Overview

ECONOMIC OUTLOOK NORDICS

DECEMBER 2012

Glimpse of light in the dark

Overview 02
GLIMPSE OF LIGHT IN THE DARK

Denmark 04
DIM LIGHT AT DAWN

Sweden 06
WINTER HAS ARRIVED

Norway 08
SUSTAINED GROWTH

Finland 10
INDICATORS POINT TO A TURN BEFORE THE SUMMER

Key figures 12
FORECASTS FOR THE GLOBAL ECONOMY
1 ECONOMIC OUTLOOK NORDICS DECEMBER 2012
NORDEA MARKETS

 Overview

Glimpse of light in the dark

If your biggest wish for Christmas is economic expansion, you should pin your hopes on the US and China which appear to be well on their way out of the doldrums. The Euro zone, on the other hand, is back in recession following a deep confidence crisis and fiscal tightening. However, monetary policy will continue to support the European economy for a long time to come as core inflation stays low and unemployment remains high. We have revised down our forecast for global growth this year to 3% (from 3.1% in September). We have also revised down our forecast for 2013 to 3.3% (from 3.5% in September), but the forecast for 2014 has been revised up to 4% (3.8% in September). The Euro-zone crisis has also hit the Nordic economies, with the exception of Norway; consequently, we have revised down our 2012 and 2013 growth estimates for this region. It will still maintain its safe-haven status in the financial markets, though. One of the main reasons is the Nordic countries relatively sound public finances compared to most other countries.
Real GDP growth, %
2011 World Denmark Finland Norway Sweden 3,9 1,1 2,7 2,5 3,7 2012 3,0 -0,5 0,5 3,4 0,8 2013 3,3 1,5 1,0 3,0 0,8 2014 4,0 1,7 2,7 2,5 2,4

about to reach a climax and that growth will return in 2013 and 2014 driven by an extremely loose monetary policy line.
US remains on track

There are more bright spots elsewhere in the global economy. After his reelection President Barack Obama will be pleased to see that the US economy is heading towards a self-sustaining recovery. Thanks to a very expansionary monetary policy line unemployment has declined and the housing market has turned around. Moreover, banks are easing their credit standards, and confidence indicators all point towards further progress. Things are thus looking good in the US at the moment, but bear in mind that the US still has to resolve its huge debt problems. Our baseline scenario, however, factors in a decision by Congress to raise the debt ceiling and extend the tax breaks introduced by the Bush Administration that otherwise expire by end-2012. If Congress fails to reach a compromise, the US economy will fall over the fiscal cliff and no doubt end up in recession again. This could have dire consequences for growth in the rest of the world.
Sino-Japanese tensions

Euro zone back in recession

The news flow out of the Euro zone this autumn was a mixed bag of positive and negative news. On the one hand, the risk of one or more countries leaving the euro has declined markedly after Greece agreed to new spending cuts and the ECB announced its new OMT (Outright Monetary Transactions) programme allowing it to purchase government bonds of debt-ridden countries. On the other hand, it has proven very difficult to revive growth. And it is now a fact that the Euro zone is back in recession. The reasons why it is so difficult for the Euro zone to drag itself out of recession are manifold. First, rising unemployment and the prospect of poor market conditions have eroded confidence to such an extent that households and businesses alike have cut down on spending and investment. Second, high oil prices and fiscal austerity measures are eroding consumers purchasing power and causing the overall operating conditions of companies to deteriorate. Third and lastly, the new stricter regulation of the financial sector has reduced the odds of this sector starting a credit-driven upswing in the region. Against this backdrop it is difficult to imagine a strong economic recovery in the Euro zone during the forecast period. Still, our baseline scenario assumes that the crisis is

At its 18th congress the Chinese Communist Party elected its new leaders. In March 2013 current Vice President Xi Jinping will take over from President Hu as the leader of the worlds most populated nation. This change of leadership ensures stability in the economic development of China. In the years ahead focus will be on changing its growth model. In future, private consumption is to be the key driver of growth instead of public investment and exports. But this shift in growth drivers should not jeopardise the goal of ensuring a growth rate sufficiently high to prevent social unrest. Accordingly, the Chinese authorities will continue to play a role in regulating economic activity in China. Recent indicators suggest that growth, which during the summer was dangerously weak, is rising again after the government (once again) introduced new infrastructure projects and monetary policy was eased. Chinas new role as an economic (and therefore political) superpower has, however, created further tensions with neighbouring countries. Not least Chinas relations with Japan have cooled after the Japanese government bought the small remote and uninhabited Senkaku/Diaoyu islands that China claims belong to its territory. The dispute has led to a Chinese boycott of many Japanese goods and sanctions against Japanese companies operating in China. These steps have had dire consequences for the export-oriented Japanese economy, which is already struggling as a result of the strong yen and is now again balancing on the edge of a new economic recession.

2 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Overview
Oil prices have peaked

Given the weak global economic trend combined with new oil finds and shale gas covering an increasing proportion of US energy consumption, oil prices have declined overall. Prices of other commodities have dropped as well, and this will contribute to dampening inflation globally over the forecast period. However, due to geopolitical risks especially in the Middle East our oil price forecast is fraught with considerable uncertainty. For instance, an escalation of the conflict between Israel and Iran or an Arab Spring version 2.0 in countries such as Saudi Arabia could trigger a new spike in the price of Brent, which would seriously harm the global and especially Europes growth outlook.
Low rates for a long time to come

sumer spending and investment activity; overall economic trends will thus be lacklustre over the coming quarters, which will also see rising unemployment. However, growth will rebound somewhat during 2013 and gather further momentum in 2014 when the labour market will also show signs of improving. In light of the weak economic trends and very low underlying inflation, the Riksbank can easily lower rates further. We look for rate cuts in both December this year and February 2013. Tightening will not be resumed until 2014. The prospect of a lower policy rate will also weaken the SEK near term.

