1271924546 Swedbank Economic Outlook April 2010

8/6/2019 1271924546 Swedbank Economic Outlook April 2010

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Swedbank Analyses the Swedish and Baltic Economies April 22, 2010

April 22, 2010 1

Swedbank Economic Outlook

Glimmers of light in the tunnelGlobal development

Worldwidestimulusmeasuresandnancialsectorsupporthaveboosted

condence,andglobalgrowthstrengthens.However,thereboundisnot

convincingyetinmanyoftheindustrializedeconomies.

Weraiseourglobalgrowthoutlookto3.9%in2010and3.6%in2011.

Theunwindingofthestimuluspackageswillbefeltprimarilyin2011.In

particular, Europe will lag behind, while the emerging markets will be themainengineofgrowthintheworld.

Sweden

Economicactivityunexpectedlyfellbackinthelastquarterof2009,but

stronglabourmarketdevelopmentsandpublicnancessuggestthatthe

economyhasreachedrmerground.

Welowerourrealgrowthforecaststo1.8%in2010and2.4%in

2011.Despiteresilienthouseholdconsumption,externaldemandand

investmentsareexpectedtolagbehind.Theeconomicpolicystancewill

remainexpansive,howevernotsufciently,withthereporatereaching

1.75%atend-2011.

Estonia

Positivequarterlygrowthratesattheendof2009suggestthatthe

bottomofthedownturnhaspassed.Furthermore,dataindicatethatthe

Maastricht-criteriaforeuroadoptionhavebeenmet,andthatimproves

theprospectsofEstoniabecomingthe17thmemberofEMU.

Weexpectpositivegrowthratesof1.5%and4.5%in2010and2011,

respectively.Exportswillinitiallydrivetherecovery,withdomestic

demand, boosted by increased foreign investments, taking over toward

theendoftheforecastperiod.

Latvia

Theeconomicslowdownabatedattheendof2009,whiledomestic

costadjustmentcontinuedatfullspeed.Springof2010broughtsignsof

stabilisationinthelabourmarket. The recession is likely to be over in early 2010 driven by export growth,

buttherecoverywillbebumpyandgrowthfragile.Weexpectthe

economytocontractby2.5%in2010duetonegativecarry-overeffects

beforeincreasingby4%in2011.Fiscalconsolidationcontinuesas

planned, but window of opportunities to carry out structural reforms

mustbeusedmoreintensively.Lithuania

ThedeeprecessioninLithuaniawasmitigatedattheendof2009by

strongerthanexpectedexportperformance.Unemployment,however,

continuedtoincreaseandwagesfell,dampeningdomesticdemand.

GDPisexpectedtofalloverallby2%in2010,withsteadyrecovery

startinginthesecondhalfoftheyear.In2011,weexpectrealgrowthto

reach3%.Exportswillrecover,whileprivateconsumptionwillimprove

onlymodestly.Thescalsituationhasstabilizedbutremainschallenging.

Table of Content:

Introduction:Fromcrisis

to recovery conditions for

growth slowly improve 2

Global:Globalgrowth-but

Europeislaggingbehind 4

Sweden:Exportmarketsfalter

-yethousholddemandpicks

up 6

Estonia:Economicprospects

improve 11

Latvia:Recessiontobeover

earlierthanexpected 16

Lithuania:Fiscalconsolidation

is rewarded 21


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2 April 22, 2010

Swedbank Economic Outlook

environment.Thedirectionoftradeisshiftingtowardsfaster-growing

emerging markets, but it takes time

to change the geographical structure

ofexports.Commongoalsfor

companies in our region to enhance

competitiveness are increased

productivity, lower costs, a product

structure in demand, and higher

value added in production through

investmentsinR&D.

Swedenseconomyisalsocharac-

terized by polarization as exports

falteranddomesticdemandpicksup.

Comparedwithlastyearsfall,the

economyisnowrecovering.Contrary

to what normally drives the economy

in an upturn, households are the main

growth engine, supported by a slow

recovery in the labour market and

stimulusmeasures.Astheeconomy

unexpectedly shrank in the last quarter

of2009,negativecarry-overeffectswill

causeGDPduring2010togrowslower

than previously foreseen, and reach1.8%incalendar-adjustedterms.Net

exports will contribute marginally to

growth, and support will instead come

from private consumption and from

companiesstartingtorestock.As

industrialcapacityisstilllow,invest-

ment growth will remain negative this

year, but then slowly turn positive

during2011.Netexportswillthen

contribute negatively to growth as

importsincreasefasterthanexports.

Domesticdemandwillpickupeven

furtherandGDPisexpectedtogrow

by2.4%.Inationpressuresarelikely

tobesubdued,andtheRiksbankcan

increase the policy rate slower than

previouslyforeseen.Attheendof

2011,itwillhavereached1.75%.Also,

eventhoughscalpolicywillremain

expansive, the general government

budgetdecitwillnotexceed2%of

GDP.

The Baltic countries have also reached

a phase of recovery after shrinkingbysome15-25%in2008-2009.The

overall sentiment towards the region

highlevels.GlobalGDPisthereforeforeseen as growing slower in 2011,

by3.6%.

The polarization between industrial

countries and emerging markets

regarding growth, is mirrored equally

inthedifferentprospectsforination.

Capacityutilisationwillstaylowin

mostindustrialcountries,andination

pressuresremainweak.Asscal

policy also becomes more restrictive,

central banks are expected to move

theirpolicyratesupwardsonlyslowly.Intheemergingmarkets,meanwhile,

capacity is becoming more constrained

and price pressures are building

up, including the effects from rising

commodity prices and large capital

inows.

ForEuropeSwedensandthe

Baltic countries most important

export markets there is a need

toimprovethescalsituationwhile

avoiding anaemic growth and strainsintheeurozonecooperation.The

European export market remain crucial

to Swedish and Baltic companies

in volume terms, and therefore it is

important not to lose market share

in this prevailing weak economic

Worldwide stimulus measures andnancialsectorsupporthaveboosted

condenceamonghouseholds,

companies,andnancialmarkets.As

global growth strengthens, a recovery

in Sweden and the Baltic countries is

takinghold.Theconditionsforgrowth

have improved, but many challenges

remain,bothintheshort-andlong-

termperspective.

The global economic environment has

become brighter, and during this year

globalGDPissettogrowby3.9%dueto inventory adjustments, improved

condence,andlargestimulus

measures from central banks and

governments.Whilemanyemerging

markets are growing strongly, industrial

countries especially the European

ones-arelaggingbehind.Theneed

to deleverage in the private and

nancialsectors,aswellasmounting

debts in the public sector with an

accompanying risk of increasing

nancialturbulence,isposinggreatchallenges.Alreadybynextyeara

number of countries will have raised

taxes and lowered public expenditures,

thusweakeningdomesticdemand.

Labour markets will improve, but

unemployment will still remain at

Introduction

Fromcrisistorecoveryconditionsforgrowthslowly improve

Macro economic indicators, 2008- 20112008 2009 2010f 2011f

RealGDPgrowth,annualchangein%

Sweden (calender adjusted) -0.5 -4.7 1.8 2.4Estonia -3.6 -14.1 1.5 4.5

Latvia -4.6 -18.0 -2.5 4.0Lithuania 2.8 -15.0 -2.0 3.0

Unemploymentrate,%oflabourforce

Sweden 6.2 8.3 9.3 9.2Estonia 5.5 13.8 14.0 11.5Latvia 7.5 16.9 21.5 19.5Lithuania 5.8 13.7 16.0 15.5

Consumerpriceindex,annualchangein%

Sweden 3.4 -0.3 1.4 2.2Estonia 10.4 -0.1 0.5 1.8Latvia 15.4 3.5 -3.0 0.0Lithuania 10.9 4.5 1.0 1.0

Currentandcapitalaccountbalance,%ofGDP

Sweden (current account) 9.6 7.2 6.2 6.5

Estonia -8.4 7.4 8.5 8.0Latvia -11.5 11.8 12.4 9.7Lithuania -10.1 7.2 4.2 3.0

Sources:NationalstatisticsauthoritiesandSwedbank


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April 22, 2010 3

Swedbank Economic OutlookIntroduction

fromnancialmarkets,international

organisations, and rating institutes has

improved.Thepoliticalenvironment

in each country has supported the

process of budget consolidation

anddeleveraging.Theprospects

of maintaining the exchange rates

xedtotheeurohavestrengthened,

and Estonia is expected to join the

eurozonein2011.Theobjectives

of Latvia and Lithuania are to follow

suitin2014.Withaglobalrecovery

and these countries adherence to

scalconsolidationandreforms,

the prospects for achieving these

objectiveswillimprove.

Estonias economy is expected to grow

by1.5%thisyear,and4.5%thenext.Initially,netexportswillcontributeto

growth, but slowly domestic demand

will take over as the growth engine, in

particular due to inventory adjustment

andEU-fundedinvestments.The

expected euro membership may also

enhanceforeigndirectinvestments.

Private consumption will remain

sluggish but gradually pick up in 2011

inthelightofimprovedcondence,

lower unemployment, and slightly

higherwages.ThisimpliesashortdeationperiodinthecaseofEstonia,

and, with increasing labour costs,

thechallengeistocreatesufcient

competitiveness by enhancing

productivity so that the export sector

developspositivelyalsoinalonger-

termperspective.Fiscalpolicyis

expected to remain prudent, but

increasingly the government will need

toworkonlong-termissues,including

efciencyofthepublicsector,thetax

system, and the level of ambition for

publicservices.

Latvias recession seems to be over,

but the recovery is expected to be slow

andfragile.GDPwillstarttopickup,

but in annual terms it will shrink by

2.5%thisyearduetocarryovereffects.

Then, higher exports will gradually

strengthen investments and inventory

build-up,thusgeneratinggrowthof

4%in2011.Competitivenesshas

increased as unit labour costs have

declinedbymorethan20%overthe

last year, and the adjustment is set

tocontinue,althoughmoreslowly.

