22 Nov 2011 10:00

SEB: Nordic Outlook: Balancing at the edge of a recession - as the euro faces an uncertain future

The situation is becoming more and more serious. Conflicting interests and deficient problem awareness has blocked crisis management efforts and created political dithering. The world economy will be close to recession in 2012. Growth will be lacklustre in 2013 as well. The Gross Domestic Product (GDP) of the 34 industria­lised OECD countries will grow by 1.2 per cent in 2012 and 1.8 per cent in 2013. The risk of worse performance is greater than the probability of stronger GDP growth, mainly due to the euro zone crisis and worsened credit con­ditions. The euro zone will show negative growth in 2012 (-0.4 per cent). The US economy will grow more strongly. One bright spot in the economic gloom will be China, with growth of about 8 per cent, but because of problems in the construction sector, risks have increased in that country as well. The conclusion we drew in the August issue of Nordic Outlook deserves to be repeated: there is no quick fix for the problems of the world and the euro. The jour­ney from imbalance to balance and greater normality will take several years, will be troublesome and will squeeze living standards in the West.

Right now the world economy needs more stimulus. Slower growth will make the task of achieving the estab­lished fiscal tightening targets more difficult and will increase the political risk premium. But we do not anticipate further austerity measures; the risks are too large and may create a downward economic spiral, leading to further decline in growth and social unrest. We expect the impact of fiscal austerity in the OECD countries to be more than 1 per cent of GDP in both 2012 and 2013. Although there is very limited room for stimulus, measures to combat high unemployment will enjoy high priority. Central banks are under increasing political pressure to continue their ultra-loose monetary policies: The European Central Bank (ECB) will use its limited manoeuvring room to lower the key interest rate to 1.0 per cent and let its securities portfolio expand by another EUR 500 billion during 2012. This monetary policy is possible because underlying global inflation is falling. Meanwhile restructuring and new regu­lations for the banking sector mean that there will be a greater risk of credit contraction than expansion. The deter­mination and resilience of political systems to implement necessary but impopular belt-tightening policies will be emphatically tested in 2012. There is a great risk of continued political uncertainty and turmoil on both the national and international level.

The euro project has a steep slope to climb in terms of credibility due to major structural problems in some euro zone economies, weaknesses in the financial system, unfinished euro zone institutions and increased political risks. The future of the euro is uncertain, and this will hamper growth and force businesses and financial institutions to prepare for the unthinkable: that the euro in its current shape may disappear. This autumn's crisis solutions have failed to gain credibility among international investors, including central banks and large sovereign investment funds. By increasing its purchases of sovereign bonds, the ECB will solve the short-term liquidity problems of coun­tries and give political leaders time to solve the main problems - solvency, competitiveness and euro zone institu­tions - but meanwhile also decrease political pressure for change. Germany's Chancellor, Angela Merkel, has more clearly begun to chart a path towards European political union, which will be a necessary development in order to ensure the cohesiveness of the euro project, but the citizens of the European Union must be persuaded of its advantages.  

In recent months, the US economy has performed somewhat better than expected, and the risks of a recession have decreased. We expect growth of 1.7 per cent in 2012 and 2.3 per cent in 2013. High unem­ployment of around 9 per cent in the next two years, and a housing market that has not yet bottomed out, are squeezing the consumption capacity of households and - together with the euro zone's problems - holding back US growth. There are major fiscal policy risks: If Congress fails to extend the long-term unemployment benefits and tax cuts for households that expire at year-end, the resulting cuts will have a tightening effect on the economy totalling nearly 2 per cent of GDP in 2012. Problems in creating a credible long-term plan for US fiscal policies will also contribute to lower consumption and capital spending.

We expect Swedish economic growth in 2012 to reach 0.7 per cent, far below the 2-2.25 per cent trend level. Growth in 2013 will be 2.0 per cent. Finance Minister Anders Borg's Swedish tiger economy will thus lose some of its stripes. The ongoing labour market improvement will level out in the spring of 2012, and by the end of 2013 unem­ployment will be 7.9 per cent. The weaker economy will create political pressure on the government to take steps towards more expansionary fiscal policy in 2012-13. We expect a stimulus dose of SEK 10 billion in 2012 and SEK 20 billion in 2013. Sweden's government finances will remain strong, and sovereign debt is expected to fall further in relation to GDP: from 39 per cent at the end of 2010 to 31.4 per cent at the end of 2013.

