Swedbank Economic Outlook January 2017€¦ · outlook for global growth. Markets are focussed more...

© Swedbank

Swedbank Economic Outlook January 2017

Rays of light amid political clouds

• Policies to boost short term global growth, but it could be short lived

• The Swedish economy is gradually slowing down - low inflation remains the main policy challenge

• Expansion in the Baltics despite external turbulence

© Swedbank

• The global economy – The start of 2017 is marked by an increasingly optimistic

outlook for global growth. Markets are focussed more on the prospects of fiscal stimulus in the US and less on the risk of trade wars.

– Still, risks remain high. The effects of the Brexit vote and the Trump victory will start to materialise in addition to European elections and geopolitical tensions. Underlying potential growth remains weak with poor productivity growth and ageing populations.

• Sweden – Growth will slow down from elevated level still supported

by strong households, housing investments and public spending. Housing prices and high household debt levels together with the still low inflations remains the main policy challenges.

• Norway – The economy will benefit from increasing oil prices, but

Norges Bank will stay put to balance financial sector risks and a still-weak economy.

• Estonia – Growth is increasing, but so is inflation and wages

• Latvia – Investments will rebound, pushing GDP growth in 2017-

2018. Structural policies are back in focus.

• Lithuania – Growth is expected to accelerate with increasing wages.

However, migration flows are unlikely to reverse leading to a declining labour force

Summary

2

Current themes

3

Short term policy boosts raise

global growth, but aging

populations creates long tem

challenges

Uncertainty will dominate

market movements, but we

expect interest rates to rise and

the dollar to strengthen

Economic growth in Sweden will

continue to benefit from strong

households, growing population

and housing shortages.

Source: Riksbank

© Swedbank

Momentum and sentiment strengthened at end-2016

4

• The start of the new year is marked by an increasingly optimistic outlook for global growth. Markets are

more focused on the prospects of fiscal stimulus in the US and less on the risk of trade wars or other

undesirable political outcomes. Composite PMIs rose further in December on a broad basis – including in

the US, EMU, Japan, and China – and together they now suggest an upswing in global economic growth.

© Swedbank

Trump promises and political uncertainties raise

stimulus in West, headwinds in emerging economies

5

• Growth in Europe and US show resilience amid global uncertainties. The effects of the financial crisis are

slowly dissipating and we expect an uptick in global growth in 2017.

• Still, risks remain high. In 2017, the effects of the Brexit vote and the Trump victory will start to materialise.

Up-coming European elections and geopolitical tensions mean that political risks will remain high. In the

short term this raises the prospects for expansionary fiscal policy

• Resource-based economies will benefit from higher commodity prices. Expectations of higher US rates and a

stronger US dollar are in general a headwind for growth for a number of emerging-market economies and

certainly make it more complicated for China to control the renminbi.

Swedbank’s global GDP forecast1/

(annual percentage change)

2015

USA 2.6 1.6 (1.5) 2.3 (2.0) 1.9 (1.8)

EMU countries 1.9 1.7 (1.6) 1.6 (1.5) 1.4 (1.4)

Germany 1.5 1.8 (1.7) 1.6 (1.4) 1.2 (1.1)

France 1.2 1.1 (1.2) 1.3 (1.2) 1.5 (1.5)

Italy 0.6 0.9 (0.8) 0.6 (0.6) 0.7 (0.7)

Spain 3.2 3.3 (3.2) 2.7 (2.5) 2.2 (2.2)

Finland 0.2 1.4 (0.9) 0.9 (0.8) 1.0 (1.1)

UK 2.2 2.0 (2.1) 1.5 (1.4) 1.2 (1.3)

Denmark 1.6 1.1 (1.0) 1.5 (1.7) 1.8 (1.9)

Norw ay 1.0 0.7 (0.7) 1.5 (1.5) 2.0 (2.0)

Japan 1.2 1.0 (0.8) 0.9 (1.0) 0.7 (0.6)

China 7.2 6.6 (6.6) 6.3 (6.5) 6.2 (6.5)

India 7.2 6.8 (7.1) 7.0 (7.0) 7.6 (7.7)

Brazil -3.8 -3.5 (-3.3) 0.2 (0.3) 1.9 (1.6)

Russia -3.7 -0.5 (-0.5) 1.5 (1.5) 2.0 (2.0)

Global GDP in PPP 2/ 3.2 3.1 (3.1) 3.4 (3.3) 3.3 (3.3)

1/ Nov ember 2016 f orecasts in parentheses.

2/ IMF weights (rev ised 2015). Sources: IMF and Swedbank.

2016e 2017f 2018f

© Swedbank

Medium-term challenges – trade and ageing

6

• Trump’s anti-trade rhetoric and Brexit risk decreasing trade further in the medium term and reduce prosperity

in particular for small open economies

• Ageing is a worldwide phenomena affecting primarily developed economies, but also China. High

immigration could mitigate (see for example Sweden and USA) but creates its own sets of problems.

