12 May 2009 10:00

Nordic Outlook: Stabilisation within sight but a long way to go

In Sweden, the economy will shrink by 5 per cent this year and be unchanged in 2010. Unemployment will rise to 12 per cent, and the government budget deficit will reach 6 per cent of GDP. We expect the autumn budget to take a further step in an expansive direction. And the Riksbank may keep its key interest rate close to zero both this year and next, SEB's economists write in their latest analysis of the economic situation in the world and in Sweden. 
"The situation looks a little brighter than three months ago, but the way forward will be difficult and challenging for businesses and households. Recent hopes of a quick turnaround - visible in share prices, for example - thus feel exaggerated. It is too early to breathe easy," says SEB's Chief Economist, Robert Bergqvist.
"The credit crisis has eased its grip on the world, but the situation is far from satisfactory," Bergqvist continues. "These problems will hamper growth for another couple of years. The credit market will continue its adjustment to an equilibrium consistent with the size of the underlying economy as well as new risk environments and regulations," Bergqvist says.
Public debt in the OECD countries can be expected to rise by about 25 percentage points to 100 per cent of GDP during the years 2008-2010 as an effect of active policy decisions and the weaker economy. More and more central banks are implementing quantitative easing by purchasing government securities and credit instruments. In a rather short time, economic policy has changed dramatically. 
"We view the risk of deflation as greater than the risk of inflation, despite enormous supportive interventions by public authorities in the economy and the banking system," says Håkan Frisén, head of SEB Economic Research. "The downward pressure on prices due to an increasing quantity of idle production capacity and global competition should not be underestimated. Only once credit flows have normalised and resource utilisation has reached more normal levels will it be time to shift economic policies," Frisén believes.
The global crisis is hitting export-dependent countries like Germany and Japan extra hard. Europe is being squeezed by the German downturn, imbalances in housing markets and large financial exposure to Central and Eastern Europe. Euro zone budget deficits will move from 2 per cent of overall GDP in 2008 to 7 per cent in 2010, among other things in response to rapidly rising unemployment.
"The euro zone, too, is grappling with a rapidly rising quantity of idle resources, which is pushing down core inflation," says SEB economist Tomas Lindström, who specialises in Europe. "In purely theoretical terms, the European Central Bank could have a key interest rate of -1 per cent. This actually only confirms the need for unconventional monetary policy," Lindström says.
The downturn in the American economy looks set to be somewhat milder; economic policy countermeasures were implemented relatively early. The United States is also a more closed economy that is somewhat less severely affected by the global export collapse. Yet it will take some time before the US takes off in earnest: 
"American households can hardly propel the US economy forward in the same way as before," says SEB economist Mattias Bruér, who specialises in the US. "Most household debt adjustment still lies ahead of us. We expect households to boost their savings, especially as unemployment climbs to a new record level of more than 11 per cent. The stress tests on American banks had a positive outcome, but the US economy and financial system are not out of the woods yet," Bruér says.
To date, Sweden has been hard hit by the global downturn. A large, cyclical export sector has proved more important than strong fundamentals. The downturn is now spreading from industry to domestic portions of the economy. In particular, there is increasing pressure for cost savings in the local government sector if it is to meet its balanced budget requirement. Because of high unemployment, wage and salary increases will be at record lows and CPI inflation will end up close to zero, thus validating the reasoning behind the Riksbank's zero interest rate policy.
"The situation in the Swedish economy looks difficult for the next couple of years, but eventually exports may benefit from the weak krona, at the same time as there is more room for fiscal stimulus. We are sticking to our earlier assessment that the government's fiscal stimulus in 2010 will be SEK 45 billion, which means that the autumn budget may include new measures totalling about SEK 20-25 billion," Håkan Frisén believes.
Key figures: International and Swedish economy 
International economy. Year-on-year percentage change
GDP, United States
GDP, euro zone
GDP, Japan
GDP, China
GDP, OECD countries
GDP, the world (purchasing power parities, PPP)
Swedish economy. Year-on-year percentage change
GDP, working day adjusted
GDP, actual
Unemployment (%, ILO definition)
CPI inflation
Public financial saving (% 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 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 leading financial centres. On March 31, 2009, the Group's total assets amounted to SEK 2,460 billion and its assets under management totalled SEK 1,187 billion. The SEB Group has about 21,000 employees. Read more about SEB at www.sebgroup.com.
For further information, please contact:
Robert Bergqvist, telephone +46 8 506 230 16
Håkan Frisén, +46 8 763 80 67
Mikael Johansson, +46 8 763 80 93
Mattias Bruer, +46 8 763 85 06
Bo Enegren, +46 8 763 85 94
Tomas Lindström, +46 8 763 80 28
Elisabeth Lennhede, Press and PR, +46 70 763 99 16, elisabeth.lennhede@seb.se