seb report: world recession risk rises to 35 per cent

7/31/2019 SEB report: World recession risk rises to 35 per cent

1/33

Increased downside risks for the world economyWEDNESDAY

JUNE 20 2012

THE WORLD ECONOMY HAS RECENTLY LOST

MOMENTUM ON A BROAD FRONT. This is manifested bya downturn in leading indicators, for example those thatmeasure business optimism and commodity prices. Inrecent weeks the euro zone crisis has deepened, althoughthe new election outcome in Greece has created somebreathing space. The American economy is continuing tomove sideways at close to trend growth, but the latestlabour market slowdown is cause for concern. Meanwhileimportant emerging market (EM) economies have shownclear decelerating tendencies.

OUR CONCLUSIONS ABOUT VARIOUS PARTS OFTHE WORLD ECONOMYhave been reported in ourMacro Updates series during the past few weeks.Downward adjustments in our main forecast, comparedto the May issue of Nordic Outlook, have been relativelysmall and primarily concern the largest EM economies.But most indications are still that a recession can belimited to crisis-hit countries in the euro zone, whilenorthern Europe and the United States will avoidrecession. We have adjusted our global 2012 GDPforecast from 3.6 to 3.3% and our 2013 forecast from 4.1to 3.9%. We believe that the risk picture has changed in anegative direction, mainly because the probability of adeeper euro zone downturn has increased. In such ascenario, it is more likely that the overall economies of the34 countries in the Organisation for EconomicCooperation and Development (OECD) will shrink. We

have thus boosted the probability of a recession scenarioto 35%, compared to 25% in the May issue of NordicOutlook. Meanwhile we have lowered the probability of a

faster recovery to 10%, compared to 20% in NordicOutlook.

Global GDP growth

Year-on-year percentage change (May Nordic Outlookin brackets)

2010 2011 2012 2013United States 3.0 1.7 2.3 (2.5) 2.7 (2.7)Japan 4.4 -0.7 2.4 (2.2) 1.7 (1.7)

Germany 3.7 3.0 0.8 (0.8) 1.3 (1.6)China 10.4 9.3 8.1 (8.5) 8.4 (8.7)

India 10.6 7.2 6.0 (7.0) 6.6 (7.3)United Kingdom 2.1 0.8 0.2 (0.5) 1.2 (1.7)Euro zone 1.9 1.5 -0.6(-0.6) 0.5 (0.8)

Nordic countries 2.7 2.5 1,2 (1.1) 1.9 (2.0)Baltic countries 1.1 6.2 2.8 (2.5) 3.4 (3.4)

OECD 3.1 1.7 1.5 (1.6) 2.0 (2.1)Emerging markets 7.3 6.2 5.2 (5.6) 5.7 (5.9)World, PPP* 5.3 3.9 3.3 (3.6) 3.9 (4.1)

Source: OECD, SEB * Purchasing power parities

IN CHINA, GDP GROWTH SLOWED NOTICEABLY

DURING THE FIRST QUARTER OF 2012 and monthlyfigures for April fuelled mounting worries about aneconomic hard landing. However, statistics for Mayindicated a stabilisation, and the central banks keyinterest rate cut in June confirmed that the focus ofChinese official economic policy has now definitivelyshifted from fighting inflation to sustaining growth. Forthis reason, we still expect a soft landing for Chinas

economy, but we have adjusted our GDP forecasts for2012 and 2013 downward by 0.4 and 0.3 percentagepoints, respectively, compared to Nordic Outlookin May.In India, there is less room for economic policymanoeuvring, due to large budget deficits and stubbornlyhigh inflation. A political stalemate is an additional reasonwhy we have adjusted our GDP forecast for this year from7.0 to 6.0%. In the EM sphere as a whole, we now expectGDP growth of 5.2%, compared to 5.6% in May. Ourdownward revision for 2013 is only 0.2 percentage points.

US ECONOMIC GROWTH WILL PROBABLY REMAIN

AROUND ITS TREND LEVEL OF 2%during the next

couple of years, sustained by a strongly expansionarymonetary policy. In recent weeks, however, most datahave turned out to be weaker than expected, especially


2/33

2

Economic Insights

labour market statistics. During the first quarter, GDPgrowth was only 1.9% even though economic activitybenefited from a historically mild winter. We haveadjusted our overall GDP forecast for 2012 from 2.5 to2.3%. Renewed signs of economic weakness haveincreased the likelihood of further monetary stimulus. Our

assessment is that the Federal Reserve will carry out athird round of quantitative easing (QE3) in the near future.The Bank of England recently indicated its willingness torespond to renewed signs of weakness with furtherstimulus, confirming that central banks are determined tomove ahead.

UNCERTAINTY HAS RECENTLY INCREASED IN THE

EURO ZONE. The recent bail-out package of nearly EUR100 billion targeted to Spains banking sector and theoutcome of Greeces new parliamentary election have notbeen sufficient to create any lasting sense of relief. Mostindicators have weakened in recent months, and the level

of the purchasing managers index (PMI) now pointstowards a clear decline in GDP. The labour marketsituation is continuing to deteriorate and retail sales aresluggish. But the picture is not completely negative. Firstquarter GDP growth was better than expected, dueamong other things to continued stability in the Germaneconomy. Euro zone exports are also generally performingdecently, partly sustained by an ever weakening euroexchange rate. Our 2012 GDP growth forecast of -0.6%(consensus -0.3%) remains unchanged, but we haverevised our 2013 forecast downward from 0.8 to 0.5%,with the risks on the downside. Our current forecast also

assumes a clear turnaround in the course of 2013.Stronger global economic performance as well as anincreasingly weak euro may provide some help. It will alsobe necessary to ease the economic policy gridlock that isnow hampering growth. One way would be for Germanyto implement fiscal stimulus measures, as well as accept ahigher rate of domestic price and pay increases, in orderto help ease euro zone imbalances. The European CentralBank (ECB) will need to step up its initiatives and showgreater flexibility as well. It is also important that problem-plagued countries genuinely fulfil the belt-tighteningpledges they have undertaken, in order to push downunsustainably high bond yields and rekindle long-termconfidence in the euro project.

FIRST QUARTER GDP GROWTH WAS AN UPSIDE

SURPRISE IN ALL OF THE NORDIC COUNTRIES. We havealso adjusted our forecasts for Finland and Norwayupward. Norway thus increasingly stands out from otherEuropean countries, with growth set to exceed 2.5% bothin 2012 and 2013. In Finland, growth will be relatively

decent in 2012, although we expect a certain slowdownafter temporary factors drove up the first quarter figure. Inboth Sweden and Denmark, we predict GDP growth of0.5% in 2012. In Sweden, various disappointments inrecent monthly figures have contributed to more subduedexpectations for the second quarter. We have thusadjusted our full-year forecasts for both 2012 and 2013slightly downward, despite the strong first quarter figure.

GDP growth, Nordic countries

Year-on-year percentage change (May NO in brackets)

2010 2011 2012 2013

Sweden 6.1 3.9 0.5 (0.7) 1.7 (1.9)Norway 0.7 1.4 2.8 (2.3) 2.6 (2.6)

Denmark 1.3 1.0 0.5 (0.5) 1.4 (1.4)Finland 3.6 2.9 1.2 (0.7) 1.7 (1.7)Nordic countries 2.9 2.5 1.2 (1.1) 1.9 (2.0)

Source: OECD, SEB

[email protected] +46 8 763 8067


3/33

U.S. economy: The outlook is cloudyFRIDAY

8 JUNE 2012

History doesnt repeat itself, but it does rhyme. Just compare what is happening so farthis year to what was happening not just at a similar juncture last year but in 2010 as well.The majority of the data releases have been coming in below expectations overthe past few months (Chart 1).