Declining population will reduce growth and increase tax burdens

© Swedbank

Pressure to raise US rates drives spreads north

7

• After a sharper focus on political risks in the autumn, the significant market turmoil has now subsided, even

though there are several forthcoming government elections in Europe..

• The US presidential election appeared to be a catalyst for a regime shift from a monetary to a fiscal policy,

and after the hike in December we expect two hikes per year in 2017 and 2018.

• We have seen a global shift towards steeper yield curves and rising inflation expectations, with US interest

rates setting the direction.

• ECB and the Riksbank will continue to gently taper asset purchasing as part of an impending normalisation.

© Swedbank

Unemployment at average in the EMU, well below in US

8

• .. And unemployment in the EMU ex. Germany is still well above normal levels

© Swedbank

Wage growth and inflation are still low in the EMU

9

© Swedbank

The investment cycle should not be mature

10

• While the credit cycle is far from mature in the EMU

… probably not in the US either

© Swedbank

An initial dollar strengthening; Euro and SEK catch up

11

• The trend on the exchange rate markets will continue

to be driven by political risk and interest rate

expectations.

– The dollar strength that we have seen in the currency

market started even before the outcome of the US election

and was a natural effect of higher interest rate expectations.

This will continue during 2017

– Our base scenario is status quo in the political landscape in

Europe after the French and German elections; this means

that the euro has the potential to strengthen against the

dollar in the long term, particularly when the ECB starts to

phase out quantitative easing.

– We expect increased risk premiums for the UK pound

during the year, with the outcome of the Brexit negotiations

continuing to be marked by great uncertainty regarding the

access to the EU’s single market. The pound is likely to

weaken further as the negative economic consequences of

Brexit are increasingly discounted into the exchange rate.

– The Swedish krona is expected to strengthen against the

euro in parallel with the Norwegian krone, as the upside

potential for Norwegian and Swedish interest rates is

greater than for the European rates.

Interest and exchange rate forecasts, %

Outcome Forecast

2016 2017 2017 2018 2018

17-Jan 30 Jun 31 Dec 30 Jun 31 Dec

Policy rates

Federal Reserve, USA 0.75 1.00 1.25 1.50 1.75

European Central Bank 0.00 0.00 0.00 0.00 0.25

Bank of England 0.25 0.25 0.25 0.25 0.25

Norges Bank 0.50 0.50 0.50 0.75 1.00

Bank of Japan -0.10 -0.10 -0.10 -0.10 -0.10

Government bond rates

Germany 2y -0.8 -0.6 -0.5 -0.2 0.2

Germany 5y -0.5 -0.3 -0.1 0.2 0.6

Germany 10y 0.3 0.4 0.6 1.0 1.2

US 2y 1.2 1.5 1.8 2.1 2.3

US 5y 1.8 2.1 2.4 2.7 2.8

US 10y 2.3 2.6 2.8 3.0 3.1

Exchange rates

EUR/USD 1.07 1.02 1.06 1.06 1.08

USD/CNY 6.9 7.1 7.2 7.2 7.3

EUR/NOK 9.98 8.85 8.75 8.70 8.70

USD/JPY 114 121 122 118 115

EUR/SEK 9.49 9.45 9.15 9.10 9.05

EUR/GBP 0.87 0.87 0.90 0.87 0.85

USD/RUB 59 57 55 52 49

So urces : M acro bo nd and Swedbank.

© Swedbank

The long term growth potential, per capita: The same?

12

© Swedbank

2017 France presidential election

April/May

Germany federal election

September

2018 Russia presidential election

March

Political risks at the core of negative scenarios

• Political risks, with Brexit and Trump’s election victory at the forefront, start to materialize in

2017

• The elections in Europe, together with geopolitical tensions, keep political risks at a high level

• After Renzi’s resignation there is a possibility of a new election in Italy in 2017.

Dutch general election

March 15

Czech legislative elections

October

Hungary parliamentary election

Spring 2018 September

Sweden parliamentary elections

Spring 2018

Italy general election

© Swedbank

Opinion polls in France and Germany

14

• Le Pen still has strong support in French polls, but currently trails behind when set against

Fillon in a second election round

• Merkel seems likely to win in the German election, but can she form a strong government?

© Swedbank

Sweden Growing pains intensify

© Swedbank

Sweden: Strong but vulnerable growth

Key Economic indicators, 2015-2018 1/

2015 2016f 2017f 2018f

Real GDP (calendar adjusted) 3,8 3,2 2,6 2,4

Industrial production 3,9 2,0 2,4 2,9

CPI index, average 0,0 1,0 1,8 2,2

CPI, end of period 0,1 1,7 1,7 2,6

CPIF, average 2/ 0,9 1,4 1,8 1,7

CPIF, end of period 0,9 1,9 1,5 1,7

Labour force (15-74) 0,8 1,0 1,3 1,0

Riksbank policy rate, end of period -0,35 -0,50 -0,50 0,00

Unemployment rate (15-74), % of labor force 7,4 6,9 6,6 6,6

Employment (15-74) 1,4 1,6 1,6 1,1

Nominal hourly w age w hole economy, average 2,4 2,5 3,0 3,3

Savings ratio (households), % 16,3 16,0 15,9 16,2

Real disposable income (households) 2,5 2,9 1,8 2,1

Current account balance, % of GDP 5,4 4,9 4,8 5,1

General government budget balance, % of GDP 2/ 0,3 1,0 0,1 -0,3

General government debt, % of GDP 43,9 41,2 39,2 37,5

1/ A nnual percentage gro wth, unless o therwise indicated. 2/ C P I with f ixed interes t rates .