Our baseline scenario assumes a continued low interest rate level in coming years. There are no signs that monetary policy will be tightened in any of the core countries until 2014 at the earliest and everything indicates that the Fed will be quicker to tighten than the ECB, although Fed Chief Ben Bernanke has said that rates will be kept exceptionally low until 2015. Moreover, given the prospect of more aggressive monetary policy tightening in the US than in the Euro zone, we believe that the USD will firm versus the EUR during the forecast period. But as always, currency trends are very uncertain. Government bond yields will also remain low as long as the economic outlook is weak and inflation is low. However, it seems indisputable that current levels in the benchmark countries are too low. That is why we expect long yields to edge higher during the forecast period and the increase will also at the long end of the yield curve be most pronounced in the US.
Norway goes solo

Exports have been the ray of sunshine in the Danish economy in recent years, but now the Euro-area recession has also hit this sector. Therefore it is crucial that domestic demand shifts into a higher gear to boost the economy. In our view, things are starting to look brighter. The record-low interest rates will support the housing market and following recent years stagnant consumer spending, the pent-up demand among Danish households is quite substantial and only waiting to be released. At the same time investment activity will again make a positive growth contribution to the Danish economy, driven by both public and private investment and supported by the governments so-called investment window. In coming years, growth will be sufficiently high to lead to a slow increase in employment again. But this does not mean that vacancies will abound, and we see a significant risk that the prolonged crisis has inflicted structural damage on the labour market. Consequently, unemployment will be permanently higher than before the crisis started.

Growth in the Norwegian economy is robust and largely as expected in our September forecast. Retail sales figures have been weaker than expected and this created some uncertainty about whether consumption growth was really as strong as expected. However, national count figures for Q3 show that strong growth in the consumption of services and abroad compensated for weak goods consumption. We see no reason to change our view that growth will remain strong in the years ahead. But a strong inflow of labour will prevent major capacity problems and wage growth will stay at the current level. Inflation should remain well below target and Norges Bank will therefore take a cautious rate setting approach. Low interest rates internationally and the risk of excessive NOK strengthening will also make Norges Bank hold back. Gradually, enough room will be created for a tentative rate hike without the NOK appreciating too much. Cold winds have hit the Swedish economy. The global downturn hurts exports and domestic demand is also weakening. The uncertain future weighs on both con-

The Finnish economy has technically avoided sliding into a recession this year, but only because GDP has followed a zig-zag pattern along a downward sloping path. The naked truth is that the economy is contracting. Consistent with an expected mild Euro-area recovery, we anticipate a moderate export-led pick-up in economic activity already before the summer of 2013. The weak shortterm outlook, however, weighs on investment and employment, which are both expected to deteriorate for most of 2013. Higher unemployment, higher income taxes and VAT are all factors that restrict advances in household purchasing power and keep private consumption growth moderate in a historical comparison. We have revised our GDP forecast for 2013 slightly down to 1.0%. Helge J. Pedersen, Global Chief Economist
helge.pedersen@nordea.com +45 3333 3126

3 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Denmark

Dim light at dawn

Danish economy slowly reviving Housing market licking its open wounds Alarming labour market cracks Public budgets with major wild card The Danish economy has run out of steam. The past two years have seen a largely unchanged activity level, and zero growth has made employment decline further. Near term we expect the Danish economy to remain stuck in darkness. But during 2013 economic activity should start accelerating again. The pick-up will mainly be driven by substantial pent-up demand among households following recent years stagnation. Against this background, we expect the Danish economy to expand by 1% next year and 1% in 2014.
Private consumption growth engine running on idle

fident about the future. At the same time rising disposable incomes in 2013 (lifted by the delayed financing element of the tax reform) will help ensure higher household consumption.
Housing market licking its open wounds

The Danish housing market is still stabilising after the price plunge that hit the market. We believe this process is underpinned by solid fundamentals that have largely restored prices on average to their long-term equilibrium levels. The biggest risk of further price drops is thus the psychological factor, which by definition is highly uncertain. But apart from this uncertainty we see good chances that the ongoing consolidation in the Danish housing market will continue in the coming quarters. Particularly in and around the large cities we expect a rising number of transactions and moderate price gains. On the other hand, prices will still edge lower in other parts of the country, resulting in more diversified geographical trends in the Danish housing market.
Alarming labour market cracks

Household consumption is still very muted. In our view, the reason is two-fold. Firstly, recent labour market trends have made consumers more uncertain, causing them to increase their savings. Households bank cash balances have consequently swelled to DKK 500bn. And recent surveys from the Danish central bank suggest that mortgage lenders and banks have tightened credit standards for private borrowers primarily due to higher funding costs and credit rating considerations. The tighter credit policy weakens the chances of a loan-financed consumption boom going forward. We expect household consumption to gradually resume the role as growth engine in the Danish economy during 2013. This will mainly happen through a gradual reduction of the savings ratio as households become more con-

