24 Nov 2010 10:04

Nordic Outlook: Somewhat brighter growth outlook, but increasingly serious policy challenges

The global recovery is continuing but remains a bit unsteady. On the one hand, this autumn's economic indicators for the United States, Germany and elsewhere have been hopeful. This has lowered the probability of a new recession. On the other hand, the main problems are still unsolved: global imbalances persist, debt reduction will need to continue, and the solvency of governments must be secured. The expected second wave of the sovereign debt crisis has struck the euro zone. We expect a third wave, probably in a couple of months. It will test the political sustainability of already approved and upcoming austerity measures, as well as the vulnerability of Spain. Given the general direction of fiscal policy starting in 2011, it will no longer serve as a positive growth force. This makes continued highly expansionary monetary policy necessary for as long as the recovery is not completely ensured. The Group of Twenty (G20) countries are having obvious problems working together, thereby jeopardising the recovery. In the long term, everyone will be the loser in a currency war.

In the OECD countries, overall GDP growth will end up at 2.3 per cent in 2011 and 2.5 per cent in 2012. We have thus revised our August forecast upward by a few tenths. But the existing imbalances are distributing growth and unemployment unevenly across the world. Different countries need different solutions, and given today's globalised economies, this creates political tensions. The US Federal Reserve (Fed) and the European Central Bank (ECB) will keep their key interest rates unchanged at extremely low levels for another 15-18 months, which is being made possible by continued low inflation. High energy and food prices will only have a transitory impact on inflation. Monetary stimulus, for example the Fed's current quantitative easing programme, can be reversed when the money supply shows normal growth.

Debt reduction in the euro zone will continue to create increased economic divergence and political tensions. Overall GDP growth will total 1.7 per cent in 2011 and 1.5 per cent in 2012. Germany's growth will reach 2.5 per cent in 2011 but will slow down to just below 2 per cent in 2012. A number of euro zone countries need further belt-tightening programmes. We anticipate that Portugal will also be forced to seek financial aid from the European Union (EU) and the International Monetary Fund (IMF). Spain's central government debt is relatively low, but as a whole the country is one of the most indebted in the Western world, with a net external debt of about 100 per cent of GDP. Major economic and political sacrifices will be required if Spain is to restore its competitiveness and regain balance. The question of whether Greece and Ireland, in particular, are still solvent remains unanswered.

In the US, the economy recovery is moving ahead slowly, but there are several threats to growth: the labour and housing markets are disturbingly weak, small and medium-sized companies are still feeling a strong headwind, and the Congressional election on November 2 has increased the risk of political deadlock. Deflationary forces persist. The responsibility for stimulating the economy rests with the Federal Reserve, which is pursuing a low interest rate policy to help ensure growth. The door is not closed to further fiscal pump-priming, but this autumn's election has weakened the ability of Congress to reach decisions. Criticism both at home and from other countries, and smaller effects on interest rates than desired, will persuade the Fed to abstain from further quantitative easing. 

In Asia, growth is now slowing - entirely as planned, and as a result of the economic policy tightening that various countries are now implementing. China's growth will fall towards about 8 per cent in 2012, reducing the risk of asset bubbles. Upturns in home prices are being cooled off in a controlled way. China possesses the tools to both decelerate and - via fiscal policy - stimulate the economy if growth should slow to an undesired extent.

Global economic cooperation is not fully functional. Although there has been progress with regard to new banking regulations, the allocation of power in the IMF and economic policy coordination, there is disagreement about how countries should apportion responsibility for the prevailing global problems in a fair way. This endangers the recovery and risks leading to protectionism. Today's top-priority issues are new tools for managing systemic financial risks and a framework for a new international monetary system.

