Nordic Outlook 1002: Recovery With Storm Clouds

! FEBRUARY 2010

Recovery with storm clouds

Asia and the Nordics well positioned
SEB Economic Research
Nordic Outlook - February 2010
This report was published on February 16, 2009.

Cut-off date for calculations and forecasts was February 12, 2009.
Robert Bergqvist, Chief Economist +46 8 506 23016

robert.bergqvist@seb.se
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Tomas Lindström, Economist 8028
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Johanna Wahlsten, Small Business Analyst 8072
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2
Contents
International overview 4
The United States 12
Japan 17
Asia 18
The euro zone 19
The United Kingdom 24
Eastern Europe 25
The Baltics 26
Sweden 28
Denmark 37
Norway 38
Finland 42
Nordic key economic data 43
International key economic data 45
Boxes
Reshaping the credit market 5

Will G20 coordination yield results? 9
The labour market in a longer perspective 14
Many jobs saved in Germany 20
Crucial situation for PIIGS countries 23
The fiscal policy framework – incorporating established
practices into the Budget Act 36
3
International overview
Recovery with storm clouds Our overall conclusion is that GDP growth in the 30
member countries of the Organisation for Economic
 Above-trend global growth in 2010 Cooperation and Development (OECD), measured as
annual averages, will be around 2-2½ per cent
 Persistently low inflation during the next couple of years. Due in part to a
 Less and less room for crafting exit strategies clear upward revision of the GDP outlook in Asian
 Credit market changes will bring tightening economies in purchasing power-adjusted terms, global
growth will exceed 4 per cent both this year and next.
 Fed and ECB will hike rates around year-end
 Euro will continue to weaken Because of moderate GDP growth in the OECD
countries, resource utilisation will remain low. Unem-
ployment will thus be stuck at high levels over the
In many respects, the global recovery has gained next couple of years. This will dominate the inflation
strength in recent months. Emerging Asian econo- dynamic, leading to continued low inflation. There is
mies are expanding rapidly, driven by domestic little risk that monetary stimulation will eventually
demand and an export upswing. American growth trigger inflation.
was unexpectedly robust in the fourth quarter and
signs of a labour market turnaround have become GDP growth
clearer. In Europe, too, the weakening of the labour Year-on-year percentage change
market has been milder than expected, strengthening
the potential for a recovery. 2008 2009 2010 2011
United States 0.4 -2.4 3.4 2.2
Meanwhile the road to balance is lined with challenges Japan -1.2 -5.0 1.5 1.8
and risks. China must cool off its economy, but China 9.6 8.7 10.5 9.0
worries about the consequences of this have Euro zone 0.5 -3.9 1.7 2.0
illustrated that the world economy remains fragile and United Kingdom 0.6 -4.6 1.8 2.6
dependent on the Chinese growth engine. Develop- Sweden -0.2 -4.5 3.1 2.7
Norway 1.8 -1.0 2.3 2.4
ments in southern Europe show how burgeoning
Denmark -0.7 -4.8 1.4 1.8
government debts and large refinancing needs
Finland 1.1 -7.4 2.5 2.7
can lead to full-blown crises of confidence. Ulti- Nordic countries 0.5 -4.1 2.4 2.4
mately, this may lead to secondary effects that affect Baltic countries -1.0 -15.9 -0.1 4.2
the stability of the entire euro zone. Large countries Emerging markets 6.1 2.1 6.3 6.0
like Japan, the United States and the United Kingdom OECD 0.6 -3.5 2.4 2.3
are grappling with deep deficit problems, and this also World, PPP* 3.0 -0.7 4.5 4.3
contributes to heightened financial risks. World, nominal. 2.0 -1.4 3.7 3.6
* Purchasing power parities
GDP growth
Year-on-year percentage change Source: OECD, SEB
10.0 10.0
SEB
forecast
7.5 7.5
Our main scenario – with moderate growth, low
5.0 5.0 inflation and cautious interest rate hikes – implies a
rather favourable environment for asset prices in both
2.5 2.5
the stock and bond markets. In addition, we expect
0.0 0.0
global economic policy collaboration, primarily among
the G20 countries, to help strengthen macroeconomic
-2.5 -2.5 stability and enable the world to avoid conflicts in the
-5.0 -5.0
trade and currency policy fields.
00 01 02 03 04 05 06 07 08 09 10 11
The main downside risks in this scenario are that large
Emerging markets OECD
Source: OECD, SEB
refinancing needs by both governments and financial
institutions may create a wave of financial market
instability. This could interrupt the positive spiral of
The period when all means were permitted in counter- recovery in asset prices and greater optimism among
acting depression and deflation risks of the crisis is households and businesses that we have seen over the
now over. The normalisation of economic policies is past six months or so.
fast approaching. Recent flare-ups in trouble spots
indicate that the room for crafting exit strategies On the other hand, there is clear potential for stronger
has narrowed. The task of ensuring recovery while growth if the pieces of the puzzle fall into place with
preventing new imbalances and bubbles from forming regard to the financial situation. Extremely low
has thus become increasingly difficult. resource utilisation combined with continued strong
4
Reshaping the credit market

Financial conditions have improved significantly in In principle, the aim of these proposals – put simply –
the past year. Government interventions, more is to influence the balance sheets of systemically
transparency and greater optimism have led to a sensitive institutions both in terms of size and
positive spiral. Further credit losses are expected, but composition (various assets in relation to various
on a more controlled scale. Improved risk appetite liabilities). A global financial sector tax is now being
has pushed down yield spreads in the corporate studied by the International Monetary Fund (IMF) and
bond market to levels not far from those prevailing others. Its purpose would be to finance crisis meas-
before the crisis, while the volume of bond issues ures that have already been implemented, but it
has been very large. Systemic risk is limited; the tools would also aim at building up government buffers
are available to handle problem institutions. against future crises. By introducing a “leverage ratio”
that would limit the balance sheet size to a certain
Credit market moves towards normalisation level in relation to equity capital, it would increase
US yield spread against government securities, per cent pressure to strengthen the capital base. This base
6 6 would meanwhile include new and better capital,
compared to the present system.
5 5
4 4
These measures imply some re-regulation of the
credit market and would influence both credit supply
3 3 and cost of capital. In a longer perspective, a smaller
2 2
credit market does not necessarily have to harm
economic growth. Preliminary studies from the IMF
1 1 and elsewhere show that weaker dynamism and
flexibility may be offset by greater macroeconomic
0 0
Jan May Sep Jan May Sep Jan May Sep Jan stability. Over the next couple of years, however, the
07 08 09 10 process of adjusting to a new financial framework is
Corporate bonds, Baa rated
Interbank rate (TED)
likely to hamper growth:
Source: Reuters EcoWin
 Because of uncertainty about future financial
Concurrent with the awakening of the venture capital sector regulations, investments and crucial
market, the global banking system is facing contin- strategic decisions about financial sector
ued pressure for structural change. Creating a business plans will be postponed. Lingering
banking system that is smaller in volume but more risks in the real economic/sectoral environment
stable and resilient is becoming an ever-clearer will create unclear credit status among individual
political goal. In most cases such proposals are still market players, which will also hamper lending.
on the drawing board, but they will be synchronised  Small and medium-sized businesses may
under the aegis of the G20 and the Financial Stability experience a credit squeeze in the next couple
Board. of years as the lending volume of the banking
sector shrinks. The potential for funding by
Sharp slowdown in bank lending means of direct issues in the global securities
Year-on-year percentage change market is open primarily to large, established
15.0 15.0 companies.
12.5 12.5
 Requiring banking systems to maintain more
10.0 10.0
and better capital, combined with a squeeze on
7.5 7.5
profitability, is very likely to result in higher capital
5.0 5.0
costs and lower lending volume. This will
2.5 2.5 influence the impact of monetary policy on the
0.0 0.0 economic (through the interest rate and credit
-2.5 -2.5 channel). One conclusion is that a neutral key
-5.0 -5.0 interest rate will be lower during the transforma-
-7.5 -7.5 tion of banking systems to a new equilibrium
99 00 01 02 03 04 05 06 07 08 09 situation.
US Euro zone
Source: Federal Reserve, European Central Bank
5
monetary policy stimulus might lay the groundwork A number of Asian countries have now initiated
for a powerful rebound. Very strong balance sheets monetary tightening measures, mainly for the purpose
among industrial companies, combined with a deeply of slowing excessively rapid credit growth that may
depressed level of capital spending, are also argu- lead to bubble tendencies in asset prices. In our
ments for a strong recovery than in our forecast for assessment, risks of a broad-based upturn in inflation
2010. are still rather small. Resource utilisation is not
alarmingly high, and these countries have become
more adept at neutralising the effects of international
Asia continues to drive world economy commodity price increases. Rather mild tightening is
Strong external balances and relatively little exposure thus probably sufficient, which means good prospects
to global financial problems helped Asian emerging of continued growth at a rather high level.
economies maintain good momentum during 2009.
Most of these countries were also able to take advan-
tage of dynamic regional trade, sustained by Chinese Strong Nordic fundamentals pay off
stimulus policies. Asia thus played an important role in During 2009, Norway put up a decent resistance to
stabilising the world economy during the most acute the international downturn, while the other Nordic
phase of the crisis. countries were relatively hard hit. Because the Finn-
ish and Swedish economies are dependent on the
Contributions to global GDP global manufacturing cycle, their GDP declines were
growth in 2010 larger than the OECD average. In Denmark, serious
Percentage point imbalances in the housing market contributed to a
sharp economic slide.
PPP Nominal
United States 0.59 0.67 The Nordic countries remain highly dependent on the
Japan 0.08 0.10 international economy, but future global economic
Euro zone 0.21 0.30 growth will be hampered mainly by public sector
United Kingdom 0.04 0.06 consolidation programmes that will curb domestic
OECD 1.24 1.51 demand. In such a situation, the secondary effects
China 1.34 0.82 on the Nordic countries will be significantly
Emerging economies 3.22 2.23 milder than during the acute credit crisis, when
World 4.50 3.70 global trade came to a sudden halt. Looking ahead, we
Source: OECD, SEB
thus believe that the Nordic countries may benefit to a
greater extent from their good fundamentals in the
form of large current account surpluses and strong
Looking ahead, Asia will also continue to serve as
government finances, viewed in an international
an engine of the world economy. The influx of
perspective.
capital to Asia will continue, and growth forces will
broaden. Due to significantly lower government debt Norway will benefit from high oil prices and extreme-
than in the OECD countries, the need for fiscal ly strong public finances. Very low mortgage interest
consolidation will be far smaller. Emerging economies, rates in Norway and Sweden have kept home prices
especially in Asia, will account for the lion’s share of up, helping sustain consumption. Meanwhile Sweden
global expansion in 2010. This is especially true if we and Finland will benefit from the upswing in global
measure in terms of purchasing power parities (PPP). demand for industrial products; their export structure
will be an advantage in the recovery phase. In Den-
mark, the recovery will be more listless, due to
Divergent government debt burdens protracted adjustment problems in the construction
Per cent of GDP
and housing sector.
110 110
100 100
90 SEB forecast 90 Baltics: Light at end of long tunnel
80 80 The most acute crisis period in the three Baltic
70 70 countries appears to be over. The Baltics have taken
60 60 advantage of the incipient recovery in global demand.
50 50
We have thus revised our GDP forecasts for Estonia
40 40
and Lithuania upward. We expect these economies to
30 30
begin growing again during 2010. Their governments’
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
austerity policies have remained in place, bolstering
confidence in the Baltic strategy of maintaining
Developed economies Nordic countries
Emerging markets
currency pegs to the euro with the aid of internal
Source: OECD, SEB devaluation. As a result, local interest rates have been
pushed down sharply.
6
Estonia probably meets all the criteria for euro zone towards its lowest level in the post-war period. As
membership. We thus assume it is overwhelmingly productivity recovers in Western Europe, companies’
likely that Estonia will be accepted as a member costs will also ease. We thus expect core inflation to
following the evaluation that will occur this spring and continue downward, bottoming out at around ½ per
that it will adopt the euro on January 1, 2011. cent both in the US and the euro zone by year-end.
The energy-driven rebound in the CPI will continue
Inflation in the OECD countries over the next few months, but CPI inflation will later
Year-on-year percentage change decline, too. Overall, this implies that inflation will
5 5 remain below central bank targets or comfort
4 4 zones for price stability.
3 3
Inflation risks exaggerated
2 2
Despite favourable inflation trends to date, there is
1 1 uncertainty about inflation in a longer perspective.
Several risk aspects are being discussed:
0 0
 The sharp increase in the monetary base may
-1 -1
00 01 02 03 04 05 06 07 08 09
lead to inflation. This may be connected to the
fact that some countries will be tempted to solve
Core inflation CPI their imbalance problems by inflating away the
Source: OECD
burden of government debt in real terms.
Difficult challenges and political tensions remain
 Output gap measurements may prove too
before the economic crisis is over. This is especially
unstable. This may, for example, be due to difficul-
true of Latvia, whose ability to live up to the require-
ties in assessing how much production capacity
ments established by the IMF and EU for the comple-
and labour are permanently sidelined during the
tion of their bail-out loan programme remains uncer-
crisis.
tain.
 Strong growth in Asia may lead to intensified
Persistent low inflation competition for finite natural resources and may
thus lead to a sharp price upturn for commodi-
During May-September 2009, Consumer Price Index
ties.
(CPI) inflation in the OECD countries as a whole was
below zero for the first time in many decades. It then  Economic policy will include sizeable elements of
rebounded, entirely as forecasted, to almost 2 per cent tax hikes that drive up inflation. This may apply
as the effects of earlier energy price declines eased. to value-added tax hikes that are part of budget
Core inflation has continued to move downward and consolidation programmes, as well as higher
is now around 1.5 percent. The continued decline in environmental taxes.
core inflation supports our fundamental view that low
resource utilisation is the dominant force in the We regard these risks as exaggerated, however.
inflation process. Monetary expansion has been a necessary element of
the stabilisation of the banking sector. Broad measures
Core inflation approaching zero
of money supply growth are continuing to slow,
Year-on-year percentage change
3.0 3.0
which demonstrates that monetary expansion is not
leaking into the real economy. Not until the appetite
2.5 SEB
forecast
2.5 for capital spending and consumption have returned in
such a lasting way that resource gaps in the economy
2.0 2.0
are nearly closed will we face a genuine inflation
1.5 1.5 threat. Our conclusion is that the central banks have
both the time and the instruments to withdraw
1.0 1.0
excess liquidity from the banking system.
0.5 0.5
Nor do we believe that commodity prices will pose a
0.0 0.0 major inflation threat over the next couple of years. In
98 99 00 01 02 03 04 05 06 07 08 09 10 11 the short term, we anticipate a minor downturn in
Euro zone US prices. In a somewhat longer perspective, too, the
Source: Eurostat, BLS, SEB
moderate increase in global demand – from deeply
depressed levels – implies that imbalances of the kind
According to most indicators, core inflation will keep that prevailed during 2004-2007 remain relatively
moving lower. Producer prices will be more subdued, remote. In this environment, the Organisation of
and the rate of wage and salary increases is moving
7
International overview .
Petroleum Exporting Countries (OPEC) is also highly by fiscal policy changes, the growth impulse in 2010
capable of keeping oil prices at around the USD will be neutral or slightly negative.
70-90/barrel level.
We expect the fiscal policy picture in 2011 to become
Inflation expectations – measured on the basis of clearer when the G20 countries present their medium-
pricing in the inflation-linked bond market – have term consolidation programmes in preparation for
admittedly risen somewhat, but we regard this mainly synthesis and evaluation by the IMF (see box). Active
as a normalisation after the deflation worries that cost savings measures will probably begin in various
prevailed during the most acute phase of the crisis. countries during 2011, but most implementation lies a
Expectations in a five-year perspective are now few years ahead in time. At present, we estimate
around 1½ per cent in the euro zone and around 2 per the tightening effect in 2011 at 1 per cent of GDP.
cent in the US. In light of the risk scenarios for the Our conclusion is that even if deficits persist and
world economy that have been discussed in recent government debts continue to grow, fiscal measures
years, our main conclusion is that confidence in the to prop up the economy are unavoidably disappearing.
ability of the central banks to keep inflation stable has
been remarkably strong.
Fed and ECB hikes by around year-end
Break-even inflation Aside from fiscal policy, changes in financial sector
5 years, per cent infrastructure and rule systems will determine the
3 3 shape of future interest rate policies. Our conclusion
(see the box on “Reshaping the credit market”) is that
2 2
an adjustment of bank balance sheets implies mone-
1 1 tary policy tightening via the volume side and
higher capital costs. This will hamper economic
0 0
activity and – all else being equal – reduce the need
-1 -1 for interest rate hikes.
-2 -2 Most leading Western central banks have also contin-
ued to emphasise the seriousness of the crisis and the
-3 -3
06 07 08 09 10
fragility of the recovery. Their top priority has been to
persuade markets that the zero interest rate policy will
Euro zone US Sweden not change in the near future, even in a situation of
stabilising economic conditions and labour markets.
Fiscal stimulus now exhausted One reason for this is that fiscal policy and the
The recent flare-ups of market crises and instability financial system generally can only change in one
demonstrate a great need for economic policy exit direction, and this will have a tightening effect on
strategies. Overheating risks in Asia, collapses of the economy. In such a situation, the central banks
confidence in southern European fiscal policies and view the risks that low interest rates will give rise to
long-term question marks about strategy choices in bubble-like price increases in asset markets as being
the US economy are all evidence that the period when limited.
all means were permitted in counteracting depression
Key interest rates
and deflation risks of the crisis is now over. But the Per cent
task of safeguarding the path to recovery without 7 7
building up new imbalances is not easy. It is neces-
6 SEB 6
sary to find a suitable mix between fiscal and mone- forecast
tary policy that also takes into account the restructur- 5 5
ing of the financial system. 4 4
Rising government debts represent an increasing- 3 3

ly acute problem for fiscal policy. When the credi- 2 2
bility of efforts to create sustainable public finances
1 1
comes into question, businesses and households may
also become more cautious in the short term. In a 0 0
00 02 04 06 08 10
theme article in the November issue of Nordic Out-
look, we presented a table on the thrust of fiscal Euro zone US Bank of England
Source: ECB, Fed, BoE, SEB
stimulus policies. Our conclusion was that fiscal
policy measures provided a positive growth impulse
equivalent to 2 per cent of GDP in the G20 countries. We thus anticipate that it will take as much as one
Most stimulus measures will remain in place during year before central banks in the largest industrialised
2010, but since their effect on growth is determined countries begin their interest rate hikes. The Federal
Reserve, the European Central Bank and the
8
Bank of England will all begin a cautious process deficits, and in the American case, increased uncer-
of normalisation around year-end 2010. Late in tainty about the long-term inflation outlook. The
2011, we expect key interest rates to stand at 2.0 per interpretation of the yield-curve slope thus becomes
cent in the US and the UK, while the ECB rate – more double-edged.
which is starting from a higher level – will reach 2.5
per cent. Steep yield curve
Government bonds, 10 year minus 2 year
The situation varies greatly, however, both with 3.0 3.0
regard to the strength and sustainability of the recov- 2.5 2.5
ery and the need for fiscal consolidation. A number of 2.0 2.0
central banks in emerging economies will carry out 1.5 1.5
interest rate hikes during 2010. Norges Bank has 1.0 1.0
already raised Norway’s key rate twice, and the rate 0.5 0.5
will continue upward to 4.25 per cent by late 2011. 0.0 0.0
We also expect Sweden’s Riksbank to hike its key -0.5 -0.5
interest rate in July, and we foresee a repo rate of 3.0 -1.0 -1.0
per cent by late 2011. -1.5 -1.5
90 92 94 96 98 00 02 04 06 08 10
Weak upturn in bond yields US Germany

Long-term bond yields in Germany and the US have
mainly moved sideways since mid-2009. Over the Viewed from the standpoint of financial stability, a
past 2-3 months, however, American yields have steep yield curve on securities contributes to greater
tended to rise while German ones have instead shown earning capacity by making it possible to borrow
a downward trend. This has opened the way for a short-term and invest long-term. On the other hand,
yield spread of around 60 basis points. German 10- rising long-term yields also risk creating unrealised
year yields are now around 3.20 per cent: only about losses in government bond holdings, which would
30 basis points above their lows early in 2009. weaken the financial system.
Because of deeply depressed short-term interest rates, Looking ahead, we foresee driving forces for long-
we now have a historically steep yield curve; in the term yields pushing in different directions. The
US it is steeper than at any time in the past two economic situation is continuing its gradual improve-
decades. Such a yield curve slope is normally an ment, and central bank rate hikes are moving ever
indicator of an improved business cycle by reflect- closer. Meanwhile budget deficits will remain high,
ing a situation where a prolonged expansionary which implies a persistent large supply of government
monetary policy is combined with rising optimism and securities. This will push up yields, especially for
risk appetite. However, long-term yield levels are at small countries with fiscal imbalances.
present to a unusually high degree influenced by large
Will G20 coordination yield results?

