SEB: Nordic Outlook: Difficult policy choices amid slow global growth - Sweden is on a roll, but its path ahead is not risk-free
Parallel with new downward adjustments in most growth forecasts, some global
sources of concern from early 2016 have partly faded. For example, oil prices
and stock markets have regained part of their earlier sharp declines, and
central banks have made their policies even more expansionary - or postponed
normalisation processes. Some of the worries about China have also diminished.
Yet global economic growth will remain anaemic and fragile in 2016: GDP growth
in the 34 mainly affluent countries of the Organisation for Economic Development
and Cooperation (OECD) will reach 1.9 per cent this year, down from 2.1 per cent
in 2015. In 2017, OECD growth will accelerate to 2.3 per cent.
Downside risks continue to dominate the outlook, though to a slightly lesser
degree than before. Political risks in the United States (the presidential
election) and the European Union (a potential British exit or "Brexit" - as well
as elections in such countries as Spain, France and Germany in 2016-2017), a
possible Chinese hard landing, global indebtedness and lack of credibility and
limited manoeuvring room for economic policymakers - are factors that are
causing concern.
Multi-dimensional policy challenges as economic associations weaken
The concept of secular stagnation - a lengthy period of slower growth, along
with low interest rates and low inflation - is gaining a firmer foothold in
economic discourse. Clear global signs of a high propensity to save and weak
willingness to invest are pushing down real interest rates. Interest rate policy
is actually accommodative rather than proactive, with nominal key interest rates
being forced downward by falling real interest rates. The role of fiscal policy
is also likely to expand as monetary policy ammunition runs out and its
effectiveness weakens. The question is whether political leaders have the
strength, and the fiscal manoevring room, to seize the initiative.
Meanwhile there are growing questions about the long-term sustainability of the
economic policy system. After decades of financial and economic deregulation,
the market economy's dependence on policy decisions has never been greater.
Price signals in the financial market are being obscured by the enormous
securities purchases of central banks, which in turn are driving up asset
prices, despite lethargic economic growth. Central banks have gained increasing
influence on the credit supply, which implies obvious risks of poorer resource
allocation. Monetary policy has also contributed to greater economic inequality,
but we are now seeing negative interest rates assuming a political dimension in
the opposite direction: being interpreted as a hidden wealth tax, especially in
countries with a tradition of large-scale saving in interest-bearing accounts -
such as Germany. The boundaries between central banks and political systems are
becoming more and more fluid, which also raises questions about the independence
of central banks.
Weak wage response confuses central banks
Japan, Germany, the United Kingdom and - to some extent - Sweden are examples of
countries where tighter labour markets have so far not triggered normal wage
and salary acceleration. In various countries, both political leaders and
central banks have signalled that speedier pay increases would be desirable.
Higher legal minimum wages, for example in the US and the UK, are signs of
weakening confidence in the ability of market forces to create equilibrium and
balance. Looking ahead, there are still signs that a tight US labour market will
finally push wages upward. We expect US pay increases of 3.5 per cent in 2017,
resulting in rising inflation to an extent that the Fed will find rather
comfortable. In a number of countries, however, mounting competition due to
globalisation and digitisation - as well as surplus production capacity - will
hold down the inflation rate. We predict that Brent crude oil prices will move a
bit higher, to around USD 45-50 per barrel in 2016-2017, which will reduce
deflation risks.
Inflation is not dead, but it will be difficult for central banks to achieve
their inflation targets. Our US inflation forecast is sufficient for the Fed to
continue hiking its key interest rate - next time to 0.50-0.75 per cent in
September. By the end of 2017, the federal funds rate will stand at 1.00-1.25
per cent. This will help push down the EUR/USD exchange rate to 1.10 at the end
of 2016, before the euro rebounds slightly in 2017 towards its underlying
equilibrium exchange rate. Despite doubts about the effectiveness of monetary
policy, a number of central banks will continue their stimulus programmes.
Because of troublingly low inflation in both the euro zone and Japan, the
European Central Bank (ECB) will keep the door open to more securities
purchases, while the Bank of Japan will cut its key interest rate from today's
-0.10 per cent to -0.30 per cent, among other things in a desperate effort to
weaken the yen. We believe that the UK and Sweden will follow the US and begin
their rate hiking cycles during the first half of 2017. We expect monetary
policies to become more coordinated within the framework of a re-assessment of
the International Monetary System, in order to avoid destabilising capital
flows and competitive devaluations.
