World economy hesitating at new crossroads

A SENSE OF RELIEF AFTER THE ACTIONS OF THE EUROPEAN CENTRAL BANK (ECB) dominated the mood of the world economy in the first quarter of 2012. By launching unlimited three-year loans (the long-term refinancing operation, LTRO) to euro zone banks, the ECB has gradually eased worries about a paralysing credit crunch. The March accord on new bail-out loans to Greece and the agreement to enlarge the resources of euro zone bail-out funds have removed further short-term concerns. Developments in the real economy and in financial markets have confirmed our main message in the February issue of Nordic Outlook (NO): that the recession will be limited to crisis-ridden euro zone countries. In the updated forecasts for various regions we have presented in recent weeks (Macro Update), our revisions compared to NO have been small. We have made upward revisions for Japan, Germany and Sweden, among other countries, but our global growth forecast for 2012 remains unchanged at 3.5 per cent in 2012 and 4.0 per cent in 2013 (adjusted for purchasing power parity).

TUESDAY APRIL 3, 2012

conflicts. In the United States, the Federal Reserve seems to be in a relatively favourable position right now. The economy is slowly gaining strength; for example, unemployment is falling and construction activity is increasing. In an environment of low inflation pressure and plenty of idle resources, the Fed still has enough flexibility to emphasise the fragility of the upturn. Announcing that key interest rates will remain low for an extended period enables the Fed to push down the entire yield curve, while holding the door open for a third round of quantitative easing (QE3). In the short term, there do not appear to be especially big credibility problems related to inflation, asset price bubbles or soaring government debt, although the Fed must again face the issue of exit strategies sooner or later.

Global GDP growth

Year-on-year percentage change (February NO in brackets)

2010 United States 3.0 Japan 4.4 Germany 3.6 China 10.4 United Kingdom 2.1 Euro zone 1.8 Nordic countries 2.9 Baltic countries 1.1 OECD 3.1 Emerging markets 7.3 World, PPP 5.2
Source: OECD, SEB

2011 2012 2013 1.7 2.5 (2.5) 2.5 (2.5) -0.7 1.9 (1.7) 1.3 (1.2) 3.0 0.7 (0.4) 1.4 (1.3) 9.3 8.7 (8.7) 8.9 (8.9) 0.8 0.4 (0.3) 1.4 (1.4) 1.5 -0.6 (-0.8) 0.8 (0.7) 2.5 1.0 (0.9) 1.9 (1.8) 6.2 2.0 (2.0) 3.2 (3.2) 1.7 1.4 (1.3) 1.9 (1.9) 6.2 5.7 (5.7) 6.0 (6.0) 3.9 3.5 (3.5) 4.0 (4.0)

THE WORLD ECONOMY NOW SEEMS TO HAVE REACHED A NEW CROSSROADS. The question is whether the positive trend can be strengthened, in an environment of continued debt consolidation needs and persistently high oil prices. To make continued upward adjustments in our forecasts possible, it is essential that the ultra-loose monetary policy of major central banks can be implemented without excessively large goal

THE SITUATION IN THE EURO ZONE IS MORE COMPLICATED. It is possible to single out a number of threats that may interrupt the current positive trend. If the recovery in Germany gains further momentum, southnorth decoupling may create difficulties for the ECB in terms of finding the right monetary policy trade-off. There are also various types of political risks related to maintaining the crisis strategy that has now been launched. The Greek crisis now appears manageable, without severe contagious effects. But it is too early to rule out risks that the process will lead to consequences that other euro zone countries find unacceptable. The Spanish government is facing a difficult balancing act. On the one hand, it must overcome mistrust from the ECB and from other euro zone countries about whether the government is willing and able to actually implement the austerity measures it has unveiled. On the other hand,

Economic Insights

there is a risk that domestic protests will grow to unmanageable levels. Meanwhile increasingly clear recessionary signals are illustrating the disadvantages of further budget tightening. The imminent French presidential election will also fuel uncertainty about the determination to fulfil the economic policy strategy that the euro zones core countries have agreed to support. Taken together, developments in the euro zone thus imply major challenges and risks. THE RELATIVELY GOOD RESILIENCE OF EMERGING MARKET ECONOMIES has ensured greater stability in the world economy over the past six months. Our main scenario implies a soft landing with GDP growth of 5.7 per cent in 2012 and 6.0 per cent in 2013, but there are risks that must be taken into account in this portion of the global economy as well. A hard landing in the Chinese credit or property market still cannot be ruled out. Indias economy is plagued by structural problems and high inflation pressure, which pose major challenges to economic policy makers. Unrest in the Middle East especially Irans increasingly tense relations with other countries risks driving up oil prices further. Such a development would not only threaten the immediate region but would also jeopardise the world economic recovery as a whole. IN THE NORDIC COUNTRIES, GROWTH WEAKENED DURING THE FOURTH QUARTER OF 2011 largely in line with our forecasts. The slowdown was primarily attributable to exports, while domestic demand and the labour market were relatively resilient. As in 2008-2009, the Nordic countries have been affected by the crisis in ways similar to Germany. This is especially true of Finland and Sweden, with their large and cyclically sensitive export sectors. In 2012, GDP growth in Denmark, Finland and Sweden as in Germany will end up close to 0.5 per cent. Because of the exceptional resilience of the Norwegian economy, we predict growth in Norway will exceed 2 per cent both in 2012 and 2013.

turnaround, this illustrates the potential for a positive shift in sentiment if external factors fall into place. Perhaps this is because companies were afraid of a repetition of the 2008-09 collapse and this kept them in a depressed mood for longer than the actual situation justified. The house price downturn that dominated much of 2011 seems to have ended early in 2012, which is another important piece of the puzzle. The Riksbanks key interest rate cuts have changed household expectations about future interest rates, while the stock market recovery has provided support. Although the home price upturn of recent months may not last, it confirms our forecast that Sweden can avoid a hard landing in the housing market.
GDP growth in Sweden
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Q1 Q3 10 Q1 Q3 11 Q1 Q3 12 Q1 Q3 13 SEB forecast 10 9 8 7 6 5 4 3 2 1 0 -1 -2