Despite the economic doldrums, unemployment has been stable in recent years. But employment has continued to fall during the same period. This indicates that the labour force has shrunk in step with the lower employment. A reduced labour force is not in itself a problem as long as the decline is temporary and due to more people entering the educational system, for instance. The problem arises if the contraction becomes permanent and the labour force loses elasticity when demand for labour increases again. At this point in the economic cycle it is very difficult to say how much of the labour force contraction that is permanent. Looking at the number of vacancies rela-

Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted)

Private consumption Government consumption Fixed investment - government investment - residential investment - business fixed investment Stockbuilding* Exports Imports GDP Nominal GDP (DKKbn) Unemployment rate, % Gross unemployment level, '000 persons Consumer prices, % y/y Hourly earnings, % y/y Nominal house prices, one-family, % y/y Current account (DKKbn) - % of GDP General govt. budget balance (DKKbn) - % of GDP Gross public debt, % of GDP
* Contribution to GDP growth (% points)

2009 (DKK bn) 822 496 304 32 71 201 793 728 1.665

2010 1,7 0,4 -2,4 8,9 -0,6 -4,9 1,0 3,0 3,2 1,6 1.761 6,3 164,5 2,3 2,3 2,8 103,6 5,9 -47,4 -2,7 42,9

2011 -0,5 -1,5 2,8 4,2 14,6 -1,6 0,5 6,5 5,6 1,1 1.792 6,2 162,1 2,8 1,8 -2,8 101,2 5,6 -34,5 -1,9 46,6

2012E 0,9 0,1 2,2 2,9 -9,4 6,8 -0,5 1,8 3,2 -0,5 1.823 6,2 163,6 2,5 1,6 -3,4 103,9 5,7 -71,0 -3,9 45,5

2013E 1,4 0,7 4,7 -4,6 1,0 7,8 0,0 2,1 3,0 1,5 1.876 6,5 169,7 1,7 1,8 1,2 90,0 4,8 -35,0 -1,9 44,5

2014E 1,8 0,8 2,1 -2,4 4,8 2,0 0,0 3,1 3,3 1,7 1.939 6,3 165,2 1,9 2,1 1,9 80,0 4,1 -10,0 -0,5 43,0

4 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Denmark
Stagnant Danish economy

tive to the number of unemployed, much indicates that recent years stalemate has inflicted more lasting structural damage to the labour market.
Exports are doing fairly well

Danish exports are doing fairly well. Despite the crisis in the Euro area and sharply eroding wage competitiveness, exports have been increasing across markets and product groups. This resilience is mainly explained by the generally low cyclicality of Danish exports. Over the coming years Danish exports are forecast to continue to rise in step with the slow recovery of the global economy. However, viewed in a historical perspective progress will be very moderate given the very low economic activity in Denmarks core export markets. Slightly longer out we expect exports to rise further on the back of improved competitiveness achieved through low wage growth, relatively high productivity gains and a weakening of the trade-weighted DKK.
Public budgets with major wild card

The Beveridge curve is shifting

Next year we expect fiscal policy to still stimulate economic growth slightly mainly through the time lag associated with planned growth in public spending and increased use of the open investment window, which should help lift overall private business investment into 2013. Our baseline scenario assumes that next years public budget deficit will end up at DKK 35bn. However, this forecast does not take into account the potentially huge one-off government revenues in 2013 as a result of the changed rules for taxation of capital pension schemes. However, extraordinary receipts of up to DKK 150bn could give rise to significant distortions. The tax reform rules clearly state that any added revenues must be used to pay off public debt. But the prospect of a very drastic reduction of the public debt ratio also entails a latent risk that fiscal policy becomes less restrictive, which in a long-term perspective could turn out to be hurtful for the Danish economy. Helge J. Pedersen
helge.pedersen@nordea.com +45 33333126

Households have increased their savings

Exports are holding on

Jan Strup Nielsen

jan.storup.nielsen@nordea.com +45 33333171

5 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Sweden

Winter has arrived

Weak economy in coming quarters Low inflation for a long time Riksbank cut to 0.75% next year Gradual SEK weakening Cold winds have hit the Swedish economy. The global slowdown is increasingly taking its toll on the export sector, with resultant cuts in both production and manpower. Domestic demand is also slowing. Household finances are sound, but consumers are reluctant to spend. At the same time investment activity is declining. GDP growth will therefore be weak in coming quarters. According to our forecast, demand for labour will recede and unemployment rise to about 8.5%. Growth will gradually rebound during 2013 driven by improved international economic trends, domestic stimulus measures and stronger confidence among consumers and businesses. However, a weak start to the year will keep full-year growth low at around 1%. The economy will improve further in 2014, but unemployment will not decrease until the end of the forecast horizon.
Domestic demand mixed picture

forward. However, savings are historically high and low inflation will boost purchasing power. And lower mortgage rates allow households to spend more and support the housing market. This suggests that moderate growth in household consumption can be maintained next year. But investment growth will be lacklustre due to an unfavourable backdrop of uncertainties and falling capacity utilisation. Notably business investment is forecast to drop. And energy investment will reverse following recent years significant growth. However, residential construction should soon bottom and an expansionary fiscal policy via infrastructure projects will curb the decline in total investment. Indicators clearly point to weak exports near term. But Swedish exporters are competitive and once demand in export markets picks up again in the course of 2013, Swedish exports should recover. The uncertain situation in the Euro area is still the main risk to our forecast for the Swedish economy.
Restrained wage growth

Household consumption will be a key factor in coming years. Households are generally quick to react to signals of cyclical changes and this has also been the case over the past year. Labour market worries have intensified, consumption growth has been muted and the savings ratio has risen. Households are probably facing a bumpy road also going

The autumn saw a string of layoff notices, hiring plans have become more pessimistic and a decreasing number of vacancies are reported to the Swedish Public Employment Service. The weaker economy has already fed through to wage formation, with strong downward pressure on wage growth. The union IF Metalls initial demands ahead of the pay talks are lower than last time. For some companies, the unions admittedly under threat of bankruptcy have even accepted lower compensation levels, which is very unusual for the Swedish labour market.

