SEB: Nordic Outlook: Stronger global growth, but downside risks dominate - Swedish boom threatened by imbalances
(Thomson Reuters ONE) -
Global economic growth has the potential to gain strength but is imbalanced and
fragile. Downside risks dominate, despite many years of expansionary monetary
policies and sharply falling energy prices. The world's manufacturers are facing
strong headwinds due to weak demand, surplus production capacity and a decline
in commodity prices, but in many countries the service sector is still showing
good resilience. A combination of expected growth deceleration in China without
a hard landing, US domestic consumption power and Europe's gradual recovery will
lead to a cautious acceleration in growth. In the 34 mainly affluent member
countries of the Organisation for Economic Cooperation and Development (OECD),
GDP growth will increase from 2.1 per cent in 2015 to 2.2 per cent this year and
2.4 per cent in 2017. Our forecast assumes that the price of Brent crude oil
will rebound towards USD 45/barrel by the end of 2016, although downward
pressure on oil prices will persist in the short term.
Powerful capital flows in motion as normalisation processes begin
The world economy faces challenges that are large, complex and strongly linked
together. The fall in commodity prices and emerging and oil-dependent economies'
increased debt burden in US dollars and other foreign currencies have revealed
structural weaknesses. China and various oil-producing countries will be forced
to sell off foreign assets worth hundreds of millions of dollars, among other
things putting pressure on global stock and fixed income markets. These forces
may both be strengthened or weakened by the US Federal Reserve (Fed)'s recent
key interest rate hike, its first since 2006, and China's shift in currency
policy after 10 years of a steadily appreciating yuan. Yet we do not regard
China's transition to a more flexible exchange rate policy as a sign of its
participation in a global currency war. Normalisation processes have begun, but
they will be anything but easy and will require intensified global cooperation
among central banks and other organisations.
China's GDP growth in 2016 will be 6.5 per cent (6.9 per cent in 2015) and will
fall to 6.0 per cent in 2017. The country will consequently avoid a hard
landing, among other things with the help of further monetary and fiscal
stimulus and an expanding service sector. The deceleration is structural - and
thus expected - as well as cyclical. The manufacturing sector is struggling with
overcapacity, and China's rapidly increasing debt in recent years - along with
the weak balance sheets of its state-owned enterprises - is making the economy
vulnerable.
Emerging markets both a drag anchor and a risk to the global economy
Russia and Brazil are showing serious growth problems and their economies will
shrink further in 2016. Currencies and stock markets have been pulled down by
financial market turbulence. India's economic performance is the opposite, and
GDP growth will climb from just above 7 per cent last year to nearly 8 per cent
in 2017. Emerging market (EM) economies account for about 60 per cent of global
GDP and have contributed more than 80 per cent of global growth in recent years.
Today they are both a drag anchor and a large asymmetric risk factor - with
worrisome political elements - to the global recovery.
Western Europe is taking small steps forward, and its economy is gradually
gaining strength. The euro zone is benefiting from low interest rates, the
decline in oil prices and a weak euro. Consumption-driven growth is being helped
by low inflation, which improves households' purchasing power as unemployment
continues to fall. A cautious upturn in capital spending is also expected, due
to relatively high capacity utilisation. We expect euro zone GDP growth to be
1.9 per cent this year (up from 1.5 per cent in 2015) and to reach 2.0 per cent
in 2017. The overall economic effects of the refugee crisis will be fairly
small, but political uncertainty will increase. Meanwhile European Union
cooperation is being tested because of the threat that the United Kingdom may
exit the EU. Our main scenario is that this "Brexit" threat will be avoided and
that the UK will remain a member, but divergent visions of the EU's future will
continue to create tensions between London and Brussels.
Above-trend but not impressive US growth - Fed taking a break until September
The US economy is showing domestic strength but is being affected by the
international situation to a greater degree than usual. The final months of
2015 were weak. We expect GDP growth in 2016 to be the same as in 2015: 2.4 per
cent. Growth will climb marginally to 2.7 per cent in 2017. US manufacturers
have been squeezed by a nearly 20 per cent appreciation in the dollar (in real
effective terms) over the past 18 months. The effects of the oil price decline
are more mixed: oil sector investments are falling, while households have gained
significantly more purchasing power. The manufacturing sector's share of the
economy has shrunk and the service sector - which is growing - has become a
more important driving force in the US economic cycle. The absence of domestic
imbalances, which historically have triggered recessions, will enable the US to
show above-trend - but hardly impressive - growth in 2016 and 2017.
