SEB : SEB: Nordic Outlook: Fight against economic slowdown escalates

     SEB : SEB: Nordic Outlook: Fight against economic slowdown escalates

Sweden under pressure to re-assess its economic policy framework

The growth rate in the world economy is accelerating, but activity is still
divergent and anaemic. Gross domestic product (GDP) in the 34 countries of the
Organisation for Economic Cooperation and Development (OECD) will grow by 1.3
per cent in 2013 and 2.3 per cent in 2014. Our scenario of low international
price pressures remains in place; if anything, inflation has provided downside
surprises because of low resource utilisation and downward pressure on wages
and salaries as well as on commodity prices. Meanwhile both fiscal austerity
policies and the targets, techniques and independence of central banks are
under re-assessment. Although official economic policies enjoy market
confidence - as reflected, among other things, by low bond yields and rising
stock markets - changes in fiscal and monetary policy are also creating

Factors on the plus side for global growth are cyclical forces and monetary
policy. Capital spending and inventory levels are depressed. In the United
States, which is playing a key role in the economic recovery, household
consumption is buoyed by rising home prices and share prices as well as by the
near-completion of the debt deleveraging process. Emerging economies will
accelerate cautiously, although several of these countries have suffered
recent setbacks. Various central bank actions are ensuring low interest rates
and an unlimited supply of liquidity, while fiscal austerity policies are
being softened. On the minus side is the euro zone, which - despite its
progress in correcting imbalances - is still struggling with a dangerous
combination of weak growth, undercapitalised banking systems and inadequate
credit supply, high government debt and political instability.

Central banks are continuing to postpone their exit policies. They are able to
do so because of low inflation, weak growth and the development of alternative
(macroprudential) tools. The main risks associated with unconventional
monetary policies have to do with the failure of political leaders to make
necessary reform decisions and with malfunctions in financial market pricing.
We expect the US Federal Reserve to continue its monthly securities purchases
during 2013 and to begin a phase-out only in early 2014. The federal funds
rate will remain at 0-0.25 per cent throughout our forecast period. The
European Central Bank (ECB), like Sweden's Riksbank, will lower its key
interest rate this summer by 0.25 percentage points - to 0.25 and 0.75 per
cent, respectively. These rates will remain in place until the end of 2014. We
do not expect the ECB to introduce negative interest rates, due to the risk of
undesired effects in the functioning of the interbank market and systemic
technical problems. The upturn in long-term yields until the end of 2014 will
not exceed 40-60 basis points. If the easing of fiscal austerity policy is not
supplemented by restructuring measures and long-term plans to bring down
government debt - while monetary policy is increasingly subjected to political
control - there is a risk of significantly driving up both inflation
expectations and interest rates.

In terms of global economic and financial policies, Japan is a joker in the
pack. The international community and the Japanese themselves have given the
green light to "Abenomics", a set of economic policies named for Prime
Minister Shinzo Abe. During our 2013-2014 forecast period, Japan's
expansionary fiscal policies and radical monetary policies will signify a
positive injection in the world economy via faster growth and downward
pressure on global interest rates. In the long term, Japan is instead a risk
factor. Unless Abenomics leads to higher pay and increased labour market
participation, especially for women, Japan will have a destabilising effect on
the world economy. Our risk analysis implies that an upturn in Japanese
long-term yields of 150-200 basis points (to 2.5-3 per cent) is manageable
both to Japan and the world.

The euro zone is struggling with serious challenges that are keeping the
future of the euro project uncertain. We expect GDP in the currency area to
fall by 0.7 per cent in 2013 and grow by 0.7 per cent in 2014. The German
economy is also feeling the effects of euro zone recession, and we expect GDP
growth of only 0.3 per cent this year and 1.3 per cent in 2014. Chancelor
Angela Merkel will not deliver an expansionary fiscal policy, despite the
September 2013 election and international calls for more active German budget
stimulus. The economic performance of France will be even worse, with
President François Hollande under pressure to turn around an unfavourable
trend. ECB monetary policies and the European Stability Mechanism (ESM)
bail-out fund have nevertheless sharply reduced the liquidity risks facing
euro zone governments and banks. Ongoing competitiveness adjustments and
belt-tightening policies are pushing down current account and budget deficits
in various crisis-hit countries of the euro zone. The easing of austerity
measures will give countries more time to achieve fiscal targets and to
stabilise their political and economic situation.

