SEB: Nordic Outlook: US holds the key to economic recovery
(Thomson Reuters ONE) -
Low inflation will delay Riksbank's key interest rate hikes
The obstacles to a global acceleration in Gross Domestic Product (GDP) will
become fewer in the next couple of years. Fading fiscal headwinds will combine
with continued strong monetary policy tailwinds. The United States is poised for
a sustainable growth surge in 2014-2015 and will achieve annual growth of around
3.5 per cent. This will also give the euro zone greater opportunities to re-
generate economic, financial and political stability, despite divergent and
sluggish GDP growth of 0.8 per cent in 2014 and 1.7 per cent in 2015, following
negative growth of 0.5 per cent this year. Global risk appetite will strengthen.
This will lead to positive stock market performance, while industrial companies
with strong balance sheets will be able to increase their capital spending and
hiring during 2014 and 2015. Overall, GDP growth in the 34 countries of the
Organisation for Economic Cooperation and Development (OECD) will accelerate
from 1.2 per cent this year to 2.4 per cent in 2014 and 2.8 per cent in 2015.
Yet major cyclical differences in growth between countries and regions will
persist, posing challenges to international economic policy cooperation.
Our relatively positive global scenario is based on two important assumptions:
that inflation will remain low and stable, and that the low interest rate
policies of central banks will be underpinned by macroprudential policies. There
is a large quantity of idle economic resources in the US, Europe and Asia, which
exerts downward pressure on wages and salaries as well as on commodity and
energy prices, allowing central banks manoeuvring room to postpone key interest
rate hikes and focus on sustaining growth and employment. This will also
facilitate the implementation of vital restructuring policy measures and fiscal
consolidation, although it is uncertain to what extent political leaders will
take advantage of this opportunity. Global monetary policy is approaching a
crossroads. Frequent emergency interventions will be replaced by the main task
of ensuring a normalisation of inflation rates and preventing the re-emergence
of financial imbalances. The communicative talents of central banks will be put
to the test when it comes to persuading financial markets that they are in
control of the situation and can ensure a continued low inflation environment.
This also requires that over the next couple of years, political leaders and
central banks can reach agreement on the way forward for macroprudential
policies.
The US Federal Reserve will not raise its key interest rate until the second
half of 2015, after more than six years of a zero interest rate. The federal
funds rate will stand at 1.0 per cent at the end of 2015. Due to an improved
economic and financial outlook, the Fed will decide as early as this September
to begin "tapering" its quantitative easing (QE) programme. Such a decision will
reduce the prevailing financial uncertainty and can easily be re-assessed if
long-term yields continue to rise sharply. The Bank of England will keep its key
interest rate at 0.50 per cent until late in 2015, when it will carry out its
first rate hike. The European Central Bank (ECB) will help sustain the euro zone
economy with a further key interest rate cut to 0.25 per cent in December 2013
and then stay put at this level in 2014 and 2015. The ECB will also offer new
Long Term Refinancing Operation (LTRO) loans for the purpose of improving the
functioning of the banking system in southern Europe and keeping interest rates
low. The Bank of Japan will continue with its aggressive bond purchases and zero
interest rate. Because of differences in monetary policies and economic
conditions, the EUR/USD exchange rate will decline from 1.33 at the end of 2013
to 1.27 at the end of 2014 and 1.20 at the end of 2015.
The main upside risks in our forecast is that the faster growth rate in the US
will have larger positive contagious effects on other countries than in our main
forecast. On the other hand, there are big remaining challenges that carry
downside risks. The risk of new reversals in growth is mainly connected to the
continued financial and political weaknesses of the euro zone and to the
potential of emerging market countries, and their willingness, to reform their
economies. While stronger US growth is positive for the world economy, changes
in US monetary policy - less stimulus and eventual tightening - may cause
economic and financial problems for countries and regions that are in divergent
cyclical phases from the US and have not yet achieved sufficient strength to
cope with higher interest rates and yields. This is true, for example, of the
euro zone, which will still need a number of years before achieving its private
sector debt deleveraging targets. Excluding the financial services sector,
global debt today is higher than in 2007. This means that higher interest rates
will have a major impact on consumption, capital spending, lending and
government finances.