The meetings of the G20 countries during 2009 decisions will be postponed until the summit
helped to calm financial markets and bolster opti- meeting in South Korea next November.
mism, since the leaders of major economies were
able to show a high degree of common understand- The G20 countries will also discuss tax policy trade-
ing of the problems. This year, the ambition is to offs between rapid improvement in the budget
make this cooperation more concrete and formal. situation and any adverse effects on capital spending
Early in 2010, the G20 countries are expected to and consumption. The G20 and the IMF will also be
present medium-term economic forecasts along with involved in the issue of changing the framework of
plans for how they intend to restore order to their monetary policy. The G20 will also discuss the issue
public finances as well as strengthen the prospects of how the international monetary system can be
of long-term stable growth. designed in a way that will be less dependent on one
currency (USD).
The IMF has been entrusted with compiling these
plans and forecasts as well as analysing their Ambitions are thus high and the agenda is far-
consequences at the global level. The point of reaching. It remains to be seen to what extent the
departure of this process is that no country’s plan G20 countries are capable of easing tensions
may adversely impact growth in another country. At the surrounding trade policy, currency rate issues and
G20 meeting next June in Canada, G20 heads of financial system issues that lie below the surface.
state and government will decide among various The G20 countries have made agreements on
policy options for strengthening the potential for working principles, but their actual degree of enthusi-
stable, sustainable global growth. This agenda asm about reaching decisions may, of course,
seems hectic, and it is likely that more concrete diminish in case of a clear economic recovery.
9
10-year government bond yields especially equities. If this scenario materialises, there
Per cent is clear potential for a further stock market upturn in
7.0 7.0 the coming year. Despite rising risk appetite and a
6.5
SEB
6.5 renewed search for yield, valuations in most stock
6.0 forecast 6.0 markets are still moderate.
5.5 5.5
5.0 5.0 Stock market performance
4.5 4.5 Index 100 = January 2007
4.0 4.0 150 150
3.5 3.5 140 140
3.0 3.0 130 130
120 120
2.5 2.5
110 110
2.0 2.0 100 100
99 00 01 02 03 04 05 06 07 08 09 10 11 90 90
80 80
US Germany
Source: Reuters EcoWin, SEB 70 70
60 60
50 50
On the other hand, we expect inflation pressure to 40 40
continue downward and confidence in low inflation Jan May Sep Jan May Sep Jan May Sep Jan
policies to last. Together with changes in financial 07 08 09 10
Sweden OMXS Emerging markets FTSE USD
infrastructure, this will probably cause estimates of US S&P 500
neutral key interest rate levels to be adjusted down-
ward. In addition, credible budget consolidation
programmes may also help curb the upturn in long- Meanwhile, however, there are various macro-related
term yields. risks. In many branches of industry, there are still
questions about the demand side. Profits have been
Overall, we expect a moderate upturn in long-term maintained at tolerable levels with the help of sharp
yields over the next couple of years. US 10-year cost-cutting, but hopes of imminent improvement in
yields will stand at 3.95 per cent at the end of 2010, the order situation have so far been dashed. As a
and German ones at 3.40. Looking ahead one year, we result, industrial firms have remained dependent on
expect Swedish 10-year yields to be about 20 basis China’s role as an economic engine. This is helping to
points higher than German ones, primarily due to fuel concerns that a sharp tightening of Chinese
Sweden’s earlier key interest rate hikes. Norges Bank economic policy might halt the upturn in the world
is far ahead of the ECB in the rate hiking cycle, which economy. Another factor influencing industrial com-
will contribute to a yield spread between Norway and panies is that fiscal imbalances might lead to interest
Germany of about 70 points at the end of 2010. rate instability that would halt the recovery. Our
conclusion is that a number of questions need to be
addressed before the potential for continued stock
Stock markets at a new crossroads market recovery can be realised.
The powerful recovery that has dominated stock
markets since the spring of 2009 has reflected a
gradually diminishing likelihood of a world economic Worries, imbalances driving currencies
collapse. This, in turn, has depended upon rising In recent years, the forces driving currency rate
confidence in the ability of economic stimulus meas- movements have changed as the economic crisis has
ures, combined with guarantees for the financial assumed different shapes. Last autumn, currencies
system, to turn around the economic cycle. In such a that benefit from rising risk appetite generally gained
situation, the flow of weak actual macroeconomic strength. The currencies of fast-growing Asian
figures has been interpreted as less important to the countries benefited from capital flows stimulated by
future trend of profits, especially as forward-looking the region’s dynamism. In the future, issues related to
indicators began to rebound. In the past month, we long-term rebalancing of global demand and the ability
have seen a correction in the world’s leading stock of the euro zone to deal with internal problems will
markets that has been especially clear in the emerging play a central role in currency rate movements.
markets field. The positive force has weakened, partly
due to a natural process after a strong development China’s currency rate policy will be increasingly
last year, and partly due to new economic and political crucial to any chances of reducing global imbalances
uncertainties that has made the outlook more uncer- by encouraging greater domestic demand in Asia and a
tain. more export-oriented American economy. In Novem-
ber’s Nordic Outlook, we examined arguments for an
Our macroeconomic scenario – moderate growth, imminent resumption of yuan appreciation against the
low inflation and low interest rates – implies funda- US dollar. The Chinese currency has been underval-
mentally favourable conditions for asset prices, ued for a long time. Now that China’s economic
10
recovery is on firmer ground, the time seems ripe for advantage of the lengthy economic expansion in order
the country to relinquish its CNY/USD peg. We to save and improve their structural position.
interpret the Chinese central bank’s new policy
statement that the value of the yuan will reflect The problems in the euro system have pushed down
“changes in international capital flows and the trends the euro from the strong position it enjoyed last
of major currencies” as a signal to this effect. autumn. We believe this will have long-lasting conse-
quences and that the “pain threshold” for how much
China: Exchange rates the euro zone economies can tolerate has been low-
USD/CNY and index ered. We thus expect a gradual adjustment of the
6.75 130 EUR/USD exchange rate towards levels closer to its
7.00 125 long-term equilibrium. We predict that the euro will
7.25 120
reach USD 1.30 by the end of 2010 and 1.25 by the
end of 2011. The British pound will also regain ground
7.50 115
against the euro. By the end of 2011, the EUR/GBP
7.75 110 exchange rate will be at 0.80. The reason why the
8.00 105 euro will not weaken further is that the deficit prob-
8.25 100
lems in the US and UK are more severe than in the
core euro zone countries.
8.50 95
05 06 07 08 09 10
The Nordic currencies will appreciate further against
Nominal effective exchange rate (RHS) the euro in the coming year. Sweden’s strong current
USD/CNY (LHS) account balance, an improved export outlook and
relatively early interest rate hikes by the Riksbank
We predict that the appreciation of the yuan against point towards SEK appreciation. We expect the EUR/
the dollar will total 7 per cent during 2010, beginning SEK exchange rate to stand at 9.50 a year from now.
this spring. After that, additional appreciation of the But the SEK is still undervalued from the standpoint of
same magnitude will occur in 2011. Chinese currency fundamentals. Combined with continuing weakness in
appreciation would also help strengthen other some euro zone countries, this might allow further
Asian currencies. In addition, interest rate differen- appreciation to 9.20 by late 2011.
tials against the West in the wake of strong growth in
Krona tracks business optimism
many countries will drive currency rate movements
12.0 -60
further.
11.5 -50
Worries about Greece weakening the euro 11.0 -40
1.20 4.0 -30

10.5
-20
1.25 3.5 10.0
-10
1.30 3.0 9.5
0
1.35 2.5 9.0 10
1.40 2.0 8.5 20
1.45 1.5 8.0 30
1.50 1.0 98 99 00 01 02 03 04 05 06 07 08 09
1.55 0.5 EUR/SEK (LHS)

Business confidence, net balance (RHS)
1.60 0.0 Source: NIER, SEB
Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec
07 08 09 10
EUR/USD (LHS) The Norwegian krone will also strenghten in the
10-year yield spread, Greece-Germany (RHS)
Source: Reuters EcoWin coming year. Norway’s central bank has already
started interest rate hikes, fiscal policy is expansionary
The fiscal crisis in the PIIGS countries (Portugal, and oil prices are relatively high. Looking ahead one
Italy, Ireland, Greece and Spain) has contributed to a year, the EUR /NOK exchange rate will stand at 7.80.
clear weakening of the euro in recent months. The During 2011, however, we expect the NOK to weak-
reason why this crisis has had such a large impact on en. When other central banks begin to carry out their
financial markets is probably that it exposes funda- rate hikes, we believe that the EUR/NOK exchange
mental problems in the euro system. The principle rate will move back towards levels more in line with
underlying euro zone regulations regarding govern- fundamental valuations and historical averages. At the
ment budget deficits, debts and so on is that no end of 2011, the EUR/NOK rate will be 8.00.
country should pursue an irresponsible fiscal policy at
the expense of the other member countries. The crisis
has revealed that many countries have failed to take
11
The United States
Strong growth this year, picture. The ISM purchasing managers’ index for the
manufacturing sector is at a level that – according to
weaker in 2011 familiar rules of thumb – is compatible with GDP
growth of around 5.5 per cent. Our forecast implies
 Inventory-driven recovery that industrial production, among other things helped
by the upturn in the automotive industry, is chugging
 Listless labour market recovery
along at a decent pace. Besides, capital spending levels
 Fed will hike key rate in December are depressed, which means there is great potential
for a rebound when capacity utilisation recovers.
The American recovery has shifted into higher gear. Capacity utilisation has climbed more than 3 percent-
According to preliminary figures, GDP grew at an age points since it bottomed out but is still 12 percent-
annualised 5.7 per cent rate in the fourth quarter of age points below its long-term average. This will hold
2009, the strongest performance since 2003. A sharp back capital spending this year. Our forecast is that
swing in the inventory cycle explains more than half corporate capital spending will level off in 2010
this upturn. The inventory cycle, along with expansive and grow by 8 per cent in 2011.
economic policies, will also contribute greatly to
decent growth figures during the first half of 2010. ISM does not indicate very strong growth
Index, year-on-year percentage change
62.5 6
Fiscal stimulus and inventories are 60.0 5
boosting GDP 57.5 4
Annualised 55.0 3
6 6 52.5
2
5 5 50.0
1
4 4 47.5
0
45.0
3 3
42.5 -1
2 2
40.0 -2
1 1 -3
37.5
0 0 35.0 -4
-1 -1 98 99 00 01 02 03 04 05 06 07 08 09
-2 -2
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ISM Composite index (LHS) Real GDP (RHS)
Source: ISM, Department of Commerce
09 10 11
Inventory contribution GDP growth
Net effect of stimulus
Source: CBO, Recovery.gov, SEB
The strength of the manufacturing sector stands in
sharp contrast to the weakness of other sectors. The
But it is still too early to breathe a sigh of relief. The non-manufacturing ISM index is stuck at around 50,
first challenge will appear later this year, when the and our composite ISM index – weighted to reflect
impact of the inventory build-up fades – historical the size of each sector in the economy – is compatible
experience shows that an inventory surge usually with GDP growth of a modest 2 per cent. This
subsides after about three quarters – and US fiscal indicator has slightly higher correlation with GDP than
policy assumes a mildly tightening direction. By mid- ISM manufacturing.
year, other growth forces must kick in. Households
ISM is high while NFIB stuck in the cellar
normally take over the lead, but due to rather listless
Index
labour market recovery and continued debt reduction, 65 30
consumption will not gain much momentum. We thus
expect economic growth to slow significantly during 60 25
the second half. Overall, this means that GDP growth 55
20
measured as an annual average will end up at 3.4 per 50
cent in 2010 and 2.2 per cent in 2011. 15
45
With unemployment stuck at high levels, low inflation 40
10
pressure and low manufacturing capacity utilisation
35 5
are likely. The Federal Reserve is thus not in a hurry
to raise its key interest rate, despite certain signs of 30 0
rising inflation expectations. The first rate hike will 86 88 90 92 94 96 98 00 02 04 06 08 10
come in December 2010. One year later, the federal ISM Manufacturing (LHS) NFIB (RHS)
funds rate will stand at 2.00 per cent. Source: ISM, NFIB
The situation is toughest for small businesses. The

Indicators point in different directions difference between the National Federal of Independ-
Leading industrial indicators paint a bright economic ent Business (NFIB) small business index and the ISM
12
The United States
has never been larger since small business surveys might justify more vigorous growth in household
began in the mid-1980s. Exposure to a weak domestic consumption than we foresee. But since households
market and difficulties in obtaining loans may explain are continue to pay down their debts – their debt-to-
the problems of small businesses. The large corpora- income ratio remains at historically high levels –
tions in the ISM index, however, are benefiting from consumption will be restrained. Our forecast is that
good momentum in the export sector, while enjoying household consumption will increase about 1.5 per
strong balance sheets and essentially unlimited access cent annually this year and next.
to cheap loans.
Working hours are expanding
3-month annualised, year-on-year % change
Rising household income 10.0 10.0
Powerful fiscal stimulus measures have succeeded in 7.5 7.5
stopping the decline in consumption. “Cash for 5.0 5.0
clunkers” auto rebates, tax cuts and higher transfer 2.5 2.5
0.0 0.0
payments – their share of income is at a record level –
-2.5 -2.5
have contributed to rising consumption during the
-5.0 -5.0
autumn and winter. According to the Conference
-7.5 -7.5
Board index, consumer confidence stood at 55.9 in
-10.0 -10.0
January, a clear improvement compared to its darkest -12.5 -12.5
month (25.3 in February 2009). But viewed in a 86 88 90 92 94 96 98 00 02 04 06 08 10
historical perspective, these levels are low. Consumer
3-month annualised
confidence is usually well above 100 during cyclical Year-on-year percentage change
upturns. During recessions, it averages 72. Source: BLS
In recent years, US household saving has undergone a Shaky housing market

significant adjustment. Saving as a percentage of The housing market is the sector that has benefited
disposable income rose from 1.7 in 2007 to 4.6 per the most from government stimulus packages, which
cent in 2009, measured as an annual average, but our is mainly reflected in falling home mortgage interest
savings model indicates a continued need for adjust- rates and a powerful upswing in existing home sales.
ment. In our assessment, saving will gradually rise in Home prices have risen for 6 months in a row,
the next couple of years. This is supported by a according to the S&P/Case-Shiller index. Tax credits
record-low appetite for credits; lending has fallen in to first-time buyers, which have been both extended
14 of the past 15 months. Unlike the situation during and expanded, seem to have placed a floor under
the last recession, weak income growth is thus not home prices and attracted buyers into the market.
being offset by credit expansion.
Existing home sales way off the lows
Not a good combo for consumer spending Millions
Year-on-year percentage change 1.5 7.50
20.0 20.0 1.4
7.00
17.5 17.5 1.3
15.0 15.0 1.2 6.50
12.5 12.5 1.1
6.00
10.0 10.0 1.0
7.5 7.5 0.9 5.50
0.8
5.0 5.0 5.00
0.7
2.5 2.5
0.6 4.50
0.0 0.0 Home sales:
0.5
-2.5 -2.5 New (LHS) 4.00
0.4
-5.0 -5.0 Existing (RHS)
0.3 3.50
60 65 70 75 80 85 90 95 00 05 10 99 00 01 02 03 04 05 06 07 08 09
Consumer credit Wage and salaries Source: Department of Commerce, National Association of Realtors
Source: Federal Reserve
On the other hand, the supply situation looks alarm-