Quarter-on-quarter percentage change (LHS) Year-on-year percentage change (RHS)

Source: Statistics Sweden, SEB

GDP growth, Nordic countries

Year-on-year percentage change (February NO in brackets)

THESE NEW CONDITIONS ARE CREATING SOMETHING OF A DILEMMA FOR THE RIKSBANK. The growth, unemployment and inflation outlook clearly point towards further key rate cuts. On the other hand, it is obvious that the governor of the Riksbank and several other Executive Board members see a danger that additional rate cuts may further inflate home prices and household debts. This is especially true considering that various international organisations, including the European Commission, have raised a clear warning flag in these areas. Our conclusion is that the Riksbank will hold off on a further rate cut at its April monetary policy meeting, but we are sticking to our forecast of rate later this year, although the probability of these has also diminished. hakan.frisen@seb.se +46 8 763 80 67

2010 Sweden 6.1 Norway 0.7 Denmark 1.3 Finland 3.6 Nordic countries 2.9
Source: OECD, SEB

2011 3.9 1.3 1.0 2.7 2.5

2012 2013 0.7 (0.5) 1.9 (1.7) 2.1 (2.1) 2.4 (2.4) 0.5 (0.5) 1.4 (1.4) 0.7 (0.5) 1.7 (1.7) 1.0 (0.9) 1.8 (1.8)

RECENTLY THE SWEDISH ECONOMY HAS SHOWN IMPORTANT BRIGHT SPOTS. The Business Tendency Survey published by the National Institute of Economic Research in late March demonstrated sharply improved optimism, especially in manufacturing. Although other leading indicators have not shown such a clear

U.S. economy on a firmer footing

A slowdown in real GDP growth seems increasingly likely in Q1 and we estimate that real GDP grew at a 2 percent annualized rate in the first quarter, compared to 3.0 percent in Q4. But the weaker first-quarter growth wouldnt rule out stronger performance in subsequent quarters, and since many soft indicators of final demand is strengthening our 2012 and 2013 GDP forecasts remain unchanged at 2.5 percent. The unemployment rate is sliding gradually to 7.4 percent at the end of 2013. Although we believe that the recovery is on a firmer footing it is not going to be a straight line up by any means. Unseasonably warm weather may have boosted activity while high oil and gasoline prices are beginning to cut into consumers purchasing power and growth prospects in general. Fortunately there are offsets: the looming credit squeeze was averted and the tail risk of a severe recession in Europe is decidedly lower. Financial conditions are much easier compared to a few months ago. Employment growth has been stronger than expected as well, but wage growth remains subdued. Arguably too much fiscal tightening too fast is the biggest risk in 2013. Under current law the fiscal tightening is around 4.5 percent of GDP easily enough to break any recovery. Even if only 2 percentage points of tightening actually occurs, its still the second largest in modern history. Dont look for any clarity until after the November election when action is needed on a smorgasbord of contentious economic issues, among others the expiring Bush era tax cuts and the sequester which automatically slash federal outlays. This is why Fed chairman Bernanke is talking about a fiscal cliff at years end. Our assumption is that the fiscal headwind will be little more than 1 percent in 2013 which is not enough to break the recovery. But expect a messy process with possible macroeconomic as well as debt rating related concerns along the way. Our inflation forecasts are revised higher this year on oil. But the upturn is judged to be temporary and in 2013 both headline and core inflation will be running well below the target. Consequently, we stick with our forecast of additional QE although it is a close call.

TUESDAY 20 MARCH 2012

Mattias Brur
SEB Economic Research +46 8 763 85 06

Key data Percentage change

2010 2011 2012 2013 GDP Unemployment* Inflation Core inflation

Source: SEB

3.0 9.6 1.6 1.0

1.7 9.0 3.1 1.7

2.5 8.2 2.2 1.9

2.5 7.6 1.3 1.3

* Per cent of labour force, yearly averages

Economic Insight

THE BIG PICTURE

Currently there is a huge split between the demand side and supply side in the U.S. economy. The supply side is all good: employment growth is around 250k a month and aggregate hours worked is 3.5 percent above the Q4 average. So what the supply side is suggesting is that growth is running above 4 percent at an annualized rate. The demand side is a different story: real consumer spending has practically no momentum and both capital spending and net exports are tracking negative GDP contributions. According to the demand side data alone real GDP growth could be closer to zero right now. But the housing market is in better shape which is one reason why the recovery may end up being more sustainable than last year. The glass half full group would point out that housing only is 2 percent of the U.S. economy, however. Soaring oil and gasoline prices are advancing on the worry list. It is not the level but the change in prices that influences growth, and the rule of thumb we use is that a persistent USD 10 dollar increase in the oil price lowers real GDP growth by 0.2 percent year one as well as year two. So compared to the October lows we may be looking at a 0.8 percent drag on real GDP growth in 2011 if oil prices stay where they are for a year all else being equal (somewhat smaller effects when using yearly averages). Fortunately there are offsets since financial conditions are much easier today compared to a few months ago and should no longer hurt growth. Higher oil prices will push up inflation temporary but further out inflation is expected to run below the level the Fed is shooting for. As long as inflation expectations are behaving well the Fed will probably look through any oil-related bounce in inflation. Remember that in January the Fed said that the funds rate is going to be held to the floor at least through late 2014 and six of the 17 Fed officials dont believe they will raise rates until 2015-16. So we remain of the view that the available policy options are 1) an unchanged accommodative monetary policy stance or 2) additional easing. Higher inflation is making more asset purchases a harder sell but more easing may come, especially if the economy starts fraying at the edges. Since Q1 real GDP growth is poised to disappoint we are reluctant to change our forecast of additional policy easing. What has been floating around recently is sterilized QE which could have the potential to stimulate the economy while at the same time subdue worries about future inflation. As an aside, Bernanke again described U.S. growth as frustratingly slow last week. Meanwhile markets may be in the process of pricing out QE and pricing in an early tightening cycle.