The euro zone crisis will remain complex and protracted, but immunity to trouble
spots has strengthened during 2013, as exemplifed by this summer's political
crises in Greece and Portugal. There are several reasons for this. The ECB's
large balance sheet essentially eliminates various liquidity and solvency risks
in the euro zone. The US and German economies are also showing vigour, helping
sustain the export sector in southern Europe. The outlook is also getting better
because of improved competitiveness in several crisis-hit countries, among other
things due to lower wages. Although positive changes in various macroeconomic
variables are welcome, levels of debt, unemployment and other variables
demonstrate that the path back to a more normal situation will still take a
number of years. High unemployment poses a risk of political unrest and opens
the way for euro-sceptical parties to strengthen their position in various
countries. Our scenario includes further aid to Greece by means of a new debt
restructuring, probably during the first half of 2014. Portugal and Ireland need
further debt relief as well. The economic curves in Italy and France will also
have to rebound. In recent months, political cooperation and integration efforts
have shown signs of deceleration. There is a great risk of political paralysis
over the coming year, due to the May 2014 election to the European Parliament
and the delay until a new Parliament and a new European Commission are in place.
China's economic performance during 2013, after a new leadership took office in
March, has demonstrated the difficulty of achieving an optimal shift in emphasis
between two growth mechanisms. Private consumption must be strengthened at the
expense of exports as well as public and private sector capital spending.
China's GDP will decelerate to 7.5 per cent in 2013 and slow down further to a
growth rate of 7.0 per cent in 2015. In the three other BRIC countries - Brazil,
Russia and India - there is also a clear deceleration, connected to lower global
economic activity but also to structural factors. Generally, the BRIC countries
will have difficulty reverting to their earlier high growth rates. Reforms
rather than fiscal stimulus measures are the recipe for a new growth surge. The
same conclusion applies to Japan. "Abenomics" will provide a short-term upswing
in growth and inflation, and after this summer's election the governing
coalition led by Shinzo Abe has strengthened its political position and gained a
3-4 year window for implementing its policies, but it is unfortunately showing
worrisome signs of ambiguity. However, the consequences of a tapering in the US
Federal Reserve's QE policies need not be so severe. The effect will be more
psychological than quantitative and will thus be transitory. We expect improved
global economic prospects to restore risk appetite and confidence in emerging
economies with sound fundamentals.
The slowdown has maintained a tight grip on the Swedish economy during 2013.
Growth will reach only 1.2 per cent this year. But the outlook is improving, and
growth will be above trend as well as above the OECD average during our forecast
period. The strong economic situation of households will be the main driver. The
government's fiscal timulus measures will provide an additional SEK 20 billion
in cash to households - more than 1 per cent of their income. Low inflation will
result in yearly real wage increases of around 1-1.5 per cent. Positive economic
signals from Germany, the US and other countries with which the Swedish economy
normally shows a high correlation indicate that exports will rebound. The growth
rate will accelerate but will be held back somewhat by uncertainty in the euro
zone. GDP growth will reach 2.6 per cent in 2014 and 3.2 per cent in 2015. This
will help push down unemployment to 7.9 per cent at the end of 2014 and to 7.3
per cent at the end of 2015.
The Riksbank has thus stopped cutting its repo rate, but the first rate hike
will be postponed until the end of 2014. By the end of 2015, the repo rate will
stand at 1.75 per cent (compared to 1 per cent today). The Riksbank will thus be
one of the first central banks to begin a cautious normalisation of its key
interest rate. Slow rate hikes will be made possible by continued low inflation
pressure as well as by discussions about alternative tools - and possible
decisions - in the macroprudential field during 2014. Home prices will climb by
some 5 per cent both this year and next and then slow in 2015, once the Riksbank
has begun hiking its key rate; the driving forces behind higher prices are
primarily a structural housing shortage and to some extent also improvements in
household income. Our forecast implies that home prices will thus have risen
entirely in line with household income.
