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A SENSE OF RELIEF AFTER THE ACTIONS OF THE EUROPEAN CENTRAL BANK (ECB) dominated the mood of the world economy in the first quarter of 2012. By launching unlimited three-year loans (the long-term refinancing operation, LTRO) to euro zone banks, the ECB has gradually eased worries about a paralysing credit crunch. The March accord on new bail-out loans to Greece and the agreement to enlarge the resources of euro zone bail-out funds have removed further short-term concerns. Developments in the real economy and in financial markets have confirmed our main message in the February issue of Nordic Outlook (NO): that the recession will be limited to crisis-ridden euro zone countries. In the updated forecasts for various regions we have presented in recent weeks (Macro Update), our revisions compared to NO have been small. We have made upward revisions for Japan, Germany and Sweden, among other countries, but our global growth forecast for 2012 remains unchanged at 3.5 per cent in 2012 and 4.0 per cent in 2013 (adjusted for purchasing power parity).
conflicts. In the United States, the Federal Reserve seems to be in a relatively favourable position right now. The economy is slowly gaining strength; for example, unemployment is falling and construction activity is increasing. In an environment of low inflation pressure and plenty of idle resources, the Fed still has enough flexibility to emphasise the fragility of the upturn. Announcing that key interest rates will remain low for an extended period enables the Fed to push down the entire yield curve, while holding the door open for a third round of quantitative easing (QE3). In the short term, there do not appear to be especially big credibility problems related to inflation, asset price bubbles or soaring government debt, although the Fed must again face the issue of exit strategies sooner or later.
2010 United States 3.0 Japan 4.4 Germany 3.6 China 10.4 United Kingdom 2.1 Euro zone 1.8 Nordic countries 2.9 Baltic countries 1.1 OECD 3.1 Emerging markets 7.3 World, PPP 5.2
Source: OECD, SEB
2011 2012 2013 1.7 2.5 (2.5) 2.5 (2.5) -0.7 1.9 (1.7) 1.3 (1.2) 3.0 0.7 (0.4) 1.4 (1.3) 9.3 8.7 (8.7) 8.9 (8.9) 0.8 0.4 (0.3) 1.4 (1.4) 1.5 -0.6 (-0.8) 0.8 (0.7) 2.5 1.0 (0.9) 1.9 (1.8) 6.2 2.0 (2.0) 3.2 (3.2) 1.7 1.4 (1.3) 1.9 (1.9) 6.2 5.7 (5.7) 6.0 (6.0) 3.9 3.5 (3.5) 4.0 (4.0)
THE WORLD ECONOMY NOW SEEMS TO HAVE REACHED A NEW CROSSROADS. The question is whether the positive trend can be strengthened, in an environment of continued debt consolidation needs and persistently high oil prices. To make continued upward adjustments in our forecasts possible, it is essential that the ultra-loose monetary policy of major central banks can be implemented without excessively large goal
THE SITUATION IN THE EURO ZONE IS MORE COMPLICATED. It is possible to single out a number of threats that may interrupt the current positive trend. If the recovery in Germany gains further momentum, southnorth decoupling may create difficulties for the ECB in terms of finding the right monetary policy trade-off. There are also various types of political risks related to maintaining the crisis strategy that has now been launched. The Greek crisis now appears manageable, without severe contagious effects. But it is too early to rule out risks that the process will lead to consequences that other euro zone countries find unacceptable. The Spanish government is facing a difficult balancing act. On the one hand, it must overcome mistrust from the ECB and from other euro zone countries about whether the government is willing and able to actually implement the austerity measures it has unveiled. On the other hand,
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there is a risk that domestic protests will grow to unmanageable levels. Meanwhile increasingly clear recessionary signals are illustrating the disadvantages of further budget tightening. The imminent French presidential election will also fuel uncertainty about the determination to fulfil the economic policy strategy that the euro zones core countries have agreed to support. Taken together, developments in the euro zone thus imply major challenges and risks. THE RELATIVELY GOOD RESILIENCE OF EMERGING MARKET ECONOMIES has ensured greater stability in the world economy over the past six months. Our main scenario implies a soft landing with GDP growth of 5.7 per cent in 2012 and 6.0 per cent in 2013, but there are risks that must be taken into account in this portion of the global economy as well. A hard landing in the Chinese credit or property market still cannot be ruled out. Indias economy is plagued by structural problems and high inflation pressure, which pose major challenges to economic policy makers. Unrest in the Middle East especially Irans increasingly tense relations with other countries risks driving up oil prices further. Such a development would not only threaten the immediate region but would also jeopardise the world economic recovery as a whole. IN THE NORDIC COUNTRIES, GROWTH WEAKENED DURING THE FOURTH QUARTER OF 2011 largely in line with our forecasts. The slowdown was primarily attributable to exports, while domestic demand and the labour market were relatively resilient. As in 2008-2009, the Nordic countries have been affected by the crisis in ways similar to Germany. This is especially true of Finland and Sweden, with their large and cyclically sensitive export sectors. In 2012, GDP growth in Denmark, Finland and Sweden as in Germany will end up close to 0.5 per cent. Because of the exceptional resilience of the Norwegian economy, we predict growth in Norway will exceed 2 per cent both in 2012 and 2013.
