Professional Documents
Culture Documents
Swedbank's Global Economic Outlook, 2010 August
Swedbank's Global Economic Outlook, 2010 August
Beyond the rebound, growth in the Western World (West) continues to trend
weakly. Fiscal austerity, debt reconstruction and weak labour, housing and
credit markets are softening growth prospects. The optimism in Europe that
followed in the wake of positive growth data, the bank stress tests and strong
corporate earnings will soon be replaced by pessimism, similar to the situation
the US now faces. Emerging economies are expected to see a soft landing.
Economic policy is being tightened to avoid an overheating in consumption
and asset markets. Emerging economies will continue to drive the global
economy, and the convergence between them and the West is accelerating.
Despite the slowdown in the US, we consider the risk of a new recession
(double dip) to be relatively small (10%). Our main scenario, with weak
growth, low inflation and low interest rates in the West, has a probability of
50%. On the other hand, the risk of deflation and weaker growth has
increased, i.e., a Japan scenario does not appear to be as far-fetched as
before. A zero interest rate policy could also contribute to a deflation scenario.
We give this a 25% probability. Faster normalisation driven by high investment
growth has a 15% probability.
Although our forecast points to a continued recovery in the Nordic and Baltic
countries, the region is vulnerable to a deterioration in Europe and emerging
economies. Countries that combine cutbacks/stimulus with structural reforms
have a better opportunity to handle new downturns and strengthen their
position in the slightly longer term at a time when globalisation is leading to
greater competition.
Cecilia Hermansson
Contents:
1. After the rebound, many challenges remain 2
2. The biggest threats to the global economy – 5
and to our forecast
3. A Japan scenario no longer far-fetched 9
4. Economic policy 11
5. Our outlook for the financial and commodity markets 15
6. Regions/countries: Western World, please hold! 20
7. Conclusions for our home markets 40
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46-8-5859 7740
E-post: ek.sekr@swedbank.se Internet: www.swedbank.com Responsible publishers: Cecilia Hermansson, +46-8-5859 7720.
Magnus Alvesson, +46-8-5859 3341, Jörgen Kennemar, +46-8-5859 7730, ISSN 1103-4897
1. After the rebound, many challenges
remain
Emerging countries, the US, Japan and most recently Europe, The recovery
in that order, have seen their economies rebound following the continues …
severe recession of 2008-2009. Economic stimulus programs,
rescue packages for the financial sector and stronger future
confidence have helped exports to accelerate once again, and
inventories have been built up, giving a big, though temporary,
lift to growth.
2 .5
0 .0
-2 .5
E u ro z o n e
-5 .0
-7 .5
Japan
-1 0 .0
00 01 02 03 04 05 06 07 08 09
S o u r c e : R e u te r s E c o W in
It is positive that the recovery has continued, but worrisome that … but a weaker US is
the US is again weakening following the rebound. Pessimism a concern
has returned. Gigantic problems in the labour, housing, and
credit markets still remain. It takes time to correct balance
sheets. The political situation is also becoming more
challenging. Our outlook has not changed significantly since the
spring: After 2.8 per cent growth this year, GDP will increase by
2.2% in 2011 and 2.5% in 2012.
Global GDP in PPP -0.7 4.3 3.6 3.8 4.0 3.7 3.9
Global GDP in US dollars -1.9 3.4 2.8 3.0 3.1 2.9 3.2
Source: National statistics and Swedbank’s forecasts with World Bank 2009
weights. Note: These countries represent 75% of the global economy.
The spring crisis in the Eurozone has passed its most acute Big risk that the
stage. After the banks underwent stress tests and transparency optimism in Europe
improved, concerns eased somewhat. Strong GDP figures for won't last
the second quarter – particularly in Germany, which has
benefitted from demand from emerging countries – have also
increased optimism. We expect that like in the US this will turn
to pessimism later this fall and that our revised GDP growth
estimate for this year (to 1.2%) will be lower for 2011 and 2012.
Due to fiscal austerity and continued weak credit and labour
markets, activity is not growing as quickly in many export-
intensive European countries as the rest of the world develops
more slowly.