Luckily a labour market turnaround is imminent. A ing, even though the upturn in housing starts has
larger number of hours worked will mean that income ceased. There are more than 9 million empty single-
will stop falling and turn upward. After a weak 2009, family homes and condominiums in the US. With a
our forecast is that disposable income will grow by record 11 per cent vacancy rate for rental units, there
about 3 per cent both this year and in 2011. is a risk-free alternative to home buying. The demo-
Income will grow more strongly than for many years graphic demand to absorb this home supply might
– during the 2001-2007 economic expansion, annual have looked better. Employment in the key 25-44 year
income increased by an average of 2.7 per cent – and old age category has fallen 8 per cent in the past two
13
The United States
years. With alternative home price indices such as Listless labour market recovery
LoanPerformance and Radar Logic having fallen once In recent months, US labour market statistics have
again, there is a clear risk that the dominant Case- been somewhat stronger than we foresaw in the
Shiller index may also be affected by near-term November issue of Nordic Outlook. A labour market
disappointments. turnaround appears relatively imminent. Given our
forecast of above-trend growth this year, we expect
US home prices going where?
Month-on-month percentage change
employment to increase by a monthly average of more
2.5 2.5
than 150,000 during 2010. In addition, nearly a million
2.0 2.0 people will gain temporary jobs this spring when the
1.5 1.5 US Census Bureau counts the population.
1.0 1.0
0.5 0.5 A jobless recovery so far
0.0 0.0 Non-farm payrolls, recession trough = 100
-0.5 -0.5 107 107
-1.0 -1.0
106 Note: Assuming the recession ended in June 2009. 106
-1.5 -1.5
-2.0 -2.0 105 105
-2.5 -2.5
104 104
00 01 02 03 04 05 06 07 08 09
103 103
Loan performance index
102 102
S&P Case-Shiller 10
Source: First American Corelogic, Standard & Poor's
101 101
100 100
Construction industry confidence indicators are hardly 99 99
pointing towards an imminent upturn. The National -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Association of Home Builders (NAHB) index has fallen 1954-1982 average 2001
during the autumn and winter. Worries about the 1991 Most recent
Source: BLS, NBER
continuing weakness of the labour market may be one
explanation. In addition, there is a large volume of One key question is whether unemployment will fall
foreclosure sales in the pipeline. According to quickly or remain stuck at current levels, as it did
Moody’s, another 2.4 million single-family homes will during the two previous cyclical upswings. We see
be auctioned off this year. The tough conditions that several important reasons why the employment upturn
still typify bank lending are another factor. Applica- and the downturn in joblessness will be sluggish.
tions for new mortgage loans remain at low levels.
Our overall assessment is that the housing market  New unemployment benefit claims admittedly
situation looks more worrisome today than a few show a clear decline in lay-offs, but new hiring is
months ago. conspicuously missing. Especially in small busi-
nesses, which historically account for 50-60 per
The labour market in a longer

perspective
From a labour market standpoint, the 2000s were a economy can renew itself and once again achieve full
lost decade. In 2000, US employment stood at 131 resource utilisation.
million. Ten years later, the number of people with
jobs remained the same. Meanwhile the labour The employment rate down like a rock
force had increased from 146 to 159 million and the Employment/population ratio, per cent
65 65
population by 30 million. Employment as a percent-
64 64
age of population (the employment rate) has fallen
63 63
by more than 5 percentage points from its peak in
62 62
2007. The Fed has singled this out as an alternative
61 61
measure of resource utilisation. Taking into account
60 60
that the labour supply grows over time, a return to full
59 59
employment in five years is equivalent to around 20 58 58
million new jobs, according to this measure. The 57 57
gap illustrates the social tensions generated when 56 56
fewer and fewer people can support themselves by 55 55
working. On the other hand, it also illustrates the 54 54
long-term growth potential that exists if the American 50 55 60 65 70 75 80 85 90 95 00 05 10
Source: BLS
14
The United States
cent of the job creation, hiring plans plans remain the strength of the recovery, the trend of commodity
at very low levels. prices and monetary policy. The spare capacity that
has been built up seems to offset price increases
 Many companies have laid off employees tempo- elsewhere.
rarily and introduced shorter work weeks. Average
working hours are still at levels that are equivalent There is admittedly some uncertainty about the degree
to the loss of another two million full-time jobs, in to which the recession has wiped out production
addition to the actual employment downturn of 8.4 capacity and pushed up equilibrium unemployment.
million. Those who already have jobs will first have Yet our assessment is that because of its extremely
to increase their hours, since this is both easiest sharp upturn, actual unemployment is far above the
and cheapest for employers. equilibrium level. We thus also believe that output gap
and Phillips curve mechanisms will dominate price
 The manufacturing, construction and the financial formation over the next couple of years. For example,
sector downturn is equivalent to about half the total unemployment among highly educated people is at a
loss of employment. Many of these jobs may be record level, which should keep down wages and
lost for good. salaries in the highest income groups.
 Long-term unemployment (out of work for 27 Another important reason why we foresee low
weeks or longer) is at a record level: 6.3 million or inflation is that the sluggish interest rate component in
43 per cent of all jobless people fit into this catego- the CPI has systematically crept downward. Rents
ry. There is a risk that the skills they need to return have fallen month-on-month for five months in a row.
to the labour market will be eroded. Rents and single-family home expenses account for
about 30 per cent of the CPI basket. Since 4.7 million
Our conclusion is thus that the recovery, like the two
US rental units are empty (15 per cent more than a
previous ones, will be of a clearly “jobless” nature.
year ago), the downturn may be prolonged.
This means that unemployment will remain at a high
level; measured as an annual average it will be slight- Productivity, which has grown by an impressive 6.7
ly above 9 per cent in 2011. per cent on average for the past two quarters, will
probably continue climbing for a while. Productivity
Spare capacity will hold down inflation growth will end up at 3.5 per cent this year and 1 per
cent in 2011. Unit labour cost will fall 1 per cent this
Headline CPI inflation has climbed rapidly, from -1.9
year and then rise by 0.5 per cent in 2011. Looking
per cent last summer to 2.8 per cent today, but the
further ahead, this will lay the groundwork for higher
upturn is due to the disappearance of negative energy-
employment and robust real wage increases. Viewed
related base effects from the twelve-month statistics.
over our forecast period, however, the resource
These effects will now fade and inflation will fall
situation, household income expectations, the percent-
again. In terms of annual averages, CPI will end
age of businesses planning to raise prices and actual
up at 1.6 per cent this year and 0.7 per cent in
events point towards a continued price and wage
2011.
squeeze. Instead, productivity will trickle down into
Benign inflation outlook company profit margins. Overall, we anticipate that
Year-on-year percentage change core inflation will fall from 1.1 per cent this year
6 6 to 0.5 per cent next year.
5 SEB 5
forecast
4 4 Fading stimulus effects
3 3 After one year in power, President Barack Obama
2 2 faces mounting headwinds. Health care reform, which
1 1 appeared poised for approval before Christmas, ran
0 0
into major obstacles. Meanwhile the Democrats have
lost their supermajority in the Senate. This means, in
-1 -1
turn, that it may be difficult for the administration to
-2 -2
enact new stimulus measures. The 2009 stimulus
98 99 00 01 02 03 04 05 06 07 08 09 10 11
package will nevertheless provide a big push to GDP
Core inflation Headline inflation
Source: US Department of Commerce, SEB
growth during the first half of 2010. But without
renewed legislation, the situation may become critical
in 2011 when a combination of expenditure cuts and
The core inflation measure excludes such volatile
tax hikes leads to a tightening equivalent to 2.5 per
components as food and energy. One recurring
cent of GDP, according to Congressional Budget
pattern is that core inflation falls during the first year
Office (CBO) estimates. Such a powerful headwind
of a recovery. Historically, this applies regardless of
might threaten the economic recovery.
15
The United States
We nevertheless expect further stimulus measures supply growth. This may be regarded as a form of
equivalent to about USD 150 billion, or somewhat less monetary tightening, although a formal exit from
than the USD 200 billion recently announced in the quantitative easing is still some distance away.
president’s fiscal 2011 budget. Congress will probably
approve many of the measures that the administration Another example is the Fed’s purchases of mortgage-
is proposing, which include infrastructure spending, backed securities, which will probably end this spring.
aid to state governments and unemployment benefits. These purchases have helped push down mortgage
In addition, large portions of the Bush administration’s rates to very low levels, even more than long-term
tax cuts will probably be extended. But the richest government bond yields justify. Once the Fed stops
households – with annual incomes of more than USD buying such securities, historical experience indicates
250,000 – will face tax increases of 2-3.6 percentage that mortgage rates may climb by about 50 basis
points if the administration’s budget is approved. points.
Overall, we expect fiscal policies to contribute 1 What could persuade the US central bank to raise its
percentage point to GDP growth in 2010 and -0.8 per key rate earlier than we are now expecting? A sharp
cent in 2011. We now estimate that the budget deficit upturn in inflation expectations would probably trigger
will rise to close to USD 1.6 trillion (10.8 per cent earlier rate hikes, as the Fed has clearly signalled.
of GDP) in fiscal year 2010, from USD 1.4 trillion in Break-even inflation expectations are also showing
fiscal year 2009. slightly larger inflation worries in the market. But we
are now back at 2007 levels according to this meas-
ure, which is hardly an indication of imminent runa-
Fed continuing to hold off on rate hikes way inflation. Surveys and the Fed’s own measure-
We are sticking to our forecast that the Federal ments of inflation expectations both point towards a
Reserve will not raise its key interest rate until continued stable trend.
December 2010. The resource situation, combined
with fiscal policies that are moving in a tightening
direction while the economy is still searching for firm
ground justifies an ultra-loose monetary policy for
another while. The Fed’s balance sheet has stopped
expanding, which is already visible in slower money
16
Japan
inflation (-1.7 per cent in December) will stay be-

Intensified deflation worries tween -1.5 and -2 per cent for another few months,
then rise as domestic and global growth accelerate. It
 Slow recovery this year and in 2011
will average -1.2 per cent this year and 0.0 per cent in
 Stronger business sentiment, but weaker 2011. Core inflation, too, will remain below zero for
capital spending plans quite some time, averaging -1.0 per cent this year and
 Intense currency debate; yen weakening to 110 -0.5 per cent in 2011.
Exchange rates
Japan has been hit hard by the financial and credit Index 100 = July 2007
crisis. GDP declined by about 5 per cent last year. 150 150
Industrial production fell significantly more deeply 140 140

than in the euro zone and the US. The strong yen, 130 130
which recorded a 14-year high against the dollar in 120 120
November, helped deepen the export downturn as 110 110
capital spending plunged. Looking ahead, we believe
100 100
that a weaker yen, global economic recovery and
some additional fiscal stimulus is enough to ensure 90 90
that growth will reach 1.5 per cent this year and 80 80
1.8 per cent in 2011, just above the consensus view. 70 70
Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
07 08 09 10
Collapse in production EUR USD JPY GBP
Year-on-year percentage change Source: Reuters EcoWin
10 10
5 5 The new finance minister, Naoto Kan, has stressed
0 0 the importance of a weaker yen and indicated that a
-5 -5 USD/JPY exchange rate of 95 is suitable for Japanese
-10 -10
exporters. The Finance Ministry has thus changed its
-15 -15
communication strategy regarding the currency. This
-20 -20
may be interpreted as a sign that Japan is ready to
-25 -25
-30 -30
intervene in the foreign exchange market. In that case,
-35 -35
it would be for the first time since 2004.
-40 -40
00 01 02 03 04 05 06 07 08 09
The Japanese economy would undoubtedly benefit
from a weaker currency, especially considering the
Euro zone Japan US sharp nominal appreciation of the yen in recent years.
Source: Eurostat, Federal Reserve, METI
A weak currency would be a way of both ending
The government has launched several fiscal deflation and stimulating growth. In light of this, we
expansion packages to help prop up the economy. believe that the Bank of Japan will keep its key
In December it unveiled the latest package, equivalent interest rate at the current 0.1 per cent until the
to 1.5 per cent of GDP. So far, stimulus packages first quarter of next year, when a cautious rate
have not caused household consumption to take off, hiking cycle will begin. We expect the yen to weaken
even though unemployment peaked last November gradually in this environment. In June the USD/JPY
and is now shrinking. We predict a cautious upturn in rate will stand at 95. It will reach 110 by the end of
consumption of 1 per cent this year and in 2011. It is 2011. This trend is compatible with export growth of
worrisome that consumer confidence has fallen after 4 per cent annually in 2010-2011.
last year’s upturn. If it should continue downward,
private consumption may show weaker growth. Weak growth combined with large fiscal stimulus
packages will erode the central government budget.
Rising business sentiment in the Bank of Japan’s Last year’s budget deficit of nearly 8 per cent of GDP
Tankan report, especially in the manufacturing sector, will increase to 9 per cent this year. This implies that
indicates that a recovery in capital spending is on its central government debt will reach levels of well
way. We thus believe that capital spending will in- above 200 per cent of GDP next year. Due to the
crease by 3 per cent this year and more than 4 per severe budget situation, Standard & Poor’s has
cent in 2011, although actual investment plans are still revised its government bond rating to negative and a
very tentative. downgrade from today’s AA credit rating is creeping
closer. At the same time, the public sector has large
Inflation pressure is very low. Both CPI and core assets, which means that the net debt is not much
inflation are now well below zero. There are many higher than in the United Kingdom or the United
indications of continued deflation pressure. CPI States. Also, the long period of large current account
surpluses has resulted in an exceptionally strong
wealth position compared to the rest of the world.
17
Asia
Continued strength 2009, as reflected by a sharp increase in broad money

supply measures. Due to the risk of overheating, the
authorities have begun hitting the brakes by taking
 Monetary tightening
various steps that are mainly targeted to the
 Risks of asset price bubbles banking system. During the second quarter of 2010,
 Limited inflation pressure they will begin hiking key interest rates and allowing
currency appreciation (see also “International over-
view”). Monetary tightening combined with diminish-
The cyclical downturn in emerging Asia was mild. ing investment stimulus will help to moderate the
Unlike the trend elsewhere in the world, including the growth rate in the second half. We expect China’s
emerging economies of Eastern Europe, GDP rose in GDP growth to average 10.5 per cent this year and
most Asian countries in 2009. In the second quarter, a 9.0 per cent in 2011, with upside risks in 2010.
recovery occurred – supported by improved exports,
returning capital flows and fiscal stimulus measures. China's growth surge not quite over yet
Rising confidence indicators point towards a stronger Year-on-year percentage change and index 100=1996
upturn this year and a broader range of economic 15 106
engines. Asia, excluding Japan, can thus preserve 14 105
strong growth despite moderate demand in the West. 13 104
12 103
Due to this growth dynamic, by late 2009 many Asian
11 102
central banks began monetary tightening, mainly to
10 101
prevent tendencies towards asset price bubbles. So
9 100
far this has consisted of various lending regulations
and stricter reserve requirements for banks, and in 8 99
China also upward adjustments in market interest 7 98
rates. This spring we also expect the first key interest 6 97

00 01 02 03 04 05 06 07 08 09
rate hikes in China and India. Combined with fading
fiscal stimulus effects, monetary tightening will cause GDP (LHS) Leading indicators (RHS)
GDP growth rates to level off or slow somewhat in
2011. The annual rate of CPI inflation rose from -1.5 per
As earlier, our assessment is that a serious consumer cent six months ago to +1.5 per cent in December.
price upturn is less risky than bubble tendencies in Core inflation rose more moderately, from -1.5 to zero
the stock and property markets. Today the Asian per cent in December. There is relatively little risk that
economies are more capable of neutralising commodi- inflation will continue upward uncontrollably. There
ty price impulses. Resource utilisation is not over- are several restraining price factors: Manufacturing
stretched, and so far the cyclical upturn has largely capacity utilisation is still a bit below the trend of the
been investment-led. Nor will these economies reach past five years. Pay hikes have slowed greatly in the
the same rapid growth rates as in the 1990s and past year. The coming yuan appreciation will lower
2000s. A few countries, including India and Vietnam, import prices. We thus we expect moderate economic
are grappling with difficult inflation problems, with policy tightening to suffice to keep average inflation
price increases approaching double digits this year. at 4 per cent in 2010 and 5 per cent in 2011.
Robust Chinese growth, no overheating Rapid turnaround in India

GDP growth in China accelerated, in line with our India has bounced back unexpectedly fast, with
forecast, to 10.7 per cent in the fourth quarter. The fiscal expansion as a driving force. Since last August,
full-year 2009 figure was 8.9 per cent, a bit above the industrial production has risen more than 10 per cent
official long-term target of 8 per cent. Various signs, year-on-year, credit growth has recovered somewhat,
mainly an export recovery, indicate that the economy and rather strong domestic demand is already evident
will now speed up. We predict that growth will climb in the cities. Meanwhile inflation and inflation expecta-
to a 12 per cent rate in the first half. According to tions have climbed rapidly. This winter, the govern-
a compilation of leading indicators, growth may climb ment introduced certain food price regulations. Bank
even higher. But this growth signal is probably some- reserve requirements were tightened. As interest rates
what exaggerated by last year’s sharp stock market are raised later this year, price acceleration will end.
surge, since share prices are one sub-indicator. Next year the government will also tighten fiscal
policy in order to rein in its budget imbalances. We are
To date, growth has been largely stimulated by raising our GDP forecast somewhat, to 8.5 per cent
government investment projects and rapid credit in 2010 and 7.5 per cent in 2011.
expansion. New bank lending more than doubled in
18
The euro zone
Shaky road ahead tortuous and drawn-out than our forecast. For
example, the German economy lost a bit of its mo-
mentum late in 2009, and financial market players
 The recovery will continue
have also begun to doubt the strength of the
 Persistently large budget deficits recovery, according to the ZEW index. In January,
 Greek crisis weighing down euro the “composite” purchasing managers’ index for the
entire euro zone also fell for the first time in a year.
 ECB will begin hiking its key rate in December
Synchronised recovery
Index (IFO: 2000=100) and net balance (ISM)
Euro zone GDP fell by 3.9 per cent in 2009. The slide 110 65
in the global market for industrial goods following the
105 60
financial crisis hit Germany especially hard, contribut-
ing to a deeper GDP decline in the euro zone than in 100
55
the United States. But industrial production bounced 50

back in the fourth quarter and will accelerate further 95
45
this year as the global economy improves. We foresee 90
a production upturn of about 5 per cent both this year 40
and next in the euro zone as a whole, and that GDP 85 35

growth will end up at 1.7 per cent this year and
80 30
2.0 per cent in 2011, which is above the consensus 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
view. Unemployment will level off at around 10.5 per
Germany (IFO, LHS) US (ISM, RHS)
cent this summer, and government budget deficits Source: IFO, ISM
will grow on a broad front. The budgetary and fiscal
chaos is pushing down the euro and raising a number Weak retail sales are another downside risk for our
of difficult questions about principles and regulations GDP forecast, and the prevailing uncertainty is
in the euro system. reflected in the wide disparity between forecasters
when it comes to household consumption. Both the
GDP on the way up European Commission’s consumer indicator and our
Percentage change
own indicator (based among other things on disposa-
5.0 SEB 5.0
forecast ble income, various interest rates and sentiment
2.5 2.5 indicators) nevertheless signal a clear recovery this
0.0 0.0 year.
-2.5 -2.5
Positive signals in manufacturing
-5.0 -5.0 Year-on-year percentage change and net balance
10 10
-7.5 -7.5
0
-10.0 -10.0 5
-10
04 05 06 07 08 09 10 11
0
-20
Quarter-on-quarter, annualised
-5 -30
Year-on-year
Growth indicator (Euroframe) -10
-40
Source: Euroframe, Eurostat, SEB
-50
-15
-60
Our relatively optimistic growth forecast is based,
among other things, on various leading indicators, -20 -70
00 01 02 03 04 05 06 07 08 09
including the Euroframe indicator, Germany’s IFO
index and the European Commission’s sentiment Industrial production (LHS)
Order bookings (RHS)
indicator. The IFO index rose more than expected in Source: Eurostat, DG ECFIN
January and now stands at an 18-month high. The

historical association between the ISM purchasing Altogether, we expect quarter-on-quarter GDP growth
managers’ index in the US and the IFO index in to end up at 0.3 per cent in the first quarter of 2010,
Germany signals a continued improvement in the then gradually rise to 0.6 per cent in the fourth
coming months, which would help export-dependent quarter. The full-year figure will be 1.7 per cent for
German industrial companies. A recovering order the whole euro zone. Germany will lead the recovery
situation in the manufacturing sector and weaker euro with a GDP growth of 2.1 per cent. Next year GDP
are pointing in the same direction. will increase by 2.0 per cent in the euro zone, which
is above both the consensus view and trend growth.
The indicators are not clear-cut, however, and it
cannot be ruled out that the recovery will be more
19
The euro zone
Consumption will recover this year Unemployment close to peaking