The unemployment rate seems to

have peaked in April, but the decline

willbeslow.Thescalsituationis

developing according to plan, and the

budgetdecitwillsqueezeinbelowthe

targetof8.5%ofGDPthisyear.Atotalconsolidationofsome7%ofGDPis

stillnecessarytocutthedecittothe

2012targetof3%ofGDP,inorderto

achieve the goal of euro adoption in

2014.

Lithuanias recession became less

deep during last year due to stronger

exportgrowththanexpected.Going

forward, the carryover effects will result

inanegativegrowthrateof2%this

year despite quarterly improvements,but a more robust annual growth of

3%willensuein2011.Netexports

will contribute positively to growth

both years, and gradually domestic

demand will strengthen as prospects

for investments improve, mainly

duetoEUstructuralfunds.The

internal devaluation is set to continue

aswageswilldecreasefurther.

Unemploymentwillstabiliseonahigh

level, thus encouraging a new wave

ofemigrationamongtheyoung.We

do not foresee any strong rebound of

consumer spending during the forecast

period.Publicnanceshavebeen

stabilised, and the government has

agreed to a plan with the European

Commissiontoreachadecitof3

%ofGDPin2012.Asthedecitis

seenat8%thisyear,theroadtoeuro

adoptionin2014isstilllong,butnot

unachievable.

Forecastrisksarebalancedasthe

possibilities of reaching higher growth

in Sweden and the Baltic countries

are more or less equal to the risks

ofexperiencinglowergrowth.The

main areas of uncertainty include the

globalrecovery.Eveniftheriskfor

a double dip has decreased, it has

nottotallydisappeared.Commodityprices, exchange rates, interest rates,

and equity prices are just a few of the

factorsthatcouldinuencegrowth

andinationprospectsinourhome

markets.Domestically,risksare

geared towards the labour market

andthescalsituation,aswellas

balance sheets of households and

companies.Therisksseenapartdo

not seem serious as such, but together

they could change the forecast

substantially.

Remainingchallengesinourregion

aremany,notleastinthemedium-and

long-termperspective.Globalisation

is continuing, increasing competition

and at the same time providing new

growthopportunities.Demographywill

lead to a decrease in labour supply,

putting pressures on the welfare

systems.Swedenspotentialgrowth

ratewillbedifculttomaintain,unless

productivity is enhanced by structural

reforms.TheBalticcountriesmust

work hard on the reform agenda to

continue their convergence with the

restoftheEU,asthenancialcrisis

andrecessionhaveslowedgrowth.In

particular, investments must again be

able to strengthen without dependence

onEUstructuralfunds.Avoidingtax

evasionintheregionisanotherissue.

Developingataxsystemthatisboth

efcientandeffectiveismuchneeded

toensurethatpublicnancesbecome

sustainable and are in line with welfaregoals.

CeciliaHermansson

Export volumes (change in %)

-20

-15

-10

-5

0

5

10

15

Sw eden Estonia Latvia Lithuania

2008 2009 2010 2011

Sources:NationalstatisticsauthoritiesandSw edbank.


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4 April 22, 2010

Swedbank Economic OutlookGlobal

Globalgrowth-butEuropeislaggingbehind

The global economy has moved from

a stage of crisis to one of recovery,

but, despite stimulus measures,

the rebound isnt convincing yet in

manyoftheindustrialcountries.

The major growth engines at themoment are the emerging markets,

and,increasingly,NorthAmericaand

Japan.Europe,ontheotherhand,

is lagging behind, as production has

stagnated and the region is crippled

with downside risks from mounting

sovereign debt and weak domestic

demand.Monetarypolicyisexpected

toremainexpansionary,butscal

policy is becoming restrictive later in

theforecastperiod.

We have revised upwards our growth

outlook for the global economy from

ourJanuaryforecast.GlobalGDP

isnowexpectedtogrowby3.9%

thisyearand3.6%in2011,and

again3.9%in2012.Thephaseout

of stimulus packages will have the

biggestimpactnextyear.Despite

thecurrentreboundintheUS,the

recovery from the second half of this

year will be slower due to lingering

problems with unemployment,

deleveraging, and weak real estatemarkets.Also,Japanwillgrowfaster

in the short term, but somewhat slower

nextyear,asmosttradingpartners--

exceptChinaandIndia,wherethe

outlookcontinuestobebright--

are contemplating contractionary

measures.Thegrowthoutlookfor

the euro zone has been reviseddownwardsfrom1.1%to0.9%this

year,andfrom1.6%to1.3%next

year.Themainreasonsarebudget

consolidation, and still rather low

condence,aswellasprevailing

weaknesses in production, labour

marketsandthenancialsector.

Downsiderisksintheshorttermare

most important for industrial countries,

as emerging markets are seen as

holding up well in the next couple of

years.Debtproblemsintheprivate,

nancial,andpublicsectorswill

result in deleveraging and budget

consolidation, creating uncertainties

regarding timingofscalmeasures,

nancialstability,andgrowth.Commoditypricesareincreasing,

andanoilpriceaboveUS$100per

barrel would cause negative effects on

growthandinationinmanycountries.

Thenancialmarketsarefacedwith

uncertainties regarding the sovereign

debt crises and euro zone cooperation;

the main risks include a Greek default

and subsequent spreading of problems

to other euro countries, such as Spain

andPortugal.

GDP forecast 2010 - 2012 (annual percentage change) 1/

April January

2009 2010 2011 2012 2010 2011

US -2.4 2.8 2.2 2.5 2.2 2.5

EMUcountries -4.0 0.9 1.3 1.9 1.1 1.6

Ofwhich: Germany -5.0 1.3 1.5 2.0 1.5 1.8

France -2.2 1.5 1.8 2.2 1.6 2.0

Italy -4.9 0.6 1.0 1.5 0.7 1.2

Spain -3.6 -0.5 0.7 1.7 -0.1 1.3

UK -4.8 1.1 1.6 2.2 1.0 1.9

Japan -5.3 2.0 1.4 1.5 1.2 1.5

China 8.6 9.5 8.8 8.0 8.5 7.8

India 6.5 7.5 7.8 8.0 7.0 7.5

Brazil -0.4 4.7 4.5 5.7 3.5 4.5

Russia -7.9 4.3 4.5 5.0 4.3 4.5

GlobalGDP -0.9 3.9 3.6 3.9 3.3 3.5

Sources:NationalStatisticalauthoritiesandSwedbank1/Countriesrepresentingaround70%oftheglobaleconomy.TheWorldBank'sweightsfrom2008(purchasingpowerparity,PPP)havebeenused.

Industrial production (index 2000=100)

80

100

120

140

160

180

200

220

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total

Euro Zone

Emerging Markets

Source:CPB


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April22,2010 5

Swedbank Economic OutlookGlobal

Inaddition,medium-andlong-term

sovereign debt concerns are building

up with regard to larger economies

suchastheUS,Japan,andtheUK,

with consequences for the political

situation,growth,ination,andinterestrates.Protectionismthreatsremain,

and the currency dispute between

theUSandChinahasnotyetbeen

resolved.Also,theeffectsongrowth

duetore-regulationofthenancial

sector constitute forecast risks in

theyearstocome.Evenifgrowthis

becoming better balanced between

theUSandAsia,rebalancingglobal

growthremainsalong-termchallenge.

FiscalpolicyisalreadyrestrictiveinIreland,Greece,Spain,andPortugal.

AftertheelectioninearlyMay,theUK

government is also expected to start

budgetconsolidation.During2011,

many other industrial countries will

follow,includingtheUS,Japan,and

Germany.Acombinationofhigher

taxes and lower public expenditures

will dampen growth, especially private

andpublicconsumption.

Although monetary policy is expected

to remain expansive over the next two

years, the degree of expansion will

abatesomewhat.Inationpressures

will be weak in most industrial

countries and strong in many of the

emerging markets where domestic

growth is higher and stimulus

measuresexpansive.TheUSFederal

ReserveandtheBankofEnglandwill

start raising their policy rates towards

the end of the year, bringing them

upto2.25%bytheendof2011.The

EuropeanCentralBankwill wait till

thersthalfof2011beforeraising

the policy rate, and then slowly make

furtherhikes,reaching1.75%bytheendofnextyear.Weforeseethatrising

GDPgrowthandsomewhathigher

inationwillplaceupwardpressure

onthelong-termbonds.Inaddition,

concern about public debt and the

phasing out of quantitative easing

mayraisebondratesevenmore.The

wider spreads between Germany and

euro countries with large imbalances

will narrow somewhat as risks come

down and subsidized loan packages

are provided, but they will remain widerthanbeforethenancialcrisisstarted.

WeforeseethattheUSdollarwill

strengthen against the euro and

the yen during the forecast period,

astheUSeconomyisexpectedto

grow more strongly and interest rates

areraisedearlier.Inaddition,the

turbulence within the euro zone will

weaken the euro further, while the yen

will be affected negatively by weaker

nancesandtherevivalofitsstatus

asafundingcurrencyforcarrytrades.Already this year, or in the beginning

ofthenext,theChineseadministration

will return to a policy involving the slow

appreciationoftherenminbi.

Our assumption of an average oil price

ofUS$75forthisyearandUS$80

for 2011 is based on an expectation

of a stronger dollar, and then slower

growth after the initial rebound in the

rsthalfofthisyear.However,therisks

are skewed towards the upside, and

higher oil and other commodity prices

cannotbeexcluded.Housepricesare

pickingupfromlowlevelsintheUSandtheUK,butcommercialrealestate

markets are lagging and may still pose

downsidegrowthrisks.Especially,the

combination of weak regional banks

and falling commercial property prices

intheUScouldweakentheoutlook.

