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2014-05-13

SEB: Nordic Outlook: Recovery & monetary policy divergence

Riksbank will cut its key interest rate twice to 0.25 per cent

Despite a cautious increase in the momentum of global economic growth, the
battle by central banks against deflation risks is not yet won
. In the United States, the economy is now accelerating steadily after
weather-related setbacks during the winter. Meanwhile the euro zone has left
its recession behind, but economic trends in the 18 member countries continue
to diverge, while high unemployment and government and private debt problems
persist and the process of political integration is not moving ahead.
Emerging market (EM) economies are hampered by regulation and structural
weaknesses. They have nevertheless shown resilience to serious new
geopolitical turbulence and other problems. Overall,the 34 mainly affluent
countries of the Organisation for Economic Cooperation
and Development (OECD) will show GDP growth of 2.1 per cent this year
(2.4 per cent according to the forecast in February'sNordic Outlook
),up from 1.2 per cent in 2013. Next year, growth will be 2.7 per cent
(unchanged forecast). The probability of a lower global growth outcome is
somewhat larger than the probability of a higher outcome.

The underlying global price trend is dominated by disinflationary forces, thus
compelling the world's central banks to be more expansionary during our
forecast period
. Deflation risks will make central banks more tolerant towards the risk of
overshooting their inflation targets. In a short-term perspective, inflation
will be lifted slightly by rising food and fuel prices - with the largest
impact in emerging market countries - as well as by changes in taxation and
in some countries also a weaker currency. Low global resource utilisation
will continue to squeeze consumer goods prices along with wages and salaries.
In the US, resource utilisation is higher than in Western Europe,
contributing to inflation that is moving up towards the Federal Reserve (Fed)
target. In the euro zone, however, further measures will be needed to prevent
falling inflation expectations from raising real interest rates and thereby
strengthening negative economic forces. While the Fed and the Bank of England
(BoE) are expected to begin their key rate hiking cycles during the third
quarter of 2015, the European Central Bank (ECB) must continue to loosen its
monetary policy. In June the ECB will begin stimulative bond purchases. The
Bank of Japan (BoJ) must increase its dose of stimulus further after enormous
monetary easing in 2013-2014. Central bank decisions and a gradual economic
upturn will lead to continued low andonly cautiously rising interest rates.
This will allow room for rising stock
markets in the medium term (6-24 months). We expect the EUR/USD exchange rate
to reach 1.34 by the end of this year and 1.28 at the end of 2015
.

The Ukraine crisis has changed the global security policy arena
. Its global economic and financial effects are difficult to quantify, since
the crisis is still unfolding, but at present our main scenario is that a
large-scale trade war and major disruptions in Russian energy deliveries to
Western Europe can be avoided. The Russian economy has large structural
problems, however. Political and economic isolation from other countries
would increase the risks that Russia will move towards severe
destabilisation. The Ukrainian economy, which has been stagnant in recent
years, will shrink by 6 per cent in 2014. Its recovery in 2015 will be weak.
The Russian economy will be close to recession this year and will see anaemic
growth in 2015.

Global economic policy challenges
are changing as acute crisis situations become fewer. Growing income and
wealth gaps have shifted the focus of research and analysis by the
International Monetary Fund (IMF) and the OECD towards a redistribution
policy aimed at reducing the risks of prolonged economic stagnation. The
purpose of such a policy is to decrease social and political risks while
improving the effectiveness of monetary policy with regard to growth and
inflation. Meanwhile central banks face greater challenges as asset prices
climb and unemployment falls for both cyclical and structural reasons, but a
larger element of political control in economic systems - both via economic
policy and financial regulation - may also increase uncertainty and thereby
also hamper growth.

In 2014-2015, global growth will benefit from welcome momentum from the US,
Japan and the United Kingdom
. TheUS
will lead the economic recovery, with GDP growth of 2.6 per cent this year and
3.7 per cent in 2015. Not all growth-related issues have been resolved, for
example when it comes to the underlying strength of business investments, but
we expect growth to be supported by such factors as a stronger labour market,
increased housing construction, the absence of federal fiscal tightening,
rising asset prices and looser credit conditions. InJapan
, economic activity is being sustained with the help of the government's
"Abenomics" package (GDP will grow by 1.0 per cent this year and 1.3 per cent
in 2015), and inflation will reach the BoJ's 2 per cent target thanks to the
weak yen, higher energy prices and the recent consumption tax hike. But the
government economy policy and indicators have not yet confirmed that Japan is
on the right track in the long term. TheUK
has been responsible for the biggest upside surprise, with an economy that
will grow by 3.0 per cent this year and 2.6 per cent in 2015.

