Swedbank Economic Outlook - Update, April 2015

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Swedbank Economic Outlook – UpdateBudding spring with spells of night frostMacro Research – April 2015


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Table of Contents

1. Executive Summary

2. Global Outlook: The global recovery is propped up by monetary policy

3. US: A rebound that faded

4. EMU: Recovery gaining momentum

5. Emerging markets: Credit Ratings At Risk

6. Sweden: Domestic demand remains the main engine for growth

7. Nordic area: A pick up since last winter

8. The Baltics

9. Appendix: Key economic indicators

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• Mature economies will provide stability in

the global recovery, propped up bymonetary policy

• Emerging economies will face increased

volatility, but some are better preparedthan others

• Sweden will have adapt to ECB

expansion, Norway to oil price swings andthe Baltic countries to the squeezebetween Russia and the euro area

Executive Summary

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3,4 3,5

3,6 3,7

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

2013 2014 2015 2016

Contribution to global growth (ppt)India

China

Japan

EMU countries

USA

Others

Global GDP (PPP)

Sources: Ecowin and Swedbank's forecasts.

0

10

20

30

40

50

60

70

April January

Risks to the forecast (prob. in %)

Main

Worse Better

Source: Swedbank

Main

Worse Better

• Pick up in mature economies despite someset backs. We expect USA and Germany tolead the way.

• Emerging economies in between energyprices and Fed; but China and to an

increasing extent India will provide the bulkof global growth

• Risks are evenly balanced;

– Downside risks are mainly coming from an

uncontrollable unravelling of Chineseimbalances, from a sustained slowdown of theUS economy and Grexit

– Upside risks reside primarily in a stronger-than-expected pick up in the euro area

combined with a rebound of the US economy

Global outlook: The global recovery is propped up by

monetary policy

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Global Outlook: Tables

Interest and exchange rate assumptions, %

Outcome Forecast

2015 2015 2015 2016 2016

15-Apr 30 Jun 31 Dec 30 Jun 31 Dec

Policy rates

Federal Reserve, USA 0,25 0,25 0,50 1,00 1,50

European Central Bank 0,05 0,05 0,05 0,05 0,05

Bank of England 0,50 0,50 0,50 0,75 1,00

Bank of Japan 0,10 0,10 0,10 0,10 0,10

Government bond rates

Germany 2y -0,3 -0,3 -0,3 0,1 0,5

Germany 10y 0,1 0,2 0,4 0,8 1,3

US 2y 0,5 0,6 1,1 1,7 2,2

US 10y 1,9 1,9 2,3 2,7 3,1Exchange rate s

EUR/USD 1,07 1,03 1,00 0,95 0,98

USD/CNY 6,2 6,1 6,1 6,0 5,9

USD/JPY 119 121 125 127 129

EUR/GBP 0,72 1 0,71 0,71 0,68

USD/RUB 50 57 65 65 65

Sources: Reuters Ecowin and Swedbank.

Swedbank’s global GDP forecast

1/

(annual percentage change)

USA 2,2 2,4 (2,4) 2,9 (3,2) 2,8 (2,8)

EMU countries -0,4 0,9 (0,8) 1,4 (1,1) 1,9 (1,9)

Germany 0,2 1,6 (1,5) 2,0 (1,5) 2,2 (2,2)

France 0,4 0,4 (0,3) 0,9 (0,6) 1,8 (1,7)

Italy -1,7 -0,4 (-0,4) 0,1 (0,0) 1,2 (1,2)

Spain -1,2 1,4 (1,3) 2,5 (2,0) 2,5 (2,3)

Finland -1,3 -0,1 (-0,3) 0,1 (-0,0) 0,9 (0,8)

UK 1,7 2,8 (2,6) 2,4 (2,5) 2,4 (2,2)

Denmark -0,5 1,1 (0,9) 2,0 (1,8) 2,3 (2,3)

Norw ay 2,3 2,3 (2,6) 1,2 (1,3) 1,4 (1,7)

Japan 1,6 -0,1 (0,2) 0,8 (1,0) 1,1 (1,1)

China 7,9 7,6 (7,5) 6,8 (7,1) 6,6 (6,8)

India 6,3 6,9 (5,2) 7,3 (6,6) 7,7 (7,0)

Brazil 2,7 0,2 (0,2) -1,2 (0,7) -0,8 (1,8)

Russia 1,3 0,7 (0,5) -5,5 (-6,0) -2,0 (-2,5)

Global GDP in PPP 2/ 3,4 3,5 (3,4) 3,6 (3,7) 3,7 (3,8)

1/ January 2015 forecasts in parenthesis.

2/ World Bank weights (rev ised 2014). Sources: IMF and Swedbank.

2015f2013 2014 2016f

Interest and exchange rate assumptions

Outcome Forecast

2015 2015 2015 2016 2016

17-apr 30 Jun 31 Dec 30 Jun 31 Dec

Interest rates (%)

Sw edish repo rate -0,25 -0,50 -0,50 -0,50 0,00

10-yr. gvt bond 0,24 0,20 0,60 1,10 1,70

Exchange rate s

EUR/SEK 9,3 9,5 9,3 9,0 8,9

USD/SEK 8,6 9,2 9,2 9,5 9,1

KIX (SEK) 1/ 114,3 116,5 114,9 113,0 113,3

1/ To tal co mpetit iveness weights. Trade-weighted exchange rate index fo r SEK.

Sources: Reuters Eco win and Swedbank

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Global view


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0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14 Q3-14

US: Real GDP growth

USA (qoq) US yoy ann.

Source: Reuters EcoWin

0

50

100

150

200

250

300

350

2012 2013 2014 2015

US: Nonfarm payrolls

Monthly change 3-month average 12-month average


• Growth declined in the fourth quarter of2014, due to temporary factors, andindicators suggest a continued weak

development in early 2015.