turnaround, this illustrates the potential for a positive shift in sentiment if external factors fall into place. Perhaps this is because companies were afraid of a repetition of the 2008-09 collapse and this kept them in a depressed mood for longer than the actual situation justified. The house price downturn that dominated much of 2011 seems to have ended early in 2012, which is another important piece of the puzzle. The Riksbanks key interest rate cuts have changed household expectations about future interest rates, while the stock market recovery has provided support. Although the home price upturn of recent months may not last, it confirms our forecast that Sweden can avoid a hard landing in the housing market.
GDP growth in Sweden
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Q1 Q3 10 Q1 Q3 11 Q1 Q3 12 Q1 Q3 13 SEB forecast 10 9 8 7 6 5 4 3 2 1 0 -1 -2
THESE NEW CONDITIONS ARE CREATING SOMETHING OF A DILEMMA FOR THE RIKSBANK. The growth, unemployment and inflation outlook clearly point towards further key rate cuts. On the other hand, it is obvious that the governor of the Riksbank and several other Executive Board members see a danger that additional rate cuts may further inflate home prices and household debts. This is especially true considering that various international organisations, including the European Commission, have raised a clear warning flag in these areas. Our conclusion is that the Riksbank will hold off on a further rate cut at its April monetary policy meeting, but we are sticking to our forecast of rate later this year, although the probability of these has also diminished. hakan.frisen@seb.se +46 8 763 80 67
2010 Sweden 6.1 Norway 0.7 Denmark 1.3 Finland 3.6 Nordic countries 2.9
Source: OECD, SEB
2012 2013 0.7 (0.5) 1.9 (1.7) 2.1 (2.1) 2.4 (2.4) 0.5 (0.5) 1.4 (1.4) 0.7 (0.5) 1.7 (1.7) 1.0 (0.9) 1.8 (1.8)
RECENTLY THE SWEDISH ECONOMY HAS SHOWN IMPORTANT BRIGHT SPOTS. The Business Tendency Survey published by the National Institute of Economic Research in late March demonstrated sharply improved optimism, especially in manufacturing. Although other leading indicators have not shown such a clear
Mattias Brur
SEB Economic Research +46 8 763 85 06
Economic Insight
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millions
millions
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Person (millions)
millions
FRIDAY 21 MARCH 2012 Mattias Brur SEB Economic Research +46 8 763 85 06
Real GDP fell 0.75 percent in 2011; the weakest growth in the G7 countries. But leading indicators and hard data are suggesting above-trend growth at the same time as reconstruction spending is providing support. Real GDP will grow 1.9 percent and 1.3 percent in 2012 and 2013, respectively. Recent hard data is suggesting that the recovery has become more entrenched: e.g. machinery orders, industrial production and retail sales were all above expectations. After the Bank of Japan intervened earlier this year, the yen has weakened for six weeks running and the yen is at its weakest level since last spring (summer) against the dollar (euro). That is good news for competitiveness. Exports have not responded yet, but that is a matter of timing only since there are lags involved. Reflecting the better tone to economic data, the weaker yen and the JPY 65 trillion AssetPurchase Program, the Nikkei has trended higher for six weeks in a row. But have a look and see on the development since the beginning of 2011; over this time period the Nikkei has traded below other major indices so maybe it can play catch-up; the price-to-book value is still looking cheap. Just to add some color, the all-time-high was posted in 1989, and the level today is 75 percent below the highs. For the first time in 31 years, Japan showed a trade deficit last year, and in January it posted its largest trade deficit ever. This raises questions about the prevailing economic structure with large current account surpluses and net savings. If also the current account surplus turns into deficit, the consequences may be dramatic since Japan would be forced to import capital to finance its gargantuan debt load. The unemployment rate has drifted higher since September, and was sitting at 4.6 percent in January. If our GDP forecast becomes reality, the unemployment rate should stabilize and decline somewhat in 2012-13. Japan is massively dependent on foreign oil; arguably a sharp upturn in oil prices is the biggest near-term risk now when the tail risk of a severe recession in Europe is lower. While inflation in year-on-year terms edged above the zero line in January, core inflation (excluding fresh food) will probably not follow suit for some time yet. The structural challenges are enormous indeed: the debt/GDP ratio has risen to a gargantuan 230 percent. Meanwhile the share of the population that tops 65 years of age is at 25 percent and it will keep rising.
