SEB report: World economy at new crossroads

8/2/2019 SEB report: World economy at new crossroads

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World economy hesitating at new crossroadsTUESDAY

APRIL 3, 2012

A SENSE OF RELIEF AFTER THE ACTIONS OF THE

EUROPEAN CENTRAL BANK (ECB) dominated the moodof the world economy in the first quarter of 2012. Bylaunching unlimited three-year loans (the long-termrefinancing operation, LTRO) to euro zone banks, the ECBhas gradually eased worries about a paralysing creditcrunch. The March accord on new bail-out loans toGreece and the agreement to enlarge the resources ofeuro zone bail-out funds have removed further short-termconcerns. Developments in the real economy and infinancial markets have confirmed our main message inthe February issue of Nordic Outlook (NO): that therecession will be limited to crisis-ridden euro zonecountries. In the updated forecasts for various regions wehave presented in recent weeks (Macro Update), ourrevisions compared to NO have been small. We havemade upward revisions for Japan, Germany and Sweden,among other countries, but our global growth forecast for

2012 remains unchanged at 3.5 per cent in 2012 and 4.0per cent in 2013 (adjusted for purchasing power parity).

Global GDP growth

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

2010 2011 2012 2013 United States 3.0 1.7 2.5 (2.5) 2.5 (2.5)

Japan 4.4 -0.7 1.9 (1.7) 1.3 (1.2)Germany 3.6 3.0 0.7 (0.4) 1.4 (1.3)China 10.4 9.3 8.7 (8.7) 8.9 (8.9)

United Kingdom 2.1 0.8 0.4 (0.3) 1.4 (1.4)Euro zone 1.8 1.5 -0.6 (-0.8) 0.8 (0.7)

Nordic countries 2.9 2.5 1.0 (0.9) 1.9 (1.8)Baltic countries 1.1 6.2 2.0 (2.0) 3.2 (3.2)OECD 3.1 1.7 1.4 (1.3) 1.9 (1.9)

Emerging markets 7.3 6.2 5.7 (5.7) 6.0 (6.0)World, PPP 5.2 3.9 3.5 (3.5) 4.0 (4.0)

Source: OECD, SEB

THE WORLD ECONOMY NOW SEEMS TO HAVE

REACHED A NEW CROSSROADS. The question iswhether the positive trend can be strengthened, in anenvironment of continued debt consolidation needs andpersistently high oil prices. To make continued upwardadjustments in our forecasts possible, it is essential thatthe ultra-loose monetary policy of major central bankscan be implemented without excessively large goal

conflicts. In the United States, the Federal Reserve seemsto be in a relatively favourable position right now. Theeconomy is slowly gaining strength; for example,unemployment is falling and construction activity isincreasing. In an environment of low inflation pressureand plenty of idle resources, the Fed still has enoughflexibility to emphasise the fragility of the upturn.Announcing that key interest rates will remain low for anextended period enables the Fed to push down the entireyield curve, while holding the door open for a third roundof quantitative easing (QE3). In the short term, there donot appear to be especially big credibility problems relatedto inflation, asset price bubbles or soaring governmentdebt, although the Fed must again face the issue of exitstrategies sooner or later.

THE SITUATION IN THE EURO ZONE IS MORE

COMPLICATED. It is possible to single out a number ofthreats that may interrupt the current positive trend. If therecovery in Germany gains further momentum, south-north decoupling may create difficulties for the ECB interms of finding the right monetary policy trade-off. Thereare also various types of political risks related tomaintaining the crisis strategy that has now beenlaunched. The Greek crisis now appears manageable,without severe contagious effects. But it is too early torule out risks that the process will lead to consequencesthat other euro zone countries find unacceptable. TheSpanish government is facing a difficult balancing act. Onthe one hand, it must overcome mistrust from the ECBand from other euro zone countries about whether thegovernment is willing and able to actually implement theausterity measures it has unveiled. On the other hand,



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Economic Insights

there is a risk that domestic protests will grow tounmanageable levels. Meanwhile increasingly clearrecessionary signals are illustrating the disadvantages offurther budget tightening. The imminent French presidential election will also fuel uncertainty about thedetermination to fulfil the economic policy strategy that

the euro zone’s core countries have agreed to support.Taken together, developments in the euro zone thusimply major challenges and risks.

THE RELATIVELY GOOD RESILIENCE OF EMERGING

MARKET ECONOMIES has ensured greater stability in theworld economy over the past six months. Our mainscenario implies a soft landing with GDP growth of 5.7 percent in 2012 and 6.0 per cent in 2013, but there are risksthat must be taken into account in this portion of theglobal economy as well. A hard landing in the Chinesecredit or property market still cannot be ruled out. India’seconomy is plagued by structural problems and high

inflation pressure, which pose major challenges toeconomic policy makers. Unrest in the Middle East –

especially Iran’s increasingly tense relations with other

countries – risks driving up oil prices further. Such a

development would not only threaten the immediateregion but would also jeopardise the world economicrecovery as a whole.

IN THE NORDIC COUNTRIES, GROWTH WEAKENED

DURING THE FOURTH QUARTER OF 2011 largely in linewith our forecasts. The slowdown was primarilyattributable to exports, while domestic demand and thelabour market were relatively resilient. As in 2008-2009,the Nordic countries have been affected by the crisis inways similar to Germany. This is especially true of Finlandand Sweden, with their large and cyclically sensitiveexport sectors. In 2012, GDP growth in Denmark, Finland

and Sweden – as in Germany – will end up close to 0.5 per

cent. Because of the exceptional resilience of theNorwegian economy, we predict growth in Norway willexceed 2 per cent both in 2012 and 2013.

GDP growth, Nordic countries

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

2010 2011 2012 2013 Sweden 6.1 3.9 0.7 (0.5) 1.9 (1.7)Norway 0.7 1.3 2.1 (2.1) 2.4 (2.4)

Denmark 1.3 1.0 0.5 (0.5) 1.4 (1.4)Finland 3.6 2.7 0.7 (0.5) 1.7 (1.7)Nordic countries 2.9 2.5 1.0 (0.9) 1.8 (1.8)

Source: OECD, SEB

RECENTLY THE SWEDISH ECONOMY HAS SHOWN

IMPORTANT BRIGHT SPOTS. The Business TendencySurvey published by the National Institute of Economic

Research in late March demonstrated sharply improvedoptimism, especially in manufacturing. Although otherleading indicators have not shown such a clear

turnaround, this illustrates the potential for a positive shiftin sentiment if external factors fall into place. Perhaps thisis because companies were afraid of a repetition of the2008-09 collapse and this kept them in a depressed moodfor longer than the actual situation justified. The houseprice downturn that dominated much of 2011 seems to

have ended early in 2012, which is another importantpiece of the puzzle. The Riksbank’s key interest rate cutshave changed household expectations about futureinterest rates, while the stock market recovery hasprovided support. Although the home price upturn ofrecent months may not last, it confirms our forecast thatSweden can avoid a hard landing in the housing market.