The biggest threat to the global economy is that the wrong The forecast risks are
economic policies are adopted and concerns about the financial both short- and long-
market again send the global economy into a tailspin. We have term – and complex
counted up to thirteen threats, each of which individually or
together could change our relatively positive, growth-oriented
outlook: a new recession in the West, deflation, instability in the
financial markets, government finances, savings imbalances,
labour markets, middle class stagnation, protectionism and a
lack of global leadership, a political stalemate, ineffective
economic policy, inflation, jittery commodity markets, and
natural disasters and other major shocks.
Deflation
Deflation driven by weaker demand and balance sheet
corrections upsets the recovery and debt reconstruction, as
consumers stop spending in expectation of lower prices,
companies find it hard to raise prices, and real debts rise in
value. It is usually hard to extricate from a deflationary spiral.
Inflation
A huge stimulus in the form of a zero interest rate policy,
expanded balance sheets and fiscal programs create the risk of
high inflation when growth proves sustainable. At this point the
monetary base has increased substantially, but not the money
supply.
2 .0 0 -1 0 0
1 .7 5 -2 0 0
USD (thousand billions)
1 .5 0 -3 0 0
USD (billions)
U S A C u rre n t
1 .2 5
A ccount -4 0 0
1 .0 0 -5 0 0
0 .7 5 -6 0 0
0 .5 0 -7 0 0
0 .2 5 -8 0 0
0 .0 0 K in a s a c k m le r a d e -9 0 0
90 92 94 96 98 00 02 04 06 08 10
S o u r c e : R e u t e r s E c o W in
Triggers: The middle class has been shrinking for some time.
The situation could get worse now that many people are being
forced from their homes and the job market is weak.
The biggest positive forecast risks are that the labour market
improves faster than expected, which increases confidence in
the future as well as domestic demand. Stronger investment in
light of high corporate earnings and solid demand for computers
and other equipment could also raise growth.
Reinhart & Rogoff (2009) have studied the financial crises of the
last century. With regard to banking crises, they have found that
on average they result in the following:
Assumptions: After the downturn and rebound the global Probability: 50%
economy continues to strengthen, but with major swings in
activity owing to shifting sentiment between optimism and
pessimism. Some stimulus measures are reversed and
austerity is adopted in countries with no other alternative,
although a further stimulus is possible as well. Domestic
demand in the West is held back, which limits inflation. Deflation
The Greek crisis has shown that the financial market is not
willing to finance certain countries’ large budget deficits
without very high risk premiums.
Even if the US, the UK, Japan and Germany have the
confidence of the financial market at this point, this could
quickly change and drive up long-term bond rates.
This probably agrees largely with the strategies that are now in Austerity is
the cards, except that Germany and Japan have decided to turn unavoidable in certain
to austerity earlier. Waiting another year or so would have been countries, but Japan
preferable. A new quantitative easing is also possible. and Germany could
Moreover, the G20 should not try to overly coordinate policy. have waited
In a 2010 study, James B. Bullard, president of the Federal A zero interest rate
Reserve Bank of St. Louis, states that a zero interest rate policy policy can contribute
in actuality increases the risk of deflation. He claims that the US to deflation
could find itself closer to a Japanese-style outcome in the years
ahead.
His thesis is that with the Taylor Rule that central banks
currently use when nominal interest rates rise more than one-
for-one when inflation deviates from a given target, there are
two stages of steady state1: 1) a conventional steady state
where monetary policy is effective/active and where the nominal
interest rate is adjusted so that inflation reaches the target, and
2) an unintended steady stage where monetary policy has no
effect/is passive since interest rates cannot be reduced when
inflation is falling.
Japan has received a lot of advice on how to fight deflation, but Despite quantitative
has not managed to climb out of this stage despite quantitative easing and fiscal
easing and fiscal stimulus. Richard Koo (2008) has stated that stimulus, Japan has
been unable to avoid
deflation
1
The Taylor Rule is not linear. If it were the benchmark interest rate would be
negative when inflation was extremely low, which is not possible. The other
curve in the diagram is a Fisher Relation, i.e., it says that the nominal interest
rate has a real interest rate component and an anticipated inflation
component. Where the Fisher Relation and the Taylor Rule cross is where the
optimal interest rate and inflation point can be found. They cross in two places
and therefore there are two stages.