As many countries are starting to exit

from their stimulus measures, there is

a need to focus more on improving the

functioningoftheeconomies.Industrial

countries will feel that competition isincreasing from emerging markets

where economic policy and the

nancialsectorwillbesupporting

growthintheyearstocome.Inthe

EuropeanUnion,theintegration

processshouldcontinue,nancial

sector regulation must be cleverly

designed, and structural reforms

shouldfocusonenhancinggrowth.In

particular, reforming the labour markets

makingthemmoreexible,and

improving the climate for innovation

andentrepreneurshipareimportant.Thereisapotentialforbenetingmore

from an increased division of labour

and specialisation within the region,

and thus improving the possibilities

for competing with growing emerging

marketsaroundtheworld.

CeciliaHermansson

Interest and exchange rate assumptions

Outcome Forecast

20 apr 2010 30 Jun 2010 31 dec 2010 30 Jun 2011 31 dec 2011

Policy rates

FederalReserve,USA 0.25 0.25 0.50 1.50 2.25

EuropeanCentralBank 1.00 1.00 1.00 1.25 1.75

Bank of England 0.50 0.50 0.75 1.25 2.25

Bank of Japan 0.10 0.10 0.10 0.10 0.10

Exchange rates

EUR/USD 1.34 1.32 1.24 1.20 1.20

RMB/USD 6.83 6.83 6.83 6.60 6.40

USD/JPY 93 98 105 112 115

Sources:ReutersEcowinandSwedbank


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6 April 22, 2010

Sweden Swedbank Economic Outlook

Sweden:Exportmarketsfalter-yethousehold

demand picks up

The decline in economic activity in

Sweden unexpectedly deepened

inthelastquarterof2009,andtheeconomy contracted in real terms

byalmost5%annually.Someofthe

momentum of the recovery was lost,

and we are revising downwards our

economicgrowthforecastto1.8%for

2010.Inparticular,domesticdemand

waslowerthanexpected.Thesharp

contraction of investments continued

while household consumption did not

provideasmuchsupportasexpected.

Labour market dynamics improved,

however, and trend employment levels

areedgingup.Positiveeconomic

growth is expected continue in 2011,

but due to a slowdown of quarterly

growthrates,itwillnotexceed2%.

We do not expect a recuperation of

thelossestorealGDPcausedbythe

globalnancialcrisisuntil2012.

The overall global economic

environment is set to improve over the

nexttwoyears.However,Swedens

main export markets, in particular the

eurozoneandtheU.K.,areexpectedto lag amidst prevailing imbalances

anderodingcondence.Furthermore,

the composition of Swedish exports,

with a predominance of investment

and capital goods, will hamper exportgrowth as investments are lagging

inmostdevelopedcountries.Thus,

despite positive growth rates of

export volumes, the recovery in 2010

is expected to be slower than we

earlieranticipated.Withexpanding

domestic demand fuelling imports, the

contribution of net exports to growth

has been revised downwards by more

thanpercentagepointofGDP.

We expect the policy stance to remain

expansive for most of the forecast

period.Thescaloutcomefor2009

was strong, with an estimated budget

decitoflessthan1%ofGDP.In

particular, tax revenues surprisedontheupside.With2010beingan

electionyear,weexpectthedecitto

continue to grow, but posing no threat

tomacroeconomicstability.Webelieve

thattheRiksbankwillstartraisingthe

policy rate in July, but that the path

to normalised rates will be somewhat

slowerthanwepreviouslyanticipated.

Forend-2011,therateisexpectedto

havereached1.75%.Consumerswill

continuetobenetfromgrowingreal

disposable incomes and ample credit

availability, which will underpin the

recovery.

Key Economic Indicators, 2008 - 2011 1/

2008 2009 2010f 2011f

RealGDP(calendaradjusted) -0.5 -4.7 1.8 2.4

Industrialproduction 3.3 -15.5 3.8 5.2

CPIindex,average 3.4 -0.3 1.4 2.2

CPI,endofperiod 0.9 0.9 1.7 2.3

CPIF,average2/ 2.7 1.9 2.1 1.4

CPIF,endofperiod 1.6 2.7 1.5 1.6

Labourforce(15-74) 1.2 0.2 0.7 0.3

Unemploymentrate(15-74),%oflaborforce 6.2 8.3 9.3 9.2

Employment(15-74) 1.1 -2.1 -0.3 0.3

Nominalhourlywagewholeeconomy,average 4.3 3.4 1.8 2.2

Nominalhourlywageindustry,average 4.4 2.9 1.6 2.0

Savingsratio(households),% 11.6 13.9 12.7 11.5

Realdisposableincome(households) 2.7 2.1 1.0 1.5

Currentaccountbalance,%ofGDP 9.6 7.2 6.2 6.5

Generalgovernmentbudgetbalance,%ofGDP3/ 2.6 -0.8 -1.9 -1.7

Generalgovernmentdebt,%ofGDP4/ 38.3 42.3 42.8 42.8

Sources:StatisticsSwedenandSwedbank.1/Annualpercentagegrowth,unlessotherwiseindicated.

2/CPIwithxedinterestrates.

3/Asmeasuredbygeneralgovernmentnetlending.

4/AccordingtotheMaastrichtcritera.

Impact from crisis

80

90

100

110

120

130

140

150

160

170

180

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Trend grow th

Sources:StatisticsSw edenandSw edbankcalculations.

RealGDP-level(1985=100)


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April22,2010 7


Swedbanks GDP Forecast Sweden

competitorontheexportmarket.This

is mainly the result of weak productivity

developments.

Inourglobaloutlook,weforeseean

export market growth for Swedish

exportersof4%in2010,whichis

more or less unchanged from January

despiteastrongerglobalgrowth.

A weaker growth in Europe, which

accountsformorethan70%of

Swedish exports, is compensated forby a stronger export market growth

in emerging countries, Japan and the

US.Fornextyear,weexpectamarket

growthof5%,drivenbyfurtherstrong

demand from the emerging markets

and despite a weaker growth outlook

inEuropethanweearlierexpected.

Duetoanunfavourabledemand

composition and a stronger krona

against the euro, we expect Sweden

to continue to lose market share (in

contrasttoourJanuaryforecast).We

have, thus, revised downwards the

volume increase in total exports to

closeto4%in2010andcloseto5%

in2011.Thenegativeoutlookcould

be mitigated by lower production

costs, which would enable Swedish

companies to lower prices and regain

marketshares.

Weak domestic demand and industrial

productionsignicantlysloweddown

growthinSwedishimportsin2009.In2010and2011,importvolumeis

expectedtogrowby4.4%and5.9%,

respectively, as industrial production

starts to recover and domestic demand

strengthens.Thecontributionfrom

netexportstoGDPisexpectedtobe

signicantlysmallerduring2010than

weexpectedinJanuary.Fornextyear

we foresee a negative contribution to

GDPduetostrongerdomesticdemand

andalimitedexportperformance.

The main downside risks to our

forecasts are external and relate to

the rising uncertainties concerning

sovereignsolvencyandnancial

marketturbulence.Ifrealized,this

would have a further negative impact

on Swedish growth, and on the labour

market.Thehighcreditgrowthand

increasingly indebted households may

pose a risk to private consumtion when

interest rates increase, and could also

affecthousepricesnegatively.

Weaker export performanceSwedens export performance

unexpectedly continued to worsen in

thenalquarterlastyear.Despitea

global recovery and growing import

demand from the euro area, Swedens

exportvolumedecreasedfurther.This

wasthefthconsecutivequarterwith

fallingexports.However,whileexports

of goods had a sharp drop, the decline

inserviceswaslesspronounced.

Swedish exports contracted more

thanthefallonthegloballevel.An

unfavourable demand composition,

particularlyforinvestmentandinter-

mediate goods, which are the bulk

of Swedish exports, is the major

reason why Sweden lost market

share.However,asthiswasthefth

consecutive year with decreasing

market share, competitiveness is also

anissue.Since2007,theincreasein

Swedens unit labour cost has beenstrong and has exceeded, for example,

Germanys, which is Swedens major

Changesinvolume,% 2008 2009 2010f 1/ 2011f1/

Households'consumptionexpenditure -0.2 -0.8 (-0.6) 2.4 (2.2) 2.8 (2.5)

Government consumption expenditure 1.4 2.1 (2.0) 1.6 (1.5) 0.6 (0.4)

Grossxedcapitalformation 2.6 -15.3 (-13.4) -2.0 (-3.2) 4.0 (3.5)

private,excl.housing 4.6 -19.0 (-16.1) -4.4 (-5.9) 3.4 (3.0)public 2.8 6.9 (7.6) 3.2 (3.0) 2.2 (1.7)

housing -5.2 -20.5 (-22.5) 1.2 (1.0) 8.7 (8.0)

Changeininventories2/ -0.6 -1.5 (-1.4) 0.8 (0.5) 0.4 (0.3)

Exports, goods and services 1.8 -12.5 (-12.5) 3.8 (4.6) 4.8 (6.0)

Imports,goodsandservices 3.0 -13.4 (-13.4) 4.4 (3.5) 5.9 (6.2)

GDP -0.2 -4.9 (-4.3) 2.1 (2.3) 2.4 (2.6)

GDP,calendaradjusted -0.5 -4.7 (-4.2) 1.8 (2.0) 2.4 (2.6)

Domesticdemand2/ 0.8 -3.0 (-2.6) 1.3 (1.0) 2.2 (2.0)

Netexports2/ -0.4 -0.5 (-0.5) 0.1 (0.8) -0.1 (0.4)

Sources:StatisticsSwedenandSwedbank.

1/TheguresfromourforecastinJanuary2010aregiveninbrackets.

2/ContributiontoGDPgrowth.

Export performance

-15

-10

-5

0

5

10

15

2001 2003 2005 2007 2009 2011

-3

-2

-1

0

1

2

3

Sources:StatisticsSwedenandSwedbank'scalculations.