Growth in the first quarter was not recession-like by any means, but 1.9% is just not thatgood when taking the balmiest winter conditions since record-keeping began intoaccount (Chart 2). The outlook is cloudy; weather effects continue to distort the picturebut it looks as if momentum is subsiding. Consequently, what many pundits areexpecting is that the Fed will ride to the rescue with some sort of additional easing whenOperation Twist ends in June.

The recent developments in Europe and the weak employment report for May hasincreased the probability of QE3 being announced at the June or Jul/Aug meeting.

Indicators give us a bit of a mixed signal as for example ISM for manufacturing is abovethe 50-level (Chart 3) at the same time as Philly Fed in May dropped sharply.

We revise our forecast for GDP-growth 2012 downward marginally to 2.3% (from2.5% in Nordic OutlookMay).

SEB Economic Research

+46 8 763 85 06

Key data

Percentage change

2010 2011 2012 2013

GDP 3.0 1.7 2.3 2.7

Unemployment* 9.6 9.0 8.2 7.9

Inflation 1.6 3.1 2.2 1.4

Core inflation 1.0 1.7 2.0 1.4

* Per cent of labour force

Source: SEB


4/33

2

Economic Insights

INCREASED PROBABILITY FOR ADDITIONAL QE FROM FED

The Fed actually revised its own economic forecasts upwards at the April meeting. One way to look at the situationis that the stage is set for additional easing; if the U.S. economy shows more signs of slipping the liquidity taps willbe turned back on. Bernanke said the following at the press conference after the April meeting: We remainprepared to do more as needed to make sure that this recovery continues.

While we think that further policy action will materialise, a new program already at the June 19-20 th might be toosoon. Market-based inflation expectations are higher now compared to when Bernanke loudly hinted at QE2 at theJackson Hole meeting in 2010 and when Operation Twist was announced last autumn (Chart 4). Core inflation istrending higher as well (Chart 5). However, the recent developments in Europe and the weak employmentreport for May has increased the probability of QE3 being announced at the June meeting.

Gasoline prices are declining again (Chart 6) which is why confidence is rising according to Michigan (Chart 7). Bycontrast, the Conference Board index dropped in May which is probably reflecting the renewed labour marketweakness (Chart 8 and 9) as well as poor income fundamentals. House process seems to have levelled off but ourmodel still points at an increased saving rate among households and that the deleveraging process is not over yet(Chart 10 and 11).

According to the bond market the economic outlook is weak. Have a look at the TIPS yield which is a proxy for realGDP growth. 10 years ago the yield on 10-year TIPS was close to 2%, and over the ensuing 10 years real GDP growthslowed to only 1.7% on average (weakest decade on record). The real rate is now below zero (Chart 12).

Per cent

Chart 5: Core inflation above 2 per cent

CPI Core-CPISource: Reuters EcoWin

07 08 09 10 11 12

-3

-2

-1

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

5

6


5/33

3

Economic Insights

Per cent

Chart 9: U.S. unemployment rate

Women MenSource: BLS, SEB

50 55 60 65 70 75 80 85 90 95 00 05 10

2

3

4

5

6

7

8

9

10

11

12

2

3

4

5

6

7

8

9

10

11

12

% of GDP, percentage change

Chart 15: Current account deficit movingsideways

General government fiscal balanceCurrent account balance

Source: Reuters EcoWin, SEB

90 92 94 96 98 00 02 04 06 08 10 12

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0


6/33

Japan: The economic recovery is ongoingWEDNESDAY

13 JUNE 2012

In the first quarter, real GDP growth was 4.7% at an annualised rate: above the marketforecast and above our own May forecast in Nordic Outlookas well. Consequently, weare raising our 2012 Japan GDP forecast to 2.4% (from 2.2%) despite the fact thatour 2012 forecast for the Chinese economy has been lowered to 8.1% (was 8.5%). In2013, the Japanese economy will grow 1.7%. Our forecast is well above the consensus

(Chart 1). Personal consumption was strong in the first quarter and contributed 2.6

percentage points to GDP growth. The governments subsidies for low-energy cars haveboosted consumption and will likely continue to do so until the subsidies dry up in thesecond half of 2012. Household confidence indicators have advanced as well (Chart 2).

Restructuring following the 2011 disaster is clearly boosting the economy; public-sector fixed investment increased strongly in the first quarter. Exports rebounded as well,and external demand clearly holds one of the keys to the outlook. Between late-Marchand the end of May, the yen was trading stronger against both the euro and the dollar(Chart 3) which is related to the sell-off in the stock market (Chart 4).

Weaker growth overseas and developments in Europe suggest that exports will slowdown in the current and subsequent quarters. To be sure, machinery orders from

overseas has shown weakness but recovered slightly in April (Chart 5) and purchasingmanagers indices are still holding up relatively well (Chart 6). Although our exportforecast is revised lower compared to the May issue of Nordic Outlook, the risks are tiltedto the downside.

For the first time in 31 years, Japan posted a trade deficit last year. What the monthlynumbers are suggesting is that there will also be a deficit in 2012. This raises questionsabout the prevailing economic structure, with large current account surpluses and netsavings. If the current account surplus also turns into deficit, the consequences may bedramatic since Japan would be forced to import capital from abroad to finance itsgargantuan debt load (Chart 7).

Inflation will be positive in 2012, while unemployment should drift lower (Charts 8 and 9).

Mattias Brur


+46 8 763 85 06

Key data

2010 2011 2012 2013

GDP* 4.4 -0.7 2.4 1.7

Unemployment** 5.1 4.6 4.3 4.0

Inflation* -0.7 -0.3 0.1 0.2

Government deficit*** -9.3 -10.3 -11.0 -11.0

*Percentage change, ** Per cent of labour force, *** Per cent of GDP

Source: SEB


7/33

2

Economic Insights

CHARTS ON THE JAPANESE ECONOMY


8/33

China: Some encouraging signs in mixed May dataFRIDAY

15 JUNE 2012

All in all, the May data were mixed but there were some bright spots, particularlyexports and imports and signs of improvement in the housing market. The dataindicate that activity in the economy stabilised in May after the very weak data for April.Inflation decelerated more than expected and the Peoples Bank of China (PBOC) cut thekey interest rate by 25 basis points to 6.31% last week (Chart 1). Combined with previouscuts in the reserve requirement ratio, this is a clear signal that government has adopted amore active macro policy. However, GDP growth will still be weak in Q2, within the7.5 to 8.0% year-on-year range; a further slowdown compared to growth of 8.1% in Q1.

The May data support our long-held assessment that, barring a major external shock, ahard landing can be avoided. However, compared to Nordic OutlookMay, the GDPforecast has been cut to 8.1% for 2012 (from 8.5%) and to 8.4% for 2013.

Headline inflation decelerated to 3.0% in May. Food inflation dropped to 6.4% and coreinflation continues to hover close to 1.5% (Chart 2). Inflation has deceleratedsubstantially since its peak last summer and should no longer be a hindrance tofurther policy loosening.

The official purchasing managers index (PMI) dropped to 50.4 in May. The arguably morereliable Markit/HSBC PMI has been below the 50 level since November 2011 and droppedto 48.4 (Chart 3).