Nominal short-term interest rates and core inflation in Japan (circles) and the US
(squares) 2002-2010 – Fisher Relationship (broken line), Taylor Rule (solid line)
Benhabib, et al (2002), who in 2001 were the first to show that it The advice being given
was possible to go from steady state 1 to 2, view that printing is unreasonable given
money is an alternative, but not if there are guarantees that today's reality
government finances will be managed sustainably and people
expect tax cuts later on. This would only worsen the deflationary
spiral. The suggestion that governments will be perceived as
irresponsible and face insolvency problems does not seem
relevant in the reality we live in today. Still, Japan has not been
able to avoid the deflation stage either, with a debt ratio of
200% of GDP.
The Bank of England (BOE), on the other hand, seems to be It is important not to
better at manoeuvring the situation. Its benchmark rate has not cut to zero – maybe
been cut below 2% in 314 years, and the BOE chose to set a the US should raise
floor of 0.5% (ECB at 1%). Quantitative easing entails rates earlier?
purchases of government bonds, which more than purchases of
mortgage bonds drives up inflation expectations. On the other
hand, the monetary base can be adjusted quickly both upward
and downward, which actually should not affect inflation
expectations. Quantitative easing has not helped to prevent
deflation in Japan either.
Interest rates
Fiscal austerity and weak domestic demand will soften price Consumer prices are
pressure in the West during the forecast period. Compared to rising, but core inflation
last year consumer prices are rising, but in many cases inflation remains low
is below its target. Emerging economies are cooling down to
reduce overheating problems, which is keeping inflation in
check.
These conditions, along with the fact that the growth rate is Interest rate hikes
slowing and the recovery is taking more time, mean that central have been delayed
banks are not expected to raise their benchmark rates as early for a year
as we predicted in our spring forecast, where we assumed that
rate hikes would begin in Europe and the US during the second
half year. Now we do not see the first hikes for another year.
The zero interest rate policy will continue.
At the same time it should be kept in mind that when confidence Low bond rates can
in a country's finances is undermined in the financial markets, quickly turn higher – if
bond rates will quickly rise, as we have now seen in Southern confidence sinks
Europe, for example.
Long-term market interest rates , 10 yr government bonds (%), US, UK, Japan and
Germany
1 5 .0
1 2 .5 UK
1 0 .0
Percent
7 .5 USA
5 .0
G e rm a n y
2 .5
Japan
0 .0
86 88 90 92 94 96 98 00 02 04 06 08 10
S o u r c e : R e u te r s E c o W in
Currencies
Since the beginning of the year the euro has fallen by just over
11% against the US dollar and by 3.5% against the British
pound, while the Japanese yen has appreciated by 8.4% and
the Chinese yuan by less than 1%. Through June the US dollar
had risen by slightly over 4% based on a broad, trade-weighted
index after last year's depreciation.
The more positive trend in Europe this summer since the worst
of the debt and banking crisis had passed has strengthened the
euro and pound against the dollar. The yen has also continued
to rise, but at the same time that China appreciated the yuan
slightly against the dollar, it has weakened against the euro.
160 S te rlin g
a g a in s t th e
E u ro a g a in s t th e U S d o lla r U S d o lla r
150
140
130
120
Y u a n a g a in s t th e U S
d o lla r
110
100
90
Y e n a g a in s t th e U S d o lla r
80
70
98 99 00 01 02 03 04 05 06 07 08 09 10
S o u rc e : R e u te rs E c o W in
We expect the dollar to rise against the euro during the forecast The dollar is expected
period driven by slightly faster growth and a continued appetite to rise during the
for US treasuries, which are still regarded as safe bets. The forecast period
Eurozone’s continued problems are also a contributing factor.
The Chinese yuan will continue to appreciate assuming that the China remains
global recovery lasts, but the pace will remain slow at about 4- cautious
5% per year. If a new global recession occurs, we think it is
likely that China will again stop the yuan’s appreciation.
While the yen isn’t likely to lose ground in the year ahead, it Diversification away
probably won't go much higher from today's levels either. A from the dollar is
relatively strong yen is partly due to the need among central helping the yen
banks to diversify their currency portfolios away from the dollar.
As the dollar appreciates, this need subsides. Slower growth in
2011 and 2012 will also weaken the yen slightly.
