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Nordic Outlook: Focus on inflation risks as COVID-19 recedes

Sweden: Rebound in the second half, no rate hike despite low inflation

After falling by more than 3 per cent in 2020, global GDP will increase by 5.9 per cent this year and 4.3 per cent in 2022. Rapid economic growth in the United States, driven by President Joe Biden’s stimulus packages and general resilience to new restrictions early in 2021 have helped improve the outlook, despite widespread COVID-19 transmission this spring. Most Western European countries also appear set to ease their pandemic-related restrictions soon. Looking ahead, households will be the most important growth engine as they activate their large savings surpluses. In the US, the focus of attention in financial markets is now shifting from large stimulus measures to overheating risks. An inflation impulse is on its way, but we do not believe it will be long-lasting. This will enable the US Federal Reserve to hold off on raising its key interest rate until 2023, but the Fed will again take the lead in the normalisation process. High household savings and fiscal stimulus are laying the groundwork for a strong recovery in the Swedish economy during the second half of this year. We have revised our GDP growth forecast upward to 4.5 per cent this year, followed by 4.0 per cent in 2022. The Riksbank will reduce its bond purchases before the Fed and the European Central Bank (ECB), with Sweden’s repo rate expected to remain at zero per cent despite low inflation over the next couple of years.

Economic resilience and vaccines set the stage for normalisation

Manufacturing and global trade have shown resilience to the pandemic. Labour-intensive service sectors will now gradually catch up, with strong household purchasing power playing a key role. It remains to be seen whether COVID-19 vaccinations can lead to a complete normalisation of societies, but the main scenario in the May 2021 issue of SEB's Nordic Outlook is that the advanced economies will revert to their pre-pandemic positions this year and that divergences in the pace of vaccinations will not lead to lasting differences. The global economy will grow by 5.9 percent this year: up from the 5.0 per cent predicted in February’s Nordic Outlook. The US economy will grow by 6.5 per cent in 2021 and by 4 per cent in 2022, an upward revision of two percentage points for this year. The euro area is lagging behind in the struggle against the coronavirus and will grow by 3.8 per cent this year and 4.2 per cent in 2022 − largely unchanged compared to our earlier forecast. The US will surpass its previous growth trend as early as 2022, while the euro area and the United Kingdom will continue to show large output gaps. There are big differences between emerging market (EM) economies. China’s successful fight against the pandemic is benefiting large portions of Asia, while the recovery will be weaker in Latin America and Africa. Widespread COVID-19 transmission in such countries as India and Brazil, along with vaccine shortages in many countries, will also weigh down their economic performance.

Low-inflation environment tested in the US amid “green” spending

Overheating risks from massive US fiscal stimulus packages will put the low-inflation environment to its biggest test in decades. One risk scenario is that the US labour supply will not respond to increased demand and that this will be combined with rising inflation expectations. Our main scenario is that the upturn in inflation will be moderate. High household savings in the 37 advanced economies of the Organisation for Economic Cooperation and Development (OECD) will provide a buffer as stimulus measures are gradually withdrawn, while unevenly distributed income and wealth will remain a risk. Looking ahead, there are new arguments for expansionary measures linked to reforms that will improve the supply side of the economy and green sustainability. Such packages have been approved by the European Union and proposed by the Biden administration. Biden's ambitious agenda is having an impact on the rest of the world – it combines an increased government role in the economy with an effort to create a minimum level of global corporate taxes and provide new leadership on the climate change issue.

The Fed will lead the way in policy normalisation, pushing up the dollar

Key interest rates will remain close to zero in most advanced economies both this year and in 2022. The Fed's new, dovish policy framework allows it room to postpone key interest rate hikes until 2023, but the US central bank will gradually reduce its stimulative bond purchases starting late this year and ending in the autumn of 2022. Wider gaps between US and Western European growth rates are pointing to a traditional central bank pattern in which the Fed − despite its more dovish new strategy − will begin policy normalisation well ahead of the ECB, which will have to keep struggling with uncomfortably low inflation. The US dollar will appreciate, following some headwinds in the near term. After rising to 1.24 this summer, the EUR/USD exchange rate will gradually fall to 1.13 at the end of 2022. Several theme articles in this issue of Nordic Outlook discuss new protectionist tendencies in world trade, the green energy transition, US inflation, cryptocurrencies and Swedish government finances.

