SEB : SEB: Nordic Outlook: US holds the key to economic recovery

       SEB : SEB: Nordic Outlook: US holds the key to economic recovery

Low inflation will delay Riksbank's key interest rate hikes

The obstacles to a global acceleration in Gross Domestic Product (GDP) will
become fewer in the next couple of years. Fading fiscal headwinds will combine
with continued strong monetary policy tailwinds. The United States is poised
for a sustainable growth surge in 2014-2015 and will achieve annual growth of
around 3.5 per cent. This will also give the euro zone greater opportunities
to re-generate economic, financial and political stability, despite divergent
and sluggish GDP growth of 0.8 per cent in 2014 and 1.7 per cent in 2015,
following negative growth of 0.5 per cent this year. Global risk appetite will
strengthen. This will lead to positive stock market performance, while
industrial companies with strong balance sheets will be able to increase their
capital spending and hiring during 2014 and 2015. Overall, GDP growth in the
34 countries of the Organisation for Economic Cooperation and Development
(OECD) will accelerate from 1.2 per cent this year to 2.4 per cent in 2014 and
2.8 per cent in 2015. Yet major cyclical differences in growth between
countries and regions will persist, posing challenges to international
economic policy cooperation.

Our relatively positive global scenario is based on two important assumptions:
that inflation will remain low and stable, and that the low interest rate
policies of central banks will be underpinned by macroprudential policies.
There is a large quantity of idle economic resources in the US, Europe and
Asia, which exerts downward pressure on wages and salaries as well as on
commodity and energy prices, allowing central banks manoeuvring room to
postpone key interest rate hikes and focus on sustaining growth and
employment. This will also facilitate the implementation of vital
restructuring policy measures and fiscal consolidation, although it is
uncertain to what extent political leaders will take advantage of this
opportunity. Global monetary policy is approaching a crossroads. Frequent
emergency interventions will be replaced by the main task of ensuring a
normalisation of inflation rates and preventing the re-emergence of financial
imbalances. The communicative talents of central banks will be put to the test
when it comes to persuading financial markets that they are in control of the
situation and can ensure a continued low inflation environment. This also
requires that over the next couple of years, political leaders and central
banks can reach agreement on the way forward for macroprudential policies.

The US Federal Reserve will not raise its key interest rate until the second
half of 2015, after more than six years of a zero interest rate. The federal
funds rate will stand at 1.0 per cent at the end of 2015. Due to an improved
economic and financial outlook, the Fed will decide as early as this September
to begin "tapering" its quantitative easing (QE) programme. Such a decision
will reduce the prevailing financial uncertainty and can easily be re-assessed
if long-term yields continue to rise sharply. The Bank of England will keep
its key interest rate at 0.50 per cent until late in 2015, when it will carry
out its first rate hike. The European Central Bank (ECB) will help sustain the
euro zone economy with a further key interest rate cut to 0.25 per cent in
December 2013 and then stay put at this level in 2014 and 2015. The ECB will
also offer new Long Term Refinancing Operation (LTRO) loans for the purpose of
improving the functioning of the banking system in southern Europe and keeping
interest rates low. The Bank of Japan will continue with its aggressive bond
purchases and zero interest rate. Because of differences in monetary policies
and economic conditions, the EUR/USD exchange rate will decline from 1.33 at
the end of 2013 to 1.27 at the end of 2014 and 1.20 at the end of 2015.

The main upside risks in our forecast is that the faster growth rate in the US
will have larger positive contagious effects on other countries than in our
main forecast. On the other hand, there are big remaining challenges that
carry downside risks. The risk of new reversals in growth is mainly connected
to the continued financial and political weaknesses of the euro zone and to
the potential of emerging market countries, and their willingness, to reform
their economies. While stronger US growth is positive for the world economy,
changes in US monetary policy - less stimulus and eventual tightening - may
cause economic and financial problems for countries and regions that are in
divergent cyclical phases from the US and have not yet achieved sufficient
strength to cope with higher interest rates and yields. This is true, for
example, of the euro zone, which will still need a number of years before
achieving its private sector debt deleveraging targets. Excluding the
financial services sector, global debt today is higher than in 2007. This
means that higher interest rates will have a major impact on consumption,
capital spending, lending and government finances.

