SEB report: A staggering world economy

8/4/2019 SEB report: A staggering world economy

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World is staggering under debtburdens but will avoid recession

Germany and Nordic countries

will be affected, despiteunderlying strength

Nordic OutlookEconomic Research August 2011


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Contents

Nordic Outlook August 2011 | 3

International overview 5

The United States 14

Japan 19

Asia 20

The euro zone 23

The United Kingdom 28

Eastern Europe 29

The Baltics 30

Sweden 32

Denmark 38

Norway 40

Finland 44

Economic data 46

Boxes

A 30 per cent recession risk 7

Commodity prices will be resilient 8

Will the euro survive? 10

What do alling petrol prices mean? 16

Hukou an obstacle to urbanisation and growth 21

Energy subsidies a heavy budget burden 22

Euro zone crisis deepening 27

Falling home prices oten lead to lower GDP 34


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4 | Nordic Outlook August 2011

Economic Research

This report was published on August 30, 2011.

Cut-o date or calculations and oreasts was August 25, 2011.

Robert Bergqvist Hkan FrisnChie Economist Head o Economic Research+ 46 8 506 230 16 + 46 8 763 80 67

Daniel Bergvall Mattias BrurEconomist Economist+46 8 763 85 94 + 46 8 763 85 06

Ann Enshagen Lavebrink Mikael Johansson

Editorial Assistant Economist+ 46 8 763 80 77 + 46 8 763 80 93

Andreas Johnson Tomas LindstrmEconomist Economist+46 8 763 80 32 + 46 8 763 80 28

Gunilla Nystrm Ingela HemmingGlobal Head o Personal Finance Research Global Head o Small Business Research+ 46 8 763 65 81 + 46 8 763 82 97

Susanne Eliasson Johanna WahlstenPersonal Finance Analyst Small Business Analyst+ 46 8 763 65 88 + 46 8 763 80 72

SEB Economic Research, K-A3, SE-106 40 Stockholm

Contributions to this report have been made by Thomas Kbel, SEB Frankurt/M and Olle Holmgren,Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible or the Norwegian analysis.Jakob Lage Hansen and Thomas Thygesen are responsible or the Danish analysis.


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International overview


World economy staggering under debt burdens Slowdown, but no recession

EM sphere showing decent resilience

Falling ination will allow policy exibility

Austerity and a new ramework are neededto save the euro

No ECB or Riksbank rate hike in 2012

Fed will carry out new stimulus

Weak American economic data and greater uncertainty con-

cerning the debt situation and political decision making capac-

ity in the United States and the euro zone have contributed to

the stock market decline and nancial turmoil o the past ew

months. This uncertainty comes in a situation where resource

utilisation remains low and room or traditional economic

policy stimulus measures in the OECD countries is very limited.

Meanwhile the nancial system is in the midst o a sensitive

restructuring process. Thereore our overall assessment is that

uncertainty will persist in the near uture, adversely aecting

peoples inclination to consume and invest. Last springs slow-

down, caused among other things by rising commodity pricesand the impact o the Japanese natural disasters, was thus not

merely temporary.

In our main scenario, GDP growth in the OECD countries will

slow to 1.7 per cent this year and 1.8 per cent in 2012. The

US as well as the euro zone will see below-trend growthin

both 2011 and 2012. Next year the OECD average will be pulled

slightly upward by higher growth in Japan, which is regaining

economic strength ater its March 2011 natural disasters. Finan-

cial imbalances are most obvious in the US, Japan, the United

Kingdom and various countries o southern Europe. However,

we also expect the ongoing deceleration to lower growth in

European countries with stronger undamental economic bal-ances, such as Germany and the Nordic countries.

Emerging market (EM) economies will also be aected, but

to a lesser extent. Due to the greater role o intra-regional

trade and ample room or loosening economic policies i nec-

essary, a sot landing with continued relatively high growth is

the most probable scenario in this sphere, which implies that

global GDP growth will remain at decent levels. Measured in

purchasing power-adjusted terms, it will slow rom 5.1 per cent

in 2011 to 4.0 per cent this year and 3.5 per cent in 2012.

In 2013 we expect growth to accelerate somewhat in the OECD

countries. The orces that will restrain recovery during the next

year will ease a bit, and by then the debt adjustment process

will have made some progress. Our main scenario assumes that

economic policy makers will utilise the stimulus measures

that remain in their toolkits. The ination outlook appears

relatively stable, which will help create a degree o exibility

or interest rate policy makers. Large problems will remain in

the euro zone, we believe that the political system will be capa-

ble o choosing a path that allows long-term stability, despite

strains, but the uncertainty is substantial.

Global GDP growth

Year-on-year percentage change

2010 2011 2012 2013

United States 3.0 1.5 1.8 2.7

Japan 4.0 -0.6 2.9 2.2

Germany 3.6 3.0 1.3 1.9

China 10.3 9.2 8.4 8.8

United Kingdom 1.4 1.1 1.6 2.0

Euro zone 1.7 1.7 1.0 1.5

Nordic countries 2.9 2.6 1.9 2.6

Baltic countries 1.4 5.7 3.7 4.4

OECD 2.9 1.7 1.8 2.1

Emerging markets 7.4 6.2 5.5 5.8

World, PPP* 5.1 4.0 3.5 3.9

World, nominal 4.4 3.3 2.8 3.2

Source: OECD, SEB * Purchasing power parities

Economic policy aces complex challengesThere are several reasons or the instability that has plagued

nancial markets in recent months. A slowdown at a time when

room or traditional stimulus measures is very limited raises

many serious questions. The situation is being made worse

because decision makers in a number o areas appear to have

been blind-sided and conused by the major challenges they

ace. In the background are both ideological dierences and

conicting national interests, but also a genuine uncertainty

about what measures are actually needed in the complicated

situation that has arisen in the atermath o the 2008-2009

nancial and economic collapse.

These major challenges have revealed weaknesses in both the

ability o the American political system to respond to large-

scale domestic problems and in the basic structure o the euro

system. We oresee several dilemmas and challenges:

Powerul scal tightening measures appear to be nec-

essary in many countries simultaneously. There are obvious

risks that this may choke o economic activity in a way


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that reduces the nal impact o budget improvements,

while uelling popular discontent and weakening govern-

ments. But a passive policy would lead to a urther and

unsustainable undermining o condence.

Todays altering euro system, with its common currency

but weak political coordination and weak institutions at the

euro zone level, seems to have reached the end o the road.

The European Union must make a choice within the next

couple o years: Either scrap the euro or else strengthen

its common institutions in a way that will introduce ed-

eralist and supranational characteristics on a scale

previously considered politically unacceptable.

The global nancial system is in a transormation

phase. Regulation in various elds is moving towards

implementation, with the ambition o increasing stability

and reducing the risks o new crises, but past experience o

large regulation projects which oten lead to unoreseen

problems is a bit unnerving.

Global trade imbalances are a key undamental cause

o tensions in the world economy. There is also a need

or greater economic policy coordination at the global level.

Here, too, institutions are relatively weak. Decisions are

oten made at national level, urther entrenching global

imbalances.

There is still room or unconventional stimulus

alternatives. However, their consequences are uncertain,

both in terms o eectiveness and any long-term adverse

impact.

Similarities and dierences rom 2008There are obvious risks that the current slowdown may tip intoa recession. Certain parallels can be drawn to events in

2007 and 2008. During the rst period ater the summer 2007

sub-prime mortgage crash, the US economy was characterised

by subdued but positive GDP growth, which only turned into a

deep recession ater the Lehman Brothers bankruptcy a year or

so later. During the initial phase, various countries showed

signicant resilience, uelling the concept o a de-coupling

between Western Europe and the US. Once the crash had

spread and the nancial crisis paralysed world trade, the reces-

sion became synchronised in most parts o the world.

Probability of a recession within a year

US: SEB recession indicator

Source: SEB

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

At present, certain indications o recession are also discernible

in US economic data. When GDP growth has allen to its cur-

rent low level, 1.6 per cent, a downward recessionary spiral

usually occurs. Below-trend growth leads to rising unemploy-

ment, which we have already seen to some extent in the past

six months. This, in turn, reinorces the negative dynamic. Our

US recession indicator, which summarises many macro and

nancial variables, points to a high probability o recession.

