Economic Outlook, September 2012 EN

■ Content

ECONOMIC
OUTLOOK
SEPTEMBER 2012

Slow speed ahead

Fragile recovery
■ The global economy is still advancing, albeit at a slow pace on a
muddy road. The Euro area is again on the brink of recession,
while activity in the US and the rest of the global economy slowed
over the summer. However, better times are ahead, but the uncer-
tainty is high.

Safe havens may also be hit
■ The Nordics have status as safe havens in financial markets. But
while the Norwegian economy shines, darker clouds are gathering
over Sweden while Finland and Denmark are on the brink of a new
recession.
.
OVERVIEW 04
SLOW SPEED AHEAD
SWEDEN 08
HOUSEHOLDS PROP UP THE ECONOMY
USA 16
MOVING SLOWLY FORWARD
EURO AREA 18
RESTORE CONFIDENCE TO END THE RECESSION
RUSSIA 24
INFLATION DÉJÀ VU
CHINA 29
STABILITY, STABILITY AND … STABILITY
OIL AND COMMODITIES 33
OIL PRICES STAY HIGH BUT SPARE CAPACITY BUFFER SHOULD BUILD
TWO ALTERNATIVES 35
RISK SCENARIOS
2 ECONOMIC OUTLOOK │SEPTEMBER 2012 NORDEA MARKETS

■ Content

Data overview OVERVIEW
Slow speed ahead......................................................................................... 4
Key figures ............................. 6
Interest rates ......................... 7
Nordic economies
Exchange rates ..................... 7
SWEDEN
Households prop up the economy ................................................................. 8

Editor NORWAY
Risk of overheating may be the biggest challenge ........................................ 10
Helge J. Pedersen,
Global Chief Economist DENMARK
helge.pedersen@nordea.com Languishing economic growth ..................................................................... 12
Tel +45 3333 3126 FINLAND
Finnish economy has cooled down across the board .................................... 14

Editorial deadline Major economies
30 August 2012 USA
Moving slowly forward ................................................................................. 16
EURO AREA
Restore confidence to end the recession ...................................................... 18
Visit us at: UK
www.nordeamarkets.com UK growth stalling – awaiting outside help ................................................... 20
JAPAN
The challenges remain in the long term ........................................................ 21

Data sources:
Data sources are Reuters EcoWin, Emerging Markets
national statistical bureaus and
own calculations unless otherwise POLAND
noted. Slowdown under control .............................................................................. 22
RUSSIA
Inflation déjà vu ........................................................................................... 24
ESTONIA
Economy remains in a soft patch ................................................................. 26
LATVIA
Economy keeps delivering positive surprises ............................................... 27
LITHUANIA
Showing resilience ...................................................................................... 28
CHINA
Stability, stability and … stability.................................................................. 29
INDIA
A drought of growth..................................................................................... 31
BRAZIL
Slow BRIC healing ....................................................................................... 32

Commodities
OIL
Oil prices stay high but spare capacity buffer should build ........................... 33
METALS
Metal prices scratching the bottom for now .................................................. 34

Two alternatives
Risk scenario 1: Back on track..................................................................... 35
Risk scenario 2: That sinking feeling............................................................ 36


■ Overview

Slow speed ahead
cy and liquidity requirements, banks and credit institu-
The global economy is still advancing, albeit at a low tions have scaled back their lending activities. This im-
pace on a muddy road. The Euro area is again on the pairment to the monetary policy transmission mechanism
brink of recession, while activity in the US and the rest of may be very difficult for the ECB to correct even if a Eu-
the global economy slowed over the summer. However, ropean banking union sees the light of day in early 2013
we believe that better times are ahead, but the uncertain- as expected.
ty is high. Monetary policy will remain very accommoda-
tive over the forecast period, and fiscal tightening in the Global interdependence
Euro area will gradually fade. Deleveraging will remain With domestic demand at low levels – albeit with large
a key theme in both the public and private sectors, result- regional differences between south and north – the Euro
ing in weak credit growth. We see global economic area will remain highly dependent on exports as a key
growth at a moderate 3.1% this year, rising to 3.5% in driver of economic growth. The problem is that the Euro-
2013 and 3.8% in 2014. area crisis has spread to other countries and regions
worldwide. For instance, US and Chinese economic indi-
Over the summer the European sovereign debt crisis was cators have shown weakness during the summer and
reignited by the parliamentary elections in Greece and there is still a risk that the situation may deteriorate fur-
the banking sector crisis in Spain. However, the fire bri- ther. The risk is especially high in the US ahead of the
gade responded promptly. At the end-June summit in presidential election in November as the country is tee-
Brussels the European leaders decided to take further in- tering on a fiscal cliff. Among other things, US policy-
stitutional steps towards the formation of a real economic makers still have not decided on a possible extension of
and monetary union and to make EUR 100bn available to the Bush-era tax breaks. If they do not find a solution, the
the struggling Spanish banking sector through the expiry of the tax breaks would imply fiscal policy tight-
EFSF/ESM, the European bailout fund. In July the ECB ening to such an extent that the US is bound to slide into
cut rates again by 0.25% point and most recently, ECB a new recession. At the same time Congress has to raise
President Draghi (“Super Mario”) verbally guaranteed the debt ceiling once again to prevent the US from de-
that there would be no disintegration of the euro. faulting on its payments early next year. These issues
will likely be left unresolved until after the presidential
It is still unclear exactly how the ECB will ensure the ex- election and consequently the political risk to sustained
istence of the euro, but there are indications that it will be progress in the US should not be underestimated.
through large-scale intervention in the government bond
market. However, the ECB will make it a condition for Our baseline scenario factors in another increase in the
the governments whose bonds it is to buy that they apply debt ceiling and the extension of at least some of the tax
for assistance from the EFSF/ESM and in that connection breaks by the new president, be it Barack Obama or Mitt
agree to a financial stability programme. Especially the Romney. Finally, it should be kept in mind that the Fed-
latter should make it a less bitter pill for the Bundesbank eral Reserve with Ben Bernanke at the helm to a much
and German politicians to swallow – again. Germany greater extent than the ECB is prepared to support eco-
remains concerned that the rescue plans would only en- nomic growth. Consequently, policy rates will remain
courage more profligacy among the decision-makers of record-low until 2014, and the door to further quantita-
the crisis-afflicted countries and trigger long-term infla- tive easing measures will remain open in case the eco-
tionary risks. Large debt-ridden countries such as Spain nomic situation deteriorates further.
and Italy will be the first in line to make use of the new
facility, should interest rates rise again to unsustainable China eases its economic policy
levels. However, in principle this option will be available The political situation in China is more predictable alt-
to all countries. hough a leadership change is to take place here also this
year. However, when it comes to doing something to
ECB proactivity – including further rate cuts – is vital if support growth, the one-party system appears unrivalled.
financial markets’ confidence in the Euro area is to be re- While export growth is hampered by the international
stored. slowdown, economic policy will most likely be eased
sufficiently to maintain economic growth around the 8%
Ultimately, it may also be pivotal to returning growth to level required to prevent unemployment from rising.
the private sector. Despite the current record-low interest
rates, consumption and investment appetite is still close The outlook for growth in Brazil and Russia remains rel-
to zero. No doubt, the reason is a lack of confidence in atively bright, underpinned by high commodity prices
the future among households and businesses, as reflected and new reform initiatives. But the situation in India ap-
in the current weak credit demand, coupled with the new pears more problematic. Indian exports are affected by
financial regulations. To meet the tighter capital adequa- the international slowdown, and Indian farmers are


