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2015-08-25

SEB: Nordic Outlook: Strong disinflationary forces, despite rising resource utilisation

Gentle Fed hikes, Chinese soft landing, persistent Grexit risk

The world economy is hesitating. Looking back at developments this spring and
summer, the lingering impression is that global growth is not really willing
to take off. One reason is still-cautious behaviour among businesses and
households in developed market (DM) countries. Low interest rates, rising
asset prices and stronger purchasing power are thus not providing the same
stimulus to capital spending and consumption that would normally have been
the case. Meanwhile uncertainty about emerging market (EM) economic
performance has intensified. In China, the stock market downturn combined
with a change in currency policy (devaluation of the yuan) is raising
questions about the country's economic stability, while countries like
Brazil, Russia and Uraine are undergoing deeper economic and political
crises. The demographic and structural problems of EM countries have become
clearer as the forces of globalisation have slowed. The growth in world trade
has decelerated, compared to the pre-crisis situation.

Gentle monetary policies wll help sustain a multi-speed world economy

Yet the main features of our forecast scenario remain intact.In the United
States, the economy will soon speed up
to an annual growth rate of around 3 per cent, from nearly 2.5 per cent this
year. The US manufacturing sector is being hampered by a strong dollar, but
the service sector is exuding optimism and the housing market once again has
a tailwind. American household incomes will be sustained by rising employment
and, eventually, also faster wage and salary growth. In Japan, the first half
of 2015 was dominated by weak consumption and exports. Meanwhile Western
European economic conditions have stabilised. Despite a strong currency and
tight fiscal policy, the United Kingdom is experiencing rather fast economic
expansion.The euro zone is showing good resilience
to the Greek debt crisis, and it is difficult to discern any major contagion
effects. The German economy is expanding at a healthy pace, but Spain in
particular has surprised on the upside. A weaker currency, easier credit
conditions due to the European Central Bank (ECB)'s stimulus programme and
low energy prices willhelp euro zone GDP growth accelerate
from just over 1.5 per cent this year to more than 2 per cent in 2016. We are
also sticking to our forecast thatChina's deceleration will occur gradually
and in a controlled way
. The recent export downturn may indicate some competitiveness problems, but
China's exports are substantially more dependent on changes in international
demand than on exchange rates; we believe that the recent yuan devaluations
should be viewed as a step in the deregulation of the financial market.
China's deceleration is mainly driven by a weak housing market and lower
capital spending, and in these areas there are certain signs of
stabilisation. Meanwhile Beijing has both the monetary and fiscal muscles to
help sustain the economy. However, theeconomic situation was clouded
by this summer'sstock market plunge
and the central bank'scurrency policy reorientation
. There is greater uncertainty about reform efforts and about the risk of
policy errors connected to deregulation of financial markets. Strong
expansion in India will help keep overall EM economic growth high.Overall, we
expect global GDP growth to reach 3.2 per cent this year and 3.8
per cent in 2016
, slightly lower than in May'sNordic Outlook
for both years.

Because of a tighter labour market situation, GDP growth in the US will peak
in 2016 and then approach its long-term trend in 2017. Various factors
suggest that the economy will continue to expand for quite some time to come,
for example a continued upside for cyclical sectors and a very leisurely
normalisation of interest rates. In the euro zone, however, unemployment
remains high and no supply-side constraints will make themselves felt during
our forecast period. GDP growth will thus remain at roughly unchanged levels
in 2017. Looking at the 34 mainly affluent countries in the Organisation for
Economic Cooperation and Development (OECD) as a whole, growth will thus
decelerate a bit towards the end of our forecast period. In the EM countries,
however, growth will improve in 2017 as the situation in crisis-hit countries
like Russia and Brazil stabilises, while India will continue its rapid
growth.Global GDP growth will end up at 3.9 per cent in 2017
, marginally above its 2016 level.