Economic Insight

CONSUMER SPENDING / CAPITAL EXPENDITURES

The trend in real consumer spending is running at a low level and our models do not suggest much improvement over the near term. Despite faster employment growth and the long and generous arm of Uncle Sam, who contributes 20 percent of the income pie, weak income growth is holding down consumer spending. Whilst growth in real disposable income has trended below real consumption growth since the beginning of 2011, the drop in the savings rate and the fading fuel shock supported consumption last year. But these tailwinds may be turning: driven in part by the ratio of household net worth to personal income falling from 650 percent at the bubble heights to 500 today, our savings model suggests that an uptrend in the savings rate is fundamentally motivated. When this ratio was at current levels in the past, the savings rate was within the 7-10 percent band with near consistency. The labor market is the key; stronger employment growth should ultimately fuel income and spending. A signpost of the current hardship: the number of Americans receiving food stamps is above 46 million. Usually the unseasonably warm weather is an argument that the bears are pushing, arguing that the economy has been artificially strong as a result. But the flip side is that excluding energy, real consumption growth is above 2 percent. In our view what is driving consumption right now is almost exclusively auto related where fleet sales represent most of the buying. Meanwhile 89 percent of the consumption pie is shrinking and we would like to see a more broad-based expansion in any event.

millions

millions

Economic Insight

THE LABOR MARKET

The unemployment rate has fallen by 0.8 percentage points since August, to 8.3 percent. More private jobs have been created since November than in any three-month period since 2006. Aggregate hours worked are up 3.6 percent at an annual rate over the last three months. As a standalone number this is suggesting real GDP growth at around 4.5 percent in Q1. But real GDP growth is tracking around 2 percent in Q1 so productivity must be contracting in the current quarter just as it did a year ago. Whenever this happens, companies move to protect their squeezed profit margins and respond the following quarter by slowing hiring. Looking back over the past decade this happened every time, and monthly payrolls, on average, come in 70k lower the following quarter. This is why we caution against extrapolating current employment trends into the future. The progress on the unemployment front has been much faster than justified by the classic Okuns law, but that is implicitly assuming that trend GDP growth rate has not changed much. But remember that trend GDP growth is the sum of labor force growth and productivity growth. While the growth in the labor force has recently picked up, the productivity trend is running slightly above zero right now. Putting these numbers together they are suggesting that trend GDP growth has been running below 1 percent for a year now. That can explain the better labor market outcomes even with frustratingly slow growth. Going forward, however, what the pick up in labor force growth is suggesting is that the lower speed limit is only temporary. Thus, going forward we expect much slower progress against unemployment even if real GDP growth will be better than last years 1.7 percent.

Person (millions)

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Japan: the economic recovery is ongoing

FRIDAY 21 MARCH 2012 Mattias Brur SEB Economic Research +46 8 763 85 06

Real GDP fell 0.75 percent in 2011; the weakest growth in the G7 countries. But leading indicators and hard data are suggesting above-trend growth at the same time as reconstruction spending is providing support. Real GDP will grow 1.9 percent and 1.3 percent in 2012 and 2013, respectively. Recent hard data is suggesting that the recovery has become more entrenched: e.g. machinery orders, industrial production and retail sales were all above expectations. After the Bank of Japan intervened earlier this year, the yen has weakened for six weeks running and the yen is at its weakest level since last spring (summer) against the dollar (euro). That is good news for competitiveness. Exports have not responded yet, but that is a matter of timing only since there are lags involved. Reflecting the better tone to economic data, the weaker yen and the JPY 65 trillion AssetPurchase Program, the Nikkei has trended higher for six weeks in a row. But have a look and see on the development since the beginning of 2011; over this time period the Nikkei has traded below other major indices so maybe it can play catch-up; the price-to-book value is still looking cheap. Just to add some color, the all-time-high was posted in 1989, and the level today is 75 percent below the highs. For the first time in 31 years, Japan showed a trade deficit last year, and in January it posted its largest trade deficit ever. This raises questions about the prevailing economic structure with large current account surpluses and net savings. If also the current account surplus turns into deficit, the consequences may be dramatic since Japan would be forced to import capital to finance its gargantuan debt load. The unemployment rate has drifted higher since September, and was sitting at 4.6 percent in January. If our GDP forecast becomes reality, the unemployment rate should stabilize and decline somewhat in 2012-13. Japan is massively dependent on foreign oil; arguably a sharp upturn in oil prices is the biggest near-term risk now when the tail risk of a severe recession in Europe is lower. While inflation in year-on-year terms edged above the zero line in January, core inflation (excluding fresh food) will probably not follow suit for some time yet. The structural challenges are enormous indeed: the debt/GDP ratio has risen to a gargantuan 230 percent. Meanwhile the share of the population that tops 65 years of age is at 25 percent and it will keep rising.
Key data Percentage change

2010 2011 2012 2013 GDP* Unemployment** Inflation* Government deficit***

Source: SEB

4.4 5.1 -0.7

-0.7 4.6 -0.3

1.9 4.4 0.1

1.3 4.2 0.2

-9.3 -10.3 -11.0 -11.0

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

CHARTS ON THE JAPANESE ECONOMY

thousand billions

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Economic Insight

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China: Weak start for 2012 but no hard landing

Distortions due to the Lunar New Year imply that data for January and February are difficult to interpret but it is clear that activity in the Chinese economy has been weak at the start of 2012. GDP growth in the current quarter is likely to be weak. The recent development puts a downside risk to our above-consensus GDP forecast of 8.7 per cent growth in 2012. However, due to data distortions caused by the Lunar New Year and models indicating a rebound in activity in April we maintain our forecast for the time being. Headline inflation fell to 3.2 per cent in February. Food inflation dropped from 10.5 per cent in January to 6.2 per cent. (Chart 1)The large drop in inflation reflects the timing of the Lunar New Year and headline inflation might rebound somewhat in March, a higher than expected fuel price increase adding further upward pressure. Lower inflation provides opportunities for policy loosening in order to stimulate growth. Most indicators point to weak growth. A preliminary reading of HSBCs manufacturing Purchasing Managers Index (PMI) for March decreased to 48.1, putting the recent rebound in doubt. (Chart 2) The official PMI for March is likely to follow suit and end up close to or even below 50. Conditions in manufacturing are weak but not consistent with a hard landing. Leading indicators points to growth below trend. (Chart 3) Export and import data are distorted due to the Lunar New Year but export growth is trending downwards. (Chart 4) The trade balance hit a deficit of 31.5 bn USD in February, the largest single-month deficit on record. (Chart 5) Retail sales are holding up well but industrial production showed the lowest reading since July 2009 in January/February (Chart 6) Total loans picked up slightly in February. (Chart 7) The gradual cooling of the housing market continues; house prices were flat in February compared to a year ago. (Chart 8) Construction activity is still strong but project starts are weak. The government is not ready to relax property market controls yet. The depreciation of the yuan towards the USD has slowed down in 2012. (Chart 9) Premier Wen has stated that the yuan might be close to an equilibrium exchange rate.