Overall, global disinflationary forces dominate due to surplus production
capacity and downward pressure on wages and salaries, as well as globalisation
and digitisation. In most countries, the upturn in inflation has again been
delayed due to the renewed oil price slide. Increased resource utilisation will
help limit the risk of deflation. In the United States, unemployment will reach
such a low level that wage growth will rebound, especially in 2017. Looking
ahead, we expect inflation to climb but remain below the inflation targets in
most countries at the end of our forecast period.
"Secular stagnation" thesis increasingly pivotal in central bank discussions
Global monetary policies will be more expansionary in 2016. Periods of weakened
risk appetite in financial markets seem to constantly provoke new central bank
stimulus measures. Although the Fed will hike its key interest rate twice during
2016 and three times in 2017 to a year-end level of 1.75 per cent, its
normalisation process is being held back because the rest of the world is moving
in the opposite direction. Troublingly low inflation expectations, combined with
downside risks to growth, will force the European Central Bank (ECB) and the
Bank of Japan (BoJ) to lower their key rates and expand asset purchases
(quantitative easing or QE). The Swedish and Norwegian central banks will also
cut their key interest rates. The Bank of England (BoE) will hold off on any
rate hikes until 2017. The appreciation of the US dollar with be determined by
the Fed and by capital flows; it will be relatively cautious during 2016: The
EUR/USD exchange rate will stand at 1.03 by the end of this year and 1.05 at the
end of 2017. The BoJ's policies will focus on weakening the yen. A stabilisation
of oil prices will enable a number of EM currencies to recover. This will make
it easier for the Fed to hike its key rate.
Given the risk of rising real interest rates (due to falling inflation), many
central banks will have difficulty foreseeing any end point to their stimulus
efforts. More and more central banks seem to agree that the short-term real
equilibrium interest rate - the interest rate that leads to inflation-free full
employment and a balance between capital spending and saving - is zero or even
negative. Among other things, this implies that future rate hikes will be
gradual and more cautious than before and that the benchmark for what can be
viewed as a normal level for long-term government bond yields will need to be
lowered. The long period of low inflation will also force central banks to re-
assess the extent to which long-term and structural forces should influence
monetary policy. It is also likely that central banks will be under increasing
pressure to admit that it may take longer than the usual two-year horizon to
achieve their inflation targets.
Nordics face divergent challenges - Norway fairly resilient to oil price slide
The Nordic economies face divergent challenges. The Norwegian economy is weighed
down by low oil prices, which are pushing down capital spending and adversely
affecting household optimism. Expansionary monetary and fiscal policy and a
greatly weakened krone will still help maintain decent growth. We expect
Norway's GDP growth to be 1.5 per cent in 2016 and 1.6 per cent in 2017. Norges
Bank will lower its key interest rate to 0.50 per cent, and its first rate hike
will occur late in 2017. Finland is plagued by continued stagnation and
competitiveness problems. Economic policy will aim at stabilising public
finances and meanwhile deal with structural growth problems. Finnish GDP growth
will reach 0.4 per cent this year and 1.1 per cent in 2017, an upturn that will
be partly sustained by low interest rates and the weak euro. Denmark will
continue its modest recovery. A strong labour market will help sustain household
consumption, but overall growth will be hampered by lower capital spending
activity. Danish GDP growth will end up at 1.8 per cent in 2016 and climb to
2.2 per cent in 2017, which is close to trend growth.
Swedish economic boom, with growing imbalances and downside risks
Sweden ended 2015 in an economic boom. Employment is increasing rapidly. Looking
ahead, however, the outlook is dominated by downside risks due to growing
domestic imbalances and political gridlock, as well as uncertainty about
international developments. Swedish GDP will grow by 3.7 per cent this year and
then slow a bit to 2.8 per cent in 2017. The strongest growth drivers are
residential investments and consumption, partly stimulated by rising demand due
to the refugee crisis. A slight upturn in manufacturing is also discernible and
will give the Swedish economy a broader growth platform to stand on.
