Swedish Economic Outlook

Swedbank Economic Outlook
Swedbank’s analysis of the international and Swedish economies 22 January 2009
Economic Secretariat, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 1028
e-mail: ek.sekr@swedbank.se Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 1588
Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897
Worldwide recession creates major challenges
for the Swedish economy
• The effects of the financial crisis on the real economy arrived faster and more
forcefully than expected, not least in the USA, Europe and Japan. The emerging
economies also experienced slow-downs. We expect that global GDP growth will
reach ½ % this year. Thus, world economic growth will be the weakest since the
early 1980s.
• The driving force for a recovery, albeit slow, is low inflation and low interest rates
in combination with fiscal stimulus. Next year, GDP growth is expected to in-
crease to 2.5 %, which will be half of the 2007 growth rate. Growth levels before
the financial crisis were not sustainable, however, but were driven by a substan-
tial build-up of debt which must now be reduced.
• There is reason for a strong economic policy expansion, as the threat of a spiral
of credit squeeze, falling demand and deflation must be given serious attention.
On the other hand, the risk of dangerous deflation after the IT bubble in the late
90s was exaggerated, and resulted in a policy that contributed to the crisis which
we are now experiencing.
• Sweden is developing in step with Europe. This year, GDP will decline by 1.8 %
and in 2010 GDP will grow by 0.5 %. Exports will decline somewhat less than in
Germany. Swedish households will gradually adjust their balance sheets. We ex-
pect that the government will continue to prioritise budget discipline. This means
restraint in the size of the fiscal stimulus package (SEK 30 billion) next year – de-
spite the fact that it will be an election year. When the business climate improves,
Sweden will probably be in a stronger position than the euro-area, as public fi-
nances will be under less strain here.
• Consumer prices are expected to fall by 0.2 % this year, and increase by 1.2 % next
year. The reversal will be driven by interest costs and raw material prices. The
Swedish Riksbank will again deviate from its own repo interest rate forecast and will
further reduce the key interest rate in the spring to 1 %.
• The downturn will hasten structural change in Swedish business, for example in the
motor vehicle industry. Times of crisis are times of change and strategy work, which
improve competitiveness in the long run. Change? Yes, we can!
Cecilia Hermansson Jörgen Kennemar

List of Contents Page
World economy on crutches 3
Balance of resources and key ratios 5
- A clearly darker view of the world than last autumn 6
- Quality-assure forecasts! 7
- Not a normal recession in the world economy 8
- Ten questions about deflation, the financial crisis and 10
economic policy
- Three scenarios for growth prospects 23
- Forecast risks should be given attention 24
- A summary of our forecast assumptions 25
- Trends in individual countries and regions 26
+ USA – households drive the downturn 27
+ Japan – will not avoid recession 29
+ China – noticeable fall in temperature 31
+ India – moderate downturn 33
+ The EU – a strong decline in exports 34
Sweden – outlook and risks 38
A severe bout of flu in exports 40
Investment falls on a broad front 45
Big risks in the labour market 48
Households keep their wallets closed 53
Inflation, up and down 59
Economic policy as a counterweight 60
- Monetary policy has room for improvement 60
- Fiscal policy: There will be more 62
References 65
2 Swedbank Economic Outlook • 22 January 2009