The euro zone crisis will remain complex and protracted, but immunity to
trouble spots has strengthened during 2013, as exemplifed by this summer's
political crises in Greece and Portugal. There are several reasons for this.
The ECB's large balance sheet essentially eliminates various liquidity and
solvency risks in the euro zone. The US and German economies are also showing
vigour, helping sustain the export sector in southern Europe. The outlook is
also getting better because of improved competitiveness in several crisis-hit
countries, among other things due to lower wages. Although positive changes in
various macroeconomic variables are welcome, levels of debt, unemployment and
other variables demonstrate that the path back to a more normal situation will
still take a number of years. High unemployment poses a risk of political
unrest and opens the way for euro-sceptical parties to strengthen their
position in various countries. Our scenario includes further aid to Greece by
means of a new debt restructuring, probably during the first half of 2014.
Portugal and Ireland need further debt relief as well. The economic curves in
Italy and France will also have to rebound. In recent months, political
cooperation and integration efforts have shown signs of deceleration. There is
a great risk of political paralysis over the coming year, due to the May 2014
election to the European Parliament and the delay until a new Parliament and a
new European Commission are in place.

China's economic performance during 2013, after a new leadership took office
in March, has demonstrated the difficulty of achieving an optimal shift in
emphasis between two growth mechanisms. Private consumption must be
strengthened at the expense of exports as well as public and private sector
capital spending. China's GDP will decelerate to 7.5 per cent in 2013 and slow
down further to a growth rate of 7.0 per cent in 2015. In the three other BRIC
countries - Brazil, Russia and India - there is also a clear deceleration,
connected to lower global economic activity but also to structural factors.
Generally, the BRIC countries will have difficulty reverting to their earlier
high growth rates. Reforms rather than fiscal stimulus measures are the recipe
for a new growth surge. The same conclusion applies to Japan. "Abenomics" will
provide a short-term upswing in growth and inflation, and after this summer's
election the governing coalition led by Shinzo Abe has strengthened its
political position and gained a 3-4 year window for implementing its policies,
but it is unfortunately showing worrisome signs of ambiguity. However, the
consequences of a tapering in the US Federal Reserve's QE policies need not be
so severe. The effect will be more psychological than quantitative and will
thus be transitory. We expect improved global economic prospects to restore
risk appetite and confidence in emerging economies with sound fundamentals.

The slowdown has maintained a tight grip on the Swedish economy during 2013.
Growth will reach only 1.2 per cent this year. But the outlook is improving,
and growth will be above trend as well as above the OECD average during our
forecast period. The strong economic situation of households will be the main
driver. The government's fiscal timulus measures will provide an additional
SEK 20 billion in cash to households - more than 1 per cent of their income.
Low inflation will result in yearly real wage increases of around 1-1.5 per
cent. Positive economic signals from Germany, the US and other countries with
which the Swedish economy normally shows a high correlation indicate that
exports will rebound. The growth rate will accelerate but will be held back
somewhat by uncertainty in the euro zone. GDP growth will reach 2.6 per cent
in 2014 and 3.2 per cent in 2015. This will help push down unemployment to 7.9
per cent at the end of 2014 and to 7.3 per cent at the end of 2015.

The Riksbank has thus stopped cutting its repo rate, but the first rate hike
will be postponed until the end of 2014. By the end of 2015, the repo rate
will stand at 1.75 per cent (compared to 1 per cent today). The Riksbank will
thus be one of the first central banks to begin a cautious normalisation of
its key interest rate. Slow rate hikes will be made possible by continued low
inflation pressure as well as by discussions about alternative tools - and
possible decisions - in the macroprudential field during 2014. Home prices
will climb by some 5 per cent both this year and next and then slow in 2015,
once the Riksbank has begun hiking its key rate; the driving forces behind
higher prices are primarily a structural housing shortage and to some extent
also improvements in household income. Our forecast implies that home prices
will thus have risen entirely in line with household income.

The Riksbank faces several trade-offs. We expected the krona, measured in
effective exchange rate terms, to reach its strongest level since 1992 by the
end of our forecast period. Meanwhile international price pressure is weak and
Swedish pay increases over the next couple of years will end up at
historically low levels. This implies that inflation will probably be well
below 2 per cent throughout our forecast period. It will also be difficult for
the Riksbank to diverge unduly from the low interest rate environment in other
countries without triggering a sharp appreciation in the krona. The government
has now announced expansionary fiscal policy measures equivalent to SEK 25
billion. This will not change conditions either, since the Riksbank's analyses
have already factored in SEK 30 billion in fiscal reform measures during
2014-2015. Underlying CPIF inflation will reach 1.6 per cent in December 2015,
thereby confirming the conclusion in our analysis of historical inflation
trends: it will be very difficult to reach the Riksbank's inflation target of
2 per cent in a medium-term perspective. A majority of the central bank's
Executive Board members seem to have concluded that they are prepared, to some
extent, to re-assess the role of household debt in key interest rate
decisions, once macroprudential policies are in place. We are assuming the a
consensus about macroprudential policies will be reached during 2014, which
will greatly ease the burden on traditional interest rate policy.