Exportgrowthinvolumein%

Changeinmarketsharein%(rs)


8/27

8 April 22, 2010


Investments are slowlyrecoveringThe downward trend in gross

xedinvestmentscontinuedinlast

yearsnalquarter.Asinvestments

decreasedby15.3%in2009,theratioofinvestmenttoGDPfellto17%,the

lowestlevelsince2005.Housingand

the private business sector account

for the largest reductions, while public

investments increased due to stimulus

directedtoinfrastructure.

We foresee a continued decline this

year,althoughataslowerrate.We

expect total investments to fall by

2%,mainlydrivenbythelowcapacity

utilisation rate in the business sectorandthefragileglobaloutlook.A

gradually better global outlook and

a stronger domestic demand will

lead to a modest recovery in the

business sector in 2011, but for export

goodstherecoverywillbesmaller.

Instead,therewillbeashifttomore

domestic-orientedbranches.Aless

negative labour market outlook and

a stronger purchasing power among

households will increase the demand

fornewhouses.Publicallyfunded

infrastructure investments will continue

togrow.Totalinvestmentswillthus

increaseby4%in2011.

Stabilisation of the labourmarket within reachThe sharp deterioration of the labour

market levelled out late last year, but

overall employment levels still took

asignicantbeatinganddecreased

bymorethan2%onaverage.The

number of hours worked decreased

evenmoreasmanyrmsreduced

working hours in line with falling

demandandproduction.Theaverage

unemployment level rose by more than

2percentagepointsto8.3%in2009,

and reached, in seasonally adjusted

terms,9.0%ofthelabourforceatend-2009.Netoffull-timestudentslooking

for jobs, the unemployment rate was

6.5%ofthelabourforce,compared

with4.6%in2008.

Recentmonthshaveseensome

indications of a stabilisation of the

labourmarket.Thenumberoflayoff

noticationshasdroppedsharply

while the number of advertised

positionshasrisen.Furthermore,

anincreasingnumberofrmsinthemanufacturing sector have stopped

sheddinglabour,andforward-looking

surveys suggest a growing number

ofrmsareplanningtoincreasetheir

hiring.Theemploymentlevelsinthe

services sectors, meanwhile, have

heldupsignicantlybetter.Seasonally

adjusted, overall employment levels

edgedupinearly2010.

Duetothestabilisationofthelabour

market dynamics, employment is

expected to start recovering over

theforecastperiod.However,asthe

responsiveness of the labour market

to real economic activity seems to

have decreased (employment rose

inthelastquarterof2009despitea

contractionofrealGDP),weexpect

employmenttogrowslowly.Atthe

same time, labour supply is positively

affected by the fewer discouraged

workers, as well as by demographic

factors.Thereformsofthesickness

benetsystemwillpushanincreasing

number of people into the labour

market.Puttogether,weexpectthe

unemploymentratetoreach9.3%

in 2010 before declining slightly in

2011.Thisimpliesthatweexpect

total employment to decrease by acumulativeof95,000over2009-11,

comparedto170,000inourJanuary

forecast.

The cost competitiveness of Swedish

production is expected to improve

following the latest rounds of wage

negotiations.Thecollectivebargaining

process, involving more than 3 million

employees, is coming to an end, and

in general the agreements came in at

relatively modest levels (in the paperindustry and among electricians no

agreements have been made and

strikesareongoing).Theservices

sector agreements, in particular

in retail, exceeded those of the

manufacturingindustries.Ingeneral,

the agreements were considerably

back-loaded,andweexpectthat

wages for the overall economy will

increasenominallyby1.8%in2010,

beforereachingto2.2%in2011.

Productivity levels will rebound

gradually.Aperiodofeconomic

downturns normally leads to weaker

productivity growth as companies often

delay laying off personnel when faced

withfallingdemand.Aseconomic

growth rates turn positive, the opposite

effectcanoftenbeobserved.Thus,

with a stable employment outlook

and a relatively slow real economic

recovery, we expect productivity to

grow by about 2 percent in 2010,

beforelevellingoffin2011.Unitlabour

Unemployment rate, 15-74 (% of labour force)

0.01.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2005 2006 2007 2008 2009 2010 2011


Full-timestudents

Households' expectations

-75

-50

-25

0

25

50

75

100

2000 2002 2004 2006 2008 2010

Netbalance

Own economy

Source:NIER

Unemployment

Swedish economy


9/27

April22,2010 9


costs will decrease, although more

slowly than we expected in January,

following some years of increased

levels.

Wide-rangingreformsinrecentyears can be expected to improve

the functioning of the labour market

over the medium term and reduce the

equilibriumrateofunemployment.In

particular,reducedwork-relatedtaxes

(including the lowering of the social

contributionratesforpeople25years

or younger), lower replacement rates

in unemployment insurance, and

alimittosickbenetscanimprove

incentives to seek employment, not

only among those already in thelabour force but also among those who

areoutside.Ithasbeenestimatedthat

the equilibrium unemployment rate has

increased by 3 percentage points since

theearly1980stoapproximately6%

ofthelabourforce.1 With the recent

labour market reforms, this rate could

decline.

Consumerpriceshaveincreased

somewhat faster at the beginning of

thisyearthanweexpectedinJanuary.

The most important explanation is

higher electricity prices, due both to

strongerweather-relateddemand

andweakersupply.Wehavethus

raised our forecast for this year, both

regarding the consumer price index

(CPI)andCPI-F(withxedinterest

rates)by0.5and0.8percentage

points,respectively.Althoughprices

will increase somewhat during this

year, the developments during 2011

are revised downwards marginally,

as it will take longer to close theoutput gap, the price pressures from

the labour market are restrained and

external prices pressures will be kept

down.Theinationtargetof2%will

not be met in the medium term as

theCPI-Fwillfallto1.4%nextyear,

although, including the effects of

monetarypolicy,theCPIwillreach

2.3%towardstheendof2011.

1See,forexample,AndersForslund,Densvenskajmviktsarbetslsheten,IFAU2008.

Households to increasespendingAftervequartersoffallingprivate

consumption, Swedish households

increased spending in annual terms

inthelastquarterof2009.Taking

into account the stronger purchasing

power, when real disposable income

grewby2.1%,householdswere

cautiouslastyear.Asconsumptionfell

by0.8%,thesavingsratioincreasedto

13.9%(and8.3%,excludingpension

fundreserves).Itisthehighestsavings

ratio2onrecordsince1994,i.e.,since

thelastnancialcrisis.

Labour market developments have

been negative, but not to the extentpreviouslyprojected.Thus,real

disposable income can continue to

grow this year, but as savings and

condencearehigh,weexpect

consumption growth to be even

strongerat2.4%(2.2%inJanuary).In

2011, households will use more of their

savings, as the unemployment rate

stabilises and household expectations

remainoptimistic.Privateconsumption

willincreaseby2.8%andwillaccount

for more than half of total growth, thus

representing the main growth engine in

theeconomy.

Duringtheforecasthorizon,risks

will be balanced, as there are upside

and downside risks facing labour

andhousing.Swedbankshousing

affordability index signals rising house

prices during this year, and possibly

astabilisationduringnextyear.Atthe

moment, house prices are increasing

in line with the high credit growth of

2Thesavingsratioisdenedashouseholdsavingsinrelationtodisposableincome.

some9%.Ourinterestrateprojection,

which has been lowered, supports the

positive developments for retail trade,

housing,andcarregistration.

However,therisksaretiltedtowardsthedownsidefor2012andonwards.

The debt ratio will then have risen to

almost200%andtheinterestratio

tocloseto6%,andthusmoreofthe

disposable income will be used for

interestratepayments.Consumption

growth of goods and services,

including vacation expenditures, will

thendampen.Weforeseeincreasing

tensions regarding the households

within a couple of years, and the

risks include a much higher repo rate,highermortgageratesduetonancial

regulation, and a worsening of the

labour market, as well as falling house

prices.

The Riksbank starts hiking but at a slower paceTheRiksbankhaskeptthereporate

at0.25%sinceJuly2009andhas

alsoprovidedbankswiththreexed-

interest rate loans that will mature in

June,August,andOctoberthisyear.

Asweforeseenonewloanswithxed

interest rates, the main policy tool

going forward is the adjustment of the

reporate.InJanuary,wereiterated

ourexpectationofthersthikein

September, but now July looks more

likelyforseveralreasons:1)The

Riksbankhassignalledthatanearlier

hike may be needed as the signs of

an economic recovery have become

clearer; 2) the labour market is viewed

as being less gloomy; and 3) the

nancialmarketisfunctioningbetter.The strong credit expansion towards

Interest rate and currency outlook

Outcome Forecast

2010 2010 2010 2011 2011

20 Apr 30 Jun 31Dec 30 Jun 31Dec

Interestrates

Policy rate 0.25 0.25 1.25 1.25 1.75

10-yr.gvtbond 3.2 3.3 3.3 3.2 3.4

Exchange rates

EUR/SEK 9.6 9.6 9.5 9.4 9.3

USD/SEK 7.1 7.2 7.7 7.8 7.8

TCW(SEK)1/ 129 129 129 128 128

Sources:ReutersEcowinandSwedbank.1/TotalCompetitivenessWeights.Trade-weightedexchangerateindexforSEK.


10/27

10 April 22, 2010


households may also signal a need to

slowly adjust monetary policy to more

normalconditions.Bytheendof2010,

thereporatewillhavereached1.25%.

During2011,however,GDPgrowthin quarterly terms will start to dampen

again, as Swedens main export

marketsslowdown.Inaddition,

nancialregulationstocurbthecredit

expansion towards households may

create expectations of wider interest

rate spreads, thus contributing to a

less expansionary monetary policy

stance.Resourceutilisationwillbe

weak and labour costs lower than

normal.Theunderlyinginationrate

(CPI-F)isexpectedtodecrease.These developments will provide

arguments for adjusting monetary

policymoreslowlyduringnextyear.

