, and by the end of the year, inflation should be broadly in line with Norges Bank’s 2.5 per cent medium-term target.
above-trend growth. Meanwhile, global growth and the outlook are stronger than the bank had assumed. Secondly, core inflation has stopped surprising on the downside relative to Norges Bank’s trajectory: on the bank’s CPIXE measure, which excluded taxes but includes an estimated trend in energy prices, the 1.5 per cent year-on-year rate in December was 0.2 percentage point higher than expected. In addition, home prices are rising faster than Norges Bank had assumed, suggesting a subsequent increase in household debt accumulation. On the downside, the trade-weighted NOK is somewhat stronger than assumed by Norges Bank. To date, the deviation is probably not sufficient to greatly alter its inflation forecast, but any further appreciation will be a concern. However, the price index for imported consumer goods in the foreign trade statistics suggests that the downward trend in imported inflation might be coming to an end. Absent any major changes in the short term, there is a better-than-even chance that Norges Bank will revise its optimal rate path slightly higher in the Monetary Policy Report due March 16. Such a revision probably hinges on inflation numbers. In the medium term, SEB has brought forward the timing of a first hike from ECB while the Swedish Riksbank is expected to hike rates somewhat faster, which should allow Norges Bank to slightly accelerate the normalisation process: hence, we now expect it to hike the deposit rate three times to 2.75 per cent by end-2011 (up from 2.50 per cent previously), and we are sticking to our forecast of five hikes during 2012 to 4.00 per cent.
Norges Bank to hike slightly faster
At its January monetary policy meeting, Norges Bank left the deposit rate unchanged at 2.00 per cent, where it has been since the hike last May. Bringing inflation up to target and stabilising output and employment “imply a low key policy rate”, while a strong krone might dent inflation too much. However, “guarding against the risk of future financial imbalances … suggests that the key policy rate should not be kept low for too long.” The bank did not send any signals that it is considering a departure from the optimal rate path stated in its October Monetary Policy Report, which sees a hike in June or August and another in the autumn, lifting the deposit rate to 2.50 cent by the end of the year. In 2012, the rate path indicates a year-end level of 3.50 per cent. These key interest rates are lower than domestic fundamentals suggest: According to the October MPR, simple policy rules based on actual GDP growth and inflation or the output gap, inflation and the level of interest rates implied that the deposit rate should be ½ percentage point higher in late 2010. However, factoring global interest rates into the equation suggested a deposit rate below the actual level.
Stronger NOK and higher rates
A wider short rate spread vs the ECB over the forecast period will support the NOK and put upside pressure on Norway’s 10-year bond spread vs Germany. Since the recovery started, EUR/NOK has remained above the 7.70 level as Norges Bank has been guarding against a too strong NOK. With imported inflation expected to turn soon the bank could adopt a more relaxed attitude to the krone, which in combination with Norges Bank resuming the rate hike cycle this summer opens up for EUR/NOK breaking below 7.70. In addition, Norway’s outstanding fiscal position will support the already positive flow outlook as we expect continued diversification flows to alternative safe havens. Our fair value model points to 7.40 for EUR/NOK. We target EUR/NOK at 7.60 by the end of 2011 and 7.50 by the end of 2012. Since the previous Nordic Outlook, the 10-year spread vs. Germany has traded within a 55-85 basis-point range. With Norges Bank delivering three hikes this year and the key interest rate spread widening, the spread will move towards the higher end of that range. With the German bond yield expected to continue to rise, we forecast a 10-year yield at 4.30 by the end of 2011 and 4.75 per cent by the end of 2012.
