Extract frm Ecnmic and Structural Reprt Swedbank s analysis f the internatinal and Swedish ecnmies 14 August 2008 A stressed glbal ecnmy is slwing Swedish grwth Due t the prtracted financial crisis, high cmmdity prices and dwnbeat sentiment, grwth prspects fr the glbal and Swedish ecnmies have wrsened during the last half year. We have revised ur glbal GDP grwth frecast dwnward by ¼ percentage pint t 3.7% this year and by slightly ver ½ percentage pint t 3.4% next year. Nt until the end f the frecast perid will a glbal recvery begin. Sweden is impacted by bth weaker glbal ecnmic cnditins and negative wealth effects as husehlds becme mre cautius. We see gd reasn fr cnsumers increased pessimism. GDP will grw by 1.8% this year and 1.7% in 2009, a sharp dwnward revisin since January. If Swedish inflatin begins t retreat in late autumn, the Riksbank can ease mnetary plicy next year. Ecnmic cnditins and strng gvernment finances will als allw fr expansinary fiscal plicies. Cnsidering the stress that the glbal ecnmy is underging, with tw majr shcks (financial and cmmdity crises), Sweden, with GDP grwth f 1.5-2%, is managing reasnably well. The reasns fr this include its ecnmic plicies and relatively gd exprt and investment trends. Prtracted glbal financial and ecnmic cncerns, a sharp decline in the real estate and labr markets, rising cmmdity prices and higher cst pressures are imprtant risks n the dwnside. Cecilia Hermanssn Jörgen Kennemar Ecnmic Research Department, Swedbank AB (publ), SE-105 34 Stckhlm, Sweden telephne +46-8-5859 1031, ek.sekr@swedbank.se, www.swedbank.se Legally respnsible publishers: Cecilia Hermanssn, +46-8-5859 1588 Jörgen Kennemar, +46-8-5859 1478, ISSN 1103-4897
Intrductin When the dmins start falling Grwth prspects fr the glbal and Swedish ecnmies have clearly wrsened in the last half year. Financial wrries still remain, cmmdity prices have risen substantially and the prevailing sentiment amng businesses and husehlds has becme glmier. We have revised ur frecast fr glbal GDP grwth dwnward t 3.7% and 3.4% in 2008-2009. Nt until the end f 2009 and 2010 d we nw anticipate a glbal recvery. Sweden is als grwing cnsiderably slwer accrding t ur new frecast. This year real grwth is estimated at 1.8% and next year 1.7% ver ne percentage pint lwer than in the January frecast. The glbal ecnmy is under pressure frm tw shcks. One cntains deflatin risks and is related t the build-up in debt, falling husing prices and the financial crisis. The ther has arisen due t rising cmmdity prices, with higher inflatin and stagflatin risks as a result. These shcks are tw sides f the same cin, caused by glbal savings imbalances, a pr chice in currency regimes by emerging cuntries and expansinary mnetary plicies. In the shrt term there is a risk f glbal recessin. At the same time inflatin is discncertingly high, particularly in many emerging ecnmies where demand is slid. In the slightly lnger term there is mre f a threat t the glbal ecnmy frm excessive resurce utilizatin, since the supply f raw materials can t keep pace with demand. Ecnmic plicies have t be mre glbally respnsible. Every cuntry can t grw its way ut f the current crisis. A cnslidatin stage is needed where imbalances are the highest (read the U.S.). Central banks must include asset prices and credit grwth in their inflatin analyses. Emerging ecnmies (read China) must intrduce mre apprpriate currency regimes. The recessin after the turn f the new millennium carried ver int the crprate sectr after a perid f excessive IT investments. Nw the husehld sectr has t adjust its balance sheets, reduce debt and save mre. This will slw GDP grwth. A husehld-led ecnmic slwdwn is likely t be mre prtracted, thugh prbably nt as extensive as a business-led recessin. Glbal trade is affected slightly less than in the last dwnturn. Labr markets are slwing, thugh prbably nt as much. The risks are weighing n the dwnside. The credit crunch culd cmplicate the situatin. Cmpared t the recessins f the early 1980s and 90s, the fast-grwing emerging ecnmies mean mre t glbal grwth. These ecnmies are als slwing due t lwer demand in Eurpe, Japan and the U.S., but nt t the same extent. The recessin began in the U.S. in 2006-2007. Nt until the last quarter has a majr dwnturn becme apparent in the EU. Grwth is als slwing significantly in Japan. We expect activity Prer grwth prspects mean relatively large dwnward revisins cmpared with ur January frecast The tw shcks facing the wrld are tw sides f the same cin The threats t the glbal ecnmy differ in the shrt and lng term There are differences between this slwdwn and previus recessins 2 Swedbank s Ecnmic and Structural Reprt 14 August 2008