■ Overview

struggling with a weak monsoon. Moreover, with India’s Even so, the Danish economy is characterised by low
huge public budget deficit it is difficult for the govern- growth and high uncertainty, stuck as it is in stagnation
ment to alleviate the situation by increasing public ex- with a largely unchanged level of activity since the au-
penditure. tumn of 2010. Over the coming quarters Denmark is ex-
pected to gradually return to the growth track driven by
Higher prices, but no wage-price spiral in sight substantial pent-up demand among households that will
Also the US is subject to the vagaries of the weather. The gradually show through in rising consumption. Mean-
worst drought in history has resulted in record-high pric- while, growth will also be underpinned by a delayed pos-
es on for instance corn and soya beans. The rising food itive contribution from public sector consumption and
prices – and now again rising oil prices – will send con- investment.
sumer prices higher, not only in the US but also in the
rest of the world. Even so, at this juncture there is no rea- Clear skies over Norway
son to worry much about inflation over the forecast hori- Only few signs of weakness are evident in the Norwegian
zon. The situation in developed countries is too weak for economy, which continues to benefit from the high level
that, considering the vast amount of idle resources. Con- of oil prices. Growth will remain high going forward. But
sequently, the risk of rising consumer prices setting an thanks to the large immigration of labour, the country
inflationary wage-price spiral in motion is very small. will most likely avoid overheating of the labour market
Moreover, global competition and the persistent crisis and a sharp acceleration in cost pressures. Although
limit the extent to which businesses can expand profit wage growth will be markedly above the levels seen in
margins. the other Nordic countries, it will not be so high as to
threaten Norges Bank’s inflation target. Nevertheless,
Easy monetary policy for a long while yet with strong economic growth and somewhat higher ca-
Against this backdrop, leading market rates will pick up pacity utilisation, interest rates should rise somewhat in
only slightly in the period up to 2014 when the ECB and the years ahead. But the dilemma for Norges Bank is that
the Fed will start tightening monetary policy again. By the NOK in that case could appreciate too much.
end-2014 we expect the ECB to have hiked its policy rate
to 1% and the Fed to have hiked its key rate to 2%. The Also the Swedish economy has been a positive story so
massive amount of liquidity that the major central banks far. Both GDP and employment rose in H1 2012 despite
have pumped into the system in recent years still poses a the slowing international economy. Much suggests that
latent risk of inflation. If it is not withdrawn as the will- growth will decline over the coming quarters, but house-
ingness of commercial banks to lend money again grows, holds are still in good shape. In combination with a
it could lead to higher interest rates than our forecast slightly more expansionary economic policy and the an-
suggests. ticipated improvement in international economic activity,
this will underpin growth over the forecast horizon. The
Monetary policy is very important for the direction of slowdown over the rest of 2012 will make its mark on the
exchange rates. Accordingly, we expect the USD to labour market. Unemployment will rise during the win-
strengthen versus the EUR over the forecast period, alt- ter, reducing domestic cost pressures. In combination
hough other issues such as the current account and debt with continued SEK appreciation, inflation will stay sig-
levels may pop up as market themes. As a result of the nificantly below the 2% target. Against this background,
peg between the USD and the GBP our baseline scenario the Riksbank will be able to cut its policy rate further this
also factors in GBP strengthening versus the EUR. Late year. Towards the end of 2013 when the economy re-
in the forecast period we expect the CHF to weaken gains strength, the bank will embark on a new tightening
against the EUR, while the JPY should weaken against cycle.
the USD in step with a gradual normalisation of financial
market conditions. Finland is also feeling the effects of the global economic
slowdown and is probably heading into recession. Ex-
Safe havens may also be hit ports and investment activity are slowing in line with the
Denmark, Finland, Norway and Sweden all belong to the trend in world trade, while weaker imports reflect prob-
exclusive club of countries with top ratings from the ma- lems in domestic demand. Consumer spending has lost
jor credit rating agencies. These countries have status as most of its steam and will lose further momentum once
safe havens in financial markets. As a result, the NOK the slowdown also hits the labour market. A new recov-
and the SEK have strengthened markedly, while interest ery driven by a stronger international economic environ-
rates in Denmark, with its fixed exchange rate policy ment will only emerge later in the forecast period.
versus the EUR, plummeted to new record lows. Actual- Against this backdrop, we have revised down our growth
ly, the Danish central bank has had to bring its CD rate forecast for 2013, which is still markedly above the Eu-
into negative territory to reduce the capital inflows that ro-area average.
caused Denmark’s foreign currency reserves to swell to
record-high levels. Helge J. Pedersen, Global Chief Economist
helge.pedersen@nordea.com +45 3333 3126


■ Overview

Growth, % Inflation, %
2010 2011 2012E 2013E 2014E 2010 2011 2012E 2013E 2014E
World1) 4.6 3.8 3.1 3.5 3.8 World1) 2.8 4.1 2.9 2.9 2.9

USA 2.4 1.8 2.2 2.0 2.2 USA 1.6 3.1 2.1 2.2 2.2
Euro area 1.9 1.5 -0.4 0.6 1.7 Euro area 1.6 2.7 2.2 1.6 1.6
China 9.2 10.5 8.0 8.3 8.5 China 3.3 5.4 3.1 4.0 3.8
Japan 4.6 -0.7 2.5 1.6 1.1 Japan -0.7 -0.3 0.2 -0.1 -0.1

Denmark 1.3 0.8 0.7 1.9 2.1 Denmark 2.3 2.8 2.4 2.0 2.2
Norw ay 1.9 2.4 3.7 3.0 2.8 Norw ay 2.5 1.2 0.8 1.8 2.1
Sw eden 6.2 3.9 1.2 1.8 2.3 Sw eden 1.2 3.0 1.2 1.2 2.0

UK 1.8 0.8 -0.4 1.0 1.7 UK 3.3 4.5 3.0 2.2 1.4
Sw itzerland 2.7 2.1 1.5 1.9 2.4 Sw itzerland 0.7 0.2 -0.7 0.6 1.6

Germany 4.0 3.1 0.9 1.4 2.1 Germany 0.2 1.2 1.9 1.7 2.1
France 1.6 1.7 0.1 0.8 1.7 France 0.1 1.7 2.1 1.8 1.9
Italy 1.8 0.5 -2.3 -0.5 1.0 Italy 1.6 2.9 3.1 2.1 1.5
Spain -0.3 0.4 -1.2 -0.9 1.1 Spain 2.0 3.1 2.4 2.2 0.5
Netherlands 1.6 1.1 -0.2 1.2 1.7 Netherlands 0.9 2.5 2.4 1.7 1.8
Austria 2.3 2.7 0.9 0.8 1.7 Austria 1.7 3.6 2.2 1.8 1.9
Belgium 2.4 1.8 -0.4 0.6 1.8 Belgium 2.3 3.5 2.2 1.5 1.7
Portugal 1.4 -1.6 -2.7 0.0 1.2 Portugal 1.4 3.6 2.9 1.5 1.3
Greece -3.5 -6.9 -6.6 -0.9 1.2 Greece 4.7 3.1 0.5 -0.5 0.0
Finland 3.3 2.7 0.8 1.2 2.8 Finland 1.2 3.4 3.0 2.5 2.3
Ireland -0.8 1.4 -0.2 1.5 2.1 Ireland -1.6 1.2 1.8 1.5 1.5
Estonia 2.3 7.6 2.3 3.5 3.8 Estonia 3.0 5.0 3.7 3.0 2.9

Poland 3.9 4.3 2.8 2.3 3.1 Poland 2.6 4.3 3.9 2.7 2.2
Russia 4.0 4.4 4.2 4.8 5.0 Russia 6.9 8.5 6.3 6.8 7.0
Latvia -0.3 5.5 4.2 2.5 3.9 Latvia -1.1 4.4 2.3 2.5 2.8
Lithuania 1.4 5.9 2.7 3.3 3.5 Lithuania 1.3 4.1 3.0 2.8 3.0
India 9.6 6.9 6.0 6.7 7.2 India 9.6 9.5 7.5 6.8 7.0
Brazil 7.6 2.8 2.6 4.6 4.8 Brazil 5.0 6.4 5.2 5.4 5.8

