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2016-02-09

SEB: Nordic Outlook: Stronger global growth, but downside risks dominate - Swedish boom threatened by imbalances

Global economic growth has the potential to gain strength but is imbalanced
and fragile. Downside risks dominate, despite many years of expansionary
monetary policies and sharply falling energy prices. The world's
manufacturers are facing strong headwinds due to weak demand, surplus
production capacity and a decline in commodity prices, but in many countries
the service sector is still showing good resilience. A combination of
expected growth deceleration in China without a hard landing, US domestic
consumption power and Europe's gradual recovery will lead to a cautious
acceleration in growth. In the 34 mainly affluent member countries of the
Organisation for Economic Cooperation and Development (OECD), GDP growth will
increase from 2.1 per cent in 2015 to 2.2 per cent this year and 2.4 per cent
in 2017. Our forecast assumes that the price of Brent crude oil will rebound
towards USD 45/barrel by the end of 2016, although downward pressure on oil
prices will persist in the short term.

Powerful capital flows in motion as normalisation processes begin

The world economy faces challenges
that are large, complex and strongly linked together. The fall in commodity
prices and emerging and oil-dependent economies' increased debt burden in US
dollars and other foreign currencies have revealed structural weaknesses.
China and various oil-producing countries will be forced to sell off foreign
assets worth hundreds of millions of dollars, among other things putting
pressure on global stock and fixed income markets. These forces may both be
strengthened or weakened by the US Federal Reserve (Fed)'s recent key
interest rate hike, its first since 2006, and China's shift in currency
policy after 10 years of a steadily appreciating yuan. Yet we do not regard
China's transition to a more flexible exchange rate policy as a sign of its
participation in a global currency war. Normalisation processes have begun,
but they will be anything but easy and will require intensified global
cooperation among central banks and other organisations.

China's GDP growth
in 2016 will be 6.5 per cent (6.9 per cent in 2015) and will fall to 6.0 per
cent in 2017. The country will consequently avoid a hard landing, among other
things with the help of further monetary and fiscal stimulus and an expanding
service sector. The deceleration is structural - and thus expected - as well
as cyclical. The manufacturing sector is struggling with overcapacity, and
China's rapidly increasing debt in recent years - along with the weak balance
sheets of its state-owned enterprises - is making the economy vulnerable.

Emerging markets both a drag anchor and a risk to the global economy

Russia and Brazil
are showing serious growth problems and their economies will shrink further in
2016. Currencies and stock markets have been pulled down by financial market
turbulence. India's economic performance is the opposite, and GDP growth will
climb from just above 7 per cent last year to nearly 8 per cent in 2017.
Emerging market (EM) economies account for about 60 per cent of global GDP
and have contributed more than 80 per cent of global growth in recent years.
Today they are both a drag anchor and a large asymmetric risk factor - with
worrisome political elements - to the global recovery.

Western Europe
is taking small steps forward, and its economy is gradually gaining strength.
The euro zone is benefiting from low interest rates, the decline in oil
prices and a weak euro. Consumption-driven growth is being helped by low
inflation, which improves households' purchasing power as unemployment
continues to fall. A cautious upturn in capital spending is also expected,
due to relatively high capacity utilisation. We expect euro zone GDP growth
to be 1.9 per cent this year (up from 1.5 per cent in 2015) and to reach 2.0
per cent in 2017. The overall economic effects of the refugee crisis will be
fairly small, but political uncertainty will increase. Meanwhile European
Union cooperation is being tested because of the threat that the United
Kingdom may exit the EU. Our main scenario is that this "Brexit" threat will
be avoided and that the UK will remain a member, but divergent visions of the
EU's future will continue to create tensions between London and Brussels.

Above-trend but not impressive US growth - Fed taking a break until September

The US economy
is showing domestic strength but is being affected by the international
situation to a greater degree than usual. The final months of 2015 were weak.
We expect GDP growth in 2016 to be the same as in 2015: 2.4 per cent. Growth
will climb marginally to 2.7 per cent in 2017. US manufacturers have been
squeezed by a nearly 20 per cent appreciation in the dollar (in real
effective terms) over the past 18 months. The effects of the oil price
decline are more mixed: oil sector investments are falling, while households
have gained significantly more purchasing power. The manufacturing sector's
share of the economy has shrunk and the service sector
- which is growing - has become a more important driving force in the US
economic cycle. The absence of domestic imbalances, which historically have
triggered recessions, will enable the US to show above-trend - but hardly
impressive - growth in 2016 and 2017.

