Macro Research

January 25, 2017

Monthly Macro Update

Politics take centre stage

US: Moment of truth for Trump

Eurozone: Strong finish to 2016 bodes well for 2017

Nordics: Drifting apart

Monthly Macro Update, January 25, 2017

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Contents

INTRODUCTION Politics take centre stage 3

US Moment of truth for Trump 5

EUROZONE Strong finish to 2016 bodes well for 2017 8

UNITED KINGDOM Set for a hard Brexit 10

NETHERLANDS Solid momentum in an uncertain world 11

CHINA Not everything can be stable at the same time 12

EMERGING MARKETS Coming to terms with Fed rate hikes; other challenges loom 13

SWEDEN Inflation to increase, but no case for a steep rise 14

NORWAY Norges Bank on hold despite the “lowflation” outlook 15

FINLAND Exports finally getting a lift from stronger manufacturing 16

DENMARK Better – but still not great 17

Key ratios 18

Disclaimer 21

Contact information

Ann Öberg: +46 8 701 2837, anob04@handelsbanken.se

Jimmy Boumediene: +46 8 701 3068, jibo01@handelsbanken.se

Anders Brunstedt: +46 701 54 32, anbr42@handelsbanken.se

Eva Dorenius: +46 701 50 54, evdo01@ handelsbanken.se

Petter Lundvik: +46 8 701 3397, pelu16@handelsbanken.se

Gunnar Tersman, +46 8 701 2053, gute032handelsbanken.se

Tiina Helenius: +358 10 444 2404, tihe01@handelsbanken.se

Janne Ronkanen: +358 10 444 2403, jaro06@handelsbanken.se

Kari Due-Andresen: +47 223 97007, kodu01@handelsbanken.no

Marius Gonsholt Hov: +47 223 97340, mago60@handelsbanken.no

Jes Asmussen: +45 4679 1203, jeas01@handelsbanken.dk

Bjarke Roed-Frederiksen: +45 4679 1229, bjro03@handelsbanken.dk

Rasmus Gudum-Sessingø: +45 4679 1619, ragu02@handelsbanken.dk

Monthly Macro Update, January 25, 2017

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Introduction

Politics take centre stage

This year looks set to be dominated by politics. While the US now formally has a new president and the UK has

opted for a “hard Brexit”, the election season in Europe is not far away. There are plenty of worries and perhaps

some opportunities for analysts and markets to fret about. Although the course of the US administration re-

mains uncertain, a possible upswing is likely to be quite short, as the economy is already operating at full

capacity. The European economy ended last year somewhat stronger than expected. However, the ECB will

likely stick to its ultra-loose policy in the year ahead. In the Nordic area, Sweden continues to stand out with

its buoyant economy, which bodes well for the krona.

While underlying economic conditions have not

changed all that much in recent months, there have

been political changes on a monumental scale. Who

would have thought a year ago that the UK would vote

to leave the EU and that the US would elect such an

unconventional figure as Donald Trump? As the politi-

cal season heats up in Europe, it is not unlikely that fur-

ther upheaval will arise. It still remains to be seen if the

economic implications of all of that will be as earthshat-

tering. Be that as it may, analysts will no doubt be kept

busy for a long time trying to work it all out.

Moment of truth for President Trump

In the US, President Trump set high expectations for

the quick delivery of many of his ambitious campaign

promises. Accordingly, financial markets have priced

in large infrastructure investment programmes, tax

cuts and a major easing of business regulations.

Looking at current market conditions, it may be that

the hype has already started to fade. In particular, the

trade-weighted USD seems to have stalled. At the

same time, financial markets appear to have scaled

back expectations of aggressive policy rate increases

from the Fed. Equity indices have stopped rising.

Uncertainty over Trump’s fiscal policy remains.

Trump will no doubt deliver considerable stimulus,

but that will still fall short of the promises made dur-

ing the election campaign. To be able to push

through even a scaled-back version of his pro-

gramme, Trump will need to cooperate with Repub-

lican rank and file in the Congress. Such cooperation

cannot be taken for granted. There are deep scars

in the Republican party, with many traditionalists re-

maining deeply sceptical about Trump’s stance. For

one thing, they are not keen to expand the deficit in

the federal budget.

More fundamentally, what can realistically be cranked

out of the US economy at this point, given that it is

already operating at close to its full potential? While

some of the proposals floated recently, such as infra-

structure spending and corporate tax reforms, could

impact the underlying growth trend in theory, the

gains from structural reforms are far from certain and

may also take years to materialise. The direct effects

seem more relevant to consider at this point. Given

that the unemployment rate is already at a cyclical

low, fiscal stimulus risks causing overheating, eroding

profits and stoking inflation. The result could well be

higher growth in the short run followed by a downturn

once the cycle has fully run its course.

The Federal Reserve is likely very much aware of

this. Against that backdrop, more tightening than that

already on the cards should probably not be ex-

pected. Given Fed Chair Yellen’s rather dovish pos-

ture, we think that the central bank is likely to stick to

its prevailing strategy and avoid tightening policy in

a way that jeopardises growth. It is also likely to see

through any Trump-driven boom/bust episode. If

markets do the same, the case for further dollar

strength is not obvious.

Slight pickup in the eurozone

In the eurozone, recent data has revealed that the

economy appears to be in a sweet spot, finishing last

year on a relatively strong note, with unemployment

trending lower and inflation rising. While the latter may

be partly blamed on technical effects, higher inflation

has been taken as a reason for downgrading deflation

fears and re-examining the case for continued ultra-

loose ECB policies. We increase our real GDP fore-

cast for 2017 by a notch and lower the path of unem-

ployment. However, we see no reason to change our

view of the ECB remaining highly expansionary.

The ECB has undoubtedly played an important role in

securing the rebound in growth during 2016. Although

speculation about possible tightening has surfaced

lately, we think that the importance of the ECB playing

its part is unlikely to change much in 2017. It is hard

to argue the case for self-sustaining reflation without

support from economic policies. As we do not expect

fiscal policy to change by much, there is a need for

Monthly Macro Update, January 25, 2017

4

the ECB to stay on the same course. However, as im-

portant as those monetary deliberations may be, mar-

kets are likely to focus more on upcoming elections in

the Netherlands, France and Germany, looking for

signs of a further erosion in European unity. There is

certainly reason to expect voter discontent.

The UK economy has held up well. Sentiment in-

creased by even more than expected during the final

quarter of 2016. However, the UK economy should

slow this year. As inflation soars and mortgage rates

increase, we expect the housing market and private

consumption to weaken. It is also now clear that the

UK government is preparing for a hard Brexit. We

believe that the road to a new trade agreement will

be turbulent, keeping the pound weak. While a weak

currency benefits exporters, it poses challenges for

the Bank of England.

Relatively sanguine about BRIC

Despite political turmoil in mature market econo-

mies, we are quite sanguine about the outlook for

large emerging economies. In particular, the BRIC

quartet – Brazil, Russia, India and China – should do

reasonably well. The first three countries are not ex-

pected to be affected much by changes in US poli-

cies. Although China is a prime target if Trump tries

to deliver his trade policy ambitions, Beijing may find

ways to partly offset US trade restrictions should

they materialise.

Regardless, stable Chinese growth requires fresh

economic policy easing; however, that is likely to re-

sult in continued growth in debt. Similarly, a gener-

ally stable exchange rate is likely to require the cen-

tral bank intervening to counter capital outflows. The

authorities still have plenty of room for manoeuvre.

Indebtedness has not yet hit the ceiling and reserves

have not yet hit the floor. Against that backdrop, we

expect the authorities to ensure that economic

growth only slows gradually and that the CNY only

weakens gradually. The policy trade-offs should be

manageable.