Intrductin t further decline during the frecast perid befre prspects imprve. The effects f the financial crisis and negative wealth effects will prbably be felt mst in the U.S. and Eurpe. The financial crunch resembles a three-act tragedy. In Greek tragedies, hubris and arrgance is a cmmn ingredient, as they were at the start f this financial crisis. We are nw in the secnd act, which has lasted lnger than hped. One reasn why the crisis wrsened beynd the initial USD 50-100 billin in subprime lans was the falling dmins that created a full-scale crisis f cnfidence. Difficulties evaluating and understanding innvative credit instruments have hurt cnfidence and in turn led t new, even greater lsses. The third act in this drama will begin with a turnarund in the U.S. husing market. If we were t see a recvery similar t the ne after the husing bubble in 1978-82, it wuld take fur years f slw grwth until the summer f 2009 befre we hit bttm. Only then and with the help f regulatry changes and better infrmatin n lan lsses will cnfidence return. The Swedish ecnmy is being slwed by weaker glbal grwth and negative wealth effects dmestically. The sentiment amng Swedish husehlds has becme much glmier. This is t be expected since there are s many negative factrs in play at the same time, including a weaker ecnmy and jb market as well as slwer incme and wealth grwth. High debts and rising interest rates have driven up the interest rati t a very high level. Even if husehlds remain an imprtant engine, they are nw driving in a lwer gear. In much f the crprate sectr, we expect relatively psitive develpment. The grwth rate fr Swedish exprts will decline, but is still decent. Crprate investments are slwing, and in the husing sectr they are falling after several years f rapid grwth. Because f weak prductivity grwth, cmpanies cntinue t seek ut efficiencies t reduce their csts. What can ecnmic plicy cntribute in a situatin with weak grwth and high inflatin? We anticipate a perid f falling inflatin beginning in late autumn. Next year the Riksbank can cut the rep rate at the same time that fiscal plicies becme mre expansinary thrugh incme tax cuts, higher state subsidies t the municipal sectr and mre public investment. Supprt frm ecnmic plicies will sften the recessin slightly, thugh there is n quick fix. Just as imprtant will be t implement structural refrms t strengthen Sweden s grwth prspects nce the ecnmy rebunds. The level f uncertainty in the abve frecast is very high and we see significant ecnmic risks n the dwnside. Still, if ur expectatins are met, Sweden s situatin wuld have t be cnsidered fairly gd given the pressures facing the glbal ecnmy. Cecilia Hermanssn The financial crisis resembles a Greek drama in three acts Falling dmins have led t a much greater financial crisis than first expected Glbal ecnmic cnditins and wealth effects dmestically are slwing Swedish GDP Ecnmic plicies can sften the impact f the recessin slightly, but there is n quick fix Swedbank s Ecnmic and Structural Reprt 14 August 2008 3
Supply balance sheet and Key ratis Swedbank s ecnmic frecast fr Sweden August 2008 Natinal Accunts Change in vlume (%) 2006 2007 1) 2008e 1) 2009e 1) Cnsumer spending 2.5 3.0 (3.1) 2.1 (2.5) 1.7 (2.9) Public spending 1.5 1.1 (0.7) 0.8 (0.8) 1.2 (1.2) Fixed grss expenditures 7.7 8.0 (8.5) 4.0 (4.5) 3.1 (4.0) - Businesses excl. husing 6.6 8.4 (9.2) 4.2 (4.5) 3.4 (3.8) - Public agencies 7.1 3.3 (5.3) 5.8 (5.8) 8.0 (6.0) - Husing 13.8 8.7 (8.8) 1.5 (3.5) -3.0 (3.0) Inventry investments 2) 0.2 0.7 (0.5) -0.2(-0.3) 0.0 (0.0) Exprts, gds and services 8.9 6.0 (5.5) 5.0 (4.9) 4.0 (5.8) Imprts, gds and services 8.2 9.6 (9.2) 5.7 (5.2) 4.7 (6.0) GDP 4.1 2.7 (2.8) 1.8 (2.2) 1.7 (2.8) GDP, calendar-adjusted 4.4 2.9 (2.9) 1.5 (2.0) 1.9 (2.8) Dmestic usage 3.0 3.2 (3.2) 1.9 (2.2) 1.7 (2.4) Net exprts 1.0-1.1(-2.2) 0.1 (0.3) 0.0 (0.4) 1) The figures frm ur