GDP growth in Sweden

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

Source: Statistics Sweden, SEB

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

10 11 12 13

-2

-1

0

1

2

3

45

6

7

8

9

10

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

SEB forecast

THESE NEW CONDITIONS ARE CREATING SOMETHING

OF A DILEMMA FOR THE RIKSBANK. The growth,unemployment and inflation outlook clearly point towards

further key rate cuts. On the other hand, it is obvious thatthe governor of the Riksbank and several other ExecutiveBoard members see a danger that additional rate cuts mayfurther inflate home prices and household debts. This isespecially true considering that various internationalorganisations, including the European Commission, haveraised a clear warning flag in these areas. Our conclusionis that the Riksbank will hold off on a further rate cut at itsApril monetary policy meeting, but we are sticking to ourforecast of rate later this year, although the probability ofthese has also diminished.

[email protected] +46 8 763 80 67



U.S. economy on a firmer footingTUESDAY

20 MARCH 2012

• A slowdown in real GDP growth seems increasingly likely in Q1 and we estimate that realGDP grew at a 2 percent annualized rate in the first quarter, compared to 3.0 percentin Q4. But the weaker first-quarter growth wouldn’t rule out stronger performance insubsequent quarters, and since many soft indicators of final demand is strengthening –our 2012 and 2013 GDP forecasts remain unchanged at 2.5 percent. The

unemployment rate is sliding gradually to 7.4 percent at the end of 2013.

• Although we believe that the recovery is on a firmer footing it is not going to be a straight

line up by any means. Unseasonably warm weather may have boosted activity while highoil and gasoline prices are beginning to cut into consumer’s purchasing power and growthprospects in general. Fortunately there are offsets: the looming credit squeeze was averted

and the tail risk of a severe recession in Europe is decidedly lower. Financial conditionsare much easier compared to a few months ago. Employment growth has beenstronger than expected as well, but wage growth remains subdued.

• Arguably too much fiscal tightening too fast is the biggest risk in 2013. Under current lawthe fiscal tightening is around 4.5 percent of GDP – easily enough to break any recovery.

Even if only 2 percentage points of tightening actually occurs, it’s still the second largest inmodern history. Don’t look for any clarity until after the November election when action isneeded on a smorgasbord of contentious economic issues, among others the expiring

Bush era tax cuts and the “sequester” which automatically slash federal outlays. This iswhy Fed chairman Bernanke is talking about a “fiscal cliff” at year’s end. Our assumption

is that the fiscal headwind will be little more than 1 percent in 2013 which is notenough to break the recovery. But expect a messy process with possible

macroeconomic as well as debt rating related concerns along the way.

• Our inflation forecasts are revised higher this year on oil. But the upturn is judged tobe temporary and in 2013 both headline and core inflation will be running well below thetarget. Consequently, we stick with our forecast of additional QE although it is a closecall.

Mattias BruérSEB Economic Research

+46 8 763 85 06

Key data

Percentage change 2010 2011 2012 2013

GDP 3.0 1.7 2.5 2.5

Unemployment* 9.6 9.0 8.2 7.6

Inflation 1.6 3.1 2.2 1.3

Core inflation 1.0 1.7 1.9 1.3

* Per cent of labour force, yearly averages

Source: SEB



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Economic Insight

THE BIG PICTURE

• Currently there is a huge split between the demand side and supply side in the U.S. economy. The supply sideis all good: employment growth is around 250k a month and aggregate hours worked is 3.5 percent above the Q4

average. So what the supply side is suggesting is that growth is running above 4 percent at an annualized rate. Thedemand side is a different story: real consumer spending has practically no momentum and both capital spending

and net exports are tracking negative GDP contributions. According to the demand side data alone real GDP

growth could be closer to zero r ight now. But the housing market is in better shape which is one reason why therecovery may end up being more sustainable than last year. The glass half full group would point out that housing

only is 2 percent of the U.S. economy, however.

• Soaring oil and gasoline prices are advancing on the worry list. It is not the level but the change in prices thatinfluences growth, and the rule of thumb we use is that a persistent USD 10 dollar increase in the oil price lowers

real GDP growth by 0.2 percent year one as well as year two. So compared to the October lows we may be lookingat a 0.8 percent drag on real GDP growth in 2011 if oil prices stay where they are for a year all else beingequal (somewhat smaller effects when using yearly averages). Fortunately there are offsets since financialconditions are much easier today compared to a few months ago and should no longer hurt growth.

• Higher oil prices will push up inflation temporary but further out inflation is expected to run below the

level the Fed is shooting for. As long as inflation expectations are behaving well the Fed will probably lookthrough any oil-related bounce in inflation. Remember that in January the Fed said that the funds rate is going to beheld to the floor “at least through late 2014” and six of the 17 Fed officials don’t believe they will raise rates until2015-16. So we remain of the view that the available policy options are 1) an unchanged accommodative monetary

policy stance or 2) additional easing. Higher inflation is making more asset purchases a harder sell but more easingmay come, especially if the economy starts fraying at the edges. Since Q1 real GDP growth is poised to disappointwe are reluctant to change our forecast of additional policy easing. What has been floating around recently is

“sterilized QE” which could have the potential to stimulate the economy while at the same time subdue worriesabout future inflation. As an aside, Bernanke again described U.S. growth as “frustratingly slow” last week.

Meanwhile markets may be in the process of pricing out QE and pricing in an early tightening cycle.



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Economic Insight

CONSUMER SPENDING / CAPITAL EXPENDITURES

• The trend in real consumer spending is running at a low level and our models do not suggest much improvement

over the near term. Despite faster employment growth and the long and generous arm of Uncle Sam, who

contributes 20 percent of the income pie, weak income growth is holding down consumer spending .