Sources: Statistics Sweden and Swedbank

• Domestic demand - key for economic

development

• During 2017-18, it will be increasingly

important for economic policy to facilitate

continued growth while reducing

vulnerabilities.

• Inflation trending upwards but not reaching

the target

• Expansionary monetary policy to be

gradually phased out

© Swedbank

Sweden: Growing pains intensify

17

Swedbank's GDP Forecast - Sweden

Changes in volume, % 2015

Households' consumption expenditure 2,7 2,1 (2,4) 2,1 (1,9) 1,8 (1,5)

Government consumption expenditure 2,5 3,6 (3,9) 2,0 (2,4) 1,8 (1,7)

Gross f ixed capital formation 7,0 6,8 (7,3) 4,0 (3,5) 3,3 (3,2)

private, excl. housing 6,6 3,8 (6,0) 2,5 (2,2) 2,6 (2,3)

public -0,5 5,9 (3,9) 5,2 (5,0) 5,3 (5,6)

housing 16,1 18,0 (14,4) 7,5 (6,3) 3,8 (4,1)

Change in inventories 1/ 0,3 0,3 (0,0) -0,2 (-0,1) 0,0 (-0,1)

Exports, goods and services 5,6 3,2 (2,6) 3,7 (3,3) 3,6 (3,1)

Imports, goods and services 5,5 4,3 (4,7) 3,8 (3,6) 3,5 (3,1)

GDP 4,1 3,3 (3,0) 2,4 (2,2) 2,3 (1,9)

GDP, calendar adjusted 3,8 3,2 (2,8) 2,6 (2,5) 2,4 (2,0)

Domestic demand 1/ 3,5 3,5 (3,8) 2,4 (2,4) 2,1 (1,9)

Net exports 1/0,3 -0,3 (-0,7) 0,1 (0,0) 0,2 (0,1)

1/ C o ntribut io n to GD P gro wth. So urces : Stat is t ics Sweden and Swedbank

N o vem ber 2016 fo recas t in parentheses .

2018f2017f2016f

© Swedbank

The Riksbank is ready but a rate hike put off until 2018

18

• Foreign central banks, strong economy, inflation and a weak krona help the Riksbank

• ECB important for monetary policy going forward

• Asset purchases, not including the reinvestment of holdings that mature and of coupon

payments, will cease by the end of summer 2017

• The Riksbank will hold over 40 per cent of the remaining stock in nominal bonds

• The Repo rate will reach zero at the end of 2018

1050 1051 1052 1047 1054 1057 1058 1059 1056 1053 Sum

Outst. Vol. (bn) 53,2 65,5 98,6 96,1 96,1 77,5 66,4 75,1 12,5 45,3 633,0

Bought in QE 1,5 25,0 39,9 45,9 39,6 34,1 25,9 26,6 0,0 2,0 240,4

"free float" 40,5 58,7 50,2 56,6 43,4 40,5 48,6 12,5 43,3

% volume 3% 38% 40% 48% 41% 44% 39% 35% 0% 4,4%

Total purchases: 240,4

Reinvestments: 10,7

QE ex reinvestments: 229,6

© Swedbank

The labour market is still strong but supply will catch

up soon

19

• Employment continues to increase at a fast pace, 190 000 over the years 2016-2018, but the growth

rate declines

• The labour force grows as well and is kept up by refugees who are accepted to the integration

scheme of the Swedish Public Employment Service

• Unemployment falls to a low of 6.5 per cent at the start of 2018 and increases then to 6.7 per cent by

the end of 2018

• Total hours worked increase considerably more than employment this year (assuming increasing

overtime and a falling share of underemployed). The difference diminishes in 2017.

© Swedbank

Strong growth in employment but division has

increased

20

• Strong increase in employment for foreign born inhabitants but the division in unemployment

between domestic and foreign born workers has grown

• Foreign born inhabitants cause the whole increase in the labour force during coming years

• Improving integration in the labour market is crucial

© Swedbank

Sluggish increase in wage growth troubles the Riksbank

21

• The wage increases in 2016 around the same size as in 2015 despite a stronger labour market

• Tough wage negotiations to be expected this year as well

• Increasing inflation, inflation expectations and labour shortages together with a weak SEK

arguments for gradually higher wage increases

• Weak growth in inflation and an insecure global environment suggest short contacts

© Swedbank

Demographic change drives development

22

• The population ages at the same time as the birth rate increases. The share of 0-19 year-olds

and those older than 80 constitutes an increasingly large share of the population. Demographic

development affects the labour market, the pension system and public finances.

