Nordic Outlook. Economic Research K C E N NC. Helsinki Oslo Stockholm Tallinn. Riga. Vilnius. Copenhagen

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1 norde.qxd Sida 1 Nordic Outlook May English edition Helsinki Oslo Stockholm Tallinn Riga Copenhagen Vilnius Economic Research Important your attention is drawn to the statement on the next page of this report which affects your rights. D AN Y S M ET O K ON AR C M E W IAL E N NC E A TH FIN

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4 Sources: EcoWin, SEB US: GDP and CPI Year-on-year change SEB forecast CPI GDP

5 US: Credit spread Difference between interest rate on -years corporate bonds and government bonds Source EcoWin US: Yield curve -year vs. -month yields 1 Basis points May Sep 99 May Sep May Basis points

6 Sources: EcoWin, SEB US: Interest rates Monthly average Fed funds rate 1-year bond yield SEB forecast

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8 Consumer prices Year-on-year change US Japan The euro zone SEB forecast Gross domestic product Year-on-year change SEB forecast US Japan The euro zone Sources: EcoWin, SEB Sources: EcoWin, SEB Germany: Interest rates Monthly average year bond yields Refi rate EMU (Germany before 1999) SEB forecast

9 7 6 UK: Wage costs and RPI-X caps Year-on-year change Source: EcoWin Wage costs, -mo sliding average RPI-X utility price caps

10 OIL PRICES After peaking at USD per barrel in March, oil prices have fallen. Three factors will determine future oil price developments: Demand for oil will grow at the pace of global recovery. Higher industrial output and rising consumption mean that more oil will be used. Technological development points towards lower oil prices. In recent years, important innovations such as three-dimensional seismographic exploration equipment and directional drills have had an impact. In the United States, the average cost of finding oil has diminished from USD 1 to USD per barrel. Directional drills mean that more oilfields can be tapped. Meanwhile the downturn in global real interest rates implies that the value of keeping these reserves in the ground will diminish. In the short term, the big question is how long OPEC discipline will last. After the decision by the Organisation of Petroleum Exporting Countries in March to increase production, a number of OPEC producers have indicated that they will cut production if prices remain below USD. Our guess is that the cartel will be more and more difficult to maintain as more time passes. Overall, our assessment is that long-term equilibrium prices of oil have fallen, but that rising global demand will keep prices somewhat above equilibrium in the immediate future. Our forecast is that towards the end of, oil prices will be at around USD per barrel and will fall further during 1 and, landing around USD 19 towards the end of. Compared to our previous forecast, we have thus revised oil prices somewhat downward, which also implies that global inflation will be marginally lower.

11 8 6 Asia* Russia GDP growth Year-on-year change Latin America Central & Eastern Europe Source: IMF IMF forecast *Excluding China and India - - Why such a strong link between Europe and the US? The strong correlation between US and European interest rates is surprising. The short-term link between interest rates in two large closed economies with floating exchange rates should be weak and be governed by expectations concerning exchange rate developments. One explanation for this over-sensitivity to developments in the United States may be that the ECB has allowed the market to gain the impression that the euro plays a larger role than the exchange rate regime indicates. Given floating exchange rates, currency movements should only be factored in if they directly affect the inflation forecast. The ECB nevertheless appears to have attached greater importance to the euro than the inflation argument indicates. Given a fixed exchange rate, interest rates should be determined by real interest rates and inflationary expectations abroad, according to the interest rate parity condition. The way that euro interest rates are tracking US dollar rates is logical if exchange rate fluctuations have been assigned especially great de facto importance for political reasons, which appears to be a reasonable hypothesis. If the ECB keeps watching the external value of the euro closely, American developments will continue to have great influence on European interest rates.