• Job creation dropped significantly in the first3 months of the year

US: A rebound that faded

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• Households are saving, debt levels aredown

• Moderate investments in housing

• Business investments are lagging

• Corporate profits and household wealth arerising

• Mid-way in the business cycle according todemand components

US: Balance sheets positioned for a pick up

300

350

400

450

500

0

2

4

6

8

10

12

2000 2002 2004 2005 2008 2010 2012 2014

US: Corporate profit & H.H net worth(% of GDP)

Corporate Profits Household Net Worth (RHS)

Source: IIF

-7

-5

-3

-1

1

3

5

7

1965 1969 1973 1977 1981 1986 1990 1994 1998 2002 2006 2011

US: Demand, deviation from trend

Sources: Macrobond and Swedbank.

Households

Public sector

Business invest. Netexports

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-2,5

-2

-1,5

-1

-0,5

0

0,5

1

1,5

World DM EM OPEC U.S. EuroArea

Japan China

US: Impact of oil price decline

GDP CPI

Source: IIF

• Low oil price in particular beneficial to theUS, despite short term negative impact onoil energy related sectors

• Headline inflation will be suppressed

• Slack in labour market will hold back wagedevelopments for yet another period of time

Oil price decline boosts growth and reduces inflation

0.0

0.5

1.0

1.5

2.02.5

3.0

3.5

4.0

4.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US: Core inflation and wages (%)

CPI core PCE core Average hourly earnings

Source: Reuters Ecowin

10


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0

0,5

1

1,5

2

2,5

3

3,5

4

2014 2015 2016 2017 Long term

FOMC median end-year forecast of targetrate

Mar 2015

Dec 2014

Sep 2014

Jun 2014

• Despite revising down growth to 2.9% (from3.2%) from 2015 we remain cautiouslyoptimistic on US prospects. Growth for 2016

is forecast at 2.8%.

• We stick to our view that Federal Reservewill hike in September this year, andthereafter twice per semester. FOMC recentforecast revision moves them closer to ourcall.

US: Solid expansion and tempered policy tightening

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Q 1 -

1 2

Q 2 -

1 2

Q 3 -

1 2

Q 4 -

1 2

Q 1 -

1 3

Q 2 -

1 3

Q 3 -

1 3

Q 4 -

1 3

Q 1 -

1 4

Q 2 -

1 4

Q 3 -

1 4

Q 4 -

1 4

Q 1 -

1 5

Q 2 -

1 5

Q 3 -

1 5

Q 4 -

1 5

Q 1 -

1 6

Q 2 -

1 6

Q 3 -

1 6

Q 4 -

1 6

US: Real GDP growth

USA (qoq)

US yoy (rhs)

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-5

-4

-3

-2

-10

1

2

3

4

5

6

37,5

40

42,5

45

47,550

52,5

55

57,5

60

62,5

65

2007 2007 2008 2009 2010 2011 2012 2012 2013 2014 2015 2016

EMU: PMI vs GDP

Composite PMI GDP q/q (annual rate, %) (RHS)

Sources: Reuters EcoWin and Swedbank

35

40

45

50

55

60

65

35

40

45

50

55

60

65

Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14

EMU: Composite PMI

Spain France Italy Germany


• Barometers have improved fast – PMIs have improved rapidly and now suggest

1.5% GDP growth on average

– Other business barometers also rising

• Actual data have also improved – German GDP growth picked up in Q4

– Retail sales set for strong growth in Q1, consumerconfidence is strong

– Employment is growing and unemployment falling

almost everywhere – Private credit is rising and the decrease in credit to

NF corp is decelerating firmly

• Monetary stimulus will continue – Exceptionally low interest rates

– Weak EUR

– Quantitative measures should give further boost tocredit growth

• We revise up expected growth to 1.4-1.9%2015/2016 – Mostly on Germany and Spain, but most countries

in EMU stand to gain

EMU: Recovery gaining momentum

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-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

2014Q2

2014Q3

2014Q4

UK: Contribution to growth (y/y, p.p.) Net Trade

Gross capital formation

General governmentfinal consumptionexpenditure

NPISH finalconsumptionexpenditureH.H final consumptionexpenditure

GDP, y/y (%)

Sources: ONS and Reuters EcoWin

Note: Components may not sum due to rounding & inventories not included

• GDP growth for 2014 was revised up, but

dismal start to 2015 – Retail sales has developed strongly and PMIs signal

growth going forward – In 2015 growth is mainly domestically driven but global

growth gives support in 2016

– In the medium to long term productivity has to increase

• Election on May 7 is expected to be a cliff-

hanger and the likelihood for a hungparliament is high – Fiscal consolidation expected no matter turn out

– Temporary depreciation of the pound likely aroundelection time

• First rate hike to 0.75% postponed to 1Q

2016 – Worrisome development of the inflation

– Pay growth remains weak

– Over the year, a stronger pound dampens import prices

UK: Politics in focus

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• Abenomics, after 2 years: – ‘A’ grade for his monetary stimulus,

– a ‘B’ for his fiscal policy and

– an ‘E’ for the limited progress on structural reform.

• Growth is still expected to accelerate in2015. – A negative impact from the consumption tax rate hike is

waning.

– A recent fall in oil prices will boost consumption.

– Exports are getting stronger, benefitting from strongerdemand in the US but also from weaker yen.

• As inflation is slowing, additional monetarystimulus is expected before the end of 2015.