latest frecast in January 2008 are in parentheses 2) Percentage change in previus year s GDP Key Indicatrs Annual percentage change unless indicated therwise 2006 2007e 2008e 2009e Nminal hurly wages, ttal 3.2 3.6 4.2 4.1 Nminal hurly wages, industry 3.2 3.9 3.4 3.6 Industrial prductin 5.1 2.7 1.7 2.0 CPI, annual average 1.4 2.2 3.8 2.8 CPI, Dec-Dec 1.6 3.4 3.7 1.9 CPIX, annual average 1.2 1.2 2.8 2.4 CPIX, Dec-Dec 1.2 2.0 3.0 2.4 Real dispsable incme 2.8 4.3 2.5 1.6 Savings rati 7.1 8.3 8.6 8.5 Open unemplyment 3) 7.0 6.2 6.3 7.0 Ttal unemplyment 3) 4) 10.0 8.1 8.2 9.0 Ttal labr frce 1.9 2.4 1.1-0.5 Current accunt balance 5) 8.5 8.4 8.0 7.8 Financial savings in public 2.2 3.5 1.9 1.1 sectr 5) Natinal debt (Maastricht) 5) 45.9 40.6 34.3 31.2 3) Percent f labr frce, EU-harmnized 4) Open unemplyment and labr market measures (individuals aged 16-64) 5) Percentage f GDP 4 Swedbank s Ecnmic and Structural Reprt 14 August 2008
Glbal Ecnmy A darkening clud ver the ecnmy In ur January frecast, we predicted that glbal grwth wuld fall shrt f its ptential in 2008, but that the utlk wuld imprve in 2009. In the last half year, hwever, glbal ecnmic cnditins have wrsened mre than expected. The assumptin f a nrmalizatin in the financial markets in spring 2008 prved inaccurate. The financial crisis will be mre prtracted than expected in January. Cmmdity prices have significantly exceeded ur assumptins, which als cntributed t higher glbal inflatin. Cnfidence amng businesses and husehlds has declined. A darkening sentiment is keeping demand in check in many cuntries. In January the Eurpean ecnmy was expected t slw, but the cmbinatin f tighter mnetary cnditins, higher inflatin and persistent financial wrries are cntributing t an even sharper decline. Ecnmic cnditins have wrsened in emerging ecnmies as well, but are still better than in mature ecnmies. We are therefre making relatively large dwnward revisins t glbal grwth. In 2009 GDP grwth is nw prjected at slightly ver ½ percentage pint lwer than in the January frecast. Glbal GDP frecast (%) August frecast January frecast GDP grwth (%) 2007 2008 2009 2008 2009 USA 2.0 1.5 1.5 1.50 2.25 EMU cuntries 2.6 1.6 1.4 1.75 2.00 f which: Germany 2.6 1.8 1.4 1.75 2.00 France 2.1 1.7 1.5 1.75 2.00 Italy 1.4 0.6 0.9 1.25 1.50 Spain 3.8 1.5 1.0 2.50 2.75 UK 3.1 1.7 1.5 1.75 2.25 Japan 2.1 1.2 1.3 1.50 1.75 China 11.9 10.0 9.0 10.5 9.75 India 9.3 7.2 7.5 8.0 8.50 Brazil 5.4 4.7 4.0 4.7 4.0 Russia 8.1 7.5 6.8 7.5 6.8 Glbal * 4.7 3.7 3.4 3.9 4.0 (3.5)** (3.8)** Surce: Natinal statistics and Swedbank s frecasts. * Cuntries representing abut 70% f the glbal ecnmy. The Wrld Bank s weights frm 2007 (purchasing pwer parity, PPP) have been used. ** The PPP weights used in the January frecast were frm 2005. Mrever, Russia and Brazil were nt included. Swedbank s Ecnmic and Structural Reprt 14 August 2008 5
Swedish Ecnmy Swedish ecnmy lsing steam Swedish ecnmic grwth is being hampered by weaker glbal cnditins, at the same time that dmestic demand is being held in check by lwer cnsumer and crprate cnfidence. Ecnmic plicies will be mre expansinary next year, sftening the slwdwn slightly. GDP will grw by 1.8% this year and 1.7% next year, cmpared t 2.2% and 2.8% in the January frecast. Swedish exprts Swedish exprt cnditins in 2008/09 have been revised dwnward due t weaker glbal grwth prspects. Prjected market grwth f arund 5.5% this year and 4.5% next year wuld mean less f a dwnturn than during the recessin f 2001/02, hwever. Grwth in emerging ecnmies and strng demand fr inputs and investment gds are helping t check the slwdwn in glbal market grwth. Due t rising unit labr csts in Swedish industry and lwer demand frm the imprtant Eurpean market, which accunts fr slightly ver 70% f Swedish exprts, exprts f gds and services are expected t grw at a slwer pace than prjected market grwth. We are frecasting that ttal exprt vlumes will rise by slightly ver 5% this year and 4% in 2009. Investments Investment grwth in the Swedish ecnmy is expected t drp in half in 2008 cmpared t 2007, frm 8% last year t 4%. In additin t a weaker glbal ecnmy and lwer crprate investment needs, financing csts fr investments have becme higher in the aftermath f the glbal financial crisis. Next year we expect verall investments t further decrease