Year-on-year percentage change We believe that euro zone unemployment is now close
5 4.0 to a turning point. It will continue to rise for another
0
3.0 several months, peak at 10.4 per cent this summer,
-5 then fall very slowly. The full-year figure will end up
2.0
-10 at 10.2 per cent both this year and next. Our unem-
-15 1.0 ployment forecast for Germany is 8.4 per cent both
-20 this year and next (using the EU-harmonised meas-
0.0
-25 ure). French unemployment will be higher, averaging
-1.0
-30
10.3 per cent in 2010. In Spain, the jobless rate will
-35 -2.0
reach a record-high 20 per cent this year.
00 01 02 03 04 05 06 07 08 09
Consumer confidence (LHS) Unemployment will peak this summer

SEB consumption indicator (RHS) Per cent
Private consumption (RHS)
Source: DG Ecfin, Eurostat, SEB 10.5 10.5
10.0 10.0
9.5 9.5
Private consumption in the euro zone as a whole will
recover, even though Germany is phasing out its 9.0 9.0
bonus for scrapping old cars. We expect a 0.4 per 8.5 8.5
cent increase this year, and 0.9 per cent in 2011. 8.0 8.0
Exports will gradually rise during our forecast period: 7.5 7.5
by about 4 per cent in 2010 and somewhat more 7.0 7.0
strongly in 2011. This means that the contribution to 6.5 6.5
growth from net foreign trade will shift from -1.2 per 99 00 01 02 03 04 05 06 07 08 09 10 11
cent of GDP to about 0.5 per cent in 2011. Capital NAIRU according to OECD Okun's Law
spending will also recuperate after a full 10 per cent Unemployment, SEB forecast
Source: OECD, SEB
downturn in 2009. The rate of increase will be 3 per
cent in 2010 and 4.2 per cent in 2011.
German labour market figures in January were
Many jobs saved in Germany unexpectedly weak (6,000 more unemployed) despite
So far, unemployment has risen less than might have an improvement in business hiring plans. This illus-
been feared in light of the downturn in output – trates the risks of disappointments as government job
especially in Germany, where the jobless rate even programmes are phased out. The sharp decline in
fell slightly during the autumn. This was largely productivity during the past year can also be interpret-
because the governments of many EU countries pay ed as signalling a future need for many businesses to
allowances for employees who temporarily work cut back their labour force.
shorter hours (“Kurzarbeit” in Germany). These
employees work about two thirds of normal hours but Lower wage inflation this year
retain a larger proportion of their regular pay. This Percentage points and per cent
type of government-subsidised job sharing is intend- -2.0 4.5
ed to serve as a bridge over the economic crisis, -1.5 4.0
enabling businesses to retain their workforce and -1.0
3.5
thus quickly ramp up production when the economic -0.5
turnaround arrives. The allowances, which have been 0.0 3.0
extended several times during the crisis, have 0.5 2.5
probably saved more than 500,000 German jobs. 1.0
2.0
The cost to the government is estimated at about 1.5
EUR 590 per month for an employee working shorter 2.0 1.5
hours, or less than the EUR 1,500/month a jobless 2.5 1.0
person costs the government in unemployment and 00 01 02 03 04 05 06 07 08 09 10 11
other benefits.
Change in unemployment, shifted two years forward (LHS)
Change in total wage and salary cost in industry (RHS)
In the prevailing exceptional situation, the OECD has Source: Eurostat, SEB
praised this type of subsidy, while warning that

adverse effects may arise if the subsidy artificially Last year’s rapid upturn in unemployment is clearly
prolongs the life of fundamentally unprofitable impacting wage formation. So far, the annual rate of
businesses, thereby making it harder for productive increase in industrial wages and salaries has decelerat-
businesses and sectors to recruit employees. It is ed from more than 4 per cent in mid-2009 to just over
thus very important to the recovery dynamic to phase
3 per cent today. We predict a further deceleration to
out these allowances at the appropriate time.
1.5 per cent by the end of 2010.
20
The euro zone
Continued low inflation As usual, inflation measured by the Harmonised Index

The large quantity of idle resources has continued to of Consumer Prices (HICP) fluctuates more than core
squeeze underlying inflation, in keeping with our inflation. Rising energy prices and, to some extent,
overall analysis of the inflation dynamic. Core infla- higher food prices contributed to a swing from -0.5
tion is currently at 1.1 per cent and will fall further in per cent HICP inflation in September to 0.9 per cent in
the coming months. In June it will stand at 0.8 per December. A decline in the producer price index
cent, and it will bottom out at zero in December. The (PPI) in manufacturing, combined with lower energy
full-year figure will end up at 0.7 per cent this year prices, indicates that HICP inflation will soon decline.
and 0.5 per cent in 2011, the lowest ever recorded. It will bottom out at 0.3 per cent in January next year
and then climb to 1.1 per cent by the end of 2011.
Budget balance, current account, central Measured as an annual average, HICP inflation
government debt and inflation, 2009 will end up at 0.8 per cent both this year and next.
The inflation rate varies greatly in the euro zone.
Budget balance, current account (CA) and debt are
measured as a percentage of GDP, HICP inflation as
Problem countries with big budget and current ac-
year-on-year percentage change. count deficits (“twin deficits”) tend to have lower
than average inflation. One interpretation is that these
Budget CA Debt HICP countries now face a great need for real-term
Greece -13.1 -8.6 112.6 1.3 currency depreciation in order to become more
Ireland -12.5 -3.1 65.8 -1.7 competitive and shrink their current account deficits.
Spain -11.5 -5.4 54.3 -0.3 This means that the rate of inflation must decelerate
France -8.5 -2.3 76.1 0.1 compared to other regions. Such a process seems to
have begun in such countries as Ireland, Portugal and
Portugal -8.2 -10.4 77.4 -0.9
Spain, but experience indicates that such internal
Slovakia -6.4 -6.1 34.6 0.9
devaluation is often both protracted and painful. Nor is
Slovenia -6.3 -0.8 35.1 0.9 there a clear pattern in the euro zone, as the relatively
Belgium -5.9 0.6 97.2 0.0 high inflation rate in Greece indicates. The situation in
Italy -5.4 -2.4 114.6 0.8 Germany, with low inflation and high household
Netherlands -4.8 3.1 59.8 1.0 saving sustaining a current account surplus, is also an
Malta -4.5 -3.6 68.5 1.9 important exception.
Austria -4.3 1.5 69.1 0.4
Cyprus -3.5 -11.8 53.2 0.2
Germany -3.2 4.0 73.1 0.2 Burgeoning budget deficits
Per cent of GDP
Finland -2.5 1.1 41.0 1.6
5.0 5.0
Luxembourg -2.2 9.9 15.0 0.0 2.5
SEB forecast
2.5
Euro zone -6.5 -0.7 78.8 0.3 0.0 0.0
Source: European Commission, Eurostat, SEB -2.5 -2.5
-5.0 -5.0
-7.5 -7.5
However, weak productivity growth last year (-2 per -10.0 -10.0
cent) will drive inflation by means of higher unit -12.5 -12.5
labour costs; these costs rose by about 3.5 per cent -15.0 -15.0
in the euro zone last year (4.5 per cent in Germany), -17.5 -17.5
but will fall by 0.5 per cent this year. 01 02 03 04 05 06 07 08 09 10 11
Euro zone Italy Greece

Falling core inflation Germany Spain
Per cent France Ireland
Source: Eurostat, SEB
4.5 4.5
4.0 4.0
3.5 3.5 ECB will hike key rate in December
3.0 Prognos 3.0 Low resource utilisation, low inflation, weak credit
SEB
2.5 2.5 and money supply growth as well as weak inflation
2.0 2.0
expectations are indications that the euro zone’s key
1.5 1.5
1.0 1.0
interest rate will remain low for an extended period.
0.5 0.5 So do monetary policy rules of thumb – Taylor rules –
0.0 0.0 based on resource utilisation and the inflation trend.
-0.5 -0.5 Nor does the European Central Bank’s own rhetoric
-1.0 -1.0
signal that it is in any rush to raise its refi rate. The
01 02 03 04 05 06 07 08 09 10 11
bank is sticking to a very modest GDP forecast (0.8
Core inflation HICP inflation per cent growth in 2010 and 1.2 per cent in 2011) and
Source: Eurostat, SEB
an HICP inflation rate clearly below its target.
21
The euro zone
Concerns about the health of the euro zone’s We now anticipate that the ECB will begin a cau-
banking system are another reason for the ECB to tious rate hiking cycle in December 2010, which is
bide its time. According to the IMF, larger write- three months later than we thought in the November
downs remain in the euro zone than in the US, where issue of Nordic Outlook. The ECB will then raise its
banks have already carried out most of these. Heavy refi rate by 25 basis points to 1.25 per cent. Before
demand from the banking sector for long-term credits this, however, the bank raises the Euro Overnight
(main refinancing operations) also signal that it will Index Average of interbank interest rates, the EONIA
take a fair amount of time before the banking sector rate, which is now about 70 basis points below the
reverts to its normal situation. refi rate. The bank will later follow this up with five
additional 25 basis point refi hikes in the course of
Weak credit growth 2011. The refi rate will stand at 2.50 per cent by
Year-on-year percentage change the end of 2011.
15.0 15.0
12.5 12.5 Credit conditions have eased

Net balance
10.0 10.0
70 70
7.5 7.5 60 60
50 50
5.0 5.0
40 40
2.5 2.5 30 30
20 20
0.0 0.0
10 10
-2.5 -2.5 0 0
99 00 01 02 03 04 05 06 07 08 09 -10 -10
Credits M3 money supply -20 -20
Source: ECB
-30 -30
-40 -40
Credit conditions in the euro zone also remain relative- 03 04 05 06 07 08 09
ly tight although they have recently eased, according Source: ECB
to the ECB’s own Bank Lending Survey. Large sums
are being parked in accounts at the ECB, indicating
that the bank’s liquidity injections are not yielding the
desired stimulus effect on the economy. This is a
further argument for a low key interest rate.
22
The euro zone
Crucial situation for PIIGS countries

The lack of national monetary policies in the euro programmes are implemented. 3) The countries will
zone makes heavy demands on fiscal policy. This is default on their loans and withdraw/be ejected from
the main reason for the Stability and Growth Pact’s the euro system.
focus on restricting public sector debt levels and
deficits. A number of countries, especially the “PIIGS” A default by a euro zone country or its withdrawal from
countries (Portugal, Ireland, Italy, Greece and Spain), the currency union would probably be perceived as a
must now pay the price for a long period of weak huge reversal for the whole euro project. There is
fiscal policy in the form of higher interest rates. also a very large risk of secondary effects, including
financial instability. If Greece should default, the
The situation is definitely the most acute in Greece. market’s expectations regarding possible defaults in
The country has the largest overall problems, among other PIIGS countries would escalate drastically.
them rising public expenditures, exploding budget Meanwhile it is increasingly doubtful at present
deficits and a high level of central government debt. In whether Greece, in particular, has the political
addition, an unfavourable cost trend and low national strength to restore order to its economy by itself. The
savings will lead to an extra large need for interna- measures it has unveiled to date are far from suffi-
tional financing. Greece’s credibility has also been cient. More far-reaching action is required, but above
damaged by repeated instances of manipulation of all, quick reforms that are actually approved and
official budget figures. implemented, in order to calm the markets.
At present, we thus view alternative 2 as the most

Wider yield spreads likely scenario for Greece. An international rescue
Percentage points above Germany
package admittedly raises a number of questions of
6 6
both a legal nature and when it comes to the moral
5 5 hazard dilemma. Formal regulations do not allow the
4 4 ECB to intervene directly and buy the government
bonds of individual countries, thereby supporting a
3 3
country facing fiscal crisis. In an increasingly acute
2 2 crisis situation, however, it is likely that individual
1 1 large countries such as Germany and France can
0 0
intervene with support measures. The IMF may also
assume a role, although the euro zone countries
-1 -1
would prefer to avoid such a situation within the
98 99 00 01 02 03 04 05 06 07 08 09 10
currency union itself.
Greece Spain Portugal
Italy Ireland The moral hazard problems can presumably also be
eased. By combining aid to Greece with strict de-
In our assessment, after Greece the situation is the mands for long-term measures, the medicine can be
most serious in Portugal and Spain. Portugal’s made so bitter that other countries will lose their
problems are largely of the same kind as those of appetite for similar solutions.
Greece, though not as severe. In Spain, the housing Our conclusion is that the risk premium on Greek
market crash has led to extremely high unemploy- government bonds will fall, probably as an effect of
ment levels, contributing to rapidly rising deficits. This international aid. To some extent, a rescue package
has revealed underlying problems with competitive- for Greece would also help push down yield spreads
ness and demographic cost pressures. for other PIIGS countries. But considering the enor-
The situation looks somewhat less bad for Ireland mous supply of government securities that investors
and Italy. Ireland’s financial system was hard hit will encounter over the next few years, it is likely that
during the culmination of the credit crisis, and the countries with weak finances will have to pay more for
government budget deficit has climbed rapidly, but their sovereign borrowing. Yield spreads above
the country entered the crisis with a much lower debt Germany will thus remain at significantly higher
level and has also introduced sizeable cost savings levels than during the period 2001-2007.
packages. Italy has had a high level of public sector The turbulence within the euro zone can affect other
debt for a long time, but its budget deficit is not as EU countries that want to introduce the euro in the
large as that of other Mediterranean countries. near term, primarily Estonia. If the situation in the
There are various conceivable short-term scenarios PIIGS countries gets worse, the ECB and other euro
for how the crisis will evolve: 1) These countries will countries may focus their energy on solving existing
tackle the problem themselves and implement problems rather than letting new members in. Our
major fiscal reform programmes. 2) International main scenario, however, is that Estonia’s low govern-
bail-out packages will be crafted, with major euro ment debt and resolute fiscal consolidation policy will
zone countries as lenders, while fiscal reform be enough for euro membership in 2011.
23
The United Kingdom
Parliamentary uncertainty consumption will grow by 0.3 per cent in 2010,