• Whilst growth in real disposable income has trended below real consumption growth since the beginning of 2011,

the drop in the savings rate and the fading fuel shock supported consumption last year. But these tailwinds may be

turning: driven in part by the ratio of household net worth to personal income falling from 650 percent at the bubble

heights to 500 today, our savings model suggests that an uptrend in the savings rate is fundamentally

motivated. When this ratio was at current levels in the past, the savings rate was within the 7-10 percent band with

near consistency. The labor market is the key; stronger employment growth should ultimately fuel income andspending. A signpost of the current hardship: the number of Americans receiving food stamps is above 46 million.

• Usually the unseasonably warm weather is an argument that the bears are pushing, arguing that the economy has

been artificially strong as a result. But the flip side is that excluding energy, real consumption growth is above 2

percent. In our view what is driving consumption right now is almost exclusively auto related where fleet sales

represent most of the buying. Meanwhile 89 percent of the consumption pie is shrinking and we would like to see

a more broad-based expansion in any event.

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Economic Insight

THE LABOR MARKET• The unemployment rate has fallen by 0.8 percentage points since August, to 8.3 percent. More private jobs have

been created since November than in any three-month period since 2006.

• Aggregate hours worked are up 3.6 percent at an annual rate over the last three months. As a standalone

number this is suggesting real GDP growth at around 4.5 percent in Q1.

• But real GDP growth is tracking around 2 percent in Q1 so productivity must be contracting in the current

quarterjust as it did a year ago. Whenever this happens, companies move to protect their squeezed profit margins

and respond the following quarter by slowing hiring. Looking back over the past decade this happened every time,

and monthly payrolls, on average, come in 70k lower the following quarter. This is why we caution against

extrapolating current employment trends into the future.

• The progress on the unemployment front has been much faster than justified by the classic Okun’s law, but that is

implicitly assuming that trend GDP growth rate has not changed much. But remember that trend GDP growth is the

sum of labor force growth and productivity growth. While the growth in the labor force has recently picked up, the

productivity trend is running slightly above zero right now. Putting these numbers together they are suggesting that

trend GDP growth has been running below 1 percent for a year now. That can explain the better labor market

outcomes even with “frustratingly slow” growth. Going forward, however, what the pick up in labor force growth is

suggesting is that the lower speed limit is only temporary. Thus, going forward we expect much slower progress

against unemployment even if real GDP growth will be better than last year’s 1.7 percent.

P e r s o n ( m i l l i o n s )

m i l l i o n s



Japan: the economic recovery is ongoingFRIDAY

21 MARCH 2012

• Real GDP fell 0.75 percent in 2011; the weakest growth in the G7 countries. But leadingindicators and hard data are suggesting above-trend growth at the same time asreconstruction spending is providing support. Real GDP will grow 1.9 percent and 1.3percent in 2012 and 2013, respectively.

• Recent hard data is suggesting that the recovery has become more entrenched: e.g.machinery orders, industrial production and retail sales were all above expectations.

• After the Bank of Japan intervened earlier this year, the yen has weakened for six weeksrunning and the yen is at its weakest level since last spring (summer) against the dollar (euro).

That is good news for competitiveness. Exports have not responded yet, but that is a matter oftiming only since there are lags involved.

• Reflecting the better tone to economic data, the weaker yen and the JPY 65 trillion Asset-Purchase Program, the Nikkei has trended higher for six weeks in a row. But have a lookand see on the development since the beginning of 2011; over this time period the Nikkei has

traded below other major indices so maybe it can play catch-up; the price-to-book value is stilllooking cheap. Just to add some color, the all-time-high was posted in 1989, and the leveltoday is 75 percent below the highs.

• For the first time in 31 years, Japan showed a trade deficit last year, and in January it postedits largest trade deficit ever. This raises questions about the prevailing economic structure

with large current account surpluses and net savings. If also the current account surplus turnsinto deficit, the consequences may be dramatic since Japan would be forced to import capitalto finance its gargantuan debt load.

• The unemployment rate has drifted higher since September, and was sitting at 4.6 percentin January. If our GDP forecast becomes reality, the unemployment rate should stabilize and

decline somewhat in 2012-13.

• Japan is massively dependent on foreign oil; arguably a sharp upturn in oil prices is thebiggest near-term risk now when the tail risk of a severe recession in Europe is lower.

• While inflation in year-on-year terms edged above the zero line in January, core inflation(excluding fresh food) will probably not follow suit for some time yet.

• The structural challenges are enormous indeed: the debt/GDP ratio has risen to a gargantuan230 percent. Meanwhile the share of the population that tops 65 years of age is at 25percent and it will keep rising.

Mattias Bruér

SEB Economic Research

+46 8 763 85 06

Key data

Percentage change2010 2011 2012 2013

GDP* 4.4 -0.7 1.9 1.3

Unemployment** 5.1 4.6 4.4 4.2

Inflation* -0.7 -0.3 0.1 0.2

Government deficit*** -9.3 -10.3 -11.0 -11.0

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

Source: SEB



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Economic Insight

CHARTS ON THE JAPANESE ECONOMY

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Economic Insight

CONTINUED…

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China: Weak start for 2012 but no hard landingMONDAY

26 MARCH 2012

• Distortions due to the Lunar New Year imply that data for January and February aredifficult to interpret but it is clear that activity in the Chinese economy has beenweak at the start of 2012. GDP growth in the current quarter is likely to be weak. Therecent development puts a downside risk to our above-consensus GDP forecastof 8.7 per cent growth in 2012. However, due to data distortions caused by the LunarNew Year and models indicating a rebound in activity in April we maintain our forecast for

the time being.

• Headline inflation fell to 3.2 per cent in February. Food inflation dropped from 10.5 percent in January to 6.2 per cent. (Chart 1)The large drop in inflation reflects the timing ofthe Lunar New Year and headline inflation might rebound somewhat in March, a higherthan expected fuel price increase adding further upward pressure. Lower inflationprovides opportunities for policy loosening in order to stimulate growth.