Overall, global disinflationary forces dominate
due to surplus production capacity and downward pressure on wages and
salaries, as well as globalisation and digitisation. In most countries, the
upturn in inflation has again been delayed due to the renewed oil price
slide. Increased resource utilisation will help limit the risk of deflation.
In the United States, unemployment will reach such a low level that wage
growth will rebound, especially in 2017. Looking ahead, we expect inflation
to climb but remain below the inflation targets in most countries at the end
of our forecast period.

"Secular stagnation" thesis increasingly pivotal in central bank discussions

Global monetary policies will be more expansionary in 2016
. Periods of weakened risk appetite in financial markets seem to constantly
provoke new central bank stimulus measures. Although the Fed will hike its
key interest rate twice during 2016 and three times in 2017 to a year-end
level of 1.75 per cent, its normalisation process is being held back because
the rest of the world is moving in the opposite direction. Troublingly low
inflation expectations, combined with downside risks to growth, will force
the European Central Bank (ECB) and the Bank of Japan (BoJ) to lower their
key rates and expand asset purchases (quantitative easing or QE). The Swedish
and Norwegian central banks will also cut their key interest rates. The Bank
of England (BoE) will hold off on any rate hikes until 2017. The appreciation
of the US dollar with be determined by the Fed and by capital flows; it will
be relatively cautious during 2016: The EUR/USD exchange rate will stand at
1.03 by the end of this year and 1.05 at the end of 2017. The BoJ's policies
will focus on weakening the yen. A stabilisation of oil prices will enable a
number of EM currencies to recover. This will make it easier for the Fed to
hike its key rate.

Given the risk of rising real interest rates (due to falling inflation), many
central banks will have difficulty foreseeing any end point to their stimulus
efforts. More and more central banks seem to agree that theshort-term real
equilibrium interest rate
- the interest rate that leads to inflation-free full employment and a balance
between capital spending and saving - iszero or even negative
. Among other things, this implies thatfuture rate hikes will be gradual
and more cautious than before and that the benchmark for what can be viewed as
anormal level for long-term government bond yields will need to be lowered
. The long period of low inflation will also force central banks to re-assess
the extent to which long-term and structural forces should influence monetary
policy. It is also likely that central banks will be under increasing
pressure to admit that it may take longer than the usual two-year horizon to
achieve their inflation targets.

Nordics face divergent challenges - Norway fairly resilient to oil price slide

The Nordic economies face divergent challenges. The Norwegian economy is
weighed down by low oil prices, which are pushing down capital spending and
adversely affecting household optimism. Expansionary monetary and fiscal
policy and a greatly weakened krone will still help maintain decent growth.
We expectNorway's GDP growth
to be 1.5 per cent in 2016 and 1.6 per cent in 2017. Norges Bank will lower
its key interest rate to 0.50 per cent, and its first rate hike will occur
late in 2017. Finland is plagued by continued stagnation and competitiveness
problems. Economic policy will aim at stabilising public finances and
meanwhile deal with structural growth problems.Finnish GDP growth
will reach 0.4 per cent this year and 1.1 per cent in 2017, an upturn that
will be partly sustained by low interest rates and the weak euro. Denmark
will continue its modest recovery. A strong labour market will help sustain
household consumption, but overall growth will be hampered by lower capital
spending activity.Danish GDP growth
will end up at 1.8 per cent in 2016 and climb to 2.2 per cent in 2017, which
is close to trend growth.

Swedish economic boom, with growing imbalances and downside risks

Sweden ended 2015 in an economic boom. Employment is increasing rapidly.
Looking ahead, however, the outlook is dominated by downside risks due to
growing domestic imbalances and political gridlock, as well as uncertainty
about international developments.Swedish GDP
will grow by 3.7 per cent this year and then slow a bit to 2.8 per cent in
2017. The strongest growth drivers are residential investments and
consumption, partly stimulated by rising demand due to the refugee crisis. A
slight upturn in manufacturing is also discernible and will give the Swedish
economy a broader growth platform to stand on.

The economic consequences of refugee flows are difficult to assess, due to
great uncertainty about both the size of the migration and the political
reaction function. The number of new arrivals may decrease compared to
earlier forecasts. On the other hand, the necessary resources per asylum
seeker may have been underestimated. We are thus sticking to our previous
assessment of spending pressure and demand stimulus.We expect the central
government budget to show deficits of 1.1 per cent of
GDP this year and 1.3 per cent in 2017.
Yet public sector debt will fall by about 1 percentage point to 43.5 per cent
of GDP in 2017, compared to 2015. Weak support in public opinion polls will
increase the pressure on the government and the finance minister to invest
more aggressively in education and training, infrastructure and housing
construction. However, a more expansionary fiscal policy is a two-edged
weapon ...

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