SEB : SEB: Nordic Outlook: Monetary tailwind meets political headwind Global growth has bottomed out -deleveraging slows

 SEB : SEB: Nordic Outlook: Monetary tailwind meets political headwind Global
             growth has bottomed out -deleveraging slows recovery

The needle of the world economic compass is pointing in the right direction.
Our forecast scenario from the autumn of 2012 remains in place. Global growth
will increase both in 2013 and 2014, but at a subdued pace and at divergent
speeds in different countries and regions. A number of positive forces are in
motion: global monetary policy is becoming more growth-focused; the recovery
in the United States and China is on increasingly firm ground; Japan has
launched a new economic stimulus programme; greater political flexibility
permeates governments' fiscal tightening efforts and the introduction of
banking regulations and standards; the imbalances in the euro zone are

But it is too early to breathe a sigh of relief and lean back. Growth is being
effectively held back because households, governments and banks in the Western
world have not yet achieved their debt consolidation targets. There is still
heightened economic and political uncertainty in the US, Europe and China due
to American budget uncertainty, deep euro zone problems and China's change of
leadership. This destabilises the optimism of industrial firms, which may
easily be transformed into a self-amplifying downward spiral of postponed
capital spending and hiring decisions. Gross Domestic Product (GDP) in the 34
countries of the Organisation for Economic Cooperation and Development (OECD)
will grow by 1.5 per cent in 2013 (up from 1.3 per cent in 2012) and 2.1 per
cent in 2014. Global resource utilisation will be low during this forecast
period. Continued high unemployment will push down the rate of pay increases.
OECD inflation will remain stable at 1-2 per cent, even though the balance
sheets of central banks will continue to grow during 2013. 

The spotlight will fall on monetary policy and its targets, techniques and
independence. This is because of low growth expectations and high unemployment
in the OECD countries, while fiscal policy is constrained. A monetary policy
evolution or revolution is unfolding. This means, for example, that an
inflation targeting policy is being expanded into nominal GDP growth and
nominal credit growth targets and a "fiscalisation" of monetary policy, in
which the decisions of central banks move closer to governments and
parliaments. The pattern that is emerging, in public discourse and with the US
and Japan as practical examples, implies that central banks are being
pressured to accept higher inflation and increased inflation risks in order to
achieve lower unemployment and more job creation. In the short term, this is
positive for global economic growth, but it pushes inflation expectations and
long-term yields upward, increases the need for macroprudential supervisory
tools and generates capital flows and appreciation pressure for Nordic and
Asian currencies, among others. Our conclusion is that the US Federal Reserve
will leave its key interest rate at 0-0.25 per cent during our forecast
period, since US unemployment will end up at 6.8 per cent in 2014 - above the
Fed's 6.5 per cent benchmark. The Bank of England and the European Central
Bank (ECB) will not touch their key rates during 2013-2014 either. 

The economic outlook in the US and China will steadily continue improving.
This will add stability, risk appetite and dynamism to the world economy
despite continued problems in Europe. In the US, the underlying growth trend
will gain strength. US households are now close to debt levels that are
sustainable in the long term. Meanwhile we expect home prices to climb by at
least 10 per cent in 2013-2014. In addition, industrial firms have been
under-investing for years. There will be no major growth surge, however, due
to a dose of fiscal tightening totalling 1.2-1.5 per cent of GDP per year, and
because of continued high unemployment. American GDP will grow by 2.1 per cent
this year and 2.7 per cent in 2014. US federal budget policy is an obvious
source of concern and growth risk, but we expect that given his politically
stronger position, President Obama will reach agreements with Congress this
spring. As a result, public sector debt will peak at 115 per cent of GDP in
2015 and then decline very slowly. The Fed will hike its key interest rate
only after our forecast period, in the spring of 2015, while its bond
purchases (quantitative easing) will end early in 2014. This exit policy will
be end immediately if it leads to undesired increases in long-term yields.