Sweden: Macro economic indicators (% annual real changes unless otherwise noted)
Private consumption Government consumption Fixed investment - industry - residential investment Stockbuilding* Exports Imports GDP GDP, calendar adjusted Nominal GDP (SEKbn) Unemployment rate, % Employment growth Consumer prices, % y/y Underlying inflation (CPIF), % y/y Hourly earnings, % y/y Current account (SEKbn) - % of GDP Trade balance, % of GDP General govt budget balance (SEKbn) - % of GDP Gross public debt, % of GDP
* Contribution to GDP growth( % points)

2009 (mia. SEK) 1,533 860 559 74 92 -46 1,489 1,288

3,106

2010 4.0 2.1 7.2 2.7 15.7 2.2 11.4 12.0 6.6 6.3 3,338 8.4 1.0 1.2 2.0 0.4 206 6.2 2.6 -2 -0.1 37.7

2011 2.1 1.1 6.4 11.4 14.7 0.5 7.1 6.3 3.7 3.7 3,500 7.5 2.1 3.0 1.4 2.9 217 6.2 2.6 6 0.2 42.1

2012E 1.4 0.4 3.0 9.8 -8.2 -0.8 -0.1 -0.9 0.8 1.1 3,574 7.7 0.5 0.9 1.0 3.3 227 6.4 2.9 -16 -0.5 39.5

2013E 1.4 0.7 -2.5 -5.8 -3.1 0.0 -1.1 -2.1 0.8 0.8 3,648 8.4 -0.4 0.3 1.1 2.8 244 6.7 3.2 -45 -1.2 40.4

2014E 1.8 1.4 3.0 3.0 4.5 0.0 4.5 3.9 2.4 2.5 3,791 8.4 0.3 1.8 1.4 2.8 263 6.9 3.3 -55 -1.5 40.2

6 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Sweden
Inflation to stay low for a long period Labour market to deteriorate

Core inflation (CPIF) has remained well below the Riksbanks 2% target over the past two years. And with easing domestic cost pressures through more moderate wage increases and a sustained downtrend in prices of imported goods and services, core inflation will remain below target also during the forecast period. The scene is thus set for more rate cuts by the Riksbank. However, the Riksbank also takes into account the risks associated with keeping interest rates low for a prolonged period. Most of all the Riksbank will not want a further sharp increase in household indebtedness from current levels. But short term the key determinants of monetary policy will be low inflation and rising unemployment. We look for repo rate cuts in December 2012 and February 2013. Note that household credit growth stabilised around SEK 10bn per month already a year ago after the previous downturn. Credit growth may well pick up next year and once again become a source of concern for the Riksbank. But with subdued resource utilisation and low inflation any rate hikes will probably be postponed until 2014.
Election year approaching

Will household credit growth gear up?

The budget for 2013 included unfinanced reforms for SEK 23bn or 0.7% of GDP. They primarily relate to corporate taxes and infrastructure investment. In 2014, which is an election year, we expect fiscal policy stimulus to the tune of SEK 20bn, partly targeted at households. Our forecast factors in a budget deficit of some 1.5% of GDP in both 2013 and 2014. Even if activity in the economy should slow further, we doubt that policymakers will be willing to boost the deficit beyond this level.
SEK to weaken slightly

Inflation low for long

The relatively strong growth in the Swedish economy over the past year allowed the Riksbank to pursue a less expansionary monetary policy than many other central banks. As a result, the SEK has strengthened versus most other currencies. Short term, we see the SEK weakening slightly versus the EUR in tandem with the Swedish economic slowdown and diminishing interest rate differentials. Longer out, the SEK should strengthen again versus the EUR as Swedish fundamentals prove more stable. During the entire forecast period the SEK will likely gradually weaken versus the USD. Torbjrn Isaksson
torbjorn.isaksson@nordea.com +46 614 8859

The SEK weaker in recent months

7 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

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 Norway

Sustained growth
Strong domestic demand underpins growth No labour market tightening Norges Bank to act cautiously We expect the key drivers of Norwegian economic growth this year, ie private consumption and oil and housing investment, to be major growth engines next year as well. In 2014 we see a slowdown, albeit not a dramatic one as growth will merely approach the trend rate. Given strong labour migration, unemployment and wage growth will remain largely around current levels. Norges Bank will take a cautious approach to rate hikes as inflation will remain below the 2.5% target.
Consumer spending on services and abroad is rising