Nordic currencies set to bounce back

In both a European and a Nordic context, Sweden

stands out. Growth has been considerably higher

than that of most peer countries for several years.

The trend is likely to continue, at least for some time.

Higher growth in the labour force is one factor. Here,

record immigration is obviously a key driver. Lately,

Sweden has also outperformed by posting higher la-

bour productivity growth.

Against that backdrop, unemployment has fallen to

levels that are likely to trigger higher wage and price

inflation. While the overall unemployment rate re-

mains rather high, it is mostly a structural issue, as a

considerable portion of the labour force lacks skills

that are in demand among employers. Given that the

economy appears close to its capacity ceiling, we

think that inflation will trend higher. The Riksbank is

still in no rush to tighten. However, the stronger out-

look for Sweden relative to the eurozone suggests

that the krona will continue to strengthen.

The Norwegian krone also looks good. While we

think that growth in Norway will pick up this year, we

suspect that underlying price pressures are weaker

than forecast by Norges Bank. In isolation, that

would call for a lowering of the policy rate. However,

owing to Norges Bank’s clearly-stated fears of spi-

ralling house prices and debt, we believe it will keep

its policy rate unchanged. Even so, that is likely to

be positive for the krone.

The other members of the Nordic group have both

suffered lacklustre growth in recent years. Denmark

has been weighed down by the sluggish eurozone

economy, while Finland has been impacted by the

recession in Russia. We have become slightly more

upbeat about Danish prospects, but we still expect

only moderate growth ahead due to structural factors

twinned with global economic and political uncertain-

ties. In Finland, manufacturing finally seems to be

picking up, although not sufficiently for us to raise our

modest growth forecast.

Gunnar Tersman, +46 8 701 2053, gute03@handelsbanken.se

Monthly Macro Update, January 25, 2017

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US

Moment of truth for Trump

Trump has promised to kick-start job growth. However, so far, it has been mostly rhetoric and his policies in

the future remain uncertain. The current high resource utilisation would restrain growth. The increase in la-

bour costs would likely hurt profits rather than lead to inflation, which is held down by the strong dollar. Our

forecast is that Trump’s policy measures will prompt a short-lived expansion, followed by economic slowdown.

The Fed will likely tighten policy cautiously until economic prospects deteriorate in the second half of 2018.

President Trump set high expectations of a quick de-

livery of many of his ambitious campaign promises.

Financial markets priced in large infrastructure in-

vestment programmes, tax cuts and a major easing

of business regulations. However, these expecta-

tions seem to have faded slightly since election day.

Both the trade-weighted USD and the expectations

of aggressive rate increases by the Fed have peaked

and now seem to be weakening.

There is still great uncertainty about Trump’s fiscal

policy stimulus. Our view at present is that Trump will

deliver considerable stimulus, though significantly

less than he promised during the election campaign.

For this to come true, however, Trump must avoid

political gridlock by establishing a good working re-

lation with Republicans in Congress, building on co-

operation and compromise.

So far, Trump seems to believe that he has a mandate

to run the US in the same way that he ran his compa-

nies. It looks as if he counts on automatic support from

the Republican majority in Congress. Furthermore,

Trump has primarily nominated business executives

and generals to lead his administration and said that

most politicians are unapt to govern the country.

In the weeks after taking office on January 20, Trump

will likely begin to deliver on his campaign promises.

He will probably start with issues that have strong

support from fellow Republicans in Congress, such

as the repeal of Obamacare, stricter border control,

lifting rules restricting oil and energy production on

federal land and deregulation of businesses includ-

ing the financial sector.

Trump also has the ambition to move aggressively

on trade, since it would be a chance to show base

voters that he is delivering. However, proposals to

reform the tax system with the aim of advancing ex-

ports and punishing imports, such as House

Speaker Paul Ryan’s blueprint, have several major

problems. They would lead to unintended income re-

distribution (decreasing the chance of passing Con-

gress), be incompatible with the US WTO obligations

and be technically complicated. Rather, we believe

that Trump will start with direct negotiations with

Mexico and China, using the threat of tariffs on US

imports from those countries as a bargaining chip.

Eventually, if the negotiations fail in a year or two,

Trump might enforce his threats and impose tariffs

on US imports from Mexico and China.

Within a few months, the Trump administration and

Republicans in Congress will have to deal with the

deep split between traditional conservative princi-

ples and Trump’s campaign promises of unfinanced

enormous tax cuts and massive infrastructure in-

vestment. The appetite for large debt-financed fiscal

programmes among Republican leaders is small.

The Majority Leader in the Senate, Mitch McConnell,

has been openly frosty to the idea of big stimulus

packages and has said that he prefers any tax cuts

to be offset by other revenue so that the budget def-

icit remains unchanged. House Speaker Paul Ryan

is pushing his own “Better Way” agenda. However,

because Ryan refused to endorse Trump in the elec-

tion, the relation between the President and the

Speaker remains tense.

Monthly Macro Update, January 25, 2017

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Generally, Trump sees an opportunity to dramati-

cally upend longstanding foreign and domestic poli-

cies. However, so far, it has been mostly rhetoric, ra-

ther than elaborate sustainable policy changes.

Trump frequently states that he has “a plan – a great

plan” - that he will communicate later.

Trump prompting a boost-bust episode

In the third quarter of last year, GDP growth re-

bounded to 3.5 percent, which ended a three-quarter

soft patch. In the fourth quarter, we expect GDP

growth to land around 2.5 percent and then remain

moderate until the second half of 2017 when

Trump’s anticipated fiscal policy stimulus would trig-

ger a short-lived economic expansion followed by an

economy slowdown.

At present, persistently low potential growth and la-

bour market overheating make it almost impossible

for general demand stimulation programmes to lift

growth to 3-4 percent over the coming years. We il-

lustrate this point by the following simple calculation.

Our assessment of potential GDP growth is 1.8 per-

cent, which also is the median of Fed officials’ individ-

ual assessments of longer-run growth. Our regression

implies that a decline of the unemployment rate by 1

percentage point corresponds to an increase in GDP

growth by 1.2 percentage points, on average.

Note that the quarterly variations in the short-term po-

tential growth rates are significant, which indicates

that the ratio between unemployment and GDP stated

above will provided little guidance for a single quarter.

The labour market is slightly overheated. In Decem-

ber, the unemployment rate was 4.7 percent, which is

slightly below the median of Fed officials’ projections

of the natural rate unemployment of 4.8 percent.

Our simple calculation implies that the unemploy-

ment rate needs to decline by 1 percentage point per

year to support a growth rate of 3 percent. Thus, the

unemployment rate needs to decline to 3.7 percent

by the end of 2017, to 2.7 percent by the end of 2018

and to 1.7 percent by the end of 2019. A widening

gap of this size between the unemployment rate and

its natural rate is very unlikely, in our view. To main-

tain growth at 3 percent in practice requires a sharp

rise in potential growth, which would mitigate the de-

cline in unemployment. Alternatively, the natural rate

of unemployment needs to decline by a couple of

percentage points. However, so far, Trump has not

presented any structural measures to raise potential

growth or to push down the natural rate of unemploy-

ment to levels that can support 3 percent growth.

We expect Trump’s infrastructure investment and

tax cuts to affect the economy in the second half of

this year. However, the current high resource utilisa-

tion will likely lead to labour market overheating,

wage increases, inflation and profit squeeze, rather

than lifting growth sharply. Slowing profits would

make businesses more cautious to invest and hire

workers. Eventually, dynamics would change and

set the economy in a recessionary spiral.