Public finances, % of GDP Current account, % of GDP
2010 2011 2012E 2013E 2014E 2010 2011 2012E 2013E 2014E
USA -8.9 -8.6 -7.0 -5.5 -4.1 USA -3.0 -3.1 -3.0 -3.5 -3.0
Euro area -6.2 -4.1 -3.7 -3.0 -2.5 Euro area 0.0 0.0 0.3 0.7 1.0
China -1.7 -1.1 -1.5 -2.3 -1.9 China 5.1 2.8 2.5 2.2 1.5
Japan -9.0 -9.7 -9.9 -9.6 -9.0 Japan 3.6 2.0 2.1 2.5 2.4

Denmark -2.7 -1.9 -3.9 -2.1 -0.5 Denmark 5.5 6.7 5.8 5.1 4.4
Norw ay 11.3 13.8 13.7 13.9 13.6 Norw ay 12.4 14.5 14.9 15.4 15.1
Sw eden -0.1 0.1 -0.3 -1.0 -0.5 Sw eden 6.8 7.0 7.2 7.6 7.5

UK -10.4 -8.3 -7.6 -6.4 -4.7 UK -2.5 -1.9 -2.3 -2.1 -1.3
Sw itzerland 0.7 0.8 0.1 0.1 0.2 Sw itzerland 14.3 10.4 9.3 8.7 9.9

Germany -4.3 -1.0 -0.8 -0.6 -0.5 Germany 5.8 5.3 4.6 4.4 4.0
France -7.1 -5.2 -4.7 -3.9 -3.5 France -2.2 -2.7 -2.4 -2.1 -2.0
Italy -4.6 -3.9 -2.0 -1.8 -1.0 Italy -3.5 -3.1 -2.0 -1.0 -0.5
Finland -2.5 -0.6 -0.5 -0.1 0.5 Finland 1.6 -1.1 -0.2 0.2 0.6
Estonia 0.2 1.0 -1.5 -0.5 -0.3 Estonia 3.8 2.1 -2.3 -1.5 -1.3

Poland -7.8 -5.1 -3.3 -3.3 -2.9 Poland -4.7 -4.3 -3.6 -3.0 -3.0
Russia -4.0 0.5 0.2 0.5 0.7 Russia 4.8 4.5 4.2 3.0 2.5
Latvia -8.2 -3.5 -2.2 -2.0 -2.0 Latvia 3.0 -1.2 -3.2 -3.5 -3.6
Lithuania -7.2 -5.5 -2.7 -3.0 -3.0 Lithuania 1.1 -1.6 -2.7 -3.0 -3.0
India -3.6 -6.6 -7.0 -7.5 -8.0 India -3.3 -2.8 -4.0 -3.0 -2.2
Brazil -2.7 -2.4 -2.0 -2.1 -2.2 Brazil -2.3 -2.1 -2.5 -2.7 -2.8
1) Weighted average of countries in t his table. Accounts for 76.5%of world GDP. Weights calculat ed using PPP adjust ed GDP levels f or 2008 according to t he IM F's World Economic Out look


■ Overview

Monetary policy rates Monetary policy rate spreads vs Euro area
30.8.12 3M 30.06.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14
US 0.25 0.25 0.25 0.25 2.00 US -0.50 -0.25 -0.25 -0.25 1.00
Japan 0.10 0.10 0.10 0.10 0.10 Japan1 -0.15 -0.15 -0.15 -0.15 -1.90
Euro area 0.75 0.50 0.50 0.50 1.00 Euro area - - - - -
Denmark 0.20 0.05 0.15 0.25 1.00 Denmark -0.55 -0.45 -0.35 -0.25 0.00
Sw eden 1.50 1.25 1.00 1.50 2.00 Sw eden 0.75 0.75 0.50 1.00 1.00
Norw ay 1.50 1.50 1.75 2.00 2.75 Norw ay 0.75 1.00 1.25 1.50 1.75
UK 0.50 0.50 0.50 0.50 1.00 UK -0.25 0.00 0.00 0.00 0.00
Sw itzerland 0.00 0.00 0.00 0.50 1.00 Sw itzerland -0.75 -0.50 -0.50 0.00 0.00
Poland 4.75 4.50 4.00 4.00 4.50 Poland 4.00 4.00 3.50 3.50 3.50
Russia 8.00 8.00 8.25 8.25 8.25 Russia 7.25 7.50 7.75 7.75 7.25
China 6.00 5.75 5.75 6.00 6.00 China 5.25 5.25 5.25 5.50 5.00
India 8.00 8.00 7.75 7.75 7.50 India 7.25 7.50 7.25 7.25 6.50
Brazil 7.50 7.50 7.50 8.00 10.50 Brazil 6.75 7.00 7.00 7.50 9.50

3-month rates 3-month spreads vs Euro area
30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14
US 0.42 0.45 0.50 0.60 2.50 US 0.13 0.20 0.25 0.10 1.30
Denmark 0.31 0.35 0.40 0.70 1.45 Denmark 0.03 0.10 0.15 0.20 0.25
Sw eden 1.95 1.55 1.50 2.00 2.50 Sw eden 1.66 1.30 1.25 1.50 1.30
Norw ay 2.05 2.02 2.27 2.43 3.16 Norw ay 1.76 1.77 2.02 1.93 1.96
UK 0.68 0.60 0.60 0.60 1.25 UK 0.40 0.35 0.35 0.10 0.05
Poland 5.04 4.85 4.35 4.30 4.80 Poland 4.75 4.60 4.10 3.80 3.60
Russia 7.17 7.40 7.50 7.50 8.00 Russia 6.88 7.15 7.25 7.00 6.80
Latvia 0.61 0.55 0.50 0.50 1.20 Latvia 0.32 0.30 0.25 0.00 0.00
Lithuania 0.89 0.75 0.80 1.10 1.70 Lithuania 0.60 0.50 0.55 0.60 0.50

10-year government benchmark yields 10-year yield spreads vs Euro area
30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14
US 1.64 2.00 2.50 3.00 4.00 US 0.30 0.25 0.60 0.80 1.35
Denmark 1.08 1.55 1.75 2.05 2.55 Denmark -0.26 -0.20 -0.15 -0.15 -0.10
Sw eden 1.38 1.80 2.00 2.60 3.00 Sw eden 0.04 0.05 0.10 0.40 0.35
Norw ay 1.97 2.58 2.86 2.96 3.14 Norw ay 0.62 0.83 0.96 0.76 0.49
UK 1.48 1.75 2.00 2.25 2.75 UK 0.14 0.00 0.10 0.05 0.10
Poland 4.92 4.80 4.90 5.00 5.50 Poland 3.58 3.05 3.00 2.80 2.85

Exchange rates vs EUR Exchange rates vs USD
30.8.12 3M 30.6.13 31.12.13 31.12.14 30.8.12 3M 30.6.13 31.12.13 31.12.14
EUR/USD 1.26 1.30 1.20 1.15 1.10 -
EUR/JPY 98.8 104.0 98.4 97.8 99.0 USD/JPY 78.6 80.0 82.0 85.0 90.0
EUR/DKK 7.45 7.45 7.46 7.46 7.46 USD/DKK 5.93 5.73 6.21 6.48 6.78
EUR/SEK 8.36 8.35 8.50 8.60 8.60 USD/SEK 6.66 6.42 7.08 7.48 7.82
EUR/NOK 7.31 7.50 7.50 7.40 7.50 USD/NOK 5.81 5.77 6.25 6.43 6.82
EUR/GBP 0.79 0.81 0.78 0.77 0.75 GBP/USD 1.58 1.61 1.55 1.50 1.47
EUR/CHF 1.20 1.20 1.20 1.25 1.30 USD/CHF 0.96 0.92 1.00 1.09 1.18
EUR/PLN 4.19 4.00 3.92 3.80 3.70 USD/PLN 3.33 3.1 3.3 3.3 3.4
EUR/RUB 40.6 40.3 36.0 32.8 31.9 USD/RUB 32.3 31.0 30.0 28.5 29.0
EUR/LVL 0.70 0.70 0.70 0.70 0.70 USD/LVL 0.55 0.54 0.58 0.61 0.64
EUR/LTL 3.45 3.45 3.45 3.45 3.45 USD/LTL 2.75 2.66 2.88 3.00 3.14
EUR/CNY 7.98 8.27 7.61 7.19 6.71 USD/CNY 6.35 6.36 6.34 6.25 6.10
EUR/INR 69.8 71.5 63.6 55.2 49.5 USD/INR 55.6 55.0 53.0 48.0 45.0
EUR/BRL 2.58 2.54 2.22 2.01 1.87 USD/BRL 2.05 1.95 1.85 1.75 1.70