the Norwegian shelf will increase sharply also next year. We have revised up our forecast presented in the September 2012 issue of Economic Outlook and now look for oil investment growth of 12% following an estimated 17% this year. Accordingly, the good times for the oil supplier industry will likely continue. Housing investment growth has outpaced our September forecast and now looks set to be close to 9% this year. The number of housing starts has risen to levels not seen since the 2006-07 construction boom, and by all accounts construction activity is not likely to slow going forward. Housing demand will also remain high, underpinned by sustained low interest rates, strong wage growth, a benign labour market and high population growth. The strong growth in residential construction will ease some of the pressure on the housing market, but construction activity growth will hardly match the current high rate of growth in demand for owner-occupied housing. We see house prices rising 7% in 2013 and 4-6% in 2014. Against this backdrop, housing investment growth should pick up further going forward. At the end of 2011 and the beginning of 2012 Norwegian exports of goods and services excluding oil and gas grew at a healthy clip. However, in the course of 2012 export growth has more or less levelled out. The part of the export sector supplying goods and services to the oil and gas industry will likely continue to show a positive trend, while exports of for instance metals look set to decline further. All in all, we expect exports of goods to remain largely flat and exports of services to grow moderately in 2013. In 2014, however, export growth should pick up again in tandem with the growing activity internationally.

This year consumers purchasing power has increased considerably as a result of decent wage growth coupled with strong employment growth and very low inflation, and consumer spending has increased sharply. Over the past four to five months retail sales growth has slowed markedly compared with at the beginning of the year, which could signal slowing spending growth. However, the Q3 GDP figures show that consumer spending remains high thanks to growing spending on services and rising holiday spending abroad. Although still solid, purchasing power growth looks set to slow in 2013 and drop further in 2014 as a result of higher interest rates. We still expect income growth to outstrip spending growth, and households savings ratio should rise further from the current high level.
Key drivers are oil/gas and housing investment

A recent survey suggests that oil investment activity on

Norway: Macroeconomic indicators (% annual real changes unless otherwise noted))

Private consumption Government consumption Fixed investment - gross investment, mainland - gross investment, oil Stockbuilding* Exports - crude oil and natural gas - other goods Imports GDP GDP, mainland Unemployment rate, % Consumer prices, % y/y Core inflation, % y/y Annual wages (incl. pension costs), % y/y Current account (NOKbn) - % of GDP Trade balance, % of GDP General govt budget balance (NOKbn) - % of GDP
* Contribution to GDP growth (% points)

2009 (NOK bn) 1.028 531 516 349 144 14 929 416 277 660 2.357 1.876

2010 3,8 1,3 -8,0 -4,5 -15,0 3,5 0,4 -6,9 3,4 9,0 0,5 1,7 3,6 2,5 1,4 3,6 304,6 12,0 11,9 284,5 11,2

2011 2,5 1,8 7,6 8,5 9,7 0,1 -1,8 -6,2 0,0 3,8 1,2 2,5 3,3 1,2 0,9 4,2 383,3 13,9 13,3 386,6 14,1

2012E 3,2 1,9 7,2 3,4 18,0 0,0 2,4 2,5 2,0 3,5 3,2 3,4 3,1 0,7 1,2 4,2 425,3 14,5 13,8 399,1 13,6

2013E 3,5 2,0 6,5 4,4 12,0 0,0 0,4 0,0 0,0 3,8 2,4 3,0 3,0 1,7 1,3 4,3 449,3 14,4 13,6 410,0 13,1

2014E 3,0 2,0 3,1 2,7 4,0 0,0 1,2 0,0 2,5 3,0 2,0 2,5 2,9 2,1 2,1 4,3 460,4 14,1 13,2 420,0 12,8

8 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

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 Norway
Stable wage growth, but gradually higher inflation Oil investment growth to remain strong also in 2013

Based on relatively strong growth in demand for labour, wage growth last year and this year exceeded 4%, which is much higher than Norways trading partners. And given sustained strong economic growth, wage growth will likely remain elevated. But strong labour migration will prevent an overall labour shortage and, in turn, rising wage growth. Weak earnings in some sectors exposed to competition will also put a damper on wage growth even though these sectors influence on wages does not seem to match that of oil-related industries. With wage growth over 4% and relatively weak productivity growth, inflation should edge higher. Meanwhile, the effects of the past years strengthening of the NOK on import prices will subside. But low inflation internationally will keep a rein on Norwegian inflation, and barring anything triggering higher cost growth, inflation should stay below target in the forecast period.
Norges Bank in no hurry

Housing starts and house prices rising

In an environment of low inflation and stable wage growth slightly above 4%, Norges Bank is in no hurry hiking rates. We see the first rate hike coming in H2 2013. Although we see no rate hikes among Norways trading partners, markets will likely start to price in higher rates globally in 2014. This will make it easier for Norges Bank to hike rates without risking excessive NOK strengthening. In 2014 central banks across the board will likely start raising their policy rates, with Norges Bank hiking rates three times by 25 bp. Beginning at the monetary policy meeting in March 2013 Norges Bank will make recommendations on the socalled countercyclical capital buffer. If banks costs rise sharply as a result of this, it could mean lower credit growth, lower GDP growth and fewer rate hikes than we have factored into our baseline scenario.
Stable or slightly weaker NOK

Practically no labour market tightening

The NOK strengthened in H1 2012 in tandem with the escalation of the Euro-area crisis. However, since summer fears of a collapse of the euro have faded, but still EUR/NOK has not changed much. Temporary factors such as Norges Banks surprise decision not to buy foreign currency for the Government Pension Fund Global in November may have prevented the NOK from weakening versus the EUR as a result of the brighter prospects for the Euro zone. Over time Norges Bank will likely resume its buying of foreign currency, and we see the NOK weakening against the EUR. But with one rate hike in 2013, the NOK weakening should be moderate. Erik Bruce
erik.bruce@nordea.com +47 2248 4449