As many households have variable

interest rates and are highly indebted,

a slower hike of the repo rate may

increase the likelihood of a more stable

consumption and housing market in

theyearstocome.Attheendof2011,

thereporatewillbe1.75%,thus1.25

percentage points lower than in our

previousforecast.

The Swedish krona is expected to

strengthen against the euro during

theforecastperiod.Inthenearterm,

theRiksbankwillraisetherepo

ratefasterthanECB,buttowards

the end of 2011, the policy spread

willhavedisappeared.Stronger

economic growth in Sweden and

better fundamentals compared to the

Eurozoneshouldsupportthekrona.

However,intermsofatrade-weighted

exchangerate(TCW),thekronaappreciates marginally as the dollar

strengthens against both the euro and

thekrona.

More room for scal policyStrong tax revenues led to a

signicantlybetterthanexpectedscaloutcomein2009.Thegeneral

government balance is estimated at

-0.8%ofGDP,comparedwithawidely

expecteddecitofmorethan2%of

GDP.Surprisingly,indirecttaxation,

mainlyvalue-addedtax(VAT),

increased, as did consumer spending,

asashareofGDP.Growinghousehold

incomesupporteddirecttaxation.

On the expenditure side, spending

related to unemployment shot up and,

together with increased investmentand consumption spending, led to a

hikeof3percentagepointsofGDP.

IncontrasttomanyotherEuropean

economies,thescalstancein

Swedenisonlymildlyexpansionary.

Variouscalculationsindicateanimpact

fromscalpolicyontheeconomy

during2009ofbetweenand1

percentagepointofGDP,including

the effects of the automatic stabilisers

anddiscretionarypolicies.Theoutput

gap is still substantial, and there is,

thus,roomforfurtherscalexpansion

with no threat to macroeconomic

stability.Indeed,thegovernmenthas

already signalled that the tax rate on

pensions will be lowered again, and

that spending on infrastructure will be

broughtforward.

Against this background, and taking

into account the general elections in

2010,weexpectthebudgetdecit

to continue to widen in 2010 beforedecliningin2011.Thespringbudget

bill amounted to an expansion of about

SEK5billion,includingincreased

child allowances and spending on

infrastructure.For2011,weanticipate

additionalscalmeasuresofSEK

35billion(about1%ofGDP).Notonly lower tax rates on pensions, but

also increased spending on public

service.However,followingthestrong

performancein2009,itislikelythat

thedecitremainsbelow2%ofGDP

in 2010 and improves slightly in 2011,

duetoimprovedrealgrowth.

Also, the projected path for general

government debt has been revised

downwards.TheMaastrichtdebt

increasedto42.3%ofGDPin2009,lowerthanexpectedduetolargeone-

offtransactionsandabetterscal

outcome.Thegrowingdecitin2010

will add on to the debt before the

recovering economy stabilises the debt

ratiobelow43%ofGDPin2011.

The main challenges over the

medium term will be to reverse the

underlyingimbalances.Weestimate

that the surplus in the public sectors

netsavingsneedtobeabout1%of

GDPover2011-14inordertoreachthe surplus target (calculated over a

7-yearbusinesscycle).Thereductions

of tax rates are permanent measures

thatwillbedifculttoundoinfullfor

whichevergovernmenttakesofce

inlate2010.Thismeansthatthe

bulk of the adjustment will have to

befoundontheexpenditureside.

Part of the reductions will come from

falling spending on labour market

policies as the economy turns, and

from the reforms of the sicknessbenetsystem.However,itislikely

that additional savings will have to be

foundelsewhere.Notaneasyfeat

when the unemployment rates remain

atelevatedlevels.

CeciliaHermansson

JrgenKennemar

Magnus Alvesson

Public sector fiscal balance (% of GDP)

40

42

44

46

48

50

52

54

56

2003 2005 2007 2009 2011

-2

-1

0

1

2

3

4

5


Expenditures

Revenues

Balance (rs)


11/27

April 22, 2010 11

Swedbank Economic OutlookEstonia

Estonia Economic prospects improve

After a period of contraction, Estonia

reportedstrong2.5%quarterly

economic growth in the fourth quarter

of2009,whichindicatesthatthe

bottomofthecyclehaspassed.

Annually,thedeclinewas9.5%,

and the full year contraction was

14.1%,consistentwithourprevious

forecast.Overalldevelopmentsintheeconomyattheendof2009andin

early 2010 have been according to our

expectations, indicating a stabilisation

of the economy and a start of the

recovery.Netexportsandinventory

increase were the main contributors

to growth, while other components

continuedtheirdownwardtrend.

We keep our previous growth

forecast,expecting1.5%growth

thisyearand4.5%growthin2011.

Even though the outlook for Estonias

most important export markets have

somewhat worsened, the outcome for

the domestic market is expected to

improve.Withstrongerthanexpected

retail sales, together with increased

condenceaboutemploymentand

future developments in the economy,

households will start to increase

spending.Inaddition,weexpect

that at the end of 2010 there may

be a onetime jump in consumption

caused by the fear of a possible priceincrease accompanying the euro

cashchangeover.TheexpectedEMU

membershipandbetter-than-expected

outcomeofthe2009budgetwill

have a positive effect on economic

developments in 2010 and 2011;

however,thesearedifculttoestimate.

The main assumption in our forecast is

thatEstoniahasfullledtheMaastrichtcriteriaandwillbecomethe17th

memberofEMU.Theformalprocess,

however, will take several months, and

thenaldecisionwillbeannouncedin

thebeginningofJuly.Estoniahasso

farmaintainedaprudentscalpolicy,

and the Estonian government has

committed itself to working towards a

balanced budget in the medium term

aswell.

The growing public sector debtinmanyEUcountriesmaycause

turbulence that could increase the

probability of negative risks for

growthprospectsinEstoniaaswell.

However,inbecomingamemberof

EMU,Estoniamaybenetfroma

more stable environment and lower

interestrateswithintheeurozone.

Other possible risks for our scenario

stemfromhouseholdspending-savingpreferences and foreign investors

strategies.Theprivatesectorsavings

reached an unprecedented level in

2009andthisisabouttoincrease

in 2010 before starting to decline in

2011.However,ifthesavinglevelwere

to remain high for a long time, it will

dampeneconomicgrowthprospects.

WhileEMUmembershipandthe

accompanying decline in currency

risk may encourage investments, the

uncertainties in the euro area maydiminishthisexpectedpositiveeffect.

Key Economic Indicators, 2009 - 2011 1/

2008 2009 2010f 2011f

RealGDP -3.6 -14.1 1.5 4.5GDP,mlneuro 16073 13730 13700 14700

Consumerprices(average) 10.4 -0.1 0.5 1.8

Unemploymentlevel,%oflabourforce 5.5 13.8 14.0 11.5

Realgrossmonthlywage 3.2 -5.2 -5.3 1.5

Exports of goods and services (nominal) 6.9 -19.9 8.0 7.0

Importsofgoodsandservices(nominal) -2.8 -30.6 6.0 7.0

Tradeandservicesbalance,%ofGDP -4.3 5.9 8.0 8.0

Currentandcapitalaccount,%ofGDP -8.4 7.4 8.5 8.0

FDIinow,%ofGDP 8.2 8.8 4.5 8.0

Grossforeigndebt,%ofGDP 118.5 126.8 121.0 115.0

Generalgovernmentbudget,%ofGDP -2.7 -1.7 -1.4 -1.0

Generalgovernmentdebt,%ofGDP 4.6 7.2 10.0 12.5

Sources:StatisticsEstoniaandSwedbank.1/Annualpercentagegrowth,unlessotherwiseindicated.

Contributions to GDP Growth

-30%

-20%

-10%

0%

10%

20%

2006 2007 2008 2009 2010f 2011f

Households Government Investments

Netexports GDP Sources:SE,Sw edbankforecast


12/27

12 April 22, 2010


Economic growth founded on

external demandThe main contributor to growth in

2010 will be net exports as export

growth will strengthen while import

developmentswilllag.In2011the

largest contributions will come from

domesticdemand.Investments

(including inventories) will already start

to grow in 2010, although a decline in

some quarters is possible due to high

uctuationsandone-offfactorsthat

arehardtopredict.TheEUstructural

funds will support public and private

sectorinvestments.Government

spending is set to decline in 2010

asbudgetconsolidationcontinues.

Householdconsumptionwillalso

continuetodecline,atleastintherst

half of 2010, and growth in the second

halfof2010willbesluggish.For

2011, the growth contributions have

shifted compared with our January

expectations, and we are forecasting

stronger support from household

consumption and slightly less from

inventorybuild-up.

Exports strengthen butimports remain weakRealexportgrowthwillbe4%in2010

and5.5%in2011;realimportgrowth

2%and5.5%.Wechangedourforeign

trade forecast due to the price and

exchange rate movements, domestic

and external demand patterns, and

companies abilities to reach export

markets.

AlthoughforEUcountriesthegrowth

outlook has weakened for 2010, we

project a comparatively good outcome

for Estonia based on the change of

geographicalandproductstructure.

Nevertheless,exportgrowthwill

beslowerthanweexpected.While

the general structure of Estonian

merchandise exports has been well

diversied,theproblemwellseen

inlate2008andearly2009is

that Estonian companies are highly

dependent on economic developments

inafewcountries.Thesharpdecline

of industrial production in Sweden

andFinlandhadthemostdevastating

effectonEstonianproducers.TheimportanceofFinlandandSweden

will remain high, but will diminish

somewhat because Estonian

producers are looking for other

markets(e.g.,non-EUcountries).We

are of the opinion that this tendency

willdeepen.

