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2016-11-22

SEB: Nordic Outlook: Trumpism will have an uncertain impact - Swedish economic optimism, Riksbank done with rate cuts

As we approach 2017, the world has become both more exciting and more
frightening from an economic and political standpoint, according to SEB's
economists in the November issue of the quarterly Nordic Outlook report. With
the United States preparing to test a new fiscal stimulus strategy, there is
new hope for economic growth now that monetary policy has reached the end of
the road. But strong and growing anti-establishment forces are changing the
domestic and foreign policy playing field in troublesome and unpredictable
ways. SEB's forecast scenario confirms stronger, but far from impressive,
global economic expansion - hampered by such factors as inequitable wealth
distribution and heavy debt. In Sweden, domestic driving forces - including
residential construction and public sector consumption, combined with
somewhat stronger exports - will lead to continued robust growth in 2017. The
Riksbank is finished with its key interest rate cuts, but the bank will be
forced to buy government securities for another while.

Our picture of the international economic outlook has not changed
especially much since our last Nordic Outlook in August. Sentiment indicators
have rebounded, and financial markets have reacted in an unexpectedly
positive way to the possibility of more growth-oriented economic policies in
the wake of Donald Trump's US presidential election victory. The outlook for
emerging market (EM) economies will improve somewhat, as Russia and Brazil
emerge from recession and Chinese growth decelerates at a controlled
pace.Average economic growth in the 35 mostly affluent member countries of
the
Organisation for Economic Cooperation and Development (OECD) will be 1.7 per
cent this year
, down from 2.3 per cent in 2015.In 2017 and 2018, annual GDP growth in the
OECD countries will be 2.0 per cent
. Considering that many central banks are maintaining historically low key
interest rates and are making large-scale purchases of securities
(quantitative easing or QE policies), this is a rather mediocre growth rate.

Yet political conditions have changed dramatically since the United Kingdom's
"Brexit" referendum on withdrawal from the European Union and the US
presidential election. Anti-establishment forces are ascendant and may become
even stronger in the important elections that will take place in Western
Europe during 2017. A general shift among established parties towards
prioritising national considerations - at the expense of international
obligations - is likely. Fiscal stimulus measures may gain a more prominent
role in the economic policy framework, and this may improve growth potential.
But large and growing uncertainty about global trade and security policies is
opening the way for completely new scenarios, which may have major negative
economic consequences in the long term.

American fiscal "battering ram" will have global impact

The election of Donald Trump as the next president of the United States is
expected to lead to more expansionary US fiscal policies - a yearly dose of
stimulus equivalent to some 0.5-1.0 per cent of GDP in 2017 och 2018 - based
on tax cuts equally divided between households and businesses, as well as
infrastructure investments. This is well below the dose of stimulus that
Trump announced during his election campaign. We are uncertain about the
coming administration's actual ambitions and about its chances of piloting
these policies through Congress. Because of heightened political uncertainty
and the potentially negative effects of various Trump proposals on
international trade, we are making minor adjustments in our US forecast:GDP
will increase by 1.6 per cent this year, accelerate to 2.3 per cent growth in
2017 and expand by 2.2 per cent in 2018
. This is somewhat higher than the potential rate of about 2 per cent. The
expansion is being held back by weak productivity growth, which hampers
capital spending, and by demographic headwinds that slow consumption.
Unemployment will fall to 4.5 per cent (below equilibrium) by the end of
2018, and the increase in average hourly earnings will accelerate to 3.5 per
cent in 2018: a level that is compatible with the Federal Reserve (Fed)'s 2
per cent inflation target.

EU political map being redrawn - stability of euro may be undermined

The power and momentum of populism is expected to be confirmed by the 2017
elections in the Netherlands, France and Germany, and perhaps also in Italy
in the aftermath of its December 2016 constitutional referendum. Governments
and established political parties will eventually be under pressure to pursue
more expansionary fiscal policies, for example by boosting defence
expenditures due to the changing security policy situation. In March 2017, we
expect the contours of the European Union's new roadmap to be unveiled during
celebrations of the 60thanniversary of the Treaty of Rome. In our assessment,
the advocates of EU federalism will be forced to lower their voices so as not
to provoke public opinion in member countries in a risky way. Established
political parties, especially on the left, will be forced to find new
strategies and alliances in order to slow the advance of new populist
parties. EU economic policy regulations and cooperation will be under stress,
with the risk of escalating tensions - for example between Germany and
various other euro zone countries. Despite political anxiety, Brexit
uncertainty and weaknesses in their banking systems,we expect the euro zone
economies to grow by 1.8 per cent this year and then
decelerate cautiously to 1.6 per cent both in 2017 and 2018
.