EUR fears easing, NOK still strong vs EUR

Katrine Godding Boye

katrine.boye@nordea.com +47 2248 7977

9 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

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 Finland

Indicators point to a turn before the summer

We have lowered our growth forecasts slightly Exports to recover just before the summer Moderate increase in private consumption Weaker trend in employment and investment
A turn before the summer lower growth estimates

Economic activity has subsided across the board as expected. Export growth has stagnated, subdued domestic demand (consumption and investment) has resulted in a distinct decline in imports and employment has begun to fall. In line with our forecast for international economy, we expect export demand to pick up and economic growth to regain momentum just before the summer. This is distinctly later than what we estimated in our September forecast. The OECD's indicator for the Finnish economy also anticipates this trend. We have lowered our economic growth forecast for 2013 only a little to 1.0% (previously 1.2%). The forecast for 2014 remains almost intact. We base our view on the fact that employment and investment will react to economic boosts with a minimum lag of six months. Due to modest economic growth, the unemployment rate is expected to rise to 8.2% on average in 2013.
GDP zigzags and is very difficult to interpret

Finnish economy grew 0.3% in Q3 from Q2. Further details were not available at the time of writing, but other data may prove that the rise has been even more robust. The positive effect of net exports and private consumption is more likely to have outweighed the negative effect of decreased investment. Goods exports increased somewhat, but goods imports declined clearly. Car sales picked up from the crash in Q2 caused by the car tax hike at the beginning of April. In addition, retail trade increased somewhat in Q3. Investment probably decreased across the board. We estimate that total production will increase slightly also in the current Q4 not only year-on-year but also quarter-to-quarter. Net exports and consumption will support growth but investment will dampen it. Without a new sharp decline, goods exports will grow year-on-year due to weak comparison figures, but imports will decrease.
Investment will decrease

This year Finnish GDP has followed a zigzag path. Total production has zigzagged up and down around the declining trend. Due to this zigzag pattern, production has not contracted in two consecutive quarters, so the technical definition of a recession has not been met. In practice, however, Finland has been in a recession throughout the year. According to the flash estimate of Statistics Finland,

The investment outlook is subdued across the board. The trend in the new orders of the industrial sector indicates that machinery and construction investment will only start to recover when we are well into 2013. In the last few months, new construction has declined clearly from last year, and the dramatic drop in the number of construction permits does not suggest a quick fix. We estimate investment to continue to decrease in 2013.
Moderate increase in private consumption

Private consumption will grow much slower than normal during the forecast period. Salaries and pensions will rise, but weaker employment, tightened taxation and a fairly quick rise in consumer prices will limit the improvement of household purchasing power.

Finland: Macroeconomic indicators (% annual real changes unless otherwise noted)

Private consumption Government consumption Fixed investment Stockbuilding* Exports Imports GDP Nominal GDP (EURbn) Unemployment rate, % Industrial production, % y/y Consumer prices, % y/y Hourly wages, % y/y Current account (EURbn) - % of GDP Trade balance (EURbn) - % of GDP General govt budget balance (EURbn) - % of GDP Gross public debt (EURbn) - % of GDP
* Contribution to GDP growth (% points)

2009 (EUR bn) 94 43 34 -2 64 62 172,3

2010 3,3 -0,3 1,9 0,8 7,5 6,9 3,3 178,8 8,4 8,3 1,2 2,6 2,9 1,6 2,6 1,4 -4,5 -2,5 87,0 48,6

2011 2,5 0,4 6,8 1,1 2,6 5,7 2,7 189,4 7,8 0,9 3,4 2,7 -2,2 -1,1 -1,2 -0,6 -1,2 -0,6 92,8 49,0

2012E 1,1 0,4 -2,7 0,1 0,3 -2,3 0,5 195,8 7,7 -2,0 2,9 3,5 -1,2 -0,6 0,7 0,4 -2,9 -1,5 100,1 51,1

2013E 1,4 0,5 -2,3 0,1 0,9 0,0 1,0 200,4 8,2 2,0 2,6 3,0 0,2 0,1 1,8 0,9 -1,4 -0,7 106,1 52,9

2014E 2,0 0,5 5,4 0,0 6,5 6,2 2,7 208,6 8,0 4,0 2,5 3,0 0,5 0,2 2,2 1,1 -0,4 -0,2 111,2 53,3

10 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Finland
Weaker employment OECD indicator anticipates pick-up in GDP growth

The labour market is facing a difficult winter, as the economic pick-up we are anticipating will increase demand for labour in late 2013 at the earliest. We estimate that the unemployment rate, excluding seasonal effects, will increase to 8.4% in the autumn. In practice, this means the disappearance of 25,000 jobs and an increase of 20,000 in the number of the unemployed.
Inflation to remain relatively high

According to the national consumer price index, the rise in consumer prices slowed down to around 2.5% in the autumn from approximately 3% in the first half of the year. The main factors behind the rise are higher food prices and several tax hikes effected at the beginning of this year. Tax hikes account for almost 1 percentage point of the price rise. There is another tax hike impending at the beginning of 2013 when the general value added tax will be raised by 1 percentage point. Part of this raise will show in prices. The decreased market rates will continue to weigh on housing loan interests well into 2013 and keep restricting the consumer price rise. This effect will, however, diminish gradually. We expect the national consumer price index to rise an average of 2.5% per year during the forecast period.
Taxation increased at a bad time