This indicator may exaggerate the recession risk. It is largelybased on sentiment data, and the gap between these and hard

data is probably larger than usual.

Basis points

Signs of European bank distress

Swap spread, Europe (10-year)Swap spread, US (10-year)

Source: Reuters EcoWin, SEB

06 07 08 09 10 11

-10

0

10

20

30

40

50

60

70

80

90

-10

0

10

20

30

40

50

60

70

80

90

In Europe the recession risks appear somewhat dierent.

Synchronised austerity programmes may choke o growth to a

greater extent than we have anticipated in our main scenario,

especially i they are not perceived as credible. Various coun-

tries must cope with continued high costs or new borrowing.

Perhaps the most serious recession risk is that weaknesses

in the banking system might lead to a tightening o lending,

mainly to industrial companies. The situation is serious in thebanking sector. Industrial companies, on the other hand, are

more nancially resilient than they were in 2008.

US: SEB Credit Conditions Index

CCI Mean (1970-2009)Sources: Federal Reserve, SEB, Reuters EcoWin

71 74 77 80 83 86 89 92 95 98 01 04 07 10

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

: .

. ,

However, various other important actors make a recession

unlikely. Cyclically volatile portions o the economy, which

normally account or most o the decline in demand during a

recession, are already deeply depressed. For example, the in-

vestment ratio in the American economy is at a record low and

residential construction has allen rom more than 6 per cent

o GDP to just above 2 per cent. Household debt retirement

has also made considerable progress. Debt as a percentage o

disposable income has dropped rom 135 to 119 per cent. The

current household savings ratio, around 5 per cent o income,

represents a continued downward adjustment in debt. Taking


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into account other variables such as the decline in home prices,

an equilibrium debt level could be reached in 3-4 years given

the current rate o debt retirement.

Strong balance sheets at industrial companies, especially in the

US, also make an imminent recession less likely. In addition,

the American banking and credit market situation looks sub-

stantially dierent rom 2008, as our indicator clearly shows.

A credit crunch that chokes o capital spending activity and

contributes to large-scale order cancellations does not appear

likely, especially in the US. Hard-earned experience rom 2008

also means that central banks will be better prepared to react

quickly i the threat o liquidity problems crops up in the nan-

cial system.

A 30 per cent recession risk in the OECDTo summarise the above discussion in the orm o three risk

scenarios, we are assigning a 55 per cent probability to

our main scenario: a slowdown without a recession.We anticipate that such a scenario will probably require ur-

ther stimulus measures rom the Fed. It also assumes that

crisis-ridden countries in the euro zone will implement their

planned austerity measures.

At the same time, we estimate the probability o a reces-

sion at about 30 per cent. There are several reasons why we

view this risk as considerably higher than normal. A recession

scenario would probably be milder in the initial phase than in

2008. On the other hand, it is likely to be lengthier, due to in-

adequate policy responses and more deep-seated uncertainty

about uture economic, political and nancial undamentals.

A scenario in which growth more quickly resumes the pattern

we oresaw beore the summer cannot be ruled out either,

but we estimate that this scenario has a low 15 per cent prob-

ability at present.

Index 2000=100

GDP, OECD countries

Recession Recovery SlowdownSource: OECD, SEB

04 05 06 07 08 09 10 11 12 13

107.5

110.0

112.5

115.0

117.5

120.0

122.5

125.0

127.5

130.0

132.5

107.5

110.0

112.5

115.0

117.5

120.0

122.5

125.0

127.5

130.0

132.5

15%

30%

Varying eects on the Nordic countriesThe Nordic countries have, albeit in varying degrees, relatively

good potential to withstand the international slowdown by

virtue o their rather strong underlying undamentals. We nev-

ertheless expect growth in Sweden and Denmark to reach

below trend next year.

The Swedish export sector normally shows great cyclical sensi-

tivity to variations in international demand. In addition, private

consumption will be squeezed by a downward price adjustment

in Swedens expensive housing market. At present, it also looks

as i a parliamentary deadlock will lead to relatively tight scal

policy. Our overall assessment is that Swedish GDP growth will

reach only 1.4 per cent in 2012.

Danish growth will be relatively low in the near uture. Given

tight scal policy, a weak labour market and a lack o optimism

among households and businesses, exports will be the only

growth orce. Next year, however, we expect scal policy to shit

in a more expansionary direction. Meanwhile there is a pent-up

need or both increased consumption and capital spending

activity. GDP growth will thus be higher than in the euro zone.

The Finnish economy, like that o Sweden, is also sensitive

to variations in international demand. We thus expect a clear

slowdown in export growth, but domestic demand will be resil-

ient. Falling unemployment will stimulate consumption, while

capital spending will rise rom a depressed level. Finland will

thus keep growing above trend in the next couple o years.

The Norwegian economy will resist the international downturn

next year. Solid public sector nances, oil income and good

undamentals in the mainland (non-oil- and shipping-related)

economy will enable growth to remain above trend. Capital

spending will be driven primarily by the oil industry and the

housing market. Meanwhile household consumption will be

sustained by good income growth and alling unemployment.

GDP growth, Nordic and Baltic countriesYear-on-year percentage change

2010 2011 2012 2013

Sweden 5.7 4.3 1.4 2.6

Norway 0.3 1.4 2.6 2.7

Denmark 1.7 1.4 1.7 2.3

Finland 3.6 2.9 2.2 2.8

Nordics 2.9 2.6 1.9 2.6

Estonia 3.1 6.5 3.5 4.0

Latvia -0.3 4.0 3.5 4.5

Lithuania 1.3 6.5 4.0 4.5

Baltics 1.4 5.7 3.7 4.4

Source: OECD, SEB

Moderate growth slowdown in the BalticsThe three Baltic countries are continuing their gradual recovery

rom the 2008-2009 crash. First hal 2011 growth was surpris-

ingly strong, especially in Estonia and Lithuania, where the

year-on-year increases in GDP were 8.4 and 6.5 per cent, re-

spectively. So ar, leading indicators have also been resilient in

the ace o international instability.

The upturn has mainly been driven by exports. Because o

poorer global prospects, the export boom will ade in the

next 6-12 months. Our orecast o a gradual upturn in do-mestic demand remains in place, however. High unemploy-

ment will slowly all. We expect Estonia and Lithuania to imple-

ment certain stimulus measures ater their earlier tightening.


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In Latvia, budget austerity will continue, but in smaller doses.

Relatively high ination, driven by energy and ood prices, will

slow next year, stimulating purchasing power.

Weighed together, growth will end up somewhat below its

potential pace o 4-5 per cent next year. Estonias GDP will

increase by 6.5 per cent this year and by 3.5 per cent in 2012.

Latvias growth will cool rom 4.0 per cent this year to 3.5 per

cent in 2012. Our orecasts or Lithuania are 6.5 and 4.0 per

cent, respectively. During 2013 a certain rebound will occur.

Ination will allIn recent months, ination has shown mixed tendencies. Be-

cause o earlier upturns in commodity prices, Consumer Price

Index (CPI) ination stands at around 3 per cent in the OECD

countries as a whole. Sustained commodity prices, despite

weaker economic prospects, have contributed to the staga-

tionary tendencies we are now seeing. On the other hand, there

are hardly any signs that high spot ination has caused second-

ary eects, or example aster pay increases. Ination expecta-tions have allen, yet there is a major dierence compared to

the situation in 2008, when strong deationary expectations

dominated the market or ination-linked bonds. Monetary

aggregates have also continued to normalise and are providing

no recessionary or deationary signals at present.

Commodity prices will be resilientSo ar, the reactions in the international commodities market

to nancial turbulence have been mild. A minor price drop was

noted or agricultural commodities, while the downturn or

industrial metals was more signicant. Rising copper pricesnevertheless oset the impact on broader indices. There was

a clear decline in energy prices earlier this year, but they have

rebounded recently. Gold prices have climbed to new heights

as investors have ed to sae assets in troubled times.

Index

Global commodity prices

Industrial metals Energy AgriculturalSource: HWWI

Jan

08

May Sep Jan

09

May Sep Jan

10

May Sep Jan

11

May

25

50

75

100

125

150

175

200

25

50

75

100

125

150

175

200

We are sticking to our view that over the next couple o years,

commodity prices will generally remain at high levels

despite the economic slowdown in the OECD countries.