Key data Percentage change
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
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thousand billions
thousand billions
CONTINUED
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billions
millions
billions
Percent
millions
thousand billions
millions
thousand billions
MONDAY 26 MARCH 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se
2010 2011 2012 2013 GDP* Inflation* USD/CNY** 10.4 3.3 6.59 9.3 5.4 6.29 8.7 4.4 6.00 8.9 4.5 5.82
* Percentage change. ** End of period. Source: National Bureau of Statistics of China, Reuters, SEB.
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GDP forecasts
Per cent 2011 Euro zone France Germany Italy Spain
Source: SEB
Key data
Percentage change 2012 -0.6 -0.3 0.7 -1.9 -1.5 2013 0.8 0.8 1.4 0.2 0.3 GDP* Unemployment** Inflation* Government deficit***
Source: SEB
2010 2011 2012 2013 1.8 10.1 1.6 -6.4 1.5 10.1 2.7 -4.4 -0.6 10.6 2.3 -3.5 0.8 11.1 1.6 -3.0
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
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INDICATORS AND GDP Most indicators have stabilised or recovered slightly but are still at levels pointing to a fall in activity. The ESI (Economic Sentiment Indicator) rose for the second consecutive month in February but still points to a fall in GDP. The composite purchasing managers index (PMI) fell to 49.3 in February. The German Ifo-index rose for the fourth consecutive time in February and is well above the long-term average. The ZEW investor sentiment also continues to recover and in March reached its highest level since June 2010. Euro zone GDP fell by 0.3 per cent in Q4, in line with the forecast in Nordic Outlook February and slightly better than the consensus forecast of -0.4 per cent due to better than expected performance in Germany and France. The decrease in GDP was driven by consumer spending and investment. Italy entered a technical recession in Q4 as GDP fell for the second consecutive quarter. Euro zone GDP is expected to fall by 0.6 per cent in 2012 followed by a weak recovery of 0.8 per cent in 2013. The forecast for Germany has been revised upwards to 0.7 per cent.
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LABOUR MARKET AND INDUSTRY Unemployment in the euro zone rose to 10.7 per cent in January and the figure for December was revised upwards. The number of unemployed increased by 185 000; the ninth consecutive monthly increase, bringing the total number of unemployed in the Euro-zone to 16.9 million. Januarys weak development along with revisions puts an upside risk to our labour market forecast. Unemployment rose sharply in several of the peripheral and southern euro zone economies in January; the unemployment rate in Greece reached 19.9 per cent. The German labour market is still strong but the rate of unemployment has stopped declining. Euro zone unit labour costs are rising slowly after the fall in 2009 and 2010. Unit labour costs in Spain continue to decrease. Manufacturing new orders rebounded in December and beat expectations. Industrial production was very weak at the end of 2011. Industrial production recovered slightly in January, increasing by 0.2 per cent compared to the previous month, but is still well below the recent high in August 2011.
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FINANCIAL AND MONETARY INDICATORS, INFLATION The liquidity provided by the two LTROs (22 December and 29 February) has avoided a serious credit crunch and diminished the need for the ECB to intervene in secondary government bond markets. The ECB kept its monetary strategy unchanged in March. No more three-year loans are expected in the months to come and the refi rate will remain at 1.0 per cent during the forecast period. In ECBs latest forecast, the GDP forecast for 2012 was revised downwards to -0.1 per cent and the inflation forecast was revised upwards. Yield spreads between German government bonds and other euro zone countries have come down since the beginning of the year but remain elevated. The Greek PSI was successful with a 95.7 per cent participation rate and a Greek disorderly default was avoided. Bank lending is still weak although there was an improvement in January. The annual growth rate of M3 rose to 2.5 per cent in January. The euro has started to weaken again since the beginning of March providing some stimulus for exports. Financial stocks have surged by around 20 per cent since the beginning of 2012. Inflation was 2.7 per cent in February. The HICP forecast was revised upwards to 2.3 per cent in 2012 and 1.6 per cent in 2013. Core inflation will bottom out at 1.2 per cent in autumn 2012 and reach 1.5 per cent by end-2013.