Japan: Recovery postponed, again

30

35

40

45

50

55

60

2008 2009 2010 2011 2012 2013 2014 2015

Japan: Economic sentiment

Manufacturing PMI, SA

Services PMI

Composite PMI, SA

Source: Markit Economics

-30

-20

-10

0

10

20

30

40

50

60

70

-3

-2

-1

0

1

2

3

4

5

6

7

2009 2010 2011 2012 2013 2014 2015

Japan: Prices, YoY change

CPI less fresh food(LHS)

REER, JPY (RHS)

Monetary base, SA,JPY (RHS)

Japan Nikkei 225


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Expansionary ECB and tighter Fed

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ln % of GDP

Central bank balances

Japan USA UK EMUSource: Reuters EcoWin

-1,00

-0,50

0,00

0,50

1,00

1,50

2,00

Central bank policy rates (%)

Fed

BoE

Norges bank

Riksbank

ECB

Source: Swedbank's forecasts

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• Major challenges for dollar borrowers!

• A number of EM countries will likely facehigh problems servicing their debt with large

refinancing risks in the next couple of years.• We expect a high degree of differentiation

between EM countries according toimplementation of macroeconomic reforms.

• China: The economy is weak on a broad

basis. High need for economic stimulus.• India: Growth has disappointed. Challenge

is now to get important reforms approved inthe upper house.

• Brazil: Weak demand from China, a strong

dollar, weak government finances, anextensive corruption scandal, high inflationand the biggest water shortage in moderntimes are all impacting growth.

• Russia: Consumers start to feel the bite withreal wages and retail volumes plummeting

Emerging markets: Credit Ratings At Risk

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• Brazil is in recession

• The Brazilian economy hurt by:

– Slower growth in China

– A stronger dollar

– Weak government finances

– Corruption scandals

– High inflation

• Tight policy to keep sovereign rating• High risk of political turbulence

• A stronger dollar is a risk as external debt inUSD is high

• A recovery will take time, which is a risk for a

setback in fiscal policy

Brazil: Unusually numerous and difficult challenges

-4

-3

-2

-1

0

1

23

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Brazil: Real GDP (y/y, %)


7

8

9

10

11

12

13

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15

Brazil: Policy rate (%)


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-15

-10

-5

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015

Russia: Growth of retail, wages and prices (%, y/y)

Real gross wage

Retail tradeturnover

Consumer prices


• Consumers start to feel the bite with real

wages and retail volumes plummeting – Russia escaped recession last year owing to a massive

drop in imports, but in the second half of 2014investments, exports, and government spending were

already falling.

‒ We inch up GDP forecast to -5.5% in 2015 and -2% in2016 (from -6% and -2.5%) due to less weak roubleand somewhat higher oil price. Volatility in GDP

aggregates will be massive, e.g., consumption down bymore than 10%, investment by about 20%.

‒ High inflation, financial squeeze, and bank bailouts;continued capital outflows.

‒ The rouble to depreciate further amid some volatility.Reserves have decreased - still at good levels toservice forex debt, but insufficient for investments.

• Major risks are political, not economic ‒ Probabilities of baseline and negative scenarios very

closely matched. Baseline scenario hinges uponcalming of the RUS/UKR conflict during 2015, followed

by gradually eased sanctions in late 2016. ‒ Negative scenario: crisis escalation, broader sanctions,

and deeper recession.

Russia: Consumers start to feel the bite

250

325

400

475

550

30

50

70

90

110

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

Russia: FX, oil price & central bank reserves

Brent, USD (1. jan2014 = 100)

USD/RUB, close(1.jan 2014 = 100)

Central bankinternationalreserves, USD bn (rs)


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48

49

50

51

52

53

54

55

56

57

58

59

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

India: PMI Manufacturing


-5,5

-5

-4,5

-4

-3,5

-3

-2,5-2

-1,5

-1

-0,5

0

India: Current Account (% of GDP)


• India is one of the big winners of the lower

oil price

• Strong improvement in the current account,

lower inflation and fx stability

• Economic policy is tight in order to buildconfidence

• However, confidence comes with a cost -

growth has disappointed• Credit growth is slow and rate cuts have not

been passed to borrowers

• We expect a gradual improvement in growthas reforms are introduced

• The government needs support in the upperhouse to push through important reforms

India: Good policy pays off in higher confidence

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100

200

300

400

500

-30

-20

-10

0

10

20

30

40

50

60

70

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

Billions% y/y

China: Foreign trade (USD)

Trade Balance (total, annual rate) Exports, % y/y, 3MA Imports, % y/y, 3MA


• Growth target at 7% for 2015

• Broad economic weakness

• House prices are falling

• Credit growth decelerates

• Tighter fiscal stance as local governmentsface borrowing restrictions

• Growth will be driven by economic stimulus,

net exports and low oil prices• Risks are (as usual) big for a disorderly

adjustment but China still has large reservesto use, if needed

• A devaluation of the Renminbi is highly

unlikely as long as exports are growing…

• …and the volume of corporate bond

maturing in 2015 is record high

China: Major challenges to rebalance the economy

0

5

10

15

20

25

30

35

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

China: Credit growth (y/y)

Bank loans Total loansSource: Reuters EcoWin

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Sweden


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1,3

2,3 2,6 3,2

-1,5

-1,0

-0,5

0,00,5

1,0

1,5

2,0

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3,0

3,5

4,0

2013 2014 2015f 2016f

Sweden: Contribution to growth (%-points of GDP)

Public cons

Foreign balance

Stockbuilding

Gross fixed investment

Private cons

GDP (cal. adj.)

Sources: Statistics Sweden and Swedbank forecasts.

• We expect the household economy toremain strong and consumption to be themain engine of growth in 2015. Next year,

tax increases, higher inflation, and, to someextent, amortisation requirements will

constrain purchasing power.

• Higher investment growth, in 2015 throughrising housing investments, in 2016 through

business investments. Economic policy,however, creates uncertainty that cancompromise corporate investment plans.