• This increases the pressure on the public sector and the need for reform – demand for

education, health care and other services increases

• It is important to integrate the foreign born in the labour market in order to keep up the tax

base

© Swedbank

The age structure changes

23

• The population grows on a record speed. We will pass 10 million at the start of January and

reach 11 million in seven years.

The population ages at the same time as the birth rate increases

• The development implies a growing dependency ratio, but is restricted by higher than expected

immigration with a high proportion of working-age people

© Swedbank

Investment growth decelerates

24

• Broad investment recovery. Longest recovery since middle of 00’s.

• Capacity constrains within real estate sector dampen investments 2017-2018

• Low utilization rate postpones investment in industry

• Large investment needs in public sector and infrastructure boost public investments

© Swedbank

High investment ratio in Swedish economy

25

• Broad rebound in investment also when housing is excluded

• Growing investments in private service sector and in immaterial assets (Fou)

• Large investment needs in public sector

• Weak investments in the euro zone

© Swedbank

Boom in construction but with growing capacity

constrains

26

•

© Swedbank

Sluggish export recovery

27

• Slightly stronger demand in Europe and higher commodity prices support Swedish export - but

export growth will still be below historical average.

• Higher unit labour costs (ULC)and gradual stronger krona will worsen competitiveness during

2017-18.

• Geopolitical risks and weak global trade limit Swedish export of goods and service.

© Swedbank

A broad rebound in inflation in the end of 2016

28

© Swedbank

Volatile but increasing inflation

29

• Volatile inflation outlook due to higher taxes (April&May) and higher energy prices, but stabilizes during the

second half of 2017. Relatively modest domestic inflation through low hikes in rents and sluggish price

pressure from the labour market.

• In the end of the forecast period we foresee a higher domestic inflation larger impact on the domestic

inflation from higher wage increases and growing utilization rate in the economy.

• Growing divergence between CPI and CPIF in 2018 when the interest rates is expected to pick up slightly.

• A gradual stronger Krona in 2017-2018 will have a dampening impact on imported inflation

© Swedbank

The coffers of the public sector will be filled and

emptied before the election

30

• Strong economy increases tax revenues and contributes to a budget surplus 2016-17. Reforms

before the election will turn the surplus to a small budget deficit 2018. Prioritized areas include

among other things the labor market, reducing inequality, social welfare services and security.

• The duration of the tax revenues of the national debt office is uncertain. There are signals of

increased scope for reform.

• The public sector is pressed by integration, demography and population growth. A failure to

address these challenges would imply tax increases or growth in gov. debt in the long term

© Swedbank

Household consumption holds up, but households

retain high saving

31

• Household’s disposable income continues to rise, albeit at a slower pace. Tax increases in

2017 will have an impact

• Strong labor market and low interest rates provide support

• Consumption “saturation" and increasing cautions dampens consumption of durable goods

• Housing costs will increase due to rising energy prices and higher interest rates

© Swedbank

Consumption is losing momentum

32

• Retail sales growth has slowed but rising consumer confidence gives some recovery in the

near term

• Consumption, particularly of durable goods, will slow during the forecast period

– Disposable income is increasing at a slower pace

– Uncertainty around regulation and more cautious banks

– Indebtedness is high and interest rates rise slowly

– “Saturation” effect especially for cars

© Swedbank

High savings ratio persists

33

• The household savings ratio is around 16 percent, which is expected to continue

• Both “imperative" and “optional" savings increase

• Slightly rising interest rates, high debt ratio and austere message from both authorities and

banks will contribute to high precautionary saving

• Demographics: high proportion of the population in the age group 50 - 64

– high income and lower prosperity to consume

– Debt leverage around 60 percent and incentives for retirement savings keep up savings ratio

© Swedbank

High but slowing growth in household debt

34

• Household credit demand has dampened after the amortization requirement was introduced, continued

slowdown in the cards due to:

– Additional regulations

– More restrained banks

– Slowdown in housing prices

• Loan growth for housing is still twice as high as the rise in nominal disposable income

• At an aggregate level, households have a strong balance sheet, as wealth has increased more than debt

• Significant upturn also in “own" savings (Deposits/Bonds/Equities/Funds/Bills & coins)

© Swedbank

Advanced economies Growth momentum is rising

35

© Swedbank

EMU: Economic growth is rising amid political risk

36

• Barometers indicate economic growth is rising. We expect GDP growth at 1.6% this year

• Consumer confidence has improved. Consumption growth is likely to be maintained

• Monetary policy will remain exceptionally expansionary for quite some time though probably

not as long as markets now expect

• Political risk remains high. We do not expect Eurosceptic parties to assume power in either of

the upcoming elections, but the probability for such an event is certainly not zero

© Swedbank

UK: Economic rebalancing to be expected

37

• Indicators suggest a strong ending for 2016 and a positive start for 2017. However, growth is

expected to gear down gradually, which results in an extended period of weakerdevelopment.