Introduction
World economy on crutches
The state of ill health of the global economy has worsened. The
financial crisis intensified during the autumn and the effects on
the real economy attained colossal proportions. World trade
slowed down, as did industrial production, and redundancies in
the labour market reached new heights. Not unexpectedly,
business and consumer confidence weakened.
We have revised global GDP growth downwards in 2009-2010
to just ½ % and 2½ % respectively (from about 5 % in 2007 and
3 % in 2008). This is the weakest growth rate since the early
1980s. The downturn is driven by a contracting financial sector
with consequent credit squeeze and lower asset prices, which
in turn reduce demand in the real economy. Nor can Sweden
avoid being affected by this downward spiral: GDP will decline
by 1.8 % this year, but there will be a slight improvement in
2010 to 0.8 % growth, in step with the start of a slow world-wide
recovery (see page 35 for a summary of the forecast for Swe-
den).
We expect lowest
global growth
since the early
1980s
The threat to the world economy can be found in the risk of a
debt-deflation spiral. As yet, consumer prices are falling as a
result of the reversal in the commodities market, although
weaker demand – if protracted – in combination with debt re-
structuring can cause good deflation to become bad or even
dangerous deflation.
The risk of a spiral
of debt restructuring,
weaker demand and
deflation should not be
taken lightly
One conclusion is that deflation will occur more often as the
central banks have become better at creating price stability. Fi-
nancial crises and asset bubbles which burst also increase the
probability of deflation. At the same time, each period of defla-
tion must be judged as unique on the basis of the prevailing
economic trend. In the early 2000s, central banks exaggerated
the fear of dangerous deflation and conducted an economic pol-
icy which was far too expansive, which also resulted in high
growth of credit and housing bubbles. A one-sided inflation tar-
get measured in terms of consumer prices tends to create un-
evenness and imbalance when inflation appears more on the
asset side (shares, housing, commodities) and globalisation
pushes down import and consumer prices.
This time around the risk of dangerous deflation is real. Our re-
port describes three prevailing channels between financial crisis
and deflation, asset prices and deflation, and credit squeeze
and deflation. Far-reaching monetary and fiscal stimuli are re-
quired to soften the effects. Another factor that contributes to
the need for expansion is the size of the financial sector and its
importance for the global economy. A major financial melt-down
must be avoided. The challenges are considerable, both for the
new president of the USA and politicians in Europe and Asia,
jointly to create better rules for the financial sector and to at-
tempt to minimise the risk of new bubbles and savings imbal-
ances.
The patient will not re-
cover without medicine
Swedbank Economic Outlook • 22 January 2009 3

Introduction
The uncertainties in the forecasts are substantial, and therefore
we discuss three scenarios in this report. A long drawn-out re-
cession with a considerable balance sheet correction is our
main scenario (with 45 % probability) and the most desirable al-
ternative. A scenario that we consider less likely is that the busi-
ness climate will recover rapidly (25 %), and with that there
would be a risk of new, even greater imbalances within a short
period of time. It would be a mistake, both for the economy and
ecologically, to attempt to maintain the build-up of debt as a
driving force for consumption. The least desirable scenario
(30 %) is that the world economy will enter a period similar to
that which took place in Japan since the 90s, i.e., with stagna-
tion and deflation. Using monetary and fiscal policy forcefully –
and also implementing structural change – can prevent this.
Our three scenarios
all have relatively high
probability – with great
uncertainties
What would drive a slow recovery of the world economy? Low
inflation and lower interest rates in combination with expansion-
ary public policies. Only after the forecast period, when debt re-
adjustment has progressed further, will there be any opportunity
for a modest recovery driven by private investment and con-
sumption.
During the next few years, the importance of government and
the public sector in economies throughout the world will in-
crease. Fiscal expansion, capital injections and banking emer-
gencies to get rid of bad loans and “quantitative/credit easing”
when the key interest rate approaches zero will inflate the bal-
ance sheets of central banks and impair public finances, both in
the short term and in the medium term. There is a very fine bal-
ance between stimulating in the right way and at the right time,
and reducing incentives and cleaning up when the recession is
over.
In times of uncertainty, forecast risks must be given attention.
The assumption that the financial crisis will slowly dissipate is a
highly uncertain one, not least as a new wave of credit losses
could occur in the wake of the recession. Up to now, the un-
ease in the financial markets has been concentrated on share
prices and interest rates, while movements in the major curren-
cies have been relatively controlled. Here there are risks, not
least in the light of worsening public finances. In the report, we
look at many other risks, but we also believe that there must be
greater focus on “known unknowns”, with sensitivity for all “un-
known unknowns”.
In times of uncertainty,
forecast risks must be
focused on!
Cecilia Hermansson

