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New Nordic Outlook: Credit market turmoil slows growth and softens central banks

Due to the problems in the American housing sector, the US slump will be relatively protracted. GDP growth will reach only about 2 per cent both this year and next, or clearly below trend. The home mortgage loan crisis will help persuade the Federal Reserve to shift its focus from lingering inflationary risks to greater uncertainty about growth. Its interest rate cuts will begin in September and the federal funds rate will reach 4.0 per cent by mid-2008.
Europe and Asia are also affected by global credit market turmoil. We expect the negative growth effect of financial market woes and lower American demand to total ¼ percentage point in Western Europe. Strong capital spending and robust labour markets will be important counterforces. Euro zone GDP will grow above trend both this year and in 2008. The European Central Bank will raise its refi rate to 4.25 per cent, but an ever-stronger euro makes further rate hikes unlikely. Within a year the euro will strengthen to USD 1.44. US bond yields will slowly move downward in the coming year as the Fed cuts interest rates, while the movement of German long-term yields will be small once the ECB's key rate levels off. 
The Swedish economy will grow by 3.6 per cent this year and 3 per cent in 2008. Export growth is slowing a bit due to somewhat weaker international economic conditions, but the strength of the domestic economy will persist. High capacity utilisation is driving capital spending, while sharply higher purchasing power and a strong labour market will boost consumption. Employment will continue upward. This year, job creation will reach 100,000 and next year 60,000. Unemployment will fall further and labour shortages will intensify. Cost pressures will rise as pay increases accelerate and productivity growth slows. Underlying inflation will thus rise, exceeding 2 per cent by the end of 2008.
Financial market turmoil and greater international uncertainty make the Riksbank's deliberations more difficult, but these factors are not enough to prevent the central bank from continuing its normalisation of the repo rate in a situation of rising resource utilisation and higher cost pressure. The Riksbank will thus continue to raise its repo rate to 4.0 per cent by year-end; it will peak at 4.5 per cent in mid-2008. Continued rate hikes in Sweden while the Fed is cutting its key rate and the ECB stops at 4.25 per cent will help strengthen the krona, which will appreciate to SEK 8.85 per euro and SEK 6.30 per dollar by the end of 2008.
Swedish public sector finances continue to improve at a rapid pace, far exceeding the official surplus target of 1 per cent of GDP. Pressure for further tax cuts and/or higher expenditures is thus likely to increase, and fiscal policy will become gradually more expansive the closer we get to the 2010 election.
Key indicators for Sweden 
Yearly change in per cent     

GDP, working day adjusted
Unemployment (%)
UND1X inflation
Public sector financial balance, % of GDP
Repo rate (dec)
Exchange rate, EUR/SEK (dec)
SEB is a North European financial group serving some 400,000 corporate customers and institutions and five million private customers. SEB has a local presence in the Nordic and Baltic countries, Germany, Poland,
the Ukraine and Russia, and a global presence through its international network in another ten countries.
On 30 June 2007, the Group's total assets amounted to SEK 2,188bn while its assets under management totalled SEK 1,403bn. The Group has about 20,000 employees. Read more about SEB at ww.sebgroup.com.
For further information, please contact:
Robert Bergqvist +46-8-506 23016
Håkan Frisén +46-8-763 80 67
Mikael Johansson +46-08-763 80 93
Tomas Lindström +46-8-763 82 97
Bo Enegren +46-8-763 85 94