But other fundamental problems remain. The credit supply in southern Europe is
inadequate, due to weak banks, over-indebted households and businesses as well
as falling home prices. Current account improvements are mainly attributable
to weak domestic economies. Unemployment will continue to climb, reaching a
new record level of 12.4 per cent in 2014. Efforts to create a political union
- an important stabilising factor - are taking ever-shorter and slower steps
forward. The euro is being pushed down by the economic trend. The fact that
austerity policies are being re-assessed may also lead to uncertainty about
the sustainability of international bail-out loan agreements. The EUR/USD
exchange rate will stand at 1.26 by the end of this year and 1.20 at the end
of 2014.  

The US economy will continue its rebound after a temporary slowdown in
activity during the next few quarters, due among other things to the automatic
"sequester" cutbacks in the public sector. We expect GDP to grow by 2.0 per
cent in 2013 and by 3.2 per cent in 2014 without signs of rising inflation
pressure. The labour market will improve slowly, but since the ongoing decline
in labour market participation will level out, unemployment will not drop to
6.5 per cent - the level at which the Fed is supposed to re-assess its
near-zero key interest rate - before the end of 2014. Budget policy remains a
source of political turbulence, but federal budget deficits are shrinking
faster than expected. We forecast that federal debt will peak at 105-110 per
cent of GDP. Meanwhile the housing market will continue to recover, with home
prices rising 7-10 per cent both in 2013 and 2014.

The slowdown in China during the past few months does not change our overall
picture of continued solid GDP growth of 7.9 per cent in 2013 and 7.7 per cent
in 2014, well above China's critical growth level of 6 per cent. The
leadership change has now been formally completed, but it is too early to say
how willing the Xi administration is to implement reforms. Generally speaking,
inflation pressure is low, with core inflation below 2 per cent and producer
prices still falling year-on-year. Home prices have begun to accelerate,
increasing the pressure for measures to slow credit expansion. During the
fourth quarter of 2013, the central bank will hike its key interest rate by
0.25 percentage points to 6.25 per cent. By the end of 2014, the key rate will
be at 6.75 per cent. The yuan will continue to appreciate, but at a somewhat
slower pace. At the end of 2014, the USD/CNY exchange rate will be 6.00.

In Sweden the recovery is continuing, but at a troublingly slow pace. The euro
zone is weighing down exports and capital spending growth, while strong
households will keep consuming despite rising unemployment. An increasing
labour supply during the next couple of years, following a more long-term
trend that has included a sharp reduction in the number of people taking sick
leaves and early retirement as well as an increase in those working past their
65^th birthday, will lead to a continued rise in unemployment during 2013 to
8.2 per cent, followed by a cautious decline in 2014. GDP will grow by 1.3 per
cent in 2013 and 2.5 per cent in 2014. We expect the Consumer Price Index
(CPI) to show weak deflation in 2013, and price increases in 2014 will be a
modest 0.8 per cent. Household consumption will be sustained by strong income
growth, a high savings ratio (11.4 per cent) and rising stock market prices.
We expect home prices to rise by 5 per cent this year and level out in 2014
when the government, Riksbank and Financial Supervisory Authority take action,
by means of recommendations and possible new changes in risk weights for home
mortgage loans, aimed at slowing the upward price trend. Falling resource
utilisation and continued low inflation - Sweden's new collective pay
agreements, for example, are among the lowest three-year contracts concluded
in the past two decades - will persuade the Riksbank to lower its repo rate
in July to 0.75 per cent. This level will remain in force for the rest of our
forecast period. The government will raise its dose of fiscal stimulus by SEK
10 billion for the election year 2014 (to SEK 35 billion, or 0.9 per cent of
GDP) compared to the 2013 budget. The net lending deficit will be 2 per cent
of GDP in 2014.

Sweden's 20-year-old economic policy framework is facing an intensified
debate. Over the past decade, underlying inflation (CPIF) has been below
target more than 80 per cent of the time. The Riksbank's sizeable revision of
its inflation outlook earlier this year is probably one step towards admitting
that long-term inflation will be lower. The bank's policy dilemma is further
accentuated by a continued rise in home prices and household debt. Meanwhile
the government finds it increasingly difficult to explain that a budget
surplus target of 1 per cent of GDP still applies. This runs a risk of
undermining the credibility of the policy framework. The surplus target has
actually assumed a greater tightening effect on the central government budget.
Net lending in the old age pension system is now around zero, instead of the
earlier surplus of 1 per cent of GDP. This means that it used to be sufficient
for the budget to be in balance - now it must show a surplus to meet the
target. Our conclusion is that Sweden is ripe for a far-reaching review of the
economic policy framework; a first step would be to decide that public
finances must be in balance (not show a 1 per cent surplus). 