Champagne sales suggest GDP is bottoming out

It has been customary in Finland to raise the income limits in the government's income tax brackets annually based on either the inflation estimate or the rise in average income level (the latter has been used in recent years). With this practice the government has aimed at taxation only being increased when real wages rise or, as in the latter case, when income rises more than the average income level. In 2013 and 2014 the income limits of the tax brackets will exceptionally remain untouched, so national income taxation will increase even when income rises less than consumer prices. Local taxation will also increase on average. In addition, the capital transfer tax applied to homebuyers will reduce the desire of home owners to move in search of a job. There may be more hikes in the pipeline in the spring when the government will have its mid-term check-up and reconsider the effect of the economic outlook on the government finances. At the moment, there are no obvious growth drivers in the Finnish economy as exports are not growing, investment dwindles, consumption growth is meagre and employment deteriorates. This means that taxation increases at an exceptionally bad stage of the economic cycle. In municipal politics, decisions to raise the tax rate at difficult times are usual. The main reason behind the government now doing effectively the same is the need to raise more tax income by any means necessary in order to maintain the high credit rating the objective is not an economic policy that supports growth. Pasi Sorjonen
pasi.sorjonen@nordea.com +358 9 165 59942

Employment set to weaken towards autumn 2013

Car registrations are recovering gradually

11 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Key figures
Growth, %
World1) USA Euro area China Japan Denmark Norw ay Sw eden UK Sw itzerland Germany France Italy Spain Finland Estonia Poland Russia Latvia Lithuania India Brazil 2010 4,7 2,4 1,9 10,4 4,6 1,6 1,7 6,6 1,8 3,0 4,0 1,6 1,8 -0,3 3,3 3,3 3,9 4,3 -0,9 1,5 9,6 7,6 2011 3,9 1,8 1,5 9,1 -0,7 1,1 2,5 3,7 0,9 1,9 3,1 1,7 0,5 0,4 2,7 8,3 4,3 4,4 5,5 5,9 6,9 2,8 2012E 3,0 2,2 -0,3 7,8 1,6 -0,5 3,4 0,8 -0,2 0,4 1,0 0,1 -2,3 -1,2 0,5 2,3 2,2 4,2 4,2 2,7 6,0 2,6 2013E 3,3 2,1 0,4 8,1 0,2 1,5 3,0 0,8 0,9 1,2 0,9 0,4 -0,5 -0,9 1,0 3,5 1,8 4,8 2,5 3,3 6,7 4,6 2014E 4,0 2,4 1,7 8,5 0,8 1,7 2,5 2,4 1,8 1,9 2,1 1,3 1,0 1,1 2,7 3,8 2,8 5,0 3,9 3,5 7,2 4,8

Inflation, %
World1) USA Euro area China Japan Denmark Norw ay Sw eden UK Sw itzerland Germany France Italy Spain Finland Estonia Poland Russia Latvia Lithuania India Brazil 2010 2,9 1,6 1,6 3,3 -0,7 2,3 2,5 1,2 3,3 0,7 1,2 1,6 1,8 -0,3 1,2 3,0 2,6 6,9 -1,1 1,3 9,6 5,0 2011 4,2 3,1 2,7 5,4 -0,3 2,8 1,2 3,0 4,5 2,4 2,5 1,7 0,5 0,4 3,4 5,0 4,3 8,5 4,4 4,1 9,5 6,4 2012E 3,0 2,1 2,2 3,1 0,1 2,5 0,7 0,9 2,9 -0,5 2,2 0,1 -2,3 -1,2 2,9 3,7 3,8 6,3 2,3 3,0 7,5 5,2 2013E 2,9 2,1 1,7 4,0 -0,1 1,7 1,7 0,3 2,2 0,3 1,6 0,4 -0,5 -0,9 2,6 3,0 2,3 6,8 2,5 2,8 6,8 5,4 2014E 2,9 2,3 1,5 3,8 -0,1 1,9 2,1 1,8 1,6 0,2 2,1 1,3 1,0 1,1 2,5 2,9 2,4 7,0 2,8 3,0 7,0 5,8

Public finances, % of GDP

USA Euro area China Japan Denmark Norw ay Sw eden UK Sw itzerland Germany France Italy Spain Finland Estonia Poland Russia Latvia Lithuania India Brazil 2010 -8,8 -6,2 -1,7 -9,0 -2,7 11,2 -0,1 -10,1 0,7 -4,1 -7,1 -4,5 -9,7 -2,5 0,2 -7,8 6,2 -8,2 -7,2 -3,6 -2,3 2011 -8,3 -4,1 -1,1 -9,7 -1,9 14,1 0,2 -8,2 0,8 -0,8 -5,2 -3,9 -9,4 -0,6 1,0 -5,0 7,0 -3,5 -5,5 -6,6 -2,1 2012E -7,0 -3,7 -1,5 -9,9 -3,9 13,6 -0,5 -7,6 0,2 -0,4 -4,7 -2,5 -7,0 -1,5 -1,5 -3,3 0,2 -2,2 -2,7 -7,0 -2,5 2013E -5,5 -3,0 -2,3 -9,6 -1,9 13,1 -1,2 -6,4 0,4 0,0 -3,9 -1,8 -6,5 -0,7 -0,5 -3,8 0,5 -2,0 -3,0 -7,5 -2,7 2014E -4,7 -2,5 -1,9 -9,0 -0,5 12,8 -1,5 -4,7 0,4 0,5 -3,5 -1,0 -5,0 -0,2 -0,3 -3,2 0,7 -2,0 -3,0 -8,0 -2,8