accelerating to 1.2 per cent in 2011.
 Manufacturers more optimistic than since 1994 The upturn in unemployment will not be as large
 Bank of England will hike in December 2010 as we had previously feared. In the past six months,
 UK sovereign credit rating in danger the jobless rate has been just above 8 per cent. Our
forecast is that it will slowly fall to 7.5 per cent in
2011. The upturn in unemployment has been much
The British downturn was lengthy. But after six milder than historical correlations with GDP have
quarters of falling GDP – the longest downturn among shown. This can be interpreted as indicating that
G7 countries – the economy grew during the fourth growth figures will be revised in the coming months.
quarter of 2009. After last year’s 4.8 per cent plunge,
Rebuilding balance sheets
the largest since 1931, GDP will grow by 1.8 per Per cent of disposable income
cent in 2010 and 2.6 per cent in 2011. Our forecast 325 15.0
is above consensus, but well below Bank of England’s
300 12.5
assessment. Furthermore, our view implies that GDP
will reach its previous peak only late in 2011. 275 10.0
250 7.5
Back up again
225 5.0
Real GDP, 2008:1 = 100
104 104 200 2.5
103 103
102 102 175 0.0
101 101 Consumer credit (LHS)
150 -2.5
100 100 Savings ratio (RHS)
99 99 125 -5.0
98 98
88 90 92 94 96 98 00 02 04 06 08 10 12
97 97
96 96 Source: ONS, SEB
95 95
94 94
93 93 This summer’s parliamentary election may be dramat-
92 92 ic. The Conservatives (Tories) have a clear public
91 91
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
opinion lead but appear unlikely to gain an absolute
08 09 10 11 majority. Public sector finances show record
UK US Germany Japan
Source: National Statistical Offices, SEB deficits, nearly 13 per cent of GDP this year. There
Business confidence indicators show rising optimism. is a risk that in a “hung Parliament”, a coalition
The purchasing managers’ index in manufacturing government will fail to tighten fiscal policy. This has
(56.7 in January) is at its highest level since 1994, and created uncertainty as to whether the UK will lose its
the OECD’s leading indicator has rebounded sharply. high credit rating. If its rating is lowered from AAA
The manufacturing upturn means capital spending will to AA, as happened in Japan, current pricing indicates
recover after a 14 per cent drop in 2009. Low capaci- that government bond yields will be about 50 basis
ty utilisation will prevent an upturn this year, but in points higher. But our main scenario is that the ratings
2011 fixed investment will grow by 8 per cent. institutions will bide their time until the parliamentary
Decent international demand will lift exports: up situation has become clearer, and that sufficient fiscal
around 4 per cent in 2010 and twice that in 2011. tightening will take place starting in 2011.
Exports will make a net contribution to GDP of Inflation will reach 2.9 per cent in 2010 – above the
nearly 0.5 per cent in both years. Bank of England target – but this upturn will be
Last year’s temporary value-added tax (VAT) cut, as temporary. Given the quantity of idle resources in the
well as lower mortgage interest rates and energy economy, inflation will fall to 1.3 per cent in 2011.
costs, helped bolster the economic situation of The BoE will begin its key rate hikes in December this
households, despite rising unemployment and weak year, about the same time as the ECB and the Fed, but
wage and salary growth. Yet consumption fell more is in no hurry to reach more normal interest rates of
than 3 per cent in 2009, since households chose to around 4 per cent. In December 2011, the key rate
build buffers for the future. In a short period, their will be 2 per cent.
savings ratio rose by about nine percentage The pound fell freely during the crisis, but so far this
points, about as much as during the early 1990s year it has regained 7 per cent of its trade-weighted
crisis. Today it exceeds the long-term average. This value. There is nevertheless room for further pound
year’s VAT hike, combined with continued debt appreciation. Our forecast is that the pound will
reduction and a sluggish labour market recovery, will strengthen from today’s EUR/GBP exchange rate
hold back income and consumption: household of 0.87 to 0.85 by late in 2010 and 0.80 by late in
2011.
24
Eastern Europe
Gradual economic upturn the presidential election may contribute to the eco-
nomic recovery. The newly elected president, Viktor
Yanukovich, is described as more pro-Russian than
 Industrial production recuperating first
both his predecessor Viktor Yushchenko and his main
 Domestic demand will strengthen slowly opponent in the election, Prime Minister Yulia Timosh-
 Currencies will appreciate after pause enko. Meanwhile he wants to continue the process of
integration with the EU and cooperate with the IMF in
order to maintain Ukraine’s bail-out loans. We thus
Even the region that was hardest hit by the global still believe that Ukraine can avoid default.
crisis – Eastern Europe – is now climbing out of its
deep recession. But the upturn is in its infancy and
Market confidence has returned
is mainly limited to higher exports and industrial
production, which in the past six months in some Large current account deficits made Eastern Europe
places have improved more clearly than in the West. extra vulnerable to the international credit crisis. The
Sustained by better fundamentals and a smaller turnaround in external balances, combined with
foreign currency share of total borrowing, Poland has the budget-tightening discipline shown by the Baltic
also maintained decent consumption growth. countries and Hungary, are important reasons why the
market has regained confidence in the region. In the
past six months, Eastern Europe has been among the
Industrial production strongest areas in the world in terms of stock
20 20
market and currency rate trends.
15 15
10 10
5 5 Exchange rates
0 0 Weekly data
-5 -5 20.0 3.00
-10 -10 22.5 3.25
-15 -15
25.0 3.50
-20 -20
-25 -25 27.5 3.75
-30 -30 30.0 4.00
-35 -35
32.5 4.25
Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
07 08 09 35.0 4.50
Poland Russia Ukraine 37.5 4.75
40.0 5.00
Our view remains that the economic upturn in most 00 01 02 03 04 05 06 07 08 09
Eastern European countries will be sluggish and Czech Republic, CZK/EUR (LHS)
uneven. Domestic demand is being held back by Poland, PLN/EUR (RHS)
cautious lending, weak wage growth and low need for
investments. Add to this the fiscal tightening now
under way in the Baltics and Hungary and expected In recent weeks, however, declining global risk
soon in milder form in Poland, Russia and Ukraine. appetite has halted the appreciation of Eastern Europe-
an currencies. In Russia, Prime Minister Vladimir
We are revising our GDP forecasts for 2010-2011 Putin’s statement that an overly strong rouble threat-
marginally upward compared to those in the last ens to disrupt the recovery may have had an impact.
Nordic Outlook. We remain somewhat above the Our forecast, however, is that in the course of 2010,
consensus on Poland and Russia. Eastern European currencies will again appreci-
ate, based on stronger current accounts and relative
Poland was the only EU country that reported posi- growth advantages compared to the West.
tive growth last year (+1.7 per cent); we predict that
GDP will increase by 3.5 per cent in 2010 and 4.5 per Key interest rates are moving in different direc-
cent in 2011. tions. The central banks in Poland and the Czech
Republic, which are among countries showing the
Russia’s GDP will turn around from -7.9 per cent in clearest signs of economic upturn, will begin hiking
2009 to +5.0 and +4.5 per cent, respectively; a their key rates in the third quarter. Russia, Hungary
levelling off of commodity prices and tighter fiscal and Romania will continue to cut their key rates. The
policy are among reasons why the upturn will slow. Russian central bank’s main motivation for this is to
moderate the appreciation of the rouble, but a surpris-
Ukraine will recover slowly after last year’s slide. ingly rapid downturn in the inflation rate (to 8.1 per
GDP growth will reach 2.5 per cent in 2010 and 4.5 cent in January) will allow greater flexibility.
per cent in 2011. A more stable political situation after
25
The Baltics
Export-led recovery to the recently regained economic stabilisation. In an

environment of high and still rising unemployment
(about 15-20 per cent), popular discontent may also
 Recession ending in Estonia and Lithuania
erupt again and test the stability of governments.
 Fiscal tightening
 Internal devaluation continues – pegs will hold Wages
35 35
The worst seems to be over in the Baltics. Bottoming- 30 30
out trends that we pointed out in our autumn reports 25 25
have strengthened in recent months. The three Baltic 20 20
countries have received essential support from an 15 15

10 10
incipient recovery in global demand. This is
5 5
apparent from both the third and fourth quarter 2009
0 0
GDP figures and continued strengthening of forward- -5 -5
looking indicators. Export prospects have improved -10 -10
rather more than expected. -15 -15
01 02 03 04 05 06 07 08 09
Exports
Estonia Latvia Lithuania
Year-on-year percentage change Source: National statistical offices
50 50
40 40 For the first time in years, this winter we have
30 30 revised our Baltic GDP forecasts upward: for
20 20 Lithuania and for Estonia. We are above consensus
10 10 for both countries. Our Estonia forecast assumes
0 0 that in May or June, the country will get the green
-10 -10 light to join the euro zone in 2011. Economic
-20 -20 trends in the Baltics this year will follow a dual track:
-30 -30 export recovery but continued weak domestic de-
-40 -40 mand. This means that current account surpluses will
05 06 07 08 09 persist. Our main scenario is still that the currency
Estonia Latvia Lithuania pegs to the euro will survive. This rests largely on
the assumption that international bail-out loans to
Latvia will continue.
Meanwhile budget austerity continues. All three
parliaments adopted 2010 budgets according to Our belief that Estonia will be accepted into the euro
government plans. This and Estonia’s ever-firmer zone in 2011 does not affect our view of the timetable
ambition to adopt the euro in 2011 have boosted for Latvia and Lithuania; 2014 remains our forecast.
confidence in the countries’ fixed exchange rate Six months ago, the Latvian government adopted
systems, reflected in a sharp downturn in local 2014 as its target. Lithuania is also targeting 2014,
interest rates and big stock market rallies. Lower Prime Minister Andrius Kubilius recently declared.
interest rates provide some relief to debt-burdened
households and businesses, though an absolute
majority of loans are in foreign currencies, mainly Strong indicators in Estonia
euros. In the short-term there is potential for further After falling by 14 per cent last year, Estonia’s GDP
interest rate declines, mainly in Estonia as euro will grow by 2 per cent in 2010 and 5 per cent in
accession draws closer. 2011, compared to our November forecast in Nordic
Outlook of -0.3 and +4.0 per cent, respectively. The
On the other hand, ongoing fiscal tightening implies main reasons are improved demand from Sweden and
that household purchasing power will be kept down Finland, where we expect companies to expand their
by pay cuts and tax hikes. Pay adjustments are under inventories, as well as more investments before and
way in both the public and private sector. We expect after euro zone accession.
this “internal devaluation” process, aimed at
regaining lost competitiveness after years of overheat- Early signs of recovery are visible in forward-looking
ing, to be completed after 2010. The depreciation of indicators. The European Commission’s combined
the euro supports the Baltics in this adjustment. Some sentiment indicator for Estonian households and
lingering uncertainty as to whether the three govern- businesses has recovered dramatically, turning
ments have the stamina to fully implement these around last spring from a historically low level and
painful belt-tightening policies is hampering private climbing almost without interruption since then. The
investments, mainly in Latvia, and still remain a threat upturn has tracked that of the euro zone and has been
26
The Baltics
far stronger than in Lithuania and Latvia. Our assessment above 20 per cent this winter will lead to
ment is that this index will keep climbing towards 105 continued decline in consumption.
this year. Historical correlation patterns thus support
our forecast of positive GDP growth in 2010. Deflationary pressure is continuing and is increas-
ingly moving into the service sector. We predict
average CPI inflation of -3.2 per cent in 2010.
Estonia heading towards growth
Year-on-year percentage change and index The international bail-out is proceeding as planned.
25 120
The government admittedly suffered a reversal when
20 115
15 110
the constitutional court ruled that pensions may not be
10 105 cut in 2009-2010, but the 2010 budget is tight enough
5 100 to make it likely that Latvia can meet the IMF/EU
0 95 requirement that its deficit not exceed 8.5 per cent of
-5 90 GDP in 2010. Prime Minister Valdis Dombrovskis of
-10 85
the New Era Party has also shown firmness in
-15 80
-20 75
reaching various agreements, together with opposition
-25 70 parties as needed, in order to resolve internal tensions.
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 But there is still some risk that his programme may
GDP, quarterly data (LHS)
collapse. Next autumn’s parliamentary election is
EU monthly sentiment indicator (RHS) an uncertainty factor, especially since the five-party
coalition’s largest member (the People’s Party) has
Aside from possible rejection by the euro zone, the balked at letting the advice of the IMF and EU control
risks of poorer economic performance in Estonia are the Latvian economy.
largely tied to whether unemployment continues
upward this spring. If so, household confidence might Broad export upswing helping Lithuania
once again begin to be undermined.
Lithuania’s recession ended during the second half
Despite the continued fall in wages, inflation will of 2009 when quarter-on-quarter GDP increased
rise this year. Reasons include indirect tax hikes and twice in a row; third-quarter growth was 6 per cent,
price hikes due to the euro transition; we predict the strongest in the EU. After plunging 15 per cent in
inflation averaging 2 per cent this year and 4 per cent 2009, GDP will gain 1 per cent this year and 4 per
in 2011. cent in 2011 (our Nordic Outlook forecast in Novem-
ber: -3.5 and +3.0 per cent, respectively). The nega-
Estonia’s budget deficit was an estimated 2.5 per tive GDP effect of closing the Ignalina nuclear power
cent of GDP last year and will shrink towards 2 per station at the end of 2009 is 1.0-1.5 percentage
cent in 2010. This means that the country is expect- points. The closure will also boost CPI by 0.7-0.8
ed to meet all the Maastricht criteria when the percentage points.
European Commission and the ECB carry out their
evaluation, probably in May. Estonia’s good track The main reason for Lithuania’s brighter growth
record in public sector finances – the budget deficit outlook in 2010 is its improved exports. A broad-
has exceeded 3 per cent of GDP only once in the past based export recovery began late in 2009, most
15 years – increases its chances of euro zone acces- clearly for wood and paper, furniture and plastic and
sion. However, if Greek-related market turbulence rubber products. Foreign demand will be even strong-
should worsen significantly, it cannot be ruled out that er this year. In the short term, exports will also benefit
the EU/ECB will postpone Estonia’s euro process. from currency appreciation in nearby countries – the
opposite of what happened one year ago. Given its
market structure, Lithuania will benefit more from this
Latvia still in recession currency trend than Estonia and Latvia.
Latvia’s GDP will fall by another 3 per cent this
year. Including last year’s downturn of 18.4 per cent, Consumption and capital spending will remain listless
this means that during the depression-like period this year due to fiscal tightening, wage cuts and weak
2008-2010, accumulated GDP downturn will be 26 construction. The labour market will weaken a bit
per cent. After that we expect a decent recovery in more. Inflation will be zero this year and 2 per cent
2011, when GDP will climb by 4 per cent. in 2011. The government’s budget target, a deficit of
8.1 per cent of GDP this year, is within reach; the
Exports and industrial production have begun to deficit will be somewhat less than in 2009.
improve, and the trans-shipment trade will also
recuperate in 2010. Offsetting this, domestic demand
will remain greatly depressed during much of the year.
Continued fiscal tightening, pay cuts and unemploy-
27
Sweden
A surprising labour market provided positive surprises in recent months.

Deficits appear likely to stay below 2 per cent of GDP
this year and improve somewhat in 2011. This will
 Improved exports ahead
give fiscal policymakers greater room for manoeuvre
 Major potential for consumer upturn than in most other countries. We are thus expecting
 Core inflation will decline continued stimulus measures in the range of SEK 15
billion in 2011. We expect a left-green government to
 Riksbank will hike repo rate in July
pursue a more expansionary fiscal policy compared to
 Fiscal expansion regardless of election outcome the centre-right Alliance government. The stimulus
effect will diminish from about 1 per cent of GDP this
Room for fiscal policy flexibility, a strong monetary year to neutral in 2011.
policy transmission mechanism and a cyclical manu- On the whole, government stimulus policies have
facturing sector imply good potential for the Swed- succeeded in sustaining domestic demand to an
ish economy to grow faster than the EU average unexpectedly high degree during the economic crisis,
during the next couple of years. Signals of stronger thereby softening the impact of the crisis on the
growth in consumption have also become clearer, but labour market and public finances while helping
last autumn’s relapse from export growth will also prevent many business closures. This, in turn, means
affect the coming months, meaning that the overall less long-term damage to the economy, but tenden-
revision in our GDP forecast since November’s cies towards the emergence of a two-track econo-
Nordic Outlook is small. We are now expecting GDP my also imply risks and drawbacks. Exceptionally
growth of 3.1 per cent in 2010 (2.8 per cent, low mortgage interest rates have led to continued
calendar adjusted) and 2.7 per cent in 2011. rapid expansion in lending to households, and home
prices are rising again. Meanwhile small and medium-
GDP and employment sized businesses are still suffering from a tighter
Year-on-year percentage change credit environment. Major gaps in the labour market
6 6
situation of different economic sectors may create
4 4 tensions during the 2010 wage round, which covers
about ¾ of the country’s workforce. In some re-
2 2
spects, necessary adjustments in the Swedish econo-
0 0 my have thus been postponed.
-2 -2
Export upturn has been interrupted
-4 -4
In recent months, Swedish exports have been unex-
GDP Employment
-6 Productivity -6 pectedly weak. Although manufacturing sentiment
indicators have climbed more conspicuously than in
-8
00 01 02 03 04 05 06 07 08 09 10 11
-8 other countries, actual figures for production, exports
Source: Statistics Sweden, SEB and orders have proved weaker. Broken down by
product categories, telecom exports show the greatest
weakness during the second half of 2009, but catego-
The labour market has continued to generate ries such as machinery and pharmaceuticals have also
upside surprises, and we believe that unemployment experienced declines.
will peak as early as this coming summer. Inflation
rose late in 2009, and underlying inflation is now
around 2½ per cent: well above the OECD average. In Merchandise exports, current prices
Index Jan 2009=100, 3-month averages
our assessment, however, the appreciation of the 110 110
Swedish krona and higher productivity growth will
push down core inflation towards 1 per cent by a year 105 105
Machinery
from now. Consumer Price Index (CPI) inflation will 100 100
nevertheless rise, due to higher interest rates. Total
95 95
We expect the Riksbank to begin hiking its key
interest rate in July. There are also signs that due to 90
Forest products and metals
90
stronger economic growth and a more expansionary
85 85
fiscal policy, the bank will raise its key rate at a faster
pace than the European Central Bank (ECB). By year- 80 Telecom products 80
Vehicles
end 2010, the repo rate will be at 1.50 per cent, and
by year-end 2011 at 3.00 per cent. 75 75
2009
Source: Statistics Sweden, SEB
The trend of central government finances has
28
Sweden
The weakness of actual export data raises some production substantially without further capital
questions about the strength of the recovery, but we spending. According to Statistics Sweden’s survey
find it difficult to see any fundamental reasons looking ahead at 2010 (October 2009), businesses are
why Sweden will not be part of an international also planning large cutbacks in capital spending this
upturn: year.
 Sentiment surveys are normally a very reliable Fixed investments by the business sector
indicator for production and exports. There are no Per cent of GDP
historical examples of a long-lasting upturn in the 21 21
20 20
National Institute of Economic Research’s Eco-
19 19
nomic Tendency Survey – such as we have seen in 18 18
the past six months – signalling a “false start” for 17 17
export growth. The current upturn in the survey is 16 16
also broadly based and includes strong order 15 15
14 14
bookings in the telecom industry.
13 13
12 12
 The demand for capital and input goods, which
11 11
dominate Swedish exports, fell dramatically during 10 10
the economic crisis. This explains last year’s deep 90 92 94 96 98 00 02 04 06 08 10
GDP downturn. Today, however, the most signifi-
US Sweden
cant upturn in global demand is for these product Source: Statistics Sweden, BEA
categories. An unfavourable Swedish industrial

structure thus cannot explain the tendencies Nevertheless, there is reason to believe that business-
towards a lag in the upturn. es will cautiously begin to increase their capital
spending during the second half of 2010. The
Manufacturing confidence, exports historical pattern is that fixed investments bounce
10 110
Manufacturing confidence (LHS) back long before capacity utilisation has normalised.
Merchandise exports, index 2008=100 (RHS)
105
This was the case after the early 1990s crisis, when
0
fixed investments began to climb as early as 1994, the
100 same year as GDP. The current trend in the United
-10
States is also following this pattern. Capital spending
95 rose slightly as early as the fourth quarter of 2009,
-20
even though US capacity utilisation is as low as that
90
of Sweden.
-30
85
Gross fixed investments
-40 80 Percentage change (2008: current prices, SEK bn)
2008 2009 2010 2011
-50 75
08 09 Government sector 96 8 6 3
Source: Statistics Sweden, NIER
Housing 98 -21 3 14
Our conclusion is that the export slowdown during Business sector 421 -18 -3 4
the fourth quarter of 2009 was temporary and that Total 615 -14 0 5
our earlier forecast that exports will grow by Source: Statistics Sweden, SEB
about 7 per cent in 2010 will hold up. This implies
that Sweden’s current account surpluses will remain
at around 5-6 per cent of GDP during the next couple One mechanism behind this may be that the level of
of years. This is a remarkably high level, especially in capital spending has fallen so low that increases are
light of the discussion now under way at the G20 needed just to preserve existing production capacity
level with regard to handling global imbalances. It is and that a deep crisis increases the pace of structural
not impossible that Sweden may be part of a group of change and thereby makes existing capital less useful
countries that will receive recommendations to pursue in the recovery. In Sweden, however, investments as
economic policies that stimulate domestic demand to a a percentage of GDP have not fallen as deeply as they
greater extent. did during the 1990s crisis, and have declined far less
than in the US during the past few years. The risks in
Uncertain capital spending upturn our capital spending forecast are thus mainly on the
During 2009 fixed investments fell by an estimated 14 downside.
per cent, which is on a par with the record downturn Housing investments and public sector investments
during 1993. Because of exceptionally low capacity will contribute to growth during the next couple of
utilisation, businesses can probably increase their
29
Sweden
years. The rapid turnaround in the housing market, Households savings ratio
combined with historically low investment levels and Per cent of disposable income
strong population growth, point towards a rapid 15.0 15.0
turnaround in housing construction. It is somewhat
12.5 12.5
worrisome, however, that the number of housing
starts continued to fall during the third quarter of 10.0 10.0
2009.
7.5 7.5
Large turnaround in inventories
5.0 5.0
Inventories, contribution to year-on-year GDP change
2.0 2.0 2.5 2.5
1.5 1.5
1.0 1.0 0.0 0.0
90 92 94 96 98 00 02 04 06 08
0.5 0.5
0.0 0.0 Germany US Sweden
Source: OECD
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5 Short-term indicators now also support the view that
-2.0 -2.0 consumption is about to accelerate. Consumer confi-
-2.5 -2.5 dence is high, and the growth of retail sales is begin-
-3.0 -3.0 ning to approach 2006-2007 levels. Auto sales also
00 01 02 03 04 05 06 07 08 09 appear likely to take off early in 2010. Overall, we
Euro zone US Sweden expect consumption to increase by 2.5-3 per cent
Source: Statistics Sweden, BEA, Eurostat annually during the next two years. This forecast
implies that the savings ratio will decline, but savings
In 2009, inventory changes lowered Swedish GDP levels will remain far above their historical average.
growth by 1.5 percentage points. This was significant-
ly more than in the euro zone and the US. Businesses
are now signalling that their inventories are approach- Home prices exposed to risks ahead
ing the desired levels. We thus expect a major shift in Home prices rebounded quickly after their decline in
the inventory cycle, with restocking investments 2008. By December 2009 they stood 3-4 per cent
contributing nearly 1 percentage point to GDP growth higher than their previous peak. In the short term, as
in 2010. The sharp run-down in inventories that has implied by SEB’s home price indicator, record-low
taken place indicates that the need for replenishment mortgage interest rates are likely to push up prices.
may actually be even larger than in our forecast.
Rapid recovery in the housing market
25 100
All pieces in place for consumer upturn 20 75
During the past decade, household real income has 15 50
increased by 3 per cent per year. This is significantly 10 25
faster than the 1970s, 1980s or 1990s. Due to expan- 5 0
sive fiscal policy, consumer purchasing power is rising 0 -25
at a decent pace, in spite of increasing unemployment.
-5 -50
Meanwhile the household savings ratio has climbed
-10 -75
steadily over the past 3-4 years, reaching a new record
-15 -100
level in 2009. In Sweden the household savings ratio
04 05 06 07 08 09
shows greater cyclical fluctuations than in many other
countries. This further illustrates the potential for Home prices, year-on-year percentage change (LHS)
Home prices, annualised month-on-month change (LHS)
lower saving and higher consumption once the eco- SEB home price indicator, net balance (RHS)
nomic situation stabilises. The chances of a long- Source: Statistics Sweden, SEB
lasting upturn in consumption have improved