The period of sharp appreciation of the trade-

weighted USD is likely over, although we expect the

USD to appreciate modestly in the coming quarters.

Our forecast is that the EUR/USD rate will reach 1.05

by the end of the second quarter and then hover

around that rate. The graph above indicates that this

would ease the downward pressure on output prices

for non-financial corporate businesses markedly.

Monthly Macro Update, January 25, 2017

7

Our forecast of a stabilisation of the USD and mod-

est increases in output prices and inflation would mit-

igate the profit squeeze somewhat. However, more

importantly, we expect the tight labour market to be-

come even tighter and drive up labour costs further

at the expense of profits. The graph below shows

that this process has started already. Note that if

productivity growth is low, even modest wage growth

has the potential to erode profits.

This is in line with the pattern in the two latest reces-

sions. The profit share of value added dropped mark-

edly ahead of those recessions. However, the profit

share has trended up in the past 15 years. The bot-

tom was higher in the recession in 2007-09 than in

the recession in 2001, and we expect the bottom in

the next recession to be even higher. Furthermore,

inflation was relatively muted prior to the two latest

recessions. Core inflation was 1.9 percent just be-

fore the recession in 2001 and 2.3 percent just be-

fore the recession in 2007-09.

Aggregate corporate non-financial profits in current

prices have declined by 9.1 percent since the peak

in the third quarter of 2014. Despite the slowdown in

profits, US equity prices are at all-time highs and in-

creasing. Primary drivers are the exceptionally loose

monetary policy and expectations that Trump will cut

corporate taxes.

Yellen to remain very cautious

At its meeting in December of last year, the Federal

Open Market Committee (FOMC) decided to in-

crease the federal funds rate target range by 0.25

percent. Moreover, officials also raised their individ-

ual policy rate forecasts. The median of their projec-

tions for the federal funds rate points to three rate

increases of 0.25 percentage points each in 2017,

2018 and 2019, compared to the previous forecast

in September of two increases in 2017 and three in

2018 and 2019. The median for growth and unem-

ployment was only revised marginally, while the pro-

jections for core inflation (excluding food and en-

ergy) remained unchanged compared to the previ-

ous forecast. At present, financial markets are also

pricing in three rate hikes in 2018. This is the first

time in many years that the Fed and markets agree

about the number of hikes over the next 12 months.

Why did the FOMC revise up its rate forecast without

changing the GDP, unemployment and inflation fore-

casts correspondingly? At the press conference, Fed

Chair Janet Yellen said that the FOMC preferred to

wait until the uncertainty about Trump’s fiscal policy

has vanished before the committee will change its

growth forecast. Our interpretation is that the many

Fed officials wanted to signal a more rapid policy

tightening. They assess that the Fed is significantly

behind the curve and that it is necessary to normal-

ise interest rates to counter excessive risk-taking,

which threatens financial stability.

In practice, Fed Chair Janet Yellen runs monetary

policy. The FOMC’s voting members are the seven

members of the Board of Governors including its

Chair Yellen (two vacancies at present), the Presi-

dent of the New York Fed and four of the remaining

eleven regional Fed presidents, who serve one-year

terms on a rotating basis. The members of the Board

of Governors always vote like its Chair, while the Fed

Presidents with voting power usually deviate when

they disagree with the Chair. Thus, as long as this

pattern persists, Yellen always has a stable majority

for whatever policy she advocates.

We believe Yellen is more dovish than the median

FOMC member. The Fed will likely stick to its pre-

vailing strategy and avoid tightening policy that

would jeopardise growth. The central bank would

likely also see through the Trump-driven boost-bust

episode. Our forecast is that the Fed will increase

rates by 0.25 percentage points in September of this

year and then deliver another hike of the same size

in March 2018. That will likely be the last rate in-

crease in this business cycle as we expect the econ-

omy to slow in the second half of 2018.

Petter Lundvik, +46 8 701 3397, pelu16@handelsbanken.se

Monthly Macro Update, January 25, 2017

8

Eurozone

Strong finish to 2016 bodes well for 2017 The economy appears to have ended 2016 on a stronger note than expected, leading to increased speculation

about reflation and a more hawkish ECB. However, we expect a strong start to the year to be followed by a

weakening economy and that recent speculation about an ECB ‘tapering’ will prove to be unfounded.

The recent economic data indicate that the economy

appears to be in a sweet spot, with momentum build-

ing toward the end of 2016, unemployment continu-

ing to drop and inflation rising steeply. As a conse-

quence, this has led to increasing inflationary expec-

tations, even though much of the increase in annual

inflation is due to a technical base effect. This has

diminished fears of disinflation, although it has not

yet led to an increase in worries about rampant infla-

tion. Against this backdrop, we slightly increase our

real GDP forecast for 2017 and lower our forecast

for the path of unemployment. We still expect GDP

growth to decline in 2017, albeit less so, to 1.3 per-

cent from 1.6 percent in 2016.

Positive overhang heading into 2017

We believe that economic growth in the eurozone

will show a further increase in Q4 2016 to 0.5 percent

q-o-q, with domestic demand being the prime con-

tributor. Sentiment surveys have signalled such an

increase, see graph below, and the acceleration in

December strengthens the case of a larger overhang

(higher GDP path) heading into 2017 than we previ-

ously expected.

Thus, there was little evidence of negative effects

emanating from the recent increase in political un-

certainty following the ‘no vote’ in Italy’s referendum

on constitutional reform. In our view, such impacts

were likely outweighed by support from the recent

weakness of the EUR and increased optimism about

global growth (specifically in the US and China).

Apart from robust private consumption, prospects of

a brighter start to 2017 are buoyed by improvements

in manufacturing activity toward the end of 2016,

helped by some destocking in the third quarter, and

sentiment surveys reaching their highest points

since 2011. However, we find the potential for further

improvement to be limited, as the EUR is no longer

providing a significant tailwind, see graph below.

Not entering a long period of reflation

The positive trends have led to increasing specula-

tion that the eurozone is entering a period of benign

reflation. The argument here is that the continuing

rise in consumption results in lower unemployment

through a favourable feedback loop. Adding fuel to

this are the low interest rates in the eurozone, with

the short end of the bond yield curve having reached

record lows around the turn of the year. Accordingly,

the corresponding decline in real yields should sup-

port spending among households and businesses.

However, we doubt that a de facto reflation period

will persist for long. Not much has really changed

since the end of 2016 besides increasing expecta-

tions and confidence, partly inspired by Trump’s vic-

Monthly Macro Update, January 25, 2017

9

tory in the presidential election (although that as-

sumes such hopes are well-founded from a Euro-

pean perspective), more optimism about emerging

markets and a fully expected, albeit trivial, rise in

headline inflation. Still, core inflation and wage

growth are muted, with both having likely bottomed

out in 2015, see graph below. Moreover, rising head-

line inflation remains a prime challenge for private

consumption growth in 2017. Finally, we note that

the challenging political environment could just as

easily capsize the improving confidence.

ECB quite successful after all

The ECB has undoubtedly played an important role

in securing the rebound in growth in 2016.

This is despite the fact that the effect of QE on the

real economy (bank lending to the private sector)

has grown ever less visible (see graph above), even

as annual credit growth has increased further

throughout 2016. The transmission mechanism is

still disturbed by high outstanding private debt that is

limiting the loan appetite of households, as well as

the limited ability of banks to lend, combined with

negative rates and regulatory burdens. However,

while monetary policy has had difficulty in stimulating

private demand through increasing private sector

debt, it has achieved greater success through the

wealth effect, both on asset prices as well as rising

inflation expectations (and in this context, a weaker

EUR as well). In addition, the ECB is playing the cru-

cial defensive role of fending off debt crises and

banking risks. In our view, the healthy rise in employ-

ment over the past three years would not have taken

place if it were not for the ECB ‘doing what it takes’.