MONDAY 26 MARCH 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

Key data Percentage change

2010 2011 2012 2013 GDP* Inflation* USD/CNY** 10.4 3.3 6.59 9.3 5.4 6.29 8.7 4.4 6.00 8.9 4.5 5.82

* Percentage change. ** End of period. Source: National Bureau of Statistics of China, Reuters, SEB.

Economic Insight

CHARTS ON THE CHINESE ECONOMY

Euro zone: The risk of a severe recession has diminished

ECB support has averted a credit crunch and stabilised bond markets. The Greek debt-restructuring (Private Sector Involvement, PSI) was reasonably successful, paving the way for the second bailout programme and thereby avoiding a disorderly Greek default for now. With the exception of the labour market, some of the recent data has surprised on the upside, including Q4 GDP, new orders and retail sales. Indicators have stabilised or recovered slightly although current levels still indicate a fall in activity. The labour market continues to deteriorate and the recent development has put an upside risk to our unemployment forecast. Consumer spending remains weak and contributed to the Q4 fall in GDP. In light of the recent data, a stabilisation in financial markets and better prospects for Germany, we revise our GDP forecast for the euro zone slightly upwards compared to Nordic Outlook February. GDP is expected to fall by 0.6 per cent in 2012 followed by a return to positive territory with a weak recovery of 0.8 per cent in 2013. The risk of a more severe recession in the euro zone has diminished. Inflation was 2.7 per cent in February and is expected to moderate during 2012 although the HICP-forecast has been revised upwards due to rising energy prices. Inflation is expected to be above the ECB target in 2012 but below the target in 2013. The ECB is not expected to make any major changes to its monetary policy stance for the time being. We expect the refi rate to remain at 1.0 per cent and no new LTROs are expected in the coming months. Having avoided a credit crunch and so far stabilised the situation in bond markets the ECB seems content with the support it currently offers. The ECB also needs some time to evaluate what they call the extremely complicated effects of the LTROs. The policy stance can be interpreted as ECB having put the ball firmly in the governments court; long-term solutions to the euro-crisis rest with governments. Andreas Johnson, SEB Economic Research andreas.johnson@seb.se, +46 8 763 80 32

WEDNESDAY 21 MARCH 2012

GDP forecasts
Per cent 2011 Euro zone France Germany Italy Spain
Source: SEB

Key data
Percentage change 2012 -0.6 -0.3 0.7 -1.9 -1.5 2013 0.8 0.8 1.4 0.2 0.3 GDP* Unemployment** Inflation* Government deficit***
Source: SEB

2010 2011 2012 2013 1.8 10.1 1.6 -6.4 1.5 10.1 2.7 -4.4 -0.6 10.6 2.3 -3.5 0.8 11.1 1.6 -3.0

1.5 1.7 3.0 0.5 0.7

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

INDICATORS AND GDP Most indicators have stabilised or recovered slightly but are still at levels pointing to a fall in activity. The ESI (Economic Sentiment Indicator) rose for the second consecutive month in February but still points to a fall in GDP. The composite purchasing managers index (PMI) fell to 49.3 in February. The German Ifo-index rose for the fourth consecutive time in February and is well above the long-term average. The ZEW investor sentiment also continues to recover and in March reached its highest level since June 2010. Euro zone GDP fell by 0.3 per cent in Q4, in line with the forecast in Nordic Outlook February and slightly better than the consensus forecast of -0.4 per cent due to better than expected performance in Germany and France. The decrease in GDP was driven by consumer spending and investment. Italy entered a technical recession in Q4 as GDP fell for the second consecutive quarter. Euro zone GDP is expected to fall by 0.6 per cent in 2012 followed by a weak recovery of 0.8 per cent in 2013. The forecast for Germany has been revised upwards to 0.7 per cent.

GDP growth, quarter-on-quarter

Per cent Q4 Euro zone France Germany Italy Spain -0.3 0.2 -0.2 -0.7 -0.3 Q3 0.1 0.3 0.6 -0.2 0.0 Q2 0.1 -0.1 0.3 0.3 0.2

Source: Eurostat, national statistical offices

Economic Insight

LABOUR MARKET AND INDUSTRY Unemployment in the euro zone rose to 10.7 per cent in January and the figure for December was revised upwards. The number of unemployed increased by 185 000; the ninth consecutive monthly increase, bringing the total number of unemployed in the Euro-zone to 16.9 million. Januarys weak development along with revisions puts an upside risk to our labour market forecast. Unemployment rose sharply in several of the peripheral and southern euro zone economies in January; the unemployment rate in Greece reached 19.9 per cent. The German labour market is still strong but the rate of unemployment has stopped declining. Euro zone unit labour costs are rising slowly after the fall in 2009 and 2010. Unit labour costs in Spain continue to decrease. Manufacturing new orders rebounded in December and beat expectations. Industrial production was very weak at the end of 2011. Industrial production recovered slightly in January, increasing by 0.2 per cent compared to the previous month, but is still well below the recent high in August 2011.