• Moderately unit labour cost (ULC) and aweaker exchange rate will support Swedish

exports during the forecast period and partlyoffset the decline in market share.

Sweden: Domestic demand remains the main engine for

growth

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0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Sweden: Households financial wealth and debt

Financial net wealth incl. NPISH Debt totalSource: Swedbank

Solid development for the household sector

0,0

1,0

2,0

3,0

4,0

5,0

6,0

0,0

2,0

4,0

6,0

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14,0

16,0

18,0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f

Sweden: Disposable income and consumption

Disposable income (real change in %, RHS)Consumption (real change in %, RHS)Savings ratioInterest rate costs (% of disp.inc)

Source: Swedbank

• Solid increase in disposable income this year, but higher taxes and rising inflation will dampen

the growth rate in 2016• Amortization Requirements and political uncertainties contributes to a persistent high savings

ratio during the forecast period• Households have a strong balance sheet at the aggregate level

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Amortization requirement takes effect

0

2

4

6

8

10

0

20

40

60

80

100

0-25 25-50 50-70 70-85 above 85

Sweden: Amortization in LTV ranges (%), newloans, 2014

Share that amortize

Share of debt (RHS)

Share of disposable income (RHS)

Source: FSA

50

55

60

65

70

7580

85

90

95

100

1500

2000

2500

3000

3500

4000

Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15

Sweden: Houshold debt & interest rate costs

Debt, bn SEK Interest rate costs, bn SEK

Source: Statistics Sweden

0

5

10

15

0

5

10

15

0-25 25-50 50-70 70-85 above 85

Sweden: Interest & debt service ratio in LTVranges, 2014, new loans

Interest ratio Debt service ratio

Source: FSA

Note: Shows interest rate payments as well as the sum ofinterest rate payments and amortization as a share ofdisposable income.

The debt service ratio refers to present amortization plans.

• Households amortizing at a higher rate, but itremains a part to fully meet the amortizationrequirement

• Both interest and debt service ratio willrise, which dampens other consumption. Due toour calculations costs will increase by 9 – 16 bnSEK, corresponding to 0.5 – 0.9 percent ofhousehold consumption.

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-20

-15

-10

-5

0

5

10

15

2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1

Sweden: Consumption on class of goods

Goods Durable goods Services


Strong consumption this year but weaker in 2016

-40

-30

-20

-10

0

10

20

30

40

50

-2

-1

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

Sweden: Retail sales & household expectations

Retail Sales (y/y) Sweden´s economy over the next 12 mths (RHS)


• Low interest rates and strong housing completions boost’s consumption this year• Amortization Requirements, higher taxes and fragile "sentiment" dampen consumption of

durable goods, mainly next year

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-15

-10

-5

0

5

10

2008 2009 2010 2011 2012 2013 2014

Sweden: Contribution to investment growth, %

Machinery/Inventories Building excl. housing

Investments that are intangible Housing


-15

-10

-5

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

Sweden: Investment in different sectors, %

Total Business, excl housing Housing Public


• Continued growth in real estate investmentsbut will decelerate in 2016 due to bas effectsand supply restrictions

• Public investments speeds up driven by thegovernment measures in infrastructure andfrom municipalities

• Low interest rates, lower increases in unitlabour costs, low oil and higher export

demand raising investments in the businesssector

Broader growth in investments

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-6

-4

-2

0

2

4

6

8

2011 2012 2013 2014 2015 2016

Sweden: Export, market growth and market shares

Market shares World market growth Export, %


-4

-2

0

2

4

6

8

10

12

14

16

Sweden: Export volume on class of goods, % change

2014 Average 2010-2013


• Export recovery during 2014 on serveralmarkets – but still sluggish for investmentgoods

• Higher expected market growth in EMU(40% of Swedish export) in 2015/16,favourable conditions for a stronger exportof goods.

• Modest unit labour cost increases and

weaker krona

Higher export growth as export demand in EMU recovers

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5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

4 200

4 400

4 600

4 800

5 000

5 200

5 400

Sweden: Employment, labour force & unemployment

Unemployment rate (%)

Labor force

Employment

Sources: Statistics Sweden, Swedbank and the Riksbank

Swedbank estimateRiksbank estimate

• Underlying development positive

• Labour force growth continues to surprise

• Unemployment decrease only gradually

Labour market improves but unemployment remains

stubbornly high

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Record population growth

• Sweden population increased by 100 000last year and is approaching 10 million

• 3/4 net immigration and ¼ net birth

• Dependency ratio has stabilized in the shortterm

7 500 000

8 000 000

8 500 000

9 000 000

9 500 000

10 000 000

-0,6%

-0,4%

-0,2%0,0%

0,2%

0,4%

0,6%

0,8%

1,0%

1,2%

0-14y (%) 15-64y (%) 65+y (%)

Chg population (%) Population (RHS)


Sweden: Population growth and contribution from age groups

60%

62%

64%

66%

2000 2002 2004 2006 2008 2010 2012 2014

Total

Dom. born


73%

75%

77%

79%

For. born

Sweden: Share 15-64 years in total pop., among foreign anddomestic born

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• Wage growth has been moderate for several

years

• Difficult wage negotiations is expected

• Wage expectations are falling

• Moderate wage increases in the yearsahead

• Labour cots will rise next year on abolishing

youth discount• Hourly wages: 2.9% this year and 3.2 %

next year

Upcoming wage negotiations increasingly in focus

1

1,5

2

2,5

3

3,5

4

1

1,5

2

2,5

3

3,5

4

Sweden: Economic Forecasts, Prospera

Wage increase expectations, Year 2 Inflation expectations, Year 5

Wage increase expectations, Year 1


0,0

1,0

2,03,0

4,0

5,0

6,0

7,0

Sweden: Wages

Total pay growth Collective bargaining agreement "Wage drift"

