Swedbank Economic Outlook Update November 2018

Transcription

1 Swedbank Economic Outlook Update November 2018 Completed: November 8, 2018, 07:32 Distributed: November 8, 2018, 08:00

2 Swedbank Economic Outlook Swedbank Economic Outlook presents the latest economic forecasts for Sweden, the Nordic and Baltic countries and the major global economies. In this update, current issues that have a bearing on economic developments are analysed. Swedbank Economic Outlook is a product made by Swedbank Macro Research. Swedbank Research Olof Manner olof.manner@swedbank.se Head of Research Recording date of price data The Swedbank Economic Outlook is available at Macro Research Sweden Anna Breman anna.breman@swedbank.se Head of Macro Research/ Group Chief Economist Oscar Andersson oscar.andersson@swedbank.se Junior Economist Martin Bolander martin.bolander@swedbank.se Cathrine Danin cathrine.danin@swedbank.se Jana Eklund jana.eklund@swedbank.se Senior Econometrician Josefin Fransson josefin.fransson@swedbank.se Assistant Åke Gustafsson ake.gustafsson@swedbank.se Knut Hallberg knut.hallberg@swedbank.se Alexandra Igel alexandra.igel@swedbank.se Economist Maria Wallin Fredholm maria.wallin-fredholm@swedbank.se Economist Matilda Kilström matilda.kilstrom@swedbank.se Estonia Tõnu Mertsina tonu.mertsina@swedbank.ee Chief Economist Estonia Liis Elmik liis.elmik@swedbank.ee Marianna Rõbinskaja marianna.robinskaja@swedbank.ee Economist Latvia Lija Strasuna lija.strasuna@swedbank.lv Chief Economist Latvia Agnese Buceniece agnese.buceniece@swedbank.lv Linda Vildava linda.vildava@swedbank.lv Economist Lithuania Nerijus Mačiulis nerijus.maciulis@swedbank.lt Deputy Group Chief Economist/ Chief Economist Lithuania Laura Galdikiené laura.galdikiene@swedbank.lt Vytenis Šimkus vytenis.simkus@swedbank.lt Economist Norway Kjetil Martinsen kjetil.martinsen@swedbank.no Acting Head of Macro Research Norway Marlene Skjellet Granerud marlene.granerud@swedbank.no Economist

3 Slowdown, but not a downturn The autumn of 2018 has been marked by financial market volatility in the presence of concerns that the next recession is getting closer. Most major economies have continued to grow at a decent pace, but political events cast doubt on the sustainability of economic growth. What could central banks and governments do to combat a recession when policy rates are already low, budget deficits are large, and government debt levels are high? Although downside risks are abundant, the economic outlook in the near term is actually quite good. And policymakers are not empty-handed if risks do materialise. When the next recession hits, there is still some room for stimulus The ability to fight the next recession seems limited by historical standards. Still, there is room for stimulus, but different countries would have to use different tools. First, the appropriate stimulus in the case of a recession will depend on the type of event that caused it. The next crisis is not likely to mimic the last two recessions that affected the global economy: the financial crisis and the euro crisis. A number of regulations have been enacted to reduce the risk of contagion spreading through the financial sector. For example, we can see that there has been little effect from recent turmoil in Italy to the rest of the euro area. Instead, the next crisis could be caused by an escalating trade war, a severe stock market correction, or even financial instability due to climate change. Second, while it is true that central banks are limited by low interest rates, it is incorrect to assume that nothing can be done. Most emerging market countries have room to cut policy rates. But even central banks such as the Fed and the ECB have room for manoeuvre. They can choose to refrain from planned policy rate hikes. They can also use QE and forward guidance to keep market rates low. Experience has taught us that central banks often introduce unprecedented monetary policy measures when the toolbox seemingly looks empty. The ECB and the Riksbank are running out of bonds to buy, but this problem would go away during a new recession, as governments would need to increase emission volumes to provide fiscal stimulus. In some European countries, high debt levels and large budget deficits dampen the ability to conduct fiscal stimulus during a new recession, but, as in earlier crises, regulations could be relaxed. It should be noted that the Nordic and Baltic countries are particularly well positioned to use fiscal stimulus, as their governments debts are relatively low and credit ratings are strong.