Exports and imports rebounded in May and clearly beat expectations, with growthof 15.3% and 12.7%, respectively, year-on-year (Chart 4).

Industrial production was weak, with growth at 9.6% year-on-year, and retail salescontinued to decelerate (Chart 5). However, sales of passenger cars increased by close to23% year-on-year and reached 1.28 million (Chart 6).

Bank lending increased in May. New loans issued by financial institutions totalled 793bn yuan, up from 682 bn in April and were larger than expected (Chart 7).

Housing prices continue to fall in year-on-year terms (Chart 8) but the number ofsales is rising, indicating the beginning of stabilisation in the housing market.

The yuan has depreciated against the USD in recent weeks. Since the start of 2012, theyuan has lost about 1% (Chart 9).

Andreas Johnson


+46 8 763 80 32

[email protected]

Key data

Percentage change

2010 2011 2012 2013

GDP* 10.4 9.3 8.1 8.4

Inflation* 3.3 5.4 3.2 3.5

USD/CNY** 6.59 6.29 6.20 6.05

* Percentage change. ** End of period exchange rate.

Source: National Bureau of Statistics of China, Reuters, SEB.


9/33

2

Economic Insights

CHARTS ON THE CHINESE ECONOMY


10/33

India: No decisive policy response expected, despitemarked growth slowdown

TUESDAY

5 JUNE 2012

GDP growth slowed to 5.3 % in Q1: lower than the consensus expectations of 6.1%and the fourth consecutive quarter of slowing growth (Chart 1). The rate is now slowerthan during the 2008-2009 financial crisis. The deceleration was led by themanufacturing sector, but agricultural production and mining were also weak.

This weak growth is largely self-inflicted and is a result of political stalemate and policyparalysis. No decisive policy response or improvement in the reform climate is expecteduntil after the May 2014 parliamentary election. Furthermore, the Reserve Bank of India(RBI) has limited room for rate cuts due to stubborn inflation.

Due to much weaker than expected growth in Q1, Indias inability to counter theslowdown with economic policy initiatives and increasing global economic uncertainty,we cut the GDP forecast to 6.0% in 2012 (from 7.0%) and to 6.6% in 2013.

Purchasing managers indices (PMIs) for both manufacturing and services havestabilised recently (Chart 2) but figures are still below the long-term average.

Industrial production is decelerating. In March, production was 3.5% below the levelof a year earlier (Chart 3). High interest rates are harming investment.

Export growth has slowed, and in April the year-on-year increase was only slightlyabove 3%. Imports are also decelerating (Chart 4).

Car sales are decelerating, indicating that domestic demand is weakening (Chart 5). Wholesale price index (WPI) inflation rebounded to 7.2% in April; food inflation is above

10% (Chart 6).

The RBI is in a tricky position due to the marked growth slowdown and stubborninflation. The central bank cut its key interest rate by 50 basis points in mid-April (Chart7). We expect a further cut of 50 basis points in Q3.

There is significant downward pressure on the rupee due to weak fundamentals andgrowing global economic uncertainty (Chart 8). Indias current account deficitcontinues to weigh down the rupee (Chart 9).

Andreas Johnson


+46 8 763 80 32

[email protected]

Key data

Percentage change

2010 2011 2012 2013

GDP* 10.6 7.2 6.0 6.6

Inflation (wholesale)* 9.6 9.5 6.8 7.2

USD/INR** 44.7 53.0 52.0 50.0

* Percentage change. ** End of period.

Source: IMF, Ministry of Commerce and Industry, Reuters, SEB.


11/33

2

Economic Insights

CHARTS ON THE INDIAN ECONOMY

Year-on-year percentage change

Chart 5: Domestic car sales are weakening

Source: SIAM

05 06 07 08 09 10 11 12

-30

-20

-10

0

10

20

30

40

50

60

70

-30

-20

-10

0

10

20

30

40

50

60

70


12/33

Euro zone: Spain the fourth euro zone country tore uire financial assistance

MONDAY

11 JUNE 2012

Financial market worries have increased recently, mainly driven by the weakness ofthe Spanish banking system in general and the governments clumsy handling of thecrisis-ridden Bankia in particular.Spanish sovereign bond yields surged to unsustainablelevels in May and fear has spread to Italy. During the past weekend, Spain finally askedfor as much as 100 bn euros in loans to help the struggling bank sector. Thescenario that we presented in Nordic OutlookMay has thereby been realised. Nextstumbling block for the euro zone will be the Greek election scheduled for June 17.

Most euro zone indicators have fallen in recent months. The Economic SentimentIndex (ESI) and the composite purchasing managers index (PMI) point to falling GDP inQ2. Germanys IFO index declined in May but is still well above the long-term average.

Whereas indicators have worsened recently there have been some positive signs inthe hard data. GDP clearly beat expectations in Q1; mainly driven by Germany. Eurozone exports have taken off and should get some help by the weakening of the euro.Retail sales are still weak however and the labour market continues to deteriorate.

GDP is expected to fall by 0.6% in 2012, followed by a return to positive territorywith a weak recovery of 0.5% in 2013. The forecast for 2013 has been reviseddownward from 0.8%.

Inflation decelerated to 2.4% in May and is expected to continue moderating. We expectinflation to be above the European Central Bank (ECB) target in 2012 but below it in 2013.

The ECB kept the refi rate on hold at its June meeting and did not present any newpolicy initiatives. The central bank maintains its position that it is up to governments tosort out their fiscal problems. The ECB also repeated its support for a banking unionimplying common bank regulation and deposit insurance. Neither new three year Long-Term Refinancing Operation (LTROs) loans nor a re-start of bond purchases (SMP) seemimminent for the time being. However, the ECB was more dovish in June, referring toincreased downside risks. Several members of the Governing Council wanted a cut in

the refi rate. Our main scenario is still that therefi rate will remain at 1.0%, but theprobability of a cut at the July meeting has increased.

Andreas Johnson


+46 8 763 80 32

[email protected]

GDP forecastsPer cent

2011 2012 2013

Euro zone 1.5 -0.6 0.5

France 1.7 0.0 0.6

Germany 3.0 0.8 1.3

Italy 0.5 -2.1 0.1

Spain 0.7 -2.0 -0.4

Source: SEB

Key data

Percentage change2010 2011 2012 2013

GDP* 1.9 1.5 -0.6 0.5

Unemployment** 10.1 10.2 11.1 11.7

Inflation* 1.6 2.7 2.3 1.4


* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Source: SEB


13/33

2

Economic Insights

INDICATORS AND GDP

Most indicators have decreased in recent months. The Economic Sentiment Indicator (ESI) fell for the secondconsecutive month in May and points to a fall in GDP. The ESI is back at a level last seen during autumn 2009. ThePMI Composite fell in May in Germany, France and Spain. PMIs for all of the big four are now below the 50 level.

GermanysIFO business sentiment index fell in May for the first time since October 2011 butis still well aboveits long-term average. The ZEW investor sentiment indicator also fell in May. Euro zone GDP was unchanged in Q1, better than consensus and the forecast in the may issue of Nordic Outlook.

The better than expected figure was mainly due to a healthy 0.5% increase in German GDP. GDP continued to fall inItaly and Spain, however, with both countries now technically in a recession. Greek GDP has decreased by more than15% since 2007 and Irish GDP has fallen by around 10%.

Euro zone GDP is expected to fall by 0.6 % in 2012; our forecast is unchanged since Nordic Outlook May. TheGDP forecast for 2013 has been revised downwards somewhat to 0.5% (from 0.8% in Nordic Outlook). There are downside risks to the GDP forecast.