This resilience will be due to undamental actors on the supply

side that will keep prices up, while rapid growth in China and

other emerging economies will sustain demand. We expectcontinued low interest rates and new monetary stimulus meas-

ures rom central banks, such as the Feds expected third round

o quantitative easing (QE3), to create good liquidity and to

benet commodities. A continued comparatively weak dollar

points in the same direction.

Despite the weakened economy, we have adjusted our oil price

orecast (Brent) somewhat higher or next year. This is due

to new inormation concerning supply conditions, with alling

OECD reserves and shrinking extra capacity in the Organisation

o Petroleum Exporting Countries (OPEC). Producers seem to

be aiming or prices o around USD 110 per barrel, and Saudi

Arabia is probably prepared to cut back production in order to

keep prices around USD 100 or somewhat higher.

Metal prices will move upward eventually. This is especially

true o aluminium and copper. Prices have allen closer to pro-

duction costs. China is also expected once again to build up its

copper reserves ater earlier draw-downs.

Prices o agricultural commodities are expected to level out

during the coming year. We previously oresaw a downturn

during the second hal o 2011, continuing into 2012. But mete-

orologists are now warning o a repetition o the La Nia period

that swept across the world during late 2010 and early 2011,

which may adversely aect harvests. In the short term, agricul-

tural prices will also be pushed higher by weaker US harvests in

the wake o a hot summer.

The risks in our commodities orecast are on the downside.

I important OECD countries should slide towards a new reces-

sion, weaker pricing awaits. Cyclically sensitive commoditieslike industrial metals also risk price squeezes in an uncertain,

turbulent economic and nancial environment.


Money supply

US, M2 Euro zone, M3Source: Federal Reserve, ECB

90 92 94 96 98 00 02 04 06 08 10

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

In the dramatic macroeconomic environment where we have

ound ourselves in recent years, the perceived threats have

changed dramatically a number o times: rom deation risks

driven by low resource utilisation and lack o optimism to ina-

tion risks driven by money-printing and monetary expansion. Inspite o this, underlying ination has shown a stable pattern. In

our economic scenario, a rather calm ination trend in the

OECD countries appears likeliest. We expect CPI ination

to decline clearly during the rst hal o 2012. Ater that,

ination will run a bit below 2 per cent in the euro zone and

quite close to 2 per cent in the US. Core ination (CPI excluding


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energy and ood) has shown a rising trend in the US since late

2010. This trend will continue during the autumn to a level just

above 2 per cent and then all again.

CPI, year-on-year percentage change

CPI inflation will fall

Euro zone USSource: Eurostat, BLS, SEB

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

forecastSEB

The risks in our ination orecast are mainly on the downside.

In an environment o weak growth, low resource utilisation andlittle room or economic policy responses, it is not unthinkable

that deationary expectations may again gain a oothold. I the

risk o recession increases urther, it is likely that commodity

prices will all, which would reinorce deationary impulses

even more.

Tightening will hamper growth in 2012Mounting debts and greater scepticism about the long-term

sustainability o public sector nances, combined with weaker

economic prospects, are creating difcult dilemmas or scal

policy makers. They must choose between dierent scal con-

solidation strategies. I they emphasise cost-cutting in the next

couple o years (ront-loaded programmes), this has a bigger

eect on market condence but meanwhile implies greater

pressure on the economy. Back-loaded programmes have less

immediate direct impact on the economy, but on the other

hand they increase debt even more. Uncertainty about how

cost-cutting will be implemented may, in itsel, also hold back

consumption and capital spending.

Net lendingPer cent o GDP 2010 2011 2012 Debt*

United States -10.6 -9.9 -7.4 101

Japan -9.5 -10.1 -9.2 234

United Kingdom -10.4 -8.0 -6.5 95

Euro zone -6.0 -4.5 -3.5 89

OECD -7.7 -6.7 -5.6 105

* Gross debt in 2012

Source: European Commission, OECD, SEB

We are now seeing how countries with major problems are

being orced to act quickly. Crisis-plagued countries in the euro

zone, as well as the United Kingdom, are implementing auster-

ity measures in the range o 5-10 per cent o GDP in the spaceo a ew years. Increased pressure on Italy has led to sizeable

cost-cutting packages or the next two years. France has now

also unveiled cost-cutting measures equivalent to 0.6 per cent

o GDP in 2012.

The US and Japan are still running budget decits o around

10 per cent o GDP, but the US cost-cutting package or the

next 10-year period approved early in August represents a step

towards more sober scal policy. Standard & Poors downgrad-

ing o its US sovereign debt rating has put some pressure on

the political system. The details are still unclear, and urther

political decisions must be made. Given the shaky economicsituation and the underlying political antagonisms, we expect

US cost-cutting to be relatively minor next year, but more

noticeable in 2013. In Japan, scal policy will be dominated in

the near uture by reconstruction programmes in the wake o

last springs natural disasters. Medium-term cost-cutting pro-

grammes will thereore be postponed.

Fiscal tighteningChange in structural balance as a percentage o GDP

2010 2011 2012 2013

United States -0.7 -0.6 0.8 1.3Japan -0.5 -2.0 -0.2 1.0

United Kingdom 0.3 1.7 1.4 1.6

Euro zone 0.4 0.9 1.3 1.0

o which GIPS 2.4 2.9 1.0 0.5

OECD -0.4 -0.5 1.2 1.2

Source: IMF, SEB

In the Nordic countries, relatively strong public sector nances

will mean that scal tightening can be avoided. Because o

budget surpluses in Sweden and Norway, scal policy will

remain expansionary. Due to greater international risks, com-bined with political disunity about suitable measures, the dose

o stimulus in Sweden will be smaller than in our previous

orecasts. In Denmark we expect a more expansive scal policy

ater the election, irrespectively o the election outcome. In Fin-

land the situation is not as avourable; given moderate budget

decits, we expect a neutral scal policy.

Overall scal policy in the OECD countries will shit in a

contractive direction next year. We estimate this eect at 1.2

per cent o GDP in 2012 and about the same in 2013. Despite

austerity measures, government debts will also continue to rise.

By late 2011, developed-country debts will surpass 100 per cent

o GDP or the rst time since the Second World War. Not untilthe end o our orecast period will these debts level out.

Need or unconventional monetary policyFiscal cost-cutting places heavy responsibility on central banks

to prevent a new recession. With key interest rates near zero in

the US, Japan and the UK, there is a high degree o ocus on the

potential impact o unconventional monetary policy.

So ar, the US Federal Reserve has gone urthest when it comes

to unconventional monetary policy. It has already allowed its

balance sheet to grow massively by means o quantitative eas-

ing (QE): buying mortgage and government securities (QE1 was

started in November 2008 and expanded in March 2009, and

QE2 was initiated in November 2010). In addition, the Fed has

pledged to keep its key interest rate near zero or an extended


9/50



period; in recent weeks it has specied an end date (summer

2013). The Fed now also has various other tools at its dis-

posal. The most immediate step will be to issue a timetable, not

only or its key rate but also or changes in its balance sheet.

Another possibility is to extend the average maturity o its bond

portolio.

New bond purchases (QE3) will probably also be carried

out i the labour market improvement derails, in line with

our orecast. We expect the volume o QE3 to be equivalent

to USD 1 trillion, probably with a ocus on longer maturities.

Looking ahead, other possible Fed measures are to establish

a quantitative target or expansion o the monetary base or to

Will the euro survive?The euro zone crisis rolls on, seemingly without end. In-

creased market scepticism about Italy and to some extent

also France has given the crisis a new dimension. Emergency

interventions to solve individual problems are apparently not

sufcient to create stability and to calm nancial markets and

political leaders around the world. I the euro is to survive,

major changes will be required at the national and European

level.

Acute short-term emergency actions include several dier-

ent elements. In order to normalise the borrowing costs ocrisis-plagued countries, urther tough decisions are required.

Budget-tightening programmes are under way in many coun-

tries, but these must probably be intensied and combined

with more ambitious structural reorms. The European Finan-

cial Stability Facility (EFSF) needs expanded resources, among

other things so that it can intervene in the sovereign bond

market. Although we do not believe that Italy will nally need

to seek a bail-out, it is important that the EFSFs resources

be expanded in such a way that Spain and Italy could also

potentially be covered by its saety net (in addition to Greece,

Ireland and Portugal).

