Increased downside risks for the world economy

THE WORLD ECONOMY HAS RECENTLY LOST MOMENTUM ON A BROAD FRONT. This is manifested by a downturn in leading indicators, for example those that measure business optimism and commodity prices. In recent weeks the euro zone crisis has deepened, although the new election outcome in Greece has created some breathing space. The American economy is continuing to move sideways at close to trend growth, but the latest labour market slowdown is cause for concern. Meanwhile important emerging market (EM) economies have shown clear decelerating tendencies.

WEDNESDAY JUNE 20 2012

faster recovery to 10%, compared to 20% in Nordic Outlook.

Global GDP growth

Year-on-year percentage change (May Nordic Outlook in brackets)

2010 United States 3.0 Japan 4.4 Germany 3.7 China 10.4 India 10.6 United Kingdom 2.1 Euro zone 1.9 Nordic countries 2.7 Baltic countries 1.1 OECD 3.1 Emerging markets 7.3 World, PPP* 5.3
Source: OECD, SEB

2011 2012 2013 1.7 2.3 (2.5) 2.7 (2.7) -0.7 2.4 (2.2) 1.7 (1.7) 3.0 0.8 (0.8) 1.3 (1.6) 9.3 8.1 (8.5) 8.4 (8.7) 7.2 6.0 (7.0) 6.6 (7.3) 0.8 0.2 (0.5) 1.2 (1.7) 1.5 -0.6(-0.6) 0.5 (0.8) 2.5 1,2 (1.1) 1.9 (2.0) 6.2 2.8 (2.5) 3.4 (3.4) 1.7 1.5 (1.6) 2.0 (2.1) 6.2 5.2 (5.6) 5.7 (5.9) 3.9 3.3 (3.6) 3.9 (4.1)

* Purchasing power parities

OUR CONCLUSIONS ABOUT VARIOUS PARTS OF THE WORLD ECONOMY have been reported in our
Macro Updates series during the past few weeks. Downward adjustments in our main forecast, compared to the May issue of Nordic Outlook, have been relatively small and primarily concern the largest EM economies. But most indications are still that a recession can be limited to crisis-hit countries in the euro zone, while northern Europe and the United States will avoid recession. We have adjusted our global 2012 GDP forecast from 3.6 to 3.3% and our 2013 forecast from 4.1 to 3.9%. We believe that the risk picture has changed in a negative direction, mainly because the probability of a deeper euro zone downturn has increased. In such a scenario, it is more likely that the overall economies of the 34 countries in the Organisation for Economic Cooperation and Development (OECD) will shrink. We have thus boosted the probability of a recession scenario to 35%, compared to 25% in the May issue of Nordic Outlook. Meanwhile we have lowered the probability of a

IN CHINA, GDP GROWTH SLOWED NOTICEABLY DURING THE FIRST QUARTER OF 2012 and monthly figures for April fuelled mounting worries about an economic hard landing. However, statistics for May indicated a stabilisation, and the central banks key interest rate cut in June confirmed that the focus of Chinese official economic policy has now definitively shifted from fighting inflation to sustaining growth. For this reason, we still expect a soft landing for Chinas economy, but we have adjusted our GDP forecasts for 2012 and 2013 downward by 0.4 and 0.3 percentage points, respectively, compared to Nordic Outlook in May. In India, there is less room for economic policy manoeuvring, due to large budget deficits and stubbornly high inflation. A political stalemate is an additional reason why we have adjusted our GDP forecast for this year from 7.0 to 6.0%. In the EM sphere as a whole, we now expect GDP growth of 5.2%, compared to 5.6% in May. Our downward revision for 2013 is only 0.2 percentage points. US ECONOMIC GROWTH WILL PROBABLY REMAIN AROUND ITS TREND LEVEL OF 2% during the next couple of years, sustained by a strongly expansionary monetary policy. In recent weeks, however, most data have turned out to be weaker than expected, especially

Economic Insights

labour market statistics. During the first quarter, GDP growth was only 1.9% even though economic activity benefited from a historically mild winter. We have adjusted our overall GDP forecast for 2012 from 2.5 to 2.3%. Renewed signs of economic weakness have increased the likelihood of further monetary stimulus. Our assessment is that the Federal Reserve will carry out a third round of quantitative easing (QE3) in the near future. The Bank of England recently indicated its willingness to respond to renewed signs of weakness with further stimulus, confirming that central banks are determined to move ahead. UNCERTAINTY HAS RECENTLY INCREASED IN THE EURO ZONE. The recent bail-out package of nearly EUR 100 billion targeted to Spains banking sector and the outcome of Greeces new parliamentary election have not been sufficient to create any lasting sense of relief. Most indicators have weakened in recent months, and the level of the purchasing managers index (PMI) now points towards a clear decline in GDP. The labour market situation is continuing to deteriorate and retail sales are sluggish. But the picture is not completely negative. First quarter GDP growth was better than expected, due among other things to continued stability in the German economy. Euro zone exports are also generally performing decently, partly sustained by an ever weakening euro exchange rate. Our 2012 GDP growth forecast of -0.6% (consensus -0.3%) remains unchanged, but we have revised our 2013 forecast downward from 0.8 to 0.5%, with the risks on the downside. Our current forecast also assumes a clear turnaround in the course of 2013. Stronger global economic performance as well as an increasingly weak euro may provide some help. It will also be necessary to ease the economic policy gridlock that is now hampering growth. One way would be for Germany to implement fiscal stimulus measures, as well as accept a higher rate of domestic price and pay increases, in order to help ease euro zone imbalances. The European Central Bank (ECB) will need to step up its initiatives and show greater flexibility as well. It is also important that problemplagued countries genuinely fulfil the belt-tightening pledges they have undertaken, in order to push down unsustainably high bond yields and rekindle long-term confidence in the euro project.

FIRST QUARTER GDP GROWTH WAS AN UPSIDE SURPRISE IN ALL OF THE NORDIC COUNTRIES. We have also adjusted our forecasts for Finland and Norway upward. Norway thus increasingly stands out from other European countries, with growth set to exceed 2.5% both in 2012 and 2013. In Finland, growth will be relatively decent in 2012, although we expect a certain slowdown after temporary factors drove up the first quarter figure. In both Sweden and Denmark, we predict GDP growth of 0.5% in 2012. In Sweden, various disappointments in recent monthly figures have contributed to more subdued expectations for the second quarter. We have thus adjusted our full-year forecasts for both 2012 and 2013 slightly downward, despite the strong first quarter figure.