4 GLOBAL Third, a crisis is often a good opportunity to act upon needed structural reforms that could otherwise be hard to get through national parliaments. The euro area countries, which implemented reforms after the euro crisis, such as Spain and Portugal, have indeed benefitted from such reforms. Growth numbers in these countries are considerably better than in non-reforming countries, like Italy. Structural reforms have indeed been shown to boost growth. In addition, EU budget rules are more lenient in allowing exceptions from the three per cent Maastricht criteria if structural reforms are enacted. Importantly, our main scenario is that global growth will slow but remain decent in the coming years. There is, however, an abundance of risks that could derail the economic outlook. Below we summarise the outlook for the major economies and the Nordic region. Euro area slows down, but has more to give The euro area growth has slowed somewhat during This stems partly from temporary factors, such as weaknesses in the German car-manufacturing industry, which has recently been subjected to new emissions standards. Additionally, political turmoil is likely contributing to weakening business and consumer sentiments. The Brexit negotiations are not progressing well, the Italian election has put the spotlight on debt sustainability in the euro area, and emerging market turbulence is dampening exports. Still, with a few noticeable exceptions, euro area fundamentals are decent: employment is growing, wages are picking up, and investments are rebounding, in particular in the business sector. The euro area is far from the peak of the business cycle and could continue to grow for several years, as long as political risks are not translated into a new crisis. The ECB is tapering its QE program, and net purchases will cease at the end of the year. A first, cautious hike in the deposit rate is expected in the second half of US growth boosted by tax cuts at the top of the business cycle In contrast to the euro area, the US economy has accelerated during In the third quarter, the US GDP rose at an annualised rate of 3.5%. The combination of tax cuts, strong job creation, moderate inflation, and rising wages boosted household consumption, while business investments were broadly unchanged. The US-China trade tensions have translated into somewhat weaker exports, but tariffs seem to have had a limited impact on inflation and consumption so far. However, inflation is rising and output growth is strong; this should keep the Federal Reserve on track to raise interest rates one more time this year and three more times in Import tariffs will, however, cause some upward pressure on inflation, and higher interest rates will slow the economy towards the end of Politics will remain turbulent. Emerging markets are at the forefront of global risks Though the larger emerging market countries China and India are still showing robust growth figures, three events pose downside risks to emerging market growth in the near term. First, Fed rate hikes have strengthened the dollar and caused higher market rates, putting pressure on countries with large current account deficits and high levels of dollar-denominated debt, such as Brazil, Turkey, Argentina, and South Africa. Second, a higher oil price, combined with a strong dollar, puts pressure on oil-importing countries such as India and China, while sanctions on Iran and geopolitical tensions in the Middle East are creating uncertainty regarding the supply of oil. Third, US import tariffs on China will dampen Chinese growth. As a consequence, other emerging markets depending on China may see reduced growth. The largest and the most systemic risk to emerging markets and the global economic outlook emanates from the US-China trade tensions and the effects they may have on global trade. The Nordic and Baltic countries are resilient to global turmoil The Nordic and Baltic countries are all performing well. Norwegian growth is picking up after the oil price slump. The housing market has rebounded, and Norges Bank has begun to raise rates, signalling that further gradual rate hikes are expected. Denmark and Finland are both expected to grow at about 2% in the coming years. Households are benefitting from strong labour markets. Low interest rates and past-year euro area recovery have helped exporting companies, and business investment is rebounding. Mean- 4

5 GLOBAL while, growth has decelerated in Estonia and Lithuania and is expected to ease in all Baltic countries in 2019 and Household income and domestic demand remain strong, but increasing unit labour costs and weaker external demand have started to bite into exports. Labour shortage remains one of the main production limiting factors, but we expect wage growth to ease in the coming years. Overall, all three Baltic economies remain well balanced, show little signs of overheating, and are well positioned to meet external shocks. Sweden is slowing after years of strong growth Sweden is cooling down after many years of high growth. House prices have stabilised in the country as a whole, but new build owner-occupied flats are still under pressure in the metropolitan areas. As a result, housing investments will decelerate in the coming years. Household consumption will grow at a slower pace as inflation is dampening real wages and the Riksbank is expected to hike the policy rate by 25 bps in December. This will be the first rate hike in seven years and further rate hikes will be gradual and slow. We expect the repo rate to be at 0.50% at the end of Households, in general, can withstand higher interest rates. However, debt levels have increased, and households are more sensitive to higher rates, in particular first-time house buyers in metropolitan areas and retirees with mortgages and low pensions. At the same time, strong population growth, a high level of public investments, and strong public finances will support growth. We expect to see growth close to, but below, 2% in 2019 and