■ Sweden

Households prop up the economy
• GDP growth edging higher in coming years … Households keep the wheels turning
Household finances are generally stable. A low inflation
• … but near term, the labour market will weaken level and pay rises jack up households’ purchasing pow-
• Long period of low inflation er. Real disposable incomes will rise by about 2% annu-
ally in 2012-2014. The improved household finances
• Riksbank to cut rates this year, and the SEK weakens have fed through to the housing market. House prices
have started to rise again after having shown a slightly
Good growth weak trend over the past year. Share prices are also im-
The Swedish economy has been surprisingly resilient to portant for households’ propensity to spend, and since
the global turbulence. GDP growth did drop towards the the turn of the year stock markets have recovered some-
end of 2011, but both the GDP and employment rose what. The conditions for households are therefore benign
again during H1 2012. The domestic economy was the so we expect consumer spending to rise noticeably in
key driver of growth, but also foreign trade improved. coming years.
Growth in H1 2012 was fairly high, we think, despite the
possibility of a downward revision to Q2 GDP growth. Investment activity lost pace in Q2 2012 after rising
sharply at the beginning of the year. There are indications
Although the economy has been able to tackle the global that capacity utilisation in several sectors has declined,
obstacles better than expected, GDP growth is still not which reduces the need for new investment. In addition,
sufficiently high to prevent a decline in the demand for investment appetite seems suppressed by the dark clouds
labour. We expect unemployment to rise above 8% dur- still hanging over Europe. The number of housing starts
ing the winter. has already dropped sharply, and total investment will
show a weak trend in coming quarters. We expect the
Prospects for H2 2012 are mixed. We will likely see sub- general need for investments to be modest during most of
dued growth. However, longer out there are factors sug- next year and then increase in 2014 in tandem with the
gesting a pick-up in activity. A benign situation for overall pick-up in activity. An expansionary fiscal policy
households, a slightly more expansionary economic poli- partly based on infrastructure investment will contribute
cy and a global economy that gradually recovers are the to underpinning investment growth over the forecast
factors that will underpin higher GDP growth in coming horizon.
years. However, due to global weakness growth will only
accelerate slowly and unemployment will not decline un- Tough times for the export industry
til the latter part of the forecast period Despite some improvement recently, exports of goods
have stagnated over the past year. The order intake re-

Sweden: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009 (SEKbn) 2010 2011 2012E 2013E 2014E
Private consumption 1,533 3.7 2.0 1.7 2.0 2.1
Government consumption 860 1.9 1.8 0.8 0.5 1.5
Fixed investment 559 7.7 6.2 2.5 1.0 3.5
- industry 74 1.0 7.9 -2.2 2.2 4.4
- residential investment 92 17.2 15.1 -8.7 -2.2 4.5
Stockbuilding* -46 2.1 0.6 -1.1 0.1 0.0
Exports 1,489 11.7 6.9 1.2 4.2 4.9
Imports 1,288 12.7 6.3 -0.4 3.8 5.1
GDP 6.2 3.9 1.2 1.8 2.3
GDP, calendar adjusted 5.9 3.9 1.5 1.8 2.4
Nominal GDP (SEKbn) 3,106 3,331 3,492 3,580 3,703 3,836

Unemployment rate, % 8.4 7.5 7.7 8.0 7.7
Employment grow th 1.0 2.1 0.3 -0.2 0.8
Consumer prices, % y/y 1.2 3.0 1.2 1.2 2.0
Underlying inflation (CPIF), % y/y 2.0 1.4 1.1 1.5 1.5
Hourly earnings, % y/y 0.4 2.9 3.3 3.2 2.8
Current account (SEKbn) 225 243 259 280 288
- % of GDP 6.8 7.0 7.2 7.6 7.5
Trade balance, % of GDP 2.6 2.7 2.9 3.0 2.7

General govt budget balance (SEKbn) -2 5 -12 -38 -18
- % of GDP -0.1 0.1 -0.3 -1.0 -0.5
Gross public debt, % of GDP 39.4 38.4 38.1 39.1 39.6
* Contribution to GDP growth (% points)


■ Sweden

mains weak, and growth in many key export markets is Rising incomes and consumption
low. Accordingly, goods exports will likely remain sub-
dued during the remainder of 2012. Also the strong SEK
is a problem for exporters. However, it probably affects
profitability rather than volumes. The situation will im-
prove longer out as the SEK will likely weaken and de-
mand gradually rise.

Sweden’s trade in services, which has increased sharply
so far this year, is gaining significance. Exports of ser-
vices have risen from 6% of GDP in 1980 to currently
15% of GDP. The export markets for services are largely
identical to those for goods – where demand is weak.
This suggests that the pick-up in H1 was temporary and
will lose momentum going forward.
Weak global demand a drag on Swedish exports
Low inflation puts pressure on the Riksbank
Despite an increase in the number of employed this year
the labour market still shows signs of weakness. The de-
mand for labour has not been sufficiently strong to keep
unemployment in check. Labour market indicators are
still at benign levels, but have started to soften. We look
for a decline in employment and accelerating growth in
unemployment during autumn and winter.

Labour market weakness is usually accompanied by re-
duced domestic inflation. Also, the SEK strengthening
helps putting a lid on costs. Inflation pressures thus look
set to moderate even further in future, extending the peri-
od of core inflation markedly below the 2% target. This Reduced pressure on domestic market
may cause some concern for the Riksbank as it could
contribute to further accelerating the decline in inflation
expectations.

The door is thus open for monetary easing. With low in-
flation, a weaker labour market, low policy rates interna-
tionally and a risk of further SEK appreciation, the Riks-
bank should cut rates this year. But when the economy
starts to recover in the latter part of 2013, the bank will
embark on a hiking cycle.

A paradigm shift for the SEK
The SEK has become a safe-haven currency in 2012. The
reasons are the modest exposure of the Swedish economy
to troubled areas, solid public finances and a highly com- Paradigm shift for SEK
petitive business sector that generates surprisingly strong
growth and increased interest rate differentials. Going
forward, we expect the SEK to weaken versus the EUR
in step with a gradual stabilisation of the situation inter-
nationally and a narrowing of interest rate differentials.
However, EUR/SEK will remain at levels below 9
throughout the forecast period. The USD will continue to
strengthen against most currencies, including the SEK.