Services exports will continue to

show good results as the opening of

EUsservicesmarketandstronger

price competitiveness will increase

the possibilities for Estonian

producers.Theserviceswillbe

providednotonlyinEstonia(e.g.,

tourism,IT,andbusinessservices)

but also in the destination countries

(e.g.,construction).Thetransport

and logistic services are about to

recover, but this recovery might not

be very rapid due to weak economic

developments in neighbouring

countries.Theeuroadoptionmay

encourage tourism from the euro

zone,particularlyfromFinland,as

price comparisons will become more

transparent and currency exchange

costs will disappear after euro adoptionin2011.

Weak domestic demand for imported

goods in 2010 will restrain the growth

ofimports.Householdsconsumption

structure has been shifting not only

more towards domestically produced

goods and services (food, housing),

butalsotowardscheaperproducts.

Price movements and euro

depreciation have affected exports

and imports more than we assumed

Swedbanks GDP Forecast Estonia

Changesinvolume,% 2008 2009 2010f1/ 2011f1/

Householdconsumption -4.7 -18.5 (-18.5) -4.0 (-6.0) 4.0 (2.0)

Government consumption 4.1 -0.5 (-0.8) -1.5 (-1.8) 0.4 (1.0)

Investments -16.6 -44.9 (-45.0) 13.0 (13.0) 12.5 (20.0)

Gross capital formation -12.1 -34.3 (-32.0) 0.0 (4.0) 10.0 (10.0)

Changesofinventories/GDP(currentprices) 0.4 -2.5 (-3.0) 1.0 (0.2) 2.0 (0.7)

Domesticdemand -7.4 -24.8 (-25.0) 0.5 (-0.5) 5.5 (6.5)

Exports -0.7 -11.3 (-10.5) 3.5 (8.0) 5.5 (5.5)

Imports -8.7 -26.8 (-27.0) 2.0 (4.0) 5.5 (6.0)

Netexports,contributiontoGDPgrowth 9.0 17.7 (18.5) 1.5 (3.5) -0.1 (-0.5)

GDP -3.6 -14.1 (-14.0) 1.5 (1.5) 4.5 (4.5)

Sources:StatisticsEstoniaandSwedbank.

1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.TheguresfromourforecastinJanuaryaregiveninbrackets.

Export Structure by Destination Country

0%

20%

40%

60%

80%

100%

2004-2006 2007 2008 2009

Other

OtherCIS

Russia

OtherEU

Germany

Sweden

Latvia&

LithuaniaFinland

Sources:SE,Swedbankcalculations


13/27

April 22, 2010 13


in previous Swedbank Economic

Outlooks.Importsbecame

substantially more expensive last

winter due to price increase of oil

products, which means that less

import is consumed domestically,and, at the same time, the price of

exported products will also rise in

time.

The turnaround of the foreign trade

balanceduring2008-2009was

largerthanweexpected.Thecurrent

and capital account surplus will,

according to our forecast, continue

to increase this year, after which

gradualdeclinewillfollow.Wealso

expectthenancialaccounttoshowabigdecitin2010thatwillbegin

to decrease substantially already in

2011.

Foreigndirectinvestments(FDI)

inowin2010willbesmallerthan

in2009duetotheprivatisationof

EstonianTelekomattheendof2009.

Excludingthis,weexpectFDI

inowtogrowin2010and2011as

the economic situation and growth

outlookimproves.Reducedrisk

estimates and the elimination of

devaluation fears through the euro

adoption will also be encouraging

factors.Weexpectthattheongoing

productiontransferprocess(e.g.,

outsourcing) will intensify, thus

creatingexportsandemployment.

FDIoutowswillremainrelatively

high due to the need to recapitalize

loss-makingcompaniesanddue

to Estonian companies investing in

LatviaandLithuania.

Investments growth supportedby EU fundsWe expect investments (including

inventories)togrowbyabout13%

in2010andby12%in2011,thus

keeping the outlook for this yearanddowngradingitforthenext.

According to our estimation, the

economy is moving from inventory

cuts to increases in inventories during

2010, and the growth rates will be

verystrongatrst.Afterwards,asthe

economic turnaround ends, inventory

growthwillslowin2011.

In2010,weexpectinvestmentgrowth

to be affected by the increased

inowofdifferentEUfunds.In2011,weforecastfewerEU-funded

investments, yet other investments

areabouttoshowmodestgrowth.

We have lowered our expectations

because we see that in 2010 and

2011FDIiscomposedmostlyofM&A,

and of loan payments, and less of

productiondevelopment.Theexcess

capacities will be a strong obstacle

forinvestmentsinnewtechnology.

ManyFDIinvestmentsaretargeting

cheap production in Estonia, which

also means that investment growth

willbenotverystrong.Thesituation

will hopefully change towards

the production of goods at higher

technological levels in the years

beyondourforecastrange.

Householdinvestmentswillremain

low; however the harsh winter might

have encouraged people to pay

moreattentiontoenergyefciency,

which,togetherwithstate-supported

programmes, may increase housing

renovationinvestments.Therstnew

residential real estate construction

may start already in the second half of

2010;however,thenon-residentialreal

estate sector will remain in a stressful

position throughout 2010, and maybeinto2011aswell.

Labour market stabilizingWe expect unemployment to reach its

highest level in 2010, and the peak

willbeinthersthalfoftheyear.By

the end of the year, seasonal factors

and the economic recovery will

graduallypushemploymentup.Still,

job creation will be slow as companies

continue to increase the workload

of existing workers (who so far areworkingpart-time)atrendthatwas

already present in the second half of

2009.Wealsoexpectthatthelabour

supplywilldeclinebutafterone-two

yearsstartgrowingagain.Atthesame

time the amount of active jobseekers

will decline due to aging that may be

accounted as one of the major risks

forEstonianeconomyinthelongrun.

We are of the opinion, however, that

theshareoflong-termunemployed

and the structural problems on labour

marketwillincrease.

The private sector had already made

downward adjustments in employment

in2008and2009,whilethepublic

sector started mostly at the end of

2009.Itispossiblethattherewillbe

additional layoffs in the second half of

2010 in the public sector as the budget

situationdeteriorates(seebelow).

Hence,thenegativeeffectofbudget

cutting will be felt on the labour market

alsointhersthalfof2010,andtoa

Export of Goods and Services, 1Q 2004=100

90

110

130

150

170

190

210

2004 2005 2006 2007 2008 2009

Total Goods Services

Sources:EP,Swedbankcalculations

Labour Market Indicators

-15%

-10%

-5%

0%

5%

10%

15%

20%

2004 2005 2006 2007 2008 2009

Employment, yoy Gross w age, real yoyUnemploymentrate Source:SE


14/27

14 April 22, 2010


lesserextentafterwards.

The decline of average real monthly

wagewillbe5-5.5%in2010,butwe

expectittogrowby1.5%in2011.Total

wagepaymentswilldropby1-2%thisyearbeforegrowingby5-6%in2011.

The difference between the average

and total growth in wage payments is

explained by the change in working

hours:whilein2009theydropped

(hence cutting incomes more than the

average wage, which is calculated for

full-timeemployment),in2010theywill

increase.

Ination to accelerate due to

world market pricesThedeationperiodwillbeshortinEstonia:after0.1%CPIdeclinein

2009,weexpectconsumerpricesto

growbyabout0.5%in2010and1.8%

in2011.Thepricegrowthisprompted

by increases in tax rates (latest

was in January), tariffs (electricity,

heating, and natural gas) and global

prices(mostofallenergy).However,

weak household demand will limit

price pressures, and most of the

unregulated prices will continue to

declineorremainstable.Householdswill also continue to shift towards

cheaper products and services; hence,

theconsumptiondeatorwillremain

negativeforthisyear.Thegrowthof

oil prices in the world will continue to

have a strong effect on consumption

offuelsinEstonia.1 Similarly, the price

growth of other products in the world

1 Of course, there are other factors as well,

such as an increase in fuel excises, and

growing unemployment (less demand for

everydaytravelling).

market has affected consumption

(and therefore the amount of imported

goods).

Household consumption

continuously weakHouseholdconsumptionwillremain

comparatively weak throughout 2010

-weforecasta4%decline-butwill

recoverin2011,showinga4%growth.

The higher forecast is the result of the

stronger developments in the retail

sectorobservedattheendof2009

andbeginningof2010.Besides,the

optimism of households has been

strengthenednotably.Still,withstrong

seasonal spending growth on heating

due to the unusually cold weather, asetback cannot be ruled out, which

means that the risk of a lower outcome

isrelativelystrong.Theotherreasons

for upgrading the consumption

forecast for this year and next is

related to euro adoption and increased

assuredness about employment, which

seemstobeencouragingcondence

and, hence, may trigger additional

spending.Still,aswementioned

above, the savings rate in the private

sector is very high, partly because

of deleveraging, and this might not

changesubstantiallyin2010-11,even

thoughspendingwillslowlyincrease.

Also, there is a possibility of a onetime

increase in consumption at the end

of this year due to households fear

of price increases after the euro cash

changeoverin2011.

According to our observations,

households have shifted their spending

towardscheaperproducts.The

share of the shadow economy may

have increased, while people prefer

to buy goods and services directly

from producers or provide them by

themselves.Thegrowthoftheinformal

economy may therefore underestimate

currentdevelopments.

Tight scal policy continuesWe expect that the public sector

decitwilldeclinefrom1.7%ofGDP

in2009to1.4%in2010andto1%in

2011.Thepublicsectordebtlevelwill

reach12.5%ofGDPattheendofthe

forecastperiod.