Balance of resources and key ratios
Swedbank’s economic forecast for Sweden
January 2009
National Accounts
Changes in volume, percent
2007 2008 P
1)
2009 P
1)
2010 P
1)
Households’ consumption 3.0 1.0 (1.8) 0.0 (1.5) 1.5
expenditure
Government consumption 0.4 1.2 (0.8) 1.5 (1.2) 1.7
expenditure
Gross fixed capital formation 7.5 2.5 (3.7) -7.5 (2.5) -3.0
- private excl. housing 8.4 3.8 (3.9) -8.5 (2.6) -6.1
- public 3.2 3.5 (5.8) 9.5 (8.0) 8.0
- housing 8.7 -5.0 (1.2) -18.0 (-3.0) -1.8
Changes in inventories 2)
0.8 -0.4 (-0.2) -0.5 (0.0) 0.0
Exports, goods and services 5.7 2.2 (4.5) -3.5 (3.0) 2.0
Imports, goods and services 9.4 3.4 (5.5) -3.7 (4.2) 1.8
GDP 2.6 0.5 (1.5) -1.7 (1.2) 0.8
GDP, calendar-adjusted 2.7 0.2 (1.2) -1.8 (1.4) 0.5
Domestic demand 2.9 1.2 (1.7) -1.0 (1.5) 0.6
Net exports -1.1 -0.3 (0.0) -0.2 (-0.3) 0.2
1) The figures from our last forecast in September 2008 are given in brackets
2) Percentage change in previous year’s GDP
Economic indicators
Annual change in percent unless otherwise indicated
2007 2008 P 2009 P 2010 P
Nominal hourly wages, total 3.6 4.0 3.5 3.0
Nominal hourly wages, industry 3.9 4.3 3.2 3.0
Industrial production 2.3 -1.0 -3.0 1.2
CPI, annual average 2.2 3.5 -0.2 1.2
CPI, Dec-on-Dec 3.5 0.9 0.9 1.7
CPIX, annual average 1.2 2.5 1.1 1.3
CPIX, Dec-on-Dec 2.0 1.4 1.5 1.4
Real disposable income 3.9 3.3 2.6 2.0
Savings ratio 5)
9.3 11.5 14.0 14.3
Open unemployment 3)
6.1 6.2 8.4 9.5
Total unemployment 3) 4)
8.1 8.1 10.6 12.0
Total labour force 2.6 1.0 -2.5 -1.3
Current account balance 5)
8.3 7.0 6.4 6.4
Financial savings in public 3.6 2.1 -1.5 -2.6
sector 5)
Central government 40.7 39.3 41.1 42.5
debt (Maastricht) 5)
3) Percentage of the labour force, EU-harmonised
4) Open unemployment and labour market measures (individuals aged 15-75)
5) Percentage of GDP

Global economy
Worsening outlook for the world economy
A distinctly darker view of the world than last autumn
When we made our last forecasts in August and September,
future prospects were quite different from those prevailing to-
day. In our main scenario, we assumed that financial unease
would continue, but that it would not deepen and persevere to
the extent that the autumn’s outcome showed. We considered
a worse scenario to be 35 % probable, but the main scenario
also had relatively low probability, even though it was some-
what higher, at 50 %. However, the worst recession scenario
became reality, and the risks that we noted in the main scenario
have been mostly realised:
Our more
pessimistic scenario
was realised …
Deeper, longer lasting financial unease
A greater degree of credit squeeze
Rapidly falling asset prices
A more rapid increase in the savings ratio of American households
Greater negative effect on emerging economies
On the other hand, the risks characterising continued, high
commodity prices and a rapidly falling dollar, were not realised.
On the contrary, there was a positive development in that com-
modity prices fell strongly and contributed to a lower inflation
rate. This, together with a reduction in demand, has also meant
that economic policy could be much more expansive than we
forecast. This applies both to monetary policy with lower key in-
terest rates and a fiscal policy with a stimulus package which
comes into effect during the current year.
… but the turnaround in
commodity prices con-
tributed to lower inflation
than expected
Global GDP forecast (%)
Source: National statistics and Swedbank’s forecasts.
* The countries represent about 70 % of the global economy.
World Bank weights from 2007 (purchasing power parity,
PPP) have been used.
January forecast September forecast
2007 2008 2009 2010 2008 2009GDP growth (%)
USA 2.0 1.2 -1.6 1.0 1.7 1.1
2.6 0.9 -2.0 0.7 1.4 0.8EMU countries
Germany 2.6 1.3 -2.2 0.6 1.8 0.6of which:
France 2.1 0.9 -1.6 0.9 1.2 0.8
-0.3 -1.7 0.5 0.5 0.2Italy 1.4
1.3 -2.0 0.0 1.2 -0.2Spain 3.7
3.0 0.8 -2.3 0.4 1.4 1.0UK
2.4 0.1 -2.1 0.2 1.1 1.1Japan
13.0 9.6 6.8 7.4 9.8 8.7China
9.3 6.2 5.5 6.0 6.9 6.4India
Brazil 5.4 6.0 2.8 4.0 4.7 4.0
8.1 6.2 1.0 4.2 7.3 6.8Russia
Global * 4.9 3.1 0.3 2.5 3.6 3.0