GDP growth, quarter-on-quarterPer cent

Q3-11 Q4-11 Q1-12

Euro zone 0.1 -0.3 0.0

France 0.3 0.1 0.0

Germany 0.6 -0.2 0.5

Italy -0.2 -0.7 -0.8

Spain 0.0 -0.3 -0.3

Source: Eurostat, national statistical offices


14/33

3

Economic Insights

LABOUR MARKET AND INDUSTRY

Unemployment in the euro zone has reached a record level of 11%. In April, the jobless total increased for thetwelfth month in a row and reached 17.4 million. Unemployment has increased further in the peripheral euro zoneeconomies; the unemployment rate reached 24.3% in Spain. French unemployment is also on the increase, but theGerman labour market is still strong.

Exports have taken off in recent months; the year-on-year increase has been around 10%. Exports should getsome help from the weakening of the euro, which has depreciated by around 3% against the USD since thebeginning of 2012.

Retail sales decreased sharply in April and are now back at levels not seen since 2004. Austerity measures and apoor labour market will continue to weigh heavily on retail sales.

Capacity utilisation edged down in Q2 and has been below the long-term average since the end of 2008. Lowcapacity utilisation will help drive inflation lower.


15/33

4

Economic Insights

FINANCIAL AND MONETARY INDICATORS, INFLATION

The uncertainty surrounding Spain has spread to Italy and both countries sovereign bond yields rose sharply in May. ECB kept the refi rate on hold at 1.0% at the June meeting but several members of the Governing Council

wanted a rate cut. A cut would not make much of a difference, however; overnight rates are already close to zero

and lower short-term interest rates are unlikely to help the economies most in need of stimulus. Although the LTROs helped to avoid a credit crunch there has been no real recovery for bank lending. Whereas

lending to both households and corporations was positive in April, year-on-year growth rates were barely positive.M3 growth was a disappointment in April and slowed to 2.5%, moving further away from the ECB target of 4.5%.

Stock markets in Greece and Spain declined sharply in May; the Athex is now back at 1990 levels. Financial sectorequities have been especially hard hit.

Inflation decelerated to 2.4% in May. Inflation is expected to continue to moderate and HICP inflation isforecasted to end up at 2.3% in 2012 and 1.4% in 2013. Core inflation will bottom out at 1.3% in spring 2013.

Per cent

Overnight interest rates are already close to zero

Refi rate Eonia ra te (overnight )Source: ECB, Reuters EcoWin

07 08 09 10 11 120.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.55.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.55.0


16/33

UK: 2012 will be a zigzag yearWEDNESDAY

13 JUNE 2012

The consensus 2012 GDP forecast fell from 0.7% in April to 0.4% in May (Chart 1).According to the Bank of England governor, Sir Mervyn King, 2012 will be a zigzag yearand we agree; the extra bank holiday (for the Queens Diamond Jubilee celebration) is anegative growth factor comparable to the Royal Wedding last year. But the impact istemporary and real GDP growth will probably turn stronger again in Q3 when the Olympic

Games in London stimulate growth in various sectors. Real GDP growth fell 0.3% in Q4, and for the first time since 2008 the year-on-year trend

is back in negative territory (Chart 2). But the contraction in the first quarter was drivenby a drop in inventories, which is suggesting only a temporary setback. That said, therecovery is fragile and we remain bearish on the economy; real GDP growth willaverage 0.2% in 2012 and 1.2% in 2013, respectively, down from 0.5 and 1.7,respectively, in the May issue of Nordic Outlook. Meanwhile, unemployment has actuallydeclined somewhat in recent months (Chart 3) but in our view an upward trend is likely toresume. Private sector employment and pay growth are holding steady. In the publicsector these trends are moving in the wrong direction (Charts 4 and 5). Austerity bites.

While inflation is dropping quickly, it still exceeds pay growth which is squeezingreal wages and holding the recovery back (Chart 6). Core inflation fell from 2.5% inMarch to 2.1% in April. M4 growth has never been weaker in recorded history (Chart 7).

The dovish tone to the May BoE Monetary Policy Committee minutes suggests that thedoor to more quantitative easing (QE) is still ajar. Retail sales plunged in April (Chart8), and if economic data continue to surprise to the downside, the MPC has to do more tosupport the economy. We recommend keeping an eye on the PMI surveys for any signsthat the euro zone crisis is hitting British shores (Chart 9); in May PMI for themanufacturing sector dropped below 50.

Mattias Brur


+46 8 763 85 06

Key data

2010 2011 2012 2013

GDP* 2.1 0.8 0.2 1.2


Inflation* 3.3 4.5 2.7 1.6


* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Source: SEB


17/33

2

Economic Insights

Percent

Per cent

Chart 3: unemployment rate vs NAIRU

Nairu UnemploymentSource: ONS, OECD, SEB

06 07 08 09 10 11 12 13

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Percentage change YoY

Chart 6: Inflation running well above paygrowth = weak backdrop for spending

UK inflationAverage weekly earnings regular pay (3m average)

Source: Reuters EcoWin SEB

01 02 03 04 05 06 07 08 09 10 11 12

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5


Chart 7: M4 growth is depressed

Source: Bank of England, SEB

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0


18/33

Russia: Resilient so farTUESDAY

12 JUNE 2012

Even though Russia is not immune to the crises in the euro zone, the economy has beenresilient so far. GDP growth during Q1 2012 came in at a strong 4.9% compared toa year earlier (Chart 1) and indicators do not point to an imminent weakening (Chart 2).

The consensus estimate has become more positive in the past quarter. We are sticking toour relatively positive view, as long as oil prices stay at roughly the levels of today (Chart3). We expect GDP to grow by 3.8 and 4.1% in 2012 and 2013, respectively,unchanged since our previous forecast and slightly above consensus for 2013.

High oil prices will fuel government revenue creating room for fiscal policy, exports andother parts of the economy such as capital spending and consumption. Our forecast isthat oil prices will average USD 113 per barrel in 2012 and USD 120 in 2013 .

There are downside risks, however. A more severe than expected downturn in the eurozone could push oil prices further down, hurting exports, the current account andgovernment finances and increasing pressures on the banking system. Oil prices arecurrently below our average forecast for 2012 but are expected to rise later this year. Onthe other hand, domestic momentum seems strong and could be underestimated.

Daniel Bergvall

Economic Research

+46 8 763 85 94

Key dataPercentage change

2010 2011 2012 2013

GDP 4.3 4.3 3.8 4.1


Inflation 6.9 8.5 4.5 5.5

Government fiscal balance** -3.5 1.6 0.0 -0.5

*% of labour force, **% of GDP

Source: Federal State Statistics Service, SEB


19/33

2

Economic Insights

DOMESTIC DEMAND RESILIENT AS EXPORTS SLOW

The purchasing managers index (PMI) for services has fluctuated around 55 in the past 12 months. Althoughexports are weakening, PMI for manufacturing has risen 3 months in a row and now stands at 53.2 (Chart 2). GDPgrowth in the first quarter of 2012was 4.9%, stronger than the consensus estimate (4.1%), up marginally fromthe previous quarter (4.8%) and better than the 2011 full-year figure of 4.3%. Details are not yet available but data

from different sectors point to a slowdown in exports, with domestic demand serving as the growth driver.

Manufacturing production shows a weakening trend (Chart 4): up 3.6% in April and 4.3% on average so far thisyear, down from 6.7% in 2011 (with the first quarter being the strongest). Exports are heading in the same direction.In nominal USD terms, exports are almost back at pre-crisis level but so far this year have grown at a clearly slowerpace than in 2011.