Torbjörn Isaksson
torbjorn.isaksson@nordea.com +46 8 614 8859


■ Norway

Risk of overheating may be the biggest challenge
• Strong domestic demand growth feared. Some export industries are facing difficulties, but
for instance strong growth in electricity exports has put a
• High immigration prevents overheating floor under total export growth. However, while this
• And Norges Bank may proceed with caution trend is probably only temporary, the strong growth in
exports within the engineering industry should continue.
The Norwegian economy is showing few signs of weak- It reflects the increasing significance of the oil services
ness and we see no reason to change our optimistic view industry for Norwegian exports. With sustained high oil
of the economy going forward. Growth looks set to be prices, prospects are good for this type of exports in the
high, but with increased labour immigration an overheat- years ahead. Over the forecast period we also see growth
ing of the economy and sharply rising costs will probably in traditional exports rising, driven by stronger traditional
be avoided. Wage growth will be much higher than in export market growth.
neighbouring countries, but not so high as to push infla-
tion above target. However, strong economic growth and The exceptionally strong growth in Norwegian oil in-
higher capacity utilisation point to higher interest rates vestment has been vital for the oil services industry.
during the next couple of years. But fears of excessive Growth will likely slow in coming years, but it will still
NOK strengthening limit Norges Bank’s room for ma- remain very high. In our view, capacity limitations in
noeuvre in monetary policy. many areas will prove the key obstacle to growth in this
industry. Pressures in this part of the economy seem to be
Strong consumption growth one of main reasons why the wage negotiations, despite
Strong wage and employment growth and very low infla- all the talk of competitiveness and the so-called
tion currently boost consumer purchasing power. It is “frontfagmodell” (meaning that the negotiations start in
therefore no surprise that consumption growth in H1 the industries particularly exposed to competition), result
2012 was very high after last year’s weaker-than- in pay rises in manufacturing way beyond those in rival
expected trend. And with an initial high level of savings countries.
and a sustained strong labour market we see consumption
growth continuing unabated during the remainder of the We also see fairly strong growth in mainland investment
year and into 2013. In 2013 and 2014 consumption going forward, although the pace is not likely to match
growth should slow down as a result of higher interest that of oil investment growth. The propensity to invest
rates and more moderate employment growth. should be high with strong production gains in large parts
of the corporate sector. Higher credit margins and tighter
Higher exports, but lower mainland investment bank credit standards could slightly dampen investment
Despite weak growth in export markets, a strong NOK growth, but this effect will likely be largely offset by the
and wage growth well above levels in other countries, overall very low interest rate level. A possible sharp es-
mainland exports have remained at a higher level than calation of the euro crisis and a new financial crisis

Norway: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009(NOKbn) 2010 2011 2012E 2013E 2014E
Private consumption 1,028 3.7 2.4 3.7 3.5 3.0
Government consumption 531 1.7 1.5 2.0 2.5 2.5
Fixed investment 516 -5.2 6.4 7.2 4.9 3.7
- gross investment, mainland 349 -2.5 8.0 3.2 3.7 3.7
- gross investment, oil 144 -14.3 9.1 20.0 8.0 4.0
Stockbuilding* 14 1.9 0.3 0.0 0.0 0.0
Exports 929 1.8 -1.4 1.6 1.1 1.3
- crude oil and natural gas 416 -4.8 -6.2 2.5 0.0 0.0
- other goods 277 2.5 -0.4 0.0 2.0 2.5
Imports 660 9.9 3.5 3.0 3.9 3.0
GDP 2,357 0.7 1.4 3.4 2.4 2.3
GDP, mainland 1,876 1.9 2.4 3.7 3.0 2.8

Core inflation, % y/y 1.4 0.9 1.2 1.5 2.1
Annual w ages, % y/y 3.6 4.3 4.2 4.3 4.3
Current account (NOKbn) 313.6 393.9 437.1 482.9 497.5
- % of GDP 12.4 14.5 14.9 15.4 15.1
Trade balance, % of GDP 12.4 13.8 14.6 15.1 14.8

General govt budget balance (NOKbn) 284.5 375.1 400.0 435.0 450.0
- % of GDP 11.3 13.8 13.7 13.9 13.6


■ Norway

could, however, result in much tighter credit standards, Norwegian manufacturing production rises
and this is probably one of the key risks to the Norwe-
gian economy.

Inflation to edge higher
Strong domestic demand growth will contribute to strong
production growth in the years ahead. However, thanks
to high immigration we do not expect labour shortages to
become a major problem. Nor do we expect major bot-
tlenecks in the labour market despite shortages in some
skilled areas. Consequently, wage growth should not pick
up sharply, but still remain relatively high at just above
4% in the years ahead.

Wage growth just above 4%, strong domestic demand
Higher income growth -> higher consumption growth
growth and a relatively stable NOK suggest that inflation
will edge higher in coming years. Core inflation may rise
to 2% over the forecast period, up from 1% at present,
but to drive inflation above the 2½% target, cost growth
would have to be higher.

Gradually higher interest rates
Against the background of strong growth, a relatively
tight labour market, somewhat higher inflation and
slightly improved prospects globally, Norges Bank will
want to hike interest rates during the forecast period. Al-
so the steady increases in house prices and credit growth
from high levels suggest higher interest rates. However,
with below-target inflation and domestic economic
growth largely matching capacity growth, Norges Bank Supply and demand growth almost identical
will not be in a hurry. In the absence of rate hikes in
neighbouring countries, an aggressive monetary policy
line would only strengthen the NOK to levels that would
cause inflation to drop further below target.

At the time of writing the NOK has strengthened quite
significantly against the EUR, but measured in terms of
the trade-weighted exchange rate, the NOK strengthening
is far more modest. We expect Norges Bank to hike its
policy rate twice next year, but these moves should not
result in a long-lasting period of NOK strengthening. In
2014 the pace of monetary tightening may be increased
further, but as interest rates in other countries are also
likely to go up, Norges Bank can hike its policy rates
without risking excessive NOK strengthening. NOK not so strong in trade-weighted terms

There is a clear risk that the high domestic demand
growth could result in increased capacity problems, high-
er wage growth and consequently gradually higher infla-
tion than we project. If so, Norges Bank will act more
aggressively, accepting the effect on the NOK. And the
NOK strengthening would contribute to preventing infla-
tion from rising above target. If Norges Bank chooses to
focus less on meeting the inflation target and more on
preventing surging house prices and household credit
growth, the result may be a combination of higher inter-
est rates and a stronger NOK. However, judging from the
bank’s rhetoric it is not about to change its priorities.

Erik Bruce
erik.bruce@nordea.com +47 2248 4449


■ Denmark

Languishing economic growth
• Rising activity towards 2014 Despite the prospect of a historically high savings ratio
our forecast assumes that consumer spending will gradu-
• Housing market improvement ally increase towards the end of 2014. The accelerating
• Delayed effect from public money flow consumer spending growth will partly be driven by a
pent-up consumption need and partly by generally im-
• Negative central bank rates work proved sentiment about the Danish economy. Not least
the prospect of increasing employment and a pick-up in
Low growth and significant uncertainty characterise the the housing market will boost Danish households’ pro-
Danish economy; activity has been stuck at largely the pensity to consume over the forecast period.
same level since the autumn of 2010. Over coming quar-
ters, we expect the Danish economy to gradually return Housing market shows signs of healing
to the growth track this year, expanding at a rate of 0.7% Since mid-2008 the ailing housing market has been a
this year, accelerating to 1.9% in 2013 and 2.1% in 2014. millstone around the neck of the Danish economy. The
contracting housing wealth, slower credit growth and his-
On the domestic front the expected reversal of economic torically low activity in the construction sector are some
trends will be driven by households’ large pent-up poten- of the main reasons why consumer spending has stagnat-
tial, which will gradually turn into growing consumer ed. However, the latest monthly property price data from
spending. At the same time, growth is underpinned by a Statistics Denmark suggest that housing prices have sta-
delayed effect from the public sector, with expected posi- bilised since the start of the year. We believe this devel-
tive contributions from consumer spending and invest- opment marks the beginning of a new regime in the Dan-
ment. ish housing market where the historically low funding
costs and substantial pent-up demand over time will lead
Consumers hang on to their money to market consolidation.
Although the payout of saved-up early retirement money
is close to DKK 20bn (already surpassing official fore- But prices will be kept in check by a still large supply of
casts), the effect on retail sales and consumer spending unsold homes, low turnover and high youth unemploy-
has so far not materialised. Instead many have chosen up ment, which limits the number of first-time buyers.
save up more; total household bank deposits have Trapped between these two opposing trends, housing
swelled to an all-time high. The Danish economy there- prices are likely to remain more or less unchanged during
fore lacks the boost to activity that normally results from the rest of the year. Into 2013 we expect housing prices
consumer spending. Moreover, the government’s scope to slowly edge higher, surpassing expected inflation
for stimulating economic activity through its tax policy is again in 2014. The moderately rising housing prices will
limited. first and foremost be concentrated in the large cities
where demographics suggest growing upward pressure
on demand.

Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009 (DKKbn) 2010 2011 2012E 2013E 2014E
Private consumption 815 1.9 -0.8 0.6 1.8 1.9
Government consumption 497 0.3 -1.3 0.4 0.8 0.8
Fixed investment 314 -3.7 0.2 2.8 4.0 4.7
- government investment 33 8.5 5.2 8.5 -12.0 2.5
- residential investment 80 -7.4 8.8 -5.8 4.7 5.0
- business fixed investment 201 -4.4 -3.8 5.0 7.1 4.9
Stockbuilding* -20 0.1 0.0 0.0
Exports 794 3.2 7.0 2.0 2.9 3.5
Imports 731 3.5 5.2 2.6 3.6 3.6
GDP 1.3 0.8 0.7 1.9 2.1
Nominal GDP (DKKbn) 1,668 1,772 1,783 1,818 1,879 1,949

Gross unemployment level, '000 persons 164.5 162.1 165.0 168.7 163.2
Nominal house prices, one-family, % y/y 2.8 -2.8 -4.3 1.2 1.9
Current account (DKKbn) 96.9 119.1 105.0 95.0 85.0
- % of GDP 5.5 6.7 5.8 5.1 4.4
General govt. budget balance (DKKbn) -47.4 -34.5 -71.0 -40.0 -10.0
- % of GDP -2.7 -1.9 -3.9 -2.1 -0.5


■ Denmark

Negative central bank rates a success Stagnant consumption
During the debt crisis the Danish central bank has been
forced to pursue a very proactive monetary policy to
keep the DKK stable versus the EUR. As a vital part of
this defence, the central bank cut its CD rate to -0.20% in
early July. It is the first time in Denmark’s history that
the CO rate is in negative territory. So far this move has
had the desired effect. The DKK has stabilised at a solid
level against the EUR without the central bank needing
to intervene in the market. This contrasts sharply with the
situation in May and June when more than DKK 36bn
was sold to defend the Danish fixed exchange rate re-
gime.

Public money flow drying out
In a bid to break the current economic deadlock the gov- The central bank’s CD rate is negative
ernment has decided to bring forward public investment
projects to the tune of DKK 19bn. At the same time pub-
lic spending is budgeted to grow by DKK 18bn this year
and an additional DKK 8bn in 2013 – corresponding to
real growth of 1.5% and 0.1%, respectively. Despite the-
se intentions public spending decreased by 1.0% in H1,
while public investment only increased very modestly.
So the Danish economy has so far not received the origi-
nally planned boost from fiscal policy. The explanation
to this sluggishness should be found in the long imple-
mentation period for public investment and in the fact
that public-sector spending historically has been very dif-
ficult to fine-tune. Against this background, there is a
likelihood of a strong ketchup effect in coming quarters, Improved competitiveness
which will help pull the Danish economy out of the dol-
drums provided that the government fulfils its own plans.

Improved competitiveness drive exports forward
After a brief dip at the beginning of the year, exports are
growing again – partly driven by sustained growth in key
export markets, partly by improved competitiveness.
This is chiefly a result of a weakening of the trade-
weighted DKK, which has made Danish products com-
paratively cheaper in international markets.

But also the past year’s sharp drop in the pace of wage
growth combined with productivity gains means that unit
labour costs now increase more slowly than in Den-
mark’s key export markets. And although the effect of Decoupling between employment and house prices
the lower unit labour costs will not feed though until
slightly longer out, it is a vital precondition for maintain-
ing the necessary momentum in exports.

Helge J. Pedersen
helge.pedersen@nordea.com +45 33333126

Jan Størup Nielsen
jan.storup.nielsen@nordea.com +45 33333171


■ Finland

Finnish economy has cooled down across the board
• Exports will not recover until 2013 for instance, turned down again in the first half of the
year. In our forecast, we assume export volumes to con-
• Growth in private consumption will slow down tinue declining in the latter part of the year. The decreas-
• Employment will fall less than previously forecast ing world trade growth will weaken production expecta-
tions globally and decrease investment needs. This is bad
• Public sector deficit will decrease news to the Finnish export industry, as its main products
are raw materials, production supplies and investment
As expected, economic activity has decreased in Finland goods. We expect international demand to strengthen
across the board after the first quarter of this year. Ex- moderately in 2013. Export volumes will increase but
ports have contracted, investment has continued to de- growth will still remain modest.
cline and the growth in private consumption has slowed
down. Imports have decreased more than exports, which Growth in private consumption to slow down
is, in particular, a sign of weakening in domestic demand. Private consumption increased at a brisk pace in Q1 this
What is positive, is that employment has not yet weak- year compared to Q4 2011. This was a result of the one-
ened. However, it is probably only a question of time be- off additional salary items based on collective agree-
fore it does. ments, which boosted retail sales, and the car tax hike
that entered into force at the beginning of April, which
Based on preliminary data, the economy contracted in Q2 made people purchase new cars earlier than they other-
compared to the previous quarter. Our forecast assumes wise would have. The growth in retail sales volumes
that the decline continues in Q3. This means that we be- slowed down markedly in Q2 and in July it stopped alto-
lieve the Finnish economy is in recession, just like many gether. Car sales, too, have decreased sharply. Thanks to
other European countries. As in our previous forecast, the strong beginning of the year, private consumption
however, we believe the recession will not last long and will significantly boost the economic growth this year
there is no need to change the previous GDP growth despite the recent cooling.
forecast of 0.8% for this year. On the other hand, interna-
tional trade has cooled down more than expected, which For the remaining part of the year and for 2013, the out-
indicates that an export-led recovery from the recession look for private consumption will remain weak. The in-
will be much slower than previously estimated. That is crease in salaries and pensions as well as the decrease in
why we have lowered our forecast for economic growth mortgage interest rates will support households' purchas-
in Finland in 2013 to 1.2% (previously 1.6%). In 2014, ing power. The growth in purchase power will, however,
we expect growth to speed up to 2.8% as especially the be restrained by tax increases and the expected weaken-
North-European economies will recover. ing in employment. Taxes will increase as the value add-
ed tax will be raised and no inflation adjustments of in-
Exports will not recover until 2013 come limits will be made in the income tax brackets. In
Finnish goods exports have varied widely over the past addition, the rather rapid growth in consumer prices will
year – and the variation has taken place around a decreas- continue and erode purchasing power. Consumer prices
ing trend. New orders received by the industrial sector, are expected to rise by 2.5% next year. The household
Finland: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009 (EURbn) 2010 2011 2012E 2013E 2014E
Private consumption 94 3.3 2.5 2.2 1.3 2.0
Government consumption 43 -0.3 0.4 0.3 0.5 0.5
Fixed investment 34 1.9 6.8 -3.2 0.6 3.8
Stockbuilding* -2 0.5 1.1 -0.3 0.3 0.1
Exports 64 7.5 2.6 -1.7 2.6 7.1
Imports 62 6.9 5.7 -3.0 2.9 6.2
GDP 3.3 2.7 0.8 1.2 2.8
Nominal GDP (EURbn) 172.3 178.8 189.4 196.0 201.6 210.1

Industrial production, % y/y 8.3 0.9 -3.0 2.0 4.0
Hourly w ages, % y/y 2.6 2.7 3.5 3.0 3.0
Current account (EURbn) 2.9 -2.2 -0.5 0.4 1.2
- % of GDP 1.6 -1.1 -0.2 0.2 0.6
Trade balance (EURbn) 2.6 -1.2 -0.1 0.1 0.8
- % of GDP 1.4 -0.6 -0.1 0.0 0.4

General govt budget balance (EURbn) -4.5 -1.2 -1.0 -0.1 1.0
- % of GDP -2.5 -0.6 -0.5 -0.1 0.5
Gross public debt (EURbn) 90.0 93.0 99.0 104.1 108.4
- % of GDP 50.3 49.1 50.5 51.6 51.6

■ Finland

savings rate continues to decline which means that an in- Cooling of world trade brings problems to exports
creasing part of income is used for consumption. The ac-
commodating monetary policy is well timed as the con-
sumption outlook would be much gloomier without it.