Norges Bank's deposit rate
7 6 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 11 12 7 6 5 4 3 2 1 0
Norges Bank's deposit rate Optimal rate path, MPR 3/10
Source: Norges Bank, SEB
Since then, global and Norwegian interest rate expectations have increased markedly. Moreover, domestic factors have moved to the upside. Firstly, growth in mainland GDP in the year to the third quarter of 2010 was ½ percentage point stronger than Norges Bank assumed, implying an even smaller negative output gap (if any), and reports from the bank’s network suggest continued
Nordic Outlook – February 2011 | 49
Recovery will continue
Exports and domestic demand will gain momentum in 2011 Moderate downturn in unemployment Budget deficits below euro zone ceiling
indicators fell somewhat in late 2010, we believe that consumption will remain comparatively good, with growth of about 2.5 per cent a year in 2011 and 2012. To date, the capital spending upturn has been driven by rising residential investments. Capacity utilisation in manufacturing has also climbed, but it remains below 80 per cent. Production bottlenecks are thus rare, and this will limit capital spending by the manufacturing sector in the near future. Unemployment peaked at around 9 per cent early in 2010. The upturn was milder than might be expected, given the large GDP downturn. This was partly due to temporary measures such as short-term lay-offs, which affected 2 per cent of the labour force at their height. Although the lay-offs were reversed, unemployment fell relatively fast and now stands at around 7.7 per cent. Nearly half the upturn has thus been reversed. Job vacancies are close to pre-crisis levels, indicating a continued decline in unemployment. Measured as yearly averages, unemployment will be 7.3 per cent in 2011 and 6.9 per cent in 2012. The 2008-2009 upturn in unemployment pushed down the rate of pay increases. They fell from an annual average of 4 per cent in 2009 to 2.7 per cent in the first three quarters of 2010. Pay rises will accelerate again in mid-2011 but remain around 3 per cent during our forecast period. During much of 2010, HICP inflation was around 1½ per cent, but by year-end it had risen to 2.8 per cent, among other things driven by food and energy prices. As an annual average, inflation was 1.7 per cent in 2010. We expect it to remain close to 3 per cent for another few months and then fall; annual average inflation will be 2.3 per cent in 2011 and 2.0 per cent in 2012. The budget consolidation of the 1990s led to a decade of public surpluses. This created a favourable situation of relatively low public debt when the crisis broke out. Our assessment is that 2010 will be the worst year, with a budget deficit of 3.2 per cent of GDP. The deficit will then shrink to 2.5 per cent in 2011 and 2.2 per cent in 2012. Public debt as measured by the Maastricht criterion will climb from 34 per cent of GDP in 2008 to more than 50 per cent in 2012, partly as an effect of weak GDP growth during the period as a whole.
Because of strong fundamentals, the Finnish economy has good potential for a strong recovery after its sharp GDP decline during the economic crisis. The labour market has proved resilient, the banking sector emerged relatively unscathed and public sector finances are solid enough to stimulate the economy. However, so far the recovery has not been as strong as might have been expected, given the steep slide in 2009. GDP rose by 3.0 per cent in 2010, but we expect an acceleration to 3.5 per cent this year. In 2012, GDP will again grow by 3.0 per cent. Our forecast is above the consensus. A robust recovery in key Nordic export markets and in Russia, plus a favourable industrial mix, will continue to stimulate exports. The expansive Asian market will also gain in importance. In the third quarter of 2010, exports grew by 10 per cent year-on-year, but they remain well below pre-crisis levels. The strong euro and moderate expansion in production and exports of information and communications technology are two explanations for this, but during the next couple of years Finnish exporters will benefit from the weakening of the euro against the Swedish and Norwegian currencies.