Global economy
Compared with our revised forecasts in September, GDP
growth for 2008 is expected to be ½ percent lower, and the out-
look for 2009 is substantially reduced (by 2½ percentage
points). The global demand slow-down during the autumn –
following the failure of Lehman Brothers and the resulting
disruption of financial markets throughout the world – has con-
tributed to the more developed economies already beginning to
contract and continuing to do so. Emerging economies are also
growing more slowly.
The forecasts have
been revised strongly
downwards since
September
This development is driven by a spiral of a contracting financial
sector, worsening sentiment and weaker demand. When these
factors reinforce one another, economies are deeply affected.
Because the global spread is considerable and previous ex-
perience of banking crises show that it takes a relatively long
time for recovery, we consider that the recession will be more
drawn-out than recent recessions. Therefore, it is expected that
recovery will be slow when the turnaround actually transpires,
and GDP growth will be relatively weak during 2010 as well.
This is our main scenario, but on page 21 and forward, we also
discuss alternative scenarios and forecast risks.
The world economy is
in a downward spiral,
where forces reinforce
one another
Quality-assure forecasts!
The forecasts made last year were not realised and will not be
realised. There are several explanations as to why the forecast-
ers – including ourselves – did not manage to assess develop-
ments. The appearance of completely unknown factors (un-
known unknowns) and the inability to evaluate the course of
that which was known (known unknowns) are some of the rea-
sons. Also, few proposed the worst scenario before there was
sufficient evidence for it occurring (optimists usually dominate
pessimists). The prevailing trend was extrapolated, and the dif-
ficulty is to determine when the turnaround will occur. It is there-
fore important to determine the relevance of the forecasts – are
they needed if they nevertheless cannot forecast when the
turnaround will occur?
We will always need assessments of the future and perhaps
even more so when there is considerable uncertainty. At the
same time, greater caution is needed both with those who pro-
duce and those who consume forecasts. Some sort of quality
assurance would be desirable.
When uncertainty is at
its greatest, the need
for forecasts is also
unusually great
In the first place economic developments are not a statistically
exact science as, for example, the natural sciences. Dynamics
as well as influence from the forecasters themselves also exist.
Pessimistic forecasts can, for example, contribute to greater in-
centive packages, which means that developments can be bet-
ter than the forecasts predicted. Also, pessimistic forecasters
can contribute to a more pessimistic climate, and the forecasts
become self-fulfilling because they are disseminated in the me-
dia.

