17 May 2011 10:29

Nordic Outlook: Continued global recovery despite new wave of European debt crisis

The global recovery will continue, helped by the underlying power of the emerging market economies, low interest rates in the Western world and optimistic, profitable companies. Cautious economic policy tightening in emerging market economies will lay the groundwork for a soft landing, while in the OECD countries the recovery has become sufficiently self-sustaining to withstand the challenges created by the disaster in Japan, unrest in the Middle East/North Africa and high prices for energy and other commodities. GDP growth in the OECD countries will reach 2.4 per cent this year and 3.1 per cent in 2012: a slight downward revision of our previous forecast for this year, but an upgrading of the growth prospects for 2012. Due to falling commodity prices and low cost pressure, inflation will fall next year despite rising resource utilisation and will reach normal levels in such countries as Germany, Sweden and Norway.


Although the recovery is progressing, it is following the pattern from the aftermath of previous financial crises. The pace of the upturn is relatively slow, and reversals easily occur when the economic and financial immune system is weak. Sovereign debts that are growing above 100 per cent of GDP in the Western world imply future risks. Global imbalances are also showing worrisome signs of beginning to grow again, in the shadow of a G20 that appears to be losing its crisis-driven reform momentum under the French chairmanship. 


The European debt crisis has changed shape, from acute liquidity crises and rapid emergency responses to a focus on the sustainable payment capacity of countries and the long-term objectives of the European project. The expected third wave of the crisis has thus washed over the euro zone. This is occurring at the same time as economic divergences are widening in the euro zone and the German economy is gaining further ground, with unemployment falling below 5.5 per cent. However, this does not help Greece, which has now reached a situation where we believe that the level of sovereign debt and the country's external position will make a debt restructuring in 2012 unavoidable. In our assessment, Greek sovereign debt will be written down by 50 per cent (slightly less than market value) for the portion held by the private sector and the European Central Bank (ECB), among others. New Greek bonds will then be guaranteed collectively by the other euro zone countries, which means that Europe will have created its own "Brady bonds". A new emergency loan to Greece will include recapitalisation funds for Greek banks. After the restructuring, which will also include privatisation of state-owned property, public sector debt in Greece will fall from about 150 per cent of GDP today to 80 per cent. We believe that the direct economic impact of Greece's debt write-down will be manageable and that the restructuring can be managed within the framework of existing emergency mechanisms. Yet there will be major strains and risks, and the political consequences - especially related to secondary effects on Portugal and Ireland - are difficult to assess. It is increasingly obvious that there is a widening gap between the voters and their representatives about how the euro zone crisis can be resolved in the long term.  


We are adhering to a relaxed view of inflation. We expect inflation to decline around the end of 2011 when the commodity effect fades. Underlying price pressure remains relatively weak. While resource utilisation in Europe is showing large variations, it is still very low in the United States. Because of earlier monetary expansion, inflation expectations will be especially important for central banks to monitor. We believe these expectations will remain stable, however, allowing central banks to proceed relatively cautiously, normalising their key interest rates step by step. The ECB will hike its key interest rate two more times this year and four times in 2012; its refi rate will stand at 1.75 per cent in December 2011 and 2.75 per cent in December 2012. The US Federal Reserve will leave its key rate unchanged until early 2012. When the Fed ends its quantitative easing (QE2) programme in June, we do not expect this to have any lasting impact on the interest rate or liquidity situation.


The US economy is benefiting from an improved labour market and expansive capital spending. We thus expect the deceleration of early 2011 to be temporary. We also believe that US fiscal policy is in the process of shifting towards a more responsible direction after the increased focus of recent weeks on the sustainability of federal finances. Congress will take advantage of the opportunities created by heightened crisis awareness to produce a plan, supported by legislation, that will slow the increase in federal debt. Failure to do so might have major consequences for the interest rate and foreign exchange markets late in 2011 and next year. 