12 year government bond yields US Japan Germany Sources: Datastream, SEB Weekly average 1 SEB forecast 7 6 1

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15 Sources: Statistics Sweden, SEB Sweden: Gross domestic product Year-on-year change SEB forecast

16 Sweden: Capital share of GDP Sources: SCB, SEB Percent 6 Sweden: Machinery and IT investments Sources: SCB, SEB 7 of total investments SEB forecast 1 9 Percent 6

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18 Sweden: CPI and UND1X Year-on-year change Consumer prices Underlying inflation, UND1X SEB Forecast Source EcoWin

19 Sources: Datastream, SEB Sweden: Interest rates Weekly average -month treasury bill 1-year government bond 99 1 SEB forecast 1 8 6

20 Repo rate Sweden and EMU SEB forecast Repo rate Sweden Refi rate EMU (Germany until 1999)

21 Sources: EcoWin, SEB Exchange rates SEB forecast USD/SEK EUR/SEK

22 EMU public opinion, April, Yes No Don t know 6% % 1% Source: Gallup, Berlingske Tidende Sources: EcoWin, SEB Denmark: GDP and CPI Year-on-year change CPI GDP SEB forecast 1 1-1

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24 Sources: EcoWin, SEB Finland: GDP and CPI Year-on-year change SEB forecast CPI GDP

25 Sources: EcoWin, SEB Norway: GDP and CPI Year-on-year change SEB forecast GDP CPI

26 1 1 The Baltics: Gross domestic product Estonia Latvia Lithuania Year-on-year change SEB forecast Sources: Ecowin, SEB

27 Sources: EcoWin, SEB The Baltics: Consumer prices Year-on-year change SEB forecast Estonia Latvia Lithuania

28 Nordic & International Key Economic Data Nordic Outlook - May Nordic Key Economic Data DENMARK Gross domestic product* Private consumption* Public consumption* Gross fixed investment* Stockbuilding (change as % of GDP) Exports* Imports* Unemployment (%).7... Industrial production (%) Consumer prices, (%), average..8.. Wage cost*.... Household savings ratio (%) Trade balance, % of GDP Current account, % of GDP Public sector financial balance, % of GDP.9... Public sector debt, % of GDP 9 9 * yearly change in percent FINANCIAL FORECASTS May-11 Sep Dec Jun 1 Dec 1 Dec Repo rate month interest rate year bond yield year spread to Germany USD/DKK EUR/DKK NORWAY Gross domestic product* Gross domestic product (Mainland Norway) Private consumption* Public consumption*.... Gross fixed investment* Stockbuilding (change as % of GDP).... Exports* Imports* Unemployment (%)...1. Industrial production ex. oil (%) Consumer prices*..6.. Wage cost* Household savings ratio (%) Trade balance, % of GDP Current account, % of GDP Public sector financial balance, % of GDP Public sector debt, % of GDP * yearly change in percent FINANCIAL FORECASTS May-11 Sep Dec Jun 1 Dec 1 Dec Deposite rate month interest rate year bond yield year spread to Germany USD/NOK EUR/NOK

29 Nordic Outlook - Maj Nordic & International Key Economic Data SWEDEN Gross domestic product*.8... Private consumption* Public consumption* Gross fixed investment* Stockbuilding (change as % of GDP) Exports* Imports* Unemployment (%) Job growth* Industrial production* Consumer prices* UND1X* Wage cost*....7 Household savings ratio (%) Real disposable income*.... Trade balance, % of GDP Current account, % of GDP Central government borrowing, SEK bn -7-1** -111** -9** Public sector financial balance, % of GDP ***.7*** Public sector debt, % of GDP * yearly change in percent ** large swings due to one-off-effects (privatisations and transfer of pension funds between different accounts). *** after assumed new tax cuts 1- FINANCIAL FORECASTS May-11 Sep Dec Jun 1 Dec 1 Dec Repo rate month interest rate year bond yield year spread to Germany USD/SEK EUR/SEK TCW FINLAND Gross domestic product*.... Private consumption* Unemployment (%) Consumer prices, (%), average Current account, % of GDP...1. Public sector financial balance, % of GDP Public sector debt, % of GDP 7 8 * yearly change in percent 9

30 Nordic & International Key Economic Data Nordic Outlook - May International Key Economic Data SEB-May SEB-Feb Cons SEB-May SEB-Feb Cons SEB-May SEB-Feb GDP USA Japan Eurozone Germany United Kingdom Inflation USA Japan Eurozone Germany United Kingdom Unemployment USA Japan Eurozone Germany United Kingdom May-11 Sep Dec Jun 1 Dec 1 Dec Official interest rates USA Fed funds Japan Call money rate ECB Refi rate United Kingdom Base rate Bond yields USA 1 years Japan 1 years ECB 1 years United Kingdom 1 years Exchange rates USD/JPY EUR/USD EUR/JPY GBP/USD EUR/GBP

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