The Brexit process
is surrounded by big question marks. The British economy has been resilient -
in line with our expectations - but we expect a slowdown in GDP growth to 1.4
per cent next year (compared to 2.0 per cent this year and 1.7 percent in
2018). New legal proceedings will take away the UK government's power to
activate the EU "exit clause" by itself. This leads to three conclusions: the
country's withdrawal from the EU may be delayed, a "soft Brexit" is more
likely and the possibility of a new British election in 2017 will open up.

Our earlier forecast scenario for several major EM economies is proving
correct. Their economic growth bottomed out last spring. InRussia
andBrazil
the worst GDP declines are now past, and both economies will return to
positive growth in 2017.India
remains the bright spot among the BRIC economies.We also expect China to
deliver good annual growth of 6-6.5 per cent
, but high indebtedness, a shaky housing market and industrial overcapacity
will continue to challenge economic policymakers in Beijing.

Fiscal policy may ease burden on monetary policy, but shift is complicated

Various elements of Trump's economic policies are well in line with what
economists and international organisations have called for over a long
period. New fiscal and structural policies mayincrease demand and boost
potential US growth capacity
. This may ease the burden on central banks, in a situation where the
effectiveness of monetary policy is becoming weaker and weaker, while its
disadvantages - greater economic inequality, weaker reform pressure and
risks of increased financial market instability - are becoming increasingly
evident.

But shifting the policy mix towards fiscal and structural measures is far from
unproblematic; political decision-making processes take time and the
independence of central banks is being questioned in countries like the US,
the UK and to some extent Sweden. Some central banks may also be forced into
further extending their QE programmes in order to soften the threat of rising
long-term bond yields in countries with weak government finances, such as
Italy. The Bank of Japan's new tools for directly controlling the entire
yield curve may also be adopted by other central banks. Our main scenario is
thatin December the European Central Bank (ECB) will extend its securities
purchases
by six months until September 2017, later providing cautious signals that it
plans to phase them out during 2017. The Bank of Japan will not change its
current sharply expansionary monetary policy.

The international low-inflation environment will be tested during 2017-2018 as
resource utilisation reaches relatively high levels. Meanwhile the UK and the
US are on their way towards becoming more closed economies. This will tend to
weaken global disinflationary forces and cause national conditions to have a
greater impact on inflation. Inflation expectations in financial markets have
already climbed a bit.The Fed will hike its key interest rate in December
and then carry out rate
hikes every six months during 2017 and 2018 to a level of 1.50-1.75 per cent
. Global concerns, the risk of a stronger dollar and a downward adjustment in
the neutral key interest rate will hold back the Fed. The Bank of England and
Norges Bank in Norway will hike their key rates during 2018, while the ECB
will keep its refi rate unchanged. We expect US and German government bond
yields to climb by 60-90 basis points, reaching higher levels than we had
previously anticipated. The EUR/USD exchange rate will move close to parity
during 2017 and later rebound towards 1.10 by the end of 2018.

Sluggish economic recovery in several Nordic and Baltic countries

The expansionary economic policies that have been employed to ease the
negative effects of falling oil priceswill contribute to a modest recovery in
the Norwegian economy, but Norway's
dual-track GDP growth will reach only 1.3 per cent this year and 1.4 per cent
in 2017
. In 2018 growth will reach 1.8 per cent, aided by stronger private
consumption. Norwegian inflation will fall when currency rate effects
fade.Finland will also experience weak growth
, although its outlook has improved.GDP will increase by 0.8 per cent this
year, accelerating to a 1.0 per cent
rate next year and 1.2 per cent in 2018 -
supported by increased capital spending and other factors. Fiscal austerity
will continue.In Denmark the recovery will broaden. GDP will increase by only
1.4 per cent
this year but then climb to a 2.1 per cent rate in 2017 and 2.4 per cent in
2018
. Growth will be supported by a stronger labour market that will improve
consumer purchasing power, while higher capacity utilisation and rising home
prices will boost capital spending.

Economic trends in the three Baltic countries will also point in the right
direction, with household consumption as the most important driving force,
but challenges to the competitiveness of these countries - due to such
factors as high pay increases and demographic headwinds - will limit their
growth potential.Estonia's GDP will increase by only a weak 1.3 per cent this
year but
accelerate to a 2.2 per cent rate in 2017 and 2.8 per cent in 2018
. InLatvia
, too, current growth is unsatisfactory, but we expect EU funds and private
consumption to pu...

Författare Hugin

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