Economic Insight

FINANCIAL AND MONETARY INDICATORS, INFLATION The liquidity provided by the two LTROs (22 December and 29 February) has avoided a serious credit crunch and diminished the need for the ECB to intervene in secondary government bond markets. The ECB kept its monetary strategy unchanged in March. No more three-year loans are expected in the months to come and the refi rate will remain at 1.0 per cent during the forecast period. In ECBs latest forecast, the GDP forecast for 2012 was revised downwards to -0.1 per cent and the inflation forecast was revised upwards. Yield spreads between German government bonds and other euro zone countries have come down since the beginning of the year but remain elevated. The Greek PSI was successful with a 95.7 per cent participation rate and a Greek disorderly default was avoided. Bank lending is still weak although there was an improvement in January. The annual growth rate of M3 rose to 2.5 per cent in January. The euro has started to weaken again since the beginning of March providing some stimulus for exports. Financial stocks have surged by around 20 per cent since the beginning of 2012. Inflation was 2.7 per cent in February. The HICP forecast was revised upwards to 2.3 per cent in 2012 and 1.6 per cent in 2013. Core inflation will bottom out at 1.2 per cent in autumn 2012 and reach 1.5 per cent by end-2013.

UK economy: still weak

While we maintain a bearish bent on the UK economy, the consensus 2012 GDP estimates actually ticked higher to 0.6 percent in March. Meanwhile the Bloomberg average is lower, at 0.2 percent for 2012. We predict GDP growth of 0.4 percent in 2012 and 1.4 percent in 2013, respectively. Recent data, e.g. on industrial production and retail sales suggests that the economy is still weak although some other indicators fuel recovery hopes. The market is currently looking for 0.4 percent GDP growth at an annual rate in the first quarter, which implies zero growth compared to the fourth quarter. A flat economy is consistent with the message from NiESRs huge macroeconomic model (a pretty amazing creature that we have used in the past) and our own forecast. The private sector continues to add to payrolls while jobs are cut in the public sector. Since the labor force is growing, the unemployment rate is on a rising trend and at 8.4 percent it is sitting at its highest level since 1995. The unemployment rate is expected to drift gradually higher in 2012-13. It is already well above the NAIRU which is why regular pay is trending below 2 percent year-on-year. But the downward pressure on real wages from inflation is diminishing which will help the recovery to take hold in 2013. Inflation continues to decline from the high-water mark in September, and fell from 3.6 percent in January to 3.4 percent in February. While the fall was somewhat smaller than expected, the trajectory is in line with the MPCs latest projections. On the margin, our inflation forecasts are revised higher on oil but we still look for below-target inflation in 2013. The dovish set of MPC minutes, with two members pushing for more stimulus, suggest that the door to more QE is still ajar.

THURSDAY 22 MARCH 2012

Mattias Brur SEB Economic Research +46 8 763 85 06

Key data Percentage change

2010 2011 2012 2013 GDP* Unemployment** Inflation* Government deficit***

Source: SEB

2.1 7.9 3.3 -10.3

0.8 8.1 4.5 -8.5

0.4 8.7 2.8 -7.0

1.4 8.8 1.5 -6.0

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

CHARTS ON THE UK ECONOMY

Percent

Economic Insight

CONTINUED

Real exchange rate

Index, 2000 = 100
125 120 115 110 105 100 95 90 85 80 75 70 74 77 80 83 86 89 92 95 98 01 04 07 10
Source: Reuters EcoWin, SEB

M4 growth still negative

Year-on-year percentage change
125 120 115 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Reuters EcoWin, SEB

20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0

Stronger

110 105 100 95 90 85

Weaker

80 75 70

Sweden: Growth forecast largely on track

Growth forecast largely on track. The sharp decline in Q4 GDP shows that Swedish growth is slowing, but exaggerates the underlying weakness. The growth forecast has been revised upward slightly to 0.7 per cent in 2012 and 1.9 per cent in 2013 (previous forecast 0.5 per cent and 1.7 per cent for 2012/13). Signs of stabilisation in the Euro zone are supportive, although many problems remain that will affect Sweden. Growth is likely to be well below trend over the next two years. The sharp decline in Q4 GDP constitutes a downside risk. However, the outcome doesnt seem to reflect the underlying trend as sentiment indicators signal a slowdown rather than a recession. Downside risks for the household sector have decreased with rising sentiment and signs of a relief in the housing market. The labour market is slowing down but indicators point to a mixed picture. Employment has been weak in the beginning of 2012 but unemployment has so far leveled out in line with our forecast. Furthermore, short-term indictors have only declined moderately. All in all, our forecast of gradually rising unemployment from mid-2012 is largely on track. CPIF inflation is expected to rise slightly in 2012 from the present low level, partly due to rising petrol prices. Headline CPI is heading lower due to declining mortgage rates. The Riksbank is expected to continue to cut rates to 1 per cent in 2012 due to rising unemployment and low inflation. The April rate decision is likely to be a close call but we continue to expect the Riksbank to remain on hold and wait for more indications on the extent of the slowdown and where the housing market is heading. The forecast for government savings has been lowered slightly but Swedish public finances are still extremely strong in an international comparison.
Swe: GDP
10 8 6 4 2 0 -2 -4 -6 10 11 12 13
% y/y % q/q (RHS)

MONDAY 26 MARCH 2012

Olle Holmgren, SEB Trading Strategy

olle.holmgren@seb.se

+46 8 763 80 79

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5

Key data Percentage change

2010 2011 2012 2013 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

6.1 5.9 8.4 1.2 0.0

3.9 4.0 7.4 3.0 0.3

0.7 1.1 7.6 1.3 -0.5

1.9 1.9 8.1 1.0 -0.4

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

GDP SLOWING BUT NOT DECREASING Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector have stabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment. Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak in January. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs also for other service sectors. Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and in the public sector. Confidence in construction has declined considerably and housing investments are predicted to decline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012 according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.
Swe: Manufacturing sentiment
20 10 0 -10 -20 -30 -40 98 00 02 04 06 08 10 12 40 30 20 10 0 -10 -20 -30 -40 -50

Swe: Economic sentiment and confidence in the service sector

120 115 110 105 100 95 90 85 80 75 03 04 05 06 07 08 09 10 11 60 50 40 30 20 10 0 -10 -20 -30

Confidence indicator

Inflow of new orders

Economic Sentiment (business + consumer confidence) Sentiment in the service sector (RHS)