The Riksbank faces several trade-offs. We expected the krona, measured in
effective exchange rate terms, to reach its strongest level since 1992 by the
end of our forecast period. Meanwhile international price pressure is weak and
Swedish pay increases over the next couple of years will end up at historically
low levels. This implies that inflation will probably be well below 2 per cent
throughout our forecast period. It will also be difficult for the Riksbank to
diverge unduly from the low interest rate environment in other countries without
triggering a sharp appreciation in the krona. The government has now announced
expansionary fiscal policy measures equivalent to SEK 25 billion. This will not
change conditions either, since the Riksbank's analyses have already factored in
SEK 30 billion in fiscal reform measures during 2014-2015. Underlying CPIF
inflation will reach 1.6 per cent in December 2015, thereby confirming the
conclusion in our analysis of historical inflation trends: it will be very
difficult to reach the Riksbank's inflation target of 2 per cent in a medium-
term perspective. A majority of the central bank's Executive Board members seem
to have concluded that they are prepared, to some extent, to re-assess the role
of household debt in key interest rate decisions, once macroprudential policies
are in place. We are assuming the a consensus about macroprudential policies
will be reached during 2014, which will greatly ease the burden on traditional
interest rate policy.
Sweden's central government debt will increase from 32.4 per cent of GDP in
2012 to 35.7 per cent in 2015. We estimate that the government's dose of fiscal
stimulus will end up at SEK 35 billion in 2014, in other words SEK 10 billion
more than the government has announced so far. We do not anticipate any major
surprises in the government's September 18 budget bill beyond what has already
emerged, for example income tax cuts, a narrowing of differences in unemployment
insurance fees, an easing of employer-financed sick pay fees and investments in
infrastructure, research and education. We expect the dose of stimulus in 2015
to be SEK 10-15 billion, regardless of the September 2014 parliamentary election
outcome. An estimated budget deficit amounting to 2 per cent of GDP in 2014 and
2015 threatens the existing budget surplus target. But if the government wishes
to stick to the surplus target, there will be room for tighter fiscal policy a
bit further in the future.
In general, the Nordic countries will benefit from the 2014-2015 international
recovery, but the domestic driving forces differ from one country to another.
While Sweden, Norway and Denmark will experience above-trend growth during our
forecast period, aided by household consumption, Finland will continue to lag
behind due to structural problems. Low capacity utilisation, rising unemployment
and a tight fiscal policy will lead to Finnish GDP growth of around 1.5 per cent
in 2014 and 2015. In Denmark, falling inflation and a stabilisation of the
housing market will boost household optimism, stimulating consumption and
enabling the economy to rebound from 0.4 per cent growth this year to 2.0 per
cent in 2014 and 2.5 per cent in 2015. In Norway, rapidly growing capital
spending will slow next year, but we expect GDP growth in both 2014 and 2015 to
be in the vicinity of 2.5 per cent. Norges Bank will begin raising its key
interest rate next summer, bringing it to 2.0 per cent at the end of 2014 (1.5
per cent today). During 2015, Norway's key rate will be raised in three further
25 basis point steps to 2.75 per cent.
The three Baltic countries - Estonia, Latvia and Lithuania - have had the
fastest GDP growth in the European Union since 2011. We expect them to show
relatively balanced economic performance in the next couple of years. One common
thread is private consumption, which will benefit from pent-up purchasing needs
and good real income increases. We also expect exports and higher capital
spending to gradually help sustain GDP growth, which will end up in the 3.5-4.5
per cent range following this year's deceleration. It will then reach 3.5-5 per
cent in 2015, with the highest growth in Lithuania and the lowest in Estonia. We
expect Latvia to experience a slight capital spending upturn related to joining
the euro zone on January 1, 2014. Lithuania's euro zone accession in 2015
remains uncertain, but if inflation continues its downside surprises this
autumn, there is a more than even chance that Lithuania will qualify to convert
to the euro.