• Households’ purchasing power weakens and futuregrowth in businessinvestments is meagre.

Neutralfiscal policy. Domestic demand is lower in 2017-18buttrade balance strengthens.

• Inflation increases due to weaker pound and higher energy costs. BoE weighs lower growth

against rising inflation. Tolerance for overshootinginflation is limited. Unchanged bankrate

expected.

© Swedbank

Brexit: Deadline approaching– (P.M.) May the force be

with you

• On January 24, the Supreme court will give its judgement whether or not the parliament should

be involved in invoking Art. 50. Neither House of Parliament is expected to bloc a Brexit. The

verdict could affect the time schedule. The P.M. wants to invoke Art. 50 in March, at latest.

• The government has published its Brexit-plan . The UK will leave the single market and retain

control over immigration (“hard” Brexit). Will not be a full member of the Customs union, but

wants a customs agreement with the EU.

• Long wish list but few sacrifices, an unsolvable equation.

• Uncertainties still prevails.

38

© Swedbank

Brexit: Deadline approaching – (P.M.) May the force be

with you

39

Supreme

court

judgement

EU wants to

complete the Brexit

terms

UK wants to end

negotiations. UK

parliament votes

Brexit!

Implementation phase

& discussions on new

deals?

British

deadline

Jan 17

Article

50

Mar 17

15-18m divorce,Sep-Oct 18

4-5m, Mar 19

Maj 19+

EU-parliament, Council &

European Council vote

© Swedbank

UK: GBP responds to politics rather than economic data

40

• GBP sensitive to political initiatives on Brexit. The market is partially pricing in a hard Brexit.

• Continued GBP weakness expected due to high uncertainties.

• The earlier the conditions are known, the better for GBP. A long period of uncertainty weighs on

GBP. At time expect high volatility that responds to politics rather than economic fundamentals.

• A weaker GBP makes economic rebalancing easier and enhances the trade balance. Consider

GBP as a buffer when fiscal policy is neutral and BoE has little room for action.

© Swedbank

Japan: some good news, finally

41

• Modest recovery with the help of an ultra-loose monetary policy and a fiscal stimulus. Export volumes and

manufacturing production have strengthened in recent months, but consumption growth remains disappointing due

to slow growth of real wages.

• A weaker yen and higher energy prices have started to lift consumer prices. However, it looks unlikely that the

central bank will be able to achieve the 2% inflation target during Kuroda’s term that ends in April 2018. No major

shifts in policy are expected during 2017. Due to the decreasing availability of government bonds, the focus of the

BoJ is expected to shift to controlling the long-term and short-term rates.

© Swedbank

US Faster momentum to carry over into 2017

© Swedbank

US: Faster momentum to carry over into 2017

43

• US economy gathered steam during second half of 2016

• Consumers to drive short-term growth, but will be increasingly constrained

• Private investments to remain subdued

• Fiscal policy, trade and deregulation push main uncertainties. Infrastructure package and tax

cuts likely, and despite cuts to other spending, overall fiscal policy to turn more expansive.

• Strong labour market to become tighter ahead and broad-based cost pressure building

© Swedbank

US: Nearing fulfilment of Fed’s dual mandate

44

• US economy at, or near, “maximum employment” objective

• Inflation also making steady progress towards target

• Fed hikes twice 2017 and twice 2018 for a Fed funds range of 1.50%-1.75% at end-2018

• Towards end of forecast period, Fed will also very gradually begin to scale back reinvestments

© Swedbank

US: Trump, Republican Congress and US economy

45

• Protectionist advisors, establishment of trade council suggest Trump to press ahead on trade

• Congress plays key role, puts repealing ACA ahead of other “Trumponomics” issues

• No further specifics on infrastructure package. Priorities? Financing?

• Overall fiscal policy to turn more expansive, but non-infrastructure spending cut back

• Tax cuts & reform as well as deregulation could give productivity boost

• Trump causing irreparable damage to the institutional framework?

Emerging Markets Diverging impact

46

© Swedbank

Emerging Markets: Mixed development

47

• We expect unusual mixed development between emerging market economies

• Resource based economies like Russia and Brazil will benefit from higher commodity prices

• A stronger dollar and higher US rates are negative for a number of EM countries

• China – Fiscal policy will remain stimulative but uncertain effects without housing as driver

• India – Short term dip in consumption after anti-corruption move

© Swedbank

China: Stop-go policy challenged

48

• Growth has been driven by housing which is now over-heated

• Fiscal policy will remain expansionary but uncertain which other sectors will fill the gap

• Politically important to keep the economy going before the party congress in 2018 when many

politicians are replaced

• US trade policy is a risk for growth

• A stronger dollar is a risk for further capital outflows and downward pressure on the renminbi