Thus, the ECB’s policy has been quite successful if

we consider the wider achievements and not just the

success in reaching its mandated inflation target.

We do not expect the importance of the ECB’s policy

support to change much in 2017, even though specu-

lation about possible policy tightening has surfaced

lately. In our view, it is difficult to envision a benign

reflation period continuing without some additional

support from economic policies. As we do not expect

fiscal policies to change much, we argue that the need

for accommodative ECB policy will probably remain.

We also interpret the main message from the De-

cember policy meeting as one of increased flexibility.

Restrictions on the asset purchase programmes

(APP) were loosened and the ECB lowered the size

of monthly purchases, while stressing that the size

can be adjusted along the way. Whether this can be

defined as ‘tapering’ is questionable, as we do not

view this as the beginning of the end of the APP. This

view was backed by the ECB extending the duration

of the APP to at least the end of 2017, and markets

generally interpreted the overall message as dovish,

sending the EUR and short-term yields lower.

With headline inflation expected to increase and

growth expected to maintain good momentum at the

beginning of 2017, speculation about an ECB taper-

ing could gain further traction during the next couple

of months before reversing course as growth and in-

flation moderate, which we expect will be visible in

the second quarter this year. We do not expect the

ECB to lower the monthly pace of purchases at the

next couple of policy meetings. That said, we

acknowledge that the uncertainty has increased due

to the ECB signalling increased flexibility in its ap-

proach. The ECB probably will be happy to save

some ammunition when possible – a message that

was confirmed in the minutes from the December

policy meeting.

Rasmus Gudum-Sessingø, +45 46791619, ragu02@handelsbanken.dk

Monthly Macro Update, January 25, 2017

10

United Kingdom

Set for a hard Brexit

Economic growth held up well toward year-end and sentiment increased even more than expected in Q4 of last

year. However, the economy should slow this year, in particular private consumption and the housing market

as inflation soars and mortgage rates increase. As we expected, the UK government is preparing for a hard

Brexit, and we believe the road to a new trade agreement will be turbulent, keeping the pound weak.

So far, so good

Output in the manufacturing and construction sec-

tors contributed to pulling GDP growth down in Q3.

However, better-than-expected sentiment indicators

point to an improvement toward year-end, especially

for manufacturing, helped by improved competitive-

ness due to the weaker pound. Retail sales have

been surprisingly strong, and sentiment indicates

that service sector growth stayed strong also in Q4.

The composite PMI suggests that GDP growth held

up at around 0.5 percent in Q4.

The economy set to weaken this year

However, hard data are set to weaken in 2017. Infla-

tion is picking up fast, and was higher than both mar-

ket and BoE expectations in December.

The accelerating inflation is a result of the weaker

pound, which has already led to sharply increased

price pressure among firms and fast increasing infla-

tion expectations. At the same time, we believe wage

growth will stay subdued, dampening disposable in-

come growth. We also believe the rise in swap rates

through H2 of last year could lead to some further

increase in mortgage rates ahead. We believe eco-

nomic growth will start to deteriorate this year, pulled

down by a weaker housing market and private con-

sumption in particular.

Set for a “hard” Brexit

In a speech on Tuesday, January 17, Theresa May

gave the clearest outline yet of the government’s

Brexit plan. The government is prepared for a hard

Brexit. To regain control of its borders, to be free from

the European Court of Justice and to be able to nego-

tiate trade deals with other countries, the government

is prepared to sacrifice access to the European single

market and the Customs Union. The government

wants a new free trade deal with the EU with “as few

barriers to trade as possible”. The plan is ambitious

and probably unrealistic both when it comes to con-

tent and time frame, as it sets out to have a deal in

place when the Article 50 deadline is up in two years.

By that time, however, the deal would have to be ap-

proved by both houses of the UK parliament and all

EU countries for it to apply. This realistically leaves

only 15-18 months for negotiations. When the UK

leaves, the government foresees a phase-in period,

and the rules applying during that period are for the

negotiations to decide, May said. The GBP has

strengthened a bit again in response to May’s speech,

but the bottom line is that her government is taking the

UK toward a hard Brexit. We reiterate our GBP ex-

pectation of 0.88 versus the EUR for the coming year,

but we expect the road toward Brexit to be turbulent

and volatility in the GBP to be high.

Kari Due-Andresen, +47 2239 7007, kadu01@handelsbanken.no

Monthly Macro Update, January 25, 2017

11

Netherlands

Solid momentum in an uncertain world

The Netherlands is still in a phase of solid economic recovery, with recent key figures indicating a continued

strong increase in GDP in Q4 last year. Confidence indicators remain at close to post-crisis highs and do not

yet show signs of being affected by international uncertainty and the Dutch general election in March.

Strong recovery continues

The Dutch economy continues to show signs of

strength and the solid economic recovery in 2016

has become more broad-based. GDP for Q3 last

year was revised up, from 0.7 percent to 0.8 percent

growth on the previous quarter, and the latest key

figures suggest that GDP also increased strongly in

the last quarter of the year. Furthermore, confidence

indicators for households and businesses remain el-

evated moving into the new year. While our forecast

of 2 percent growth for 2016 seems valid, the appar-

ent strong finish to the year puts our forecast for

growth in 2017 of 1.6 percent at risk of being a little

pessimistic. For now, we maintain our view that

growth will slow somewhat in 2017.

Broad-based recovery to cool somewhat

The recovery in the Dutch economy has become

broad-based, as exports, investments and household

consumption have been picking up strongly. Strong

growth in exports over recent months indicates that for-

eign trade has so far been unaffected by increasing in-

ternational uncertainties. As the Netherlands is more

exposed to the UK than other European countries, due

to its strong trade and financial links, there is a risk that

exports could be hurt disproportionally by Brexit.

Furthermore, our outlook for slower growth among

some of the Netherlands’ other main trading partners

also indicates that export growth will cool somewhat

further into 2017. Private consumption has been

supported by strong gains in real wages, a faster

than expected rise in employment and the EUR 5bn

package of tax cuts introduced on January 1, 2016.

As we expect inflation to gradually rise in the coming

months as the negative effect of oil prices disap-

pears, real wage growth will rise less strongly in

2017, thereby sapping households’ purchasing

power somewhat. However, some of the increase in

disposable income during 2016 will presumably not

be spent until this year, which adds a buffer to the

outlook for private consumption in 2017.

The most notable development over the last two

years has been the revival in residential investments

as the housing market continued to pick up pace. We

however expect housing investments to decelerate

in 2017 from the unsustainable +20 percent growth

rates of the past two years as we move closer to their

pre-2009 peak, which will also dampen overall do-

mestic spending. Despite those headwinds, our

main scenario remains that the Dutch economy will

again outperform the eurozone as a whole in 2017.

Political uncertainties – but no ‘Nexit’

The main risks to the Dutch economy lie on the politi-

cal front, both internationally and domestically. Any

Trump policies that affect global trade will hurt the rel-

atively open Dutch economy, as will negative conse-

quences on the UK economy from Brexit. Further-

more, political uncertainty ahead of elections in sev-

eral eurozone countries could also weigh on invest-

ment decisions and thus dampen economic growth.

