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SEB’s economic outlook: No smooth recovery

Wednesday, February 17, 2010
Opalesque Industry Update – In many respects, the global economic recovery has strengthened in recent months. Crisis policies have fulfilled their task: stabilising economic and financial systems. But now that the world is permitted to lift its gaze, not unexpectedly there are mounting worries about how government finances will be restored to an even keel quickly enough, and how changes in the global credit market will affect access to capital and cost of capital. Our conclusion is the same as previously: growth will be hampered. We expect GDP in the OECD countries to grow at close to trend levels in 2010-2011, which will suffice in order to stabilise the job market in many countries. Yet there is a great risk that unemployment will get stuck at higher levels.

China will remain a driving force in the world economy. The country will admittedly need to tighten its credit market in order to counteract bubble tendencies in asset prices, but there is hardly any danger of inflation and overheating. China has the tools to dodge imbalances and will thus serve as a stabilising force for its region and for the world.

Generally speaking, the risk of inflation in the world economy is small. Since fiscal policies must be tightened and the credit situation is expected to be tough, interest rate policy will remain gentle in many countries; the US Federal Reserve (Fed) and the European Central Bank (ECB) will not hike their key interest rates until around the end of 2010. In the euro zone, collaboration is being thoroughly tested in an environment of high unemployment, where a number of countries no longer have access to effective economic policy instruments. The euro will continue to weaken.

Sweden stands well equipped when other countries are forced to undergo restoration of sound central government finances. In some respects, we can thank the lessons and the methods used to combat the 1990s economic crisis for this situation. GDP growth will be 3.1 per cent in 2010 and 2.7 per cent in 2011 (2.8 and 2.7, respectively, in calendar-adjusted terms). Household consumption capacity will benefit from fiscal expansion (SEK 15 billion more in the 2011 government budget), great sensitivity to interest rates and unusually high savings. In addition, Sweden's industrial structure should prove to be an advantage during the international recovery phase. Unemployment will peak at 9.5 per cent during the second quarter of 2010, half a percentage point lower than our November forecast. Collective pay agreements will end up at around 2 per cent for the year and pose no threat to inflation; productivity will rebound. The Riksbank will raise its repo rate during the second half of 2010, starting in July. The Swedish central bank's key rate will reach 1.5 per cent in December and 3.0 per cent in December 2011.

"Of course it is hardly news that many countries are caught in a troublesome fiscal situation," says Robert Bergqvist, SEB's Chief Economist. "In the case of various euro zone countries, for example, there is now little room for economic policy manoeuvring if growth curves should begin pointing downward when interest, currency and fiscal policy measures are not available. This worries many financial market players."

"The recovery is surrounded by storm clouds, but there is still growth momentum. Interest rate policies will remain expansionary as long as there are risks of reversals, and depressed production levels in manufacturing represent a potential for rapid increases," says Håkan Frisén, SEB's Head of Economic Research and editor in chief of Nordic Outlook. "Labour market weakening has been milder than expected. This is encouraging, since it reduces the risks of long-term damage to the economy. Meanwhile it is likely to take time before we see unemployment falling to more reasonable levels."

Nordic Outlook is sticking to its assessment that internal and external forces will affect the global banking/credit systems in a way that will have monetary policy consequences.

"It is difficult to quantify effects, but it is highly probable that new financial regulations and requirements will hamper the general credit situation, through lower supply and higher cost of capital," says Tomas Lindström, monetary policy analyst at SEB Economic Research. "This, and low core inflation, will give central banks room to maintain lower key interest rates on average in a slightly longer perspective. As we know, the Riksbank has now lowered its forecast of a neutral key interest rate, as foreseen in our assessment last autumn."

The US economy is under heavy strains, especially from the weak labour market.