GDP growth, Nordic countries

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

Sweden Norway Denmark Finland Nordic countries

Source: OECD, SEB

2010 6.1 0.7 1.3 3.6 2.9

2011 3.9 1.4 1.0 2.9 2.5

2012 2013 0.5 (0.7) 1.7 (1.9) 2.8 (2.3) 2.6 (2.6) 0.5 (0.5) 1.4 (1.4) 1.2 (0.7) 1.7 (1.7) 1.2 (1.1) 1.9 (2.0)

hakan.frisen@seb.se +46 8 763 8067

U.S. economy: The outlook is cloudy

History doesnt repeat itself, but it does rhyme. Just compare what is happening so far this year to what was happening not just at a similar juncture last year but in 2010 as well. The majority of the data releases have been coming in below expectations over the past few months (Chart 1). Growth in the first quarter was not recession-like by any means, but 1.9% is just not that good when taking the balmiest winter conditions since record-keeping began into account (Chart 2). The outlook is cloudy; weather effects continue to distort the picture but it looks as if momentum is subsiding. Consequently, what many pundits are expecting is that the Fed will ride to the rescue with some sort of additional easing when Operation Twist ends in June. The recent developments in Europe and the weak employment report for May has increased the probability of QE3 being announced at the June or Jul/Aug meeting. Indicators give us a bit of a mixed signal as for example ISM for manufacturing is above the 50-level (Chart 3) at the same time as Philly Fed in May dropped sharply. We revise our forecast for GDP-growth 2012 downward marginally to 2.3% (from 2.5% in Nordic Outlook May).
Key data Percentage change

FRIDAY 8 JUNE 2012 SEB Economic Research +46 8 763 85 06

2010 2011 2012 2013 GDP Unemployment* Inflation Core inflation

* Per cent of labour force Source: SEB

3.0 9.6 1.6 1.0

1.7 9.0 3.1 1.7

2.3 8.2 2.2 2.0

2.7 7.9 1.4 1.4

Economic Insights

INCREASED PROBABILITY FOR ADDITIONAL QE FROM FED The Fed actually revised its own economic forecasts upwards at the April meeting. One way to look at the situation is that the stage is set for additional easing; if the U.S. economy shows more signs of slipping the liquidity taps will be turned back on. Bernanke said the following at the press conference after the April meeting: We remain prepared to do more as needed to make sure that this recovery continues. While we think that further policy action will materialise, a new program already at the June 19-20th might be too soon. Market-based inflation expectations are higher now compared to when Bernanke loudly hinted at QE2 at the Jackson Hole meeting in 2010 and when Operation Twist was announced last autumn (Chart 4). Core inflation is trending higher as well (Chart 5). However, the recent developments in Europe and the weak employment report for May has increased the probability of QE3 being announced at the June meeting. Gasoline prices are declining again (Chart 6) which is why confidence is rising according to Michigan (Chart 7). By contrast, the Conference Board index dropped in May which is probably reflecting the renewed labour market weakness (Chart 8 and 9) as well as poor income fundamentals. House process seems to have levelled off but our model still points at an increased saving rate among households and that the deleveraging process is not over yet (Chart 10 and 11). According to the bond market the economic outlook is weak. Have a look at the TIPS yield which is a proxy for real GDP growth. 10 years ago the yield on 10-year TIPS was close to 2%, and over the ensuing 10 years real GDP growth slowed to only 1.7% on average (weakest decade on record). The real rate is now below zero (Chart 12).

Chart 5: Core inflation above 2 per cent

Per cent
6 5 4 3 2 1 0 -1 -2 -3 07 08 09 10 11 12 6 5 4 3 2 1 0 -1 -2 -3

CPI

Core-CPI
Source: Reuters EcoWin

Economic Insights

Chart 9: U.S. unemployment rate

Per cent
12 11 10 9 8 7 6 5 4 3 2 50 55 60 65 70 75 80 85 90 95 00 05 10 12 11 10 9 8 7 6 5 4 3 2

Women

Men
Source: BLS, SEB

Chart 15: Current account deficit moving sideways

% of GDP, percentage change
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 90 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 92 94 96 98 00 02 04 06 08 10 12

General government fiscal balance Current account balance

Source: Reuters EcoWin, SEB

Japan: The economic recovery is ongoing

In the first quarter, real GDP growth was 4.7% at an annualised rate: above the market forecast and above our own May forecast in Nordic Outlook as well. Consequently, we are raising our 2012 Japan GDP forecast to 2.4% (from 2.2%) despite the fact that our 2012 forecast for the Chinese economy has been lowered to 8.1% (was 8.5%). In 2013, the Japanese economy will grow 1.7%. Our forecast is well above the consensus (Chart 1). Personal consumption was strong in the first quarter and contributed 2.6 percentage points to GDP growth. The governments subsidies for low-energy cars have boosted consumption and will likely continue to do so until the subsidies dry up in the second half of 2012. Household confidence indicators have advanced as well (Chart 2). Restructuring following the 2011 disaster is clearly boosting the economy; publicsector fixed investment increased strongly in the first quarter. Exports rebounded as well, and external demand clearly holds one of the keys to the outlook. Between late-March and the end of May, the yen was trading stronger against both the euro and the dollar (Chart 3) which is related to the sell-off in the stock market (Chart 4). Weaker growth overseas and developments in Europe suggest that exports will slow down in the current and subsequent quarters. To be sure, machinery orders from overseas has shown weakness but recovered slightly in April (Chart 5) and purchasing managers indices are still holding up relatively well (Chart 6). Although our export forecast is revised lower compared to the May issue of Nordic Outlook, the risks are tilted to the downside. For the first time in 31 years, Japan posted a trade deficit last year. What the monthly numbers are suggesting is that there will also be a deficit in 2012. This raises questions about the prevailing economic structure, with large current account surpluses and net savings. If the current account surplus also turns into deficit, the consequences may be dramatic since Japan would be forced to import capital from abroad to finance its gargantuan debt load (Chart 7). Inflation will be positive in 2012, while unemployment should drift lower (Charts 8 and 9).

WEDNESDAY 13 JUNE 2012 Mattias Brur SEB Economic Research +46 8 763 85 06

Key data

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

Source: SEB

4.4 5.1 -0.7

-0.7 4.6 -0.3

2.4 4.3 0.1 -11.0

1.7 4.0 0.2 -11.0

-9.3 -10.3

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

Economic Insights

CHARTS ON THE JAPANESE ECONOMY

China: Some encouraging signs in mixed May data

All in all, the May data were mixed but there were some bright spots, particularly exports and imports and signs of improvement in the housing market. The data indicate that activity in the economy stabilised in May after the very weak data for April. Inflation decelerated more than expected and the Peoples Bank of China (PBOC) cut the key interest rate by 25 basis points to 6.31% last week (Chart 1). Combined with previous cuts in the reserve requirement ratio, this is a clear signal that government has adopted a more active macro policy. However, GDP growth will still be weak in Q2, within the 7.5 to 8.0% year-on-year range; a further slowdown compared to growth of 8.1% in Q1. The May data support our long-held assessment that, barring a major external shock, a hard landing can be avoided. However, compared to Nordic Outlook May, the GDP forecast has been cut to 8.1% for 2012 (from 8.5%) and to 8.4% for 2013. Headline inflation decelerated to 3.0% in May. Food inflation dropped to 6.4% and core inflation continues to hover close to 1.5% (Chart 2). Inflation has decelerated substantially since its peak last summer and should no longer be a hindrance to further policy loosening. The official purchasing managers index (PMI) dropped to 50.4 in May. The arguably more reliable Markit/HSBC PMI has been below the 50 level since November 2011 and dropped to 48.4 (Chart 3). Exports and imports rebounded in May and clearly beat expectations, with growth of 15.3% and 12.7%, respectively, year-on-year (Chart 4). Industrial production was weak, with growth at 9.6% year-on-year, and retail sales continued to decelerate (Chart 5). However, sales of passenger cars increased by close to 23% year-on-year and reached 1.28 million (Chart 6). Bank lending increased in May. New loans issued by financial institutions totalled 793 bn yuan, up from 682 bn in April and were larger than expected (Chart 7). Housing prices continue to fall in year-on-year terms (Chart 8) but the number of sales is rising, indicating the beginning of stabilisation in the housing market. The yuan has depreciated against the USD in recent weeks. Since the start of 2012, the yuan has lost about 1% (Chart 9).
Key data Percentage change