New Nordic and Baltic rebound after COVID-19 reversals in early 2021

New virus outbreaks and tighter restrictions have resulted in a weak start to the year in various Nordic and Baltic economies, but their recovery will regain momentum later in 2021. Fiscal stimulus measures, high savings and pent-up demand will provide support for consumption-led growth in Norway. Total GDP will grow by 2.6 per cent this year and 3.5 per cent in 2022. Rising home prices have increased the pressure on Norges Bank, and despite below-target inflation the Norwegian central bank will raise its key rate before the end of 2021, ahead of most other advanced economies. Because of a rapid reopening, our GDP growth forecast for Denmark is unchanged at 3.0 per cent this year and 4.5 per cent in 2022 − despite a temporary setback for consumption during the first quarter. By the end of next year, the Danish economy will again be approaching full employment. Finland has performed well through the pandemic both in terms of health care and economic policy. The Finnish economy will grow by 3 per cent this year, reverting to its pre-crisis levels. In 2022, growth will slow to 2.5 per cent; higher economic growth rates will require increased capital spending and productivity.

A successful vaccination drive and exports of vaccine components are driving the recovery in Lithuania. GDP will grow by 4.6 and 3.8 per cent in 2021 and 2022, respectively. In Latvia, powerful fiscal stimulus and foreign demand will lift GDP by 3.7 and 5.2 per cent respectively. A vaccine shortage is a downside risk. In Estonia, fiscal stimulus measures combined with early pension fund payments will trigger a consumption boom. GDP will grow by 3.3 per cent this year and 4.5 per cent in 2022. Inflation is rising in all three Baltic countries, among other things driven by resilient labour markets and upward pressure on wages and salaries.

Sweden: Growth will rebound in the second half – no key rate hike

Despite expanded restrictions, Sweden’s downturn in early 2021 was milder than previously feared. Elevated household savings and the government’s fiscal stimulus measures are creating good prospects for a strong recovery during the second half of 2021. We have revised our 2021 GDP growth forecast to 4.5 per cent (from 2.8 per cent), but growth will slow to 4.0 per cent in 2022. By the end of next year, GDP will be back at its pre-pandemic growth trend.

The Swedish business community is strongly optimistic. Merchandise exports of goods are expected to revert to their previous trend as early as Q2. Shortages of semiconductors for the automotive industry, in particular, are a risk factor since vehicles account for 13.5 per cent of Sweden’s total merchandise exports. The recovery in service exports will take longer; business travel is unlikely to return to previous levels even in the long term. Capital spending has weathered the crisis relatively well. Machinery investments are rising at a healthy pace. Residential investments are bouncing back after several weak years. Record-high home price increases will slow as the economy reopens and consumption broadens.

Because of record-high savings, consumption will soar during the second half. It is hard to track the labour market situation due to a reorganisation of official statistics. Our own calculations indicate that employment in Sweden will grow again after temporarily levelling off early this year, accelerating in the second half of 2021. By the end of 2022, unemployment will be back at pre-crisis levels. Inflation rose early this year, driven by base effects from low prices at the beginning of the pandemic, as well as shifts in seasonal patterns. Both factors will reverse this summer, causing inflation to fall noticeably again. As a consequence of low pay increases and price pressures on imported goods − due to a strong krona − inflation will remain low during the next couple of years. At the end of our forecast period, CPIF inflation (the consumer price index minus interest rate changes) will be just above 1 per cent.

Good prospects for the real economy and a slight upturn in inflation expectations have diminished the need for new monetary policy easing. We believe that the Riksbank will gradually reduce its bond purchases this year according to its earlier plan. Despite low inflation, the Riksbank will thus act before both the Fed and the ECB. The limited Swedish government bond supply and a reluctance to buy more mortgage-backed bonds in an increasingly overheated housing market are two reasons. Some members of the Riksbank’s Executive Board suggest that interest rate cuts will be the next step if further stimulus is needed. A key rate cut cannot be ruled out if a strong krona were to push inflation below 0.5 per cent, but our main scenario is that the repo rate will remain at zero throughout our forecast period. Since Swedish government bond yields are high in a European perspective, the Riksbank's reduced bond purchases will not have a major impact on Swedish yields; we expect the spread against Germany on 10-year government bonds to remain around 50 basis points. The krona will continue to appreciate gently. The EUR/SEK exchange rate will reach its long-term equilibrium level of 9.70 by the end of 2022. If the krona appreciates well beyond equilibrium, we foresee a strong probability of new interest rate cuts.