• Most indicators point to weak growth. A preliminary reading of HSBC’s manufacturingPurchasing Manager’s Index (PMI) for March decreased to 48.1, putting the recentrebound in doubt. (Chart 2) The official PMI for March is likely to follow suit and end upclose to or even below 50. Conditions in manufacturing are weak but not consistentwith a hard landing. Leading indicators points to growth below trend. (Chart 3)

• Export and import data are distorted due to the Lunar New Year but export growth istrending downwards. (Chart 4) The trade balance hit a deficit of 31.5 bn USD inFebruary, the largest single-month deficit on record. (Chart 5)

• Retail sales are holding up well but industrial production showed the lowest readingsince July 2009 in January/February (Chart 6) Total loans picked up slightly inFebruary. (Chart 7)

• The gradual cooling of the housing market continues; house prices were flat inFebruary compared to a year ago. (Chart 8) Construction activity is still strong but projectstarts are weak. The government is not ready to relax property market controls yet.

• The depreciation of the yuan towards the USD has slowed down in 2012. (Chart 9)Premier Wen has stated that the yuan might be close to an “equilibrium exchange rate”.

Andreas Johnson


+46 8 763 80 32

[email protected]

Key data

Percentage change

2010 2011 2012 2013

GDP* 10.4 9.3 8.7 8.9

Inflation* 3.3 5.4 4.4 4.5

USD/CNY** 6.59 6.29 6.00 5.82

* Percentage change. ** End of period.

Source: National Bureau of Statistics of China, Reuters, SEB.



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Economic Insight

CHARTS ON THE CHINESE ECONOMY



Euro zone: The risk of a severe recession hasdiminished

WEDNESDAY

21 MARCH 2012

• ECB support has averted a credit crunch and stabilised bond markets. The Greekdebt-restructuring (Private Sector Involvement, PSI) was reasonably successful, pavingthe way for the second bailout programme and thereby avoiding a disorderly Greekdefault for now.

• With the exception of the labour market, some of the recent data has surprised on

the upside, including Q4 GDP, new orders and retail sales. Indicators havestabilised or recovered slightly although current levels still indicate a fall in activity.The labour market continues to deteriorate and the recent development has put anupside risk to our unemployment forecast. Consumer spending remains weak andcontributed to the Q4 fall in GDP.

• In light of the recent data, a stabilisation in financial markets and better prospects forGermany, we revise our GDP forecast for the euro zone slightly upwards compared toNordic Outlook February . GDP is expected to fall by 0.6 per cent in 2012 followed bya return to positive territory with a weak recovery of 0.8 per cent in 2013. The riskof a more severe recession in the euro zone has diminished.

• Inflation was 2.7 per cent in February and is expected to moderate during 2012 althoughthe HICP-forecast has been revised upwards due to rising energy prices. Inflation isexpected to be above the ECB target in 2012 but below the target in 2013.

• The ECB is not expected to make any major changes to its monetary policy stance for thetime being. We expect the refi rate to remain at 1.0 per cent and no new LTROs areexpected in the coming months. Having avoided a credit crunch and so far stabilisedthe situation in bond markets the ECB seems content with the support it currently offers.The ECB also needs some time to evaluate what they call the “extremely complicated”effects of the LTROs. The policy stance can be interpreted as ECB having put the ballfirmly in the governments’ court; long-term solutions to the euro-crisis rest withgovernments.

Andreas Johnson, SEB Economic Research

[email protected], +46 8 763 80 32

Key data

Percentage change2010 2011 2012 2013

GDP* 1.8 1.5 -0.6 0.8

Unemployment** 10.1 10.1 10.6 11.1

Inflation* 1.6 2.7 2.3 1.6

Government deficit*** -6.4 -4.4 -3.5 -3.0


Source: SEB

GDP forecasts Per cent

2011 2012 2013

Euro zone 1.5 -0.6 0.8

France 1.7 -0.3 0.8

Germany 3.0 0.7 1.4

Italy 0.5 -1.9 0.2

Spain 0.7 -1.5 0.3 Source: SEB



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Economic Insight

INDICATORS AND GDP

• Most indicators have stabilised or recovered slightly but are still at levels pointing to a fall in activity. TheESI (Economic Sentiment Indicator) rose for the second consecutive month in February but still points to a fall inGDP. The composite purchasing managers’ index (PMI) fell to 49.3 in February.

• The German Ifo-index rose for the fourth consecutive time in February and is well above the long-term average.The ZEW investor sentiment also continues to recover and in March reached its highest level since June 2010.

• Euro zone GDP fell by 0.3 per cent in Q4, in line with the forecast in Nordic Outlook February and slightly betterthan the consensus forecast of -0.4 per cent due to better than expected performance in Germany and France. Thedecrease in GDP was driven by consumer spending and investment. Italy entered a technical recession in Q4 as GDPfell for the second consecutive quarter.

• Euro zone GDP is expected to fall by 0.6 per cent in 2012 followed by a weak recovery of 0.8 per cent in2013. The forecast for Germany has been revised upwards to 0.7 per cent.

GDP growth, quarter-on-quarterPer cent

Q4 Q3 Q2

Euro zone -0.3 0.1 0.1

France 0.2 0.3 -0.1

Germany -0.2 0.6 0.3

Italy -0.7 -0.2 0.3

Spain -0.3 0.0 0.2

Source: Eurostat, national statistical offices



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Economic Insight

LABOUR MARKET AND INDUSTRY

• Unemployment in the euro zone rose to 10.7 per cent in January and the figure for December was revisedupwards. The number of unemployed increased by 185 000; the ninth consecutive monthly increase, bringing thetotal number of unemployed in the Euro-zone to 16.9 million. January’s weak development along with revisionsputs an upside risk to our labour market forecast.

• Unemployment rose sharply in several of the peripheral and southern euro zone economies in January; theunemployment rate in Greece reached 19.9 per cent.

• The German labour market is still strong but the rate of unemployment has stopped declining.

• Euro zone unit labour costs are rising slowly after the fall in 2009 and 2010. Unit labour costs in Spain continue todecrease.

• Manufacturing new orders rebounded in December and beat expectations. Industrial production was very weakat the end of 2011. Industrial production recovered slightly in January, increasing by 0.2 per cent compared tothe previous month, but is still well below the recent high in August 2011.