FRIDAY 15 JUNE 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2010 2011 2012 2013 GDP* Inflation* USD/CNY** 10.4 3.3 6.59 9.3 5.4 6.29 8.1 3.2 6.20 8.4 3.5 6.05

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

Economic Insights

CHARTS ON THE CHINESE ECONOMY

India: No decisive policy response expected, despite marked growth slowdown

GDP growth slowed to 5.3 % in Q1: lower than the consensus expectations of 6.1% and the fourth consecutive quarter of slowing growth (Chart 1). The rate is now slower than during the 2008-2009 financial crisis. The deceleration was led by the manufacturing sector, but agricultural production and mining were also weak. This weak growth is largely self-inflicted and is a result of political stalemate and policy paralysis. No decisive policy response or improvement in the reform climate is expected until after the May 2014 parliamentary election. Furthermore, the Reserve Bank of India (RBI) has limited room for rate cuts due to stubborn inflation. Due to much weaker than expected growth in Q1, Indias inability to counter the slowdown with economic policy initiatives and increasing global economic uncertainty, we cut the GDP forecast to 6.0% in 2012 (from 7.0%) and to 6.6% in 2013. Purchasing managers indices (PMIs) for both manufacturing and services have stabilised recently (Chart 2) but figures are still below the long-term average. Industrial production is decelerating. In March, production was 3.5% below the level of a year earlier (Chart 3). High interest rates are harming investment. Export growth has slowed, and in April the year-on-year increase was only slightly above 3%. Imports are also decelerating (Chart 4). Car sales are decelerating, indicating that domestic demand is weakening (Chart 5). Wholesale price index (WPI) inflation rebounded to 7.2% in April; food inflation is above 10% (Chart 6). The RBI is in a tricky position due to the marked growth slowdown and stubborn inflation. The central bank cut its key interest rate by 50 basis points in mid-April (Chart 7). We expect a further cut of 50 basis points in Q3. There is significant downward pressure on the rupee due to weak fundamentals and growing global economic uncertainty (Chart 8). Indias current account deficit continues to weigh down the rupee (Chart 9).

TUESDAY 5 JUNE 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 (wholesale)* USD/INR** 10.6 9.6 44.7 7.2 9.5 53.0 6.0 6.8 52.0 6.6 7.2 50.0

* Percentage change. ** End of period. Source: IMF, Ministry of Commerce and Industry, Reuters, SEB.

Economic Insights

CHARTS ON THE INDIAN ECONOMY

Chart 5: Domestic car sales are weakening

Year-on-year percentage change
70 60 50 40 30 20 10 0 -10 -20 -30 05 06 07 08 09 10 11 12
Source: SIAM

70 60 50 40 30 20 10 0 -10 -20 -30

Euro zone: Spain the fourth euro zone country to require financial assistance
Financial market worries have increased recently, mainly driven by the weakness of the Spanish banking system in general and the governments clumsy handling of the crisis-ridden Bankia in particular. Spanish sovereign bond yields surged to unsustainable levels in May and fear has spread to Italy. During the past weekend, Spain finally asked for as much as 100 bn euros in loans to help the struggling bank sector. The scenario that we presented in Nordic Outlook May has thereby been realised. Next stumbling block for the euro zone will be the Greek election scheduled for June 17. Most euro zone indicators have fallen in recent months. The Economic Sentiment Index (ESI) and the composite purchasing managers index (PMI) point to falling GDP in Q2. Germanys IFO index declined in May but is still well above the long-term average. Whereas indicators have worsened recently there have been some positive signs in the hard data. GDP clearly beat expectations in Q1; mainly driven by Germany. Euro zone exports have taken off and should get some help by the weakening of the euro. Retail sales are still weak however and the labour market continues to deteriorate. GDP is expected to fall by 0.6% in 2012, followed by a return to positive territory with a weak recovery of 0.5% in 2013. The forecast for 2013 has been revised downward from 0.8%. Inflation decelerated to 2.4% in May and is expected to continue moderating. We expect inflation to be above the European Central Bank (ECB) target in 2012 but below it in 2013. The ECB kept the refi rate on hold at its June meeting and did not present any new policy initiatives. The central bank maintains its position that it is up to governments to sort out their fiscal problems. The ECB also repeated its support for a banking union implying common bank regulation and deposit insurance. Neither new three year LongTerm Refinancing Operation (LTROs) loans nor a re-start of bond purchases (SMP) seem imminent for the time being. However, the ECB was more dovish in June, referring to increased downside risks. Several members of the Governing Council wanted a cut in the refi rate. Our main scenario is still that the refi rate will remain at 1.0%, but the probability of a cut at the July meeting has increased.

MONDAY 11 JUNE 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

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

Key data Percentage change 2012 -0.6 0.0 0.8 -2.1 -2.0 2013 0.5 0.6 1.3 0.1 -0.4
GDP* Unemployment** Inflation* Government deficit***
Source: SEB

2010 2011 2012 2013 1.9 10.1 1.6 -6.2 1.5 10.2 2.7 -4.1 -0.6 11.1 2.3 -3.6 0.5 11.7 1.4 -3.1

1.5 1.7 3.0 0.5 0.7

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

Economic Insights

INDICATORS AND GDP Most indicators have decreased in recent months. The Economic Sentiment Indicator (ESI) fell for the second consecutive month in May and points to a fall in GDP. The ESI is back at a level last seen during autumn 2009. The PMI Composite fell in May in Germany, France and Spain. PMIs for all of the big four are now below the 50 level. Germanys IFO business sentiment index fell in May for the first time since October 2011 but is still well above its long-term average. The ZEW investor sentiment indicator also fell in May. Euro zone GDP was unchanged in Q1, better than consensus and the forecast in the may issue of Nordic Outlook. The better than expected figure was mainly due to a healthy 0.5% increase in German GDP. GDP continued to fall in Italy and Spain, however, with both countries now technically in a recession. Greek GDP has decreased by more than 15% since 2007 and Irish GDP has fallen by around 10%. Euro zone GDP is expected to fall by 0.6 % in 2012; our forecast is unchanged since Nordic Outlook May. The GDP forecast for 2013 has been revised downwards somewhat to 0.5% (from 0.8% in Nordic Outlook). There are downside risks to the GDP forecast.