Leading indicators improving
60 40 20 0 -20 -40 -60 -80 04 05 06 07 08 09 10 60 40 20 0 -20 -40 -60 -80
Manufacturing sector Service sector
Source: DG ECFIN
Leading indicators are showing a domestic recovery driven by the service sector. Meanwhile construction sector activity remains relatively weak. Consumer confidence bottomed out in early 2009, and private consumption bounced back relatively early. Although
50 | Nordic Outlook – February 2011
Yearly change in per cent 2009 level, DKK bn 1,660 817 492 312 784 727 2009 -5.3 -4.3 3.1 -15.4 -2.4 -9.7 -12.1 3.6 1.1 3.1 4.2 3.6 41.4 Jun 11 1.05 3.55 15 5.32 7.45 Sep 11 1.30 3.65 15 5.14 7.45 2010 2.3 1.9 1.2 -3.0 1.0 7.0 5.5 4.2 2.2 2.3 4.5 -5.1 44.0 Dec 11 1.55 3.75 15 5.32 7.45 2011 2.6 2.3 0.0 4.0 0.0 6.6 5.7 3.7 2.4 2.1 4.3 -3.5 46.0 Jun 12 2.10 3.95 15 5.44 7.45 2012 2.3 2.5 0.5 5.5 0.0 5.5 6.2 3.5 2.1 3.0 4.0 -2.5 46.0 Dec 12 2.65 4.20 20 5.73 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 Deposit rate 10-year bond yield 10-year spread to Germany, bp USD/DKK EUR/DKK
Feb 3 1.05 3.25 3 5.47 7.45
Yearly change in per cent 2009 level, NOK bn Gross domestic product 2,256 Gross domestic product (Mainland Norway) 1,732 Private consumption 956 Public consumption 487 Gross fixed investment 476 Stockbuilding (change as % of GDP) Exports 1,008 Imports 638 Unemployment (%) Consumer prices CPI-ATE Wage cost 2009 -1.4 -1.3 0.2 4.7 -7.4 -2.6 -4.0 -11.4 3.2 2.1 2.6 4.5 2010 0.1 1.9 3.5 3.0 -9.2 2.9 -1.7 8.1 3.6 2.5 1.4 3.6 2011 2.7 3.1 3.7 2.2 5.9 0.0 1.4 3.6 3.5 1.6 1.6 3.8 2012 2.5 3.2 3.5 2.0 5.3 0.0 2.0 4.5 3.4 2.2 2.1 4.1
FINANCIAL FORECASTS Deposit rate 10-year bond yield 10-year spread to Germany, bp USD/NOK EUR/NOK
Feb 3 2.00 3.81 60 5.73 7.82
Jun 11 2.25 4.05 65 5.50 7.70
Sep 11 2.50 4.20 70 5.31 7.70
Dec 11 2.75 4.30 70 5.43 7.60
Jun 12 3.25 4.55 75 5.47 7.50
Dec 12 4.00 4.75 75 5.77 7.50
Nordic Outlook – February 2011 | 51
Nordic key economic data
Yearly change in per cent 2009 level, SEK bn Gross domestic product 3,089 Gross domestic product, working day adjusted Private consumption 1,527 Public consumption 858 Gross fixed investment 550 Stockbuilding (change as % of GDP) Exports 1,495 Imports 1,294 Unemployment, (%) 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 Feb 3 1.25 2.10 3.44 22 6.47 8.82 120.3 Jun 11 1.75 2.15 3.70 30 6.21 8.70 117.4 2009 -5.3 -5.2 -0.4 1.7 -16.3 -1.4 -13.4 -13.7 8.3 -2.1 -19.4 -0.3 1.9 3.4 12.9 1.5 3.2 7.2 176 -1.0 41.9 Sep 11 2.25 2.65 3.85 35 5.93 8.60 115.4 2010 5.7 5.4 3.5 1.7 5.5 0.7 11.4 12.7 8.4 1.0 10.2 1.3 2.1 2.0 10.6 0.9 2.5 6.5 1 0.2 37.6 Dec 11 2.75 3.15 4.00 40 6.07 8.50 115.0 2011 4.7 4.7 3.3 0.9 10.5 0.2 8.9 8.5 7.3 2.1 9.0 2.7 1.7 2.3 10.1 2.7 2.8 6.0 -39 0.7 33.5 Jun 12 3.25 3.65 4.25 45 6.13 8.40 114.4 2012 2.6 3.0 2.5 0.9 4.0 0.2 5.4 5.3 6.6 1.1 4.0 2.4 1.5 3.9 10.3 2.8 2.9 6.0 -48 1.0 30.8 Dec 12 3.75 4.15 4.50 50 6.46 8.40 115.8
Yearly change in per cent 2009 level, EUR bn 171 94 43 33 64 60 2009 -8.1 -1.9 1.2 -14.5 0.9 -20.5 -18.1 8.2 1.6 4.0 2.7 -2.5 43.8 2010 3.0 2.1 0.2 1.5 0.2 6.5 4.3 8.3 1.7 2.8 2.5 -3.2 47.1 2011 3.5 2.4 0.2 5.1 0.1 7.4 6.0 7.3 2.3 2.4 2.6 -2.5 49.7 2012 3.0 2.4 0.3 5.9 0.0 6.4 6.2 6.9 2.0 2.9 2.5 -2.2 51.9
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
52 | Nordic Outlook – February 2011