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
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Percent
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CONTINUED
20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0
Stronger
80 75 70
+46 8 763 80 79
2010 2011 2012 2013 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Economic Insight
GDP SLOWING BUT NOT DECREASING Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector have stabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment. Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak in January. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs also for other service sectors. Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and in the public sector. Confidence in construction has declined considerably and housing investments are predicted to decline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012 according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.
Swe: Manufacturing sentiment
20 10 0 -10 -20 -30 -40 98 00 02 04 06 08 10 12 40 30 20 10 0 -10 -20 -30 -40 -50
Confidence indicator
Economic Sentiment (business + consumer confidence) Sentiment in the service sector (RHS)
Industry
Service sector
Economic Insight
HOUSEHOLD SECTOR AND THE LABOUR MARKET Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in the stock market. Car registration and retail sales are holding up well, while consumer confidence has recovered. Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was one explanation. There has been a downward revision to the household savings ratio implying that household savings almost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective. The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3 months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 per cent over the next two years but downside risks have decreased. Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast. Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment is likely to start rising from mid-2012.
Swe: Consumer confidence
30 20 10 0 -10 -20 -30 04 05 06 07 08 09 10 11 75 50 25 0 -25 -50 -75
15 10 5 0 -5
Ex manatory pension savings Own financial savings
10 5 0 -5 -10
Valueguard houses
93
96
99
02
05
08
11
-10
Unemployment, %
07
08
09
10
11
12
13
4450
Economic Insight
INFLATION AND THE RIKSBANK Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiations remain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some signs of negotiation strains but we expect wage agreements to be reached with out any major strikes. The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIF inflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF ex food and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicates that the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1 per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbank will take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a stabilisation in the housing market will be more important than the lower than expected Q4 GDP.
Swe: CPI, % y/y
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10
CPIF, ex food and energy CPI CPIF
11
12
10
11
12
13
2 1 0 -1 -2
Riksbank, RU-indicator SEB's, indicator
2 1 0 -1 -2 -3
2.5 2.0
1.5
01 02 03 04 05 06 07 08 09 10 11
1.5
-3
03
04
05
06
07
08
09
10
11
Inflation
Labour-market
Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway
Growth is seen holding near trend
Mainland GDP and Norges Banks regional network
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 10 Mainland GDP, % change year-on-year (LHS) Regional network output indicator, index (RHS) Output expectations 6 mth ahead, index (RHS) 11 12 4 3 2 1 0 -1 -2
2010 2011 2012 2013 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 0.7 1.9 3.6 2.5 1.4 10.8 1.6 2.6 3.3 1.2 0.9 13.6 2.1 2.6 3.3 1.5 1.5 11.5 2.4 2.9 3.2 1.9 1.9
* Per cent of labour force, ** General government, per cent of GDP, forecast 2012 MoF (Oct. 2011) Source: SEB
Economic Insights
DEMAND AND PRODUCTION Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012. The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly winds from abroad. The 13-point jump in the PMI from December to a 4 -year high of 59.7 in March and an even stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery. Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period which marked the previous high.
Consumption has firmed in early 2012
3-month average
16 12 8 4 0 -4 -8 -12 03 04 05 06 07 08 09 10 Consumption of goods, % change year-on-year (LHS) % change from 3 mth. earlier (RHS) 11 4 3 2 1 0 -1 -2 -3 -2.5 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Private consumption, % change year-on-year (LHS) Consumer confidence, net balance (RHS) 5.0 2.5 0.0 30 20 10 0 -10 10.0 50 7.5 40
40 35 30 25 20 15
9 8 7 6 5 4 3
Economic Insights
LABOUR MARKET AND INFLATION The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy. Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year. Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure excl. taxes and energy was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015. Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt, but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
Employment growth continues to run strongly
3-month average
5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 Employment, % change year-on-year (LHS) Unemployment, % of labour force (RHS) 09 10 11 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0 87 89 91 93 95 97 99 01 03 05 Wage growth, % change year-on-year (LHS) LFS unemployment rate, reversed (RHS) 07 09 11 4 2 10 8 6 0 1 2 3 4 5 6 7
7 6 5 4 3 2 1 0 -1 -2
Economic Insights
MONETARY POLICY AND FINANCIAL CONDITIONS Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end 2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a global recovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year. The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a 7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.
Norges Bank sees rates lower for longer..