The participation o the International Monetary Fund (IMF)

and the European Central Bank (ECB) is important in the short

term. The IMFs resources and expertise are needed in order

to increase the credibility o the scal reorm process. The

ECB is the institution that can act quickly when the political

process becomes lengthy. The euro zone countries probably

need nancial aid via the G20/IMF, in which especially China

can play a role. Larger elements o nancial regulation may

also be necessary. Further debt write-downs are also likely,

and i these are sizeable, recapitalisation o the banking sec-

tor will become necessary.

A path towards preserving the euro. In the long term,however, the euro zone cannot be dependent on supervision

by the IMF or emergency interventions rom the ECB. The ECB

has clearly declared its desire to return to a narrower mon-

etary policy task. In order to make progress, steps that have

so ar been controversial will be necessary. Despite todays

unwillingness rom various quarters to issue common euro

bonds, a step has already been taken in this direction, since

EFSF loans are guaranteed by all countries in the euro zone.

This, in turn, should be combined with clear steps towards

increased coordination and, in practice, supranational author-

ity in scal policy.

The proposals recently unveiled by Germany and France,including the establishment o an economic government in

the euro zone, are examples o this. But these proposals do

not undamentally dier so much rom the procedure known

as the European semester a cycle o economic policy

coordination that is already on its way to being implemented.

This, in turn, is alarmingly similar to the old Stability Pact.

The undamental dilemma is that the system is based on the

concept o countries supervising each other on a more or

less voluntary basis. To make the system stable a change is

needed shiting crucial scal policy decision making rom

individual countries to the euro zone level.

Is this path easible? For many years, the main economicargument against the euro has been that the euro zone is

not an optimal currency area, since the dierences between

its member economies are so wide. Recent developments

have conrmed this picture. The idea that the euro as such

will drive the convergence process has also suered a blow.

Instead, imbalances have actually continued to worsen, aided

by the supposed protection that the euro has provided. Shit-

ing to a path that genuinely creates the underlying prereq-

uisites or a common currency seems difcult to swallow in

many ways. In the case o Germany, it is a matter o assuming

an expanded economic and political responsibility or the

whole euro zone. For many problem-plagued countries, it isa matter o giving up sovereignty over their own scal policy

and thereby, in practice, accepting a kind o guardianship. To-

day it is obvious that there is a wide condence gap between

leading euro zone politicians and their domestic voters. The

question now is whether nancial pressures can help politi-

cians create a greater understanding in their home countries

or the measures that are required. Our risk scenario includes

another alternative, in which the voters do not accept the

path towards increased supranational authority, and the

political orces that advocate such a path lose inuence.

What will happen i the euro system collapses?Our main

scenario implies that the necessary steps will be taken andthat the euro will be saved. In spite o everything, the politi-

cal will to preserve the euro is strong. However, a scenario in

which the political strains prove too great cannot be ruled

out. Ending the euro project would naturally be associated

with major problems and costs, which are difcult to oresee.

The decision must be made abruptly and major bail-out

measures must be available at the national level when debts

and contracts are to be renegotiated. When additional debt

restructuring ollows in various countries, banks will undoubt-

edly need to be nationalised. New currency conversion rates

must quickly be decided. A period o great nancial uncer-

tainty, with sizeable adverse impact on the real economy, will

be unavoidable.


10/50



intervene in the xed income market in unlimited amounts to

guarantee that a given yield level is not exceeded.

Unconventional monetary policy is not problem-ree.A

long period o zero interest rates and generous access to mon-

ey increases the risk o new nancial imbalances. Low interest

rates also delay the repairing o nancial sector balance sheets

and household debt retirement. In addition, the Fed risks in-

ternational criticism or driving up commodity prices and con-

tributing to persistent global imbalances. Domestic criticism,

too, is growing especially considering that the Feds stimulus

measures may increase President Barack Obamas chances o

re-election in 2012. At present, however, these objections hard-

ly carry sufcient weight. There is little risk o undesirably high

ination pressure due to the Feds unconventional policy. To

date, the rapid expansion o the monetary base has not led to

accelerating money supply growth. This is probably explained

both by cautious lending practices and low borrowing demand.

Studies by the Bank or International Settlements (BIS) conrm

that changes in the Feds balance sheet have had little impacton monetary supply and ination.

Within the ramework o unconventional policy, but partly out-

side the realm o central banks, more ar-reaching interventions

in the unctioning o the market economy are also conceivable.

Various types o regulation that imply direct monetary support

to various economic sectors can be implemented. For example,

securities companies can be compelled to invest a certain

proportion o their portolios in various kinds o credit instru-

ments (both public and private), and yields can be determined

by regulatory authorities. Similarly, lending institutions can be

compelled to oer loans under predetermined conditions to

selected economic sectors.

Looking ahead, other dramatic changes in economic policy may

be considered. More and more observers (or example, recently

Kenneth Rogo, ormer chie economist o the IMF) are begin-

ning to ask whether todays debt and asset imbalances are too

large to be manageable in a low-ination environment. Lower-

ing the real-term value o debts and assets through higher

ination would be a way out o this dilemma. Such a shit natu-

rally carries signicant risks, and there are also large question

marks as to the technical mechanisms. But in a situation where

traditional methods or reducing debt imbalances are begin-

ning to seem increasingly painul and problematical, the ina-tion argument may gain urther support in public discourse and

thus become a more integral element o market expectations.

Key interest rates will remain extremely lowGiven the ocus on unconventional monetary policy in the US,

the UK and Japan, key interest rate hikes will not be con-

sidered in the oreseeable uture. During the next couple o

years, key rates in large portions o the industrialised world will

thus remain close to zero.

For the ECB, however, the situation is somewhat dierent.

Relatively high capacity utilisation in Germany and certain

other countries justiy a higher key interest rate than in the US,or example. Various support mechanisms or crisis-aected

countries in southern Europe relieve interest rate policy mak-

ers o certain stimulus tasks. However, given our growth and

ination scenario, we see no reason or the ECB to continue its

interest rate hikes. We thus believe that the ECB will leave its

re rate unchanged at 1.5 per cent or an extended period;

we expect possible small rate hikes no earlier than the

end o 2013.

Per centKey interest rates

Euro zone USSource: ECB, Fed, SEB

00 02 04 06 08 10 12

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

forecastSEB

In Sweden, the Riksbank aces a shit in interest rate policy.

Weaker economic conditions and exceptionally low interest

rates in other countries will result in a downward adjustment in

the central banks projected key interest rate path. Because o

airly strong domestic economic data, the Riksbanks change in

policy will most likely occur gradually. Such action is also con-

sistent with the Riksbanks historical behaviour pattern o

wanting to wait or clear conrmation o cyclical changes be-

ore realigning its monetary policy. We thus expect one more

additional key rate hike this autumn to 2.25 per cent, ater

which the Riksbank will take a long pause.

Per cent

Key interest rates

Euro zone Norway SwedenSource: ECB, Riksbank, Norges Bank, SEB

00 02 04 06 08 10 12

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

forecastSEB

Norges Bank will go signicantly urther in its interest rate

hiking cycle than other central banks. Because o Norways

resilience during the 2008-2009 downturn, the labour market

situation is already tight today. Ater hiking the deposit rate to

2.25 per cent in May, Norges Bank deviated rom its earlier rate

path and kept the rate unchanged, but we expect it to resume

gradual rate hikes. Norges Bank has highlighted the risk o new

imbalances as its justication or new hikes. Given the countrys

signicant domestic resilience, among other things because

o persistently high oil prices, we oresee a need or continued

monetary policy normalisation. By the end o 2013, the deposit

rate will stand at 4 per cent.


11/50



Continued low government bond yieldsInternationally, government bond yields have declined almost

uninterruptedly during the past ve months. This downturn

accelerated during the July-August stock market slide. Since

late July, both American and German 10-year yields have allen

by nearly one percentage point. In mid-August they reached

record-low levels o 2.06 per cent in the US and 2.10 per cent inGermany. The US sovereign credit rating and Germanys major

obligations in the euro zone have thus not weakened the desire

o investors to seek saety in German and American govern-

ment securities.