© Swedbank

Brazil: Recovery helped by higher commodity prices

49

• Still in recession but the economy has stabilized

• Some political progress as the government passed a spending cap

• The social security system also needs to be reformed for in order to consolidate the budget…

• …which will be a challenge in a recession with low confidence in government politicians

• Lower inflation opens up for more rate cuts

© Swedbank

India: Short term pain after anti-corruption move

50

• The majority of all money notes was exchanged in an anti-corruption move

• Consumption will take a severe hit short term as India is very reliant on cash

• Long term intentions are good

• However, the move comes at a time when investments are already weak

• The reform process remains slow

© Swedbank

Russia: subdued recovery unless sanctions are lifted

51

• Recovery led by industry. Labour markets lag, retail still down 5%YoY. PMIs show expectations

of broader/stronger recovery. With less inflation, CBR to resume its policy rate cuts (now 10%)

to 8% in end-2017, 6.5% in end-2018. RUB/USD strengthening to 55 at end-2017, 49 at end-

2018, due to rising oil price. GDP down 0.5% in 2016, up 1.5% and 2% p.a. in 2017-18.

• Sanctions against Russia to be eased in 2017, but without a major positive impact on its GDP

and the ruble as the major ones (i.e., financial markets and technologies) remain. Russia may

ease its sanctions against the West in 2018, but without major gains to the Baltic exporters.

© Swedbank

USD gaining strength through relative yield advantage

53

USD having a large yield advantage explaining the latest rally

Further USD gains in sight due to higher risk premium in EUR

Further rally below parity against EUR is depending on Fed outlook and

requires more hikes than is currently discounted on the market.

Outlook for more aggressive hikes could vanish due to already tight financial

conditions

© Swedbank

SEK driven by short term yield spreads

54

The latest SEK development has been driven by yield spread supported by

robust macro development

SEK expected to depreciate against USD in the short term but going to gain

ground in the longer term

The elevated political risk in Europe will depress EUR against SEK during this

spring

© Swedbank

Swedish macro data picking up

55

Swedish macro surprises on the upside

We consider the Swedish krona fundamentally undervalued regarding the

relative strength in Swedish economy

SEK is expected to trade stronger further on due to more relaxed Riksbank

and improved underlying inflation trend

© Swedbank

Steeper yield curves and higher inflation expectations

57

Rising optimism on fixed income market due to positive fiscal outlook and

central bank communication

Global yield curves steepened due to rising long end in wake of the reflation

impulses

Market expectations on long-term inflation outlook turned to positive

© Swedbank

Latest bond sell off mainly driven by increased risk

premiums in highly correlated bond market

58

The global bond market highly correlated today due to strong international ties

on financial market activity and global trade

Spillover effect into other markets

However, the relative contribution to the latest rate increase driven more by

increased term premium than by increased inflation or monetary policy

expectations

© Swedbank

Yield curve development driven by rate hike

expectations and outlook for central banks’ quantitative

easing

59

The yield curve development can change in light of new central bank optimism

The US yield curve is expected to flatten in the long term but in a lesser degree than in

previous hiking cycles. An increase in supply of US treasuries and Feds eventual intention

to gradually scale down the balance sheet will counteract the flattening on an already

historically depressed US yield curve

Swedish yield curve relatively steep vs Germany - partly driven by inflation divergence

between Sweden and Euro area

© Swedbank

The timing for the end of QE will be the key for the

Swedish bond market

60

The Swedish bond market liquidity is very tight due to relative size of QE –

could have increased the liquidity risk premium for Swedish bonds

Swedish bond market relatively more vulnerable for QE termination

considering the size of outstanding stock

Swedish bond market has historically correlated highly both with US and

German yields but the QE-outlook elementary for Swedish bond market

development further on

© Swedbank

The Nordic and Baltic Countries

61

• Norway: The worst is (probably) past

• Denmark: A solid economic performance,

also looking forward

• Finland: Will it be able to catch the train?

• Estonia: Grab the opportunities and grow!

• Latvia: growth is picking up, investments to

rebound

• Lithuania: wages grow, people leave

The Nordics Growth is stabilising

62

© Swedbank

Norway: The worst is (probably) past

63

• We expect Mainland GDP growth to pick up to 1.5% this year, twice that of 2016

• Registered unemployment has stabilised in the oil region and is falling elsewhere

• Rising consumer confidence and receding inflation suggest household demand will strengthen

• Risks are rising for a boom-and-bust cycle in house prices and construction activity

• We expect no more rate cuts to the key policy rate in this cycle as worries about the downturn

in oil have receded relative to worries about financial instability

© Swedbank

Denmark: A solid economic performance, also looking

forward

64

• A significant upward revision of GDP data paints a more upbeat picture of the Danish economy over the last couple

of years. the labour market has performed solidly and real income also rose on the back of depressed inflation.

