Swedbank Economic Outlook August 2011

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Swedbank analyses theSwedish and Baltic Economies.

Transcript of Swedbank Economic Outlook August 2011

Swedbank Economic Outlook

August 23, 2011 1

Swedbank Analyses the Swedish and Baltic Economies August 23, 2011

Global headwinds pose policy challengesGlobal development

Since our spring forecast, economic growth in the US and the Eurozone has slowed. Financial turbulence has increased, and confidence is falling. We have revised global GDP-growth for 2011 to 3.8% from 4.1%, and foresee it to remain just below 4% 2012-2013.

As uncertainties are high, our main scenario has 60% probability, while the risk for a worse scenario with a new global recession is 30%. For growth to return to 5%, we need stronger political confidence, thus the probability of a better scenario is just 10%.

Sweden Economic growth continued to be strong in the first half of 2011, but we are

seeing a significant slowdown for the remainder of the year. Exports will be affected by a slowing of global growth, and falling confidence of households and companies will limit consumption and investment growth.

We revise the growth rate downwards for 2012 to 2.2%, and, for 2013, we expect growth to reach 2.3%. The current economic situation presents a policy challenge, and we expect monetary policy to scale back rate increas-es, but fiscal policy to become too tight. Thus, targeted, timely, and tempo-rary actions will be required to push unemployment down.

Estonia The Estonian economy grew strongly in the first half of this year due to

a stronger-than-expected recovery of domestic demand and solid export growth. Export growth is expected to slow during the second half of this year, while domestic demand strengthens further.

Despite slowing global economic growth, Estonia is estimated to grow by 4.2% in 2012 and by 4.0% in 2013, fostered by domestic demand. Invest-ment growth is supported by growth in industry, EU funds, and environment-related investments. Increasing employment and growing wages will sup-port private consumption.

Latvia Economic growth picked up strongly in the second quarter of 2011, and was

broad based. On the back of good data for the first half of the year, we are raising the annual GDP growth forecast to 4.2%.

With the global outlook now weaker, we are cutting the 2012 growth fore-cast to 3.5% and anticipate 3.9% growth in 2013. Growth will remain export and investment driven. Euro entry in 2014 remains part of our main sce-nario, but policy action is needed.

Lithuania The Lithuanian economy grew by a healthy 6.5% in the first half of this

year, but growth is likely to decelerate in the second half of 2011 and 2012. Investments and household consumption both were important factors of growth. Consumer prices increased faster than we forecast.

We still expect the economy to grow by 4.7% next year and by 4.5% in 2013. Export and investment growth will fall back, but household spending is set to increase more rapidly. Slower global growth poses challenges in meeting the Maastricht criteria next year, but euro adoption is still part of our main scenario.

Table of Content:

Introduction: Global instability our main forecast risk 2

Global: The global recovery slows 4

Sweden: Focus on economic policy 7 Estonia: Domestic demand supports growth 12

Latvia: Growth to continue amidst global slowdown 16

Lithuania: A more balanced economy meets headwinds 20

Swedbank Economic Outlook

August 23, 2011 2

sees global growth returning to last years rate of 5%. This scenario is made possible as greater trust in the political process spurs investment and recruitment, which, in turn, reduces uncertainties about the future.

In our main scenario, the US keeps its Fed funds rate at 0.25% until the second half of 2013. The ECB raises rates at a slower pace beginning in the second half of 2012 after a pause, while the Bank of England holds off on its first hike until 2013. The inflation outlook becomes friendlier, keeping monetary policy more expansionary as fiscal retraction starts to kick in. The US dollar is assumed to appreciate against the euro, but slower than we assumed in the spring. Commodity prices will start to fall, with an average oil price for the second half of 2011 at $107 per barrel and a continued drop to $97 and $94 in 2012 and 2013. Also, industrial materials and food prices are set to fall from their high levels, in line with a lower growth in demand and a better supply than last year.

Lower commodity prices mean lower inflation especially in the Baltic countries, where food and energy make up a larger share of the consumer price index (CPI). At the same time, slower growth in the advanced economies will reduce export demand, with the risk of a weaker domestic demand. GDP growth in all four economies has been revised downwards for 2012 in terms of quarterly growth, but, as 2011 growth has been revised upwards, the annual rates will stay about the same, or be just mildly reduced. In 2012, GDP growth will fall to 2.2% in Sweden, and to 4.4% in Estonia, 3.5% in Latvia, and 4.7% in Lithuania. With low external demand lingering in 2013, the outlook for that year will not be very different from that for 2012.