Good Chinese growth outlook - worse US outlook, especially in 2016
China's deceleration path is relatively close to our forecasts that its economy
will avoid a hard landing. Beijing's easing of fiscal and monetary policies is
softening the negative effects of surplus production capacity and housing
inventory, as well as high indebtedness among both state-owned and private
companies. China's domestic economy has good potential to take over as the
economic engine of the future, but there is great uncertainty as to when this
rebalancing will have a bigger impact. We expect GDP growth of 6.5 per cent in
2016, down from 6.9 per cent in 2015, and slowing to 6.3 per cent in 2017. In
the other BRIC countries, economic performance will be highly divergent. While
India will grow by 7.5 per cent, both Russia and Brazil will be mired in deep
recession this year due to structural problems, low oil prices and political
worries, but we generally expect some degree of stabilisation in the emerging
market (EM) sphere during 2017.
We do not believe that the broad-based US growth slump early this year reflects
underlying weaknesses. Financial conditions have recently loosened, due to such
factors as low interest rates, rebounding share prices and a weaker dollar.
Households can look forward to better economic conditions related to the labour
market, earnings and wealth effects. Combined with somewhat higher oil prices,
the situation in the manufacturing sector will stabilise. Economic growth will
bounce back in the second half of 2016. Yet full-year GDP growth will reach only
1.9 per cent, down from 2.4 per cent in 2015. Next year, growth will amount to
2.5 per cent.
In the November US presidential election, we believe that Republican candidate
Donald Trump has a 35-40 per cent chance of being elected. Despite his
confrontational and largely unrealistic protectionist programme, Trump attracts
voters by playing on their underlying frustrations about current economic policy
and the role of the United States in the world. If Trump's economic policies
were implemented, US and world economic growth would be threatened by reversals.
Recovery in Western Europe despite political fears
Western Europe's recent economic performance has been relatively stable. Early
in 2016 the euro zone reached the same level of GDP as before the Lehman
Brothers collapse of 2008. In our view, the euro zone has the potential for GDP
growth above its trend rate (1.0 per cent) during the next two years. We expect
euro zone GDP to increase by 1.7 per cent in 2016 (marginally higher than in
2015) and to reach 1.8 per cent in 2017. But the euro zone is a currency union
with imbalanced growth and is surrounded by major political concerns. Germany
faces growing criticism from the International Monetary Fund (IMF), the US and
the other euro zone countries because of its EUR 290 billion yearly financial
savings surplus (8 per cent of GDP) and overly cautious economic policies. The
banking sector, especially in southern Europe, is being squeezed by high
corporate debts, doubtful loans and a low interest rate environment. This is
hampering growth. Populism is gaining ground in an increasing number of
countries, causing major tensions for the EU project. How the refugee crisis is
managed - both in the short and long term - and how relations with Turkey will
evolve are important and unanswered political questions, although their economic
impact will be minor.
The UK's "Brexit" referendum on June 23 represents a political crossroads for
Europe and the EU project. We foresee a 65 per cent chance that the Remain side
will win. If there is a weak majority in favour of the Leave alternative (which
is a 25 per cent probability), there is likely to be room for new negotiations
with the EU followed by another referendum.
Nordic divergence - Baltic convergence
The Norwegian economy has bottomed out, with domestic demand gaining strength
despite falling oil investments. The labour market and the manufacturing sector
are showing some bright spots. The government's fiscal policy will become even
more expansionary - the biggest stimulus programme since 2009 - and we foresee
one more key rate cut to 0.25 per cent by Norges Bank. We expect overall
Norwegian GDP to grow by 1.2 per cent this year, down from 1.6 per cent in
2015. In 2017, growth will be marginally higher: 1.5 per cent. Last year's
disappointing economic growth in Denmark is difficult to explain, but the
current outlook is favourable - helped by stronger domestic demand. We expect
Denmark to show a 1.5 per cent growth rate in 2016 and 2.2 per cent in 2017. The
Finnish economy has also passed its low point but faces a long uphill struggle.
Exports will show some improvement, while households are being squeezed from
several directions. Yet low inflation is allowing an improvement in purchasing
power, which is being offset by continued public sector austerity. We expect
Finland's GDP growth in 2016 to reach 0.7 per cent, marginally higher than last
year. Next year the economy will grow by 1.1 per cent.
The outlook for Estonia, Latvia and Lithuania is improving, but downside risks
remain. Private consumption is an important driver of economic growth and is
benefiting from strong labour markets. Expected wage and salary increases will
give households more purchasing power in an environment where inflation remains
low, but at the same time these increases pose a threat to the competitiveness
of the Baltic countries. In 2017, Estonia and Latvia will experience inflation
that exceeds the ECB's target. Public sector finances are strong, serving as a
potential shock absorber and giving the three governments flexibility in case of
renewed economic weakness. We expect GDP growth in the Baltic countries to come
in at nearly 2.5 per cent this year, accelerating by another 0.5-1.0 percentage
points in 2017. This means that these countries will achieve their potential
growth rates.