"It looks as if there will be strong growth figures in the United States during 2010, but the economy will lose momentum late in the year as inventory effects and the impact of fiscal stimulus measures fade," says Mattias Bruér, US analyst at SEB Economic Research. "We expect unemployment to remain stuck at a bit above 9 per cent in 2011. Spare capacity will keep inflation down, and only in December 2010 will the Fed move its key interest rate cautiously upward."

For the first time in years, SEB is raising its Baltic GDP forecasts: for Estonia and Lithuania, where the recession is now expected to end in 2010.

"The worst seems to be over in the Baltic countries. Bottoming-out trends that we pointed out in our autumn reports strengthened during the winter. Export prospects have improved further, and Estonian membership of the euro zone in 2011 looks increasingly likely, which is boosting investments. Meanwhile there is some lingering uncertainty as to whether the three governments will have the stamina to fully implement their painful belt-tightening policies. This risk applies especially to Latvia, which is holding an election this coming autumn," says Mikael Johansson, Baltic and Eastern European analyst at SEB Economic Research.

Swedish exports and private consumption may provide upside surprises during 2010-2011, but Sweden is of course dependent on continued international economic growth without reversals.

"The Nordic countries stand out in a positive way when it comes to strong fundamentals," says Daniel Bergvall, government finance analyst at SEB Economic Research. "Swedish central government finances have resisted the recession surprisingly well. The budget deficit will be less than 2 per cent of GDP in 2010 and 2011, and central government debt will climb to 'only' 36 per cent of GDP. A change of government after the September 2010 election would not affect these figures so much in the short term, though we would expect fiscal policy under a new, more leftist government to have more of a demand-side profile."

Consumer Price Index (CPI) inflation in Sweden is moving upward as a direct consequence of the disappearance of earlier energy price and interest rate declines from the 12-month figures. Looking ahead, the Riksbank is expected to hike its key interest rate. Core inflation, which is somewhat higher than in many other countries, is nevertheless on its way down. Rising productivity and a stronger Swedish krona will soften inflation pressure.

"Unlike its peers in most other countries, the Riksbank cannot count on fiscal policy to be tightened in the next couple of years. We thus expect the bank to hike its key interest rate in July. The repo rate will stand at 3 per cent late in 2011 − a higher level than the Fed and ECB key rates, for example," Håkan Frisén says. "Given a continued rapid increase in lending to households and a renewed upturn in home prices, the Riksbank will face a dilemma earlier than many other central banks. It remains to be seen whether the Riksbank, or some other government agency, will be granted clearer authority to influence loan-to-value ratios and rates of loan principal repayment."

The Group of 20 economies is continuing to build the "new world economic order" aimed at achieving more balanced, stable global economic and financial market performance in the future.

"We believe that the work under way in the G20, backed by the International Monetary Find, may be of very great importance," says Robert Bergqvist. "When the G20 'reach their goal' in South Korea late this year, we may have a completely new way of thinking about both global cooperation and economic policy benchmarks. This is of course highly interesting to Sweden, given our international dependence. The final outcome may be something positive, but we should also have realistic expectations."

Key figures: International and Swedish economy  

(SEB, Feb-10)








International economy. GDP, year-on-year change, %





United States





Euro zone










OECD countries










Baltic countries





The world (purchasing power parties, PPP)





Swedish economy. Year-on-year changes, %





GDP, working day corrected





GDP, actual





Unemployment, % (EU definition)





Consumer Price Index (CPI) inflation





Government net lending (% of GDP)





Repo rate (December)





Exchange rate, EUR/SEK (December)





SEB is a Northern European financial group serving some 400,000 corporate customers and institutions and five million private individuals. SEB offers universal banking services in Sweden, Germany and the three Baltic countries − Estonia, Latvia and Lithuania. It also has a local presence in the other Nordic countries, Ukraine and Russia and a global presence through its international network in leading financial centres. On December 31, 2009, the Group's total assets amounted to SEK 2,308 billion and its assets under management totalled SEK 1,356 billion. The SEB Group has about 20,000 employees.


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