Commodity markets
In line with a stronger global economy this year, we are raising After rebounding
our oil price forecast upward to 78.5 dollars a barrel (75 dollars oil prices will rise
in our spring forecast). The growth rate will then slow and be more slowly
weaker in 2011 and 2012 compared to our previous forecast.
Oil is now expected to rise to 82 dollars in 2011 and 90 dollars
in 2012.
The price of oil will remain considerably above the average for
1970-2010 of 27 dollars, and even above the average for 2005-
2010 of 72 dollars.
Financial
bubble
125
100
US dollar/barrel
2012
2011
75 2010
High demand, also some supply problems
50 IT bubble
Second Oil Crisis
Kuwait Irak
25
First Oil Crisis 9 eleven
Asian Crisis
0
70 73 76 79 82 85 88 91 94 97 00 03 06 09
Source: Reuters EcoWin
We expect metal and food prices to continue to trend upward, The fires in Russia
although the growth rate will slow in 2011 and 2012 compared have increased the risk
to the rebound after the crisis. The risk of higher grain prices of higher grain prices
has increased due to the fires in Russia and the export
stoppage there and in Ukraine, although the inventory situation
still seems better than during the supply shock in 2008.
350
300
Index
200
150
100
F o o d p ric e in d e x
50
00 01 02 03 04 05 06 07 08 09 10
S o u rc e : R e u te rs E c o W in
Asset markets
Housing prices have not yet hit bottom in Spain and Ireland, for
example, and even though the slowdown has eased in the US
and Denmark there are as yet no signs of a clear recovery. In
the US, the phase-out of tax subsidies has created uncertainty,
200 USA
S
N
175
DK
150
SF
125
IR L
100
75
99 00 01 02 03 04 05 06 07 08 09
Market jitters returned in 2010 due to the Greek crisis and the Strong equity prices
Eurozone’s inability to handle it. To date stock markets have will require an increase
benefitted from corporations’ lower costs. Order bookings, in order bookings
especially from the West, are lower than normal, however.
Going forward they will have to increase in pace with the
recovery – a reasonable scenario – but since the impact of cost
savings is ebbing, stock prices are rising slower than in 2009.
Stock price trends in the US, Japan, India, China, Russia and Europe
(Index January 2009 = 100)
400
C h in a R u s s ia
( S h a n g h a i)
350
300
250
Index
200
Japan
150
I n d ia ( M u m b a i)
100
U S A (S & P 5 0 0 )
50
06 07 08 09 10
S o u r c e : R e u te r s E c o W in
In the years ahead the recovery will also slow due to tighter
economic policy, mainly fiscal policy, though also gradually less
expansive monetary policy as well as stricter rules on the
financial sector.
15
P h ilip p in e s
10
I n d o n e s ia
Percent
M a la y s ia
0
-5
T a iw a n T h a ila n d
-1 0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
06 07 08 09 10
S o u r c e : R e u t e r s E c o W in
Attempts are being made to reduce imbalances and cool off The key is to avoid
these economies. The key is to avoid too fast of a slowdown, a hard landing in
especially if stricter economic policies are coupled with lower emerging economies
capital inflows and a downturn in more developed countries.
Our main scenario includes a soft landing in emerging countries
such as China, India and Brazil. The risk of a recession there is
limited, and if one does occur, it could be countered by new
stimulus measures more easily than in the West. (Russia will be
dealt with in a forthcoming analysis).
The US has led the recovery. The rebound has also been Optimism has turned
stronger than expected in Japan. The fourth quarter of 2009 to pessimism in the US
and first quarter this year were the strongest measured in terms – Europe is likely to
of annual and quarterly growth. Now we expect a slower second follow
half at the same time that Europe, which usually trails by about
a half year, sees its growth peak in the second and third
quarters. The positive trend in the US about six months ago has
crossed over to Europe, and with it optimism has followed.
150
145
140
135
130
125
120
115
110
105
100
95
US
90 Japan
85 Eurozone
China
80 India
75
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009 2010 2011 2012
Our conclusion is that the West is continuing to grow below its The financial crisis
potential, at the same time that emerging economies are has accelerated the
cooling off but still expanding greatly in comparison. Even convergence between
without the financial crisis and recession, the convergence East and West
would have continued, but now it is accelerating due to slower
anticipated growth in the West.
Note: For the West to grow faster will require structural reforms
that lead to higher productivity and compensate for the negative
effects of austerity measures.