Source: Swedish National Mediation Office

30


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-1,00%

-0,50%

0,00%0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

2010 2011 2012 2013 2014 2015 2016

Sweden: Inflation development

CPI Swedbank CPIF Swedbank

Sources: Swedbank and Statistics Sweden

• Inflation has bottomed out and CPIFincrease to 1.0% in 2015 partly due to baseffects

• In 2016 CPIF increase to 2% driven byhigher energy prices and tax increases

• The government tax increases on fuels and

lower tax reduction for building/constructionwill raise the CPI by 0.35 percentage points

in 2016

• Positive contribution to CPI in 2016 whenthe interest rates gradually start to increase

Higher inflation

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-1,00

-0,50

0,00

0,50

1,00

1,50

2,00

2,50

2010-11-15 2012-11-15 2014-11-15 2016-11-15

Sweden: Repo rate path

Outcome Riksbank (Mar) Swedbank (Apr) Riba/FRA (Apr 20)

Sources: Swedbank, Riksbanken and BloombergNote: The Riksbank repo rate path is an estimation from the press release

• The Riksbank cuts the repo rate to – 0.5percent

• Additional purchases of government bonds

– SEK 50 billion – Covered bonds and bonds from local authorities are

plausible

• Loans to small and medium-sizedenterprises (possibility)

• FX-interventions (possibility)• Repo rate raised the second half of 2016 in

two steps to 0 percent (September andDecember)

The Riksbank implements additional easing in the

spring

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Neutral fiscal policy

33

• Neutral to marginally negative effect on GDP 2015 och 2016• SEK 8 bn 2015 och 20 bn 2016 in fully financed reforms

• Scope for more reforms in the fall; gasoline tax, defense, jobs, education

Reforms in Spring Budget Bill SEK bn 2016 Effect on GDP 2016

Jobs and competitiveness +5,5 Higher private and public consumption

School +2,6 Higher public consumption

Health care and elderly care, unemploymentbenefits

+6,5 Higher public consumption

Environment +2,0 Higher public consumption

Other (mainly to municipalities) +3,4 Higher public consumption

Social contribution fees for people


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Negative policy rate - unique possibility for fiscal

policy

34

• Expansive fiscal policy can contribute to strengthen growth with a positive multiplier whenpolicy rates have reached the zero lower bound (see e.g., Blanchard och Leigh 2013,Eichengreen and O’Rourke 2012)

• Ineffective fiscal policy?

– In countries with a government debt over 90 % (Reinhardt och Rogoff 2010, 2012)

– Multiplier effect diminshes witha government debt over 70% (Becker 2006)

• Swedish government debt 2015 40,9%

– Real interest rate 10-year government bonds about -1,7%


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Fiscal policy: There will be more

SEK 28 bn in tax increases planned and more reforms to be announced

35

Revenue increases SEK 20 bn Expenses SEK 20 bn

Jobs and comp!"!"#nss Schoo$

%a$!h car and $dr$y car& 'nmp$oymn! bn"!s n#"ronmn!

*!hr (ma"n$y m'n"c"pa$"!"s) Soc"a$ con!r"b'!"on s

*!hr


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Relativ inflation is key to FX outlook

• Usually, FX is not a tool/target for centralbanks that are inflation targeting

• However, FX is crucial now due to: – Global disinflation processes in the light of the debt

crisis and doubled capacity in the world economy

since 1990 – Global policy rates are at zero and monetary

policies have to act with QE and indirectly againstFX

• Currencies are a zero sum game, in thepast Fed and BoE lowered their

currencies• Inflation outlook in the short term is driven

by base effects, energy and currencies: – Slowly upwards: Sweden and the Eurozone

– Unchanged: US and Norge

– Down: UK

• Note that central banks view the falling oilprice differently. – Fed , ECB and Norges bank disregard it

– Riksbanken and ECB assume that it affectsinflation expectations and thereby emphasis it

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EURUSD close to parity this year before Fed lifts-off.

• Labour costs in the US start increasing as the labour market continues to improve

• Strong USD/low oil prices support limited rate hiked by Fed

• Expectations on Fed is currently ”only” 25 bp hike in December and Fed funds around 1.00 % Dec

16.

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• Norway: Slowdown set to continue

• Denmark: A successful defence of thecurrency peg

• Finland: Less clouds, but still rainy

Nordic area: A pick up since last winter

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• Outlook has weakened further... – Regional network projects growth below 1%

– Oil prices remain low, investments falling

– Wage growth slows down to below 3% this year

• ...but unemployment remains low – Registered (NAV) unemployment has risen more slowly

than expected

– Labour force survey (AKU) has reported an upswing,but remains volatile

• Norges Bank set to cut policy rate – Kept policy rate unchanged at 1.25% in March for fear

of fuelling strong house price growth

– Rate path projection implies cut to 1% in Q2, anddownside bias thereafter

– We see clear downside risks and expect rate

eventually bottom at 0.5% next year

• We reduce our growth projections to

1.2-1.4% in 2015/2016, with risks ondownside

• We expect NOK to remain weak

Norway: Slowdown set to continue

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

2002 2005 2008 2011 2014

Norway: GDP outcome and forecast (%)

Norges Bank's forecast GDP MainlandNetwork survey Network forecast

Sources: Reuters EcoWin, Swedbank and Norges Bank.

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Norway: Unemployment in %

Norges Bank's forecast Unemployment (survey)

Unemployment (registred)

Sources: Reuters EcoWin and Swedbank.