due t lwer husing investments. Higher interest expenses and a weaker increase in dispsable incme are affecting husing demand. Public sectr investments in infrastructure, envirnmental imprvements and energy supplies will psitively cntribute t prjected investment grwth f slightly ver 3% in 2009. Labr market The utlk fr the labr market has deterirated in 2008. Weaker ecnmic cnditins and higher prductin csts are increasing the pressure n businesses t imprve efficiencies. We expect the number f jbs t decline in 2009 by an average f 0.5% r 20,000 wrkers after fur cnsecutive years f emplyment gains. We expect resurce utilizatin in the labr market t drp during the frecast perid. A slwdwn in jb grwth at the same time that the labr frce cntinues t expand thugh at a lwer rate will cntribute t an increase in pen unemplyment t slightly ver 7% f the wrking ppulatin by the end f 2009, frm slightly ver 6% in 2008. A weaker jb market and lwer prfit margins fr businesses are reducing the likelihd f much wage drift. Swedish husehlds Swedish husehlds are grwing mre pessimistic abut their financial situatin, the Swedish ecnmy and the jb market. We see gd reasn 6 Swedbank s Ecnmic and Structural Reprt 14 August 2008
Swedish Ecnmy fr their diminished expectatins. Incme grwth will slw next year, and husehld balance sheets have wrsened significantly. We anticipate a stabilizatin r slight decline in the increase in the price f single-family hmes during the frecast perid wing t the weaker ecnmy and labr market as well as lwer husing affrdability. The interest rati interest expenses as a percentage f dispsable incme has als risen substantially and has nw returned t the levels we saw in 1993/94. Cnsumer spending is grwing mre slwly, by 2.1% this year and 1.7% next year, while husehlds are saving mre. Fiscal plicy Ecnmic cnditins, relatively strng public finances and public pinin are likely t frce the gvernment t adpt mre expansinary fiscal plicies next year. Unfinanced tax hikes and increased expenditures ttaling SEK 30 billin are expected in the autumn budget. Withut tax cuts fr husehlds, dispsable incme grwth will be cut by half next year. This will lessen the decline in cnsumptin grwth, since husehlds given the gvernment s current financial situatin expect the tax cuts t remain permanent. Inflatin and mnetary plicy Accrding t ur frecast, inflatin will begin t fall in Octber and reach the inflatin target in autumn 2009. The Riksbank is likely t raise the rep rate ne mre time in September, althugh the situatin has been mre uncertain nw that il prices have drpped and the ecnmy has weakened mre than expected. At the same time inflatin has risen mre than the Riksbank previusly anticipated, and inflatin expectatins remain high. Next year, when the trend tward lwer inflatin becmes mre evident, the Riksbank is likely t cut the rep rate, which, based n ur prjectins, will be 4% by the end f the frecast perid. The krna will rise slightly in value against the eur, but weaken mre clearly against the dllar. TCW is prjected at 123 at the end f the frecast perid. The reprt includes an analysis f the tightness f mnetary plicy. Applying a simple Taylr rule, we see that the rep rate has been behind the curve since 2005. The increase in the interest rati shws that husehld sensitivity t a hike in interest rates is cnsiderably greater under these circumstances than during the similar rise in 2005. Ecnmic Research Department SE-105 34 Stckhlm, Sweden Telephne +46-8-5859 1588 ek.sek@swedbank.se www.swedbank.se Legally respnsible publishers Cecilia Hermanssn, +46-8-5859 1588 Jörgen Kennemar, +46-8-5859 1478 ISSN 1103-4897 Swedbank s Ecnmic and Structural Reprt is published as a service t ur custmers. We believe that we have used reliable surces and methds in the preparatin f the analyses reprted in this publicatin. Hwever, we cannt guarantee the accuracy r cmpleteness f the reprt and cannt be held respnsible fr any errr r missin in the underlying material r its use. Readers are encuraged t base any (investment) decisins n ther material as well. Neither Swedbank nr its emplyees may be held respnsible fr lsses r damages, direct r indirect, wing t any errrs r missins in Swedbank s Ecnmic and Structural Reprt. Swedbank s Ecnmic and Structural Reprt 14 August 2008 7