The Estonian government cut budget

spending and increased revenues

throughout2009,thusendingtheyearwithapublicsectordecitof

only1.7%ofGDP.Thebudget-

tightening measures included some

one-offitems(e.g.,theincreased

dividendpaymentsfromstate-owned

companies), and several decisions that

affect the budget over several years

(e.g.,thestoppageofpaymentsinto

the compulsory pension scheme and

the smaller increase in pensions than

the law stipulates lowered costs, but

the promises to make compensations

in 2011 and onwards will increase

spending).Expenditureswerelowered

more by cutting costs and increasing

efciency,andlessbycuttingservices

provided.Weurgethatthisefciency-

increasing approach continue and

widen to areas that so far have been

relativelyuntouched(e.g.,tomany

municipalities),andamorecase-by-

case approach should be introduced

insteadoftheone-measure-for-all

approach, which was widespread in

2009.

Price Indices and Deflators

-15%

-10%

-5%

0%

5%

10%

15%

CPI deflator PI goods

deflator

PI goods

deflator

Consumption Exports Imports

2008 2009 Source:SE

Confidence Indices, s.a.

-50

-40

-30

-20

-10

0

10

20

30

40

2002 2003 2004 2005 2006 2007 2008 2009 2010

IndustryConsumerTotal economy Source:EKI,Swedbankcalculations


15/27

April22,2010 15


Despitestrongbudgetcuts,their

direct negative effect on economic

growthremainedrelativelymodest:

governmentconsumptionfellby0.5%

in2009,althoughinthesecondhalfof

the year the annual decline reached

1%.Thisrelativelymodestoutcome

could be explained by increased use of

EUfunds(particularlystartinginMay-

June), and not so much decrease of

theservicesprovided.Additionally,the

outcome was affected by the increase

in social services due to the sharp rise

inunemployment.

Government budget spending will

remain tight in 2010 and 2011, and we

expect spending cuts to take place, but

mostly in the municipalities that were

not very eager to cut spending prior to

thelocalelectionsinOctober2009and

thushavinglargeproblemsafterwards.

Hence,thestrongertighteningof

spending started there in the fourth

quarter, and this is about to continue

throughout2010.Themunicipalities

budgets remain one of the major risks

inourbudgetforecast.

We are of the opinion that the central

government will continue its existing

budgetary policy and will reduce

the central government budgetdecitin2010-2011.However,the

municipalities situation is about to

worsen, we cannot expect a strong

improvement in the public sector

balance (although it may happen,

depending on how the budgetary

problems at the local levels will be

solved).In2011,severaldecisionstakenin2009willleadtoraised

spending,e.g.oncompulsory

pensioninsurance-whiledeclining

unemploymentwillleadtoareduction.

Although the government plans to

reach a budget surplus after a few

years,wearescepticalaboutthis.We

are of the opinion that the government

willbeforcedtoworkonlong-term

development issues, particularly those

affectingsocialservices(e.g.,the

labour market and health system), orotherwise the Estonian economy will

faceanothercrisisin10years.The

efciencyofthepublicsectorshould

be improved, and access to public

servicesaswell.Thetaxsystemmay

need some stronger adjustments

to ensure that social systems will

continue to work properly when, after

ve-sevenyears,theworking-age

populationdropssharply.

Maris Lauri

Annika Paabut

General Government Finances, % of GDP

-4%

-2%

0%

2%

4%

6%8%

10%

12%

14%

2005 2006 2007 2008 2009 2010f 2011f

Debt Budget balance Source:SE


16/27

16 April 22, 2010

Swedbank Economic OutlookLatvia

Latvia:RecessiontobeoverearlierthanexpectedKey Economic Indicators, 2008 - 2011 1/

The recession in Latvia is likely to

beoveralreadyintherstquarterof

2010duetoexportgrowthandbetter-

than-expectedprivateconsumption

developments.However,therecovery

path will be bumpy, and the growth

willbefragileinthebeginning.

The economy has become quite

heterogeneous, with developments

differing across sectors, and thus it is

hard to forecast how they will interact

inaparticularquarter.

The seasonally adjusted quarterly

GDPfallslowedto2.9%inthe

fourthquarterof2009duetoslower

household consumption decline and

strongerexportgrowth.Last-quarter

developmentshighlyinuencethe2010 forecasts due to substantial

carryover effects (more negative

for investments, less negative for

consumption and imports, and more

positiveforexportsvis--visour

previousforecast).Forinstance,

assuming that seasonally adjusted

GDPisatthroughouttheyear(i.e.,

the same as the fourth quarter of

2009level),theeconomywouldfallby

4.3%in2010.WeforeseethatGDP

will grow during the year mostly on

account of exports, and thus the fall

of2-3%willbeduesolelytocarryover

effects.Astrongerreboundisexpected

in2011,withGDPgrowingbyabout

4%,supportedbyrecoveringdomestic

demand.Strongerexportsand

restocking will stimulate investments

and,thus,importsin2011.

The job seekers rate is forecast to

peakbymid-2010atabout23%and

start to diminish gradually afterwards,

rstduetoemigrationandrising

inactivity, and in 2011 also due to

slowjobcreation.However,thejob

seekers rate will remain high for years

tocome.Deationisinfullswing,with

theannualconsumerpriceindex(CPI)

declinereaching3.9%inMarch2010,

and it will continue during 2010 and

early2011.Thesmalldecitintradeofgoodsandservicesin2009willturn

intosurplusesin2010-2011,drivenby

exportgrowth.

Domesticpositivesurprisesinterms

ofGDPandsectoraldevelopments

seem to have become more likely

thantherealizationofnegativerisks.

However,theupcomingparliament

elections in October pose risks of

delay in implementing structural

reforms.Theriskofworseningtax

collection may force the government

to revise its 2010 budget to squeeze

belowthedecitcapof8.5%ofGDP

and thus compress domestic demand

evenfurther.Exportsmightbeweaker

if competiveness gains do not become

cleverer,i.e.,ifproductivitygrowth

ispoor.Theglobaloutlookisstillfavourable, although certain risks have

2008 2009 2010f 2011f

Economic growth -4.6 -18.0 -2.5 4.0

GDP,mlneuro 21952 18067 16444 16859

GrowthofGDPdeator,% 15.4 0.3 -6.7 -1.4

Consumerprices(average) 15.4 3.5 -3.0 0.0

Harmonisedunemploymentlevel,%oflabourforce 7.5 16.9 21.5 19.5

Realnetmonthlywage(average) 6.3 -5.9 -8.0 2.0

Exports of goods and services (nominal) 10.6 -17.8 10.0 14.0

Importsofgoodsandservices(nominal) -1.7 -37.6 0.0 15.0

Balanceofgoodsandservices,%ofGDP -13.6 -0.3 4.3 4.3

Currentaccountbalance,%ofGDP -13.0 9.4 9.0 6.5

Currentandcapitalaccountbalance,%ofGDP -11.5 11.8 12.4 9.7

NetFDI,%ofGDP 3.0 0.4 0.4 0.8

Externalgrossdebt,%ofGDP 129 155 167 158

Generalgovernmentbudget(accrualbasis),%ofGDP -4.1 -9.0 -8.5 -6.0

Generalgovernmentdebt,%ofGDP 19.5 36.1 59.0 66.0

Sources:CSBLandSwedbank.

1/Annualpercentagechangeunlessotherwiseindicated.

Seasonally adjusted quarterly real GDP (in %)

-20

-15

-10

-5

0

5

10

15

1Q05 1Q06 1Q07 1Q08 1Q09

GDP ExportsPrivate consumption Grossfixedcapitalform.

Source:CSBL.


17/27

April22,2010 17


becomemorevisible.Iftrade-partner

countries see weaker growth than

currently expected, it would slow the

recoveryinLatvia.

Export growth stronger andbroaderAlthough economic growth is expected

to slow in the second half of 2010, the

globaloutlookisstillfavourable.The

forecast of weaker demand in euro

zone countries will be compensated

for by stronger growth in some other

EuropeancountriesandRussia,as

well as by a weaker euro against

theU.S.dollar.This,togetherwith

improving competitiveness (seebelow) and the growing market shares

of Latvian exporters, continues to

supportgrowth.Themarketshares

ofLatvianexportersintheEU27and

Russiawererisingduringallof2009.

Although we expect faster real export

growth due to carryover effects, we are

keeping our nominal export forecast

atabout10%for2010and12-14%for

2011duetoslowerdeatorgrowth.

Whileinlate2008-early2009,the

fall in nominal goods exports was

counteracted by services exports,

by the end of last year goods

exportsbecamethedriverofgrowth.

Manufacturing growth is very fragile

so far, and industry developments

werequitedisappointingintherst

twomonthsof2010.Nevertheless,

manufacturingcondenceindicators

continue to improve, suggesting that

manufacturing growth is likely to gain

strengthlaterthisyear.

The situation also differs substantially

acrossindustries.Forinstance,the

wood industry has become the growth

engine both for manufacturing and

exportsin2009,butthisgrowthis

expected to slow somewhat in 2010

with external competition for marketsharesincreasing.Theoutlookfor

food, metal, and chemical industries

is quite favourable, while on a clearly

negative trend are still the textile

industry and the manufacturing of

transportvehiclesandtheirparts.

Regardingservices,tourismprospects

remain relatively positive, due to a

decreaseinvalue-addedtax(VAT)for

accommodation services and several

large-scaleprojectsannouncedfortouristattractioninRiga.Business

services developments have been

alsorelativelygoodsofar.Incontrast,

freight transportation started to decline

inthesecondhalfof2009andremains

underseverecompetitionregionally.

The fall in imports slowed substantially

and goods imports were quite stable

inthesecondhalfof2009.However,

imports are still constrained by the

substitution effect due to the growing

difference between prices of locally

produced and imported goods (see

below)andbyfallingincomes.The

part of imports used for domestic

demand will thus continue to fall,

albeit more slowly, but the growingneed for imports of exporting sectors

willoutweighthiseffect.Realimports

will still fall in 2010, but we forecast

nominalimportstobestable.A

rebound is expected to follow in 2011

both in real and nominal terms due to

growing investments and consumption,

aswellrestocking.