In the short run, domestic political uncertainty could

also weigh as the general election on March 15

draws closer. Even though the eurosceptic, anti-im-

migration Freedom Party (PVV), led by Geert Wil-

ders, is ahead in the polls and stands to become the

largest party in parliament, it is unlikely that he will

be able to form a government. Prime Minister Rutte

recently said that the chances of cooperating with

PVV were zero and promptly adopted a stronger

anti-immigration stance to draw in PVV voters. As it

stands, the main scenario seems to be the formation

of a multi-party coalition that excludes the PVV and

that will not support an EU referendum. This also ap-

pears to be the sentiment in markets as illustrated by

the low and stable development in Dutch yields

spreads vis-à-vis its German counterparts.

Even in the unlikely event that the PVV is able to

form a government coalition, we still think that an EU

referendum is unlikely to be called, as few other par-

ties share the PVV’s euroscepticism. In such a situa-

tion, a knee-jerk widening in the Dutch-German yield

spread could occur, but we expect that to be short-

lived due to the favourable fundamentals of the Dutch

economy. In the event of PVV gaining enough votes

to form a government on its own, all gloves would be

off, as that would definitely increase the risk of an EU

referendum taking place; however, we view such a

scenario as highly unlikely.

Jes Asmussen, +45 4679 1203, jeas01@handelsbanken.dk

Monthly Macro Update, January 25, 2017

12

China

Not everything can be stable at the same time

Stable economic growth requires fresh economic policy easing, but that will likely result in debt growth con-

tinuing. On a similar note, a generally stable exchange rate likely requires that FX interventions continue to

counter capital outflows, resulting in tumbling FX reserves. However, debt has not yet hit the ceiling and re-

serves have not yet hit the floor. Against that backdrop, we expect the Chinese authorities to ensure that eco-

nomic growth only slows gradually and that the CNY only weakens gradually.

Official GDP growth landed at 6.7 percent for 2016

as a whole, comfortably inside the official growth

target interval of 6.5-7 percent. The trajectory of

GDP growth (y-o-y) has been remarkably stable

throughout 2016, contrary to many other indicators

of economic activity that dipped in 2015 and early

2016 but recovered since then. Our alternative

measure of economic growth, Handelsbanken’s

China Macro Index, also shows a strong rebound

recently. We introduced the index in a Macro Com-

ment China on December 8.

The recent growth rebound is, as usual in China,

policy-driven. Authorities supported the property

market through an easing of lending conditions and

regulations and also boosted infrastructure invest-

ments. The property market rebound means – once

again – surging house prices, although it also sup-

ports construction activity and related industries, as

well as households’ consumption of goods and ser-

vices related to the upgrade of dwelling standards.

However, we believe the rebound is likely to be

short-lived, as the authorities are already seeking

to dampen house price increases in the cities where

the housing market appears to be the most frothy.

Private consumption, especially car sales, received

a boost from a temporarily lowered tax on cars, but

that positive effect will likely fade soon as well. Fur-

thermore, the outlook for the export sector is more

uncertain, as a trade war with the US looms follow-

ing Trump’s inauguration as president.

Once growth starts to decline somewhat into 2017,

as we forecast, economic policies are likely to be-

come accommodative again and temporarily stabi-

lise growth. Interest rates might not necessarily be

cut, but the authorities still have many other easing

tools in their toolbox. Thus, we foresee another

‘mini-cycle’ in 2017, much like the ones China has

experienced in each of the past couple of years.

Stripping away the mini-cycles, China’s growth is

structurally slowing; we expect overall GDP growth

to decline gradually over the forecast period.

The USD strength following Trump’s election victory

has allowed the Chinese authorities to let the CNY

weaken versus the USD while still keeping the effec-

tive, or trade-weighted, CNY generally stable. De-

spite the authorities’ efforts to shift the focus toward

a basket of currencies, the USD/CNY remains the

point of focus when it comes to Chinese FX policy.

The weakening of the CNY versus the USD has in-

creased expectations of further CNY weakness and

spurred accelerated capital outflows. The outflows

and the consequent weakening pressure on the

CNY have been counteracted by currency interven-

tion, which in turn has resulted in tumbling FX re-

serves. However, reserves are not even close to be-

ing depleted yet, and taken together with a renewed

tightening of capital controls and stricter enforce-

ment of prevailing rules, the authorities are still fully

in control of the level of the exchange rate. That said,

the de-liberalisation of capital controls is a blow to

the process toward a fully convertible currency and

will likely, as an unwanted by-product, deter some

capital inflows. We expect a gradual weakening of

the CNY over the forecast period.

Bjarke Roed-Frederiksen, +45 4679 1229, bjro03@handelsbanken.dk

Monthly Macro Update, January 25, 2017

13

Emerging markets

Coming to terms with Fed rate hikes; other challenges loom

The Emerging Markets economies will likely weather the gradual tightening of US monetary policy better than

usual. However, other challenges loom, not least the political and geopolitical developments. The outlook for

slightly higher oil/commodity prices should support the recovery in Brazil and Russia, for instance; whereas com-

modity importers will have to find other ways to improve growth.

Except for some special cases, most Emerging

Markets (EM) economies and financial assets have

done well since the US presidential election. Gen-

eral risk appetite has increased as investors have

focused on the likely positive effects of fiscal policy

loosening under Trump. The Trump fever has, how-

ever, somewhat faded recently. EMs are usually

hurt when the US Fed tightens monetary policy, and

that would also likely have been the case following

the interest rate hike in December, had that not

been widely expected. Trump’s fiscal stimulus

might require more aggressive monetary tighten-

ing, which could prove challenging for many EM

countries. However, since we in fact foresee fewer

not more US interest rate hikes than generally ex-

pected, we do not see this as the most prominent

headwind for EM ahead.

Instead, the political situation is perhaps the biggest

threat to many EM economies and their financial

markets. In Brazil, the political situation is finally

improving, or at least it has stabilised. Thus, eco-

nomic growth is on track to finally become positive

in 2017 as the central bank has kick-started its cy-

cle of interest rate cutting. However, public finances

have not been consolidated; the political situation is

still messy and the outlook could easily deteriorate.

The domestic political situation in Russia seems

more ‘stable’. However, geopolitics (and the oil

price) remain important. Unless oil and other com-

modity prices increase significantly, the outlook is

still for positive but low growth for the foreseeable

future. It may be that the Trump administration will

prove less hostile to Russia than Obama was. That

could bring some benefits down the road but the

near-term impact is probably limited.

In South East Asia, geopolitics could also take centre

stage as China flexes its military muscles in the South

China Sea, North Korea’s nuclear programme moves

on, and several countries including the Philippines are

turning their backs on the US and instead looking to-

ward China. Trump’s anti-globalisation rhetoric and

threats of tariffs and interference with free-trade have

also created uncertainty for the region, and the rise of

commodity prices in 2016 is another matter for con-

cern. GDP growth was relatively stable last year in the

region. As global trade remained lacklustre, these

economies had to rely on domestic demand for

growth. This engine is also likely to be the key source

of expansion this year, when no major relief is likely to

appear, with China’s production model changing to

become more self-reliant and reorienting toward do-

mestic use.

To tackle India’s corruption, the government unex-

pectedly removed 86 percent of its currency from

circulation. All 500-rupie and 1000-rupie notes were

switched for new ones or converted into electronic

deposits. The immediate impact was cash short-

ages, long lines at banks and post offices, and a

slowdown in economic activity. To mitigate the eco-

nomic damages, the government rapidly introduced

new stimulus measures, while the central bank

eased monetary policy. Although GDP likely slowed

slightly in the fourth quarter of last year, we expect

a rebound in the following quarter.