Sweden's central government debt will increase from 32.4 per cent of GDP in
2012 to 35.7 per cent in 2015. We estimate that the government's dose of
fiscal stimulus will end up at SEK 35 billion in 2014, in other words SEK 10
billion more than the government has announced so far. We do not anticipate
any major surprises in the government's September 18 budget bill beyond what
has already emerged, for example income tax cuts, a narrowing of differences
in unemployment insurance fees, an easing of employer-financed sick pay fees
and investments in infrastructure, research and education. We expect the dose
of stimulus in 2015 to be SEK 10-15 billion, regardless of the September 2014
parliamentary election outcome. An estimated budget deficit amounting to 2 per
cent of GDP in 2014 and 2015 threatens the existing budget surplus target. But
if the government wishes to stick to the surplus target, there will be room
for tighter fiscal policy a bit further in the future.

In general, the Nordic countries will benefit from the 2014-2015 international
recovery, but the domestic driving forces differ from one country to another.
While Sweden, Norway and Denmark will experience above-trend growth during our
forecast period, aided by household consumption, Finland will continue to lag
behind due to structural problems. Low capacity utilisation, rising
unemployment and a tight fiscal policy will lead to Finnish GDP growth of
around 1.5 per cent in 2014 and 2015. In Denmark, falling inflation and a
stabilisation of the housing market will boost household optimism, stimulating
consumption and enabling the economy to rebound from 0.4 per cent growth this
year to 2.0 per cent in 2014 and 2.5 per cent in 2015. In Norway, rapidly
growing capital spending will slow next year, but we expect GDP growth in both
2014 and 2015 to be in the vicinity of 2.5 per cent. Norges Bank will begin
raising its key interest rate next summer, bringing it to 2.0 per cent at the
end of 2014 (1.5 per cent today). During 2015, Norway's key rate will be
raised in three further 25 basis point steps to 2.75 per cent.

The three Baltic countries - Estonia, Latvia and Lithuania - have had the
fastest GDP growth in the European Union since 2011. We expect them to show
relatively balanced economic performance in the next couple of years. One
common thread is private consumption, which will benefit from pent-up
purchasing needs and good real income increases. We also expect exports and
higher capital spending to gradually help sustain GDP growth, which will end
up in the 3.5-4.5 per cent range following this year's deceleration. It will
then reach 3.5-5 per cent in 2015, with the highest growth in Lithuania and
the lowest in Estonia. We expect Latvia to experience a slight capital
spending upturn related to joining the euro zone on January 1, 2014.
Lithuania's euro zone accession in 2015 remains uncertain, but if inflation
continues its downside surprises this autumn, there is a more than even chance
that Lithuania will qualify to convert to the euro.

Key figures: International and Swedish economy

International economy. GDP, year-on-year changes, % 2012 2013 2014 2015
United States                                       2.8  1.6  3.3  3.7
Euro zone                                           -0.6 -0.5 0.8  1.7
Japan                                               2.0  1.9  1.4  1.0
OECD                                                1.5  1.2  2.4  2.8
China                                               7.8  7.5  7.4  7.0
Nordic countries                                    1.2  0.8  2.4  2.5
Baltic countries                                    4.2  2.9  3.8  4.4
The world (purchasing power parities, PPP)          3.4  3.2  4.0  4.2
Swedish economy. Year-on-year changes, %
GDP, actual                                         0.7  1.2  2.6  3.2
GDP, working day corrected                          1.0  1.2  2.7  3.0
Unemployment, % (EU definition)                     8.0  8.1  8.0  7.5
Consumer Price Index (CPI) inflation                0.9  0.0  1.0  2.0
Government net lending (% of GDP)                   -0.9 -2.1 -2.2 -1.8
Repo rate (December)                                1.0  1.0  1.25 1.75
Exchange rate, EUR/SEK (December)                   8.58 8.70 8.40 8.20

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               anna.helsen@seb.se
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
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