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• Net exports main contributor to growth in2015 – Although, substantial negative impact of the Russian

economic crisis, average foreign demand has improvedlately

• Supply side of the economy is primarilysupported by growth in the service sector – Industrial sector output is still in the negative territory

• Finland’s economic growth potential hasdecreased – Productivity growth has been very sluggish, and

working-age population and investments have

decreased several years in a row.

• Investments will have positive growthnumbers only in 2016

• Private consumption grows marginally in2015, primarily supported by low energyprices – Household savings have been negative for 2 years in a

row, which inhibits more robust pick-up in consumption

• Public sector has to implement even morestrict austerity policies as the budget deficitfell below the 3% limit last year

Finland: Less clouds, but still rainy

-8

-4

0

4

8

12

2010 2011 2012 2013 2014 2015

Industrial output Services' turnover

Sources: Statistics Finland and Swedbank

Finland: Industrial output and services' sector turnover, YoY %

32.6

-1.5-1.3

-0.1

0.1 0.9

-8

-6

-4

-2

0

2

4

6

8

2010 2011 2012 2013 2014 2015f 2016f

Finland: GDP and its transactions, YoY %

GDP Exports Private consumption Investments

Sources: Statistics Finland and Swedbank

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• Aggressive reductions of policy rates, and

large intervention in the currency marketshave kept the krone well within bounds

Denmark: A successful defence of the currency peg

-1,00

-0,80

-0,60-0,40

-0,20

0,00

0,20

0,40

0,60

0,80

1,00

2012 2013 2014 2015

Denmark: Monetary policy rates (%)

Certificates of deposit rate Discount rateCurrent-account rate Lending rate

Source: Danmarks Nationalbank

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015

Denmark: Foreign-exchange reserve (DKK billion)


7,2 kr

7,3 kr

7,4 kr

7,5 kr

7,6 kr

7,7 kr

Market rate Central rate Fluctuation limits (+/-2.25 per cent)

Denmark: Kroner per euro


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35000

40000

45000

50000

55000

60000

94

96

98

100

102

104

106

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Denmark: Competitiveness and exports

REER (ULC) Export (m Dkk, RHS)

Sources:BIS and Statistics Denmark.

72

73

74

75

76

77

78

79

-6

-4

-2

0

2

4

6

8

Mar-05 Jun-06 Sep-07 Dec-08 Mar-10 Jun-11 Sep-12 Dec-13

Denmark: Labour market developments (%)

Employment growth Unemployment rate Employment rate (RHS)

Source: Statistics Denmark

• Exports improves on the back of improved

competitiveness

• Employment and employment rate recover,

while unemployment rate declines fromelevated levels

• We expect growth to continue to increase ata moderate rate

Denmark: Competitiveness and labour market improve

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• Estonia: More opportunities for growth

• Latvia: Consumers driving growth

• Lithuania: Wear your long johns until the

summer

The Baltics

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• GDP real growth in 2015 and 2016 revisedmarginally upwards

• Manufacturing sector turnover and export growthis expected to decelerate this year – Negative effect from the economic crisis in Russia, but

– Estonian enterprises have increased their exports to several

other markets – Foreign demand stronger than we forecast in January SEO

• Uncertainty among enterprises inhibit the growth ofbusiness sector investments – Faster growth of government investments

• Labour market is expected to tighten

– Wage growth remains strong

– Working-age population is decreasing

– Unemployment will drop further

– Households’ real purchasing power will grow markedly and

feed private consumption this year

• Consumer prices are expected to start rising (yoy)in the 2H of this year – Energy and food prices will start to increase

– USD denominated imports become more costly

– In 2016 another round of excise tax hikes

Estonia: More opportunities for growth

4.7

1.62.1 2.1 2.8

-6

-4

-2

0

2

4

6

8

2012 2013 2014 2015f 2016f

Inventories

Net exports

Investments

GovernmentHouseholds

GDP growth, %

Estonia: Contributions to GDP growth, pp

Sources: Statistics Estonia and Swedbank

10.0%

8.6%

7.4%7.0% 6.7%

-2%

0%

2%

4%

6%

8%

10%

12%

2012 2013 2014 2015f 2016f

Estonia: Labour market indicators and inflation

Unemployment rate

Consumer prices,YoY

Net wage realgrowth, YoY

Sources: Statistics Estonia and Swedbank

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Li h i W i l j h il h


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• First half of 2015 looks dismal – Exports in January-February were 6.9% smaller than a

year ago. This was mainly due to Russia’s embargoand recession – exports to it have shrunk by 34.7%.

– Retail trade growth has also weakened – annual

growth in January-February was 2.7%, down from abrisk 8.2% in December. Part of this is cautiousnessafter the euro adoption, thus household consumption islikely to recover later this year.

– Consumption will be supported by rising wages and

deflation – we’ve revised our CPI forecast to -0.5%.

• Growth is likely to return to its trend in 2016 – Recovering euro zone and more stable Russia (and a

likely end of embargo) will support export growth,which expected to expand by 7%

– Parliament elections in autumn will encourage

government to increase public sector wages. We alsoforecast that non-taxable income threshold will be

increased by 10%, further boosting householdconsumption.

– Unemployment will drop to 8.5%, but mainly due toshrinking labor force; employment growth is likely toremain meagre

Lithuania: Wearing long johns until the summer

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2012 2013 2014 2015

Lithuania: Exports of goods, annual growth

Exports of goods to RussiaExports of goodsExports of goods produced in Lithuania (w/o mineral pr.)Exports of goods produced in Lithuania (w/o mineral pr. & Russia)

Source: Statistics Lithuania.

1,6

6,1

3,8

3,3 2,92,3

3,5

-4

-2

0

2

4

6

8

2010 2011 2012 2013 2014 2015f 2016f

Lithuania: Contributions to GDP growth, pp

Household consumption Government consumption

Investment (excl.invent.) Inventories

Net export GDP growth, %

Sources: Statistics Lithuania and Swedbank forecasts.