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Economic Insight

FINANCIAL AND MONETARY INDICATORS, INFLATION

• The liquidity provided by the two LTROs (22 December and 29 February) has avoided a serious credit crunch anddiminished the need for the ECB to intervene in secondary government bond markets. The ECB kept its monetarystrategy unchanged in March. No more three-year loans are expected in the months to come and the refi ratewill remain at 1.0 per cent during the forecast period. In ECBs latest forecast, the GDP forecast for 2012 was

revised downwards to -0.1 per cent and the inflation forecast was revised upwards.• Yield spreads between German government bonds and other euro zone countries have come down since

the beginning of the year but remain elevated. The Greek PSI was successful with a 95.7 per cent participationrate and a Greek disorderly default was avoided. Bank lending is still weak although there was an improvement inJanuary. The annual growth rate of M3 rose to 2.5 per cent in January.

• The euro has started to weaken again since the beginning of March providing some stimulus for exports.Financial stocks have surged by around 20 per cent since the beginning of 2012.

• Inflation was 2.7 per cent in February. The HICP forecast was revised upwards to 2.3 per cent in 2012 and 1.6per cent in 2013. Core inflation will bottom out at 1.2 per cent in autumn 2012 and reach 1.5 per cent by end-2013.



UK economy: still weakTHURSDAY

22 MARCH 2012

• While we maintain a bearish bent on the UK economy, the consensus 2012 GDPestimates actually ticked higher to 0.6 percent in March. Meanwhile the Bloombergaverage is lower, at 0.2 percent for 2012. We predict GDP growth of 0.4 percent in2012 and 1.4 percent in 2013, respectively. Recent data, e.g. on industrial productionand retail sales suggests that the economy is still weak although some other indicators

fuel recovery hopes.

• The market is currently looking for 0.4 percent GDP growth at an annual rate in the first

quarter, which implies zero growth compared to the fourth quarter. A flat economy isconsistent with the message from NiESR’s huge macroeconomic model (a pretty

amazing creature that we have used in the past) and our own forecast.

• The private sector continues to add to payrolls while jobs are cut in the public sector.Since the labor force is growing, the unemployment rate is on a rising trend and at8.4 percent it is sitting at its highest level since 1995. The unemployment rate isexpected to drift gradually higher in 2012-13. It is already well above the NAIRU which iswhy regular pay is trending below 2 percent year-on-year. But the downward pressure on

real wages from inflation is diminishing which will help the recovery to take hold in2013.

• Inflation continues to decline from the high-water mark in September, and fell from 3.6percent in January to 3.4 percent in February. While the fall was somewhat smaller than

expected, the trajectory is in line with the MPC’s latest projections. On the margin, ourinflation forecasts are revised higher on oil but we still look for below-target inflationin 2013. The dovish set of MPC minutes, with two members pushing for more stimulus,suggest that the door to more QE is still ajar.

Mattias Bruér


+46 8 763 85 06

Key dataPercentage change

2010 2011 2012 2013

GDP* 2.1 0.8 0.4 1.4


Inflation* 3.3 4.5 2.8 1.5

Government deficit*** -10.3 -8.5 -7.0 -6.0* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Source: SEB



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Economic Insight

CHARTS ON THE UK ECONOMY

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CONTINUED…

Index, 2000 = 100

Real exchange rate

Source: Reuters EcoWin, SEB

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

70

75

80

85

90

95

100

105

110

115120

125

70

75

80

85

90

95

100

105

110

115120

125

Stronger

Weaker

Year-on-year percentage change

M4 growth still negative

Source: Reuters EcoWin, SEB

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.017.5

20.0

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.017.5

20.0



Sweden: Growth forecast largely on trackMONDAY

26 MARCH 2012

Growth forecast largely on track. The sharp decline in Q4 GDP shows that Swedish

growth is slowing, but exaggerates the underlying weakness. The growth forecast hasbeen revised upward slightly to 0.7 per cent in 2012 and 1.9 per cent in 2013

(previous forecast 0.5 per cent and 1.7 per cent for 2012/13). Signs of stabilisation in theEuro zone are supportive, although many problems remain that will affect Sweden.Growth is likely to be well below trend over the next two years.

The sharp decline in Q4 GDP constitutes a downside risk. However, the outcome

doesn’t seem to reflect the underlying trend as sentiment indicators signal a slowdownrather than a recession.

Downside risks for the household sector have decreased with rising sentiment andsigns of a relief in the housing market.

The labour market is slowing down but indicators point to a mixed picture. Employmenthas been weak in the beginning of 2012 but unemployment has so far leveled out in line

with our forecast. Furthermore, short-term indictors have only declined moderately. All inall, our forecast of gradually rising unemployment from mid-2012 is largely ontrack.

CPIF inflation is expected to rise slightly in 2012 from the present low level, partly

due to rising petrol prices. Headline CPI is heading lower due to declining mortgage rates.

The Riksbank is expected to continue to cut rates to 1 per cent in 2012 due torising unemployment and low inflation. The April rate decision is likely to be a closecall but we continue to expect the Riksbank to remain on hold and wait for moreindications on the extent of the slowdown and where the housing market is heading.

The forecast for government savings has been lowered slightly but Swedish public

finances are still extremel stron in an international com arison.

Olle Holmgren,SEB Trading

Strategy

[email protected]

+46 8 763 80 79

13121110

10

8

6

4

2

0

-2

-4

-6

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

Swe: GDP

% q/q (RHS)

% y/y


2010 2011 2012 2013

GDP* 6.1 3.9 0.7 1.9

GDP working day adjusted* 5.9 4.0 1.1 1.9


Inflation* 1.2 3.0 1.3 1.0Government savings*** 0.0 0.3 -0.5 -0.4


Source: SEB



2

Economic Insight

GDP SLOWING BUT NOT DECREASING

Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector havestabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat

in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment.

Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak inJanuary. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs alsofor other service sectors.

Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and

in the public sector. Confidence in construction has declined considerably and housing investments are predicted todecline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.