Per cent
8 7 6 5 4 3 2 1 0 02 03 04 05 06 07 Norges Bank deposit rate Optimal rate path, MPR 3/11 08 09 10 11 12 13 14 Optimal rate path, MPR 1/12
Source: Norges Bank, SEB
95 93 91 89 87 85 83
150
100
50
0 01 02 03 04 05 06 07 08 09 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 10 11
Source: Reuters, SEB
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5
Inflation
Labour-market
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Percent, 12M
Percent (Y-Y)
Net balance
Net balance
Economic Insight
The unemployment rate has kept falling. The drop in public employment is moderating, but this year is unlikely to see a marked improvement in labor markets in general as growth is subdued. Consumers expectations of unemployment have turned less negative, but they still point to higher unemployment in the near term. The growth in exports is waning as Denmarks main trading partners have delivered slower growth. A weaker effective exchange rate is offering some counterbalance. The large current account surplus has persisted and the foreign reserves have grown as the central bank has defended the peg to the euro. However, some of the positive pressure on the krone has come off as the negative tail risk in the Eurozone has fallen. The krone level is still relatively strong and the negative policy spread to Euroland has thus been maintained. The resulting low mortgage yields are providing a cushion for consumers. The government has launched another bank package lifting real estate loans off the balance sheets of the large corporate lender FIH. It will also create a special credit institute extending credit to well run agricultural companies who face tight credit as the sector in general has experienced large capital losses on land putting pressure on banks.
Housing investments and prices
30 15
40 30 20
20
10
10
Percent (12M)
5
%-points (12M)
Percent, 12M
10 0 -10
-10
-5
-20
-10
-15
Percent, 12M
Exchange rate
110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90
7 6 5 4
92
94
96
98
00
02
04
06
08
10
12
Percent
2010 2011 2012 2013 GDP Unemployment* Inflation 3.6 8.4 1.7 2.7 7.8 3.3 -1,5 0.7 7.8 2.0 -1.7 1.7 8.0 1,9 -0.5
Economic Insights
GROWTH TO REMAIN WEAK IN THE FIRST HALF OF 2012 Except for Q3, growth was weak in 2011 and in the last quarter GDP just barely increased (+0.1% q/q). The development towards the end of the year was in line with Statistics Finlands monthly GDP indicator and EU Commission indicators. The deteriorating outlook took its toll on business confidence last year, but since the turn of the year, there has been a slight improvement and stabilisation in confidence. Services are above zero, but for manufacturing and construction indicators still point at contraction. The indicators for all three sectors are below long term averages. Even though the sharp dip in exports late last year was a statistical oddity, the development since then has been weak but more stable. After shaking off the worst of the recession fear late last year, confidence among consumers has improved and was unchanged in March compared to February. Consumer confidence has bounced back since the weak readings late last year. Consumer confidence and consumption weakened towards the end of 2011 but retail sales for January and February points towards an improvement ahead (up on average 5.5 per cent on an annual basis). Overall, consumer spending is expected to hold up relatively well, supported by the labour market. Bank (MFI) lending to households and especially to non-financial corporations are rising, reaching just above 8 per cent on an annual basis in February for the latter. Investments were second after household consumption in contributing to GDP-growth last year although capacity utilisation is still at a low level, although rising. Capital spending is expected to level off and increase only slightly in 2012. The economy is slowing down, but the labour market still develops favourably. Vacancies are still trending higher and unemployment continues to fall. In February unemployment stood at 7.4 per cent, down from 8.1 per cent a year earlier. We expect unemployment to continue to level off at this level and rise again from mid-year. Inflation has been stuck around 3 per cent in January and February but is expected to fall, giving a boost to household real income that together with the labour market will support consumer spending.
Economic Insights
WEAK GROWTH WILL AFFECT PUBLIC FINANCES, BUT NO IMMEDIATE NEED FOR CONSOLIDATION A government surplus in the years leading up to the crisis has put Finland in a better position than many other economies. General government net lending is expected to worsen somewhat in 2012 compared to 2011, but will not drop below -2 per cent of GDP. In a euro zone perspective this puts Finland in a favourable position with no or small need for the government to implement front-loaded budget tightening that would further erode growth prospects. Instead fiscal policy can be neutral in the short term. Noteworthy is that the abated tolerance of high government debt has not affected relatively low indebted Finland; on the other hand, long term government yields have dropped more than 100 bps in the last year. At the same time though, the 10-year government bond spread to Germany has doubled from approximately 25 to 50 bps.