The economic consequences of refugee flows are difficult to assess, due to great
uncertainty about both the size of the migration and the political reaction
function. The number of new arrivals may decrease compared to earlier forecasts.
On the other hand, the necessary resources per asylum seeker may have been
underestimated. We are thus sticking to our previous assessment of spending
pressure and demand stimulus. We expect the central government budget to show
deficits of 1.1 per cent of GDP this year and 1.3 per cent in 2017. Yet public
sector debt will fall by about 1 percentage point to 43.5 per cent of GDP in
2017, compared to 2015. Weak support in public opinion polls will increase the
pressure on the government and the finance minister to invest more aggressively
in education and training, infrastructure and housing construction. However, a
more expansionary fiscal policy is a two-edged weapon in Sweden's current
economic situation. The government has abandoned the principle of financing new
programmes "krona-by-krona" but is prepared to defend the legally mandated
expenditure ceiling. Overall, this implies that in light of the political
situation, the contents of the spring budget bill will be rather meagre, with
few new reforms.
Sweden is moving gradually towards increased resource utilisation. Unemployment
will fall during the next 12-18 months to a low of 6.4 per cent. Due to an
increased labour supply, the jobless rate will then climb to 6.8 per cent by the
end of 2017. Our assessment is that structural unemployment - today about 7 per
cent - may climb significantly in the next couple of years in the absence of a
policy shift that lowers the barriers for new arrivals in Sweden to join the
labour market. The growing signs of labour shortages in certain occupational
categories will not affect the outcome of the ongoing nationwide wage and salary
negotiations; we expect three-year collective agreements that end up with annual
pay hikes below 2.5 per cent. During the next couple of years, the rate of pay
increases is expected to remain at levels below what is compatible with
achieving the Riksbank's 2 per cent inflation target, but this year various tax
hikes will help push up inflation. Looking ahead, our main scenario is moderate
and delayed inflation effects. By the end of 2016, CPIF inflation (excluding
interest rate changes) will be 1.4 per cent and by the end of next year 1.9 per
cent.
Riksbank pressured to cut repo rate to -0.45 per cent; krona a joker in the
pack
Continued low inflation and the fact that other central banks are moving in a
more expansionary direction are putting pressure on an already stressed-out
Riksbank, which has a short-term focus. The bank will lower its repo rate to
-0.45 per cent in February and will not carry out its first rate hike until
early in 2017. If the krona begins a clear appreciation trend or if it reaches
SEK 9.00-9.10 per euro during the next six months, we expect the Riksbank to
intervene and sell kronor in the foreign exchange market. But this is not our
scenario. We expect a shift in monetary policy during the second half of 2016,
after the national wage round has ended and with the focus of attention
returning to household debt. This will lead to a stronger krona: by the end of
2016, the krona will be trading at 9.00 per euro and 8.75 per dollar. At the end
of 2017 the EUR/SEK exchange rate will be 8.70 and the USD/SEK rate 8.30.
The recently published evaluation of the Riksbank's policies during 2010-2015 is
not expected to influence Swedish monetary policy in the short term, but it will
form the backbone of a political review of the Sveriges Riksbank Act. In
practice, the report does not propose any far-reaching change in the Swedish
monetary policy framework, but it aims important criticism of the bank's
flexibility, both concerning the role of economic modelling results for its
decision making in a complex environment and the Riksbank's need to accept the
fact that it may take time to achieve its inflation target. In addition, the
report advises politicians to abstain from introducing a dual targeting mandate
that would also include unemployment. We expect any changes in the Riksbank Act
to be minor.
Domestic policy stalemate is worrisome, both in the short and long term
The political situation in Sweden is volatile. The Alliance opposition parties
are enjoying a surge in the opinion polls. This puts them, especially the
dominant Moderate Party, under internal pressure to act in ways that will enable
them to take power. Yet the economic and social policy challenges resulting from
the refugee crisis make governing very difficult and demanding. Alliance party
leaders are thus remaining focused on taking power after winning the 2018
election; above all, they realise the risks of taking over in the current
parliamentary situation, where they will become directly dependent on the Sweden
Democrats, a right-wing nativist party. But it is not difficult to imagine
scenarios that might cause the scales to tip. A further upswing in public
support for the Alliance, more clearly leftist policies by the curent Social
Democratic-Green Party government or internal tensions within the ruling
coalition on refugee policy are a few factors that might trigger a government
crisis and a possible extra election. Our conclusion is thus that there is a
great risk of a cabinet reshuffle or an extra election during the coming year,
but this is not our main scenario.
