01 Sep 2009 09:00

Nordic Outlook: It will soon be time to phase out "monetary insurance"

Sweden's Riksbank is no exception. It will raise its repo rate to 2 per cent late in 2010 and to 3 per cent during 2011. This implies that monetary policy will still remain expansive. Swedish GDP growth will reach 1.7 per cent in 2010 and 2.6 per cent in 2011; inflation will be kept down by low resource utilisation and historically low pay increases; unemployment will climb to 11 per cent during 2010, then decline slowly. The government will add another SEK 25 billion in fiscal stimulus in its autumn budget. The budget will be expansive in 2011 as well, regardless of whether the non-socialist Alliance stays in power or a left-leaning government takes over after the September 2010 election. The public opinion situation adds extra uncertainty about the formation of a new government and thus about the economic policy climate after 2010, SEB's economists write in the latest issue of Nordic Outlook.
"The prospects for economic growth have clearly improved, compared to the severe crisis situation this past winter. Greater stability will lay the groundwork for decent growth," says Robert Bergqvist, Chief Economist at SEB. "Inventory build-up and short-term stimulus measures will lead to a positive rebound in economic growth in the next six months. Uncertainty about household consumption and corporate capital spending create doubts about the strength and sustainability of this growth," Mr Bergqvist says.
"The global banking system needs more time to normalise and consolidate," he continues. "Credit supply is now functioning satisfactorily with the help of the securities market, but the system seems to be relying on hopes of a long-lasting government presence and on the central banks as holders of credit risk. This means that risk-taking is being incorrectly priced, thereby increasing the hazards of inefficient credit allocation and new imbalances. It is a challenge to central banks and will accelerate their interest rate hikes," Mr Bergqvist concludes.
The way that economists have viewed inflation has varied over the past year - from an oil price shock and fears of inflation in the summer of 2008 to deflation worries during the winter and subsequent concerns that inflation would be triggered by expansive monetary policies. These changes have led to large movements in the fixed income market.
"Resource utilisation remains low, and unemployment is high. Global wage and salary growth is falling significantly, which will help keep inflation low in 2010 and 2011," says Håkan Frisén, SEB's Head of Economic Research and editor in chief of Nordic Outlook. "Cyclical forces will improve productivity, leading to lower cost pressure for companies and enabling households to maintain their purchasing power. We believe that interest rates will behave more calmly in the coming months, with long-term yields continuing upward a bit and then falling somewhat in 2010," Mr Frisén says.
The American consumer has faced tough challenges in recent years. Short-term federal stimulus measures have been enacted. As a result the US economy has stopped declining, and economic growth is improving.
"We expect a rebound in US growth during the second half of 2009 with the help of inventory effects, targeted measures aimed at boosting consumption such as the 'cash for clunkers' auto rebates and subsidies to young first-time buyers in the real estate market," says Mattias Bruér, US analyst at SEB Economic Research. "Our analysis of historical turning points shows that households play a pivotal role in economic recovery. This time around, there is very great uncertainty. Households have begun saving money and are expected to boost their savings ratio another couple of percentage points as a consequence of earlier home price declines and the continued rise in unemployment. This clouds the future economic outlook," Mr Bruér says.
The German economy will play a key role for the economic recovery in Europe.
"Germany was exceptionally hard hit by the industrial downturn last winter," says Tomas Lindström, euro zone analyst at SEB Economic Research. "But today we can see some bright spots, and the rebound may be stronger than in many other countries once the recovery takes off. Meanwhile there are euro zone countries that are still severely affected by the financial and housing crisis. This shows what a difficult situation the European Central Bank is in when it comes to choosing the right time to begin its rate-hiking cycle," Mr Lindström says.
The outlook for the Swedish economy has improved.
"Sweden has a good starting position. The manufacturing sector may benefit from the international upturn and a weak krona, while the central government and the private sector have strong balance sheets," says Håkan Frisén. "Swedish mortgage interest rates are very low in international terms, which may explain why home prices in Sweden have not fallen as in other countries. Today many households have floating-rate loans, which make the Riksbank's interest rate weapon extra powerful. On the other hand, this also implies risks that we will experience negative effects in the housing market at a later stage than other countries, as interest rate hikes begin." 
Key figures: International and Swedish economy
International economy. GDP, year-on-year change, %
United States
Euro zone
OECD countries
Baltic countries
The world
Swedish economy. Year-on-year changes, %
GDP, working day adjusted
BNP, actual
Unemployment, % (EU definition)
Consumer Price Index (CPI) inflation
Public sector financial balance, % of GDP
Repo rate (December)
Exchange rate, EUR/SEK (December)

SEB is a Northern European financial group serving some 400,000 corporate customers and institutions and five million private individuals. SEB offers universal banking services in Sweden, Germany and the three Baltic countries - Estonia, Latvia and Lithuania. It also has a local presence in the other Nordic countries, Poland, Ukraine and Russia and a global presence through its international network in another ten countries. On June 30, 2009, the Group's total assets amounted to SEK 2,374 billion and its assets under management totalled SEK 1,267 billion. The SEB Group has about 20,500 employees. Read more about SEB at www.sebgroup.com.
For further information, please contact:
Robert Bergqvist, +46 70 445 1404
Mattias Bruér, +46 8 763 8506
Håkan Frisén, +46 70 763 8067
Mikael Johansson, +46 8 763 8093
Tomas Lindström, +46 8 763 8028
Olle Holmgren, +46 8 763 8079
Elisabeth Lennhede, Press & PR, +46 70 763 99 16, elisabeth.lennhede@seb.se