The growing trade surplus will also

keep the current account surplus

highin2010atabout9%,butthiswilldiminishto5-7%in2011dueto

strongerimportgrowth.Theincome

account surplus will still persist in

2010 because of continuing foreign

direct investment losses, but it will be

substantially smaller than last year

andwillcontinuetodeclinein2011.

Currentandcapitaltransferaccounts

willalsobeimprovedbyEUfunds

inows.Emigrantremittancesarealso

likely to increase, thus raising income

andcurrenttransferaccountsurpluses.

Swedbanks GDP Forecast Latvia

Changesinvolume,% 2008 2009 2010f 1 2011f1

GDP -4.6 -18.0 (-18.0) -2.5 (-3.0) 4.0 (4.0)

Householdconsumption -5.5 -22.4 (-23.5) -9.0 (-12.0) 2.0 (1.5)

General government consumption 1.5 -9.2 (-8.0) -7.4 (-3.0) -3.0 (-2.0)Grossxedcapitalformation -15.6 -37.7 (-36.0) -27.0 (-17.0) 7.0 (5.0)

Exports of goods and services -1.3 -13.9 (-15.0) 6.0 (5.0) 8.0 (7.0)

Importsofgoodsandservices -13.6 -34.2 (-34.0) -8.0 (-7.0) 8.5 (6.0)

NetexportcontributiontoGDP 8.5 14.4 (13.8) 6.6 (5.6) 0.1 (0.6)

Sources:CSBLandSwedbank.1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.TheguresfromourforecastinJanuaryaregiveninbrackets.

Exports by main product groups, millions of lats

0

20

40

60

80

Foodandagricultural

products

Wood, etc Machines

and

equipment

Metal etc Chemicalproducts

Mineral

products

Transport Text iles,

w earing,

leather etc

Jan.-Dec.2009 Jan.-Feb.2010 Source:CSBL.


18/27

18 April 22, 2010


Investments to grow in 2011The largest fall in investments is over

now,asgrossxedcapitalformation

is60%downfromitspeakinthe

secondquarterof2007.However,

investments will remain weak in 2010due to continuing deleveraging, spare

capacity,andexpensiveandhard-to-

obtainnancing.

On account of a steep fall in gross

xedcapitalformationduring2009,

there are huge negative carryover

effectsforthisyear(-23%).Despitean

expected stabilisation in the middle of

the year and gradual growth afterwards

duetoincreasingcondence,attractive

assetprices,aninowofEUfunds,and lessening spare capacity, gross

xedcapitalformationisforecast

tofallby25-29%in2010,almost

solelyduetothecarryovereffect.A

rebound is then expected in 2011, with

grossxedcapitalformationgrowth

reachingabout7%,mostlyowingto

theexportingsectors.Investments

conancedbyEUfundsareestimated

toconstituteupto7%ofGDPin2010

andremainat5-6%ofGDPin2011.

Spare capacity in manufacturing is

stilllarge,at42%,comparedwith27%

onaveragein2005-2007.Thegrowth

in capacity utilisation accelerated

at the beginning of 2010, and the

rate is expected to rise further, but,

as elsewhere in the economy, the

differencebetweenexporting-and

domesticdemand-orientedsectors

isbecomingmoreandmorevisible.

Facinggrowingdemand,exporting

sectors need to rebuild their stocks in

2010, increasing their production, and,

as spare capacity gets exhausted,

theirdemandforinvestmentswillrise.

Forinstance,thecapacityutilisation

rate in wood, food, and chemical

industriesisalreadyclosetopre-crisislevels, although it might be temporary,

as the rebound in demand is likely to

slowlateron.Incontrast,destocking

indomesticdemand-orientedsectors

will continue, and the necessary

deleveraging provides additional

pressure.

Unemployment will peak soonAlthough unemployment growth has

stopped, the situation in the labour

marketremainsdifcult.Sofar,competitiveness gains have been

achieved mostly through labour cost

reduction.1 The progress is remarkable

bytheendof2009unitlabour

costshaddeclinedby21%since

thefourthquarterof2008.Butthe

competitiveness adjustment should

stillcontinue.Inordertoreducethe

pressure on the labour market and

the rising negative domestic demand

effects, further competitiveness

gainsneedtocomeviaproductivity-

enhancing structural reforms driving

outputgrowth.

Reviseddatashowedaslower

increase in the job seekers rate, and

itreached20.3%inDecember2009.

Preliminary data show that registered

unemployment rate seems to have

peakedattheendofMarch.We

1 See our Swedbank Analysis for more

details:CompetitivenessadjustmentinLatvia:nopainnogain?Availableathttp://

www.swedbank.lv/eng/docs/materiali.php

thus keep our forecast that the job

seekersratewillpeakatabout23%,

stabilizingduringthespring-summer

and start falling very slowly later in the

year due to emigration and a rising

inactivityrate.Economicgrowthisexpected to be productivity driven;

thus, employment growth starting in

2011willbeweak.Furthermore,the

rsttogainfromrecoverywillbethose

currentlyworkingpart-timewhowill

shifttofull-timeemployment.This

means that structural policies must be

devised to support job creation and

reducethenegativeeffectsoflong-

term unemployment on the quality and

sizeofthelabourforce.

Surveys show that majority of

businesses are revising their

remuneration packages in the

beginningoftheyear.Therefore,

the relatively small wage cuts in the

private sector thus far most likely

intensiedintherstquarterof2010

asunemploymentisalreadyveryhigh.

Furtherdevelopmentswilldepend

on how strong productivity growth

willbe.Currently,weexpectwages

to stabilize by the end of the year

andstartgrowingslowlyin2011.Although government spending cuts

will continue, most of the wage cuts in

the public sector most likely are over

intherstquarterof2010.Netwages

will also be reduced by the personal

incometaxrisefrom23%to26%asof

January2010,butdeationwilllessen

thefallinrealincomes.Consequently,

we forecast average net real wage to

decreasebyabout8%in2010and

growmarginallyin2011.

Industry indicators, s.a.

60

70

80

90

100

110

120

Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10

-60

-45

-30

-15

0

15

30

Manufacturingoutput,2005=100

Production expectations f or the months ahead, pts

Sources:ReutersEcoWin,CSBL.

Wage bill, productivity and job seekers (%)

-50

-25

0

25

50

1Q06 1Q07 1Q08 1Q09

-20

-10

0

10

20

Wage bill, yoy Nominalgrossw age,yoy

FTEproductivity,yoy Job seekers' rate (rs)

Source:CSBL.


19/27

April22,2010 19


Deation in local goods andservices to continueMonthlyconsumerpricedeation

eased in early 2010 mostly due to

seasonal factors, but also owing to

importedpriceincreases.Higherglobalprices are raising consumer prices in

Latvia, but this is expected to slow in

thesecondhalfof2010.Nevertheless,

higher global oil prices will lead to

increased gas and heating tariffs in

Latviainthesecondhalfoftheyear.

Localdeationarypressureremains,

supported by a weak labour market

andcontinuingdeleveraging.Wethus

forecasta3%averagedeationin

2010andaby-and-largestableCPIin

2011.

Deleveragingisbecomingmore

prevalent,anddeationismakingthe

processmoredifcult.Fallingwages

and employment make debt servicing

increasingly tough a situation that is

reectedinrisenloanoverduesinthe

market.Sincelate2009,thepipelineof

new overdues is gradually drying up,

suggestingacertainstabilisation.Also,

real estate prices, and thus collateral

values,havingdroppedabout70%

fromtheirpeakinmid-2007,are

startingtoshowsometentativegrowth.

Creditstockisslowlyfalling,asthe

amount of newly issued loans cannot

compensate for the amortization of

existingloans.However,thedebt

service burden is increasing both

for households and businesses as

incomesaredecliningfaster.This,in

turn, is weighing down on consumption

andinvestments.

Deationalsoraisestherealinterest

rate,thusmakingnancingmore

expensive.Inaddition,europolicy

rates are expected to start increasing

inthersthalfof2011.Deleveraging

is unavoidable and it will take time global experience shows that this

processtakesyears.Banksarestill

cautious to lend, although mortgage

lending is about to pick up as housing

affordability has improved more than

threefold since the real estate price

peak,mainlyduetolowerprices.

According to our estimations, currently

one monthly average net wage buys

1squaremeter,comparedwithto0.3

squaremeterin2007.

Household consumption tostabilise earlier than expectedHouseholdconsumptionwillremain

weak in 2010 due to falling incomes

andcontinuousdeleveragingpressure.

Theincreaseinconsumercondence

sincethesecondhalfof2009does

not immediately translate into robust

economicactivity.However,recent

retail trade turnover developments

suggest that private consumption

might have increased or at least been

stableintherstquarterof2010(partly due to unusually cold and

snowywinter).Weforecasthousehold

consumptiontofallbyabout9%in

2010, almost fully due to the negative

carryover effect, and grow by about

2%in2011.Duetocontinuing

deleveraging pressure, household

consumption will fall more than total

incomes(i.e.,thewagebillplus

pensions) in 2010 and grow less than

latterin2011.

The surprisingly strong retail trade

performance in early 2010, together

with some stabilisation in household

deposits and the continuing fall in

taxrevenuesasapercentofGDP

(see below), suggests that theshareofenvelopeincome(i.e.,

thegreyeconomy)hasincreased.

Forinstance,TheStateLabour

Inspectorateestimatesthatnearly

one-fthofofciallyregistered

unemployedactuallyareworking.This

increases the forecast error for private

consumptionfortheupcomingyears.

As the consumption side seems to

better measure the economic activity

than the income side, true incomes

might actually fall less than our

forecastsuggests.

Tax collection to be improvedDespiteaslightslipinscaldiscipline

attheyearsveryend,the2009

budgetdecitstoodat9%ofGDP

(accrualbasis),i.e.,belowthe10%

target.Thecurrentg

1271924546 Swedbank Economic Outlook April 2010

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