Investment to decline, employment to weaken
The bleak short-term outlook for exports, production and
consumption as well as the major uncertainty over the
Euro area developments will eat away economic agents'
confidence and thus decrease willingness to invest and
weaken employment prerequisites. Machinery and
equipment investment increased sharply last year but
turned down again already in the beginning of this year.
The decline is expected to continue at least for the rest of
this year. Construction investment is also expected to de-
Weak sentiment points to an outright fall in GDP
cline. The decrease in the number of granted construction
permits indicates that the decline in residential and other
construction will continue and even steepen during the
latter part of the year. Reconstruction will compensate
for the decline in new construction.

We expect both the traditional machinery and equipment
investment and construction investment to increase again
in 2013. A precondition for this, however, is that the
global economy will grow as forecast, the Euro area debt
crisis will clear up and confidence will return.

The labour market has provided very positive surprises
this year. Employment measured with the number of
people has not weakened (although the number of work- A decline in GDP is bad news for employment
ing hours has probably started to decrease) and the num-
ber of unemployed people has not started to increase.
Seasonally adjusted unemployment rate has stabilised at
7.5% in recent months. The unemployment rate for 2012
seems to remain at 7.7% (the previous forecast was
8.0%), which is lower than in 2011. We still expect un-
employment to increase, especially in 2013 with the un-
employment rate rising to an average of 8%.

Slower decrease in public sector deficit
Tax revenues will increase at a slower pace due to the
sluggish economic growth, even though income taxation
will be tightened and value added tax will be raised. The
public sector deficit will, however, continue to decline.
The deficit is estimated to decrease to 0.1% of GDP in Confidence + labour market = weak consumption
2013 and turn into a small surplus in 2014. The govern-
ment's annual borrowing need will remain at EUR 4–6bn
during the forecast period, which will increase the public
debt close to 52% of the value of total production already
in 2013.

Pasi Sorjonen
pasi.sorjonen@nordea.com +358 9 165 59942


■ USA

Moving slowly forward
• If a perfect storm of fiscal chaos is avoided … After all, the economy’s fundamentals are much im-
proved. Businesses are highly profitable, banks have re-
• ... progress towards full employment in 2014 capitalised and the deleveraging process in the private
• Stronger underlying inflation pressures set to emerge sector has come a long way. Still, households – especial-
ly younger families – are likely to continue the process of
• Fed to start tightening by mid-2014 balance sheet repair. Home prices seem to have bot-
tomed, but the expected slow price increases provide lim-
US economic growth is likely to remain moderate in the ited support to household net worth going forward.
next few years through 2014, constrained by household
deleveraging, fiscal restraint, subpar global demand, In 2014 growth is expected to slow to a pace more in line
slower working-age population growth and a deteriora- with potential. Full employment, defined as an unem-
tion of job skills. ployment rate of 7%, should be achieved in late 2014.

The US economy clearly lost momentum during Q2 QE3 only in case of policy errors
2012, but recent economic data paint a slightly brighter The effects of the drought in the Midwest on food com-
picture, pointing towards GDP growth of 1½-2% in H2 modity prices and a rebound in oil prices are likely to
2012. Stronger disposable income growth, easier finan- push headline inflation meaningfully higher by mid-
cial conditions and bank lending standards, continued 2013.
housing recovery, the end of the payback for the warm
winter weather and less drag from seasonal adjustment With the business cycle adjustment more or less com-
distortions suggest that economic momentum will pick pleted in 2014, signs of stronger underlying inflation
up slightly in the near term. pressures are projected to emerge in the latter part of the
forecast horizon. As a result, we expect the Fed to start
However, while the threat from the Euro-area crisis cur- raising policy rates and gradual unwind its securities
rently appears less menacing, US fiscal challenges holdings around mid-2014.
around the end of this year imply that risks to the US out-
look over the next two to three quarters remain tilted to In the more immediate future, however, the Fed is likely
the downside. The probability of another US recession is later this month to postpone the expected first rate hike
uncomfortably high at 20-25%, in our view. from late 2014 to mid-2015. In our view, the central bank
is currently overestimating the labour market slack and
On the other hand, an orderly resolution of the pending hence underestimating the longer-term risk of inflation.
fiscal issues, as assumed in our baseline scenario, should Additional asset purchases (QE3) by the Fed are not ex-
pave the way for stronger confidence and hence brighter pected unless the Euro-area crisis blows up again or if
economic prospects in 2013, when growth is projected to US policymakers fail to resolve the pending fiscal issues
exceed potential assumed at around 2% annually through in an orderly manner.
most of the year.

USA: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009 (USDbn) 2010 2011 2012E 2013E 2014E
Private consumption 9,845.9 1.8 2.5 1.9 2.0 2.1
Government consumption and investment 2,967.2 0.6 -3.1 -2.0 -0.9 -0.3
Private fixed investment 1,703.5 -0.2 6.6 9.4 6.9 6.9
- residential investment 354.2 -3.7 -1.4 11.7 9.4 12.4
- equipment and softw are 898.3 8.9 11.0 8.3 6.9 6.0
- non-residential structures 451.1 -15.6 2.8 10.2 4.5 3.5
Stockbuilding* -154.2 1.5 -0.2 0.2 0.1 0.0
Exports 1,587.5 11.1 6.7 4.3 5.2 5.3
Imports 1,976.2 12.5 4.8 4.2 5.7 5.4
GDP 2.4 1.8 2.2 2.0 2.2
Nominal GDP (USDbn) 13,973.7 14,498.9 15,075.7 15,716.1 16,276.1 16,885.0

Industrial production, % y/y 5.4 4.1 4.0 4.0 4.3
Consumer prices ex. energy and food, % y/y 1.0 1.7 2.1 2.2 2.2
Current account (USDbn) -442.0 -465.9 -471.5 -569.7 -506.5
- % of GDP -3.0 -3.1 -3.0 -3.5 -3.0

Federal budget balance (USDbn) -1,293.5 -1,300.0 -1,100.0 -900.0 -700.0
- % of GDP -8.9 -8.6 -7.0 -5.5 -4.1


■ USA

A perfect storm of fiscal chaos hopefully avoided Moving slowly forward
Three US fiscal issues pose a threat to the economic out-
look: the so-called fiscal cliff, another increase in the
Treasury debt ceiling and the need for longer-term fiscal
sustainability.

As we approach the end of the year, attention will focus
even more sharply on the risk of the fiscal cliff – the un-
fortunate coincidence of about USD 600bn in tax in-
creases and spending cuts that will take effect next year,
should Congress not act to change current law. Failure to
scale back the fiscal cliff could knock as much as 4¼%
off real GDP in 2013, enough to push the US economy
back into recession. Moreover, the Treasury is likely to
hit the debt ceiling again in December. Assuming it uses
Slow progress towards full employment in late 2014
the accounting strategies that have been employed in the
past, the Treasury seems likely to be able to finance gov-
ernment operations under the current limit until some-
time in February 2013, by which point Congress must
raise the debt ceiling. Failure to do so would imply de-
fault on some of the US government’s obligations.

With both political parties in full campaigning mode,
none of these issues are likely to be resolved before the
presidential elections on 6 November. As seen too often
during the past two years, there will most likely be plenty
of political brinkmanship and the accompanying uncer-
tainty will probably come at a cost to the economy and
the financial markets later this year and in early 2013.
The longer the uncertainty persists, the more likely it will Stronger underlying inflation pressures in 2014
hurt confidence, hiring, investment and spending.