Despite that the US central bank, the Federal Reserve, cut its An unconvincing
benchmark interest rate to zero two years ago and expanded its recovery despite
balance sheet by US$1.2 trillion – and the administration the stimulus
pushed through a fiscal stimulus package worth nearly US$800
billion in February of 2009 – the American economy has not
shown signs of a lasting recovery.
2
Other assumptions include an annual growth rate of 5% in other emerging
economies, 2.5% in the UK, Canada and Australia, and 1.5% in the Eurozone
och Japan. The PPP assumptions here are constant, but in reality will change
over time.
During previous recoveries the US labour market benefitted The national recession
from its mobility, but because this recession was nationwide in and weak housing
scope and people aren’t moving to the same extent, along with market are reducing
the fact that the housing market continues to stagnate, there is mobility in the labour
a lack of vitality in the economy. Long-term unemployment has market
risen. Unemployment compensation has been extended to
avoid a further slowdown in spending. The risk of higher
structural unemployment is high.
D e b t r a t io - - - - >
1 5 .0 < - - - - S a v in g s r a t io 1 .2
1 0 .0 1 .0
7 .5 0 .9
5 .0 0 .8
2 .5 0 .7
0 .0 0 .6
-2 .5 0 .5
60 65 70 75 80 85 90 95 00 05 10
S o u r c e : R e u t e r s E c o W in
9 The stronger dollar and slightly slower global growth are expected
to impede exports. Instead there will be a shift to imports of foreign
products in manufacturing, which makes it harder for domestic
players and does nothing to alleviate surplus capacity.
9 The effects of the fiscal and monetary stimulus are fading at the
same time that the administration has been unable to garner
support for a new stimulus. If the so-called Bush tax cuts from
2001 and 2003 are not extended when they expire in 2011, it could
25 1 0 2 .5
20 1 0 0 .0
15 9 7 .5
Percent
Index
10 9 5 .0
5 9 2 .5
0 9 0 .0
< - - - S h a r e o f c o m p a n ie s
-5 p la n n in g to r e c r u it 8 7 .5
-1 0 8 5 .0
-1 5 8 2 .5
85 90 95 00 05 10
S o u r c e : R e u te r s E c o W in
One positive forecast risk is that business investment (which IT investments are
accounts for about 6.5% of GDP) rises more than expected surprising on the
thanks to low capital costs and higher profits. At a growth rate of upside and can
15%, this would contribute 1% to growth. raise growth
At this point the risk of a double-dip or a new recession has Deflation problems
diminished since late last spring as Europe's situation has are getting closer
improved. The most likely scenario is weak GDP growth in line
with our forecast, with little in the way of consumer price
increases. The risk of deflation in the US has risen, however.
Core inflation (consumer price index less energy and food) was
less than 1% in April, May and June, the first time this has
happened since the 1960s. US 10-year treasury notes have fallen
from 4% in April to 2.8% at the time of writing. The US imports
deflation due to a weaker euro/stronger dollar. In Japan, deflation
is already a fact, and parts of Europe also risk deflation.
And so the signs of a Japanese scenario don't seem all that The risk of a Japan-
farfetched for the US: A period of weak to modest growth, like scenario in the US
deflation or low inflation, a liquidity trap, debt restructuring and is no longer negligible
growing hopes that fiscal policy is the recipe.
Like the US, Japan saw its GDP rebound after the deep
recession in 2008 and 2009. In the first quarter of this year GDP
grew by 4.4% on an annualised basis, mainly due to a recovery
in auto exports. A strong boost from China and other parts of
Asia has benefitted Japanese exporters and is reflected in the
optimism in the Tankan business sentiment index. The second
quarter saw a more modest growth of 0.4% in annualised terms.
After the strong first quarter Japan’s GDP in real terms is back Japan’s nominal GDP
to the 2005 level. Nominal GDP, on the other hand, is only back is back to the 1993
to the same level as 1993. This is an indication of the level!
deflationary problems Japan has faced in the last two decades.
Except for 1997/98 and 2008, consumer prices have fallen.