Capital spending holding up. Fixed investments have been low in Russia over a number of years, something thegovernment wants to change. Indicators for construction have improved and bank lending is increasing, although abit more slowly than in earlier months (Charts 5 and 6). Even if bank lending conditions have improved in emergingEurope after the European Central Banks LTRO loans, increased financial turbulence in the euro zone will also affectRussia. Bank lending is increasing predominately in roubles (up by 30% year-on-year in February).

Consumer confidence has improved during the past year. A faster than expected fall in inflation has given aboost to real income; in recent months, real wages have been rising by approximately 10% year-on-year (Chart 7).The slowdown in retail sales is a bit surprising, given improved confidence, but might be a sign that householdsexpect real income to grow at a slower pace ahead. Consumption and capital spending are expected to be the largecontributors to growth this year.


20/33

3

Economic Insights

LESS ROOM NOW FOR FISCAL POLICY RESPONSE

Employment and unemployment continue to develop favourably. Employment increased by 1.6% in April andunemployment stood at 5.8%, the lowest figure since July 2008 (Chart 8). Unemployment is expected to continuedeclining somewhat before edging up marginally this fall.

Inflation has fallen more rapidly than expected: 3.6% in April compared to 9.6% a year earlier (Chart 9).Postponements of hikes in regulated prices and fees (from January 1 to July 1) due to the parliamentary andpresidential election partly explains this so far during the year. We thus expect higher inflation in the second half of2012. Less inflation has eased the pressure on the central bank, which has increased its focus on inflation fighting.We expect the central bank to keep its key interest rate on hold for the rest of 2012.

Good public finances are a stabilising factor for Russia, but reliance on oil revenues makes the budgetvulnerable and also reduces pressure to pursue reform (Charts 10 and 11). Looking ahead, even with oil pricesaccording to our forecast, there will be little room for additional spending or for manoeuvre in case world economicperformance is worse than our forecast.

The government budget is expected to be broadly balanced. In the latest budget, expenditures are expected toincrease at a slower pace than in recent years and we expect short-term fiscal policy to be slightly expansionary.

The long (18 years) journey towards World Trade Organisation membership is coming to an end. Membershipnegotiations were finalised in November and Russias membership was approved by the WTO on December 16.Russia needs to ratify the deal before mid-June and will then become a member 30 days after notifying the WTO.Joining the WTO will bring benefits to the Russian economy, but ultimately, the effects will be dependent on thegovernments actual desire and commitment to implementing reforms that improve the functioning of the economy.


21/33

Baltics: Slightly improved outlookTUESDAY

12 JUNE 2012

After stronger than expected Q1 outcomes we are raising our full year 2012 GDPgrowth forecasts for Estonia and Latvia: Estonia to 2.0% from 1.5%, Latvia to 3.2%from 2.5%. We are thus foreseeing the materialisation of certain upsides risks to thesecountries highlighted in Nordic Outlook, May 2012, in which we noted potential for fasterincreases in domestic demand. The Lithuanian GDP forecast for 2012 (as well as the

one for 2013) was already revised upward inNordic Outlook

. In Q1 2012, year-on-year GDP growth fell somewhat in Estonia and Lithuania compared

to Q4 2011, both to 3.9% respectively. Latvia showed a surprising upturn to 6.9% (from5.7%). In all countries growth was driven by private consumption and capital spending.Since late 2011, exports are growing at a clearly slower pace compared to the very strongincreases earlier in 2011 and in 2010. In April, exports in highly export-dependent Estoniaactually shrank in current prices and y-o-y terms for the first time since 2009.

Over the coming twelve months, we expect Baltic exports to remain relatively weak.Capital spending will fade while consumption will grow at a decent, if somewhatdecelerating pace. In Q2 and Q3 we thus expect a broad slowdown in the GDP growth.

Mikael Johansson

Economic Research

+46 8 763 80 93


GDP

Estonia Latvia LithuaniaSource: National statistical offices

02 03 04 05 06 07 08 09 10 11

-20

-15

-10

-5

0

5

10

15

-20

-15

-10

-5

0

5

10

15

Key data

Percentage change

2010 2011 2012 2013

GDP Estonia 2.3 7.6 2.0 2.5

GDP Latvia -0.3 5.5 3.2 4.0

GDP Lithuania 1.4 5.9 3.0 3.5

Inflation Estonia 2.7 5.1 4.0 5.0

Inflation Latvia -1.2 4.2 2.5 2.1

Inflation Lithuania 1.2 4.1 2.5 3.0

Source: SEB

Year-on-year percentage change, current prices

Exports


02 03 04 05 06 07 08 09 10 11 12

-40

-30

-20-10

0

10

20

30

40

50

60

70

80

-40

-30

-20-10

0

10

20

30

40

50

60

70

80

Year-on-year percentage change, constant prices

Retail sales


02 03 04 05 06 07 08 09 10 11 12

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30


22/33

2

Economic Insights

NO DRAMATIC ECONOMIC DOWNTURN IN SIGHT

Recent sentiment data on the Baltics have sent mixed signals, but the general picture is a more stable trendcompared to the negative pattern in Western Europe. The European Commissions monthly manufacturingsentiment indicator has actually picked-up slightly in Latvia and Lithuania but has continued downward in Estonia.Consumer confidence has strengthened somewhat in Estonia and Lithuania but has remained shaky in Latvia. In all

three countries, the EC aggregate sentiment indicator declined marginally in the May survey; Estonia and Latviawere still slightly above the historical average of 100 and Lithuania was almost exactly at that level, compared to90.6 for the euro zone. In the coming months, we expect a general weakening in manufacturing in the Baltics as aconsequence of clearly bleaker external demand. Stronger real wages and fairly resilient labour markets will helpsustain households, although sentiment will probably weaken.

The labour markets are holding up well. In Q1 unemployment turned up in all three countries. But this can largelybe explained by a seasonal pattern, although unemployment rates in Latvia and Lithuania rose slightly more thisyear than in the corresponding quarter in 2011. On the other hand, employment in these countries has showngreater strength this year. In Estonia, employment growth fell from 6.8% y-o-y in Q1 2011 to 3.9% in Q1 2012. Goingforward, we expect only Estonia to report a full-year average rise in unemployment during 2012.

As expected, HICP inflation rates are coming down, more markedly so in Latvia and Lithuania (to 2.2% and2.5%, respectively in May). Estonias inflation is more rigid, still around 4%. We expect this divergence to persistahead. The main reason is higher wage increases in Estonia. In Q1 Estonias y-o-y wage growth was almost 7%, thehighest rate since 2008 and slightly above long-term productivity growth. Wages in Latvia and Lithuania areincreasing more calmly; the countries showing 3.7% and 3.2 %, respectively, in y-o-y growth during Q1.

Since the middle of the 2000 decade, when they joined the European Union, all three Baltic states have beenstruggling with a negative demographic trend, accentuated by emigration. Another such wave hit these countriesduring the recent deep recession. Published in late May 2012, Estonias first census since 2000 showed thatpopulation has shrunk 5.5% in twelve years. During roughly the same period, Latvias population has declinedby one tenth, according to official Latvian statistics published earlier.