GDP growth, quarter-on-quarter

Per cent Q3-11 Euro zone France Germany Italy Spain 0.1 0.3 0.6 -0.2 0.0 Q4-11 -0.3 0.1 -0.2 -0.7 -0.3 Q1-12 0.0 0.0 0.5 -0.8 -0.3

Source: Eurostat, national statistical offices

Economic Insights

LABOUR MARKET AND INDUSTRY Unemployment in the euro zone has reached a record level of 11%. In April, the jobless total increased for the twelfth month in a row and reached 17.4 million. Unemployment has increased further in the peripheral euro zone economies; the unemployment rate reached 24.3% in Spain. French unemployment is also on the increase, but the German labour market is still strong. Exports have taken off in recent months; the year-on-year increase has been around 10%. Exports should get some help from the weakening of the euro, which has depreciated by around 3% against the USD since the beginning of 2012. Retail sales decreased sharply in April and are now back at levels not seen since 2004. Austerity measures and a poor labour market will continue to weigh heavily on retail sales. Capacity utilisation edged down in Q2 and has been below the long-term average since the end of 2008. Low capacity utilisation will help drive inflation lower.

Economic Insights

FINANCIAL AND MONETARY INDICATORS, INFLATION The uncertainty surrounding Spain has spread to Italy and both countries sovereign bond yields rose sharply in May. ECB kept the refi rate on hold at 1.0% at the June meeting but several members of the Governing Council wanted a rate cut. A cut would not make much of a difference, however; overnight rates are already close to zero and lower short-term interest rates are unlikely to help the economies most in need of stimulus. Although the LTROs helped to avoid a credit crunch there has been no real recovery for bank lending. Whereas lending to both households and corporations was positive in April, year-on-year growth rates were barely positive. M3 growth was a disappointment in April and slowed to 2.5%, moving further away from the ECB target of 4.5%. Stock markets in Greece and Spain declined sharply in May; the Athex is now back at 1990 levels. Financial sector equities have been especially hard hit. Inflation decelerated to 2.4% in May. Inflation is expected to continue to moderate and HICP inflation is forecasted to end up at 2.3% in 2012 and 1.4% in 2013. Core inflation will bottom out at 1.3% in spring 2013.
Overnight interest rates are already close to zero
Per cent
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 07 08 09 10 11 12 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Refi rate

Eonia rate (overnight)

Source: ECB, Reuters EcoWin

UK: 2012 will be a zigzag year

The consensus 2012 GDP forecast fell from 0.7% in April to 0.4% in May (Chart 1). According to the Bank of England governor, Sir Mervyn King, 2012 will be a zigzag year and we agree; the extra bank holiday (for the Queens Diamond Jubilee celebration) is a negative growth factor comparable to the Royal Wedding last year. But the impact is temporary and real GDP growth will probably turn stronger again in Q3 when the Olympic Games in London stimulate growth in various sectors. Real GDP growth fell 0.3% in Q4, and for the first time since 2008 the year-on-year trend is back in negative territory (Chart 2). But the contraction in the first quarter was driven by a drop in inventories, which is suggesting only a temporary setback. That said, the recovery is fragile and we remain bearish on the economy; real GDP growth will average 0.2% in 2012 and 1.2% in 2013, respectively, down from 0.5 and 1.7, respectively, in the May issue of Nordic Outlook. Meanwhile, unemployment has actually declined somewhat in recent months (Chart 3) but in our view an upward trend is likely to resume. Private sector employment and pay growth are holding steady. In the public sector these trends are moving in the wrong direction (Charts 4 and 5). Austerity bites. While inflation is dropping quickly, it still exceeds pay growth which is squeezing real wages and holding the recovery back (Chart 6). Core inflation fell from 2.5% in March to 2.1% in April. M4 growth has never been weaker in recorded history (Chart 7). The dovish tone to the May BoE Monetary Policy Committee minutes suggests that the door to more quantitative easing (QE) is still ajar. Retail sales plunged in April (Chart 8), and if economic data continue to surprise to the downside, the MPC has to do more to support the economy. We recommend keeping an eye on the PMI surveys for any signs that the euro zone crisis is hitting British shores (Chart 9); in May PMI for the manufacturing sector dropped below 50.

WEDNESDAY 13 JUNE 2012 Mattias Brur SEB Economic Research +46 8 763 85 06

Key data

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

0.2 8.5 2.7 -7.0

1.2 8.5 1.6 -6.0

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

Economic Insights

Chart 3: unemployment rate vs NAIRU

Per cent
8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 06 07 08 09 10 11 12 13 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0

Percent

Nairu

Unemployment
Source: ONS, OECD, SEB

Chart 6: Inflation running well above pay growth = weak backdrop for spending
Percentage change YoY
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 01 02 03 04 05 06 07 08 09 10 11 12 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0

Chart 7: M4 growth is depressed

Year-on-year percentage change
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: Bank of England, SEB

UK inflation Average weekly earnings regular pay (3m average)

Source: Reuters EcoWin, SEB

Russia: Resilient so far

Even though Russia is not immune to the crises in the euro zone, the economy has been resilient so far. GDP growth during Q1 2012 came in at a strong 4.9% compared to a year earlier (Chart 1) and indicators do not point to an imminent weakening (Chart 2). The consensus estimate has become more positive in the past quarter. We are sticking to our relatively positive view, as long as oil prices stay at roughly the levels of today (Chart 3). We expect GDP to grow by 3.8 and 4.1% in 2012 and 2013, respectively, unchanged since our previous forecast and slightly above consensus for 2013. High oil prices will fuel government revenue creating room for fiscal policy, exports and other parts of the economy such as capital spending and consumption. Our forecast is that oil prices will average USD 113 per barrel in 2012 and USD 120 in 2013. There are downside risks, however. A more severe than expected downturn in the euro zone could push oil prices further down, hurting exports, the current account and government finances and increasing pressures on the banking system. Oil prices are currently below our average forecast for 2012 but are expected to rise later this year. On the other hand, domestic momentum seems strong and could be underestimated.