The labour market is approaching equilibrium in many countries

Assessments of resource utilisation in the economy of different regions are
important as a basis for making forecasts about central bank policies and
financial markets.Unemployment in the three largest OECD economies (the US,
Japan and Germany)
is close to equilibrium, but as yet there are few signs of faster pay
increases
. Because of a global price squeeze, especially for commodities,deflationary
forces continue to dominate
. Inflation and unemployment are not following their classic inverse
relationship, which is creating headaches for the US Federal Reserve (Fed).
Can we rely on inflation and pay increases to remain low, or do we risk a
"ketchup effect" once the labour market becomes sufficiently hot? The Fed has
now clearly signalled that it is prepared to begin key interest rate hikes,
indicating that it is not ready to abandon old analytical frameworks, but it
probably views the risk of prematurely killing the recovery as greater than
the risk of an overheating scenario if the central bank should wait too long.
This implies thatthe Fed can be expected to proceed very cautiously with its
key rate hikes
. Our main scenario is still thatthe first rate hike will occur in September
but that the second hike will not come until March 2016. The rate path we
foresee is far more gentle than both the historical pattern and the path
signalled by the Fed itself, reflecting our view that the Fed will encounter
rather severe headwinds in a low-inflation environment where several other
leading central banks are continuing their stimulative policies. We believe
that the Bank of England (BoE) will follow the Fed's example and begin rate
hikes in February. However, the Bank of Japan (BoJ) will expand its stimulus
measures this autumn, while the ECB continues monthly bond purchases at least
until September 2016, as planned; if anything, these purchases may be
expanded. The differences between US and UK monetary policy, on the one hand,
and euro zone and Japanese policy on the other, will drive foreign exchange
(FX) trends during the coming year. We thus anticipate that theEUR/USD
exchange rate will again fall, reaching parity (1.00) in mid-2016
. Meanwhile the Fed's slow rate path is the reason for our view thatbond
yields will move higher but remain historically low
. Although global economic and financial market trends seem more mixed and
uncertain than before, we are still in a phase of the economic cycle that is
usually favourable to equities. Emerging market countries are the most
vulnerable to Fed rate hikes, but history shows that EM asset prices are
usuallyresilient to tighter Fed policy if rate hikes are based on stronger US
economic growth
.

Good growth in Sweden, but major economic policy challenges

Our forecast of 3.0 per cent Swedish GDP growth this year remains unchanged,
and GDP will keep growing above trend in 2016 and 2017
, partly sustained by gradually stronger international economic conditions.Yet
there has been no real lift-off in the manufacturing sector
. Merchandise exports and industrial production rose during the first half of
2015, but forward-looking indicators do not signal that any vigorous recovery
is on the way. Better growth in Europe and the US is being offset by
deceleration in China and various other EM countries. Service exports appear
likely to climb by nearly 10 per cent, however, contributing to a relatively
rapid increase in total exports. Despite lower trade surpluses, Sweden's
current account surplus remains high due to capital income.

The rapid population increase is affecting domestic economic performance in
various ways.Private consumption is growing at a relatively good pace
, but per capita consumption is increasing somewhat more slowly than the
historical average, since households are continuing to build up their
savings. Rapid housing construction is helping to boost overall capital
spending despite cautious businesses, but this isnot enough to ease the
imbalances in the housing market
. Employment is growing at a healthy pace, also partly due to rapid population
growth, andunemployment is falling very slowly
.

Next year the collective agreements covering most of the Swedish labour market
will expire. Depressed inflation expectations and a long period of good real
wage increases suggest that high pay agreements are unlikely, despite labour
market tensions.The wage round this coming winter and spring will thus not
solve the
Riksbank's dilemma
. Inflation is climbing, partly due to a weaker krona, but will not reach the
central bank's 2 per cent target. In the short term, the Riksbank will remain
under pressure from low inflation expectations and falling oil prices. We
expecta further repo rate cut to -0.45 per cent this autumn
as the Riksbank continues its struggle to restore the credibility of the
inflation target. We expect the Riksbank eventually to pay greater attention
to the risks of rising home prices and debt, and its first key rate hike will
occur in late 2016. In the short term, one further rate cut will push down
the krona, but signs of slightly higher inflation will enable the Riksbank to
lower its guard and allow a somewhat stronger krona.The EUR/SEK exchange rate
will be 9.20 at the end of 2015 and 8.80 at the end
of 2016
. Because of the further key rate cut, Swedish 10-year government bond yields
will probably drop below German yields, but long-term yields will then rise
faster than in Germany as the Riksbank prepares its rate hikes. Sweden's
political situation is dominated by gridlock and a lack of constructive
cooperation between the political blocs. We expect a relatively cautious 2016
budget in September, but there is increasing pressure to enact more
aggressive policies.

Rather good outlook elsewhere in the Nordic region

The economic outlook in the other Nordic countries is mixed.In Denmark the
recovery is solid, while the Norwegian economy is being
hampered by the consequences of falling oil prices. For a long time, the
Finnish economy has been grappling with structural problems
; 2015 will be a year of zero growth after three years of falling GDP. For the
region as a whole, the growth outlook appears rather good. A weak currency
and resilient households will limit the scale of the slowdown in Norway,
while Danish growth will accelerate with the help of expansionary fiscal
policy and good ...

Författare Hugin

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