Inflation (HICP)


02 03 04 05 06 07 08 09 10 11 12-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0


23/33

Sweden: Continued growth, but no strong recoveryTUESDAY

12 JUNE 2012

We deem slower international growth momentum more important than rising domesticsentiment indicators and stronger than expected Q1 GDP growth. Still, our view thatSweden can avoid a recession and grow in line with the relatively stronger northernEuropean countries has strengthened. We are making a minor (0.2 percentage point)downward revision to our growth forecast for both 2012 and 2013 to 0.5% and

1.7% respectively. Sentiment indicators remained at high levels up to May and are generally at levels

higher than assumed in our growth forecast. We expect both consumer and businessconfidence to decline over the next 3-4 months.

The labour market is slowing very gradually. Employment still trending upward, whileunemployment has levelled out. Furthermore, short-term indicators have only declinedmoderately. Slow growth suggests that unemployment will rise from mid-2012.

CPIF inflation is expected to rise slightly in 2012 from the present low level, mainlydue to higher core inflation. Headline CPI is heading lower due to declining mortgagerates. Petrol prices are now a downside risk.

Government finances continue to look strong. The budget is expected to be close tobalance although slower growth and lending to the IMF suggests risks of larger deficits.

The government continues to resist calls for more expansionary fiscal policy, butrecent comments from Finance Minister Anders Borg may indicate that the Budget Billthis autumn will be more expansionary than the government has earlier indicated.

The Riksbanks key interest rate is expected to stay on hold in July, but euro zoneturbulence has strengthened the case for a rate cut later in 2012. We expect a cut to1.25% in September and believe that the repo rate will stay at this level throughout 2013.

Olle Holmgren

SEB Trading [email protected]

+46 8 763 80 79

13121110

10

8

6

4

2

0

-2

-4

-6

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

Swe: GDP

% q/q (RHS)

% y/y

Key data

2010 2011 2012 2013

GDP* 6.1 3.9 0.5 1.7

GDP working day adjusted* 5.9 4.0 0.8 1.7


Inflation* 1.2 3.0 1.1 1.1

Government savings*** 0.0 0.3

* Percentage change ** Per cent of labour force *** Per cent of GDP

Source: SEB


24/33

2

Economic Insights

GDP SLOWING BUT NOT DECREASING

We are seeing a mixed picture regarding to what extent the manufacturing sector is slowing. Industrialproduction and exports are declining, but companies are still optimistic about future growth.

The weakness in exports and industrial production continued up to April. Production problems in the

pharmaceutical industry lowered industrial production by 2-6 % in February-April 2012 and also contributed tolower exports. Production problems are said to have persisted in Q2 and could continue to lower productionthroughout 2012.

Strong fixed investment was one reason for Swedens surprisingly strong first quarter 2012 GDP. There was asharp upturn for capital spending in utilities and non-residential construction, while manufacturing investmentslevelled out. Residential construction is heading lower after two strong years.

Sentiment in the service sector was higher during the spring but seems to be turning lower again after renewedfinancial market turbulence. Still, our forecast that domestic sectors will support growth is on track.

121110090807060504030201

120

110

100

90

80

70

3

2

1

0

-1

-2

-3

Swe: GDP and economic sentiment

% q/q (RHS)

Economic sentiment (NIER)


25/33

3

Economic Insights

HOUSEHOLD SECTOR AND THE LABOUR MARKET

The household sector has remained firm,with rising sentiment and retail sales. Car registrations were weak inApril/May and are trending lower. Confidence is expected to decline again over the next 3-4 months but shouldremain at expansionary levels. Private consumption is expected to grow by 1.5-2.5% in 2012 and 2013.

The housing market has recovered since the Riksbanks latest rate cuts and prices are now close to the peaksfrom 2011. We are maintaining our forecast that home prices are set to decline by 10-15 per cent over the nexttwo years, but downside risks have decreased.

Employment continued to trend higher early in 2012, while unemployment stabilised ,largely in line with ourforecast. Short-term indicators, such as employment plans in the NIER survey, are easing very gradually and still atlevels that suggest that employment will continue to rise in the short run. Due to weak economic growth, the joblessrate should start increasing from mid-2012. We think unemployment will rise to slightly above 8% in early 2013.

11080502999693

15

10

5

0

-5

-10

15

10

5

0

-5

-10

Swe: Household savings ratio, % of income

Total

Ex manatory pension savingsOwn financial savings

13121110090807

4700

4650

4600

4550

4500

4450

9.0

8.5

8.0

7.5

7.0

6.5

6.0

5.5

Swe: Labour market

Unemployment, % (RHS)

Employment, 1000s


26/33

Denmark: Stuck in first gear, zero rate on DKK demandFRIDAY

15 JUNE 2012

After two quarters of negative growth, the first quarter was up 0.3 percent. Domesticdemand grew, while net exports turned negative.

Private consumption rose. Rising unemployment, falling real wages and housingweakness are negatives counterbalanced by a one-off transfer from a pension reform.

Public consumption posted a gain after a very weak end to 2011 suggesting that fiscalpolicy is starting to reverse, although planned investments havent materialised yet. Private investments rose, but capacity utilisation suggests that it is not a start of a strong

trend. Inventories also grew while housing investments continued the fall from late 2011.

Manufacturing has rolled over and sentiment suggests near-term weakness is ahead. To increase the labour supply the government has proposed a tax and labour market

reform. Negotiations with labour market participants have broken down and negotiationson taxes are still ongoing. Hence, we keep the fiscal assumptions unchanged.

Bottom line, still on track to 0.5 percent growth in 2012 with downside risks fromexports.

Jakob Lage Hansen

X-asset Research

+4533281469

GDP

GDP quarter-quarter GDP year-yearSource: Reuters EcoWin

92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-10

-5

0

5

10

15


2010 2011 2012 2013

GDP 1.3 1.0 0.5 1.4


Inflation 2.2 2.5 2.1 1.5

Government deficit** -2.7 -1.9 -3.0 -1.5

* Per cent of labour force, ** Per cent of GDP

Source: SEB

3M

change

3M

change

Netbalance

Percent,

12M


27/33

2

Economic Insight

Financial developments have been more dramatic. The renewed uncertainties in the euro zone caused the positivepressure on DKK to resume as Denmark fundamentally compares favourably with the euro zone. To defend thepeg vs. EUR the central bank intervened heavily in currency markets in May and has lowered the main interestrates twice by a total of 25 basispoints. The lending rate is now 0.45 percent (vs. ECB 1 percent) and the deposit rateis 0 percent (vs. ECB 0.25 percent).

The central banks resolve is likely to increase as EUR/DKK approaches the all-time low of 7.42 makingnegative deposit rates likely. Our base case is a reversal of EUR/DKK over summer above this level (also aided byeuro zone uncertainties subsiding), but the traditional lines of defence are stretched given the large foreign reservesand low yields in the euro zone. The next logical step is expansionary fiscal policy to lower the chroniccurrent account surplus. However, this does not seem imminent, so a move towards the official floor at 7.29 couldwell ensue if more adverse Euro scenarios start being discounted.

Government bonds have been well bid due to a low debt to GDP ratio and manageable deficits. The first four yearsof the yield curve were negative at one point and the 10 year yield fell below 1 percent before rebounding.