TUESDAY 12 JUNE 2012 Daniel Bergvall Economic Research +46 8 763 85 94

Key data Percentage change

2010 2011 2012 2013 GDP Unemployment* Inflation

*% of labour force, **% of GDP Source: Federal State Statistics Service, SEB

4.3 7.5 6.9

4.3 6.6 8.5 1.6

3.8 6.0 4.5 0.0

4.1 6.1 5.5 -0.5

Government fiscal balance** -3.5

Economic Insights

DOMESTIC DEMAND RESILIENT AS EXPORTS SLOW The purchasing managers index (PMI) for services has fluctuated around 55 in the past 12 months. Although exports are weakening, PMI for manufacturing has risen 3 months in a row and now stands at 53.2 (Chart 2). GDP growth in the first quarter of 2012 was 4.9%, stronger than the consensus estimate (4.1%), up marginally from the previous quarter (4.8%) and better than the 2011 full-year figure of 4.3%. Details are not yet available but data from different sectors point to a slowdown in exports, with domestic demand serving as the growth driver. Manufacturing production shows a weakening trend (Chart 4): up 3.6% in April and 4.3% on average so far this year, down from 6.7% in 2011 (with the first quarter being the strongest). Exports are heading in the same direction. In nominal USD terms, exports are almost back at pre-crisis level but so far this year have grown at a clearly slower pace than in 2011. Capital spending holding up. Fixed investments have been low in Russia over a number of years, something the government wants to change. Indicators for construction have improved and bank lending is increasing, although a bit more slowly than in earlier months (Charts 5 and 6). Even if bank lending conditions have improved in emerging Europe after the European Central Banks LTRO loans, increased financial turbulence in the euro zone will also affect Russia. Bank lending is increasing predominately in roubles (up by 30% year-on-year in February). Consumer confidence has improved during the past year. A faster than expected fall in inflation has given a boost to real income; in recent months, real wages have been rising by approximately 10% year-on-year (Chart 7). The slowdown in retail sales is a bit surprising, given improved confidence, but might be a sign that households expect real income to grow at a slower pace ahead. Consumption and capital spending are expected to be the large contributors to growth this year.

Economic Insights

LESS ROOM NOW FOR FISCAL POLICY RESPONSE Employment and unemployment continue to develop favourably. Employment increased by 1.6% in April and unemployment stood at 5.8%, the lowest figure since July 2008 (Chart 8). Unemployment is expected to continue declining somewhat before edging up marginally this fall. Inflation has fallen more rapidly than expected: 3.6% in April compared to 9.6% a year earlier (Chart 9). Postponements of hikes in regulated prices and fees (from January 1 to July 1) due to the parliamentary and presidential election partly explains this so far during the year. We thus expect higher inflation in the second half of 2012. Less inflation has eased the pressure on the central bank, which has increased its focus on inflation fighting. We expect the central bank to keep its key interest rate on hold for the rest of 2012. Good public finances are a stabilising factor for Russia, but reliance on oil revenues makes the budget vulnerable and also reduces pressure to pursue reform (Charts 10 and 11). Looking ahead, even with oil prices according to our forecast, there will be little room for additional spending or for manoeuvre in case world economic performance is worse than our forecast. The government budget is expected to be broadly balanced. In the latest budget, expenditures are expected to increase at a slower pace than in recent years and we expect short-term fiscal policy to be slightly expansionary. The long (18 years) journey towards World Trade Organisation membership is coming to an end. Membership negotiations were finalised in November and Russias membership was approved by the WTO on December 16. Russia needs to ratify the deal before mid-June and will then become a member 30 days after notifying the WTO. Joining the WTO will bring benefits to the Russian economy, but ultimately, the effects will be dependent on the governments actual desire and commitment to implementing reforms that improve the functioning of the economy.

Baltics: Slightly improved outlook

After stronger than expected Q1 outcomes we are raising our full year 2012 GDP growth forecasts for Estonia and Latvia: Estonia to 2.0% from 1.5%, Latvia to 3.2% from 2.5%. We are thus foreseeing the materialisation of certain upsides risks to these countries highlighted in Nordic Outlook, May 2012, in which we noted potential for faster increases in domestic demand. The Lithuanian GDP forecast for 2012 (as well as the one for 2013) was already revised upward in Nordic Outlook. In Q1 2012, year-on-year GDP growth fell somewhat in Estonia and Lithuania compared to Q4 2011, both to 3.9% respectively. Latvia showed a surprising upturn to 6.9% (from 5.7%). In all countries growth was driven by private consumption and capital spending. Since late 2011, exports are growing at a clearly slower pace compared to the very strong increases earlier in 2011 and in 2010. In April, exports in highly export-dependent Estonia actually shrank in current prices and y-o-y terms for the first time since 2009. Over the coming twelve months, we expect Baltic exports to remain relatively weak. Capital spending will fade while consumption will grow at a decent, if somewhat decelerating pace. In Q2 and Q3 we thus expect a broad slowdown in the GDP growth.

TUESDAY 12 JUNE 2012 Mikael Johansson Economic Research +46 8 763 80 93

GDP
Year-on-year percentage change
15 10 5 0 -5 -10 -15 -20 02 03 04 05 06 07 08 09 10 11 15 10 5 0 -5 -10 -15 -20

Key data Percentage change

2010 2011 2012 2013 GDP Estonia GDP Latvia GDP Lithuania Inflation Estonia Inflation Latvia Inflation Lithuania
Source: SEB

2.3 -0.3 1.4 2.7 -1.2 1.2

7.6 5.5 5.9 5.1 4.2 4.1

2.0 3.2 3.0 4.0 2.5 2.5

2.5 4.0 3.5 5.0 2.1 3.0

Estonia

Latvia

Lithuania
Source: National statistical offices

Exports
Year-on-year percentage change, current prices
80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 02 03 04 05 06 07 08 09 10 11 12 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 30 20 10 0 -10 -20 -30 02 03 04

Retail sales
Year-on-year percentage change, constant prices
30 20 10 0 -10 -20 -30 05 06 07 08 09 10 11 12

Estonia

Latvia

Lithuania
Source: National statistical offices

Estonia

Latvia

Lithuania
Source: National statistical offices

Economic Insights

NO DRAMATIC ECONOMIC DOWNTURN IN SIGHT Recent sentiment data on the Baltics have sent mixed signals, but the general picture is a more stable trend compared to the negative pattern in Western Europe. The European Commissions monthly manufacturing sentiment indicator has actually picked-up slightly in Latvia and Lithuania but has continued downward in Estonia. Consumer confidence has strengthened somewhat in Estonia and Lithuania but has remained shaky in Latvia. In all three countries, the EC aggregate sentiment indicator declined marginally in the May survey; Estonia and Latvia were still slightly above the historical average of 100 and Lithuania was almost exactly at that level, compared to 90.6 for the euro zone. In the coming months, we expect a general weakening in manufacturing in the Baltics as a consequence of clearly bleaker external demand. Stronger real wages and fairly resilient labour markets will help sustain households, although sentiment will probably weaken. The labour markets are holding up well. In Q1 unemployment turned up in all three countries. But this can largely be explained by a seasonal pattern, although unemployment rates in Latvia and Lithuania rose slightly more this year than in the corresponding quarter in 2011. On the other hand, employment in these countries has shown greater strength this year. In Estonia, employment growth fell from 6.8% y-o-y in Q1 2011 to 3.9% in Q1 2012. Going forward, we expect only Estonia to report a full-year average rise in unemployment during 2012. As expected, HICP inflation rates are coming down, more markedly so in Latvia and Lithuania (to 2.2% and 2.5%, respectively in May). Estonias inflation is more rigid, still around 4%. We expect this divergence to persist ahead. The main reason is higher wage increases in Estonia. In Q1 Estonias y-o-y wage growth was almost 7%, the highest rate since 2008 and slightly above long-term productivity growth. Wages in Latvia and Lithuania are increasing more calmly; the countries showing 3.7% and 3.2 %, respectively, in y-o-y growth during Q1. Since the middle of the 2000 decade, when they joined the European Union, all three Baltic states have been struggling with a negative demographic trend, accentuated by emigration. Another such wave hit these countries during the recent deep recession. Published in late May 2012, Estonias first census since 2000 showed that population has shrunk 5.5% in twelve years. During roughly the same period, Latvias population has declined by one tenth, according to official Latvian statistics published earlier.