Current account, % of GDP

USA Euro area China Japan Denmark Norw ay Sw eden UK Sw itzerland Germany France Italy Spain Finland Estonia Poland Russia Latvia Lithuania India Brazil 2010 -3,1 -0,6 5,1 3,7 5,9 12,0 6,2 -2,5 14,4 6,1 -2,0 -3,5 -4,4 1,6 3,8 -4,7 4,8 3,0 1,1 -3,3 -2,3 2011 -3,1 0,0 2,8 2,1 5,6 13,9 6,2 -1,9 14,2 5,6 -2,6 -3,3 -3,7 -1,1 2,1 -4,3 4,5 -1,2 -1,6 -2,8 -2,1 2012E -3,0 0,3 2,5 2,1 5,7 14,5 6,4 -3,0 10,5 5,6 -2,4 -1,5 -2,4 -0,6 -2,3 -3,2 4,2 -3,2 -2,7 -4,0 -2,5 2013E -3,5 0,2 2,2 2,5 4,8 14,4 6,7 -2,5 11,0 4,8 -2,1 -1,0 -1,0 0,1 -1,5 -2,5 3,0 -3,5 -3,0 -3,0 -2,7 2014E -3,0 0,2 1,5 2,4 4,1 14,1 6,9 -1,8 14,2 4,0 -2,0 -0,5 0,0 0,2 -1,3 -2,5 2,5 -3,6 -3,0 -2,2 -2,8

1) Weighted average of countries in this table. Accounts for 76.5%of world GDP. Weights calculated using PPP adjusted GDP levels for 2008 according to the IM F's World Economic Outlook

12 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

 Key figures

13 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

Economic Research Nordea

Denmark:
Helge J. Pedersen, Global Chief Economist
helge.pedersen@nordea.com, tel. +45 3333 3126

Sweden:
Annika Winsth, Chief Economist Sweden
annika.winsth@nordea.com, tel. +46 8 614 8608

Johnny Bo Jakobsen, Chief Analyst

johnny.jakobsen@nordea.com, tel. +45 3333 6178

Torbjrn Isaksson, Chief Analyst

torbjorn.isaksson@nordea.com, tel. +46 8 614 8859

Anders Svendsen, Chief Analyst

anders.svendsen@nordea.com, tel. +45 3333 3951

Andreas Jonsson, Senior Analyst

andreas.w.jonsson@nordea.com, +46 8 534 910 88

Jan Strup Nielsen, Senior Analyst

jan.storup.nielsen@nordea.com, tel. +45 3333 3171

Bengt Rostrm, Senior Analyst

bengt.rostrom@nordea.com, tel. +46 8 614 8378

Amy Yuan Zhuang, Senior Analyst

amy.yuan.zhuang@nordea.com, tel. +45 3333 5607

Linus Lauri, Assistant Analyst

linus.lauri@nordea.com, tel. +46 8 614 80 03

Aurelija Augulyte, Analyst

aurelija.augulyte@nordea.com, tel. +45 3333 6437

Siri Pettersson, Assistant Analyst

siri.pettersson@nordea.com, tel. +46 8 614 80 03

Henrik Lorin Rasmussen, Assistant Analyst

henrik.l.rasmussen@nordea.com, tel. +45 3333 4007

Estonia:
Tnu Palm, Chief Analyst
tonu.palm@nordea.com, tel. +372 628 3345

Heidi stergaard, Assistant Analyst

ostergaard.heidi@nordea.com, tel. +45 3333 6102

Latvia:
Andris Strazds, Senior Analyst
andris.strazds@nordea.com, tel. +371 67 096 096

Daniel Freyr Gustrafsson, Assistant Analyst

daniel.freyr.gustafsson@nordea.com, tel. +45 3333 5115

Finland:
Roger Wessman, Chief Economist Finland
roger.wessman@nordea.com, tel. +358 9 165 59930

Lithuania:
Zygimantas Mauricas, Analyst
zygimantas.mauricas@nordea.com, +370 5 2657 198

Pasi Sorjonen, Senior Analyst

pasi.sorjonen@nordea.com, tel. +358 9 1655 9942

Russia:
Dmitry A. Savchenko, Analyst
dmitry.savchenko@nordea.ru, +7 495 777 34 77 4194

Annika Lindblad, Analyst

annika.lindblad@nordea.com, tel. +358 9 1655 9940

Dmitry S. Fedenkov, Analyst

dmitry.fedenkov@nordea.ru, +7 495 777 34 77 3368

Norway:
Steinar Juel, Chief Economist Norway
steinar.juel@nordea.com, tel. +47 2248 6130

Poland:
Piotr Bujak, Chief Economist Poland
piotr.bujak@nordea.com, +48 22 521 36 51

Erik Bruce, Chief Analyst

erik.bruce@nordea.com, tel. +47 2248 4449

Thina M. Saltvedt, Senior Analyst

thina.margrethe.saltvedt@nordea.com, tel. +47 2248 7993

Katrine Godding Boye, Senior Analyst

katrine.godding.boye@nordea.com, tel. +47 2248 7977

Bjrnar Tonhaugen, Senior Analyst

bjornar.tonhaugen@nordea.com, tel. +47 2248 7959

14 ECONOMIC OUTLOOK NORDICS DECEMBER 2012

NORDEA MARKETS

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