Meanwhile the Riksbank will lower its key interest rate from today's 2.0 per cent to 1.25 per cent during 2012. These rate cuts will be possible because inflation is expected to be lower than we anticipated in August, and the quantity of idle resources in the economy will be larger during the next two years as a consequence of higher unemployment. The new composition of the Riksbank's Executive Board may have an impact on future interest rates, in a more dovish direction. Sweden's credit and housing markets are gradually cooling off. We are sticking to our forecast of a 10-15 per cent decline in home prices during the next two years. High unemployment will push down home prices, while lower interest rates will help sustain them. Historical experience indicates, however, that home prices usually fall more than this much in downturn phases. We thus foresee risks of an even large home price downturn; if so, this may have significant consequences for consumption and growth. The underlying strength of the krona will persist, but in the short term it will be hampered by international uncertainty and slowing export growth. A year from now, the krona will be traded at SEK 8.85 per euro and SEK 7.10 to the dollar (assuming an EUR/USD exchange rate of 1.25).

Among the other Nordic countries, as usual Norway will weather the global economic downturn best. We expect Norwegian GDP growth of 2.2 per cent in 2012 and 2.5 per cent in 2013. Like other central banks, Norges Bank will lower its key interest rate late this year. It will leave this rate unchanged during most of 2012, then raise it cau­tiously. The potential for good growth will depend on fiscal manoeuvring room, but this policy carries risks of an excessively rapid credit expansion and rising home prices. The situation in Denmark is more worrisone and eco­nomic performance will be strongly affected by the growth outlook in the euro zone and continued weaknesses in the housing market. We expect growth of 1.0 per cent in 2012 and 1.4 per cent in 2013. Finland will also be adver­sely affected by the global deceleration, but there will be no need for further budget-tightening. The ECB's inte­rest rate cuts and a weaker euro will help Finland, and we expect GDP growth of 1.2 per cent in 2012 and 2.0 per cent in 2013.  

Estonia, Latvia and Lithuania are facing a clear export-led deceleration. Their tough austerity policies and pay cuts were painful, but credible and succesful. Their GDP growth will end up in the vicinity of 2-4 per cent annually in 2012 and 2013. Cautiously increasing domestic demand - helped among other things by stronger purchasing power as energy and food price inflation fades - will help sustain growth, but labour market improvements are occuring slowly and the Baltic countries will not avoid the European downturn. Structural problems in the labour market and alarming demographic trends pose threats to the long-term economic growth prospects of the three countries. 

   Key figures: International and Swedish economy 

International economy. GDP, year-on-year changes, % 2010 2011 2012 2013
United States 3.0 1.8 1.7 2.3
Euro zone 1.8 1.6 -0.4 0.8
Japan 4.1 -0.3 2.0 1.2
OECD 2.9 1.7 1.2 1.8
China 10.4 9.1 8.0 8.2
Nordic countries 2.9 2.5 1.3 2.0
Baltic countries 1.4 6.0 2.5 3.5
The world (purchasing power parities, PPP) 5.1 4.0 3.2 3.8
Swedish economy. Year-on-year changes, %
GDP, actual 5.6 4.3 0.7 2.0
GDP, working day corrected 5.4 4.3 1.1 2.0
Unemployment, % (EU definition) 8.4 7.4 7.4 7.9
Consumer Price Index (CPI) inflation 1.2 3.0 1.1 1.4
Government net lending (% of GDP) -0.2 0.0 -0.2 -0.1
Repo rate (December) 1.25 2.0 1.25 1.25
Exchange rate, EUR/SEK (December) 8.98 9.30 8.85 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 contact
Elisabeth Lennhede,  Press & PR
+46 70 763 9916
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 September 30, 2011, the Group's total assets amounted to SEK 2,359 billion while its assets under management totalled SEK 1,241 billion. The Group has about 17,600 employees. Read more about SEB at www.sebgroup.com