500 5
450 4
Percent
< - - - - R e a l G D P - le v e l
400 3
350 2
300 1
250 0
200 -1
150 C o n s u m e r p r ic e s -2
100 -3
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
S o u r c e : R e u t e r s E c o W in
In our March forecast we assumed that the yen would weaken If the yen becomes
significantly when it again became popular as a funding even stronger,
currency for the carry trade. Instead foreign investors (central interventions may
banks and sovereign funds) have purchased Japanese be needed
securities, despite the marginal return, to diversify their
portfolios away from the dollar and euro. The yen – now about
JPY 85 per US dollar – is stronger than businesses would like
(the pain threshold is around 90). However, the real effective
exchange rate has not appreciated as much due to deflation.
Since unit labour costs have fallen greatly in the wake of
increased productivity, industry’s profit margins have held up so
far. If the yen rises further, which authorities are trying to offset
by giving commercial banks greater incentive to lend to certain
sectors, and later possibly interventions as well, there is a risk
of a new recession.
With a public debt ratio of around 190% of GDP and an acute A political impasse is
crisis of confidence in European government finances, Naoto close at hand in Japan
Kan, the Democratic Party of Japan’s second Prime Minister as well
since Yukio Hatoyama stepped down in June of last year and
Japan's fifth PM in four years, launched a fight to improve the
The reason why has China been forced to step on the brakes is Although credit growth
that the tremendous credit growth through the banking system, has now slowed, it is
which has been permitted to offset the effects of the recession, still too expansive
has created a risk of inflation and overheating in several
sectors: real estate, the stock market, retail, auto sales, etc.
This year banks are committed to add only US$ 1.1 trillion in
new lending, 22% less than last year. It hasn't hindered growth,
however.
3 5 .0 8
3 2 .5 C o n s u m e r p r ic e s - - - > 7
3 0 .0 6
2 7 .5 5
2 5 .0 4
Percent
Percent
2 2 .5 3
2 0 .0 2
1 7 .5 1
1 5 .0 0
1 2 .5 -1
< - - - K r e d it e x p a n s io n
1 0 .0 -2
7 .5 -3
98 99 00 01 02 03 04 05 06 07 08 09 10
S o u r c e : R e u te r s E c o W in
China’s currency – the yuan – in relation to the US dollar and euro as well as
nominal trade weighted index from BIS (inverted here and forecast for July)
1 1 .5 0 .0 1 0 5 0
< --- E U R /C N Y
1 1 .0 0 .0 1 0 2 5
1 0 .5 0 .0 1 0 0 0
1 0 .0 0 .0 0 9 7 5
9 .5 0 .0 0 9 5 0
9 .0 N o m in a l t r a d e w e ig h te d in d e x - - > 0 .0 0 9 2 5
8 .5 0 .0 0 9 0 0
< ----U S D /C N Y
8 .0 0 .0 0 8 7 5
7 .5 0 .0 0 8 5 0
7 .0 0 .0 0 8 2 5
6 .5 0 .0 0 8 0 0
05 06 07 08 09 10
S o u r c e : R e u te r s E c o W in
Our expectation is that China will grow by nearly 10% this year
(9.9%). During the second half of the year economic growth will
cool to an annualised rate of 8.5% by year-end. Since stimulus
measures are not having the same impact on growth and the
West is growing somewhat slower, we expect China to dip
down to 8-8.5% in 2011-2012. In other words, there will be a
soft landing in our main scenario.
Despite that growth only slightly exceeds India's potential Stronger domestic
(around 7.5%), there have been growing problems with demand and supply
overheating. High commodity prices, rapidly rising wages and problems have both
the strong domestic demand, which provides companies with driven inflation higher
opportunities to raise prices, coupled with a shortage of certain
foods, have contributed to rising inflation. In addition, the
government is reforming its program of fuel subsidies, which is
also raising consumer prices and having one-time effects.
Inflation, measured in wholesale prices, is rising by around 9-
10%, but inflation will slow along with consumer prices for
industrial workers and farmers now that the monsoon rains
have stabilised.