The EM economies are now going through a phase of long-term downward
adjustments in growth expectations after their rapid expansion in the 2000s
decade
. These countries also face various types of structural challenges. Meanwhile
recent developments confirm our impression that their resilience to financial
disruptions and geopolitical turmoil has increased - due to stronger public
finances, better external balances and more robust exchange rate
systems.China's economy
is expected to deliver a gradually slower growth rate: from 7.7 per cent in
2013 to 7.2 per cent this year and 7.0 per cent in 2015, with Beijing
accepting this process even though growth is below the official target of 7.5
per cent.India's economy
is expected to grow by 5.0 per cent this year and 5.4 per cent in 2015. At the
same time, there are reasons to continue warning against exaggerated hopes
that a change of government in India will lead to extensive economic reforms.

The outlook for the Nordic countries remains divergent
. The Norwegian economy is dominated by forces that are pulling in different
directions. Headwinds include subdued capital spending in the oil and gas
sector as well as weak housing investments. But the labour market has
stabilised, along with the housing market, and decent real income increases
will help sustain consumption.We expect Norway's GDP to grow by 1.9 per cent
both this year and next, which
is somewhat below trend growth
. Norges Bank is being pushed closer to an interest rate hike, but looser
monetary policies in the euro zone and in Sweden will persuade the central
bank to wait until the summer of 2015. At the end of 2015 the deposit rate
will stand at 2.00 per cent (1.50 per cent today). In Denmark there are
increasingly clear signs that the economic recovery will gain a stronger
foothold due to falling unemployment, rising home prices and rising
optimism.Danish GDP growth will be 2.0 per cent this year and 2.5 per cent in
2015
. The Finnish economy faces major challenges, however. Structural problems
connected to the forest product and information and communication technology
(ICT) sectors, plus relatively large exposure to Russia, are squeezing
growth.The Finnish economy cannot avoid a recession in 2014 (growth is
expected to be
-0.3 per cent)
and the subsequent recovery will be weak (GDP
will grow by 0.8 per cent in 2015
).

The Baltic countries are weighed down by nearby unrest, both via trade with
Russia and lower investments
. Meanwhile the Baltics have buffers that make them relatively immune to major
growth slowdowns. These include strong real incomes, healthy public finances
and small current account deficits. In addition, the small remaining exchange
rate risk in Lithuania will disappear in May-June, when the country is
expected to receive a go-ahead to join the euro zone in 2015.GDP
growth in Lithuania will be 2.7 per cent this year and 3.8 per cent in 2015.
Corresponding GDP forecasts for Estonia are 0.5 and 2.3 per cent, and for
Latvia 2.5 and 3.2 per cent
.

Swedish economic signals this spring have been mixed, with a special focus on
the low inflation figure
. The pace of recovery in the manufacturing sector has been disappointing, and
this has contributed to a low rate of capital spending. But there are
cautious signs of economic improvement. There is good potential for a strong
upturn in consumption: solid real wage increases, tax cuts, low interest
rates. Home prices rose by 5 per cent during 2013 and they are expected to
climb as much during 2014 and then level out.Unemployment will fall to 7 per
cent
by the end of next year: still well above long-term equlibrium.We expect GDP
to grow by 2.7 per cent this year
(0.2 percentage points higher than in our February forecast), up from 1.5 per
cent in 2013.Next year we foresee Swedish GDP growth of 3.1 per cent
(0.1 percentage points lower).

Inflation in Sweden
(both CPI and CPIF)has probably bottomed out, but we expect price increases to
remain worryingly
low
. CPIF inflation (CPI excluding taxes) will amount to 0.5 per cent this year
and 1.3 per cent in 2015, i.e. well below target. In the past six months,
three things have increased the pressure on the Riksbank to act.
First,inflation
has shown downside surprises in a way that puts in question the Riksbank's
forecasting ability and understanding of the driving forces of inflation.
Other central banks, too, have been confronted with this fact.
Second,inflation expectations
have ended up at their lowest level in 15 years, which threatens the
credibility of the Riksbank's inflation target. Third, the responsibility for
and the shaping ofmacroprudential oversight policy
has become clearer; to some extent this lessens the responsibility of the
Riksbank for financial stability. The Riksbank has confirmed this shift in
policymaking in various ways:the inflation trend has assumed a more important
role in its interest rate
decisions
. In the prevailing low inflation environment, the krona also seems to have
assumed a major role in monetary policymaking.We expect the Riksbank to cut
its key interest rate by 0.25 percentage points
in early July and then, in October, cut it further to 0.25 per cent
. Not until the autumn of 2015 will the Riksbank begin to hike its key rate,
which will reach 0.75 per cent in December 2015. Because of the Riksbank's
rate cuts, the krona will come under pressure and have a low value...

Författare Hugin

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