Swe: Production, % y/y, 3-month average

15 10 5 0 -5 -10 -15 -20 -25 04 05 06 07 08 09 10 11 15 10 5 0 -5 -10 -15 -20 -25

Confidence in the retail sector

40 20 0 -20 -40 -60 -80 07 08 09 10 11 Total 12 Durable goods Mostly food 40 20 0 -20 -40 -60 -80

Industry

Service sector

Swe: Confidence in construction

75 50 25 0 -25 -50 -75 -100 96 98 00 02 04 06 08 10 12 75 50 25 0 -25 -50 -75 -100

Swe: Housing starts and residential fixed investments, % y/y

175 150 125 100 75 50 25 0 -25 -50 -75 00 01 02 03 04 05 06 07 08 09 10 11 Housing starts Residential investments
Source: Reuters EcoWin

175 150 125 100 75 50 25 0 -25 -50 -75

Building activity, expectations Order books, outcome The confidence indicator

Economic Insight

HOUSEHOLD SECTOR AND THE LABOUR MARKET Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in the stock market. Car registration and retail sales are holding up well, while consumer confidence has recovered. Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was one explanation. There has been a downward revision to the household savings ratio implying that household savings almost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective. The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3 months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 per cent over the next two years but downside risks have decreased. Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast. Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment is likely to start rising from mid-2012.
Swe: Consumer confidence
30 20 10 0 -10 -20 -30 04 05 06 07 08 09 10 11 75 50 25 0 -25 -50 -75

Swe: Mortgage lending rates and the repo rate

9 8 7 6 5 4 3 2 1 0 -1 -2 07 08 09 10 11 Spread 12 3 - month mortgage lending rates Repo rate 325 300 275 250 225 200 175 150 125 100 75 50

Consumer confidence SEB, housing price indicator

Swe: House Prices, index 2005 = 100

160 150 140 130 120 110 100 90 05 06 07 08 09 10 11 160 150 140 130 120 110 100 90

Swe: Household savings ratio, % of income

15
Total

15 10 5 0 -5
Ex manatory pension savings Own financial savings

10 5 0 -5 -10

SCB, houses Valueguard, Flats

Valueguard houses

93

96

99

02

05

08

11

-10

Swe: Employment according to the NIER survey

4 3 2 1 0 -1 -2 -3 -4 04 05 06 07 08 09 10 11 30 20 10
Net balance

Swe: The labour market

3-month average

9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5

Unemployment, %

4700 4650 4600 4550 4500

Employment, 1000s (RHS)

0 -10 -20 -30 -40 -50

07

08

09

10

11

12

13

4450

Employment, % y/y Planed employment, business sector (RHS)

Economic Insight

INFLATION AND THE RIKSBANK Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiations remain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some signs of negotiation strains but we expect wage agreements to be reached with out any major strikes. The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIF inflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF ex food and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicates that the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1 per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbank will take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a stabilisation in the housing market will be more important than the lower than expected Q4 GDP.
Swe: CPI, % y/y
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10
CPIF, ex food and energy CPI CPIF

Swe: CPIF, % y/y

3.5 3.0 2.5 2.0 1.5 1.0 0.5 13 0.0

2.5 2.0 1.5 1.0 0.5 0.0

SEB Riksbank

2.5 2.0 1.5 1.0 0.5 0.0

11

12

10

11

12

13

Swe: Hourly wages, % y/y

5.0
Total economy

Swe: Capacity utilisation indicators

5.0 4.5 4.0 3.5 3.0

2 1 0 -1 -2
Riksbank, RU-indicator SEB's, indicator

2 1 0 -1 -2 -3

4.5 4.0 3.5 3.0 2.5 2.0

Corrected for historical bias (Riksbank's estimate) Business sector

2.5 2.0

1.5

01 02 03 04 05 06 07 08 09 10 11

1.5

-3

03

04

05

06

07

08

09

10

11

Swe: Lending to households

15 13 11 9 7 5 3 02 03 04 05 06 07 08 09 10 11 15 13 11 9 7 5 3

Swe: Government bond spread vs Germany, bps

40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 07 08 09 10 11 12 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70

% m/m, annualised, SA, 3 month average % y/y

Norway: Activity running at a solid clip

Activity indicators for the first couple of months of the year suggest that overall activity has started the year on a stronger-than-expected footing. The solid impression fits with what respondents reported in the most recent report from Norges Banks regional network: output increased fairly rapidly in winter while expectations ahead was for some moderation (as they tend to be), consistent with growth in mainland GDP i.e. excluding oil/gas and shipping at near 3% year-on-year rate in the first half of 2012. Relative to Februarys Nordic Outlook, we lift the forecast for growth in mainland GDP in 2012 to 2.6% from 2.3% while leaving the forecast for 2013 unchanged at 2.9% for now. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 which nonetheless implies stronger growth than in 2011. We see upside risks to the forecasts. The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wage growth to stem deteriorating competitiveness in export industries. The trend-setting negotiation for manufacturing blue-collar workers has broken down with the official mediator stepping in. Pay increases might be slower than in 2011: according to media reports, labour unions will trade it for a common paternal leave in the private sector to be paid for by government. Actual wage inflation in manufacturing is likely to be stronger than agreed in the central negotiations due to wage drift (local pay), reflecting tight labour markets. Moreover, wage growth in the dominant public sector might not slow as much. In all, we expect overall wage growth to ease from 4.2% in 2011 to 3.9% in 2012, yielding a solid increase when adjusted for inflation. Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at its mid-March monetary policy meeting, citing still-lingering concern for global growth and lower inflation due to NOK appreciation. The bank lowered its optimal rate path quite markedly, putting any rate hike off to Q3/13. We think a hike will come next spring at the latest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.