We are sticking to our positive forecast about the Swedish economy. GDP will grow by 5 per cent in 2010 (4.7 in our August forecast) and then by 3.5 (2.9) per cent in 2011 and 2.5 (2.3) per cent in 2012. Falling interest rates, lower taxes and the absence of falling home prices - plus a rapid upturn in exports thanks to a favourable sectoral structure and a previously weak krona - have given exports an extra push. Unemployment will drop to 7.1 per cent by 2012. Sweden's central government finances will strengthen, and sovereign debt will fall to 30 per cent of GDP in 2012. We expect the recently re-elected Swedish government to pursue a neutral, caretaker-like and cautious fiscal policy during the next couple of years. Towards the end of its four-year term, the government is likely to switch to a more aggressive policy direction, focusing on such matters as corporate taxation and social welfare. Two main risks confront the Swedish economy: exports within Europe and household debt.

The limits of Swedish economic policy will increasingly be determined by international problems and the need for global rebalancing and debt reduction during the next few years. A low Swedish inflation rate and low interest rates in other countries are holding back the Riksbank's key rate hikes, among other things due to changes in the value of the krona. Our conclusion, however, is that the Swedish economy can cope with a further appreciation of the krona. But this situation raises the question of how the balance between monetary and fiscal policy should be optimised. A more expansionary, structurally oriented fiscal policy offset by a tighter monetary policy may counter the emergence of an excessive savings surplus and should decelerate credit growth. Although public discourse both internationally and in Sweden is beginning to deal with new tools for countering financial imbalances, the process seems to be moving too slowly to ease the pressure on the Riksbank's interest rate policy.

The outlook is also generally positive in the other Nordic countries and the Baltic countries, with GDP growth close to trend. These regions are benefiting from strong fundamentals - central government finances and external balance - and an export structure that is taking advantage of global recovery. Norwegian and Danish GDP growth will end up around 2 per cent annually in 2011-2012, and in Finland the economic growth rate will be more than 2.5 per cent. In the Baltics, gradual export-led recovery is continuing after a period of extreme downturn, but also following a successful internal devaluation policy. The domestic economy is also cautiously beginning to thaw, but unemployment will remain high and the unwinding of private debt will continue while capital spending languishes. Growth in Estonia, Latvia and Lithuania will end up at around 4.5-5 per cent annually. Latvia will also continue its fiscal belt-tightening in 2011. The euro will become the currency of Estonia in 2011 and that of Latvia and Lithuania by 2014.  

Key figures: International and Swedish economy 

International economy. GDP, year-on- year changes, %2009201020112012
United States -2.6 2.7 2.2 3.4
Euro zone -4.0 1.6 1.7 1.5
Japan -5.3 3.1 1.6 1.5
OECD -3.3 2.5 2.3 2.5
China 8.7 10.2 9.0 8.0
Nordic countries -4.5 2.7 2.8 2.4
Baltic countries -15.6 0.9 4.0 4.5
The world (purchasing power parities, PPP) -0.6 4.7 4.1 4.5
Swedish economy. Year-on-year changes, %2009201020112012
GDP, working day corrected -5.0 4.7 3.5 2.9
GDP, actual -5.1 5.0 3.5 2.5
Unemployment, % (EU definition) 8.3 8.4 7.5 7.1
Consumer Price Index (CPI) inflation -0.3 1.2 1.8 2.1
Government net lending (% of GDP) -1.2 -0.5 0.1 0.8
Repo rate (December) 0.25 1.25 2.25 3.00
Exchange rate, EUR/SEK (December) 10.24 9.15 8.75 8.60


For further information, please contact
Robert Bergqvist, +46 70 445 1404
Håkan Frisén, +46 70 763 8067
Daniel Bergvall, +46  8 763 8594
Mattias Bruér, +46 8 763 8506

Olle Holmgren, +46 8 763 8079
Mikael Johansson, +46 8 763 8093
Andreas Johnson, +46 8 763 8032
Tomas Lindström, +46 8 763 8028


Press contakt
Elisabeth Lennhede,  Press & PR
+46 70 7639916

Ola Kallemur, Group Press Officer
+46-8-763 9947, +46-76-397 5466

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 other 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 September 30, 2010, the Group's total assets amounted to SEK 2,254 billion while its assets under management totalled SEK 1,343 billion. The Group has about 17,000 employees, excluding its retail banking operations in Germany. Read more about SEB at www.sebgroup.com.