However, our assessment is that there is some room or gov-

ernment bond yields to all urther in the near uture. Weak

macro data and the likely launch o QE3 in the United

States will push down yields a bit below 2 per cent during

the autumn.Ater that, we believe that yields will climb

moderately. Fixed income market pricing indicates a rather

high probability o recession. This means that our low-growth

scenario, without a recession, represents a certain potential or

somewhat higher yields. We expect German 10-year yields to

climb to 2.50 per cent in December 2012 and to 2.90 per cent

by the end o 2013.

The downward trend, especially in US long-term yields, raises

the question o whether we are on our way into a Japanese

scenario o permanent exceptionally low yields. This parallel is

urther reinorced by the Feds latest interest rate signal, which

will mean that by 2013 the US key interest rate will have been

parked at near zero or a total o at least ve years. Traditional

cycles thus seem to have been rendered inoperable. But the

US trend still deviates in important respects rom that oJapan. Ination orecasts indicate that the chances o a genu-

ine US deation are quite remote. One important ingredient in

the Japanese trend is continuous appreciation in the yen, which

has made gradual deation possible without major changes in

competitiveness. In addition, demographic trends in the two

countries dier greatly. Taken together, these dierences have

contributed to our main scenario, in which international bond

yields will remain very low in historical terms yet still show a

weakly rising trend.

Per cent

10-year government bonds

US GermanySource: Reuters EcoWin, SEB

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

SEBforecast

Swedish 10-year yields reached a record-low 1.93 per centin mid-August. Room or new lows is more limited in Sweden,

since that the Riksbank will be carrying out key interest rate

hikes later this autumn. We predict that the spread against

Germany will move rom todays level o -10 basis points to 0

points at the end o this year, and then gradually climb to 20-

25 points by the end o 2013.

Norwegian long-term yields have also allen sharply in recent

months as a consequence o general risk aversion and in-

creased demand rom oreign investors. Due to the very limited

supply o Norwegian government bonds, yields on these have

allen below Norges Banks key interest rate. Norges Bank will

resume its rate hikes, contributing to an upturn in yields next

year. The spread against Germany will move rom todays 50

basis points to 65 points by December 2012.

Continued unstable stock market climateDuring the rst hal o 2011, leading international stock markets

moved sideways, even though the growth outlook began to

dim last spring. The gap between equities and the xed income

market thus widened. Ever since the euro zone sovereign debt

crisis broke out in the spring o 2010, we have seen an underly-

ing trend towards lower yields, while share prices resisted thistrend or many months. One interpretation o this is that xed

income markets gradually discounted the act that central

banks would be orced to maintain record-low key interest rates

or an extended period. Meanwhile the stock market remained

condent that such a stimulus policy would actually succeed in

keeping the recovery alive and that high corporate prot levels

could thus be preserved. The recent slide in equities is appar-

ently a signal o increased doubts that economic policy ammu-

nition will sufce to achieve this.

During the recovery phase, the stock market upturn in the

Nordic countries was more signicant than elsewhere. So ar

this year, though, the Nasdaq OMX Stockholm and to a great

extent other Nordic exchanges as well has underperormed

other leading world stock markets. The cyclical sensitivity o

the economy in general, and o the stock market in particular,

has proved more important than good domestic undamentals.

Currency appreciation has played a role, although its eect

should not be exaggerated.

Per cent, index

Fixed income market often leads equities

10-year government bonds (LHS) S&P 500 (RHS)Source: Reuters EcoWin, SEB

07 08 09 10 11

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Looking ahead, we oresee continued stock market uncertainty.

Macro orecasts will probably be revised urther downward,

squeezing corporate prot orecasts. The unstable economic

policy environment and resulting recession risks will persist.Above all, the potential or more proound problems in the Eu-

ropean banking sector poses a risk. Meanwhile there are many

indications that stock market pricing has already discounted


12/50



major recession risks. I our orecast o weak yet positive

growth is correct, there is room or a slight recovery.

Fundamentals controlling FX marketSince the global recovery began in 2009, underlying undamen-

tals have been the most important driving orce in the oreign

exchange (FX) market. Countries with good growth, low debtratios, rising central bank interest rates and current account

surpluses have normally seen their currencies appreciate. This

has resulted in a avourable trend or the Scandinavian curren-

cies as well as those o various commodity-producing countries

like Australia and Canada.

In this environment, the US dollar has had difculty in holding

its own. Large decits and the political disunity that contrib-

uted to the downgrading o the US governments credit rating

have reinorced investors doubts about the long-term stability

o the dollar. The American central bank has pledged to keep

its key interest rate near zero or another two years, which has

not made things better. Recent developments have conrmedthe same trend. According to the historical pattern, the sharp

decline in risk appetite should have helped strengthen the USD,

but no such appreciation occurred. Instead the dollar is being

traded at close to historical lows in eective terms. Another

negative actor or the USD is apparent rom the statistics on

non-US investors purchases o American securities. These

indicate a diminished interest in buying American government

securities in order to nance a budget situation that is unsus-

tainable in the long term.

USD and share index

S&P 500 (LHS) USD index (RHS, inverted)Source: S&P, Reuters EcoWin

Jan

08

May Sep Jan

09

May Sep Jan

10

May Sep Jan

11

May Sep

72.5

75.077.5

80.0

82.5

85.0

87.5

90.0

92.5

95.0

97.5600

700

800

900

1000

1100

1200

1300

1400

1500

Greek crisis

Weaker USD

Nor is the outlook or the euro especially encouraging, at a timewhen the entire euro project is in jeopardy and there is great

uncertainty about the management o the European debt crisis.

However, certain undamentals avour the euro, among them

generally lower budget decits and especially a current account

balance that is close to zero. Portolio investment ows are also

more avourable or the euro than or the USD. We thus end up

with a orecast that points cautiously upward or the EUR/

USD exchange rate during the coming year. By mid-2012, we

expect the EUR/USD rate to stand at 1.53. Looking even urther

ahead, we oresee a movement towards exchange rates that are

more justied by undamentals. We expect the EUR/USD rate

to be 1.40 at the end o 2013.

Due to the crises o recent years, currencies have moved

towards extreme levels in a historical perspective. Deensive

currencies like the Swiss ranc and the yen, as well as attractive

commodity-related currencies, have commanded record-high

exchange rates in historical terms. Meanwhile currencies like

the USD and the British pound have remained at low levels. But

the question is how relevant a comparison o historical values

is at present. We oresee no strong reasons why the same trend

cannot continue towards new record levels. Currencies o Asian

countries with low debt levels and relatively high growth shouldbe able to keep attracting capital inows. Continued current

account surpluses in Japan and Switzerland, and uncertainty

about developments in the euro zone and the US, will also lead

to continued appreciation. New interventions will be necessary

in order to soten the consequences in the real economy.

Index

SEK, real trade-weighted exchange rate

Source: BIS

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

80

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

The Norwegian krone (NOK) and the Swedish krona (SEK)

will remain attractive alternatives. This summers nancial

market turmoil and increasing signs o approaching economic

downturn have not weakened the Swedish krona to the extent

that normally occurs. This conrms our view that Swedens

strong balance sheet is transorming the krona rom an ex-

tremely pro-cyclical currency to a somewhat more stable one.

Swedens cyclical export structure nevertheless contributes to a

squeeze on the SEK during periods o greater global economic

weakness. Liquidity shortages will also help make it hard or

the krona to ully hold its own in times o instability. We thus

believe the EUR/SEK exchange rate will rise to 9.35 in the

coming month. However, the krona is one o the ew curren-

cies with relatively strong undamentals that is not overvalued.

Looking urther ahead, we are thus sticking to our ore-

cast that the krona will strengthen to 8.70 per euro. The

same pattern applies to the Norwegian krone, which will gain

strength rom persistently high, stable oil prices and wideninginterest rate dierentials. We predict a movement in the EUR/

NOK exchange rate towards 7.50 by the end o 2012.


13/50

The United States


Walking a loose tightrope Growth slowdown with risk o recession

Unemployment will peak at 9.5 per cent

Deation risks gaining renewed attention

Fiscal tightening, but stimulus rom the Fed

The American economy is grappling with major difculties.