Real GDP growth and inflation in India June 2005 - June 2010 (%)
2 0 .0
C P I in d u s t r ia l w o r k e r s
1 7 .5
C P I a g r ic u lt u r a l w o r k e r s
1 5 .0
1 2 .5
G D P -g ro w th
1 0 .0
Percent
7 .5
5 .0
2 .5
0 .0
W h o le s a le p r ic e s
-2 .5
05 06 07 08 09 10
S o u r c e : R e u t e r s E c o W in
The fact remains that the urban population has benefitted from The urban population’s
rapid growth in many service-oriented sectors: outsourcing, IT, standard of living has
telecom, real estate and finance. Wage growth is in the double improved in recent
digits. Moreover, taxes have been cut. The urban population years
has had plenty of opportunity to increase consumption, and car
sales in particular have climbed substantially. In spite of a slight
slowdown, we expect domestic demand to remain strong,
driven by large capital inflows, foreign and domestic investment,
and latent demand following the financial crisis, during which
many people saw their net wealth shrink.
Since India does not have an upcoming congressional election With no elections in
scheduled, the sitting government has the opportunity to the near future, will the
consolidate the budget and introduce unpopular structural government take this
reforms. By further reducing subsidies and broadening the tax opportunity to institute
base, it could boost revenue. Combined with the recovery, this reforms?
would enable it to slash the budget deficit from nearly 7% last
year to just below 5% this year. The national debt, at around
80% of GDP, is still trending higher, and that has to change.
Brazil has handled the global financial crisis and recession well.
Last year GDP fell by a marginal 0.2%. International confidence
in the country seems fairly strong, and access to foreign capital
has been good. The future challenges facing the country are to
ensure a soft landing after signs of overheating and to
successfully hold the presidential and congressional elections in
October.
30 Im p o rt In v e s tm e n ts
20
Percent
P r iv a t e
10 C o n s u m p t io n
GDP
E x p o rt
-1 0
-2 0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
05 06 07 08 09
S o u r c e : R e u t e r s E c o W in
Fiscal policy will be a more important focus after the 3 October Economic policy is not
election. Regardless of who wins – the Workers’ Party (PT) or expected to change
Social Democrats (PSDB) – macroeconomic policy isn’t significantly after the
expected to change, i.e., budget discipline will stay in place. election
The budget deficit as a share of GDP is estimated at 2% this
year and the national debt could continue to decline during the
forecast period to 60% of GDP (40% of GDP net).
9
G re e c e
8
7
Percentage Points
4
P o rtu g a l
3
2
I t a ly
1 B e lg iu m S p a in
0 F ra n c e
Sweden
-1
ja n m aj sep ja n m aj sep ja n m aj sep ja n m aj
07 08 09 10
S o u r c e : R e u t e r s E c o W in
The €110 billion rescue package for Greece took too long for Despite uncertainty
Germany and the other euro countries to agree upon. As a about the specifics,
consequence, a massive €750 billion rescue package had to be both the rescue
passed in early May to avoid having the Greek crisis spread to package and …
Spain, Portugal and potentially other euro members with high
levels of public debt such as Italy. Despite uncertainty about the
specifics of the package, it has had a calming effect on the
financial market.
The stress tests of European banks have also created calm, as … stress tests have
have their strong results in the last two quarters. A number of helped to calm
outstanding questions remain, such as whether the financial markets
requirements in the tests were tough enough. In any case, the
increased transparency into the European banking system has
been positive. While US banks have written off “toxic” assets,
shrunk their balance sheets and secured US$700 billion in new
capital in the last 18 months, European banks have largely sat
on their hands. They are therefore less capitalised and carry
about twice as much debt as their American competitors. The
stress tests showed that 7 of 91 European banks had to
Concern about public debt in the Eurozone is simply concern Concern about public
about the region's banking system. Of the US$2533 billion debt debt = concern about
Greece, Ireland, Portugal and Spain have issued, and which is the banking system
being held abroad, Eurozone banks account for 75%. Despite
the rescue package, Greece’s national debt will reach 150% of
GDP within a couple of years, so the risk of a suspension of
payments has merely been put off a little longer.
110
105
100
Index
95
90
G e rm a n y
F ra n c e
85 F in la n d
E u ro z o n e
Ita ly
80
75
06 07 08 09 10
S o u rc e : R e u te rs E c o W in
The labour market has deteriorated but with regional Germany’s labour
differences. Unemployment has risen to nearly 20% in Spain, market has gone
upwards of 10% in France – the Eurozone average – and 8.6% against the stream
in Italy. In Germany, on the other hand, unemployment has
fallen after a brief upturn partly thanks to a shortened work
week (kurzarbeit) and partly because the labour market has
become more flexible in general. This differs significantly from
the US, where productivity has improved considerably without
any real job gains.