MONDAY 2 APRIL 2012 Growth

Inflation

Labour-market

Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway
Growth is seen holding near trend
Mainland GDP and Norges Banks regional network
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 10 Mainland GDP, % change year-on-year (LHS) Regional network output indicator, index (RHS) Output expectations 6 mth ahead, index (RHS) 11 12 4 3 2 1 0 -1 -2

Key data Percentage change

2010 2011 2012 2013 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 0.7 1.9 3.6 2.5 1.4 10.8 1.6 2.6 3.3 1.2 0.9 13.6 2.1 2.6 3.3 1.5 1.5 11.5 2.4 2.9 3.2 1.9 1.9

* Per cent of labour force, ** General government, per cent of GDP, forecast 2012 MoF (Oct. 2011) Source: SEB

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012. The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly winds from abroad. The 13-point jump in the PMI from December to a 4 -year high of 59.7 in March and an even stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery. Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period which marked the previous high.
Consumption has firmed in early 2012
3-month average
16 12 8 4 0 -4 -8 -12 03 04 05 06 07 08 09 10 Consumption of goods, % change year-on-year (LHS) % change from 3 mth. earlier (RHS) 11 4 3 2 1 0 -1 -2 -3 -2.5 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Private consumption, % change year-on-year (LHS) Consumer confidence, net balance (RHS) 5.0 2.5 0.0 30 20 10 0 -10 10.0 50 7.5 40

as turn in confidence has suggested

Source: Statistics Norway

Source: Ecowin, Statistics Norway

Choppy momentum in manufacturing, but

3-month average
24 16 8 0 -8 -16 01 02 03 04 05 06 07 08 09 10 11 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 6 4 2 0 -2 -4

sharp recovery in PMI suggests solid outlook

75 70 65 60 55 50 45 40 35 30 04 05 06 07 08 09 10 11
Source: Ecowin

75 70 65 60 55 50 45 40 35 30 PMI manufacturing (RHS) PMI new orders (RHS)

Source: Statistics Norway

The upturn in housing starts has levelled off..

80 60 40 20 0 -20 -40 01 02 03 04 05 06 07 08 09 10 11 Housing starts 3 mth. average, % change year-on-year (LHS) Housing starts in 1.000, 12 mth. aggregate (RHS)
Source: Statistics Norway

.. but orders suggest much more in the pipeline

11 10 160 140 120 100 80 60 40 20 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Housing starts in 1.000, quarterly average (LHS) Nominal orders new residential buildings, 2Q earlier (RHS)

40 35 30 25 20 15

9 8 7 6 5 4 3

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy. Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year. Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure excl. taxes and energy was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015. Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt, but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
Employment growth continues to run strongly
3-month average
5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 Employment, % change year-on-year (LHS) Unemployment, % of labour force (RHS) 09 10 11 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0 87 89 91 93 95 97 99 01 03 05 Wage growth, % change year-on-year (LHS) LFS unemployment rate, reversed (RHS) 07 09 11 4 2 10 8 6 0 1 2 3 4 5 6 7

Wage growth to moderate slightly in 2012

Source: Statistics Norway

Source: Statistics Norway

Core inflation shows no definite trend-change

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 -2 02 03 04 05 06 07 08 09 10 11 Consumer prices CPI excl. taxes and energy
Source: Statistics Norway

Imported goods are denting inflation

Year-on-year percentage change
6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 02 03 04 05 06 07 08 Core CPI domestic goods and services Core CPI imported consumer goods 09 10 11 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5

7 6 5 4 3 2 1 0 -1 -2

Source: Statistics Norway

Existing home prices continue to climb ..

25 20 15 10 5 0 -5 -10 01 02 03 04 05 06 07 08 09 10 Existing home prices, % change year-on-year (LHS) Existing home prices per sqm in NOK 1.000 (RHS) 11 15 10 25 20 35 30

..as home completions lag household formation

Thousands
50 40 30 20 10 0 -10 -20 02 03 04 05 06 07 08 09 10 11 Net balance No of households, change y/y Housing completions 50 40 30 20 10 0 -10 -20

Source: Norw. Ass. of Real Estate Agents

Source: Norges Bank, Statistics Norway

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end 2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a global recovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year. The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a 7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.
Norges Bank sees rates lower for longer..
Per cent
8 7 6 5 4 3 2 1 0 02 03 04 05 06 07 Norges Bank deposit rate Optimal rate path, MPR 3/11 08 09 10 11 12 13 14 Optimal rate path, MPR 1/12
Source: Norges Bank, SEB

..as NOK is expected to remain stronger

Index
8 7 6 5 4 3 2 1 0 95 93 91 89 87 85 83 2010 2011 NOK import-weighted NOK assumption MPR 3/11 2012 2013 2014 NOK assumption MPR 1/12
Source: Norges Bank, SEB

95 93 91 89 87 85 83

Low rates spur stronger credit growth

Year-on-year percentage change
25 20 15 10 5 0 -5 25 20 15 10 5 0 -5 01 02 03 04 05 06 07 08 09 10 11 Domestic credit growth Domestic credit to households Credit to non-financial companies Source: Statistics Norway
9 8 7 6 5 4 3 2 1 0

Tight spread vs. Germany didnt hold for long

Weekly average
200

150

100

50

0 01 02 03 04 05 06 07 08 09 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 10 11
Source: Reuters, SEB

NOK marginally weaker after latest rate cut..

Weekly average
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 2004 2005 2006 2007 2008 2009 EUR/NOK (LHS) USD/NOK (RHS) 2010 2011
Source: Reuters, SEB

.. but is still stronger than at end-2011

Weekly average
116 112 108 104 100 96 92 88 84 2004 2005 2006 2007 NOK trade-weighted (LHS) 2008 2009 2010 2011 NOK import-weighted (RHR) 112 108 104 100 96 92 88 84 80

9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

Source: Reuters, SEB

Denmark: Muddling through still on track

Growth moved sideways in the last part of 2011 as export growth slowed and public consumption kept contracting. The fiscal stance is set to reverse providing an important growth impetus this year. Private consumption grew at the end of the year. Even though consumer confidence has improved on the margin it still points to sluggish consumption in 2012. Housing investments started stalling at the end of 2011 after a strong beginning to the year. House prices have resumed the decline and the housing market sees low turnover. Fixed investments have held up fairly well and capacity utilization suggests some room for investments in 2012. Manufacturing has staged a rebound alongside PMIs, in line with the global tendency. However, the latest readings suggest slowing momentum in the short term.