Bjarke Roed-Frederiksen, +45 4679 1229, bjro03@handelsbanken.dk

Gunnar Tersman: +46 8 701 2053, gute03@handelsbanken.se

Petter Lundvik: +46 8 701 3397, pelu16@handelsbanken.se

Tiina Helenius: +358 10 444 2404, tihe01@handelsbanken.se

Monthly Macro Update, January 25, 2017

14

Sweden

Inflation to increase, but no case for a steep rise Weak cost growth appears to be a main reason behind low inflation over the past years. So far, the signs of

acceleration in costs are bleak, but hard evidence will surface at a later stage. The labour market is stretched

today, we argue, despite an unemployment rate of 7 percent. We assume rising cost growth will support higher

inflation, but not immediately: we do not forecast CPIF inflation at 2 percent until 2018 and we expect a first

rate increase from the Riksbank in April that year.

Labour market heat: a bit ‘under the radar’?

Despite strong employment growth in recent years,

unemployment remains high. One factor that should

inhibit lower unemployment ahead is the structural

rise in participation, which is at a record high. Moreo-

ver, the sharp increase in the foreign-born population,

a group that has a much lower average employment

rate, sets a higher ‘lower bound’ for unemployment.

This overlaps with the obvious mismatch between

jobs and jobseekers: while the estimated number of

unemployed persons was around 360,000 in Q4 2016

(according to the Labour Force Survey), the average

number of remaining vacancies stayed around

80,000. Unemployment spells have risen markedly in

2016, as have recruitment times. We do not expect

unemployment to fall significantly from where it stands

today. Nevertheless, we argue that the labour market

is rather stretched. Despite the high unemployment

rate, we find several factors that normally would result

in rising wages and cost growth. Eventually, we ar-

gue, cost growth will take off – just not immediately.

Perhaps wage growth isn’t that low after all?

While this tight labour market does not appear to

have led to higher wage growth so far, we argue that

the overall notion of weak wage growth might be

overblown. Wage and salary statistics (from the Na-

tional Mediation Office), the most monitored data,

are quite problematic: they undergo a year of revi-

sions, ranging between 0.0 and 2.0 percent on a

monthly basis (comparing final outcomes to first pre-

liminary readings). The cyclical aspect of the revi-

sions is a potential upside risk to this data: ‘wage

drift’ in 2016-17 will likely lift revisions higher than

those for ‘average years’. Also, wage data usually

appear to accelerate at a later stage than data on

labour costs per hour from the national accounts

(NA). We believe that the rise in cost growth in the

NA data (from 1.4 percent to 3.0 percent) is more

accurate than the flat growth rate in the wage data

(at 2.5 percent).

The most crucial factor for the inflation outlook

should be core inflation. Our core component calcu-

lation, covering 53 percent of the total CPI basket,

points to acceleration in 2017-18. Thus, our CPIF

forecast reaches the targeted 2 percent inflation in

H1 2018 (likely in March), which is why we expect a

first Riksbank rate hike in April that year. Rising in-

flation and the monetary policy turnaround is the ba-

sis for our forecast of a stronger SEK. Less expen-

sive imports in the CPI will then increasingly chal-

lenge the inflationary rise, but we believe this will be

trumped by other factors in 2017-18.

Anders Brunstedt, +46 701 54 32, anbr42@handelsbanken.se

Monthly Macro Update, January 25, 2017

15

Norway

Norges Bank on hold despite the “lowflation” outlook

Since our latest update on Norway, the inflation reading has yet again disappointed significantly on the down-

side. We see a risk that underlying price pressures are weaker than forecast by Norges Bank. In isolation, this

could contribute to a lowering of the policy rate. However, owing to Norges Bank’s clearly stated fears of spi-

ralling housing prices and debt, we believe the Bank will continue to keep its policy rate unchanged, at 0.5

percent, for the foreseeable future.

CPI-ATE still running below NB’s estimates

Since our latest update on Norway (“Housing market

puts (soft) floor under policy rate,” December 16), ev-

idence points to the inflation outlook being weaker

than forecast by Norges Bank. Recall that Norges

Bank, in its December report, lowered its inflation

forecasts quite significantly due to lower actual infla-

tion, combined with a more muted wage outlook. The

latest reading showed that the core inflation rate had

yet again disappointed significantly on the downside.

Despite solid base effects, which should have given

the CPI-ATE a temporary upward push in Decem-

ber, the y-o-y rate declined to 2.5 percent. This was

down from 2.6 percent in November, and the outturn

was 0.4 p.p. below Norges Bank’s estimate. In prin-

ciple, this may have been a “noisy” event which

tends to be reverted quite fast, but we are increas-

ingly worried that this decline is due to the underlying

price pressures being weaker than generally antici-

pated. More specifically, food prices were the key

contributor to December’s downside disappoint-

ment. However, food prices have declined for five

consecutive months, and we suspect that this has

more to do with the increasing slack in the retail sec-

tor, which can be attributed to stubbornly weak

household spending on consumer goods. At this

point, however, we choose to keep our medium-term

inflation outlook unchanged, as we are already an-

ticipating lower inflation relative to Norges Bank’s es-

timates. The risk to our 2017 inflation forecast is

skewed marginally to the downside.

No significant news for the real economy

With regard to the real economy, Labour Force Sur-

vey data released prior to the Christmas holidays

showed a monthly drop in overall employment, with

the longer-term trend still being flat. However, survey

unemployment is steady, although at elevated lev-

els, as more people have dropped out of the labour

force. Registered unemployment has been some-

what lower than expected, but the decline in people

registered as fully unemployed is hard to square with

the weak employment trends. Thus we continue to

suspect that the registered figures underestimate the

degree of labour market slack.

Policy rate to stay flat at 0.5 percent

Housing prices have continued to rise somewhat

faster than expected by Norges Bank, but on the

other hand household debt growth has been lower

than expected. In summary, however, financial sta-

bility concerns are probably as severe as they were

at Norges Bank’s December meeting. Recall that

Norges Bank (in December) included a new factor in

its interest account: namely, “Financial imbalances

and uncertainty”, which is central bank-speak for

“the housing market and credit growth”. This new

factor has some different characteristics than the

usual factors affecting the interest rate. The new

housing market factor will contribute to pulling up the

interest rate path as long as Norges Bank is worried

about potential financial imbalances coming from the

housing market.

We continue to believe that housing market con-

cerns will dominate the outlook for policy rates. The

deviation in regard to inflation trends, at least at this

stage, is probably too small to alter Norges Bank’s

policy rate path. We therefore continue to expect that

Norges Bank will resist lowering its policy rate any

further. Our base case is that Norges Bank will keep

the policy rate on hold, at 0.50 percent, for the fore-

seeable future.

Marius Gonsholt Hov, +47 2239 7349, maho60@handelsbanken.no

Key variables 2015 2016f 2017f 2018f

Mainland GDP 1.1 0.7 1.5 1.9

Unemployment (LFS) 4.4 4.8 4.8 4.8

CPI-ATE 2.7 3.0 2.2 1.2

Policy rate 0.50 0.50 0.50 0.50

EUR/NOK (end of year) 9.60 9.09 8.75 8.75

Monthly Macro Update, January 25, 2017

16

Finland

Exports finally getting a lift from stronger manufacturing

Finland’s GDP growth in 2016 is likely to end up a little stronger than our forecast of one percent. In 2017, we

expect that exports will join domestic demand as one of the engines of GDP growth as the broad-based manu-

facturing recovery lifts exports. Hence, we keep our modest 2017-2018 GDP forecast intact.

Growth outcome in 2016 likely to be stronger

At the start of the New Year, it looks likely that eco-

nomic growth for 2016 is going to be a couple of dec-

imal points stronger than our forecast of one percent.