6 GLOBAL Another aspect related to the Swedish economy is the protracted government formation. This will neither affect the Swedish economy, nor the krona, nor interest rates in the short run. Strong public finances and a functioning budget-procedure framework have created trust in the Swedish system among international investors. In the long run, however, economic policy and the implementation of reforms (or lack thereof) will affect both the economy and long-run growth. Volatility in financial markets to continue Volatility in foreign exchange and interest rates is back. Global trade, the Brexit negotiations, and the Italian budget debacle have impacted financial markets during the fall. In addition, markets are affected by the substantial interest rate differential between central banks policy rates in the US and Europe, and expectations on monetary policy going forward. We expect the euro to appreciate against the dollar as the ECB takes the first cautious steps towards policy normalisation, but given continued Fed hikes, this will happen very gradually. Our forecast is for the euro to remain largely unchanged until mid-2019 and then gradually appreciate towards 1.20 against the dollar towards mid Both the Swedish and the Norwegian krona are expected to appreciate against the euro and the dollar as the Norges Bank and the Riksbank move ahead of the ECB with policy rate hikes. However, we do expect the Riksbank to move very gradually as a too fast appreciation of the krona would cause the Riksbank to halt its rate hikes. Our forecast is for EURSEK to be at by the end of 2018 and at towards mid Importantly, we stress that the genuine uncertainty and political unpredictability is likely to continue to deliver temporary large swings in currency and rate markets. 6

7 APPENDICES Appendices Swedbank s global GDP forecast 1/ Percentage change F 2019F 2020F USA (2.7) 2.6 (2.5) 1.5 (1.5) EMU countries 2/ (2.1) 1.8 (1.9) 1.6 (1.6) Germany (2.0) 1.9 (1.9) 1.6 (1.6) France (1.7) 1.7 (1.8) 1.5 (1.6) Italy (1.1) 1.0 (1.0) 0.9 (0.9) Spain (2.7) 2.2 (2.2) 1.9 (1.8) Finland (2.7) 2.1 (2.2) 1.8 (1.8) UK (1.4) 1.5 (1.7) 1.7 (1.6) Denmark (1.1) 2.0 (2.0) 2.0 (2.0) Norway (mainland) (2.4) 2.5 (2.3) 2.1 (2.1) Japan (1.0) 1.2 (1.1) 0.6 (0.6) China (6.6) 6.2 (6.4) 5.9 (6.2) India (7.0) 7.2 (7.2) 7.6 (7.8) Brazil (1.6) 2.2 (2.1) 2.3 (2.3) Russia (1.9) 1.7 (1.8) 1.8 (1.8) Global GDP in PPP 3/ (3.8) 3.6 (3.7) 3.5 (3.5) 1/ Previous forecast in parentheses 2/ Calendar adjusted 3/ IMF PPP weights (revised April 2018) Sources: IMF & Swedbank Research 7

8 APPENDICES Interest and exchange rate forecasts Policy rates (%) Outcome Forecast 2018 NOV DEC JUN DEC JUN DEC 31 Federal Reserve, USA 1/ European Central Bank 2/ Bank of England Riksbank Norges Bank Bank of Japan Government bond rates (%) Sweden 2y Sweden 5y Sweden 10y Germany 2y Germany 2y Germany 10y US 2y US 5y US 10y Exchange rates EUR/USD EUR/SEK USD/SEK KIX (SEK) 3/ EUR/NOK NOK/SEK EUR/GBP USD/CNY USD/JPY USD/RUB / Upper Bound 2/ Refi Rate 3/ Trade-weighted exchange rate index for SEK. A higher value of the index means that SEK has depreciated Sources: Macrobond & Swedbank Research 8