• Growth should reach 1½-2% in the next two years and the main drivers will be household consumption backed by

rising employment and wages. A growing shortage of qualified employees risks limit growth potential as well as

eroding external competitiveness. Over the medium to long term the labour force is expected to contract being

significantly lower than in neighbouring Sweden and Norway.

• Housing prices and household debt levels remain a significant risk to the economy and external risks are mainly

related to the fallout from Brexit; UK being one of Denmark’s main trading partners.

© Swedbank

Finland: Will it be able to catch the train?

65

• Economic growth made a strong recovery in 2016 relying on the growth of private consumption

and construction sector investments. However, the growth in private consumption was partly based

on decline in savings and construction sector is expected to have reached its peak.

• The gap between wage and productivity has started to narrow, boosting competitiveness, but the

growth of export volume has remained sluggish.

• In 2017 and 2018 private consumption and investments’ growth is expected to slow. Exports will

improve, but not enough to keep the current growth pace. GDP growth will decelerate to 0.9% in

2017 and 1% in 2018.

The Baltics Expansion despite external turbulence

66

© Swedbank

Estonia: Grab the opportunities and grow!

67

• Despite the GDP slowdown, 2016 was a positive turnaround in several economic indicators. Industrial output

volume increased and export growth accelerated. At the same time enterprises credit portfolio has increased

with accelerated pace and non performing loans ratio is declining.

• In 2017-2018, foreign demand is expected to improve and investments to recover. The growth in export

prices will contribute to the rise in turnover and lessen the negative impact of increasing labour cost.

• In 2017, inflation in Estonia is expected to accelerate to around 3%, due to more expensive commodities,

and new rounds of excise tax hikes on alcohol, tobacco, and fuels

• The growth of purchasing power is expected to slow dramatically in 2017, whereas in 2018 a substantial

increase in the non-taxable income will push the growth of average net wage up by 9% in real terms.

© Swedbank

Latvia: growth is picking up, investments to rebound

68

• 4Q to mark a pickup in growth (good preliminary data on industrial output, export, retail sales), but

due to the investment slump GDP estimated to have grown only 1.6% in 2016. EU funds’ inflow

and turning credit cycle to boost investments and push GDP growth to 2.9% and 3.1% in 2017-18.

• Exports to grow solid 4% p.a. supported by external demand. Investment recovery to revive job

creation, pushing unemployment below 8% in 2018, supporting wage and consumption growth.

Fiscal policy has turned more expansionary, but fiscal stance to remain solid.

• Structural policies back in focus: education reforms are stepped up, changes in tax code to be

drafted in spring, health care and administrative reforms likely to be next in line.

© Swedbank

Lithuania: wages grow, people leave

69

• Contracting inventories will not drag growth anymore and investments will rebound – GDP will

accelerate from 2.0% last year to 2.8% in 2017, but slow down slightly to 2.5% in 2018.

• Employment will be shrinking due to lack of labour force; purchasing power growth limited by

higher inflation. Export growth will accelerate somewhat, but costs competitiveness is eroding.

• After declining steadily for three years, emigration increased by 21.6% in 2015 and by 14.5% in

2016 – despite higher wages and more job vacancies. Some of it may have been only on paper.

• Much will depend on new governments’ policies, which point in the right direction in most cases.

© Swedbank

Appendix 1: Estonian outlook

70

ESTONIA: Key economic indicators, 2015-2018 1/

2015

Real GDP grow th, % 1.4 1.2 (1.3) 2.2 (2.4) 2.8 (2.5)

Household consumption 4.6 4.0 (3.8) 3.2 (3.0) 3.8 (3.0)

Government consumption 3.4 1.4 (0.5) 3.0 (2.0) 2.0 (2.0)

Gross f ixed capital formation -3.4 -1.0 (2.0) 5.0 (6.5) 4.5 (5.0)

Exports of goods and services -0.6 4.0 (2.6) 3.5 (3.6) 3.7 (3.7)

Imports of goods and services -1.4 5.6 (4.6) 5.0 (5.0) 4.5 (4.5)

Consumer price grow th, % -0.5 0.1 (0.1) 3.0 (2.6) 2.7 (2.4)

Unemployment rate, % 2/ 6.2 6.9 (6.9) 7.5 (7.2) 7.7 (7.5)

Change in employment, % 2.6 0.8 (0.9) -0.2 (-0.2) -0.1 (-0.1)

Real net monthly w age grow th, % 8.0 7.4 (7.5) 2.2 (2.5) 8.7 (2.1)

Nominal GDP, billion euro 20.2 20.8 (20.9) 21.8 (21.9) 23.0 (23.0)

Exports of goods and services (nominal), % grow th -2.1 3.7 (2.4) 4.5 (4.1) 5.3 (5.2)

Imports of goods and services (nominal), % grow th -3.1 4.1 (3.4) 5.5 (5.5) 6.1 (6.1)

Balance of goods and services, % of GDP 4.1 3.9 (3.4) 3.2 (2.4) 2.4 (1.7)