further as a result of labour market stabilisation. Looking further ahead, however, there are clear risks
that home prices will fall. The upturn has been driven
Household income and consumption mainly by low interest rates. Household interest
Percentage change expenses will climb significantly when the Riksbank
2008 2009 2010 2011 begins hiking its repo rate, a trend will be further
Consumption -0.2 -0.8 2.9 2.6 accentuated by rising indebtedness and the high
Income 2.7 3.3 0.9 1.7 proportion of adjustable rate mortgages. We also
Savings ratio,
anticipate that steps will be taken that will tighten the
% of income 11.6 14.9 13.3 12.6
mortgage funding system, although at present it is
unclear how the Swedish Financial Supervisory
30
Sweden
Authority and other public agencies will handle this the depressed productivity level, which signals
issue in concrete terms. Another indication that a price additional needs for employee cutbacks, we expect
adjustment is on the way is that home prices have the turning point to be postponed by another quarter
fallen in nearly all other OECD countries. Structural or so. A relatively moderate recovery in GDP will then
factors such as a lengthy period of low construction result in a lengthy process with only a small downturn
and regional imbalances are hardly strong enough in joblessness during 2011. As an annual average,
reasons why Sweden should diverge completely from unemployment in 2011 will be higher than 2010.
the international pattern in a longer perspective. Worth
noting is that the Riksbank last week decided to Despite the upward adjustment in the employment
initiate a study on the relationship between its own outlook, productivity will recover. Such a pattern is
tasks and targets and the housing market. The report normal in the current stage of the economic cycle and
will also look into what tools should be at hand to is also supported by the fact that growth and produc-
avoid the emergence of imbalances and risks. tion indicators are stronger than labour market ones.
Rising household lending Labour market

Year-on-year percentage change Percentage change
20.0 20.0 2008 2009 2010 2011
17.5 17.5 Employment 1.1 -2.1 -0.7 0.5
15.0 15.0
12.5 12.5 Unemployment, % 6.2 8.3 9.3 9.2
10.0 10.0 Unemployment, %
7.5 7.5 (old definition) 4.6 6.5 7.1 7.2
5.0 5.0
2.5 2.5
Average hours worked 0.1 -0.4 0.3 -0.1
0.0 0.0 Productivity (GDP) -1.4 -1.7 3.4 2.3
-2.5 -2.5 Source: Statistics Sweden, SEB
-5.0 -5.0
-7.5 -7.5
04 05 06 07 08 09 Pay increases of around 2 per cent
Households Businesses
The 2010 wage round is now entering a crucial phase.
Source: Statistics Sweden The wage round covers 550 collective agreements
and 3.3 million employees, in a labour force of less
Surprising labour market improvement than 4.5 million (see the box in Nordic Outlook,
The labour market outlook has improved remarkably November 2009 for further details). A two-track
fast, and unemployment forecasts have had to be economy, in which manufacturing has been hard hit
revised sharply downward. During the fourth quarter by the international crisis while many domestic
of 2009, the jobless rate showed clear signs of sectors have benefited from economic stimulus
levelling off, and employment even rose in terms of policies, will create tensions in the wage round. The
the seasonally adjusted quarter-on-quarter change. traditional wage-setting role of manufacturing will
thus be in dispute. At present, all parties in the wage
Labour market approaches a turning point round appear to assume that the manufacturing sector
Unemployment, per cent (LHS)
will conclude its agreements first. But it remains an
9.5 4650 open question how the benchmark set by manufactur-
Employment, thousands (RHS)
9.0 4600
ing will then be interpreted and dealt with by the rest
SEB forecast of the labour market.
8.5
4550
8.0
4500 Manufacturing employment falling
7.5 Thousands of jobs, 3-month average
3950 720
4450
7.0
3900 700
4400
6.5
4350 3850 680

6.0
3800 660
5.5 4300
05 06 07 08 09 10 11
Source: Statistics Sweden, SEB 3750 640
3700 620
Of course there is reason to interpret the figures for
3650 Total, excl manufacturing (LHS) 600
individual quarters with caution, but the labour market Manufacturing (RHS)
shift is supported by several indicators. If this trend 3600 580
persists, it indicates that unemployment may peak 05 06 07 08 09
as early as in the next 3-4 months. But in light of
31
Sweden
So far, public statements are following a rather effects of the sharp Swedish krona depreciation
traditional pattern. The employer organisations have during 2009.
said they want zero per cent pay hikes in light of the
labour market situation. Unions are demanding a bit Core inflation will fall
above 2½ per cent per year. The blue-collar Swedish Year-on-year percentage change
Trade Union Confederation (LO) has presented 5 5
demands for a guaranteed minimum pay increase and 4 4

a special fund for low-paid, female-dominated occu- SEB forecast
pations. This is also part of the proposals by unions 3 3
representing employees of local governments and the
2 2
distributive trades. Such demands put particular
pressure on local government employers. Their 1 1
financial manoeuvring room has admittedly been
0 0
squeezed by the economic crisis, but the central
government has meanwhile granted them extra funds. -1
CPI
-1
CPIF
CPIF excl energy & food
-2 -2
Hourly pay increasing more slowly 08 09 10 11
Year-on-year percentage change, 3-month averages Source: Statistics Sweden, SEB
5.0 5.0
Business sector
4.5 Total 4.5
The krona has now regained about half of its decline
from the first half of 2009. As a result, producer and
import prices for goods have fallen significantly.
4.0 4.0
After the usual lag, this will push down inflation at
the consumer level early in 2010. We expect the
3.5 3.5 downturn in import prices to reduce the inflation rate
about one percentage point during the coming year.
3.0 3.0
Contributions to CPI inflation, December
2.5 2.5
01 02 03 04 05 06 07 08 09 2009 2010 2011
Source: National Mediation Office, SEB
Goods excl energy and food 0.5 -0.3 -0.2
Services excl rents 0.8 0.4 0.5
Despite the somewhat improved labour market Rents 0.4 0.2 0.3
situation, we are sticking to our earlier assessment
that contractual wage and salary hikes will end up Food 0.0 0.0 0.1
somewhat above 2 per cent and that wage drift will be CPIF excl energy 2.4 1.0 1.5
low – probably close to zero or negative. Overall, this Energy 0.4 0.2 0.1
means that pay increases will end up at 2 per cent in CPIF 2.7 1.1 1.5
2010 and 2011. The trend towards lower pay hikes Interest expenses -1.5 1.1 1.6
will thus continue. It is still uncertain whether the two
CPI 0.9 1.9 2.8
sides will be able to reach three-year agreements,
which have become the standard during the past Source: Statistics Sweden, SEB
decade. If they sign agreements running for only one
year, there is an upside risk of pay increases in 2011.
Unit labour costs are also about to turn around.
The rate of pay increases has already decelerated, and
Core inflation will decline we expect productivity to recover quickly when
Inflation rose during late 2009. This was entirely in growth takes off. The sizeable upturns of recent
line with our forecast and a consequence of base years will be only partly reversed.
effects from energy price declines and interest rate
cuts late in 2008 vanishing from the 12-month figures. Labour costs in the business sector
Core inflation – defined as CPI excluding interest Percentage change
rates, energy and food – has nevertheless also risen. 2008 2009 2010 2011
In December it was as much as 2.7 per cent. Given Wage and salary costs 3.0 2.5 1.6 2.3
such high core inflation, Sweden is clearly diverging Productivity -2.4 -2.8 4.8 3.0
from the international pattern. By the same yardstick, Unit labour costs 5.5 5.5 -3.1 -0.7
core inflation is 1.1 per cent in the euro zone and 1.8
per cent in the US. Behind the upturn are high unit
labour costs due to low productivity growth and the
32
Sweden
We expect rent increases during 2010 to total 1.7 per need for interest rate adjustments will become strong-
cent, which is about 1.5 percentage points lower than er.
during 2009. This will slow inflation by nearly two
tenths of a percentage point. We also expect food A sharp increase in lending to households (see the
inflation to decline in 2010. Food prices fell in Europe chart on page 31) might accelerate interest rate
during 2009, reversing a large proportion of the hikes, but the Riksbank has stated that other instru-
upturns of the preceding years, but the weakening of ments besides the repo rate should be used to deal
the krona delayed this process in Sweden. with imbalances in the housing market, for example
fiscal measures and greater freedom for the Financial
CPI inflation is likely to climb steeply, due to higher Supervisory Authority (FI) to influence bank lending.
interest rate costs for single-family homes resulting The Riksbank’s newly initiated in-house research
from the Riksbank’s key rate hikes. study on the risks in the Swedish housing market
(commissioned by the parliamentary Finance Commit-
tee) may be a step towards clearer role allocation on
Repo rate hike in July this issue. Further ahead, it may also raise the issue of
In line with our expectations, the Riksbank’s latest a merger of the Riksbank and FI.
Monetary Policy Report presents a more front-
loaded forecast path, including three repo rate There are also other reasons why the key interest rate
hikes in 2010. Meanwhile the repo rate at the end of will remain low in the next couple of years. In keeping
the bank’s forecast period, in 2013, has been adjusted with global trends, the Swedish banking system will
downward a bit, also in line with expectations. The also undergo structural changes. New regulations and
bank’s reasons for beginning its journey towards requirements may have a tightening effect, both due
more normal interest rates are hardly surprising: a to lower lending volume and higher capital costs. This
more symmetric risk picture, a slightly more optimis- will reduce the need for key rate hikes in the future –
tic labour market scenario and some concerns about especially since small and medium-sized companies
higher household debt. The bank will raise its key rate with limited access to international borrowing may be
before the ECB. Today’s negative short-term interest extra hard hit if the banks remain cautious.
rate gap of 75 basis points will thus close, shifting to
a positive gap starting in the winter of 2010/11. Taken together, this brings us to a forecast that the
Riksbank will carry out its first interest rate hike in
Riksbank employment forecasts July. At the end of 2010, the repo rate will be at 1.5
Thousands of individuals per cent and at the end of 2011 at 3.0 per cent. The
4650 4650 trend of real interest rates will depend entirely on what
4600 4600 inflation measure nominal interest rates are compared
to. Real interest rates based on CPI will be largely
4550 Riksbank forecasts 4550
unchanged during our forecast period, while CPIF-
4500 4500 based ones will climb about 4 percentage points.
Feb. 10
4450 4450
4400
Sep. 09
Dec. 09 4400 Krona will strengthen with the economy
The Swedish krona has regained just over half of the
4350 4350
Oct. 09 sharp decline it suffered as the financial crisis culmi-
4300
Jul. 09
4300 nated, but the EUR/SEK exchange rate is still about 7-
4250 4250 8 per cent away from its 2007 average.
05 06 07 08 09 10 11 12
Source: Statistics Sweden, Riksbank Flows generated by export income are an important
driving force for the krona. Weak export performance
There are several reasons why the Riksbank will
late in 2009 probably contributed to the krona staying
raise its key interest rate before the ECB does.
at more than SEK 10 per euro. Renewed international
The economic recovery will be clearer in Sweden,
market instability and the Riksbank’s signals that it
while underlying inflation pressure is higher. The
intends to keep its key interest rate low for a long time
thrust of fiscal policy also points in this direction. In
have also contributed to the continued relative weak-
countries with large deficits, for example in the euro
ness of the krona. Recent turbulence in the euro zone
zone, tightening measures may need to take place
in combination with somewhat tougher message in the
even before the recovery has gained a foothold. In
latest Monetary Policy Report in February has
Sweden the central government budget is expansion-
strengthened the krona.
ary this year, and we expect some fiscal stimulus in
2011 as well, regardless of the outcome of the Sep- We expect the cyclical sensitive Swedish currency
tember 2010 election. If fiscal policy becomes less to continue strengthening as the economic recov-
supply side-oriented in case the red-green opposition ery progresses. The EUR/SEK exchange rate will
takes over from the ruling centre-right Alliance, the return to around 9.50 at the end of 2010 and continue
33
Sweden
to strengthen to 9.20 at the end of 2011. According to Sweden is one of the few countries that will stay
our forecasts, the Riksbank will begin hiking its key below the Stability and Growth Pact’s deficit ceiling
rate about six months before the ECB, which will help of 3 per cent of GDP in 2010 (see the section on the
strengthen the krona during the second half of 2010. euro zone).
Strong central government finances – in clear contrast
to the crisis-ridden countries of southern Europe – as The trend of central government finances has provid-
well as large current account surpluses will further ed upside surprises in recent months, however.
bolster the arguments for an appreciation of the Monthly outcome figures from the National Debt
krona. Office have been stronger than expected, and a better
than expected labour market will improve the underly-
Stronger krona ahead ing outlook both on the revenue and expenditure side.
Monthly average We thus expect a smaller deficit than we predicted in
11
SEB
11 the November issue of Nordic Outlook. The deficit
forecast will bottom out this year at 1.9 per cent of GDP
10 10
and improve somewhat to 1.8 per cent of GDP in
9 9 2011. The underlying improvement is somewhat
better as we estimate that discretionary policy will be
8 8
expansionary 2011.
7 7
Public finances
6 6
Per cent of GDP
5 5 2008 2009 2010 2011
01 02 03 04 05 06 07 08 09 10 11 Revenue 52.6 51.4 50.7 50.1
EUR/SEK USD/SEK Expenditures 50.1 53.0 52.6 51.9
Source: Reuters EcoWin, SEB
Net lending 2.5 -1.6 -1.9 -1.8
Wider yield spread against Germany General gov’t gross
debt 38.0 40.8 40.5 39.9
Sweden’s yield spread against Germany for 10-year
government bonds remained close to zero early in Central gov’t debt 33.7 36.5 36.6 36.4
2010. Because we are forecasting earlier and larger Central gov’t borrowing
key interest rate hikes by the Riksbank than the ECB, requirement, SEK bn -133 176 57 60
we believe the spread will widen slightly and Source: Statistics Sweden, SEB
amount to 20 basis points early in 2011. This implies a
moderate upturn in long-term yields from today’s level
of about 3.35 per cent to 3.95 per cent by the end of In 2009 the central government borrowing re-
2011. quirement was SEK 176 billion, or SEK 7 billion
better than our autumn forecast. We estimate this
Strong Swedish central government finances will help year’s requirement at SEK 57 billion, which repre-
prevent the yield spread from widening further. We sents a revision of SEK 22 billion. We expect that the
foresee a 2010 central government budget deficit of 2011 borrowing requirement will stay at about the
less than 2 per cent of GDP, or nearly four percentage same level as 2010.
points lower than that of Germany. We expect the
volume of National Debt Office bond auctions to Forecast of the central government
remain at about SEK 3 billion per two-week period. In borrowing requirement
an environment of large government deficits around SEK billion
the world, this favourable supply situation is especially 2009 2010 2011
important in determining interest rates.
SEB 176 57 60
National Debt Office, October* 176 64 40
Strong government finances National Institute of Economic
In recent years, Swedish public finances have weak- Research (NIER), December 188 59 28
ened due to the economic downturn and discretionary National Financial Management
fiscal stimulus measures. Between 2007 and 2009, Authority (ESV), December 177 70 26
central government finances moved from a surplus Ministry of Finance,
equivalent to 3.8 per cent of GDP to a deficit of 1.6 September 196 106 102
per cent. Unlike most other countries, Sweden will * 2009 final outcome.
not need to announce and implement savings
Source: National Debt Office, NIER, ESV, Government
packages in the coming years. Swedish public Offices, SEB
finances are in conspicuously good shape, compared
to other EU countries. According to our forecast,
34
Sweden
A comparison with recent economic crisis periods Several factors indicate that the gap between the two
also shows that Swedish public finances have weak- blocks may become even narrower. Sweden’s EU
ened to a strikingly moderate degree. During 2008- presidency cooled off domestic political debate during
2010, for example, central government debt will the autumn. Now that Sweden is moving closer to the
rise by only 3 per cent of GDP before it again regular election campaign, the members of the gov-
begins to fall. This can be compared to the 1990s ernment will have more time to debate domestic
crisis, when this debt climbed by more than 30 per policies. If labour market stabilisation continues, the
cent of GDP. Alliance will find it easier to defend the tax cuts it has
implemented during its term of office in order to
Swedish public finances have historically shown great strengthen the incentives to work.
sensitivity to cyclical fluctuations, which is normal
for countries with a large public sector. A GDP Regardless of who wins the election, we expect the
decline of 1 per cent in Sweden weakens public budget for 2011 to include SEK 15 billion in additional
finances by 0.55 per cent of GDP, according to stimulus. This will have the effect that fiscal policy,
OECD estimates. In case of sharp cyclical changes, measured as the discretionary effect on net lending,
this rule of thumb has also tended to underestimate will be neutral. However, it is possible that a left-green
actual developments; during the 1990s crisis, for government will pursue a more expansionary fiscal
example, sensitivity to fluctuations was significantly policy compared to a centre-right Alliance govern-
larger than this. ment.
Net lending in the public sector during The Alliance government’s spring economic bill and
three recessions the red-green opposition’s shadow economic bill will
Per cent of GDP signal the policies of both sides more clearly, but
5.0 5.0 many of their important proposals will be saved until
the final weeks of the autumn election campaign. It is
2.5 2.5
clear that pensioners will be a high-priority group for
0.0 0.0 both blocks. Local governments will probably also
-2.5 -2.5
receive more central government funds – neither side
wants to attract criticism for pursuing policies that
-5.0 1993 = 0 -5.0
2002 = 0
will undermine the wide range of social, health care
-7.5 2010 = 0 -7.5 and other services provided by local governments.
-10.0 -10.0
Policy differences between the blocks will be charac-
-12.5 -12.5 terised by classic left-right patterns, with a focus
-3 -2 -1 0 1 2 3
Source: OECD, SEB
on tax, social welfare and structural policy issues.
This means that the Alliance’s supply side-oriented
But despite a sharp slide in Swedish GDP during policies will face off against the more demand-
2009, our calculations indicate that public finances oriented policies of the leftist block. In case of a leftist
weakened to a smaller degree than the OECD rule of victory, various tax increases will probably be imple-
thumb predicted. To some extent, this may reflect mented. For example, the real estate tax will be
structural changes that have made public finances revamped and some form of wealth tax will probably
less cyclically sensitive, but the main reason is that be re-introduced. Meanwhile it is likely that the
the GDP downturn was concentrated in the export differences between the tax policies of the two blocks
and manufacturing sectors. Since the domestic are being exaggerated in public discourse. Both the
economy held up so well, this diminished its effects Social Democrats and their Green Party partners have
on the labour market, for example, thereby easing the accepted three of the four stages in the earned income
impact on both public revenue and expenditures. tax credit reform.
A situation in which the right-wing populist Sweden
Continued fiscal stimulus measures Democrats win a kingmaker role in Parliament would
The government’s budget bill for 2010 contained trigger greater uncertainty about economic policy,
powerful fiscal stimulus measures, focusing on thus giving rise to an extra risk premium related to
income tax cuts and grants to local governments. interest rates and exchange rates. In a somewhat
Including measures approved earlier, fiscal stimulus in longer perspective, governing coalitions that include
2010, measured as the discretionary change in net parties from both of the main blocks might provide
lending between years, will be about 1 per cent of greater stability and predictability in economic policy.
GDP. The strong support enjoyed by the current fiscal
policy framework also reduces the risk of policy
With seven months left until the election, public fluctuations and risky economic policy experiments.
opinion surveys indicate that the leftist red-green
block has a slight lead, although its size fluctuates.
35
Sweden
The fiscal policy framework – International comparisons show a general tendency