Swedens GDP increased by 5.4% last year. The bounceback was strong and continued into the first half of 2011, leading to a projected GDP growth of

are already low and fiscal stimulus is turning into austerity. The recipe for politicians is to create more confidence by agreeing on medium-term fiscal plans, and to carry out structural reforms to boost the growth potential.

As many of the important forecast parameters change daily, we realise that uncertainties are high at the moment. We therefore need to describe the world economy by setting up a main, a worse, and a better scenario.

Our main scenario has a global annual growth rate of 3.5-4% 2011-2013 and can best be described as a muddling-through scenario, both in terms of the economy and the political process. This scenario comes with a probability of 60% and growth has been revised downwards from our spring forecast by 0.3 percentage point per year, due to slower demand in the US and in the euro zone. A worse scenario, where global growth falls below 2%, comes with a probability of 30%. This scenario envisages a new global recession and more financial turbulence as debt in Italy, Spain, and even France cause instability on financial markets. We believe emerging markets will be able to counteract such a global slowdown somewhat, albeit not to the extent as during 2008-2009 because of their overheating problems. A better scenario, with a probability of 10%,

The economic situation in Sweden and the Baltic countries has been more positive than in most other advanced economies over the last year. The Baltic countries have successfully managed to return to growth after a severe recession, and confidence is improving. Sweden is back to the GDP level seen before the financial crisis and, after a forceful bounceback, is heading for trend growth. Government debt levels are low, budgets are already balanced or on their way to becoming balanced, and unemployment is falling, albeit slowly. After higher-than-expected growth was seen during the first half of the year, GDP forecasts have been revised upwards for 2011, to 4.3% and 4.2% in Sweden and in Latvia, and to 6.3% and 6.7% in Lithuania and in Estonia, respectively.

However, global risks could markedly worsen the Swedish and Baltic outlook for 2012 and 2013. Already in the spring we warned that headwinds were picking up. Since then, risks for a new global recession, financial instability, and more severe effects of the debt crises in the US and Europe have increased. On the other hand, inflationary risks through escalating commodity prices have decreased. There is for economic and, not least, political reasons less leeway to counteract a new recession if it were to occur, as policy interest rates


Global instability our main forecast risk

Macro economic indicators, 2010- 20132010 2011f 2012f 2013f

Real GDP growth, annual change in %Sweden (calender adjusted) 5.4 4.3 2.2 2.3Estonia 3.1 6.7 4.2 4.0Latvia -0.3 4.2 3.5 3.9Lithuania 1.3 6.3 4.7 4.5

Unemployment rate, % of labour forceSweden 8.4 7.5 7.2 6.9Estonia 16.9 13.2 12.4 11.6Latvia 18.7 15.9 13.9 11.8Lithuania 17.8 15.5 13.0 10.5

Consumer price index, annual change in %Sweden 1.2 3.1 2.3 2.4Estonia 3.0 4.8 2.7 2.5Latvia -1.1 4.5 2.4 2.5Lithuania 1.3 4.0 2.5 3.0

Current account, % of GDPSweden 6.1 7.3 7.2 6.7Estonia (incl. capital account) 6.3 6.8 3.0 2.2Latvia 3.6 1.5 -0.1 -2.1Lithuania 1.8 -1.6 -2.5 -2.7

Sources: National statistics authorities and Swedbank.

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August 23, 2011 3


4.3% this year. The economy is now coming back to more normal growth rates of some 2-2.5% during 2012 and 2013. The discussion of Sweden as a tiger economy is thus fading. Still, economic policy supports growth, and, in a worse scenario, stimulus could be enhanced. In our main scenario, export growth falls below 5% in 2012 due to slower demand and a stronger krona, while investment growth stays rather high, although losing speed as global growth slows. The labour market will improve, but not as fast as previously envisaged due to weaker demand and structural unemployment. The Riksbank will pause in its hiking of the policy rate in the autumn and will revise downwards its interest path, which will stay at 2% at the end of 2011, before rising to 2.75% and 3% at the end of 2012 and 2013, respectively. The government will postpone implementation of the fifth earned income tax credit, as it lacks a majority in the parliament and concerns about the economy i