%-points(12M)

Percent(12M)

Percent

Percent,

12M

Percentagepoints

Netbalance

Euro vs. DKK

Source: Reuters EcoWin

99 0 0 01 02 03 04 05 06 07 08 09 10 11 12

EUR/DKK

7.420

7.425

7.430

7.435

7.440

7.445

7.450

7.455

7.460

7.465

7.470

Percent

Percent

DKK(billions)

Percent


28/33

Norway: Parting further from peersFRIDAY

15 JUNE 2012

Momentum in the Norwegian economy was surprisingly strong at the start of the year asmainland GDP excl. oil/gas and shipping expanded by an above-trend 1.1% on the

quarter in Q1 to be up a very solid 4.1% year-on-year. Moreover, the recent report from

Norges Banks regional network (a summary of anecdotal evidence resembling the Beige

Book) suggests that activity will continue to run at a solid clip in the near term.

Private consumption looks set to be on a firmer trajectory than previously expected oneven stronger growth in real disposable income, and is the main reason why we the

forecast for mainland GDP growth is revised up from 2.7% to 3.0% and for overallGDP from 2.4% to 2.8%. Surging investment in the petroleum sector should addapprox. 1%-point to overall GDP growth in 2012. However, we keep the 2013-forecasts unchanged at 3.1% for mainland GDP and 2.6% in overall GDP.

Recent indicators would suggest even stronger growth in 2012, but were not going allin. First, some of the boost in early 2012 should prove transitory (e.g. surging electricity

production on the supply side). Second, growth in private consumption in Q1 is in for a

downward revision to a change of methodology. Third, soft in imports in Q1 is unlikely to

last considering solid domestic demand. Finally, and importantly, downside risks are

emanating from heightened uncertainty to the near-term outlook in the euro-zone, both

directly (exports) and indirectly (animal spirits and thus consumption and investment).

Stronger-than-expected growth and wage inflation is unlikely to make much of animpact on Norges Banks monetary policy meeting June 20. Previously, we expected that

the bank was about to rethink its strategy and lift its optimal rate path from next year on.

However, Norges Bank should remain dovish, focusing on downside risks to theglobal outlook in general and potential repercussion from ongoing stress in the euro-

zone in particular. Moreover, Norwegian inflation is still too low while forward interest

rates abroad are lower than the bank has assumed (which feed s into its policy rate

equation although the NOK index is slightly weaker than projected).

Stein BruunSEB Norway+47 21 00 85 34

Erica BlomgrenSEB Trading Strategy

+47 22 82 72 77

Norges Banks network sees solid growthYear-on-year percentage change, index

-4

-2

0

2

4

6

8

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

Mainland GDP (LHS)Regional network output indicator (RHS)Output expectat ions 6 mth ahead (RHS)

Source: Nor es Bank, Stat istics Norwa


2010 2011 2012 2013

GDP 0.7 1.4 2.8 2.6

Mainland GDP 1.9 2.4 3.0 3.1


Inflation 2.5 1.2 1.1 1.9

Core inflation 1.4 0.9 1.4 1.9

Government balance** 11.3 13.8 13.6

* Per cent of labour force, ** General government, per cent of GDP,forecast 2012 MoF (May 2011)

Source: SEB


29/33

Economic Insights

DEMAND AND PRODUCTION

Growth in mainland GDP (excl. oil/gas and shipping) was surprisingly strong in Q1, rising 1.1% on the quarter to beup a well above-trend 4.1% year-on-year. The acceleration was lifted by private consumption rising a solid 1.3%

from last Q4, and a surprisingly strong 3.8% gain in exports of non-oil goods (reversing almost all the slump in late

2011) and declining imports of such goods. However, overall non-oil investment declined 2.7% on the quarter: note,

though, that business investment and public ones as well tends to be very choppy on a quarter-to-quarter basis.Meanwhile, overall GDP expanded an even stronger 1.4% from Q4/11 and 4.1% year-on-year as well on strong

investment growth in the petroleum sector and a revival in aggregated oil and gas exports.

Retail sales have gathered pace since year-end which isnt surprising as fundamentals remain very solid: householdsreal disposable income was thus up a strong 6.0% year-on-year in Q1. Momentum in retail sales should slow going

forward. However, Q2 started strongly with the April level of consumption of goods (a broader gauge) 1.7% above

the Q1 average, though inflated by a suspicious jump in spending on electricity which should correct downwards.

Manufacturing production continues to lag well behind what various surveys suggest. The manufacturing PMIcontinued to defy gravity from weakness abroad with very strong new orders index suggesting healthy momentum.

Growth well above trend in early 2012


-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

03 04 05 06 07 08 09 10 11 12

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

Norwegian real GDP GDP mainland NorwaySource: Stati stics Norway

Solid consumption, exports surprised in Q1Year-on-year percentage change

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

03 04 05 06 07 08 09 10 11 12

-20

-10

0

10

20

30

40

Private consumption (LHS) Private non-oi l investment (RHS)Export s non-oil goods (RHS)

Source: Stati stics Norway

Retail sales have gathered speed

Percentage change, 3-month average

-8

-4

0

4

8

12

16

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

Real retail sales excl. autos, year-on-year (LHS)From 3 mth. earlei r ( RHS)

Source: Stat istics Norway

Strong investment boom in petroleum sectorNOK bn.

40

60

80

100

120

140

160

180

200

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

40

60

80

100

120

140

160

180

200

Actual and planned investment oil/ gas extraction and pipeli nesSource: Stati stics Norway

Manufacturing production continues to lag Percentage change, 3-month average

-16

-8

0

8

16

24

03 04 05 06 07 08 09 10 11 12

-4

-2

0

2

4

6

Manufactur ing product ion, %change year-on-year (LHS)From 3 months earl ier (RHS)

Source: Stat istics Norway

upbeat survey-based indicatorsNet balance (sentiment) and index (PMI)

-30.0

-22.5

-15.0

-7.5

0.0

7.5

15.0

22.5

30.0

37.5

03 04 05 06 07 08 09 10 11 12

30

35

40

45

50

55

60

65

70

75

Manufacturing sentiment (LHS) PMI manufacturing (RHS)

PMI new orders (RHS)Source: Ecowin, Stati stics Norway

2


30/33

Economic Insights

LABOUR MARKET AND INFLATION

Healthy momentum in the broader economy continues to underpin labour markets. Employment was thus up a verysolid 2.2% year-on-year on average in February-April, lowering the LFS unemployment rate to 3.0%. Going forward,

we expect some recovery in the labour force and moderating employment growth to lift unemployment marginally.

The wage settlements in the dominant public sector confirm our earlier expectations that overall wage growth in2012 will be little changed from 4.2% rate in 2011. (Note that the timing of pay hikes in the main municipalities

sector already implies a 3% increase in 2013). Adding in solid employment and benign overall inflation, households

real disposable income is likely to be up even more than the very strong 4.2% gain in 2011.

The year-on-year rate in core consumer prices (excl. taxes and energy) downshifted from 1.5% in March to a one-year low of 0.7% in April only to lift to 1.4% in May. The choppiness reflects very volatile airfares which make up less

than 1% of the basket but exhibit very sharp twist and turns. Excluding this, underlying inflation eased to 1.0% in

May on our calculation, the slowest since December. Meanwhile, overall CPI inflation was still very low at 0,5% in

May, held in check by a further decline in electricity prices which have dented headline inflation 1.1%-point over the

past year, and lower gasoline prices. We stick to out forecast for gradually higher core inflation going forward.