incorporating established practices for firmer frameworks to result in greater budget
discipline. Despite the lack of legislation, however,
into the Budget Act
the Swedish system has often worked better than
The fiscal policy framework – with its central govern-
legally mandated frameworks in other countries. This
ment expenditure ceilings and targeted balance for
shows how important it is that there is a genuine
the general government sector – that has gradually
political will to follow the framework.
evolved since Sweden’s 1990s economic crisis has
been based on established practices and has not The amendment of the Budget Act, as proposed by
been regulated by law. During its term of office, the the government, will probably be approved. The
Alliance government has reviewed this framework opposition has admittedly criticised the government
and now wants to take steps to formally incorporate for shortcomings in its preparation of the bill on
these practices into the Budget Act. mandatory expenditure ceilings, but the Social
Democrats and the Green Party are hardly going to
 Last autumn, Parliament decided that it should
oppose the bill. Both potential governing coalitions
be mandatory for a government to use expendi-
want the voters to view them as the most reliable
ture ceilings and that these should cover three-
guarantors of continued fiscal discipline.
year periods.
 Last spring the government stated that the use of
targeted budget balances should also be made
mandatory and that Parliament will be asked to
approve this in conjunction with the 2011 budget
bill this coming autumn.
36
Denmark
Continued below-trend growth international demand will provide support, while lost
competitiveness – via the strong euro and relatively
high pay increases – will constrain exports. Overall,
 Export outlook improving
we predict decent export growth this year.
 Domestic demand slowly reviving
 Central bank keeps narrow spread over ECB We expect capital spending to continue falling in
2010, though not nearly as dramatically as last year.
The need for construction investments is being re-
We are sticking to our earlier scenario of a listless strained by earlier over-investments. Capital spending
Danish recovery. The slide in home prices and the plans in manufacturing also remain negative, reflecting
downturn in construction investments after the previ- unchanged very low capacity utilisation.
ous overheating will leave their mark on domestic
demand for another while, although this winter there Consumption is gradually climbing. This winter,
has been a stabilisation in both the housing market and retail sales showed their first year-on-year increase in
private consumption. Due to stronger export demand, a long time, though it was weak. Looking ahead,
especially from other Nordic countries, we are also consumption will benefit from tax cuts, and moderate
raising our Danish growth forecasts slightly. After inflation will allow relatively strong income growth.
last year’s estimated decline of nearly 5 per cent, GDP But wage and salary increases will remain low,
will increase by 1.4 per cent this year and by 1.8 squeezed by unemployment that will continue upward,
per cent in 2011. Growth will thus fall a bit short of peaking only late in 2010.
trend. Driving forces in 2010 will be exports, invento-
ry build-up and stimulus measures leading to gradual Idle resources in the Danish economy
recovery in consumption. Per cent, quarterly data
5.0 90.0
Sentiment indicators have mainly strengthened 4.5 87.5
since last autumn. The clearest shift has occurred in 4.0 85.0
manufacturing. This winter, the purchasing managers’ 3.5 82.5
index in manufacturing climbed above its expansion 3.0 80.0
level of 50. In January, it stood at 57.1: the highest 2.5 77.5
level since the first half of 2008. This upturn is proba- 2.0 75.0
bly largely export-related. The EU’s Danish service
1.5 72.5
sector indicator has risen marginally, while the con-
1.0 70.0
struction sector indicator has remained depressed. Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Household confidence indicators have continued up- 06 07 08 09 10
ward at a cautious rate. For the first time since late Unemployment, seasonally adjusted (LHS)
Capacity utilisation in manufacturing (RHS)
2007, there are somewhat more optimists than pessi- Souorce: Reuters EcoWin
mists. One partial explanation is reduced worry about

jobs. Inflation rapidly accelerated this winter, reaching
about 2 per cent in January, but this upturn was large-
Better manufacturing outlook and exports ly driven by temporary energy price spikes, tax
Year-on-year percentage change and net balance changes and rents. Core inflation is lower, around 1.5
20 70 per cent. We view the January figure as a tempo-
15 65 rary price surge and predict that inflation measured
10 60 as an annual average in 2010 will end up at 1.7 per
5 55 cent, then climb to 1.8 per cent next year.
0 50
-5 45 This winter, the central bank surprisingly reduced the
-10 40 spread between its repo rate and the ECB’s refi rate to
-15 35 an unusually narrow 5 basis points. This cut was in
-20 30 response to a large influx of foreign currency and
-25 25 Denmark’s stronger current account, which had
05 06 07 08 09
pushed the krone upward. We predict that the spread
Exports, current prices (LHS) will remain at a low 5 points in 2010. During 2011,
Purchasing managers in manufacturing (RHS) as current account surpluses shrink due to rising
imports, there will be a gradual upward adjustment in
Exports – in current prices year-on-year – have re- the spread to a more normal 25 basis points.
bounded from a 20 per cent decline early last autumn
to near zero in December. Worth noting is that exports
to Sweden are now rising year-on-year while exports
to Germany are still falling. Looking ahead, greater
37
Norway
Broader-based upturn Consumption remains strong

Private consumption was instrumental in turning
 Recovery on firmer ground around the economy last spring and summer.
Households enjoyed very strong income growth due
 Core inflation to trend lower to mid-2010 to solid real wage increases and, in particular, noticea-
 Norges Bank to continue hiking ahead of peers ble support from very low interest rates. Unemploy-
ment has also trended only slightly higher.
The broad contour of the recovery in the Norwe-
Real disposable income and savings ratio
gian economy remains intact. While mainland GDP Change y/y % and per cent of disposable income
– excluding oil/gas and shipping – declined some 1 per 7 12.5
cent from 2008 to 2009, the tide turned last spring,
6 10.0
fuelled by sharply lower interest rates that spurred
5 7.5
private consumption and by a massive fiscal stimulus.
4 5.0
In addition, exports of non-oil goods have showed an
earlier and more pronounced turnaround than expect- 3 2.5
ed, giving the recovery a broader base. However, non- 2 0.0

oil business and residential investment plunged in 2009 1 -2.5
at its steepest rate in some 20 years. 0 -5.0
88 90 92 94 96 98 00 02 04 06 08
Real disposable income excl share dividends (LHS)

Steady GDP growth ahead Households savings ratio (RHS)
Growth in mainland GDP was probably above Households savings ratio excl share dividends (RHS)
Source: SSB
trend in late 2009. The high level of private con-
sumption and non-oil exports implies stronger-than-
expected momentum into 2010 (the national accounts Real disposable income surged 5.2 per cent year-
for the fourth quarter and full year will be published on-year in the third quarter of 2009. Since private
February 18). consumption was running only modestly higher year-
on-year, the household savings ratio increased
However, we now expect oil sector investment to markedly: according to the national accounts for Q3
drop 7 per cent in 2010, versus 4 per cent previously. 2009, it shot up from slightly negative in early 2008
The effect on mainland GDP via lower demand will be to 8.0 per cent of disposable income.
more than offset by stronger non-oil exports, but
suppliers to the petroleum sector will be significantly Private consumption ended 2009 on a strong note
affected. The outlook for oil sector investment in as consumption of goods (roughly half the total) was
2010 and beyond remains a major uncertainty: we up a very solid 2.4 per cent from the third to the
have factored in an unchanged level in 2011. fourth quarter and 5.4 per cent year-on-year. With the
year-end level higher than expected, we have revised
In addition, growth in overall public sector demand our full-year 2010 forecast upward from 4.2 per cent
is likely to slow markedly in 2011 as the govern- to 4.5 per cent, slowing to a still healthy 3.4 per cent
ment starts adjusting its budget back in line with the growth rate in 2011 as higher interest rates start to
fiscal policy rule (which limits the non-oil deficit to 4 bite. However, the fact that the savings ratio is almost
per cent of Government Pension Fund Global). The twice the average for the past 20 years leaves house-
2010 budget left the cyclically adjusted non-oil deficit holds with a lot of ammunition. The risk to our pri-
NOK 45 billion above what the rule allows. Given vate consumption forecast is therefore still on the
unchanged policies, the deficit will not be on target upside.
until 2018. The finance minister previously indicated
an intention to revert to the fiscal policy rule during Nominal wage growth is likely to ease from a project-
the current parliament (until 2013) but has since re- ed 4 per cent rate in 2009 to 3.5 per cent in 2010.
frained from setting a timetable. Nonetheless, while The upcoming wage round will, as usual, start in the
fiscal policy will provide stimulus to the economy in manufacturing sector with the overall aim of stabilis-
2010, it is likely to be tightened in 2011. ing competitiveness for export-oriented sectors – a
tough task. The centralised negotiations in manufac-
Overall, we are revising our forecast for mainland turing are thus likely to end with a moderate outcome
GDP growth slightly higher to 2.9 per cent in 2010 by Norwegian standards, but wage growth is bound
while sticking to our earlier forecast of 3.0 per cent to be higher in the public sector, where unemploy-
for 2011. Total GDP should grow by 2.3 per cent and ment is lower and job security higher.
2.4 per cent, respectively; we have revised our fore-
cast for 2011 downward from 2.8 per cent.
38
Norway
Consumption of goods and home prices per cent year-on-year in Q4 2009, the sharpest in 17
Year-on-year percentage change years but nonetheless indicative of a rather flexible
10.0 25 labour market. Meanwhile, employment declined 0.6
20
per cent on average in 2009, the weakest outcome
7.5
since 2003 and coming at the heels of way above-
15
5.0 trend growth in excess of three per cent in the previ-
10
2.5
ous three years. Employment growth in the public
5 sector dented the downturn, but it is worth noting
0.0 that overall employment stabilised towards year-end
0
-2.5 -5
while the stock of vacancies has trended slightly up
again. New jobless claims have increased some-
-5.0 -10
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
what in recent months, indicating that the labour
market is not out of the woods yet.
Consumption of goods, 3-month average (LHS)
Home prices (RHS) While the overall impression is that the labour market
Source: Statistics Norway, NEF
is stabilising earlier than expected, we still expect
Home prices rose 13 per cent in the year to January, unemployment to rise a bit further to rise to 3.6 per
and almost 16 per cent from the slump in late 2008, cent on average in 2010 with a peak around mid-year.
setting a new all-time high. The fact that the 0.2 However, the latest numbers and a more broad-based
percent seasonally adjusted gain on the month in Janu- recovery in the economy certainly suggest that risks
ary was the smallest since the tide turned might sug- are skewed to the downside.
gest that the strong rise is about to level off. In addi-
tion, Norwegian authorities are trying to put a lid on Mainland investment nears turnaround
banks lending at a too high a loan-to-value ratio. Fun-
Non-oil business and residential investment has
damentally, however, low interest rates will continue
continued to plunge. In fact, the latter component
to stimulate demand. Meanwhile still-depressed hous-
started to decline in mid-2007 and is at a ten-year low
ing starts are denting supply.
relative to mainland GDP. However, the steep drop in
housing starts showed signs of stabilising towards
Unemployment surprisingly benign year-end 2009, while orders for new homes seem to
Following a rather sharp increase in late 2008 and have turned around, suggesting that residential invest-
early 2009, unemployment stayed surprisingly low for ment should resume growth during 2010. While the
the better part of last year. According to the Labour annual average this year should be slightly down from
Force Survey, the unemployment rate has increased 2009, we expect strong growth in 2011.
from a 20-year low of 2.3 per cent in spring 2008 to
Private non-oil investments
3.2 per cent at end-2009, only slightly higher than in Per cent of mainland GDP
the first half of the year and well below the level ex- 10 10
pected at the start of the year. (In fact, a year ago 9 9
SEB expected the Labour Force Survey unemploy- 8 8
ment rate to average 3.9 per cent in 2009 while Norg- 7 7
es Bank’s forecast was 4 ¼ per cent.) 6 6
5 5
Unemployment and employment 4 4
7.0 5 3 3
6.5 2 2
4
6.0 86 88 90 92 94 96 98 00 02 04 06 08
5.5 3
Private service sector
5.0 2 Manufacturing and other goods-producting sectors
4.5 Residential investment
1 Source: Statistics Norway
4.0
3.5 0
3.0 Despite a rather marked drop in investment in the
-1
2.5 dominant service sector, the level remains high rela-
2.0 -2 tive to GDP. Manufacturing capacity utilisation is still
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 depressed (about five percentage points below the
Unemployment, % of labour force (LHS) historical average), reflecting both the previous down-
Employment, year-on-year percentage change (RHS)
Source: Statistics Norway
turn in actual production as well as huge investments
in excess capacity in previous years. An imminent
Part of the very modest increase in unemployment turnaround thus seems unlikely.
reflects a decline in the labour force which fell 0.7
39
Norway
However, in the Business Tendency Survey for the This subdued trend is surprising, considering the
fourth quarter of 2009 manufacturers were less nega- strong momentum in domestic demand, but is partly
tive about their capital spending expectations. Moreo- due to the high import content of business investment.
ver, Norges Bank’s recent lending survey showed that However, as the investment cycle slowly starts to turn
banks reported rising actual and expected credit de- around and private consumption growth accelerates,
mand from businesses. This might suggest that the imports should start to trend higher. In all, following a
contraction in business investment is easing. very solid contribution to overall GDP in 2009, net
exports will likely be a small drag in 2010.
Business investment and expectations
Year-on-year percentage change, index
30 57.5 Exports and manufacturing production
25 55.0 Year-on-year percentage change
20
52.5 15 15
15
10 50.0
10 10
5 47.5
0 5 5
45.0
-5
42.5 0 0
-10
-15 40.0
-5 -5
-20 37.5
94 96 98 00 02 04 06 08 10 -10 -10
Non-oil business investment (LHS) -15 -15

Expected investment in manufacturing, 1Q earlier (RHS) 97 98 99 00 01 02 03 04 05 06 07 08 09
Exports traditional goods, volume