In China, government economic policy is expected to become clearer this spring
after the change of leadership, which will support higher capital spending and
consumption. What is happening in China is a historic economic, financial and
political experiment with an uncertain outcome. Social discontent, home price
and goods inflation, border disputes as well as questions about - and the
impact of - China's new growth model are significant risks to growth, but the
likelihood that they will materialise during our forecast period is small. We
expect China's GDP to grow by 8.1 per cent in 2013 and by 7.7 per cent in
2014. This is above the political target of 7.5 per cent and well above the 6
per cent GDP growth that is regarded as a critical level to enable the country
to avoid rising unemployment. The central bank will begin a cautious key
interest rate hiking cycle late in 2013 from a rate of 6.00. We expect the
yuan to become about 5 per cent stronger against the US dollar during

The euro zone's acute crisis has faded but its problems are far from solved.
Euro zone countries have made both economic and political progress. Without
the presence of the ECB's crisis mitigation mechanisms, however, borrowing
costs for governments and banks would not have fallen and financial stress
decreased. Corrections are under way in euro zone competitiveness and
imbalances, but further structural reforms are necessary to create lasting
current account surpluses that will reduce large external debts and
refinancing risks. We expect the euro zone to show near-zero growth in
2013-2014, while unemployment will rise to a new record level of 12.4 per
cent. According to the OECD, the euro zone's banking system is EUR 400 billion
undercapitalised, which hampers credit supply and economic growth.

Our euro zone scenario still contains large elements of political uncertainty.
European cooperation and crisis resolution capacity will be tested at both
national and supranational levels by social pressures and coming parliamentary
elections (for example in Italy and Germany in 2013 and at the EU level in
2014) and growing calls for referendums related to the emergence of a new
European political union. There is still a disturbingly high probability that
at least one country, for example Greece, will choose to withdraw from the
euro zone, although the immediate risk has diminished. As we have indicated
earlier, we believe that Spain will need an emergency loan to deal with that
instability that permeates the Spanish economy and banking system. During the
next two years, an escalating debate on the future of both the euro and the EU
will add uncertainty to economic policy, thus hampering growth. As a result of
this, we predict that the euro will lose value against the dollar, especially
during 2014; the EUR/USD exchange rate in December 2014 will stand at 1.20.

Sweden's economic slowdown will persist in 2013-2014, but growth has already
bottomed out despite a surprisingly weak year-end 2012. We are thus sticking
to the forecast we presented last autumn. The recovery will occur with support
both from underlying capital spending and consumption potential and from the
government and the Riksbank (Sweden's central bank), which will take new steps
to stimulate the economy. The dose of government fiscal stimulus in 2014 will
be as large as in 2013 (about SEK 25 billion or 0.7 per cent of GDP), focusing
primarily on households for tactical political reasons: next year's
parliamentary elections at the EU and national levels. The net lending deficit
will be about 1.5 per cent of GDP in both forecast years, and central
government debt will climb by 3 percentage points to more than 36 per cent of
GDP (including the latest loan to the Riksbank). Yet these developments will
pose no threats to confidence that would raise Sweden's interest rate margins.
Sweden's zero inflation environment, the fiscal stimulus and this spring's new
collective agreements in the labour market - which are expected to result in
total pay increases of less than 3 per cent - will generate strong real
purchasing power for households, whose overall savings ratio will be above 10
per cent. Sweden's GDP will grow by 1.2 per cent in 2013 (up from 0.8 per cent
in 2012) and will reach 2.5 per cent in 2014.

The Riksbank will cut its key interest rate to 0.75 per cent and then leave it
unchanged for the rest of our forecast period. There are a number of reasons
for this. Resource utilisation will remain low and unemployment will be at a
high 8.2 per cent in 2014, or 1.5 percentage points higher than on the day of
the 2006 parliamentary election. Cost pressures are being pulled down, and
inflation - both CPI and CPIF inflation (CPI without interest rate changes) -
will stay below 2 per cent during our forecast period. Meanwehile global
monetary policy is moving towards greater flexibility in interpreting the
scope for inflation, and this will result in expansionary monetary conditions
for extended periods. The Riksbank will find it difficult to "stand out from
the crowd" without pushing up the value of the Swedish krona. Our forecast is
that in effective exchange rate terms (TCW), the krona will appreciate by 4
per cent. This is equivalent to an interest rate hike of around 1 percentage
point. In December 2013, the EUR/SEK and USD/SEK exchange rates will be 8.30
and 6.50, respectively; in December 2014 they will stand at 8.10 and 6.75.