47

A di K i i di &


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Estonia Key economic indicators


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Estonia: Key economic indicatorsESTONIA: Key economic indicators, 2013-2016 1/

2013 2014Real GDP grow th, % 1,6 2,1 2,1 (2,0) 2,8 (2,7)

Household consumption 3,8 4,6 4,7 (4,2) 3,6 (3,6)

Government consumption 2,8 2,3 2,0 (1,0) 2,0 (1,0)

Gross fixed capital formation 2,3 -2,8 2,0 (0,6) 3,5 (3,5)

Exports of goods and services 2,4 2,6 2,1 (1,5) 4,0 (3,7)

Imports of goods and services 3,3 2,7 3,1 (2,1) 4,6 (4,2)

Consumer price grow th, % 2,8 -0,1 0,1 (0,3) 2,7 (2,6)

Unemployment rate, % 2/ 8,6 7,4 7,0 (7,3) 6,7 (7,2)

Real net monthly w age grow th, % 4,6 4,2 7,0 (6,5) 3,0 (3,3)

Nominal GDP, billion euro 18,7 19,5 20,5 (20,4) 21,7 (21,7)

Exports of goods and services (nominal), % grow th 3,5 2,4 1,9 (1,5) 4,5 (4,2)

Imports of goods and services (nominal), % grow th 2,9 1,1 2,1 (1,9) 5,1 (4,7)

Balance of goods and services, % of GDP 1,4 2,5 2,3 (2,4) 1,9 (2,2)

Current account balance, % of GDP -1,1 -0,1 -0,3 (-0.9) -1,0 (-1.3)

Current and capital account balance, % of GDP 0,6 0,6 0,8 (-0.4) -0,4 (-1.0)FDI inf low , % of GDP 3,6 6,1 4,9 (3,9) 4,6 (3,7)

Gross external debt, % of GDP 93,5 97,2 93,0 (87,2) 88,8 (83,4)

General government budget balance, % of GDP 3/ -0,5 0,6 -0,5 (-0.4) -0,5 (-0.2)

General government debt, % of GDP 10,1 10,6 10,2 (9,8) 10,0 (9,5)

1/ January 2015 forecast in parenthesis

2/ According to Labour f orce survey

3/ According to Maastricht criterion

2015f 2016f

Sources: Statistics Estonia, Bank of Estonia and Swedbank

Key economic indicators, 2013-2016 1/

2013 2014

Real GDP grow th, % 1,6 2,1 2,1 (2,0) 2,8 (2,7)

Consumer price grow th, % 2,8 -0,1 0,1 (0,3) 2,7 (2,6)



Current and capital account balance, % of GDP 0,6 0,6 0,8 (-0.4) -0,4 (-1.0)

General government budget balance, % of GDP 3/ -0,5 0,6 -0,5 (-0.4) -0,5 (-0.2)


2/ According to Labour force surv ey

3/ According to Maastricht criterion

Sources: Statistics Estonia, Bank of Estonia, Swedbank.

2015f 2016f

50

Latvia: Key economic indicators


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Latvia: Key economic indicatorsLATVIA: Key economic indicators, 2013-2016 1/

2013 2014

Real GDP grow th, % 4,2 2,4 1,9 (1,9) 3,5 (3,5)

Household consumption 6,2 2,3 3,5 (3,5) 4,0 (4,0)

Government consumption 2,9 3,4 0,6 (0,7) 0,5 (0,5)

Gross fixed capital formation -5,2 1,3 -0,5 (-0,5) 10,0 (10,0)

Exports of goods and services 1,4 2,2 1,4 (1,0) 4,0 (4,0)

Imports of goods and services -0,2 1,6 2,3 (2,2) 7,0 (7,0)

Consumer price grow th, % 0,0 0,6 0,8 (0,5) 2,7 (2,5)Unemployment rate, % 2/ 11,9 10,8 10,2 (10,2) 9,2 (9,2)


Nominal GDP, billion euro 23,2 24,1 24,8 (24,9) 26,5 (26,4)

Exports of goods and services (nominal), % grow th 2,2 1,8 1,2 (1,1) 5,9 (5,9)

Imports of goods and services (nominal), % grow th 0,9 1,2 1,5 (1,6) 8,6 (8,9)

Balance of goods and services, % of GDP -3,3 -2,9 -3,0 (-3,0) -4,5 (-4,7)

Current account balance, % of GDP -2,3 -3,1 -2,9 (-2,6) -4,4 (-4,3)

Current and capital account balance, % of GDP 0,1 -0,1 0,2 (-0,2) -1,9 (-2,8)

FDI inf low , % of GDP 2,9 1,5 2,4 (2,4) 3,0 (3,0)

Gross external debt, % of GDP 131,3 138,6 135,9 (136,9) 132,2 (133,7)

General government budget balance, % of GDP 3/ -0,9 -1,6 -1,6 (-1,5) -1,2 (-1,2)

General government debt, % of GDP 38,2 40,3 39,3 (39,4) 38,3 (38,5)

Sources: CSBL and Swedbank.

2015f 2016f

1/ January 2015 f orecast in parenthesis.2/ According to Labour force surv ey .3/ According to Maastricht c riterion.

Key economic indicators, 2013-2016 1/

2013 2014

Real GDP grow th, % 4,2 2,4 1,9 (1,9) 3,5 (3,5)

Consumer price grow th, % 0,0 0,6 0,8 (0,5) 2,7 (2,5)



Current account balance, % of GDP -2,3 -3,1 -2,9 (-2,6) -4,4 (-4,3)

General government budget balance, % of GDP 3/ -0,9 -1,6 -1,6 (-1,5) -1,2 (-1,2)1/ January 2015 forecast in parenthesis.