Temporary actors such as high energy prices and supply

disruptions ollowing the Japanese disaster explain some othe decline in growth during the rst hal, but the underlying

strength o the economy was also less than estimated. This,

combined with growing questions about the unctioning o the

political system and a shit towards scal headwinds, has con-

tributed to our downward adjustment o the US outlook. GDP

will grow 1.5 per cent this year, 1.8 per cent in 2012 and 2.7

per cent in 2013, clearly lower than consensus. Below-poten-

tial growth implies that unemployment will creep higher, but

a alling labour supply will limit this upturn. The Federal Re-

serve will leave its key interest rate unchanged through-

out our orecast period and will resort to urther quantitative

easing, even though ination is high at present.GDP growth below trend

Annualised Year-on-year percentage changeSource: BEA, SEB

07 08 09 10 11 12 13

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

SEB forecast

Ater the latest revision in GDP statistics, it is clear that the

2007-2009 downturn was the deepest o the post-war period

and the subsequent recovery has been the slowest. GDP re-

mains below its peak o 3 years ago. GDP per capita is at

the same level as in 2005. Despite both monetary and scal

stimulus, GDP growth averaged a mere 0.7 per cent during the

rst hal o 2011. Because o the continued large output gap,

the threat o deation may re-emerge in the months ahead.

Probability of a recession within a year

SEB recession indicator

Source: SEB

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Recession risk in the short termThe probability o a new recession within 3-9 months is 30

per cent, in our assessment. Year-on-year GDP growth is now

1.5 per cent. Historically, such weak growth gures oten lead

to new economic downturns. It is a troubling signal that unem-

ployment has climbed this summer, since such upturns histori-

cally oten create a negative, sel-ampliying dynamic. The job

creation trend is sending out similar signals. We assume thatin late 2011 the US Congress will extend household tax cuts or

another year, but i this is not the case, a blast o wintry scal

weather in 2012 will also contribute to recession risks. In addi-

tion, there is a threat that the European debt crisis will escalate,

leading to a global tightening o credit conditions aecting the

US corporate sector as well.

Index

Credit conditions are still easy

Credit conditions index Mean (1970-2009)Source: SEB

71 74 77 80 83 86 89 92 95 98 01 04 07 10

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

: .

. ,

Due to several actors, a new recession is less likely than a

continued recovery. Both our credit conditions index and our

nancial conditions index point towards an expansive nancial

environment. In addition, the American banking system has

built up sizeable buers during the past couple o years.

Nor is the ederal debt situation as serious as the grim political

climate makes it seem. The US has no problems meeting its in-


14/50


The United States

terest payments, especially at the record-low interest rates now

prevailing. The most cyclical sectors in the economy, which

ordinarily account or most o the GDP declines, are close to

historical lows an indication that the downside is limited. A

third round o quantitative easing (QE3) may lit growth pros-

pects and risk appetite, but meanwhile new monetary policy

programmes such as this will probably have a diminishingimpact.

Per cent of GDP

The most cyclical sectors are close to the bottom

Cyclical sectorsSource: BEA, SEB

50 55 60 65 70 75 80 85 90 95 00 05 10

16

17

18

19

20

21

22

23

24

25

26

27

16

17

18

19

20

21

22

23

24

25

26

27

Mean

I the economy can dodge short-term recessionary risks, there

is reason or optimism urther ahead. In the housing market,

home prices have allen more than 30 per cent rom their 2006

peak and various valuation yardsticks indicate that homes are

no longer overvalued. Looking ahead a year or so, households

will probably be in a better position rom the standpoint o

savings and debts.

In a slightly longer perspective, extremely strong corporate

balance sheets also represent major upside potential oncedemand rebounds. One main reason or our positive growth

scenario in earlier orecasts was that changes in private sec-

tor nancial saving have historically provided a reliable signal

about where consumption, and especially capital spending, is

headed. Even i we now postpone this positive dynamic, this is

one reason why 2013 may be a year o decent growthde-

spite the scal tightening that lies ahead.

Shaky manuacturing sectorIn recent months the downturn in the ISM purchasing manag-

ers index has been twice as dramatic as in 2010, when worries

about an American double dip recession were also widespread.The downturn also has a global dimension this time around.

The euro zone crisis has spread to larger countries in the

common currency area, while the OECDs leading industrial

indicator has allen below zero, indicating that prospects or

global manuacturers have worsened. Despite the competi-

tive dollar, American exports are alling by around 6 per cent

compared to three months earlier (their worst decline since

March 2009). Overall, we expect US industrial production to

increase by 4.1 per cent this year, 2.3 per cent in 2012 and 4.1

per cent in 2013.

The perormance o small businesses is also important, since

historically speaking, this is where the new jobs are created.According to a recent survey by the US Chamber o Commerce,

ewer than 20 per cent o small enterprises plan to increase

their labour orce in the coming year. The corresponding gure

one year ago was 30 per cent. The National Federation o In-

dependent Business (NFIB) index has allen ve months in

a row, to its lowest level since September 2010. Weak domestic

demand, combined with continued difculties in obtaining

small businesses loans explain the depressed mood.

Altogether, we believe that total xed investment will increase

by 5 per cent this year and about 7 per cent on average in

2012 and 2013. These gures include residential investments,

which will increase by some 6 per cent in 2012 and 2013 ater a

urther decline this year (the sixth straight year). Public sector

consumption and capital spending, with state governments

and the Deence Department as key elements, has shown a

alling trend in recent years and urther cutbacks are likely to

occur.

Super-depressed householdsHousehold consumption has been the main driving orce in the

American economy over the past 30 years. When the economy

has weakened, real interest rates have allen. At that point,households oten using their homes as collateral have

increased their debt and consumption. Such a dynamic is

not going to recur this time around. Ater a temporary dip in

household saving last spring, when high petrol and ood prices

were undermining purchasing power, the savings ratio has re-

bounded again. Falling share prices and uncertainties about the

labour market as well as the political rules o the game indicate

that the trend towards higher household saving will persist: our

orecast is that the savings ratio will reach 6.5 per cent by

the end o 2012. Meanwhile household debt has allen by 16

percentage points since its peak, rom 135 to 116 per cent o

disposable income. Home prices, as measured by the S&P/Case-Shiller index, have allen to their 2002 level. In 2002,

indebtedness stood at 108 per cent o income, which indicates

the need or continued debt retirement.

Per cent of disposable income

Households are still deleveraging

Household debt-to-income ratio (LHS)Personal savings ratio (RHS)

Source: Federal Reserve, BEA, SEB

45 50 55 60 65 70 75 80 85 90 95 00 05 10

1

23

4

5

6

7

8

9

10

11

12

13

20

3040

50

60

70

80

90

100

110

120

130

140

Real consumption growth has allen or three consecutive

months, with the year-on-year rate decelerating to 1.8 per cent

rom 3.2 per cent at the end o 2010. Household condence

indicators signal a urther weakening. In August, the Reuters/

University o Michigan consumer condence index ell

sharply to its lowest level in 31 years. During recessions this

index averages 74 points; current levels are nearly 20 points

lower. Interestingly, uture expectations also ell to their low-

est level since the early 1980s. The correlation with household

consumption a ew months later is 76 per cent.


15/50


The United States

On the other hand, the latest statistics related to automotive

and retail sales, as well as the rebound in purchasing power

ater petrol prices ell this summer, indicate that consump-

tion remains at decent levels. Household consumption will

increase by an average o 1.7 per cent in 2011-2012 and

somewhat more in 2013.

What do alling petrol prices mean?Lower oil and petrol (gasoline) prices justiy a degree o opti-

mism about growth. West Texas Intermediate, which peaked

at USD 113 per barrel in May, is now being quoted at slightly

above USD 80/barrel (about the same level as at the end o

2010). According to simple rules o thumb, an oil price de-

cline o USD 10 lits GDP growth by 0.2-0.3 percentage

points. Petrol prices, which peaked at around 4 dollars per US

gallon, are alling towards USD 3.25/gallon. This gives house-

holds USD 80 billion more in their wallets over a one-year

period a welcome boon at a time when the labour market is

shaky and the stock market is alling.


Gasoline consumption is declining

Source: BEA, SEB

70 75 80 85 90 95 00 05 10-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

Meanwhile lower demand is one important reason why

oil and petrol prices have allen; real petrol consumption

ell at a year-on-year rate o 4.6 per cent, according to the

latest gures. As the above chart illustrates, such low growth

rates set o cyclical warning bells. Three years ago, oil prices

ell rom a peak o USD 145/barrel in July 2008 to USD 30/

barrel at the end o 2008, but that did not prevent the global

recession.