As earlier, the joker in the pack when setting the key interest rate is
household debt. Our forecast is that household debts will increase by 4-5 per
cent a year in 2013-2014. We believe this is consistent with the Riksbank's
tolerance level. According to our calculations, stable home prices combined
with low residential investments indicate that lending growth will decelerate
rather than accelerate. Too much focus on debt may also turn into a growth
risk for Sweden. Looking ahead, we expect housing construction in Sweden to
be low in relation to population growth. This is due to such factors as
building legislation and rent controls, which affect profitability. Since the
Swedish political landscape does not allow room for decisions that will
stimulate construction, understandably restrictive lending practices may also
worsen the construction situation even more, adversely affecting long-term
growth. The need for macroprudential supervisory tools is increasing, but due
to disunity among the Riksbank, government and Financial Supervisory Authority
about these tools and the allocation of responsibility - as well as the need
for international coordination - it may take time before such tools are in
place. This is a major dilemma for the Riksbank.

A subdued global recovery will mean that the other Nordic countries and the
Baltic countries must rely on stronger domestic demand - consumption and
capital spending - for increased economic activity during the next two years.
The potential is good, thanks to generally strong fundamentals. Norway will
continue to stand out, sustained by both its domestic economy and demand for
oil. GDP growth will end up at 2.4 per cent in 2013 and 2.3 per cent in 2014.
Norges Bank will begin its interest rate hiking cycle this autumn; the bank's
key rate (now 1.50 per cent) will be 1.75 per cent at the end of this year and
at 2.50 per cent at the end of 2014. If appreciation pressure against the
Norwegian krone becomes too great, key rate hikes will be postponed. Meanwhile
the situation is troublingly weak in Denmark and Finland, and GDP growth will
barely exceed 1.5 per cent in 2014. Danish households are being squeezed by
high debt and a continued weak real estate market. Finland's export sector is
clearly feeling the impact of problems elsewhere in Europe, but is expected to
benefit from the higher Swedish krona. In Estonia and Lithuania, growth will
end up just above 3 per cent in 2013 while Latvia will achieve nearly 4 per
cent. During 2014, growth in the three Baltic countries will reach around 4
per cent. A continued favourable economic trend in the Baltics may be
jeopradised by accelerating pay increases, in the absence of corresponding
productivity gains. Latvia will switch to the euro on January 1, 2014.

Key figures: International and Swedish economy

International economy. GDP, year-on-year changes, % 2011 2012 2013 2014
United States                                       1.8  2.2  2.1  2.7
Euro zone                                           1.4  -0.5 -0.3 0.9
Japan                                               -0.5 2.0  1.3  1.5
OECD                                                1.8  1.3  1.5  2.1
China                                               9.3  7.8  8.1  7.7
Nordic countries                                    2.3  1.0  1.3  2.2
Baltic countries                                    6.4  4.0  3.4  3.9
The world (purchasing power parities, PPP)          3.8  3.3  3.7  4.1
Swedish economy. Year-on-year changes, %
GDP, actual                                         3.7  0.8  1.2  2.5
GDP, working day corrected                          3.7  1.1  1.2  2.7
Unemployment, % (EU definition)                     7.5  7.7  8.2  8.2
Consumer Price Index (CPI) inflation                3.0  0.9  0.1  1.3
Government net lending (% of GDP)                   0.2  -0.7 -1.3 -1.3
Repo rate (December)                                1.75 1.00 0.75 0.75
Exchange rate, EUR/SEK (December)                   8.91 8.58 8.30 8.10

For more information, please contact          Press contact
Robert Bergqvist, +46 70 445 1404             Anna Helsén, Press & PR
Daniel Bergvall, +46 8 763 8594               +46 70 698 4858
Mattias Bruér, +46 8 763 8506       
Olle Holmgren , +46 8 763 8079
Mikael Johansson, +46 8 763 8093              
Andreas Johnson, +46 8 763 8032
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in Sweden and the Baltic countries offers financial advice and a wide range of
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