Manufacturing production
Stronger exports helping production Source: Statistics Norway
Manufacturing production contracted 10 per cent in

the year to the second quarter of 2009 but has since Norges Bank to continue hiking rates
started to firm, recording positive quarterly growth Norges Bank has hiked its key deposit rate twice from
rates in the second half. This was somewhat earlier an all-time low of 1.25 per cent last summer. In all,
and more than suggested by the manufacturing senti- the statement from the February meeting was fully in
ment and purchasing managers’ indices. line with the optimal rate path in the October Mone-
tary Policy Report, which put the deposit rate at 2.25
Meanwhile the split between the intermediate and
per cent by mid-2010 and 2.75 per cent by year-end.
consumer goods sectors, on the one hand, and the
Concerning the near-term outlook, however, the gov-
capital goods sector, on the other, has become even
ernor emphasised that the rate path is evenly split on
sharper, according to the Business Tendency Survey.
whether the next hike will come in March or May.
The latter sector, especially petroleum industry suppli-
ers such as producers of ships and oil platforms, has In our view, Norges Bank will continue to be at the
seen a further fall in production and orders and the forefront in cautiously normalising key interest
outlook is grim. The outlook among producers of rates. Norway’s recession was rather shallow and
intermediate goods has turned positive. The consumer short-lived compared to its peers, with mainland GDP
goods sector reported an upturn in production and falling a comparatively modest 2.3 per cent peak-to-
higher demand from the domestic market and expects trough. Previous statements from the bank also sug-
further growth in output and demand in early 2010. gest that it still sees current key rate levels as “insur-
ance” against downside global risk, which are clearly
The apparent turnaround for the intermediate goods
fading relative to its forecast. Finally, according to the
sector is not surprising, since it includes a lot of ex-
bank’s forecasts, the negative output gap will close by
port-oriented production and that there has been a
early next year. This suggests that key rates should be
turnaround in industrial production among Norway’s
closer to a “neutral” level if any inflation gap is closed
main trading partners. In fact, exports of traditional
as well: however, the bank expects core inflation to be
goods – excluding oil/gas, ships and oil platforms –
2.0 per cent in early 2011 and thus below its 2.5 per
have picked up surprisingly fast since mid-2009.
cent medium-term target.
According to foreign trade statistics, such exports
gained 1.4 per cent in volume quarter-on-quarter in CPI-ATE core inflation (excluding taxes and energy)
Q4 2009, building on a very strong 6.0 per cent rate was 2.3 per cent year-on-year in January. Norges
in the previous quarter, and was up 3.6 per cent year- Bank’s forecast see a sharp downshift to a trough at
on-year – the first such positive figure in over a year. 1.5 per cent on average in the second quarter of 2010,
in particular due to markedly lower imported inflation
At the same time, imports of traditional goods in vol-
as a lagging effect from the appreciation of the NOK
ume fell slightly in late 2009, according to trade statis-
starting in mid-2009. We agree that core inflation
tics (which may differ from the national accounts).
40
Norway
should trend lower in the near term, but see the ously assumed, which obviously limits Norges Bank’s
low point slightly higher than the bank, partly because leeway, since it will try to avoid any further marked
high labour costs in 2009 will still have an impact. (and too rapid) appreciation of the NOK. Hence, we
have revised the forecast for the deposit rate at end-
Output gap and real deposit rate 2010 slightly lower to 3.00 per cent but still see it
Percentage points ending 2011 at 4.25 per cent – in both instances 25
5 9 basis points above Norges Bank’s current rate path.
4
7
3 Norges Bank's rate path
5
2 7 7
1 3
0 6 6
1
-1
-1 5 5
-2
-3 -3 4 4
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
3 3
Output gap, Norges Bank's MPR 3/09 (LHS)
Real deposit rate (RHS) 2 2
Forecast real deposit rate, MPR 3/09 (RHS)
Source: Norges Bank
1 1
00 01 02 03 04 05 06 07 08 09 10 11
We have long expected key interest rates to be
hiked somewhat faster from mid-2010 than im- Norges Bank: Deposit rate SEB forecast
Optimal rate path, October 2009
plied by Norges Bank’s rate path. However, SEB Source: Norges Bank, SEB
now sees some of its peers – most notably the ECB

and the Riksbank – moving more slowly than previ-
Core inflation
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
99 00 01 02 03 04 05 06 07 08 09 10 11
CPI-ATE (CPI excl taxes and energy)

SEB's forecast, February 2010
CPIXE (CPI-ATE adjusted for the trend in energy prices)
Norges Bank's forecast, October 2009
Source: Statistics Norway, Norges Bank, SEB
41
Finland
Manufacturing turns around torically low level in December 2008, is on its way
up. Retail sales are increasing again. Continued weak
employment, combined with lower pay increases in
 Deepest GDP decline in the OECD last year
2010-2011, will nevertheless result in weak disposa-
 Leading indicators have turned upward ble income growth. Private consumption will in-
 Strong underlying government finances crease by only about 1 per cent this year and 1.8 per
cent in 2011, and household saving will decline.
Last year’s global deceleration had a clear impact on Altogether, we anticipate that GDP will grow by 2.5
Finland’s export-dependent economy. GDP fell more per cent this year and 2.7 per cent in 2011, above
than 7 per cent, the sharpest downturn among OECD the consensus view and the euro zone average.
countries and far worse than Finland’s previous Finland will grow faster than OECD average
record downturn in 1991. Exports plunged nearly 25 Year-on-year percentage change
per cent and industrial production by nearly 20 per 7.5 7.5
cent.
5.0 5.0
But today the situation is brighter. The European 2.5 2.5

Commission’s leading indicators for Finnish construc- 0.0 0.0
tion, manufacturing and services, which rebounded in
mid-2009, are continuing upward. The service sector -2.5 -2.5
leads the upturn, but manufacturing is also on its -5.0 -5.0

way up as the global economic picture – and Finland’s -7.5 -7.5
export outlook – recovers. Construction fell unexpect-
edly in January, however, but this was probably a -10.0 -10.0
00 01 02 03 04 05 06 07 08 09 10 11
temporary effect caused by the cold winter. The
supply of unsold properties and flats has declined, Finland Euro zone
Source: Eurostat, SEB, Statistics Finland
which may set the stage for a recovery in construc-
tion.
Employment will continue downward for another
Rebounding indicators while. The effect on the jobless rate is limited by a
Index decline in labour supply, among other things because
70 70 many employees are retiring. Unemployment will
50 50 continue all the way up to about 9.5 per cent in
30 30 June. The upturn will restrain pay levels; we predict
pay hikes of about 2 per cent per year in 2010-2011.
10 10
-10 -10 Lower value-added tax on food, combined with lower

-30 -30 interest rates, drove down the national CPI figure late
-50 -50
last year. We expect CPI inflation of about 1 per cent
this year and 2 per cent in 2011, measured as annual
-70 -70
00 01 02 03 04 05 06 07 08 09
averages. Eurostat’s harmonised inflation measure
(HICP), which excludes interest expenses, will be
Construction sector Service sector higher: 1.6 per cent this year and 2.1 per cent in 2011.
Manufacturing sector
Source: DG ECFIN
The banking sector has coped well so far. Profita-
Finland’s exports, which were hit especially hard by bility is relatively good, and according to the Bank of
last year’s Russian economic collapse, will increase Finland’s stability report the capital base is large
by 5.8 per cent in 2010 and slightly more than 6 per enough to cover future losses, even in a worse-than-
cent in 2011. Relatively strong growth in Russia, expected scenario.
Sweden and Germany this year will benefit manufac-
turing (about 30 per cent of exports go to these coun- Finland was in good economic shape at the outset of
tries). In addition, Finland’s exports also benefit from the crisis, with large budget and current account
stronger SEK and NOK against the euro. Total indus- surpluses, but as in all other countries, the budget has
trial production will increase by nearly 5 per cent in deteriorated sharply. In 2009 the deficit was equiva-
2010, and a bit more in 2011. Capacity utilisation is lent to 2.5 per cent of GDP. It will grow further to
rising. Combined with low interest rates, this will more than 3 per cent this year, but then improve in
contribute to a cautious capital spending upturn: about the course of 2011, ending up at 2.7 per cent.
2 per cent in 2010 and 4 per cent in 2011. Central government debt will climb from just over 40
per cent last year to nearly 50 per cent in 2011. In an
Things also look better for the household sector. international perspective, Finnish government finances
Consumer confidence, which bottomed out at a his- will thus remain relative strong.
42
Nordic key economic data
DENMARK
Yearly change in per cent
2008 level,
DKK bn 2008 2009 2010 2011
Gross domestic product 1,737 -0.7 -4.8 1.4 1.8
Private consumption 846 -0.2 -4.5 1.5 1.9
Public consumption 464 1.5 2.2 1.3 1.1
Gross fixed investment 366 -4.9 -13.0 -4.5 3.0
Stockbuilding (change as % of GDP) 0.4 -1.5 0.5 0.0
Exports 956 2.4 -10.0 3.0 4.0
Imports 909 3.0 -12.0 1.7 4.3
Unemployment (%) 1.8 3.5 5.7 5.5

Consumer prices, harmonised 3.6 1.1 1.5 1.8
Wage cost 4.4 3.2 2.8 3.0
Current account, % of GDP 2.2 3.0 2.5 2.0
Public sector financial balance, % of GDP 3.6 -3.0 -5.5 -4.0
Public sector debt, % of GDP 33.0 38.0 43.0 46.0
FINANCIAL FORECASTS Feb 11 Jun 10 Sep 10 Dec 10 Jun 11 Dec 11

Deposit rate 1.05 1.05 1.05 1.30 1.90 2.75
10-year bond yield 3.54 3.50 3.55 3.55 3.65 3.80
10-year spread to Germany, bp 32 25 20 15 15 15
USD/DKK 5.44 5.52 5.60 5.73 5.87 5.96
EUR/DKK 7.44 7.45 7.45 7.45 7.45 7.45
NORWAY
2008 level,
NOK bn 2008 2009 2010 2011
Gross domestic product 2,313 1.8 -1.0 2.3 2.4
Gross domestic product (Mainland Norway) 1,762 2.2 -1.1 2.9 3.0
Private consumption 952 1.3 0.1 4.5 3.4
Gross fixed investment 511 1.4 -7.8 -2.2 3.8
Stockbuilding (change as % of GDP) 0.4 -1.5 0.3 0.1
Exports 1,049 0.9 -5.0 2.0 2.3
Imports 707 2.2 -10.9 3.8 4.6
Unemployment (%) 2.6 3.2 3.6 3.5

Consumer prices 3.8 2.1 2.4 2.0
CPI-ATE 2.6 2.6 2.0 2.1
Wage cost 6.0 4.0 3.5 3.7

Sight deposit rate 1.75 2.25 2.50 3.00 3.50 4.25
10-year bond yield 3.87 3.95 4.20 4.30 4.35 4.45
USD/NOK 5.89 5.85 5.90 6.00 6.30 6.40
EUR/NOK 8.06 7.90 7.85 7.80 8.00 8.00
43
Nordic key economic data
SWEDEN
2008 level,
SEK bn 2008 2009 2010 2011
Gross domestic product 3,156 -0.2 -4.5 3.1 2.7
Gross domestic product, working day adjusted -0.5 -4.4 2.8 2.7
Private consumption 1,467 -0.2 -0.8 2.9 2.6
Gross fixed investment 616 2.6 -14.0 0.0 5.0
Stockbuilding (change as % of GDP) 5 -0.6 -1.4 0.8 0.2
Exports 1,710 1.8 -13.3 7.4 6.8
Imports 1,477 3.0 -14.3 7.4 7.6
Unemployment, (%) 4.6 6.5 7.1 7.2

Unemployment, (%) (EU definition) 6.2 8.3 9.3 9.2
Employment 1.1 -2.1 -0.7 0.5
Industrial production -3.2 -19.2 4.0 7.0
Consumer prices 3.4 -0.3 1.3 2.4
CPIX 2.7 1.9 1.7 1.1
Wage cost 4.3 3.3 1.9 2.3
Household savings ratio (%) 11.6 14.9 13.3 12.6
Real disposable income 2.7 3.3 0.9 1.7
Trade balance, % of GDP 4.0 3.9 3.3 2.5
Central government borrowing, SEK bn -133 176 57 60
Public sector debt, % of GDP 38 41 41 40

Repo rate 0.25 0.25 0.75 1.50 2.00 3.00
3-month interest rate, STIBOR 0.48 0.48 1.10 1.90 2.40 3.40
10-year bond yield 3.35 3.35 3.50 3.60 3.75 3.95
USD/SEK 7.23 7.22 7.22 7.31 7.36 7.36
EUR/SEK 9.90 9.75 9.60 9.50 9.35 9.20
TCW 132.9 130.5 128.7 128.6 127.6 125.6
FINLAND
2008 level,
EUR bn 2008 2009 2010 2011
Gross domestic product 185 1.1 -7.4 2.5 2.7
Private consumption 96 1.4 -1.8 1.0 1.8
Gross fixed investment 38 0.4 -12.6 2.2 4.1
Stockbuilding (change as % of GDP) -0.9 -0.3 0.3 0.0
Exports 87 7.4 -24.7 5.8 6.2
Imports 80 7.0 -21.7 4.4 5.6
Unemployment (%) 6.4 8.3 9.4 9.1

Wage cost 5.6 3.0 2.0 2.2
Public sector debt, % of GDP 34.1 41.0 45.4 49.5
44
International key economic data
EURO ZONE
2008 level,
EUR bn 2008 2009 2010 2011
Private consumption 5,236 0.3 -0.9 0.4 0.9
Public consumption 1,887 2.1 2.5 2.0 1.8
Gross fixed investment 2,016 -0.5 -10.2 3.0 4.2
Exports 3,871 0.8 -13.8 4.0 4.8
Imports 3,782 0.8 -11.5 3.8 4.4
Unemployment (%) 7.5 9.4 10.2 10.2

US
2008 level,
USD bn 2008 2009 2010 2011
Private consumption 10,010 -0.2 -0.6 1.4 1.3
Public consumption 2,906 3.1 1.9 1.1 0.7
Gross fixed investment 2,022 -5.1 -18.4 3.0 7.6
Exports 1,706 5.4 -9.9 9.9 6.1
Imports 2,297 -3.2 -14.2 5.3 4.1
Unemployment (%) 5.8 9.3 9.6 9.2

Consumer prices 3.8 -0.3 1.6 0.7
LARGE INDUSTRIAL COUNTRIES

Yearly change in percent
2008 2009 2010 2011
GDP
United Kingdom 0.5 -4.8 1.8 2.6
Japan -1.2 -5.0 1.5 1.8
Germany 1.3 -5.0 2.1 2.2
France 0.3 -2.2 1.8 2.0
Italy -1.0 -4.8 1.4 1.7
Inflation
United Kingdom 3.6 2.2 2.9 1.5
Japan 1.4 -1.4 -1.2 0.0
Germany 2.8 0.2 0.9 0.7
France 3.2 0.1 1.1 1.3
Italy 3.5 0.8 1.4 1.4
Unemployment (%)
United Kingdom 5.9 7.9 7.8 7.5
Japan 4.0 5.1 5.4 5.0
Germany 7.3 7.6 8.4 8.4
France 7.9 9.4 10.3 10.2
Italy 6.8 7.7 8.6 8.5
45
International key economic data
EASTERN EUROPE
2008 2009 2010 2011

GDP, yearly change in percent
Estonia -3.6 -14.0 2.0 5.0
Latvia -4.6 -18.4 -3.0 4.0
Lithuania 2.8 -15.0 1.0 4.0
Poland 4.9 1.7 3.5 4.5
Russia 5.9 -7.9 5.0 4.5
Ukraine 2.1 -15.0 2.5 4.5
Inflation, yearly change in per cent

Estonia 10.6 0.2 2.0 4.0
Latvia 15.4 3.4 -2.5 1.5
Lithuania 11.1 4.2 0.0 2.0
Poland 4.2 3.4 2.5 2.7
Russia 14.1 11.7 8.0 7.5
Ukraine 25.2 16.0 12.0 10.0
FINANCIAL FORECASTS
Feb 11 Jun 10 Sep 10 Dec 10 Jun 11 Dec 11

Official interest rates
US Fed funds 0.25 0.25 0.25 0.50 1.50 2.00
Japan Call money rate 0.10 0.10 0.10 0.10 0.50 0.50
Euro zone Refi rate 1.00 1.00 1.00 1.25 1.75 2.50
United Kingdom Repo rate 0.50 0.50 0.50 0.75 1.50 2.00
Bond yields
US 10 years 3.72 3.70 3.85 3.95 4.00 4.10
Japan 10 years 1.33 1.30 1.40 1.50 1.50 1.50
Germany 10 years 3.23 3.25 3.35 3.40 3.50 3.65
United Kingdom 10 years 4.02 4.15 4.30 4.40 4.45 4.50
Exchange rates
USD/JPY 90 95 97 100 105 110
EUR/USD 1.37 1.35 1.33 1.30 1.27 1.25
EUR/JPY 123 128 129 130 133 138
GBP/USD 1.57 1.50 1.48 1.53 1.59 1.56
EUR/GBP 0.87 0.90 0.90 0.85 0.80 0.80
GLOBAL KEY INDICATORS

Yearly percentage change
2008 2009 2010 2011
GDP OECD 0.6 -3.5 2.4 2.3
GDP world, PPP 3.0 -0.7 4.5 4.3
CPI OECD 3.5 0.1 1.1 0.7
Export market OECD 2.3 -13.1 5.3 5.3
Oil price, Brent (USD/barrel) 97.2 61.9 75.0 75.0
46
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Nordic Outlook 1002: Recovery With Storm Clouds

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  !   FEBRUARY 2010

Recovery with storm clouds

This report was published on February 16, 2009.

Robert Bergqvist, Chief Economist +46 8 506 23016

Fax no. +46 8 763 9300

Reshaping the credit market 5

Reshaping the credit market

Rising government debts represent an increasing- 3 3

Weak upturn in bond yields US Germany

Will G20 coordination yield results?

Worries about Greece weakening the euro 11.0 -40

1.20 4.0 -30

1.55 0.5 EUR/SEK (LHS)

The situation is toughest for small businesses. The

In recent years, US household saving has undergone a Shaky housing market

On the other hand, the supply situation looks alarm-

The labour market in a longer

inflation (-1.7 per cent in December) will stay be-

Industrial production fell significantly more deeply 140 140

Continued strength 2009, as reflected by a sharp increase in broad money

China also upward adjustments in market interest 7 98

rates. This spring we also expect the first key interest 6 97

Robust Chinese growth, no overheating Rapid turnaround in India

the United States. But industrial production bounced 50

and next in the euro zone as a whole, and that GDP 85 35

January and now stands at an 18-month high. The

Consumption will recover this year Unemployment close to peaking

Consumer confidence (LHS) Unemployment will peak this summer

praised this type of subsidy, while warning that

Continued low inflation As usual, inflation measured by the Harmonised Index

Euro zone Italy Greece

12.5 12.5 Credit conditions have eased

Crucial situation for PIIGS countries

At present, we thus view alternative 2 as the most

Parliamentary uncertainty consumption will grow by 0.3 per cent in 2010,

Export-led recovery to the recently regained economic stabilisation. In an

have strengthened in recent months. The three Baltic 20 20

countries have received essential support from an 15 15

A surprising labour market provided positive surprises in recent months.

categories. An unfavourable Swedish industrial

lasting upturn in consumption have improved

Rising household lending Labour market

4350 3850 680

demands for a guaranteed minimum pay increase and 4 4

The fiscal policy framework – International comparisons show a general tendency

mists. One partial explanation is reduced worry about

Broader-based upturn Consumption remains strong

ed, giving the recovery a broader base. However, non- 2 0.0

Real disposable income excl share dividends (LHS)

Non-oil business investment (LHS) -15 -15

Exports traditional goods, volume

Manufacturing production contracted 10 per cent in

now sees some of its peers – most notably the ECB

CPI-ATE (CPI excl taxes and energy)

But today the situation is brighter. The European 2.5 2.5

leads the upturn, but manufacturing is also on its -5.0 -5.0

-10 -10 Lower value-added tax on food, combined with lower

Unemployment (%) 1.8 3.5 5.7 5.5

FINANCIAL FORECASTS Feb 11 Jun 10 Sep 10 Dec 10 Jun 11 Dec 11

Unemployment (%) 2.6 3.2 3.6 3.5

FINANCIAL FORECASTS Feb 11 Jun 10 Sep 10 Dec 10 Jun 11 Dec 11

Unemployment, (%) 4.6 6.5 7.1 7.2

! FEBRUARY 2010