Current account balance, % of GDP 2.2 2.2 (1.1) 1.5 (0.2) 0.7 (-0.6)

Current and capital account balance, % of GDP 6.5 5.4 (3.1) 4.8 (2.2) 3.2 (0.4)

FDI inflow , % of GDP -2.9 3.4 (3.8) 3.7 (3.7) 3.9 (3.9)

General government budget balance, % of GDP 3/ 0.1 0.2 (0.3) -0.6 (-0.6) -0.4 (-0.2)

General government debt, % of GDP 10.1 9.4 (9.4) 10.5 (10.2) 10.9 (11.0)

1/ Nov ember 2016 f orecast in parenthesis

2/ According to Labour Force Surv ey

3/ According to Maastricht criterion

2016e 2017f 2018f

© Swedbank

Appendix 2: Latvian outlook

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LATVIA: Key economic indicators, 2015-2018 1/

2015

Real GDP grow th, % 2.7 1.6 (1.6) 2.9 (2.6) 3.1 (2.9)



Gross f ixed capital formation 2.8 -20.0 (-11.0) 12.0 (8.0) 10.0 (10.0)

Exports of goods and services 2.6 2.5 (2.5) 4.0 (4.0) 4.0 (3.7)

Imports of goods and services 2.1 3.8 (3.8) 6.0 (6.0) 6.5 (6.5)

Consumer price grow th, % 0.2 0.1 (0.0) 2.5 (2.5) 2.0 (2.0)

Unemployment rate, % 2/ 9.9 9.7 (9.5) 8.5 (8.7) 7.9 (8.3)

Change in employment, % 1.3 -0.2 (0.2) 0.6 (-0.2) 0.7 (0.2)



Exports of goods and services (nominal), % grow th 2.1 0.1 (0.4) 4.5 (5.0) 5.6 (5.7)

Imports of goods and services (nominal), % grow th 0.8 -2.7 (-0.9) 7.7 (8.1) 8.1 (8.6)

Balance of goods and services, % of GDP -1.1 0.6 (-0.3) -1.2 (-2.1) -2.6 (-3.8)

Current account balance, % of GDP -0.8 1.0 (0.5) -0.6 (-1.3) -1.9 (-3.1)

Current and capital account balance, % of GDP 2.0 2.1 (1.6) 1.9 (1.2) 0.3 (-0.9)

FDI inflow , % of GDP 2.8 0.8 (0.8) 2.3 (2.7) 2.4 (2.8)

General government budget balance, % of GDP 3/ -1.3 -0.9 (-0.9) -1.0 (-1.1) -1.1 (-1.1)



2/ According to Labour Force Surv ey

3/ According to Maastricht criterion

2016e 2017f 2018f

© Swedbank

Appendix 3: Lithuanian outlook

72

LITHUANIA: Key economic indicators, 2015-2018 1/

2015

Real GDP grow th, % 1.8 2.0 (2.0) 2.8 (2.8) 2.5 (2.5)



Gross f ixed capital formation 4.7 0.0 (4.0) 7.0 (7.0) 6.0 (6.0)

Exports of goods and services -0.4 3.0 (5.0) 5.0 (6.0) 4.5 (5.5)

Imports of goods and services 6.2 2.0 (4.0) 6.0 (7.0) 5.5 (6.5)

Consumer price grow th, % -0.9 0.9 (1.0) 3.0 (3.0) 2.5 (2.5)

Unemployment rate, % 2/9.1 8.0 (8.0) 7.4 (7.4) 7.2 (7.2)

Change in employment, % 1.2 1.8 (1.9) -0.2 (-0.4) -0.2 (-0.4)



Exports of goods and services (nominal), % grow th -4.3 0.0 (1.0) 7.0 (8.0) 6.0 (6.5)

Imports of goods and services (nominal), % grow th -1.2 -2.7 (-1.5) 9.0 (9.5) 7.0 (7.5)

Balance of goods and services, % of GDP -0.7 1.4 (1.2) 0.0 (0.2) -0.7 (-0.5)

Current account balance, % of GDP -2.3 0.0 (-0.6) -0.7 (-0.5) -1.4 (-1.2)

Current and capital account balance, % of GDP 0.7 1.3 (1.0) 1.5 (1.7) 1.6 (1.8)

FDI inflow , % of GDP 2.3 0.0 (0.5) 1.0 (1.0) 1.0 (1.0)

General government budget balance, % of GDP 3/-0.2 0.0 (0.0) -0.8 (-0.8) -0.5 (0.5)



2/ According to Labour Force Surv ey .

3/ According to Maastricht criterion.

2016e 2017f 2018f

© Swedbank

Contact Information

73

Swedbank Research

Olof Manner

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Head of Research

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Macro Research Strategy

Anna Breman Knut Hallberg Nicole Bångstad Vaiva Šečkutė Sara Arfwidsson

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Tõnu Mertsina Åke Gustafsson Sihem Nekrouf Siim Isküll

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