The average GDP growth for Q1-Q3 alone, accord-

ing to the quarterly national accounts data,

amounted to 1.5 percent, and high frequency data

points to a relatively robust finish to the year. The

expansion in 2016 was much stronger in industry

and construction than in services, which reflects the

norm of secondary production being more respon-

sive in business cycle turnarounds. A look at GDP

from the demand side shows that domestic demand,

private consumption and construction investments

were the key drivers of growth.

Industry data indicates an export recovery

As we now have industry output data for almost all of

2016, we can make a conclusion that industrial activ-

ity has indeed bottomed out and experienced a broad-

based recovery, yet a more moderate one than the

historical norm. This is a promising development for

2017, particularly since the turn has taken place in the

second half of the year and carried over to the end of

the year. A strong pickup in industrial orders in No-

vember further supports this view.

Taking a closer look at the sectors, it is the metal and

chemical industries, both strongholds for exports,

which have contributed most to this turnaround. In

addition, forest industry and non-metallic mineral

production that are fuelled by robust domestic con-

struction activity have experienced a lift-off. One

sector clearly outshines the rest: the manufacture of

transport equipment has boosted output in the entire

metal sector. This is essentially traced to the revival

of Finnish shipbuilding and car manufacturing. The

recovery in manufacturing supports our view that in

2017 exports will gradually take the side of private

consumption and construction investments, as en-

gines of GDP growth.

Confidence and capacity utilisation rising

The business surveys support the brighter outlook

for Finnish manufacturing. In December, the confi-

dence indicator for manufacturing from the Confed-

eration of Finnish Industries improved its long-term

average of +1. This is the highest value since June

2011. Also 77 percent of companies evaluated in De-

cember stated that their production capacity was

fully utilised and the capacity utilisation rate for man-

ufacturing industry stood above 80 percent. This

should support corporate investments.

We have argued that Finland needs its export sector

to lead the recovery so that growth would not stem

from build-up of domestic leverage alone. An export

recovery ignites the expansion of manufacturing out-

put. Eventually, this should lead to growth of indus-

trial employment; yet there is a need for manufactur-

ers to increase the working hours of existing workers

and boost productivity and profitability. This is al-

ready happening. Corporate sector profitability has

improved, yet the turnaround starts after a major de-

terioration and hence industrial employment has not

responded yet to improved conditions. Both produc-

tivity and profitability will have to recover a good deal

more for the recovery to spread via industrial em-

ployment to domestic demand. For this reason, we

keep our modest 2017-18 GDP forecast intact.

Tiina Helenius, +358 10 444 2404, tihe01@handelsbanken.se

Janne Ronkanen, +358 10 444 2403, jaro06@handelsbanken.se

Monthly Macro Update, January 25, 2017

17

Denmark

Better – but still not great

Significant revisions to Denmark’s national accounts data have painted the recovery in the Danish economy in

a more favourable light, but trend growth in the wake of the financial crisis has fallen. We have lifted our GDP

growth forecast but still expect only moderate growth in the coming years, as supply-side constraints and the

uncertain global economic and political landscapes dampen the outlook.

Is the crisis over?

Significant revisions to national accounts data

painted the recovery in the Danish economy in a

much brighter light than previously assumed. Along-

side decent GDP growth in the first three quarters of

2016, this has led to a broadly held view that talk of

a low-growth crisis in the Danish economy is a thing

of the past.

We agree that the revised GDP data indicate a better

performance in the Danish economy, but we are not

yet convinced that we will see a stronger recovery

take hold. Despite the stronger growth picture over

the past couple of years, it is thus still clear that trend

growth has weakened in the wake of the great finan-

cial crisis, see graph below.

Even though the revisions also led to a more favour-

able development in productivity growth, the trend

over the past two years has still been down and cur-

rently stands at about 0.5 percent on an annual basis.

Thus, potential growth in Denmark is still considered

to be below 1 percent, and even a relatively slow in-

crease in demand could quickly give rise to an in-

crease in supply-side growth constraints. This is per-

haps already visible in business surveys and wage

trends. The percentage of businesses reporting lim-

its to production due to lack of skilled labour is clearly

on the rise, and wage growth in the manufacturing

sector has once again begun to grow faster than the

average among Denmark’s main trading partners.

If sustained, this labour/wage trend would under-

mine competitiveness and push already rising unit

labour costs even higher. This would hurt profits and

increase the risk of a weakening labour market.

Despite the stronger perception of the recovery in

the Danish economy, it is thus still imperative that

structural reforms are implemented to boost invest-

ment, productivity and potential output growth, in or-

der to enable a stronger, sustainable recovery.

Only moderate growth ahead

Given better-than-expected trends through 2016 we

have raised our GDP growth forecast for 2016 from 0.6

percent to 1.0 percent. However, even though GDP

growth came out at a healthy 0.4 percent

q-o-q in the third quarter last year, the composition of

growth was unfavourable, as it was almost entirely

driven by inventory accumulation and public spending,

whereas investments and private consumption cooled.

Given relatively weak consumer confidence and the

latest slowdown in retail sales, we are still not con-

vinced that private consumption will pick up signifi-

cantly this year.

The main wildcard in the Danish economy continues

to lie on the business investment side, where pent-

up demand could be released and support both the

short-term cyclical performance as well as the

longer-term structural view. Given the abundance of

uncertainties regarding the global economic and po-

litical situations, however, we are still not convinced

that businesses will increase investments in earnest.

In combination with an expected slowdown in eco-

nomic growth among several of Denmark’s main

trading partners, we thus retain our view that GDP

growth will be lacklustre in both 2017 and 2018.

Jes Asmussen, +45 4679 1203, jeas01@handelsbanken.dk

Monthly Macro Update, January 25, 2017

18

Key ratios

Real GDP forecasts

Source: Handelsbanken Capital Markets

Inflation forecasts

Source: Handelsbanken Capital Markets

Unemployment forecasts

Source: Handelsbanken Capital Markets

2015 2016f

(Previous

forecast

2016) 2017f

(Previous

forecast

2017) 2018f

(Previous

forecast

2018)Sweden 3.8 3.2 3.2 2.5 2.4 2.0 2.1Norway 1.6 0.7 0.5 0.5 0.5 1.0 1.0Norway Mainland 1.1 0.7 0.7 1.5 1.5 1.9 1.9Finland 0.2 1.3 1.0 1.0 1.0 0.8 0.8Denmark 1.6 1.0 0.6 0.7 0.5 0.7 0.5

EMU 1.9 1.6 1.5 1.3 1.1 1.2 1.3USA 2.6 1.6 1.6 2.4 2.4 1.8 1.8UK 2.2 2.1 2.1 1.4 1.3 1.1 1.1The Netherlands 2.0 2.0 1.6 1.6 1.3 1.5 1.3Japan 1.2 1.0 0.6 1.2 0.7 0.8 0.6

Brazil -3.8 -3.5 -3.3 0.6 0.7 2.3 2.3Russia -3.7 -0.6 -0.8 1.1 1.1 1.5 1.5India 7.2 7.5 7.5 7.6 7.7 7.6 7.7China 6.9 6.7 6.6 6.4 6.3 6.0 5.9Poland 3.6 2.7 3.0 3.0 3.3 3.3 3.5

2015 2016f

(Previous

forecast

2016) 2017f

(Previous

forecast

2017) 2018f

(Previous

forecast

2018)Sweden -0.1 1.0 1.0 1.4 1.4 2.2 2.1Norway 2.1 3.6 3.6 2.1 2.1 1.2 1.2Finland -0.2 0.4 0.3 0.9 0.9 1.2 1.2Denmark 0.5 0.3 0.3 1.0 1.1 1.3 1.3