However, our expectation is that when pressured by the
threat of another recession, policymakers will take action
to reduce the fiscal drag on growth (to around 0.5% of
GDP) either during the so-called lame duck session after
the election or in January when the new government
takes office. Obviously, the outcome of the November
elections will be very crucial to how the fiscal debate
plays out. In this context, the congressional election re-
sults will be at least as important as who wins the White
House, Obama or Romney.

Extending the otherwise expiring tax cuts and other eas-
ing measures and repealing the automatic federal spend- Recession if economy is pushed off the fiscal cliff
ing cuts would significantly reduce the risk of recession, 1 1
% points Fiscal policy impact on GDP growth % points
but at the cost of a substantially larger budget deficit.
0 0
Thus, with an extension of current policy federal debt
held by the public would rise from 70% of GDP today to -1 -1

around 90% by 2022 compared to around 60% if current
-2 -2
law is not changed. In other words, apart from resolving
the fiscal cliff issue and raising the debt ceiling policy- -3 -3
makers will also soon have to address the need to restore
-4 -4
longer-term fiscal sustainability in order to shift the risk
Current law Current policy
to the economic outlook from negative to positive. -5 -5
2011 2012 2013
Source: Nordea Marktes, Congressional Budget Office and Office of
Johnny Bo Jakobsen Management and Budget
johnny.jakobsen@nordea.com +45 3333 6178


■ Euro area

Restore confidence to end the recession
• Gradual recovery from year-end Restoring confidence is key to recovery
Why do we expect a recovery when numerous problems
• Helped by smarter interventions remain unsolved and deleveraging has only just begun?
• Significant downside risks to inflation Well, because we believe that decisions have been taken
and will be taken in the coming months that are decisive
• Spain heading for deeper recession and will help gradually restoring confidence in the Euro
area. After all, monetary policy is extremely lenient, ex-
The Euro area is in recession. The second quarter showed port markets are growing decently, the EUR is weaken-
GDP contraction and the third quarter most likely will ing and even if more fiscal tightening will be needed in
too. We expect a recovery starting around year-end and a the years to come at least the pace of tightening will be
very gradual pick-up of momentum during 2013. In 2014 slower. Confidence is the missing ingredient that will al-
growth will still be somewhat below the pre-crisis “nor- low these factors to work and pave the way for a very
mal” level. gradual recovery.

We have made a modest upward revision to growth this Restoring confidence takes more time than eroding it,
year, but otherwise kept the Euro-area forecast roughly and we do not in any expect that the debt crisis is about
unchanged compared with our May forecast revision. We to end. Solving the crisis requires massive deleveraging
have revised down our growth forecast for Spain in 2013 in the years to come, structural reforms, growth and
after the announcement of new austerity measures during building new credible institutions to prevent the same
the summer. kind of crisis from happening again. Restoring confi-
dence also requires that Greece starts implementing the
Recovery from year-end reforms agreed with the Troika.
It is fair to say that signs of recovery have been scant up
to this point. However, the most forward-looking indica- Interventions will work this time
tors for growth in the Euro area as a whole have at least In terms of the decisive action, the ECB seems ready to
stopped falling and stabilised at low levels. bring out Big Bertha – more or less the entire arsenal of
instruments is being considered. We believe ECB inter-
The contraction in Q2 was not as severe as one might ventions in the secondary market – done smarter this
have expected given the financial stress during that peri- time – combined with intervention in the primary market
od with Greek post-election chaos and a Spanish bank by the EFSF/ESM will reduce the level of stress in finan-
bailout. Some lagged adverse impact on the economy is cial markets and help restore the confidence that is need-
likely to be visible in the Q3 growth numbers, but we ex- ed to embark on a path to recovery.
pect Q3 to mark the bottom of the current business cycle. When the ECB intervened through its old programme
(the SMP) it did not work very well. Rather it reduced
Another reason that the Q2 numbers were not as bad as the incentive for eg Italy to do the right thing. Therefore,
feared is Germany. German growth remained resilient interventions to reduce financial stress never became
during the first half of the year driven to a large extent by credible. This time, the ECB will intervene with strict
the export sector and to some extent also the German conditionality – ie only in countries that have a bailout
consumers. At present, the survey-based indicators point programme with promises to reduce budget deficits and
to slightly negative growth in Germany in Q3.

Euro area: Macroeconomic indicators (% annual real changes unless otherwise noted)
2009 (EURbn) 2010 2011 2012E 2013E 2014E
Private consumption 5,128 0.9 0.2 -0.8 -0.4 0.3
Government consumption 1,987 0.7 -0.3 0.2 -0.9 -0.8
Fixed investments 1,735 -0.2 1.6 -3.0 1.1 2.4
Stockbuilding* -48 0.7 0.3 -1.2 -0.1 0.5
Exports 3,272 11.0 6.3 1.6 4.9 1.6
Imports 3,155 9.4 4.1 -2.3 2.9 1.4
Net exports* -0.8 0.7 1.0 1.6 1.0 0.2
GDP 1.9 1.5 -0.4 0.6 1.7
Nominal GDP, EUR bn 8,917 9,155 9,410 9,512 9,725 9,804

Industrial production, % y/y 4.3 2.7 -2.6 2.9 5.8
- core inflation** 1.0 1.7 1.6 1.2 1.0
Current account, bn EUR -3.2 -1.1 33.1 21.0 17.0
Current account, % of GDP 0.0 0.0 0.3 0.7 1.0
General government budget balance, % of GDP -6.2 -4.1 -3.7 -3.0 -2.5
General government gross debt, % of GDP 85.3 87.2 90.9 93.9 96.4


■ Euro area

undertake reforms – which will make actions on both Gradual recovery from year-end
sides more credible. The ECB can intervene in large
amounts and significantly reduce financial stress because
the ECB does not have to rely on market pressure. In-
stead, the crisis bailout country will have to continuously
meet the agreed conditions, or it not only risks losing ac-
cess to the cheap bailout loan but also to the “free” ECB
interventions.

Within the next few months we expect Spain to ask for
interventions from the bailout funds and hence from the
ECB. Italy could follow late this year, as it could be a
way for the current premier to secure budget discipline
beyond the April 2013 general elections. Such a political
manoeuvre could make the next government obliged to
Confidence is crucial
continuously meet the conditions that Mr Monti agrees
upon to get ECB support, or the ECB stops intervening.

Limited underlying inflationary pressure
Consumer price increases are likely to remain above 2%
in the coming quarters despite the ongoing recession.
Higher food and energy prices as well as indirect tax
hikes in some countries will keep the headline numbers
elevated. Underlying inflation will, however, gradually
fall throughout most of this year and 2013 before picking
up modestly in 2014. Risks are skewed significantly to
the downside throughout the forecast horizon. Upside
risks to inflation from the very easy monetary policy are
unlikely to materialise within our current forecast hori-
zon. Consumer price increases remain elevated

Spain heading for deeper recession
Since our most recent forecast update, Spain has taken a
EUR 100bn bank bailout and announced new austerity
measures totalling EUR 65bn until 2014. The bailout of
Spanish banks seems sufficient to cover near-term capi-
talisation needs, as it has also been confirmed by inde-
pendent consultants. However, the banking sector re-
mains a key concern as the economy heads deeper into
recession.

Key elements of the austerity package include a VAT
hike from 18% to 21% from September this year and cuts
in benefits and public wages. As a consequence, we have
revised down our forecast for growth in both 2012 and Monetary policy is extremely lenient
2013. On a more positive note, we do expect intervention
in Spanish sovereign bonds by the ECB and the rescue
funds and a somewhat reduced level of financial stress.

Anders Svendsen
anders.svendsen@nordea.com +45 3333 3951


Economic Outlook, September 2012 EN

Economic Outlook, September 2012 EN

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