Inflation (HICP)
Year-on-year percentage change
20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 02 03 04 05 06 07 08 09 10 11 12 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0

Estonia

Latvia

Lithuania
Source: National statistical offices

Sweden: Continued growth, but no strong recovery

We deem slower international growth momentum more important than rising domestic sentiment indicators and stronger than expected Q1 GDP growth. Still, our view that Sweden can avoid a recession and grow in line with the relatively stronger northern European countries has strengthened. We are making a minor (0.2 percentage point) downward revision to our growth forecast for both 2012 and 2013 to 0.5% and 1.7% respectively. Sentiment indicators remained at high levels up to May and are generally at levels higher than assumed in our growth forecast. We expect both consumer and business confidence to decline over the next 3-4 months. The labour market is slowing very gradually. Employment still trending upward, while unemployment has levelled out. Furthermore, short-term indicators have only declined moderately. Slow growth suggests that unemployment will rise from mid-2012. CPIF inflation is expected to rise slightly in 2012 from the present low level, mainly due to higher core inflation. Headline CPI is heading lower due to declining mortgage rates. Petrol prices are now a downside risk. Government finances continue to look strong. The budget is expected to be close to balance although slower growth and lending to the IMF suggests risks of larger deficits. The government continues to resist calls for more expansionary fiscal policy, but recent comments from Finance Minister Anders Borg may indicate that the Budget Bill this autumn will be more expansionary than the government has earlier indicated. The Riksbanks key interest rate is expected to stay on hold in July, but euro zone turbulence has strengthened the case for a rate cut later in 2012. We expect a cut to 1.25% in September and believe that the repo rate will stay at this level throughout 2013.

TUESDAY 12 JUNE 2012 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Swe: GDP
10 8 6 4 2 0 -2 -4 -6 10 11 12 13
% y/y % q/q (RHS)

Key data
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5

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

0.5 0.8 7.5 1.1

1.7 1.7 8.0 1.1

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

Economic Insights

GDP SLOWING BUT NOT DECREASING We are seeing a mixed picture regarding to what extent the manufacturing sector is slowing. Industrial production and exports are declining, but companies are still optimistic about future growth. The weakness in exports and industrial production continued up to April. Production problems in the pharmaceutical industry lowered industrial production by 2-6 % in February-April 2012 and also contributed to lower exports. Production problems are said to have persisted in Q2 and could continue to lower production throughout 2012. Strong fixed investment was one reason for Swedens surprisingly strong first quarter 2012 GDP. There was a sharp upturn for capital spending in utilities and non-residential construction, while manufacturing investments levelled out. Residential construction is heading lower after two strong years. Sentiment in the service sector was higher during the spring but seems to be turning lower again after renewed financial market turbulence. Still, our forecast that domestic sectors will support growth is on track.

Swe: GDP and economic sentiment

120 110 100 0 90 80 70
% q/q (RHS) Economic sentiment (NIER)

3 2 1

-1 -2 -3

01 02 03 04 05 06 07 08 09 10 11 12

Economic Insights

HOUSEHOLD SECTOR AND THE LABOUR MARKET The household sector has remained firm, with rising sentiment and retail sales. Car registrations were weak in April/May and are trending lower. Confidence is expected to decline again over the next 3-4 months but should remain at expansionary levels. Private consumption is expected to grow by 1.5-2.5% in 2012 and 2013. The housing market has recovered since the Riksbanks latest rate cuts and prices are now close to the peaks from 2011. We are maintaining our forecast that home prices are set to decline by 10-15 per cent over the next two years, but downside risks have decreased. Employment continued to trend higher early in 2012, while unemployment stabilised, largely in line with our forecast. Short-term indicators, such as employment plans in the NIER survey, are easing very gradually and still at levels that suggest that employment will continue to rise in the short run. Due to weak economic growth, the jobless rate should start increasing from mid-2012. We think unemployment will rise to slightly above 8% in early 2013.

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

93

96

99

02

05

08

11

-10

Swe: Labour market

4700 4650 4600 4550
Employment, 1000s

9.0 8.5 8.0 7.5 7.0 6.5 6.0

Unemployment, % (RHS)

4500 4450

07

08

09

10

11

12

13

5.5

Denmark: Stuck in first gear, zero rate on DKK demand

After two quarters of negative growth, the first quarter was up 0.3 percent. Domestic demand grew, while net exports turned negative. Private consumption rose. Rising unemployment, falling real wages and housing weakness are negatives counterbalanced by a one-off transfer from a pension reform. Public consumption posted a gain after a very weak end to 2011 suggesting that fiscal policy is starting to reverse, although planned investments havent materialised yet. Private investments rose, but capacity utilisation suggests that it is not a start of a strong trend. Inventories also grew while housing investments continued the fall from late 2011. Manufacturing has rolled over and sentiment suggests near-term weakness is ahead. To increase the labour supply the government has proposed a tax and labour market reform. Negotiations with labour market participants have broken down and negotiations on taxes are still ongoing. Hence, we keep the fiscal assumptions unchanged. Bottom line, still on track to 0.5 percent growth in 2012 with downside risks from exports.
GDP
15

FRIDAY 15 JUNE 2012 Jakob Lage Hansen X-asset Research +4533281469

Key data Percentage change

2010 2011 2012 2013

10

GDP Unemployment* Inflation Government deficit**

1.3 4.2 2.2 -2.7

1.0 4.1 2.5 -1.9

0.5 4.5 2.1 -3.0

1.4 4.2 1.5 -1.5

-5

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

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 GDP quarter-quarter GDP year-year
Source: Reuters EcoWin

-10 92

Percent, 12M

Net balance

3M change

3M change

Economic Insight

Financial developments have been more dramatic. The renewed uncertainties in the euro zone caused the positive pressure on DKK to resume as Denmark fundamentally compares favourably with the euro zone. To defend the peg vs. EUR the central bank intervened heavily in currency markets in May and has lowered the main interest rates twice by a total of 25 basispoints. The lending rate is now 0.45 percent (vs. ECB 1 percent) and the deposit rate is 0 percent (vs. ECB 0.25 percent). The central banks resolve is likely to increase as EUR/DKK approaches the all-time low of 7.42 making negative deposit rates likely. Our base case is a reversal of EUR/DKK over summer above this level (also aided by euro zone uncertainties subsiding), but the traditional lines of defence are stretched given the large foreign reserves and low yields in the euro zone. The next logical step is expansionary fiscal policy to lower the chronic current account surplus. However, this does not seem imminent, so a move towards the official floor at 7.29 could well ensue if more adverse Euro scenarios start being discounted. Government bonds have been well bid due to a low debt to GDP ratio and manageable deficits. The first four years of the yield curve were negative at one point and the 10 year yield fell below 1 percent before rebounding.