Key figures: International and Swedish economy
+---------------------------------------------------+----+----+----+----+
|International economy. GDP, year-on-year changes, %|2012|2013|2014|2015|
+---------------------------------------------------+----+----+----+----+
|United States |2.8 |1.6 |3.3 |3.7 |
+---------------------------------------------------+----+----+----+----+
|Euro zone |-0.6|-0.5|0.8 |1.7 |
+---------------------------------------------------+----+----+----+----+
|Japan |2.0 |1.9 |1.4 |1.0 |
+---------------------------------------------------+----+----+----+----+
|OECD |1.5 |1.2 |2.4 |2.8 |
+---------------------------------------------------+----+----+----+----+
|China |7.8 |7.5 |7.4 |7.0 |
+---------------------------------------------------+----+----+----+----+
|Nordic countries |1.2 |0.8 |2.4 |2.5 |
+---------------------------------------------------+----+----+----+----+
|Baltic countries |4.2 |2.9 |3.8 |4.4 |
+---------------------------------------------------+----+----+----+----+
|The world (purchasing power parities, PPP) |3.4 |3.2 |4.0 |4.2 |
+---------------------------------------------------+----+----+----+----+
|Swedish economy. Year-on-year changes, % | | | | |
+---------------------------------------------------+----+----+----+----+
|GDP, actual |0.7 |1.2 |2.6 |3.2 |
+---------------------------------------------------+----+----+----+----+
|GDP, working day corrected |1.0 |1.2 |2.7 |3.0 |
+---------------------------------------------------+----+----+----+----+
|Unemployment, % (EU definition) |8.0 |8.1 |8.0 |7.5 |
+---------------------------------------------------+----+----+----+----+
|Consumer Price Index (CPI) inflation |0.9 |0.0 |1.0 |2.0 |
+---------------------------------------------------+----+----+----+----+
|Government net lending (% of GDP) |-0.9|-2.1|-2.2|-1.8|
+---------------------------------------------------+----+----+----+----+
|Repo rate (December) |1.0 |1.0 |1.25|1.75|
+---------------------------------------------------+----+----+----+----+
|Exchange rate, EUR/SEK (December) |8.58|8.70|8.40|8.20|
+---------------------------------------------------+----+----+----+----+
For more information, please contact Press contact
Robert Bergqvist, +46 70 445 1404 Anna Helsén, Press & PR
Håkan Frisén, +46 70 763 8067 +46 70 698 4858
Daniel Bergvall, +46 8 763 8594 anna.helsen(at)seb.se
Mattias Bruér, +46 8 763 8506
Olle Holmgren, +46 8 763 8079
Mikael Johansson, +46 8 763 8093
Andreas Johnson, +46 8 763 8032
--------------------------------------------------------------------------------
SEB is a leading Nordic financial services group. As a relationship bank, SEB in
Sweden and the Baltic countries offers financial advice and a wide range of
other financial services. In Denmark, Finland, Norway and Germany the bank's
operations have a strong focus on corporate and investment banking based on a
full-service offering to corporate and institutional clients. The international
nature of SEB's business is reflected in its presence in some 20 countries
worldwide. On June 30, 2013, the Group's total assets amounted to SEK 2,596
billion while its assets under management totalled SEK 1,387 billion. The Group
has about 16,000 employees. Read more about SEB at www.sebgroup.com.
Press release PDF:
http://hugin.info/1208/R/1724889/575057.pdf
Nordic Outlook:
http://hugin.info/1208/R/1724889/575058.pdf
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Source: SEB via Thomson Reuters ONE
[HUG#1724889]
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Datum: 27.08.2013 - 09:01 Uhr
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News-ID 291099
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