Swe: Manufacturing sentiment

Conf idence indicator Inf low of new orders

98 00 02 04 06 08 10 12

-50

-40

-30

-20-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

Swe: Economic sentiment and confidence in the servicesector

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

03 04 05 06 07 08 09 10 11

-30

-20

-10

0

10

20

30

40

50

60

75

80

85

90

95

100

105

110

115

120

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

Industry Service sector

04 05 06 07 08 09 10 11

-25

-20

-15

-10

-5

0

5

10

15

-25

-20

-15

-10

-5

0

5

10

15

Confidence in the retail sector

Durable goods Mostly food Total

07 08 09 10 11 12-80

-60

-40

-20

0

20

40

-80

-60

-40

-20

0

20

40

Swe: Confidence in construction

Building activity, expectationsOrder books, outcomeThe confidence indicator

96 98 00 02 04 06 08 10 12

-100

-75

-50

-25

0

25

50

75

-100

-75

-50

-25

0

25

50

75

Swe: Housing starts and residential fixedinvestments, % y/y

Housing starts Resident ial investmentsSource: Reuters EcoWin

00 01 02 03 04 05 06 07 08 09 10 11-75

-50

-25

0

25

50

75100

125

150

175

-75

-50

-25

0

25

50

75100

125

150

175



3

Economic Insight

HOUSEHOLD SECTOR AND THE LABOUR MARKET

Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in thestock market. Car registration and retail sales are holding up well, while consumer confidence has recovered.

Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was oneexplanation. There has been a downward revision to the household savings ratio implying that household savingsalmost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective.

The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing

price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 percent over the next two years but downside risks have decreased.

Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast.Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will

continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment islikely to start rising from mid-2012.

Swe: Consumer confidence

Consumer confidenceSEB, housing price indicator

04 05 06 07 08 09 10 11

-75

-50

-25

0

25

50

75

-30

-20

-10

0

10

20

30

Swe: Mortgage lending rates and the repo rate

3 - month mortgage lending ratesRepo rate

Spread

07 08 09 10 11 1250

75

100

125

150

175

200

225250

275

300

325

-2

-1

0

1

2

3

4

56

7

8

9

Swe: House Prices, index 2005 = 100

SCB, housesValueguard, Flats

Valueguard houses

05 06 07 08 09 10 11

90

100

110

120

130

140

150

160

90

100

110

120

130

140

150

160

11080502999693

15

10

5

0

-5

-10

15

10

5

0

-5

-10

Swe: Household savings ratio, % of income

Total

Ex manatory pension savingsOwn financial savings

Swe: Employment according to the NIER survey

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

04 05 06 07 08 09 10 11

N e t b a l a n c e

-50

-40

-30

-20

-10

0

10

20

30

-4

-3

-2

-1

0

1

2

3

4

13121110090807

9.0

8.5

8.0

7.5

7.0

6.5

6.0

5.5

4700

4650

4600

4550

4500

4450

Swe: The labour market

3-month average

Employment, 1000s (RHS)

Unemployment, %



4

Economic Insight

INFLATION AND THE RIKSBANK

Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiationsremain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some

signs of negotiation strains but we expect wage agreements to be reached with out any major strikes.

The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIFinflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF exfood and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength

and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however

Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicatesthat the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbankwill take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a

stabilisation in the housing market will be more important than the lower than expected Q4 GDP.

13121110

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Swe: CPI, % y/y

CPI

CPIF

CPIF, ex food and energy

13121110

2.5

2.0

1.5

1.0

0.5

0.0

2.5

2.0

1.5

1.0

0.5

0.0

Swe: CPIF, % y/y

Riksbank

SEB

1110090807060504030201

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

Swe: Hourly wages, % y/y

Business sector

Total economy

Corrected for historical bias (Riksbank's estimate)

111009080706050403

2

1

0

-1

-2

-3

2

1

0

-1

-2

-3

Swe: Capacity utilisation indicators

SEB's, indicator

Riksbank, RU-indicator

Swe: Lending to households

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

02 03 04 05 06 07 08 09 10 11

3

5

7

9

11

13

15

3

5

7

9

11

13

15

Swe: Government bond spread vs Germany, bps

07 08 09 10 11 12-70

-60

-50

-40

-30

-20

-10

0

10

2030

40

-70

-60

-50

-40

-30

-20

-10

0

10

2030

40



Norway: Activity running at a solid clipMONDAY

2 APRIL 2012

Activity indicators for the first couple of months of the year suggest that overall activityhas started the year on a stronger-than-expected footing. The solid impression fits

with what respondents reported in the most recent report from Norges Bank’s regional

network: output “increased fairly rapidly” in winter while expectations ahead was for

some moderation (as they tend to be), consistent with growth in mainland GDP – i.e.

excluding oil/gas and shipping – at near 3% year-on-year rate in the first half of 2012.

Relative to February’s Nordic Outlook , we lift the forecast for growth in mainland GDP

in 2012 to 2.6% from 2.3% while leaving the forecast for 2013 unchanged at 2.9% for

now. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 which

nonetheless implies stronger growth than in 2011. We see upside risks to the forecasts.

The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wage

growth to stem deteriorating competitiveness in export industries. The trend-setting

negotiation for manufacturing blue-collar workers has broken down with the official

mediator stepping in. Pay increases might be slower than in 2011: according to media

reports, labour unions will trade it for a common paternal leave in the private sector to be

paid for by government. Actual wage inflation in manufacturing is likely to be stronger

than agreed in the central negotiations due to wage drift (local pay), reflecting tight

labour markets. Moreover, wage growth in the dominant public sector might not slow as

much. In all, we expect overall wage growth to ease from 4.2% in 2011 to 3.9% in2012, yielding a solid increase when adjusted for inflation.

Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at its

mid-March monetary policy meeting, citing still-lingering concern for global growth and

lower inflation due to NOK appreciation. The bank lowered its optimal rate path quite

markedly, putting any rate hike off to Q3/13. We think a hike will come next spring at the

latest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.

Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway

Growth

Inflation

Labour-market

Growth is seen holding near trendMainland GDP and Norges Bank’s regional network

-4

-2

0

2

4

6

8

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

Mainland GDP, %change year-on-year (LHS)Regional network out put i ndicator , i ndex (RHS)Output expectati ons 6 mth ahead, index (RHS)

Source: Nor es Bank, Statisti cs Norwa


2010 2011 2012 2013

GDP 0.7 1.6 2.1 2.4

Mainland GDP 1.9 2.6 2.6 2.9


Inflation 2.5 1.2 1.5 1.9

Core inflation 1.4 0.9 1.5 1.9

Government balance** 10.8 13.6 11.5

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

Source: SEB



Economic Insights

DEMAND AND PRODUCTION

Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by

fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption

of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked

payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012.

The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently

mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly

winds from abroad. The 13-point jump in the PMI from December to a 4 ½-year high of 59.7 in March and an even

stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery.

Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but

following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging

orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong

labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period

which marked the previous high.

Consumption has firmed in early 2012…

3-month average

-12

-8

-4

0

4

8

12

16

03 04 05 06 07 08 09 10 11

-3

-2

-1

0

1

2

3

4

Consumption of goods, %change year-on-year (LHS)%change from 3 mth. earlier (RHS)

Source: Stat istics Norway

… as turn in confidence has suggested

-2.5

0.0

2.5

5.0

7.5

10.0

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

-10

0

10

20

30

40

50

Private consumpti on, %change year-on-year (LHS)Consumer confidence, net balance (RHS)

Source: Ecowin, Stat istics Norway

Choppy momentum in manufacturing, but …

3-month average

-16

-8

0

8

16

24

01 02 03 04 05 06 07 08 09 10 11

-4

-2

0

2

4

6

Manufactur ing product ion, %change year-on-year ( LHS)From 3 months earlier (RHS)


… sharp recovery in PMI suggests solid outlook

30

35

40

45

50

55

60

65

70

75

04 05 06 07 08 09 10 11

30

35

40

45

50

55

60

65

70

75

PMI manufacturing (RHS) PMI new orders (RHS)Source: Ecowin

The upturn in housing starts has levelled off..

-40

-20

0

20

40

60

80

01 02 03 04 05 06 07 08 09 10 11

15

20

25

30

35

40

Housing start s 3 mth. average, %change year-on-year (LHS)Housing start s in 1. 000, 12 mt h. aggregate (RHS)


.. but orders suggest much more in the pipeline

3

4

5

6

7

8

9

10

11

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

0

20

40

60

80

100

120

140

160

Housing start s in 1.000, quar ter ly average (LHS)

Nominal or ders new residential buil dings, 2Q earli er (RHS)Source: Stat istics Norway

2



Economic Insights

LABOUR MARKET AND INFLATION

The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy.

Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from

September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS

unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year.

Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure –excl.

taxes and energy – was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank

for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on

import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in

the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015.

Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets

Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt,

but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new

household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,

Employment growth continues to run strongly

3-month average

-2

-1

0

1

2

3

4

5

01 02 03 04 05 06 07 08 09 10 11

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Employment , %change year-on-year ( LHS)

Unemployment, %of labour force (RHS)Source: Stat istics Norway

Wage growth to moderate slightly in 2012

0

2

4

6

8

10

87 89 91 93 95 97 99 01 03 05 07 09 11

0

1

2

3

4

5

6

7

Wage growt h, %change year-on-year ( LHS)LFSunemployment rate, r eversed (RHS)


Core inflation shows no definite trend-change

Year-on-year percentage change

-2

-1

0

1

2

3

4

5

6

7

02 03 04 05 06 07 08 09 10 11

-2

-1

0

1

2

3

4

5

6

7

Consumer prices CPI excl. taxes and energy


Imported goods are denting inflationYear-on-year percentage change

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

02 03 04 05 06 07 08 09 10 11

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

Core CPI domestic goods and servicesCore CPI imported consumer goods


Existing home prices continue to climb ..

-10

-5

0

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10 11

10

15

20

25

30

35

Existi ng home pri ces, %change year-on-year (LHS)Existing home pr ices per sqm in NOK 1.000 (RHS)

Source: Norw. Ass. of Real Estat e Agents

..as home completions lag household formationThousands

-20

-10

0

10

20

30

40

50

02 03 04 05 06 07 08 09 10 11

-20

-10

0

10

20

30

40

50

No of households, change y/ y Housing completions Net balance

Source: Norges Bank, Stat isti cs Norway

3



Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS

Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian

economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK

index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered

markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end

2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a globalrecovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike

rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year.

The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals

relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges

Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a

7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation

inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated

supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.

Norges Bank sees rates lower for longer..Per cent

0

1

2

3

4

5

6

7

8

02 03 04 05 06 07 08 09 10 11 12 13 14

0

1

2

3

4

5

6

7

8

Norges Bank deposi t rat e Opt imal rat e path, MPR 1/12Opt imal rat e path, MPR 3/ 11

Source: Nor ges Bank, SEB

..as NOK is expected to remain strongerIndex

83

85

87

89

91

93

95

2010 2011 2012 2013 2014

83

85

87

89

91

93

95

NOK import -weighted NOK assumpt ion MPR 1/ 12NOK assumpt ion MPR 3/ 11

Source: Norges Bank, SEB

Low rates spur stronger credit growthYear-on-year percentage change

-5

0

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10 11

-5

0

5

10

15

20

25

Domest i c credi t grow th Domest i c credi t t o householdsCredit to non-financial companies


Tight spread vs. Germany didn’t hold for longWeekly average

0

1

2

3

4

5

6

7

8

9

01 02 03 04 05 06 07 08 09 10 11

0

50

100

150

200

NOK 10-year government bond yield, %(LHS)Spread vs. Bunds, basis point s (RHS)

Source: Reuters, SEB

NOK marginally weaker after latest rate cut..Weekly average

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

2004 2005 2006 2007 2008 2009 2010 2011

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

EUR/ NOK (LHS) USD/ NOK (RHS)Source: Reuters, SEB

.. but is still stronger than at end-2011Weekly average

84

88

92

96

100

104

108

112

116

2004 2005 2006 2007 2008 2009 2010 2011

80

84

88

92

96

100

104

108

112

NOK trade-weighted (LHS) NOK import-weighted (RHR)Source: Reuters, SEB

4



Denmark: Muddling through still on trackWEDNESDAY

28 MARCH 2012

• Growth moved sideways in the last part of 2011 as export growth slowed and publicconsumption kept contracting. The fiscal stance is set to reverse providing an importantgrowth impetus this year.

• Private consumption grew at the end of the year. Even though consumer confidence has

improved on the margin it still points to sluggish consumption in 2012.

• Housing investments started stalling at the end of 2011 after a strong beginning to the year.House prices have resumed the decline and the housing market sees low turnover.

• Fixed investments have held up fairly well and capacity utilization suggests some room forinvestments in 2012.

• Manufacturing has staged a rebound alongside PMIs, in line with the global tendency.However, the latest readings suggest slowing momentum in the short term.