12 G e rm a n y
11
10
9
Percent
8
E u r o la n d
7
6 US
3
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
S o u r c e : R e u te r s E c o W in
Since the Eurozone does not face a major inflation threat and The ECB isn't
deflation is probably a greater risk in light of upcoming fiscal expected to raise
constraints, it would be reasonable for the ECB to wait before its benchmark rate
launching a period of interest rate hikes until 2012 at the when fiscal policy
earliest. What could change this picture are if the central bank is tightened
governor is replaced (by the more inflation-focused Axel
Weber), commodity prices rise or growth surprises by being
consistently stronger than expected.
Like ourselves, we expect many forecasters to revise their GDP The key is not to draw
growth projections upward for the Eurozone after a strong hasty conclusions
second quarter. It is important, however, not to draw hasty based on the second
conclusions since the rebound, like in the US, may not be quarter’s positive data
sustainable. The Eurozone – like the US – is struggling with a
number of underlying problems: a weak labour market, a huge
need for debt reconstruction, a shrinking and more regulated
financial sector, cutbacks in the public sector, pensions and
wages. That is why developments weaken in 2011 and 2012
compared to 2010, and why we revise our forecast downward.
One example of an overblown expansion is that the number of The public sector has
public employees has increased by 877 000 in the last decade, expanded quicker than
while the private sector hired 870 000. Wages have risen by the private sector in
3.3% in the public sector, but by 2.7% in the private sector. the last decade
The UK’s growth model, like the model in the US – consumption The British have to
driven by a large share of investments targeting finance and change their growth
real estate – has to be replaced. The purchasing managers’ model
index indicates that export orders are beginning to stabilise
rather than continuing to rise. If the global economy slows and
the pound remains fairly strong, it will be hard to create higher
growth through the export sector. Relatively high inflation of
around 3% is also contributing to higher costs compared to
competitors.
The British central bank (the Bank of England) seems to have a The BOE may have
tougher equation to solve than its counterparts – at least in the to raise interest rates
short term. The problem is that inflation remains above its earlier – a more
comfort zone. Waiting too long to raise the benchmark interest difficult equation to
rate from the current 0.5% is risky. There hasn’t been a new solve ...
quantitative easing since February of last year. British banks
have strengthened their results, but if the economic recovery
grinds to a standstill due to budget consolidation and weak
domestic demand, the banking system again faces a risk. A
new quantitative easing cannot be ruled out.
At the same time the medium-term risk of deflation is lower in ... although the risk
the UK than in the US and the Eurozone. It is also positive that of deflation is lower!
the central bank hasn’t adopted a zero interest rate policy and
instead focused more on quantitative easing in the form of
government bond purchases that, if anything, raise inflation
expectations.
Our new GDP growth forecast is intact at 1.1% and 1.6% for
2010 and 2011 compared to our spring forecast, but slightly
weaker for 2012 due to the growing impact of the budget
consolidation and slightly weaker global demand.
It is also important to avoid that domestic imbalances are built Domestic imbalances
up which cause the global recession to have an even greater must be avoided –
impact at home. Households in Sweden and Norway right now Norwegian and
are building up debt related to rising housing prices, but which Swedish households
could prove unsustainable in a few years if a new recession have to watch out!
arises or if interest rates were to jump substantially.
Cecilia Hermansson
Swedbank
Economic Research Department
SE-105 34 Stockholm Swedbank, Global Economic Outlook is published as a service to our customers.
Telephone +46-8-5859 7740 We believe that we have used reliable sources and methods in the preparation of
ek.sek@swedbank.se
the analyses reported in this publication. However, we cannot guarantee the
www.swedbank.com
accuracy or completeness of the report and cannot be held responsible for any
Legally responsible publisher error or omission in the underlying material or its use. Readers are encouraged to
Cecilia Hermansson, base any (investment) decisions on other material as well. Neither Swedbank nor
+46-8-5859 7720. its employees may be held responsible for losses or damages, direct or indirect,
Magnus Alvesson, +46-8-5859 3341 owing to any errors or omissions in Swedbank’s Global Economic Outlook.
Jörgen Kennemar, +46-8-5859 7730
ISSN 1103-4897