The Swedish economy is decelerating, but from high growth levels. GDP will increase by 4.7 per cent in 2011 and 2.6 per cent in 2012 (3.0 per cent corrected for working days in 2012). The export sector is continuing to show its strength and is coping well with the pressure of a stronger krona. The effects of higher interest rates are beginning to be noticeable in the form of slowdowns in both credit growth and home prices. The expansion in retail sales has also cooled, but we believe there will be continued fairly strong growth in consumption over the next couple of years. We expect a decline in registered unemployment to 6 per cent by the end of 2012: a level that is probably somewhat below equilibrium. Available indicators, such as labour shortages and the relationship between unemployment and job vacancies, hardly supports the belief that the equilibrium unemployment level has recently declined clearly. 


Given an increasingly strained resource situation, Sweden's Riksbank will continue to normalise its key interest rate. Rising underlying inflation pressure towards the end of 2012 and inflation expectations above 2 per cent in a two- and five-year perspective also make continued key rate normalisation likely. We expect the Riksbank to raise its repo rate at every monetary policy meeting during 2011, bringing it to 2.75 per cent by year-end and 3.75 per cent by the end of 2012. A widening of short-term interest rate spreads will cause the krona to appreciate to 8.50 per euro. Swedish government finances are continuing to improve faster than expected. Together with low sovereign debt, this will allow room for further fiscal stimulus measures. We expect proposals equivalent to another SEK 5-10 million to be unveiled in the September budget bill, bringing the year's dose of fiscal stimulus initiatives to nearly 1 per cent of GDP. The change in the policy mix towards more expansionary fiscal policy and tighter monetary policy that we have discussed in recent issues of Nordic Outlook will thus continue.


The other Nordic countries show strong economic fundamentals but more modest growth figures than Sweden. In Norway, growth will slow due to a tight labour market, a strong currency and rising interest rates. After a pause of about one year, Norges Bank has now resumed its key interest rate hikes. We expect the deposit rate to be increased gradually to 4 per cent towards the end of 2012 as a consequence of the tight resource situation and gradually rising core inflation. The Danish economy will grow by around 2 1/2 per cent. Household consumption is being held back by high indebtedness, low pay increases and tight fiscal policy. In Finland, the euro zone country hardest hit by the crisis, exports and capital spending will contribute to GDP growth of 3.5 per cent in 2011 and 3.0 per cent in 2012.


The gradual recovery of the Baltic economies is continuing. Exports remain a major driving force, while domestic demand is slowly recuperating after the crisis. Growth will be 4-5 per cent annually over the next couple of years, led by Estonia with 5 per cent in 2011. We have made a slight downward adjustment in our forecast for Latvia. Inflation impulses have primarily been external, and a severe inflation surge similar to the overheating of 2005-2007 is unlikely. On the whole, Baltic fhainancial imbalances have decreased significantly, but major structural problems in the labour market as well as budget deficits in Latvia and Lithuania pose continued challenges.  


Key figures: International and Swedish economy 

International economy. GDP, year-on-year changes, % 2009 2010 2011 2012
United States -2.6 2.9 2.8 3.8
Euro zone -4.0 1.7 2.2 2.2
Japan -6.3 3.9 0.5 2.4
OECD -3.4 2.8 2.4 3.1
China 9.2 10.3 9.3 8.5
Nordic countries -4.6 2.9 3.3 2.7
Baltic countries -15.6 1.2 4.1 4.4
The world (purchasing power parities, PPP) -0.5 5.0 4.3 4.5
Swedish economy. Year-on-year changes, % 2009 2010 2011 2012
GDP, working day corrected -5.2 5.3 4.7 3.0
GDP, actual -5.3 5.5 4.7 2.6
Unemployment, % (EU definition) 8.3 8.4 7.2 6.3
Consumer Price Index (CPI) inflation -0.5 1.2 3.3 2.5
Government net lending (% of GDP) -1.0 -0.3 0.8 1.3
Repo rate (December) 2.00 0.25 2.75 3.75
Exchange rate, EUR/SEK (Dec) 10.24 8.98 8.70 8.50


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 contact
Elisabeth Lennhede,  Press & PR
+46 70 763 9916

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 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 some 20 countries worldwide. On 31 March 2011, the Group's total assets amounted to SEK 2,118 billion while its assets under management totalled SEK 1,372 billion. The Group has about 17,000 employees. Read more about SEB at www.sebgroup.com