08 Feb 2011 10:00

Nordic Outlook: Giddy euphoria about the Swedish economy

The global economic outlook is now improving further. Major companies are surprisingly optimistic and profitable. The US recovery, which received an extra kick late in 2010 from a more expansive fiscal policy, is increasingly self-sustaining. Developing countries - led by China - and the Nordic countries as well as Germany are among the driving forces. This will create good conditions for capital spending and new jobs. GDP growth in the OECD countries will end up at 2.8 per cent both in 2011 and 2012: 5 and 3 tenths of a percentage point higher, respectively, than in our November forecast.  


In the United States, GDP growth will reach 3.6 per cent this year and 4.0 per cent in 2012. One factor benefiting US growth is that private saving - primarily in the corporate sector - is moving from high to normal levels. The economic situation of households and private consumption will be sustained by gradual improvements in the labour market and a lighter interest burden, but will be hampered by further home price declines (about 5 per cent in 2011), chronic high unemployment and continued debt consolidation. The country's credit rating will be saved by stronger economic growth. In the euro zone, growth will be 1.9 per cent this year and 1.8 per cent in 2012. This trend will be characterised by wide divergences, both in terms of economic activity and the labour market. Germany's growth of 3.1 per cent and 2.5 per cent in 2011 and 2012, respectively, will serve as a stabilising force in the euro zone. German unemployment is, moreover, at its lowest level since 1992. In Asia, growth will now decelerate, entirely as planned and as a consequence of the tightening measures that various countries are implementing. China's growth will fall towards 8 per cent in 2012 , reducing the risk of asset bubbles. Inflation is a problem, but we expect Chinese authorities will be able to deal with this development.


A number of risks and problems will nevertheless continue to afflict the world economy. Global imbalances will persist. World economic growth will be uneven, creating economic policy challenges. In the OECD countries, sovereign debt is continuing to grow towards 100 per cent of GDP, eroding the credibility of fiscal policy makers and making central bank monetary policy more difficult. The effect of fiscal tightening will be equivalent to 0.25 per cent of GDP in 2011 and 1.5 per cent in 2012, but new action programmes are probably needed in a number of OECD countries. Europe's supranational crisis mechanism, the European Financial Stability Facility (EFSF), is beginning to take shape and will be crucial to the stability of the euro - the trend towards a "United Debt of Europe" together with other economic policy reforms imply that steps are now being taken towards a political union. But the question of whether the EU is ripe for such a development remains unanswered. Meanwhile a number of euro zone countries are plagued by severe competitiveness problems and high private debt.


Fears of a broad-based inflation surge in the US and Europe are exaggerated. The impact of high energy and food prices will fade later in 2011, causing CPI inflation to fall. Rising food prices nevertheless increase the risks of social unrest in many emerging economies. Faster economic growth, rising resource utilisation and persistently high commodity prices will, to some extent, also change the game plan for the major central banks in the OECD countries. Thoughts about an exit policy, which were dormant for nearly a year, are thus about to be reawakened. We expect the European Central Bank (ECB) to raise its key interest rate this coming autumn, and by the end of 2012 the refi rate will stand at 2.5 per cent. A reformed EFSF will de-couple the ECB from euro zone sovereign debt policy, enabling the bank to stop purchasing government securities and focus to a greater degree on inflation-fighting. The US Federal Reserve may hold off for an additional six months or so before cautiously adjusting its key rate upward in the spring of 2012. In December 2012, the federal funds rate will stand at 1.75 per cent.


The Swedish economy is in a state of almost euphoric giddiness. GDP will climb by 4.7 per cent in 2011, after record-high growth of 5.7 per cent last year. In 2012, a stronger krona will help dampen growth to 2.6 per cent. Unemployment will continue to fall at a rapid pace from today's 8.0 per cent to 6.5 per cent by the end of 2012. Sweden's public finances will show a surplus equivalent to 0.7 per cent of GDP in 2011 and 1.0 per cent in 2012. This means that central government debt will fall to about 30 per cent of GDP. It is difficult to find good long-term arguments for pushing down the debt level further. We thus believe that the Alliance government will find it hard to continue pursuing the cautious strategy that has characterised its new term of office so far since the September 2010 election. We thus expect a more expansionary fiscal policy, including broad tax cuts as early as next year. The stimulus effect in 2012 will be equivalent to 0.7 per cent of GDP, after a neutral effect this year.