Swedish public opinion on EU divided - "euro the price to pay to stay in the EU"
British withdrawal from the European Union would have a larger political than
economic impact on Sweden and would change the power balance in the EU to the
advantage of the euro zone countries. It would increase pressure on Sweden to
adopt the euro. In May, SEB chose to commission Demoskop to conduct a survey
aimed at measuring the opinions of the Swedes on remaining in the EU and
adopting the euro. According to the survey, 47 per cent of respondents would
want Sweden to leave the EU if introducing the euro became mandatory for member
countries; 38 per cent would accept the euro if given that choice. Our
intepretation is that Swedes are surprisingly willing to accept the euro as "the
price they have to pay" in order to stay in the EU. The same poll also confirms
that unlike the British, the Swedes are not currently prepared to start a fight
about renegotiating their country's relations with the EU.
Sweden's GDP growth will decelerate, but undramatically, in 2017. Record growth
in public sector consumption - the highest in 20 years, driven by refugee-
related spending, residential construction and a slightly faster export upturn
due to a weak krona - will help decrease GDP growth to 4.0 per cent in 2016,
down from 4.1 per cent in 2015. Growth will be 2.8 per cent next year, which is
still well above trend. Smaller immigration flows as well as bottlenecks in the
construction sector will slow economic growth in 2017. Despite rapid job
growth, rising labour force participation has been instrumental in keeping
unemployment higher than expected so far. During 2016, unemployment will drop
below 6.5 per cent. It will then climb again late in our forecast period.
Equilibrium unemployment is 6.5-7.0 per cent, which implies tighter resource
utilisation and will make it difficult for the government to meet its target of
achieving the lowest unemployment in the EU by 2020. Now that this year's
national wage round is over, we have adjusted our 2016 forecast of wage and
salary increases downward from 3.1 to 2.7 per cent. We expect the 2017 wage
round to result in faster pay increases due to a tighter labour market
situation. Taken together, this will result in rising CPIF inflation (consumer
price index minus interest rate changes), which will nevertheless not reach the
Riksbank's 2 per cent target by the end of 2017.
Is Sweden a "bumblebee" that defies the law of gravity without a parachute?
Swedish public finances are surprisingly strong, but there is still no shortage
of challenges. Rapid GDP growth is giving an extra push to tax revenues, since
this growth is employment-driven and is also dominated by highly taxed demand
segments such as construction and private consumption. After achieving a
balanced budget in 2015, Sweden is expected to show fiscal surpluses during
2016 and 2017, while government debt will fall from 45 per cent in 2014 to 40
per cent in 2017. The official expenditure ceiling is no longer being
threatened, among other things due to downward revisions in projected
immigration. This is increasing pressure on Finance Minister Magdalena Andersson
to become more aggressive about pushing down unemployment, thereby hopefully
turning around the powerful public opinion headwinds that the Social
Democratic-led minority government is facing ahead of the September 2018
election.
But fiscal expenditures are not without dangers in a situation of large
underlying spending pressures. Many key public sector functions are hard-
pressed. Meanwhile budget increases for defence, integration of immigrants into
Swedish society, labour market training and skills development programmes will
probably be necessary. And eventually there will also be risks posed by higher
debt service expenditures and cyclical downturns. Political logic suggests that
the finance minister will be forced to find a compromise between stimulus
measures and a continued firm grip on spending, but next autumn's budget for
2017 is likely to end up with even more expansionary fiscal policy. The more
stimulus measures the government unveils, the more difficult it would be for
the centre-right Alliance parties - which lost the 2014 election after eight
years in power - to remain passive in Parliament. We thus cannot rule out that
the government's policies may face growing opposition this autumn.
The Riksbank's repo rate path is being driven by both domestic and international
forces. Resource utilisation in Sweden is now more stretched than the historical
average. Meanwhile fiscal policy is becoming more expansionary, household credit
is growing and the krona is undervalued. Swedish inflation will not move
cyclically higher until 2017. But international forces - low global real
interest rates - and the risk that the ECB will keep the door open to further
stimulus measures, due to low inflation pressure, will cause Sweden to slow its
monetary policy normalisation process in order not to trigger an undesirably
high krona exchange rate. The recent King-Goodfriend report on the Riksbank will
speed up the central bank's process of adopting a new metric for its inflation
target (CPI today), re-assessing its analytical and forecasting models and
accepting divergences from its inflation target both in terms of level and
timing. The multi-year review of the Sveriges Riksbank Act that is beginning
this spring is not expected to result in any major changes in the monetary
policy framework, but will lead to greater clarity mainly regarding the
Riksbank's financial stability mandate.
Our forecast is that the Riksbank will begin to reverse its negative key
interest rate in April 2017. By the end of 2017, the repo rate will stand at
0.25 per cent. The bank will be forced to accept some appreciation of the krona.