Labour market remains very solid

3-month average

-2

-1

0

1

2

3

4

5

03 04 05 06 07 08 09 10 11 12

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Employment, %change year -on-year (LHS)

Unemployment, %of l abour for ce (RHS)Source: Stati stics Norway

Wage growth holding up in 2012

0

1

2

3

4

5

6

7

8

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

1

2

3

4

5

6

7

8

Wage growth, %change year-on-year (LHS)LFSunemployment r ate, reversed (RHS)

Source: Stat isti cs Norway, SEB

SEB

forecast

CPI inflation remains very benign


-2

-1

0

1

2

3

4

5

6

7

02 03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

5

6

7

Consumer prices CPI excl. taxes and energy


Trend in domestic inflation only slightly higherYear-on-year percentage change

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

02 03 04 05 06 07 08 09 10 11 12

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

Core CPI domest ic goods and servicesCore CPI import ed consumer goods


Core inflation lower excl. airfaresYear-on-year percentage change

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 2008 2009 2010 2011 2012

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

CPI excl. taxes and energy Core CPI excl. airfares

Source: Stat isti cs Norway, SEB

Increase in home prices easing marginallyPercentage change

-15

-10

-5

0

5

10

15

20

25

30

03 04 05 06 07 08 09 10 11 12

-15

-10

-5

0

5

10

15

20

25

30

Existi ng home pri ces, year-on-year (LHS)From 6 mth. earli er, annualised (RHS)


3


31/33

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS

Following the 75bps rate cuts since last December, Norges Bank should keep the key deposit rate at 1.50% andreiterate a dovish message at the monetary policy meeting June 20. Make no mistake, policy rates are too low

relative to domestic fundamentals even taking low inflation into account, in our view. Mainland GDP expanded 4.1%

in the year to Q1 and the recent report from Norges Banks network suggests continued above-trend growth in the

near term: the output gap is likely slightly positive. Unemployment is a low 3.0% as employment is growing morethan 2% year-on-year. Domestic core inflation (excl. taxes and energy) is approx. 2%, while wage growth should

exceed 4% in 2012, too. Finally, existing home prices continue to climb and domestic credit to households was up

6.8% year-on-year in April (though now at par with the solid gain in nominal disposable income in Q1). However,

Norges Bank should continue focusing on downside risks to the global outlook and a too-low overall inflation.

The Norwegian krone has outperformed all G10 currencies over the past week but remains vulnerable. Markets rateexpectations are cautious and unchanged rates for the reminder of the year is discounted: nevertheless, risks are

still skewed toward a dovish surprise. In addition, with Norges Bank holding off from boosting FX purchases just yet,

there will be a catch-up effect in late Q3/Q4. Hence, we regard the 7.40-area to provide good buying opportunities

in EUR/NOK ahead of a markedly deteriorating flow outlook later this year, and forecast EUR/NOK 7.60 by end Q3.

Norges Bank sees rates staying lower for longerPer cent

0

1

2

3

4

5

6

7

8

02 03 04 05 06 07 08 09 10 11 12 13 14

0

1

2

3

4

5

6

7

8

Nor ges Bank deposi t rat e Opt i mal rat e pat h, MPR 1/ 12Optimal rat e path, MPR 3/ 11

Source: Nor ges Bank, SEB

Tight spread vs. Germany didnt hold for long

Weekly average

0

1

2

3

4

5

6

7

8

9

01 02 03 04 05 06 07 08 09 10 11

0

50

100

150

200

NOK 10-year government bond yiel d, %(LHS)

Spread vs. Bunds, basis points (RHS)Source: Reuters, SEB

NOK indexes mowing sidewaysWeekly average

84

88

92

96

100

104

108

112

116

2005 2006 2007 2008 2009 2010 2011 201280

84

88

92

96

100

104

108

112

NOK trade-weighted (LHS) NOK import-weighted (RHR)Source: Reuters, SEB

Spread versus Bunds has drifted higherWeekly average

0

1

2

3

4

5

6

7

8

03 04 05 06 07 08 09 10 11 12

0

25

50

75

100

125

150

175

NOK 10-year government bond yiel d, %(LHS)

Spread vs. Bunds, basis point s (RHS)Source: Reuter s, SEB

Market pricing, Norges Bank March path, SEB forecast

0.75

1.25

1.75

2.25

2.75

3.25

04.12 11.12 06.13 01.14 08.14

Market pricing SEB forecastNorges Bank Main Norges Bank Low

Credit growth has levelled outYear-on-year percentage change

-5

0

5

10

15

20

25

03 04 05 06 07 08 09 10 11 12

-5

0

5

10

15

20

25

Domest ic cr edi t gr owt h Domest ic cr edi t to househol ds

Credit t o non-fi nancial companiesSource: Stati stics Norway

4


32/33

Finland: Slowdown ahead after strong Q1THURSDAY

14 JUNE 2012

For the export-dependent Finnish economy, the downbeat outlook for the worldeconomy and especially the euro zone will contribute to 2012 being a weak year. Afterending 2011 on a weak note, first quarterGDP growth came in surprisingly strong,but looking at the details it seems like things will be worse ahead .

In the first quarter of 2012, exports grew and household consumption was boostedby car sales (high in March due to impending tax increases in April). Although domesticfundamentals are relatively strong, consumption will grow at a slower pace over the year.Monthly data for April show a clear slowdown, both on an annual and monthly basis.

Leading indicators for manufacturing and construction are falling (Chart 2). Theconfidence indicator for manufacturing industry has been below zero since July 2011, andproduction fell in the first quarter of 2012 compared with the same period last year. On ayear-on-year basis, exports have also been weak so far this year (Chart 3).

Taken together, the strong first quarter will push up growth in 2012 even though weexpect it to be weak for the rest of the year. We are revising our GDP forecast upwardto 1.2% 2012 (from 0.7% in Mays Nordic Outlook), with 2013 unchanged at 1.7%.

Daniel Bergvall

Economic Research

+46 8 763 85 94


2010 2011 2012 2013

GDP 3.7 2.9 1.2 1,7


Inflation 1.7 3.3 2.5 2.1

Government fiscal balance** -2.5 -0,5 -1.0 -0.5

* Per cent of labour force, ** Per cent of GDP

Source: SEB


33/33

Economic Insights

LABOUR MARKET RESILIENT SO FAR, CONSUMERS GETTING MORE WORRIED

Capital spending is still rising, albeit at a slower pace than last year. The first quarter showed fixedinvestments increasing both in annual and quarterly terms (0.3 q/q, 1.5% y/y). Despite weakness in manufacturing,capacity utilisation is still on the rise (graph 4) and bank lending does not indicate an imminent slowdown.

Unemployment has edged up somewhat in recent months (from 7.5% in January to 7.7% in April). Meanwhilethe number of vacancies is still on the rise (Chart 5). We expect no significant increase in unemployment, and asannual average the figure is expected to stay at the same level in 2012 as 2013. With the jobless rate rising onlyslowly, consumer confidence and consumption will be relatively stable, although developments elsewhere in theeuro zone are a significant cause for concern (Chart 6).

Inflation has been stickier than expected, but lower inflation in 2012 than in 2011 is still boosting real householdincome (Chart 7). Still, household confidence has fallen to levels that suggest slower consumption growth. We stillbelieve that domestic demand will be the main growth driver 2012.

Inflation is expected to continue falling in 2012, although increases in excise duties and adjustments to value-added tax will make the process more drawn-out. HICP inflation was 3.2 per cent in November last year, down from3.7 per cent in mid-2011. We expect HICP inflation to average just below 2 per cent in 2012.

Relatively low government debt has boosted financial market confidence. The government deficit for 2011turned out better than expected at -0.5% of GDP. Yields on government bonds are at historical lows, at presentaround 1.7%, although higher than in such countries as Germany and Sweden.

seb report: world recession risk rises to 35 per cent

Documents