Resource utilisation is now rising rapidly, which will increase inflation risks further ahead. We expect Sweden's 2012 wage round to result in pay increases of about 4 per cent next year, a trend that we expect will go hand in hand with rising wages and salaries in Germany. Meanwhile the upturn in Swedish home prices and household debt will continue. The risk scenarios related to both price stability and financial stability thus point in the same direction: the need for key rate hikes by the Riksbank will increase. We expect the central bank to hike its key rate at every monetary policy meeting during 2011, bringing the repo rate to 2.75 per cent at the end of 2011 and continuing up to 3.75 per cent at the end of 2012. The change in the economic risk scenario does not mean that we are ruling out the possibility that the Riksbank must change its monetary policy in an even clearer way in order to achieve a more rapid normalisation of the repo rate. Rate hikes of 50 basis points may thus be considered in about six months. This is not our main scenario, because tightening via the key interest rate is reinforced by other factors. Macro supervisory regulations will help raise market interest rates, and the Riksbank has also indicated its support for launching such regulations more quickly and forcefully than in other countries. In addition, the stronger krona will have an impact; we expect the EUR/SEK exchange rate to be 8.40 at the end of 2012. Our overall assessment is thus that Swedish monetary policy will be somewhat contractive towards the end of 2012.


The economic outlook in the other Nordic countries is also good, although growth will be more subdued than in Sweden. The Nordic countries benefit from having economies that are in good fundamental shape in terms of government finances and foreign trade. This reinforces the stimulus from the global recovery and from low interest rates. In Norway, supply side restrictions are already beginning to hamper economic expansion, which is one reason why Norges Bank will resume its key interest rate hikes later this year. After that, we expect the central bank to hike its deposit rate to 4 per cent by late 2012; the EUR/NOK exchange rate will continue moving towards 7.50 by late 2012. The competitiveness of both Finland and Denmark has improved, among other things because the Swedish and Norwegian currencies have appreciated from their earlier weak levels. GDP growth in Denmark and Finland will end up at 2.5-3.5 per cent, which is well above trend, during the next couple of years.


The Baltic economies are continuing to recover after their previous deep downturn. In 2011 and 2012, we expect GDP growth of 4-5 per cent. Growth is driven by strong, competitive exports. Domestic demand is being restrained by continued debt retirement and persistent high unemployment.

Key figures: International and Swedish economy 

International economy. GDP, year-on-year changes, % 2009 2010 2011 2012
United States -2.6 2.9 3.6 4.0
Euro zone -4.0 1.7 1.9 1.8
Japan -6.3 4.0 1.6 1.6
OECD -3.5 2.7 2.8 2.8
China 9.2 10.3 9.5 8.5
Nordic countries -4.6 2.9 3.4 2.6
Baltic countries -15.6 1.2 4.1 4.7
The world (purchasing power parities, PPP) -0.6 5.0 4.5 4.6
Swedish economy. Year-on-year changes, % 2009 2010 2011 2012
GDP, working day corrected -5.2 5.4 4.7 3.0
GDP, actual -5.3 5.7 4.7 2.6
Unemployment, % (EU definition) 8.3 8.4 7.3 6.6
Consumer Price Index (CPI) inflation -0.3 1.3 2.7 2.4
Government net lending (% of GDP) -1.0 0.2 0.7 1.0
Repo rate (December) 0.25 1.25 2.75 3.75
Exchange rate. EUR/SEK (December) 10.24 8.98 8.50 8.40



Watch Håkan Frisén comment on Nordic Outlook report on Youtube: http://www.youtube.com/watch?v=Q0RLZu-SeHw


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 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 December 31, 2010, the Group's total assets amounted to SEK 2,180 billion, while its assets under management totalled SEK 1,399 billion. The Group has about 17,000 employees, excluding its retail banking operations in Germany. Read more about SEB at www.sebgroup.com.