Key figures: International & Swedish economy (figures in brackets are from the February 2021 issue of Nordic Outlook)

International economy, GDP, year-on-year changes, % 2019 2020 2021 2022
United States  2.2 (2.2) -3.5 (-3.5) 6.5 (4.5) 4.0 (3.6)
Euro area 1.3 (1.3) -6.6 (-6.6) 3.8 (3.1) 4.2 (4.9)
United Kingdom 1.4 (1.4) -9.8 (-10.3) 6.4 (3.5) 5.8 (8.2)
Japan 0.7 (0.7) -4.8 (-5.2) 2.8 (2.1) 1.8 (1.0)
OECD 1.6 (1.6) -4.8 (-4.9) 4.9 (3.7) 3.7 (3.7)
China 6.0 (6.1) 2.3 (2.3) 9.0 (8.0) 5.3 (5.6)
Nordic countries 1.6 (1.6) -2.3 (-2.7) 3.5 (3.0) 3.7 (3.8)
Baltic countries 3.7 (3.7) -2.1 -(2.7) 4.1 (2.7) 4.4 (4.2)
The world (purchasing power parities, PPP) 2.8 (2.8) -3.3 (-3.7) 5.9 (5.0) 4.3 (4.3)
Nordic and Baltic countries, GDP, year-on-year changes, %
Norway 0.9 (1.2) -0.8 (-1.3) 2.6 (3.4) 3.5 (2.8)
Denmark 2.9 (2.8) -2.7 (-4.0) 3.0 (3.0) 4.5 (4.5)
Finland 1.3 (1.1) -2.8 (-3.3) 3.0 (2.8) 2.5 (2.5)
Estonia 5.0 (5.0) -2.9 (-2.8) 3.3 (3.3) 4.5 (3.8)
Latvia 2.2 (2.2) -3.6 (-4.7) 3.7 (3.9) 5.2 (4.6)
Lithuania 4.3 (4.3) -0.9 (-1.5)  4.6 (1.8) 3.8 (4.2)
Swedish economy, year-on-year changes, %
GDP, actual 1.4 (1.3) -2.8 (-2.6) 4.5 (2.8) 4.0 (4.8)
GDP, working day corrected 1.4 (1.3) -3.1 (-2.9) 4.4 (2.7) 4.0 (4.8)
Unemployment, % (EU definition) 7.1 (6.8) 8.6 (8.3) 8.7 (8.7) 7.5 (7.7)
CPI (consumer price index) 1.8 (1.8) 0.5 (0.5) 1.4 (1.3) 1.3 (1.0)
CPIF (CPI minus interest rate changes) 1.7 (1.7) 0.5 (0.5) 1.6 (1.4) 1.3 (1.0)
Government net lending (% of GDP) 0.6 (0.4) -3.1 (-3.3) -2.1 -(3.2) -1.0 (-1.9)
Repo rate (December) 0.0 0.0 0.0 (0.0) 0.0 (0.0)
Exchange rate, EUR/SEK (December) 10.46 10.05 9.90 (9.80) 9.70 (9.70)

For further information, contact:
Robert Bergqvist: +46 70 445 1404
Håkan Frisén: +46 70 763 8067
Daniel Bergvall: +46 73 523 5287
Per Hammarlund: +46 76 038 9605
Olle Holmgren: +46 70 763 8079 
Elisabet Kopelman: +46 70 655 3017
Marcus Widén: +46 70 639 1057

Press contact:
Niklas Magnusson, Group Press Officer
+46 70 763 8243

SEB is a leading northern European financial services group with a strong belief that entrepreneurial minds and innovative companies are key in creating a better world. SEB takes a long-term perspective and supports its customers in good times and bad. In Sweden and the Baltic countries, SEB offers financial advice and a wide range of financial services. In Denmark, Finland, Norway, Germany and the United Kingdom, 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. At 31 March 2021, the Group's total assets amounted to SEK 3,443bn while its assets under management totalled SEK 2,243bn. The Group has around 15,500 employees Read more about SEB at https://www.sebgroup.com