Labour market is treading waterThe latest labour market statistics are a mixed bag. Ater highlevels during the summer, initial claims or unemployment ben-

ets have allen back some. Lay-o notices, on the other hand,

increased by 80 per cent compared to three months earlier. The

July employment report contains various bright spots, surpass-

ing gloomy market expectations. Private sector employment

rose by 154,000, indicating that the recovery is continuing at a

decent pace. But the trend o private sector employment is

still worrisome.Measured as three-month averages, job crea-

tion has allen by more than hal since April and is consistent

with the trend just beore the three latest economic downturns.

In addition, the Household Survey indicates a substantial

downturn in jobs.

Unemployment ell to 9.1 per cent in July. But i labour orce

participation had not dropped to its lowest level since 1984

(63.9 per cent), unemployment would have ended up at 9.3

per cent instead, or 0.5 percentage points above its low o last

spring. Such an upturn would have been an obvious recession

signal, since all recessions since the 1970s have been preceded

by upturns o this magnitude in the jobless rate.


GDP growth below 1.6 per cent is a warning sign

Source: BEA, SEB

50 55 60 65 70 75 80 85 90 95 00 05 10

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Over the past year, ull-time employment has decreased by

0.5 per cent (143,000), while part-time jobs have risen by 3 per

cent (461,000). Our interpretation is that companies had low-

ered their expectations even beore the late-summer market

turbulence. This, combined with slimmed-down organisational

structures, indicates that the economy can cope with low

growth gures without the negative dynamic gaining the

upper hand this time around.

Per cent

Unemployment will drift up again

Classic Okun Unemployment rate NAIRUSource: CBO, BEA, SEB

97 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

3

4

5

6

7

8

9

10

11

3

4

5

6

7

8

9

10

11

forecastSEB

Long-term unemployment is a growing problem: 6.3

million Americans have been without a job or at least six

months. For people in this category, the probability o landing

a new job within one month is a low 10 per cent, according to

a survey rom the Bureau o Labor Statistics (BLS). For newly

unemployed people, the corresponding probability is three

times higher. Given youth unemployment o 25 per cent,

social tensions may explode in the US as well. Deep recessions

also aect lietime income. Studies show that entry-level pay

or those who actually land jobs is being pushed down by 25

per cent. Lower entry-level pay keeps down an individuals

income level or decades. One political aspect is that high

unemployment will undermine Barack Obamas chances

o re-election. Never beore has an incumbent president been

returned to ofce when the election-day jobless rate has beenabove 7.8 per cent.


16/50


The United States

Productivity curves are pointing downward. On a quarterly

basis, productivity has allen two quarters in a row, Measured

year-on-year, productivity growth is alling towards zero ater

having peaked at 6.1 per cent last year (a 50-year record).

Looking ahead, the ambition o businesses to turn around this

productivity trend will restrain job creation. This year and in

2012, we predict employment gains averaging just below100,000 per month. Such weak job creation is compatible with

higher unemployment, but alling labour orce participation

has the opposite eect. Meanwhile our estimated association

between GDP growth and changes in unemployment (Okuns

Law) shows that when growth is one percentage point below

trend, unemployment rises by about our tenths. Our orecast is

that employment measured as annual averages will be 9.1 per

cent this year, 9.4 per cent next year and 9.1 per cent in 2013.

Unemployment will peak at 9.5 per cent in 2012, and at the

end o our orecast period will stand at 9 per cent.

Lingering scal policy uncertaintyAter months o negotiations, Democrats and Republicans

reached a last-minute agreement on the US ederal debt ceiling

that avoided economic chaos. A budget stalemate would

have triggered an economic crisis o historic proportions.

Per cent of GDP

Government spending

Mandatory spendingDiscretionary spending

Discretionary with cuts

Source: CBO, SEB

00 02 04 06 08 10 12 14 16 18 20

6

7

8

9

10

11

12

13

14

6

7

8

9

10

11

12

13

14

CBO forecast

In brie, the agreement stipulates that the ederal debt ceiling

will be raised in two steps and expenditures will be lowered

correspondingly. The rst increase in the ceiling, USD 900 bil-

lion, will sufce until early in 2012. The US Congress meanwhile

approved spending cutbacks o the same magnitude. This

autumn, a Congressional scal policy committee consisting o

both Democrats and Republicans will try to reach an agree-

ment on urther spending cuts totalling USD 1.5 trillion, spread

over nine years starting in 2013. I Congress ails to adopt the

committees proposal beore December 23 (non-entitlement)

expenditures will automatically be slashed by USD 1.2 trillion.

Entitlement-related spending such as rapidly rising

health care costs will not be aected at all.

In the short term, the debt agreement only marginally aects

spending cutbacks. In 2012, ederal cutbacks will increase by

USD 20 billion. This means that scal tightening under to the

current law will total USD 270 billion (1.7 per cent o GDP).

However, we expect the economic situation to justiy exten-sions o the 2011 tax cuts or households and o compensation

to the long-term unemployed, although this will lead to new

clashes between Democrats and Republicans. Fiscal tighten-

ing at the ederal level is just below 1 per cent o GDP in

2012 but total scal tightening will be slightly bigger since belt-

tightening continues at the state and local levels.

Per cent of GDP

Government spending and revenues

Federal outlays, total Federal receipts, totalSource: US Department of the Treasury, SEB

55 60 65 70 75 80 85 90 95 00 05 10

12

13

14

15

16

17

18

19

20

21

22

23

24

25

12

13

14

15

16

17

18

19

20

21

22

23

24

25

The path to sustainable long-term public nances will be

among the main themes o the November 2012 election. Thedebt agreement is also ormulated in such a way that this issue

will land on the presidents desk at regular intervals until the

election. At present, no one knows exactly which expenditures

will be cut. This, in turn, means that households and businesses

are unsure about how ederal budget constraints will aect

them. Uncertainty about economic policy making rules will

adversely aect consumption, capital spending and hiring

plans and is one important reason behind the downward revi-

sion in our US economic orecast.


Lower inflation in 2012

Core inflation InflationSource: BLS, SEB

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6 SEBforecast

Ination will slow down againInation has climbed sharply during the past six months. The

oil price upturn has played a large role; price ormation in the

US is signicantly more sensitive to oil price uctuations than

in Europe. The weakening o the US dollar and last years eco-

nomic acceleration may also partly explain the price upturn, but

these actors are also rmly in the past. As base eects disap-

pear rom the statistics, ination will thus drop sharply, but over

the next six months we believe that ination and core ina-

tion will continue upward, peaking at 3.7 per cent and 2.2

per cent, respectively. Ination will then all to a low o 1.1 per

cent (May 2012) and core ination slightly higher. Measured as

annual averages, ination will amount to 3.1 per cent this year,1.7 per cent in 2012 and 1.3 per cent in 2013. Annual average

core ination will end up at 1.6-1.7 per cent in 2011-12, and 1.2

per cent in 2013, at or just below the Feds target level.


17/50


The United States

Ratio, year-on-year percentage change

Money multiplier still broken

M2 money supply / monetary baseM2 money supply

Source: Federal Reserve, ECB

60 65 70 75 80 85 90 95 00 05 10

0.0

2.5

5.0

7.5

10.0

12.5

15.0

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Meanwhile there is great uncertainty. Leading ination indica-

tors, such as pricing plans among large and small businesses,

have allen sharply since their peak. Taking into account that

the recovery began more than 2 years ago, the output gap

is record-sized. In the housing and labour markets, there arestrong orces that are pulling down prices. This is also true o

the household sector, which continues to pay down its debts.

The risk o even weaker economic growth, in a situation where

potential orms o stimulus are very limited, also explains

the Feds worries about alling prices, but the situation is not

completely clear. During the rst and second quarters o 2011,

unit labour costs rose by 4.8 and 2.4 per cent on an annualised

basis, respectively. In addition, growth in broad money supply

aggregates has surged. However, the money supply multiplier

is continuing to all, implying that the expansion o the mone-

tary base is not having a ull impact on the economy.

Per cent of GDPUS output gap moving sideways

Source: CBO, SEB

60 65 70 75 80 85 90 95 00 05 10

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

New monetary stimulus measuresIn a situation where scal policy makers have run out o am-

munition, responsibility or maintaining growth rests with the

Fed. The central bank predicts that its most important key

interest rate will remain at a record-low 0-0.25 per cent or at

least another two years. We predict that no key rate hikes will

occur during our orecast period.