EMU 0.0 0.2 0.2 1.3 1.3 1.3 1.3USA (core) 1.4 1.7 1.7 2.0 2.0 2.1 2.1UK 0.0 0.7 0.7 2.6 2.3 2.5 2.5The Netherlands 0.2 0.1 0.0 1.0 1.0 1.0 1.0

2015 2016f

(Previous

forecast

2016) 2017f

(Previous

forecast

2017) 2018f

(Previous

forecast

2018)Sweden 7.4 6.9 6.9 6.8 6.9 7.1 7.2Norway 4.4 4.8 4.8 4.8 4.8 4.8 4.8Finland 9.4 8.8 8.8 8.5 8.5 8.4 8.4Denmark 6.2 6.2 6.1 6.5 6.3 6.6 6.5

EMU 10.9 10.1 10.2 9.8 10.1 9.8 9.9USA 5.3 4.9 4.9 4.4 4.4 4.6 4.6UK 5.4 4.9 4.9 5.3 5.3 5.5 5.5The Netherlands 6.9 6.1 6.3 5.6 5.9 5.5 6.0

Monthly Macro Update, January 25, 2017

19

Currency forecasts

Source: Handelsbanken Capital Markets

Interest rate forecasts

Source: Handelsbanken Capital Markets

Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

EUR/SEK 9.50 9.55 9.40 9.30 9.20 9.00

USD/SEK 8.84 9.27 8.95 8.86 8.76 8.18

GBP/SEK 11.04 10.85 10.68 10.57 10.45 10.23

NOK/SEK 1.06 1.06 1.06 1.04 1.05 1.03

DKK/SEK 1.28 1.28 1.26 1.25 1.23 1.21

CHF/SEK 8.85 8.93 8.79 8.69 8.60 8.26

JPY/SEK 7.82 8.43 8.14 8.05 7.97 7.79

CNY/SEK 1.29 1.32 1.24 1.20 1.17 1.04

EUR/USD 1.07 1.03 1.05 1.05 1.05 1.10

USD/JPY 112.99 110.00 110.00 110.00 110.00 105.00

EUR/GBP 0.860 0.880 0.880 0.880 0.880 0.880

GBP/USD 1.25 1.17 1.19 1.19 1.19 1.25

EUR/CHF 1.07 1.07 1.07 1.07 1.07 1.09

EUR/DKK 7.44 7.44 7.44 7.45 7.45 7.46

SEK/DKK 0.78 0.78 0.79 0.80 0.81 0.83

USD/DKK 6.92 7.22 7.09 7.10 7.10 6.78

GBP/DKK 8.64 8.45 8.45 8.47 8.47 8.48

CHF/DKK 6.93 6.95 6.95 6.96 6.96 6.84

JPY/DKK 6.12 6.57 6.44 6.45 6.45 6.46

EUR/NOK 8.99 9.00 8.90 8.90 8.75 8.75

SEK/NOK 0.95 0.94 0.95 0.96 0.95 0.97

USD/NOK 8.36 8.74 8.48 8.48 8.33 7.95

GBP/NOK 10.45 10.23 10.11 10.11 9.94 9.94

CHF/NOK 8.38 8.41 8.32 8.32 8.18 8.03

JPY/NOK 7.40 7.94 7.71 7.71 7.58 7.58

USD/BRL 3.16 3.40 3.60 3.70 3.80 4.00

USD/RUB 59.42 58.40 57.20 56.70 56.70 54.40

USD/INR 68.14 68.25 68.50 68.75 69.00 70.00

USD/CNY 6.85 7.00 7.20 7.40 7.50 7.90

EUR/PLN 4.37 4.35 4.30 4.25 4.15 4.00

EUR/RUB 63.87 60.20 60.10 59.50 59.50 59.80

Policy rates Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden -0.50 -0.50 -0.50 -0.50 -0.50 0.00

US (range midpoint) 0.625 0.625 0.625 0.875 0.875 1.125

Eurozone -0.40 -0.40 -0.40 -0.40 -0.40 -0.30

Norway 0.50 0.50 0.50 0.50 0.50 0.50

Denmark -0.65 -0.65 -0.65 -0.65 -0.65 -0.45

UK 0.25 0.25 0.25 0.25 0.25 0.25

3m interbank rates Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden -0.57 -0.45 -0.35 -0.30 -0.25 0.25

US 1.04 1.05 1.05 1.10 1.10 1.25

Eurozone -0.33 -0.25 -0.25 -0.25 -0.25 -0.10

Norway 1.02 1.00 1.00 1.00 1.00 1.00

Denmark -0.23 -0.20 -0.20 -0.20 -0.20 0.00

Monthly Macro Update, January 25, 2017

20

Interest rate forecasts, continued

Source: Handelsbanken Capital Markets

2y govt. yields Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden -0.57 -0.55 -0.45 -0.20 0.10 0.25

US 1.15 1.20 1.25 1.30 1.35 1.40

Eurozone (Germany) -0.69 -0.60 -0.60 -0.60 -0.50 -0.40

Norway 0.55 0.50 0.50 0.50 0.50 0.60

Denmark -0.60 -0.55 -0.55 -0.55 -0.50 -0.30

Finland -0.61 -0.50 -0.50 -0.50 -0.35 -0.20

UK 0.16 0.25 0.25 0.30 0.30 0.45

5y govt. yields Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden -0.28 -0.25 0.05 0.10 0.25 0.60

US 1.86 1.90 1.90 1.90 1.90 1.85

Eurozone (Germany) -0.45 -0.40 -0.40 -0.40 -0.30 -0.20

Norway 1.11 1.00 1.00 1.00 1.00 1.10

Denmark -0.24 -0.20 -0.20 -0.20 -0.10 0.05

Finland -0.39 -0.35 -0.35 -0.35 -0.20 -0.05

UK 0.58 0.50 0.50 0.50 0.60 0.70

10y govt. yields Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden 0.65 0.55 0.60 0.65 0.75 0.90

US 2.40 2.20 2.10 2.10 2.10 1.90

Eurozone (Germany) 0.40 0.25 0.25 0.25 0.35 0.50

Norway 1.71 1.60 1.60 1.60 1.60 1.70

Denmark 0.36 0.25 0.25 0.25 0.40 0.60

Finland 0.56 0.40 0.40 0.40 0.55 0.80

UK 1.38 1.20 1.20 1.20 1.20 1.30

2y swaps Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden -0.31 -0.25 -0.10 0.15 0.50 0.65

US 1.45 1.50 1.55 1.60 1.70 1.80

Eurozone (Germany) -0.17 -0.15 -0.15 -0.15 -0.10 0.00

Norway 1.26 1.10 1.10 1.10 1.10 1.20

Denmark 0.01 0.05 0.05 0.05 0.15 0.25

UK 0.67 0.55 0.55 0.55 0.55 0.60

5y swaps Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden 0.32 0.30 0.55 0.55 0.65 1.00

US 1.91 1.90 1.95 2.00 2.10 2.20

Eurozone (Germany) 0.12 0.05 0.05 0.05 0.05 0.15

Norway 1.55 1.40 1.40 1.40 1.40 1.50

Denmark 0.36 0.20 0.20 0.20 0.30 0.45

UK 0.97 0.80 0.80 0.80 0.80 0.85

10y swaps Jan 23 Q1 2017 Q2 2017 Q3 2017 End 2017 End 2018

Sweden 1.17 1.05 1.00 1.05 1.15 1.30

US 2.27 2.10 2.10 2.20 2.30 2.30

Eurozone (Germany) 0.74 0.60 0.60 0.60 0.60 0.75

Norway 1.97 1.80 1.80 1.80 1.90 2.00

Denmark 1.02 0.90 0.90 0.90 1.00 1.10

UK 1.37 1.20 1.20 1.20 1.20 1.30

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