At the end of 2016, the EUR/SEK exchange rate will be 9.00 and the USD/SEK rate
will be 8.20. Our corresponding forecast for the end of 2017 is a EUR/SEK
exchange rate of 8.70 and a USD/SEK rate of 7.80. During our forecast period,
the krona will appreciate by about 5 per cent in trade weighted KIX terms.
Key figures: International & Swedish economy (figures in brackets are forecasts
from the February 2016 issue of Nordic Outlook)
+-----------------------+-----+----------+-------------+-----------+
|International economy, |2014 | 2015 | 2016 | 2017 |
|GDP, year-on-year | | | | |
|changes, % | | | | |
+-----------------------+-----+----------+-------------+-----------+
|United States | 2.4 |2.4 (2.4) | 1.9 (2.4) | 2.5 (2.7) |
+-----------------------+-----+----------+-------------+-----------+
|Euro zone | 0.9 |1.6 (1.5) | 1.7 (1.9) | 1.8 (2.0) |
+-----------------------+-----+----------+-------------+-----------+
|Japan | 0.0 |0.6 (0.6) | 0.5 (1.0) | 0.5 (0.5) |
+-----------------------+-----+----------+-------------+-----------+
|OECD | 1.9 |2.1 (2.1) | 1.9 (2.2) | 2.3 (2.4) |
+-----------------------+-----+----------+-------------+-----------+
|China | 7.3 |6.9 (6.9) | 6.5 (6.5) | 6.3 (6.0) |
+-----------------------+-----+----------+-------------+-----------+
|Nordic countries | 1.6 |2.2 (2.1) | 2.2 (2.2) | 2.0 (2.1) |
+-----------------------+-----+----------+-------------+-----------+
|Baltic countries | 2.8 |1.8 (1.9) | 2.6 (2.7) | 3.1 (3.2) |
+-----------------------+-----+----------+-------------+-----------+
|The world (purchasing | 3.4 |3.1 (3.1) | 3.1 (3.4) | 3.7 (3.8) |
|power parities. PPP) | | | | |
+-----------------------+-----+----------+-------------+-----------+
|Swedish economy. Year- | | | | |
|on-year changes. % | | | | |
+-----------------------+-----+----------+-------------+-----------+
|GDP. actual | 2.3 |4.1 (3.6) | 4.0 (3.7 ) | 2.8 (2.8) |
+-----------------------+-----+----------+-------------+-----------+
|GDP. working day | 2.3 |3.9 (3.4) | 3.8 (3.5) | 3.0 (3.0) |
|corrected | | | | |
+-----------------------+-----+----------+-------------+-----------+
|Unemployment. % (EU | 7.9 |7.4 (7.4) | 6.9 (6.7) | 6.5 (6.6) |
|definition) | | | | |
+-----------------------+-----+----------+-------------+-----------+
|Consumer Price Index |-0.2 |0.0 (0.0) | 0.9 (0.6) | 1.4 (1.6) |
|(CPI) inflation | | | | |
+-----------------------+-----+----------+-------------+-----------+
|Government net lending |-1.6 |0.0 (-1.1)| 0.4 (-1.1) |0.1 (-1.3) |
|(% of GDP) | | | | |
+-----------------------+-----+----------+-------------+-----------+
|Repo rate (December) |0.00 | -0.35 |-0.50 (-0.45)|0.25 (0.50)|
+-----------------------+-----+----------+-------------+-----------+
|Exchange rate. EUR/SEK |9.39 | 9.19 | 9.00 (9.00) |8.70 (8.70)|
|(December) | | | | |
+-----------------------+-----+----------+-------------+-----------+
For more information. Press contact
please contact Anna Helsén. Press & PR
Robert Bergqvist. +46 70 698 4858
+46 70 445 1404 anna.helsen@seb.se
Håkan Frisén.
+46 70 763 8067
Elisabet Kopelman.
+46 8 763 8046
Daniel Bergvall
+46 8 763 8594
Mattias Bruér.
+46 8 763 8506
Olle Holmgren.
+46 8 763 8079
Andreas Johnson
+46 8 763 8032
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SEB is a leading Nordic financial services group. As a relationship bank. SEB
in Sweden and the Baltic countries offers financial advice and a wide range of
other financial services. In Denmark. Finland. Norway and Germany the bank's
operations have a strong focus on corporate and investment banking based on a
full-service offering to corporate and institutional clients. The
international nature of SEB's business is reflected in its presence in some
20 countries worldwide. On March 31. 2016 the Group's total assets amounted to
SEK 2.700 billion while its assets under management totalled SEK 1.637
billion. The Group has about 15.500 employees. Read more about SEB at
www.sebgroup.com.
Press Release (PDF):
http://hugin.info/1208/R/2013297/746084.pdf
Nordic Outlook:
http://hugin.info/1208/R/2013297/746086.pdf
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[HUG#2013297]
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