WEDNESDAY 28 MARCH 2012 Growth

Inflation

Labour-market

Jakob Lage Hansen, SEB X-asset Research, +45 33281469

Key data Percentage change

2010 2011 2012 2013 GDP*

Percent (Y-Y)

1.3 4.2 2.2 -2.6

1.0 4.1 2.7 -3.0

0.5 4.3 1.7 -4.5

1.4 4.2 1.8 -2.5

Unemployment** Inflation* Government deficit**

Source: SEB

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Percent, 12M

Percent (Y-Y)

Net balance

Net balance

Economic Insight

The unemployment rate has kept falling. The drop in public employment is moderating, but this year is unlikely to see a marked improvement in labor markets in general as growth is subdued. Consumers expectations of unemployment have turned less negative, but they still point to higher unemployment in the near term. The growth in exports is waning as Denmarks main trading partners have delivered slower growth. A weaker effective exchange rate is offering some counterbalance. The large current account surplus has persisted and the foreign reserves have grown as the central bank has defended the peg to the euro. However, some of the positive pressure on the krone has come off as the negative tail risk in the Eurozone has fallen. The krone level is still relatively strong and the negative policy spread to Euroland has thus been maintained. The resulting low mortgage yields are providing a cushion for consumers. The government has launched another bank package lifting real estate loans off the balance sheets of the large corporate lender FIH. It will also create a special credit institute extending credit to well run agricultural companies who face tight credit as the sector in general has experienced large capital losses on land putting pressure on banks.
Housing investments and prices
30 15

40 30 20

20

10

10
Percent (12M)

5
%-points (12M)

Percent, 12M

10 0 -10

-10

-5

-20

-10

-20 -30 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Housing investments House prices

Source: Reuters EcoWin

-30 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Non-residential investments Capacity utilisation

-15

Percent, 12M

Exchange rate
110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90
7 6 5 4

Danish rates and FX reserves

500 450 400 350 300 3 2 1 0 250 200 150 100 04 05 06 07 08 09 10 11 12

92

94

96

98

00

02

04

06

08

10

12

DKK effective exchange rate Source: Reuters EcoWin

Danish lending rate ECB repo rate

Mortgage rate (0-1Y incl. costs) Currency reserve, DKK

Source: Reuters EcoWin

Percent

Finland: Recent data confirms slowdown

The slowdown for major trading partners is affecting the sensitive Finnish economy with exports ending last year, and starting 2012, on a weak note. Leading indicators have bottomed out in December 2011/January 2012 and has since showed some improvements, although they remain at low levels. As has been the case through the crisis, the service sector sees the outlook as brighter than manufacturing and construction. With exports representing roughly 40 per cent of GDP, the economy will feel more of the international slowdown; the structure of production with focus on capital and intermediate goods hold back the development. In 2011, export volumes was more than 15 per cent lower than 2008 and the near term outlook is weak. Monthly data in current prices showed unchanged exports in January 2012. We expect export volumes to stay flat compared to 2011. The labour market continues to look strong but will be affected negatively ahead. We adjust our GDP forecast for 2012 and 2013 slightly upwards to 0.7 and 1.7 per cent respectively from 0.5 and 1.7 per cent respectively in Nordic Outlook, February 2012. Given this forecast, GDP will just reach its pre-crisis (2008) level in 2013. Daniel Bergvall, Economic Research, +46 8 763 85 94
Key data Percentage change

MONDAY 2 APRIL 2012

2010 2011 2012 2013 GDP Unemployment* Inflation 3.6 8.4 1.7 2.7 7.8 3.3 -1,5 0.7 7.8 2.0 -1.7 1.7 8.0 1,9 -0.5

Government fiscal balance** -2.5

* Per cent of labour force, ** Per cent of GDP Source: SEB

Economic Insights

GROWTH TO REMAIN WEAK IN THE FIRST HALF OF 2012 Except for Q3, growth was weak in 2011 and in the last quarter GDP just barely increased (+0.1% q/q). The development towards the end of the year was in line with Statistics Finlands monthly GDP indicator and EU Commission indicators. The deteriorating outlook took its toll on business confidence last year, but since the turn of the year, there has been a slight improvement and stabilisation in confidence. Services are above zero, but for manufacturing and construction indicators still point at contraction. The indicators for all three sectors are below long term averages. Even though the sharp dip in exports late last year was a statistical oddity, the development since then has been weak but more stable. After shaking off the worst of the recession fear late last year, confidence among consumers has improved and was unchanged in March compared to February. Consumer confidence has bounced back since the weak readings late last year. Consumer confidence and consumption weakened towards the end of 2011 but retail sales for January and February points towards an improvement ahead (up on average 5.5 per cent on an annual basis). Overall, consumer spending is expected to hold up relatively well, supported by the labour market. Bank (MFI) lending to households and especially to non-financial corporations are rising, reaching just above 8 per cent on an annual basis in February for the latter. Investments were second after household consumption in contributing to GDP-growth last year although capacity utilisation is still at a low level, although rising. Capital spending is expected to level off and increase only slightly in 2012. The economy is slowing down, but the labour market still develops favourably. Vacancies are still trending higher and unemployment continues to fall. In February unemployment stood at 7.4 per cent, down from 8.1 per cent a year earlier. We expect unemployment to continue to level off at this level and rise again from mid-year. Inflation has been stuck around 3 per cent in January and February but is expected to fall, giving a boost to household real income that together with the labour market will support consumer spending.

Economic Insights

WEAK GROWTH WILL AFFECT PUBLIC FINANCES, BUT NO IMMEDIATE NEED FOR CONSOLIDATION A government surplus in the years leading up to the crisis has put Finland in a better position than many other economies. General government net lending is expected to worsen somewhat in 2012 compared to 2011, but will not drop below -2 per cent of GDP. In a euro zone perspective this puts Finland in a favourable position with no or small need for the government to implement front-loaded budget tightening that would further erode growth prospects. Instead fiscal policy can be neutral in the short term. Noteworthy is that the abated tolerance of high government debt has not affected relatively low indebted Finland; on the other hand, long term government yields have dropped more than 100 bps in the last year. At the same time though, the 10-year government bond spread to Germany has doubled from approximately 25 to 50 bps.