9 APPENDICES SWEDEN: Key economic indicators, / F 2019F 2020F Real GDP growth (calendar adjusted), % (2.8) 1.8 (1.9) 1.5 (1.5) Real GDP growth, % (2.7) 1.8 (1.9) 1.8 (1.8) Household consumption (2.7) 1.9 (2.2) 1.8 (1.6) Government consumption (0.8) 0.9 (1.1) 1.4 (1.3) Gross fixed capital formation (3.9) 1.3 (1.6) 1.7 (1.8) Change in inventories, contribution to GDP growth (0.1) 0.0 (0.0) 0.0 (0.0) Exports of goods and services (3.4) 4.0 (4.3) 3.7 (3.9) Imports of goods and services (3.3) 3.5 (4.0) 3.5 (3.7) CPI, % (average) (2.1) 2.3 (2.5) 2.5 (2.7) CPI, % (end of period) (2.4) 2.2 (2.6) 2.7 (2.8) CPIF, % (average) 2/ (2.2) 2.1 (2.2) 1.9 (2.0) CPIF, % (end of period) 2/ (2.4) 1.7 (2.0) 2.0 (2.0) Riksbank policy rate, % (end of period) (-0.40) 0.00 (0.00) 0.5 (0.50) Unemployment rate (15-74), % (6.2) 6.5 (6.1) 6.4 (6.0) Change in labour force (15-74), % (1.2) 1.1 (0.8) 0.7 (0.6) Change in employment (15-74), % (1.7) 1.0 (0.9) 0.7 (0.7) Number of hours worked, calendar adjusted (1.7) 1.0 (1.0) 0.6 (0.6) Nominal hourly wage (NMO), whole economy, % (2.7) 2.9 (3.1) 3.4 (3.5) Household real disposable income, % (2.5) 2.0 (2.3) 1.0 (1.4) Household nominal disposable income, % (4.7) 3.8 (4.4) 2.5 (3.3) Household savings ratio, % (16.6) 15.6 (16.6) 14.9 (16.5) General government budget balance, % of GDP 3/ (0.7) 0.5 (0.4) 0.3 (0.3) General government debt, % of GDP 3/ (36.9) 35.2 (35.1) 35.0 (34.9) 1/ Previous forecast in parenthesis 2/ CPI with fixed interest rates 3/ According to Maastricht definition Sources: Statistics Sweden & Swedbank Research ESTONIA: Key economic indicators, / F 2019F 2020F Real GDP growth, % (3.5) 3.2 (3.2) 2.7 (2.7) Household consumption (3.5) 3.7 (3.5) 3.0 (3.0) Government consumption (2.0) 2.0 (2.0) 2.0 (2.0) Gross fixed capital formation (1.0) 6.0 (6.0) 4.5 (5.5) Exports of goods and services (5.0) 3.5 (4.0) 3.0 (3.5) Imports of goods and services (5.5) 4.0 (4.5) 3.5 (4.0) Consumer price growth, % (3.4) 2.8 (3.0) 2.2 (2.5) Unemployment rate, % 2/ (5.5) 5.1 (5.1) 5.3 (5.3) Change in employment, % 2/ (0.8) 0.5 (0.5) 0.0 (0.0) Gross monthly wage growth, % (6.6) 6.0 (6.0) 5.5 (5.5) Nominal GDP, billion euro (24.8) 27.1 (26.5) 28.7 (28.1) Exports of goods and services (nominal), % growth (7.7) 5.6 (7.1) 5.1 (6.6) Imports of goods and services (nominal), % growth (8.7) 6.1 (7.7) 5.6 (7.1) Balance of goods and services, % of GDP (3.8) 2.9 (3.4) Current account balance, % of GDP (2.5) 1.1 (1.6) Current and capital account balance, % of GDP (6.1) 3.2 (4.3) FDI inflow, % of GDP (3.0) 3.3 (3.0) General government budget balance, % of GDP 3/ (-0.5) 0.4 (-0.3) 0.2 (-0.2) General government debt, % of GDP 3/ (8.6) 7.3 (8.0) 6.6 (7.6) 1/ Previous forecast in parenthesis 2/ According to Labour Force Survey 3/ According to Maastricht definition Sources: National statistics and Swedbank Research 9