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

Growth

Inflation

Labour-market

P e r c e n t ( Y - Y )


2010 2011 2012 2013

GDP* 1.3 1.0 0.5 1.4Unemployment** 4.2 4.1 4.3 4.2

Inflation* 2.2 2.7 1.7 1.8

Government deficit** -2.6 -3.0 -4.5 -2.5


Source: SEB

N e t b a l a n c e

P e r c e n t ( Y - Y )

N e t b a l a n c e

P e r c e n t ,

1 2 M



2

Economic Insight

• The unemployment rate has kept falling. The drop in public employment is moderating, but this year is unlikely tosee a marked improvement in labor markets in general as growth is subdued. Consumers’ expectations ofunemployment have turned less negative, but they still point to higher unemployment in the near term.

• The growth in exports is waning as Denmark’s main trading partners have delivered slower growth. A weakereffective exchange rate is offering some counterbalance.

• The large current account surplus has persisted and the foreign reserves have grown as the central bank hasdefended the peg to the euro. However, some of the positive pressure on the krone has come off as the negative tail

risk in the Eurozone has fallen. The krone level is still relatively strong and the negative policy spread to Eurolandhas thus been maintained. The resulting low mortgage yields are providing a cushion for consumers.

• The government has launched another bank package lifting real estate loans off the balance sheets of the largecorporate lender FIH. It will also create a special credit institute extending credit to “well run” agricultural companies

who face tight credit as the sector in general has experienced large capital losses on land putting pressure on banks.

Non-residential investments Capacity utilisation

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

% - p o i n t s

( 1 2 M )

-15

-10

-5

0

5

10

15

P e r c e n t

( 1 2 M )

-30

-20

-10

0

10

20

30

Housing investments and prices

Housing investments House pricesSource: Reuters EcoWin

93 9 4 9 5 9 6 9 7 98 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 07 08 09 1 0 1 1

P e r c e n t

, 1 2 M

-30

-20

-10

0

10

20

30

40

P e r c e n t

P e r c e n t ,

1 2 M

Exchange rate

DKK effective exchange rate

Source: Reuters EcoWin

90 92 94 96 98 00 02 04 06 08 10 12

92.5

95.0

97.5

100.0

102.5

105.0

107.5

110.0

Danish rates and FX reserves

Danish lending rateECB repo rate

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

Source: Reuters EcoWin

04 05 06 07 08 09 10 11 12

100

150

200

250

300

350

400

450

500

0

1

2

3

4

5

6

7



Finland: Recent data confirms slowdownMONDAY

2 APRIL 2012

• The slowdown for major trading partners is affecting the sensitive Finnish economy withexports ending last year, and starting 2012, on a weak note. Leading indicators havebottomed out in December 2011/January 2012 and has since showed someimprovements, although they remain at low levels. As has been the case through thecrisis, the service sector sees the outlook as brighter than manufacturing and

construction.• With exports representing roughly 40 per cent of GDP, the economy will feel more of the

international slowdown; the structure of production with focus on capital andintermediate goods hold back the development. In 2011, export volumes was more than15 per cent lower than 2008 and the near term outlook is weak. Monthly data in currentprices showed unchanged exports in January 2012. We expect export volumes to stay flatcompared to 2011.

• The labour market continues to look strong but will be affected negatively ahead. Weadjust our GDP forecast for 2012 and 2013 slightly upwards to 0.7 and 1.7 per centrespectively from 0.5 and 1.7 per cent respectively in Nordic Outlook, February 2012.Given this forecast, GDP will just reach its pre-crisis (2008) level in 2013.

Daniel Bergvall, Economic Research, +46 8 763 85 94


2010 2011 2012 2013

GDP 3.6 2.7 0.7 1.7


Inflation 1.7 3.3 2.0 1,9

Government fiscal balance** -2.5 -1,5 -1.7 -0.5

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

Source: SEB



2

Economic Insights

GROWTH TO REMAIN WEAK IN THE FIRST HALF OF 2012

• Except for Q3, growth was weak in 2011 and in the last quarter GDP just barely increased (+0.1% q/q). Thedevelopment towards the end of the year was in line with Statistics Finland’s monthly GDP indicator and EUCommission indicators.

• The deteriorating outlook took its toll on business confidence last year, but since the turn of the year, there hasbeen a slight improvement and stabilisation in confidence. Services are above zero, but for manufacturing andconstruction indicators still point at contraction. The indicators for all three sectors are below long term averages.Even though the sharp dip in exports late last year was a statistical oddity, the development since then has beenweak but more stable.

• After shaking off the worst of the recession fear late last year, confidence among consumers has improved and wasunchanged in March compared to February. Consumer confidence has bounced back since the weak readings latelast year. Consumer confidence and consumption weakened towards the end of 2011 but retail sales for January andFebruary points towards an improvement ahead (up on average 5.5 per cent on an annual basis). Overall, consumerspending is expected to hold up relatively well, supported by the labour market.

• Bank (MFI) lending to households and especially to non-financial corporations are rising, reaching just above 8 per

cent on an annual basis in February for the latter. Investments were second after household consumption incontributing to GDP-growth last year although capacity utilisation is still at a low level, although rising. Capitalspending is expected to level off and increase only slightly in 2012.

• The economy is slowing down, but the labour market still develops favourably. Vacancies are still trending higherand unemployment continues to fall. In February unemployment stood at 7.4 per cent, down from 8.1 per cent ayear earlier. We expect unemployment to continue to level off at this level and rise again from mid-year.

• Inflation has been stuck around 3 per cent in January and February but is expected to fall, giving a boost tohousehold real income that together with the labour market will support consumer spending.



Economic Insights

WEAK GROWTH WILL AFFECT PUBLIC FINANCES, BUT NO IMMEDIATE NEED FOR CONSOLIDATION

• A government surplus in the years leading up to the crisis has put Finland in a better position than many othereconomies. General government net lending is expected to worsen somewhat in 2012 compared to 2011, but willnot drop below -2 per cent of GDP. In a euro zone perspective this puts Finland in a favourable position with no orsmall need for the government to implement front-loaded budget tightening that would further erode growth

prospects. Instead fiscal policy can be neutral in the short term.

• Noteworthy is that the abated tolerance of high government debt has not affected relatively low indebtedFinland; on the other hand, long term government yields have dropped more than 100 bps in the last year. At thesame time though, the 10-year government bond spread to Germany has doubled from approximately 25 to 50 bps.

Documents

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