%-points (12M)

Percent (12M)

Percent, 12M

Euro vs. DKK

7.470 7.465 7.460
Percentage points

7.455
EUR/DKK

Net balance

7.450 7.445 7.440 7.435 7.430 7.425 7.420 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Reuters EcoWin

DKK (billions)

Percent

Percent

Percent

Percent

Norway: Parting further from peers

Momentum in the Norwegian economy was surprisingly strong at the start of the year as mainland GDP excl. oil/gas and shipping expanded by an above-trend 1.1% on the quarter in Q1 to be up a very solid 4.1% year-on-year. Moreover, the recent report from Norges Banks regional network (a summary of anecdotal evidence resembling the Beige Book) suggests that activity will continue to run at a solid clip in the near term. Private consumption looks set to be on a firmer trajectory than previously expected on even stronger growth in real disposable income, and is the main reason why we the forecast for mainland GDP growth is revised up from 2.7% to 3.0% and for overall GDP from 2.4% to 2.8%. Surging investment in the petroleum sector should add approx. 1%-point to overall GDP growth in 2012. However, we keep the 2013forecasts unchanged at 3.1% for mainland GDP and 2.6% in overall GDP. Recent indicators would suggest even stronger growth in 2012, but were not going all in. First, some of the boost in early 2012 should prove transitory (e.g. surging electricity production on the supply side). Second, growth in private consumption in Q1 is in for a downward revision to a change of methodology. Third, soft in imports in Q1 is unlikely to last considering solid domestic demand. Finally, and importantly, downside risks are emanating from heightened uncertainty to the near-term outlook in the euro-zone, both directly (exports) and indirectly (animal spirits and thus consumption and investment). Stronger-than-expected growth and wage inflation is unlikely to make much of an impact on Norges Banks monetary policy meeting June 20. Previously, we expected that the bank was about to rethink its strategy and lift its optimal rate path from next year on. However, Norges Bank should remain dovish, focusing on downside risks to the global outlook in general and potential repercussion from ongoing stress in the eurozone in particular. Moreover, Norwegian inflation is still too low while forward interest rates abroad are lower than the bank has assumed (which feed s into its policy rate equation although the NOK index is slightly weaker than projected).

FRIDAY 15 JUNE 2012

Stein Bruun
SEB Norway +47 21 00 85 34

Erica Blomgren
SEB Trading Strategy +47 22 82 72 77

Norges Banks network sees solid growth

Year-on-year percentage change, index
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 Mainland GDP (LHS) Regional network output indicator (RHS) Output expectations 6 mth ahead (RHS) 10 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 11.3 1.4 2.4 3.3 1.2 0.9 13.8 2.8 3.0 3.2 1.1 1.4 13.6 2.6 3.1 3.2 1.9 1.9

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

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Growth in mainland GDP (excl. oil/gas and shipping) was surprisingly strong in Q1, rising 1.1% on the quarter to be up a well above-trend 4.1% year-on-year. The acceleration was lifted by private consumption rising a solid 1.3% from last Q4, and a surprisingly strong 3.8% gain in exports of non-oil goods (reversing almost all the slump in late 2011) and declining imports of such goods. However, overall non-oil investment declined 2.7% on the quarter: note, though, that business investment and public ones as well tends to be very choppy on a quarter-to-quarter basis. Meanwhile, overall GDP expanded an even stronger 1.4% from Q4/11 and 4.1% year-on-year as well on strong investment growth in the petroleum sector and a revival in aggregated oil and gas exports. Retail sales have gathered pace since year-end which isnt surprising as fundamentals remain very solid: households real disposable income was thus up a strong 6.0% year-on-year in Q1. Momentum in retail sales should slow going forward. However, Q2 started strongly with the April level of consumption of goods (a broader gauge) 1.7% above the Q1 average, though inflated by a suspicious jump in spending on electricity which should correct downwards. Manufacturing production continues to lag well behind what various surveys suggest. The manufacturing PMI continued to defy gravity from weakness abroad with very strong new orders index suggesting healthy momentum.
Growth well above trend in early 2012
Year-on-year percentage change
9.0 7.5 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 03 04 05 06 Norwegian real GDP 07 08 09 10 GDP mainland Norway 11 12 9.0 7.5 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 2.5 0.0 -2.5 -5.0 03 04 05 06 07 Private consumption (LHS) Exports non-oil goods (RHS) 10 0 -10 -20 08 09 10 11 12 Private non-oil investment (RHS)
Source: Statistics Norway

Solid consumption, exports surprised in Q1

Year-on-year percentage change
10.0 7.5 5.0 40 30 20

Source: Statistics Norway

Retail sales have gathered speed

Percentage change, 3-month average
16 12 8 4 0 -4 -8 03 04 05 06 07 08 09 10 Real retail sales excl. autos, year-on-year (LHS) From 3 mth. earleir (RHS) 11 12 4 3 2 1 0 -1 -2

Strong investment boom in petroleum sector

NOK bn.
200 180 160 140 120 100 80 60 40 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Actual and planned investment oil/gas extraction and pipelines
Source: Statistics Norway

200 180 160 140 120 100 80 60 40

Source: Statistics Norway

Manufacturing production continues to lag

Percentage change, 3-month average
24 16 8 0 -8 -16 03 04 05 06 07 08 09 10 11 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 12 6 4 2 0 -2 -4 37.5 30.0 22.5 15.0 7.5 0.0 -7.5 -15.0 -22.5 -30.0

upbeat survey-based indicators

Net balance (sentiment) and index (PMI)
75 70 65 60 55 50 45 40 35 30 03 04 05 06 07 08 09 10 11 12 Manufacturing sentiment (LHS) PMI manufacturing (RHS) PMI new orders (RHS) Source: Ecowin, Statistics Norway

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION Healthy momentum in the broader economy continues to underpin labour markets. Employment was thus up a very solid 2.2% year-on-year on average in February-April, lowering the LFS unemployment rate to 3.0%. Going forward, we expect some recovery in the labour force and moderating employment growth to lift unemployment marginally. The wage settlements in the dominant public sector confirm our earlier expectations that overall wage growth in 2012 will be little changed from 4.2% rate in 2011. (Note that the timing of pay hikes in the main municipalities sector already implies a 3% increase in 2013). Adding in solid employment and benign overall inflation, households real disposable income is likely to be up even more than the very strong 4.2% gain in 2011. The year-on-year rate in core consumer prices (excl. taxes and energy) downshifted from 1.5% in March to a oneyear low of 0.7% in April only to lift to 1.4% in May. The choppiness reflects very volatile airfares which make up less than 1% of the basket but exhibit very sharp twist and turns. Excluding this, underlying inflation eased to 1.0% in May on our calculation, the slowest since December. Meanwhile, overall CPI inflation was still very low at 0,5% in May, held in check by a further decline in electricity prices which have dented headline inflation 1.1%-point over the past year, and lower gasoline prices. We stick to out forecast for gradually higher core inflation going forward.
Labour market remains very solid
3-month average
5 4 3 2 1 0 -1 -2 03 04 05 06 07 08 09 Employment, % change year-on-year (LHS) Unemployment, % of labour force (RHS) 10 11 12 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 8 7 6 5 4 3 2 1 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Wage growth, % change year-on-year (LHS) LFS unemployment rate, reversed (RHS)
SEB forecast