10 APPENDICES LATVIA: Key economic indicators, / F 2019F 2020F Real GDP growth, % (4.0) 3.0 (3.0) 2.5 (2.5) Household consumption (5.7) 5.0 (5.0) 3.3 (3.3) Government consumption (3.5) 3.0 (3.0) 2.9 (2.9) Gross fixed capital formation (15.0) 8.0 (8.0) 5.5 (5.5) Exports of goods and services (4.0) 3.3 (3.5) 3.5 (3.7) Imports of goods and services (6.8) 5.7 (6.0) 4.5 (4.6) Consumer price growth, % (2.6) 2.7 (2.5) 2.3 (2.3) Unemployment rate, % 2/ (7.6) 7.1 (7.1) 6.9 (6.9) Change in employment, % 2/ (1.5) 0.2 (0.2) -0.3 (-0.3) Gross monthly wage growth, % (9.0) 7.0 (7.0) 5.5 (5.5) Nominal GDP, billion euro (29.1) 31.4 (31.1) 33.2 (32.9) Exports of goods and services (nominal), % growth (7.5) 5.4 (5.4) 5.6 (5.6) Imports of goods and services (nominal), % growth (7.9) 7.1 (7.3) 5.8 (5.9) Balance of goods and services, % of GDP (-1.5) -1.0 (-2.6) -1.1 (-2.8) Current account balance, % of GDP (-0.8) -0.4 (-2.0) -0.5 (-2.2) Current and capital account balance, % of GDP (0.9) 1.3 (-0.2) 1.3 (-0.3) FDI inflow, % of GDP (1.0) 1.3 (2.1) 1.2 (2.0) General government budget balance, % of GDP 3/ (-0.8) -0.8 (-0.8) -0.7 (-0.7) General government debt, % of GDP 3/ (38.1) 36.4 (36.4) 37.0 (37.2) 1/ Previous forecast in parenthesis 2/ According to Labour Force Survey 3/ According to Maastricht definition Sources: National statistics and Swedbank Research LITHUANIA: Key economic indicators, / F 2019F 2020F Real GDP growth, % (3.6) 2.5 (2.5) 2.0 (2.0) Household consumption (3.8) 3.5 (3.5) 2.5 (2.5) Government consumption (1.5) 1.5 (1.5) 1.0 (1.0) Gross fixed capital formation (9.0) 7.0 (7.0) 5.0 (5.0) Exports of goods and services (4.5) 3.0 (3.0) 2.0 (2.0) Imports of goods and services (6.0) 4.0 (4.0) 3.0 (3.0) Consumer price growth, % (2.7) 2.7 (2.5) 2.5 (2.5) Unemployment rate, % 2/ (6.4) 6.3 (6.5) 6.2 (6.6) Change in employment, % 2/ (0.2) 0.1 (-0.1) 0.1 (0.0) Gross monthly wage growth, % (8.7) 7.0 (7.0) 4.0 (4.0) Nominal GDP, billion euro (44.9) 47.4 (47.3) 49.5 (49.4) Exports of goods and services (nominal), % growth (8.0) 5.0 (5.0) 3.0 (3.0) Imports of goods and services (nominal), % growth (9.0) 6.0 (6.0) 4.0 (4.0) Balance of goods and services, % of GDP (1.5) 2.1 (0.7) 1.3 (-0.1) Current account balance, % of GDP (-0.3) 1.4 (0.1) 1.1 (-0.3) Current and capital account balance, % of GDP (1.1) 2.9 (1.6) 2.5 (1.2) FDI inflow, % of GDP (2.5) 2.0 (2.0) 2.0 (2.0) General government budget balance, % of GDP 3/ (0.6) 0.2 (0.3) 0.1 (0.1) General government debt, % of GDP 3/ (35.3) 37.5 (37.8) 36.8 (36.4) 1/ Previous forecast in parenthesis 2/ According to Labour Force Survey 3/ According to Maastricht definition Sources: National statistics and Swedbank Research 10

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