Further quantitative easing appears likely. Although the

Fed cannot lower its key interest rate, it can stimulate the

economy in other ways. Its battery o sot measures includes

a possible timetable or winding down the Feds balance sheetand an extension in the duration o its bond portolio, but the

Feds own analysis indicates that these measures would have

a airly minor impact. Market expectations certainly also put

tougher measures at the top o their wish list. According to a

recent CNBC survey, almost 50 per cent o the respondents

expected the Fed to resume QE. O those who believe in more

QE, bond purchases are expected to average USD 628 billion.

A third round o bond purchases (QE3) is one logical next step.

According to our own indicator, which compares the current

situation with that o a year ago, the nancial developments

and events in the real economy justiy new purchases. But the

picture is not entirely clear. Ination is signicantly higher today

than in 2010, as is the Feds own measure o ination expecta-

tions. On the other hand, it is not todays ination rate that is

decisive, but the outlook a year or so down the road. According

to the central banks orecasts, by that time ination may be

lower than its target. Also decisive is that not even the most

optimistic orecasters are predicting ull employment beore

2015, since the Fed has a dual mandate. Our assessment is thus

that urther bond purchases, equivalent to USD 1 trillion,

will occur during the coming six-month period. With a

divided Federal Open Market Committee, opposition to urtherstimulus measures among politicians and the possibility that

the growth slump may prove temporary, this orecast is hardly

carved in stone.

I the threat o recession creeps closer, the Fed can roll out

its heavy artillery. In an eort to avoid a deation scenario

similar to that o Japan, Fed Chairman Ben Bernanke has dis-

cussed the possibility o a targeted long-term bond yield level

(which in practice means unlimited bond purchases). Price level

or nominal GDP targets are other alternatives, as are purchases

o other assets besides mortgage and government bonds.


18/50

Japan


Clear signs that a recovery has begun Above-trend growth due to reconstruction

New stimulus package on the way

Yen appreciation pressure will ease

As expected, the earthquake and tsunami disasters in March

have severely aected growth in Japan. Measured quarter-on-

quarter, GDP ell 0.9 per cent in the rst quarter and 0.3 per

cent in the second. This means the economy has shrunk or

three quarters in a row. The second-quarter decline was less

than expected, however, and there are now clear signs o re-

covery. The purchasing managers index has rebounded, ater

a sharp decline ollowing the natural disasters. Other indicators

are also pointing towards a turnaround. Industrial production

has begun to climb, although its June level was still nearly 10

per cent lower than beore the earthquake. Retail sales, how-

ever, have now surpassed their pre-disaster level ater an unex-

pectedly strong June gure.

Index 100=2007

Retail sales and industrial production rising again

Indust rial p roduct ion Retail salesSource: Ministry of Economy, Trade and Industry

07 08 09 10 11

65

70

75

80

85

90

95

100

105

65

70

75

80

85

90

95

100

105

Weak export perormance explained most o the second-quar-

ter GDP decline. In addition, there is a risk that Japans export

recovery will be aborted by the record-strong yen, combinedwith global economic weakening. Continued energy supply

problems also risk hampering the GDP recovery. In short,

we expect growth to become positive again during the third

quarter and then accelerate during the ourth quarter as the

positive eects o reconstruction eorts intensiy. In 2011 as a

whole, however, we expect GDP to decline by 0.6 per cent.

Reconstruction will help boost GDP growth to 2.9 per cent

in 2012. Growth will slow to 2.2 per cent in 2013.

Domestic political turbulence, ocusing on Prime Minister Na-

oto Kan, has continued in recent months. Ater being severely

criticised or weak crisis management, Kan has now stepped

down ater pressure both rom the opposition and his own

party. He is succeeded by the ormer nance minister, Yoshihiko

Noda, who is regarded as a scal hawk. With Noda as head o

government, there is a greater likelihood that Japan will eventu-

ally take steps to improve its weak government nances.

To date, the natural disasters have not led to any greater eco-

nomic policy consensus. Conrontations between government

and opposition have delayed the legislation needed to nance

the budget or the new scal year that started in April. Recently,

however, a proposal to issue bonds to nance the decit was

approved. Two supplementary budgets (equivalent to 0.8 and

0.4 per cent o GDP, respectively) to cover urgent disaster as-

sistance were presented earlier. The government is also puttingtogether a third, ar more extensive supplementary budget

(around 2.1 per cent o GDP) to cover the actual reconstruction.

Japans Statistics Bureau has unveiled a revised ination index,

aimed at better reecting the prices that consumers encounter.

The new index has led to a clear downward revision in CPI ina-

tion. For example, the June gure was revised downward rom

0.2 per cent to -0.4 per cent. Japan is thus still experiencing

deation and there are no signs that the ination rate will begin

rising to any great extent.

Monetary policy has been urther eased. The Bank o Japan

(BoJ) credit acility or companies and the asset purchase undwere each expanded by JPY 5 trillion and together now total JPY

50 trillion (around USD 630 billion). The BoJ is also expected

to keep its key interest rate at a record-low level (in the

0.00-0.10 per cent range) until the end o 2013.

During recent nancial market turbulence, the yen has rein-

orced its role as a sae haven currency. Since early July, it has

appreciated about 5 per cent against the USD. Because this

threatened exporters competitiveness, early in August the

central bank began intervening in the oreign exchange market.

Although the eect o this action was short-lived, signals rom

the BoJ and the nance minister indicate that urther interven-

tions will occur i the yen becomes stronger than 76-77 to thedollar. Japan is also to provide up to USD 100 billion rom its

oreign exchange reserves to support Japanese overseas invest-

ments and exports in an attempt to encourage capital outows.

Looking ahead, we expect appreciation pressure to ease some-

what, leading to a USD/JPY exchange rate o 75 at the end o

2011, 80 at the end o 2012 and 94 at the end o 2013.


19/50

Asia


Buoyant growth with only a moderate slowdown Growth is decelerating

Ination outlook still challenging in China

Continued tightening in India

The role o Asian emerging countries as engines o the world

economy is now becoming even more important as growth

weakens in the OECD countries. Our orecast o a moderate de-

celeration is supported by incoming data. GDP growth slowed a

bit urther in most Asian economies during the second quartero 2011. Purchasing managers indices have allen in recent

months, indicating that this deceleration will continue.

GDP, year-on-year percentage change

Growth is slowing in Asia

ChinaIndia

IndonesiaMalaysia

South KoreaThailand

Source: National statistical offices

07 08 09 10 11

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Looking ahead, there is a risk that a clearly deteriorating US and

European growth outlook will lead to a signicant downturn in

demand or the regions export goods, but other actors may

help sustain growth. Over time, the region has become less

and less dependent on developments in the Western world.

Domestic demand is also good, with strong growth in con-

sumption. There is also some room or scal stimulus, although

rising debt levels mean that less ammunition is available thanin 2008. There is also potential to ease monetary policy in case

o a sharp deceleration. By way o summary, we thus see good

reasons to stick to our main scenario o a moderate slow-

down in todays high growth.

In the short term, rising ination may nevertheless pose a

policy dilemma or Asian central banks. Ination pressure has

escalated urther in countries like China, Malaysia and Vietnam.

Rising core ination indicates that in some places, higher ood

prices have now broadened into more general price increases.

Monetary tightening has thus continued; India, or example,

has hiked its key interest rate by 0.75 basis points since mid-

June. We expect such tightening to continue, although the paceand extent o rate hikes will depend on the outlook or global

growth and nancial markets. The outlook or ination is un-

certain but we oresee a decline in ination pressure this

autumn as a consequence o tighter monetary policy, culmi-

nating ood and commodity prices and the deteriorating global

economic outlook.

During the past year, currency appreciation has been an active

means o ination-ghting. Looking ahead, the appreciation

pressure on Asian currencies is expected to persist. Higher

interest rates and stronger growth prospects than in the OECD

countries will lead to capital inows in search o higher returns.

Stronger Asian currencies are also an important element o

eorts to reduce global economic imbalances. However, thereis a risk that poorer global growth prospects and decreasing

ination problems will again cause decision makers to become

more worried that stronger curren

Documents

SEB report: A staggering world economy