2/ According to Labour force surv ey .

3/ According to Maastricht criterion. Sources: CSBL and Swedbank.

2015f 2016f

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Lithuania: Key economic indicators


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Lithuania: Key economic indicators

Key economic indicators, 2013 -2016 1/

2013 2014

Real GDP grow th, % 3,3 2,9 2,3 (2.3) 3,5 (3.5)

Consumer price grow th, % 1,0 0,1 -0,5 (0.7) 2,5 (2.0)

Unemployment rate, % 2/ 11,8 10,7 9,7 (9.7) 8,5 (8.5)

Real net monthly w age grow th, % 3,8 4,8 5,4 (4.2) 4,0 (4.5)

Current account balance, % of GDP 1,6 0,1 -1,6 (-1.7) -3,0 (-3.2)

General government budget balance, % of GDP 3/ -2,6 -1,3 -1,6 (-1.6) -1,0 (-1.0)

1/ January 2015 forecast in parenthesis2/ According to Labour force surv ey .

3/ According to Maastricht criterion.

Sources: Statistics Lithuania,

Bank of Lithuania and Swedbank.

2015f 2016f

LITHUANIA: Key economic indicators, 2013-2016 1/

Real GDP grow th, % 3,3 2,9 2,3 (2.3) 3,5 (3.5)

Household consumption 4,2 5,6 4,3 (4.0) 4,5 (4.7)

Government consumption 1,8 1,3 2,0 (2.5) 2,5 (2.5)

Gross f ixed capital formation 7,0 8,0 2,0 (2.0) 8,0 (8.0)

Exports of goods and services 9,4 3,4 -2,5 (0.0) 7,0 (7.0)

Imports of goods and services 9,0 5,4 1,0 (2.6) 8,4 (8.5)

Consumer price grow th, % 1,0 0,1 -0,5 (0.7) 2,5 (2.0)

Unemployment rate, %2/

11,8 10,7 9,7 (9.7) 8,5 (8.5)Real net monthly w age grow th, % 3,8 4,8 5,4 (4.2) 4,0 (4.5)

Nominal GDP, billion euro 35,0 36,3 37,1 (37.7) 39,3 (39.7)

Exports of goods and services (nominal), % grow th 8,0 1,0 -3,0 (-2.5) 9,0 (8.0)

Imports of goods and services (nominal), % grow th 7,5 2,1 -1,5 (-0.5) 10,8 (10.0)

Balance of goods and services, % of GDP 1,3 0,1 -1,1 (-1.2) -2,5 (-2.7)

Current account balance, % of GDP 1,6 0,1 -1,6 (-1.7) -3,0 (-3.2)

Current and capital account balance, % of GDP 4,6 2,9 1,2 (0.9) 0,0 (-0.7)

FDI inf low , % of GDP 1,5 0,8 1,0 (1.5) 1,5 (2.0)Gross external debt, % of GDP 69,8 70,0 70,1 (68.2) 67,5 (65.8)

General government budget balance, % of GDP 3/ -2,6 -1,3 -1,6 (-1.6) -1,0 (-1.0)

General government debt, % of GDP 39,0 41,1 42,1 (42.6) 37,5 (38.2)


2/ According to Labour force surv ey .

3/ According to Maastricht criterion.

Sources: Statistics Lithuania, Bank of

Lithuania and Swedbank.

52

Contact information


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Contact informationMacro Research

Olof Manner Magnus Alvesson Martin Bolander Andrejs Semjonovs Jerk Matero

[email protected] [email protected] [email protected] [email protected] [email protected]

Head of Macro Head of Economic Forecasting Senior Economist Economist Chief IR Strategist

+46 (0)70 567 9312 +46 (0)8 700 94 56 +46 8 700 92 99 +371 6744 58 44 +46 (0)8 700 99 76

Anna Felländer Knut Hallberg Sihem Nekrouf Lija Strašuna Hans Gustafson

[email protected] [email protected] [email protected] [email protected] [email protected]

Group Chief Economist Senior Economist Economist, EA to Anna Felländer Senior Economist Chief EM Economist & Strategist +46 (0)8 5859 39 34 +46 (0)8 700 93 17 +46 (0) 725 88 39 34 +371 6744 58 75 +46 (0)8 700 91 47

Harald-Magnus Andreassen Jörgen Kennemar Øystein Børsum Vaiva Še č kut ė

[email protected] [email protected] [email protected] [email protected]

Chief Economist NO Senior Economist Senior Economist Senior Economist

+47 23 11 82 60 +46 (0)8 700 98 04 +47 99 50 03 92 +370 5258 21 56

Tõnu Mertsina Åke Gustafsson Helene Stangebye Olsen Strategy

[email protected] [email protected] [email protected] MadeleinePulk

Chief Economist EE Senior Economist Reserach Assistant [email protected]

+372 888 75 89 +46 (0)8 700 91 45 +47 23 23 82 47 Head of Strategy and Allocation

+46 (0)72 53 23 533

Nerijus Ma č iulis Anna Breman Liis Elmik

[email protected] [email protected] [email protected] Anders Eklöf

Chief Economist LT Senior Economist Senior Economist [email protected]

+370 5258 22 37 +46 (0)8 700 91 42 +372 888 72 06 Chief FX Strategist

+46 (0)8 700 91 38

M ārti ņš Kaz āks Cathrine Danin Teele Aksalu

[email protected] [email protected] [email protected]

Deputy Group Chief Economist, Chief Economist LV Economist Economist

+371 6744 58 59 +46 (0)8 700 92 97 +372 888 79 25

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Swedbank Economic Outlook - Update, April 2015

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