Wage growth holding up in 2012

0 1 2 3 4 5 6 7 8

Source: Statistics Norway

Source: Statistics Norway, SEB

CPI inflation remains very benign

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 12 Consumer prices CPI excl. taxes and energy
Source: Statistics Norway

Trend in domestic inflation only slightly higher

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 -2 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 02 03 04 05 06 07 08 09 Core CPI domestic goods and services Core CPI imported consumer goods 10 11 12 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5

Source: Statistics Norway

Core inflation lower excl. airfares

Year-on-year percentage change
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 CPI excl. taxes and energy Core CPI excl. airfares
Source: Statistics Norway, SEB

Increase in home prices easing marginally

Percentage change
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 25 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 Existing home prices, year-on-year (LHS) From 6 mth. earlier, annualised (RHS) 10 11 12 30 25 20 15 10 5 0 -5 -10 -15

Source: Statistics Norway

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Following the 75bps rate cuts since last December, Norges Bank should keep the key deposit rate at 1.50% and reiterate a dovish message at the monetary policy meeting June 20. Make no mistake, policy rates are too low relative to domestic fundamentals even taking low inflation into account, in our view. Mainland GDP expanded 4.1% in the year to Q1 and the recent report from Norges Banks network suggests continued above-trend growth in the near term: the output gap is likely slightly positive. Unemployment is a low 3.0% as employment is growing more than 2% year-on-year. Domestic core inflation (excl. taxes and energy) is approx. 2%, while wage growth should exceed 4% in 2012, too. Finally, existing home prices continue to climb and domestic credit to households was up 6.8% year-on-year in April (though now at par with the solid gain in nominal disposable income in Q1). However, Norges Bank should continue focusing on downside risks to the global outlook and a too-low overall inflation. The Norwegian krone has outperformed all G10 currencies over the past week but remains vulnerable. Markets rate expectations are cautious and unchanged rates for the reminder of the year is discounted: nevertheless, risks are still skewed toward a dovish surprise. In addition, with Norges Bank holding off from boosting FX purchases just yet, there will be a catch-up effect in late Q3/Q4. Hence, we regard the 7.40-area to provide good buying opportunities in EUR/NOK ahead of a markedly deteriorating flow outlook later this year, and forecast EUR/NOK 7.60 by end Q3.
Norges Bank sees rates staying 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

Tight spread vs. Germany didnt hold for long

Weekly average
9 8 7 6 5 4 3 2 1 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

8 7 6 5 4 3 2 1 0

200

150

100

50

NOK indexes mowing sideways

Weekly average
116 112 108 104 100 96 92 88 84 2005 2006 2007 2008 NOK trade-weighted (LHS) 2009 2010 2011 2012 NOK import-weighted (RHR)
Source: Reuters, SEB

Spread versus Bunds has drifted higher

Weekly average
112 108 104 100 96 92 88 84 80 8 7 6 5 4 3 2 1 0 03 04 05 06 07 08 09 10 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 11 12 175 150 125 100 75 50 25 0

Source: Reuters, SEB

Market pricing, Norges Bank March path, SEB forecast 3.25 2.75 2.25 1.75 1.25
0 25 20 15 10 5

Credit growth has levelled out

Year-on-year percentage change
25 20 15 10 5 0 -5 03 04 05 06 07 08 09 10 11 12 Domestic credit growth Domestic credit to households Credit to non-financial companies

0.75 04.12 11.12 06.13 01.14 08.14 Market pricing Norges Bank Main SEB forecast Norges Bank Low

-5

Source: Statistics Norway

Finland: Slowdown ahead after strong Q1

For the export-dependent Finnish economy, the downbeat outlook for the world economy and especially the euro zone will contribute to 2012 being a weak year. After ending 2011 on a weak note, first quarter GDP growth came in surprisingly strong, but looking at the details it seems like things will be worse ahead. In the first quarter of 2012, exports grew and household consumption was boosted by car sales (high in March due to impending tax increases in April). Although domestic fundamentals are relatively strong, consumption will grow at a slower pace over the year. Monthly data for April show a clear slowdown, both on an annual and monthly basis. Leading indicators for manufacturing and construction are falling (Chart 2). The confidence indicator for manufacturing industry has been below zero since July 2011, and production fell in the first quarter of 2012 compared with the same period last year. On a year-on-year basis, exports have also been weak so far this year (Chart 3). Taken together, the strong first quarter will push up growth in 2012 even though we expect it to be weak for the rest of the year. We are revising our GDP forecast upward to 1.2% 2012 (from 0.7% in Mays Nordic Outlook), with 2013 unchanged at 1.7%.

THURSDAY 14 JUNE 2012 Daniel Bergvall Economic Research +46 8 763 85 94

Key data Percentage change

2010 2011 2012 2013 GDP Unemployment* Inflation 3.7 8.4 1.7 2.9 7.8 3.3 -0,5 1.2 7.8 2.5 -1.0 1,7 7.9 2.1 -0.5

Government fiscal balance** -2.5

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

Economic Insights

LABOUR MARKET RESILIENT SO FAR, CONSUMERS GETTING MORE WORRIED Capital spending is still rising, albeit at a slower pace than last year. The first quarter showed fixed investments increasing both in annual and quarterly terms (0.3 q/q, 1.5% y/y). Despite weakness in manufacturing, capacity utilisation is still on the rise (graph 4) and bank lending does not indicate an imminent slowdown. Unemployment has edged up somewhat in recent months (from 7.5% in January to 7.7% in April). Meanwhile the number of vacancies is still on the rise (Chart 5). We expect no significant increase in unemployment, and as annual average the figure is expected to stay at the same level in 2012 as 2013. With the jobless rate rising only slowly, consumer confidence and consumption will be relatively stable, although developments elsewhere in the euro zone are a significant cause for concern (Chart 6). Inflation has been stickier than expected, but lower inflation in 2012 than in 2011 is still boosting real household income (Chart 7). Still, household confidence has fallen to levels that suggest slower consumption growth. We still believe that domestic demand will be the main growth driver 2012. Inflation is expected to continue falling in 2012, although increases in excise duties and adjustments to valueadded tax will make the process more drawn-out. HICP inflation was 3.2 per cent in November last year, down from 3.7 per cent in mid-2011. We expect HICP inflation to average just below 2 per cent in 2012. Relatively low government debt has boosted financial market confidence. The government deficit for 2011 turned out better than expected at -0.5% of GDP. Yields on government bonds are at historical lows, at present around 1.7%, although higher than in such countries as Germany and Sweden.