From a Nordic perspective - like at the global level - the economic picture is
showing more and more divergent trends. Even though the euro has weakened, the
Danish and Finnish economies are characterised by stagnation. In both
countries, slumping exports are combined with sagging domestic demand. In
Denmark, GDP will increase by 0.2 per cent this year and 1.6 per cent in 2014;
corresponding figures for Finland are a decline of 0.2 per cent and an
increase of 1.6 per cent. At present there is no indication that the
governments of the two countries are prepared to follow the international
trend and use fiscal policy more actively to stimulate growth. In Norway, the
domestic economy is more resilient. We expect GDP growth inNorway of 1.7 per
cent this year and 2.4 per cent in 2014. Because of low inflation pressure and
the risks of an excessively strong krone if Norges Bank diverges from the
global central bank pattern, the expected key interest rate hike will be
postponed and will not occur until the spring of 2014. The Norwegian krone
will trade at 7.45 per euro by the end of 2013 and 7.35 by year-end 2014. Our
corresponding EUR/SEK exchange rate forecasts are 8.35 and 8.10, respectively.

The three Baltic countries have been the fastest-growing economies in the EU
for three years. Expansion is now slowing in Latvia and Lithuania, while
Estonia's growth in 2013 will largely be unchanged compared to 2012, at 3.3
per cent; next year, activity will increase by 3.7 per cent. In Latvia, we
expect growth of 3.5 per cent this year and 4.8 per cent in 2014; the
corresponding figures for Lithuania are 3.2 per cent and 3.5 per cent. Growth
in these three countries is mainly being driven by private consumption,
although exports will also grow decently thanks to good competitiveness after
earlier internal devaluations. In Estonia, however, cost pressures have begun
to emerge in the wake of high pay increases. We are sticking to our assessment
that Latvia will get the green light to introduce the euro at the beginning of
2014. There is a 50 per cent chance that Lithuania will achieve its target of
euro zone accession in 2015, since the country will find it difficult to bring
inflation below the maximum qualifying level.

Key figures: International and Swedish economy

International economy. GDP, year-on-year changes, % 2011 2012 2013 2014
United States                                       1.8  2.2  2.0  3.2
Euro zone                                           1.6  -0.6 -0.7 0.7
Japan                                               -0.6 2.0  1.7  1.4
OECD                                                1.8  1.3  1.3  2.3
China                                               9.3  7.8  7.9  7.7
Nordic countries                                    2.3  1.0  1.0  2.2
Baltic countries                                    6.4  4.1  3.3  3.9
The world (purchasing power parities, PPP)          3.8  3.3  3.6  4.2
Swedish economy. Year-on-year changes, %
GDP, actual                                         3.7  0.8  1.3  2.5
GDP, working day corrected                          3.7  1.2  1.3  2.7
Unemployment, % (EU definition)                     7.8  8.0  8.2  8.1
Consumer Price Index (CPI) inflation                3.0  0.9  -0.1 0.8
Government net lending (% of GDP)                   0.0  -0.7 -1.5 -2.0
Repo rate (December)                                1.75 1.00 0.75 0.75
Exchange rate, EUR/SEK (December)                   8.91 8.58 8.35 8.10

  For more information, please contact Press contact
  Robert Bergqvist, +46 70 445 1404    Anna Helsén, Press & PR
  Håkan Frisén, +46 70 763 8067       +46 70 698 4858
  Daniel Bergvall, +46 8 763 8594
  Mattias Bruér, +46 8 763 8506
  Olle Holmgren, +46 8 763 8079
  Mikael Johansson, +46 8 763 8093
  Andreas Johnson, +46 8 763 8032

SEB is a leading Nordic financial services group. As a relationship bank, SEB
in Sweden and the Baltic countries offers financial advice and a wide range of
other financial services. In Denmark, Finland, Norway and Germany the bank's
operations have a strong focus on corporate and investment banking based on a
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countries worldwide. On March 31, 2013, the Group's total assets amounted to
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