Key figures: International & Swedish economy (figures in brackets are forecasts
from the November 2015 issue of Nordic Outlook.
+-------------------------+------+-------------+-------------+-----------------+
|International economy, | 2014 | 2015 | 2016 | 2017 |
|GDP, year-on-year | | | | |
|changes, % | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|United States | 2.4 | 2.4 (2.5) | 2.4 (2.9) | 2.7 (2.6) |
+-------------------------+------+-------------+-------------+-----------------+
|Euro zone | 0.9 | 1.5 (1.5) | 1.9 (2.0) | 2.0 (2.1) |
+-------------------------+------+-------------+-------------+-----------------+
|Japan |- 0.1 | 0.6 (0.6) | 1.0 (1.1) | 0.5 (0.8) |
+-------------------------+------+-------------+-------------+-----------------+
|OECD | 2.0 | 2.1 (2.1) | 2.2 (2.4) | 2.4 (2.4) |
+-------------------------+------+-------------+-------------+-----------------+
|China | 7.3 | 6.9 (6.9) | 6.5 (6.5) | 6.0 (6.3) |
+-------------------------+------+-------------+-------------+-----------------+
|Nordic countries | 1.6 | 2.1 (2.1) | 2.2 (2.3) | 2.1 (2.2) |
+-------------------------+------+-------------+-------------+-----------------+
|Baltic countries | 2.8 | 1.9 (2.0) | 2.7 (2.7) | 3.2 (3.3) |
+-------------------------+------+-------------+-------------+-----------------+
|The world (purchasing | 3.5 | 3.1 (3.1) | 3.4 (3.6) | 3.8 (4.0) |
|power parities, PPP) | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|Swedish economy. Year-on-| | | | |
|year changes, % | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|GDP, actual | 2.3 | 3.6 (3.2) | 3.7 (3.6 ) | 2.8 (2.8) |
+-------------------------+------+-------------+-------------+-----------------+
|GDP, working day | 2.3 | 3.4 (3.0) | 3.5 (3.4) | 3.0 (3.0) |
|corrected | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|Unemployment, % (EU | 7.9 | 7.4 (7.4) | 6.7 (6.8) | 6.6 (6.8) |
|definition) | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|Consumer Price Index | -0.2 | 0.0 (0.0) | 0.6 (1.0) | 1.6 (1.9) |
|(CPI) inflation | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|Government net lending (%| -1.7 | -1.1 (-1.2) | -1.1 (-1.6) | -1.3 (-1.8) |
|of GDP) | | | | |
+-------------------------+------+-------------+-------------+-----------------+
|Repo rate (December) | 0.00 |-0.35 (-0.45)|-0.45 (-0.25)| 0.50 (0.75) |
+-------------------------+------+-------------+-------------+-----------------+
|Exchange rate, EUR/SEK | 9.39 | 9.19 (9.20) | 9.00 (8.70) | 8.70 (8.60) |
|(December) | | | | |
+-------------------------+------+-------------+-------------+-----------------+
For more information, Press contact
please contact Anna Helsén, Press & PR
Robert Bergqvist, +46 70 698 4858
+46 70 445 1404 anna.helsen(at)seb.se
Håkan Frisén,
+46 70 763 8067
Elisabet Kopelman,
+46 8 763 8046
Daniel Bergvall
+46 8 763 8594
Mattias Bruér,
+46 8 763 8506
Olle Holmgren,
+46 8 763 8079
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 December 31, 2015, the Group's total assets
amounted to SEK 2,496 billion while its assets under management totalled
SEK 1,700 billion. The Group has about 15,500 employees. Read more about SEB
at www.sebgroup.com.
Press Release (PDF):
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Nordic Outlook :
http://hugin.info/1208/R/1984568/727598.pdf
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Datum: 09.02.2016 - 10:00 Uhr
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