International key economic data
Yearly change in per cent 2009 level, EUR bn 8,979 5,170 1,975 1,773 3,259 3,140 2009 -4.0 -1.0 2.4 -11.3 -0.7 -13.1 -11.8 9.5 0.3 9.6 2010 1.7 0.7 0.8 -0.6 1.3 9.8 10.1 10.0 1.6 9.5 2011 1.9 0.8 0.8 4.2 0.2 6.1 5.6 9.8 2.0 9.3 2012 1.8 1.1 1.1 4.1 0.0 5.3 5.0 9.5 1.4 9.0
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 14,277 10,132 2,934 1,638 1,690 2,116 2009 -2.6 -1.2 1.6 -18.4 -0.6 -9.5 -13.8 9.3 -0.3 5.9 2010 2.9 1.8 1.1 3.8 1.3 11.7 12.6 9.6 1.7 5.8 2011 3.6 3.2 0.4 10.3 -0.4 10.1 5.3 8.8 1.5 5.6 2012 4.0 3.0 0.0 14.5 0.0 11.3 10.1 8.0 1.6 5.8
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 percent 2009 GDP United Kingdom Japan Germany France Italy Inflation United Kingdom Japan Germany France Italy Unemployment (%) United Kingdom Japan Germany France Italy -4.9 -6.3 -4.7 -2.5 -5.1 2010 1.4 4.0 3.6 1.6 1.1 2011 1.5 1.6 3.1 1.7 1.3 2012 2.5 1.6 2.5 1.5 1.5
2.2 -1.3 0.2 0.1 0.8
3.3 -0.7 1.2 1.7 1.6
3.7 0.2 1.8 1.8 1.7
2.4 0.4 1.4 1.5 1.4
7.7 5.1 7.5 9.5 7.8
8.0 5.1 6.9 9.7 8.5
7.8 5.1 6.4 9.6 8.3
7.4 4.9 6.1 9.4 8.2
Nordic Outlook – February 2011 | 53
International key economic data
2009 GDP, yearly change in per cent Estonia Latvia Lithuania Poland Russia Ukraine Inflation, yearly change in per cent Estonia Latvia Lithuania Poland Russia Ukraine -13.9 -18.0 -14.7 1.7 -7.9 -15.1 2010 2.7 0.0 1.3 3.8 4.0 4.5 2011 4.5 4.0 4.0 4.5 4.6 4.6 2012 4.5 5.0 4.5 4.8 5.0 4.4
0.2 3.3 4.2 3.5 11.7 15.9
2.8 -1.2 1.2 2.7 6.9 9.4
4.0 2.5 3.5 3.3 8.9 10.3
5.0 2.4 4.0 3.0 7.6 9.6
Feb 3 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 11 0.25 0.10 1.00 0.50 Sep 11 0.25 0.10 1.25 0.50 Dec 11 0.25 0.10 1.50 0.75 Jun 12 0.75 0.10 2.00 1.25 Dec 12 1.75 0.50 2.50 2.00
10 years 10 years 10 years 10 years
3.55 1.24 3.21 3.78
3.70 1.30 3.40 4.00
3.85 1.40 3.50 4.15
4.00 1.50 3.60 4.30
4.10 1.70 3.80 4.40
4.30 2.00 4.00 4.60
82 1.36 111 1.61 0.84
86 1.40 120 1.61 0.87
87 1.45 126 1.69 0.86
90 1.40 126 1.67 0.84
94 1.37 129 1.69 0.81
98 1.30 127 1.67 0.78
GLOBAL KEY INDICATORS
Yearly percentage change GDP OECD GDP world CPI OECD Export market OECD Oil price, Brent (USD/barrel) 2009 -3.5 -0,6 0,1 -11.4 61.9 2010 2.7 5.0 1.5 11.1 79.8 2011 2.8 4.5 1.5 9.9 90.0 2012 2.8 4.6 1.4 7.7 90.0
54 | Nordic Outlook – February 2011
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SEB is a leading Nordic financial services group. As a relationship bank, SEB in Sweden and the Baltic countries offers financial advice and a wide range of financial services. In Denmark, Finland, Norway and Germany the bank’s operations have a strong focus on corporate and investment banking based on a full-service offering to corporate and institutional clients. The international nature of SEB’s business is reflected in its presence in 20 countries worldwide. On 31 December 2010, the Group’s total assets amounted to SEK 2,180bn while its assets under management totalled SEK 1,399bn. The Group has about 17,000 employees, excluding the German retail operations. Read more about SEB at www.sebgroup.com. With capital, knowledge and experience, we generate value for our customers − a task in which our research activities are highly beneficial. Macroeconomic assessments are provided by our Economic Research unit. Based on current conditions, official policies and the long-term performance of the financial market, the Bank presents its views on the economic situation − locally, regionally and globally. One of the key publications from the Economic Research unit is the quarterly Nordic Outlook, which presents analyses covering the economic situation in the world as well as Europe and Sweden. Another publication is Eastern European Outlook, which deals with the Baltics, Poland, Russia and Ukraine and appears twice a year.