Global economy
In the second place, now that we are going forward, we will also
continue to have many “known and unknown unknowns”. This
concerns the continued progress of the financial crisis, the ef-
fect of the crisis on the real economy and on economic policy
and the effect of incentives on the economy. Instead of just
reading tables and focusing on individual growth figures, it is
better to see how various scenarios compare with another and
on forecast risks. One should also see the figures as an aver-
age value in a broader range.
Finally: Individual forecasters seldom make better forecasts
than the average assessment over time, but in downturns, pes-
simists have an advantage and optimists a disadvantage (and
vice versa). Therefore, the consumer of forecasts also needs to
consider what organisation is behind them and how they look
historically – among optimists and pessimists. Forecasts are of-
ten revised when developments change rapidly. Consensus
forecasts should therefore be monitored on a continuous basis.
Not a normal recession in the world economy
A typical recession normally lasts four quarters and involves a
2 % decline in GDP. The IMF economists, Claessens, Kose and
Terrones (2008) have, however, found that if credit squeezes
and falling asset prices are included or contribute to the down-
turn, recessions are longer and deeper. See also Rogoff and
Reinhart (2008).
Type of crisis No. of quarters Effect
Credit squeeze 10 -20 % decline in credit
Fall in house prices 18 -30 % decline in house prices
Fall in share prices 10 -50 % decline in share prices
Experience suggests
a more prolonged
recession
If both a credit squeeze and a fall in house prices are included,
the recession is prolonged by at least one quarter, while the
downturn in GDP will be two to three times greater. With re-
spect to the size of the financial crisis and its consequences for
both the credit squeeze and the fall in price of asset prices –
and that it has a global spread – the probability is considerable
that the recession in the world economy will last longer this time
than, for example, in 2001 when the IT bubble burst.
Previously – see, for example, Swedbank Analysis No. 2 (2008)
– we explained the financial crisis as a combination of political
failure (micro and macro), market failure (micro), and economic
psychology (mania, panic and crash resulting from herd behav-
iour, exaggerated expectations and asymmetric information).

Global economy
In this report, we investigate the connection between the finan-
cial economy and the real economy. In 1933 (“The Debt-
Deflation Theory of Great Depressions”), Irving Fisher had al-
ready found a connection between financial crisis and deflation.
In the 1980s, Hyman Minsky developed the model by also in-
cluding asset prices (1982), and the present Federal Reserve
Chairman, Ben Bernanke (1983), investigated the connection
between credit market and deflation. Below, we see how these
three channels act together. The components reinforce one an-
other in a downward spiral of losses in the financial system and
weaker demand and prices.
It is time to take a new
look at old theories
from the 1930s,
for example, Fisher’s
debt-deflation theory
Connections between financial sectors (indebtedness) and the real
economy (deflation)
Source: Goetz von Peter (2005)
This spiral can be “triggered” by such factors as an increase in
interest rates by the central bank, which creates stress among
many of those who are in debt. Asset prices (such as house
prices) fall. In 1994, Ben Bernanke, together with Gertler and
Gilchrist, wrote about the financial accelerator (The financial ac-
celerator and the flight to quality). In times of high productivity
growth, the balance sheets of companies and households im-
prove, and this reduces premiums on the credit market. In this
way, the financial sector strengthens the upturn in the economy,
but on the other hand, the downturn is also strengthened be-
cause the effect of the financial sector on the business climate
is procyclical. For many years, the financial accelerator has
been positive, but since the financial crisis started, it has in-
stead been negative. Since the beginning of the 1980s, many
countries have increased their debt burden considerably faster
than their GDP growth.
We must learn to
understand the
financial accelerator
better!
Deflation
Losses
Indebtedness
Banking
system
Credit-
squeeze
Suspend
payments
Forced
to sell
Repay-
Monetary
squeeze
Asset -
prices
Expenditure
Reduce
Minsk
Minsky
BernankeFisher
y

Global economy
American debt in relation to GDP (left-hand scale) and
nominal and real bond interest (right-hand scale)
S o u rc e : R e u te rs E c o W in
In the USA, the debt burden as a percentage of GDP doubled
from 160 % in 1980 to 360 % in 2008; some of the reasons be-
ing a result of hyperactivity, deregulation in the financial mar-
kets and other product markets, lower market interest rates in
the wake of greater competition, and the entry of emerging
countries into the world market. Also, higher indebtedness has
driven growth in the real economy for many years.
The debt burden (and associated imbalances in savings) cre-
ates risks for the world economy. The size of the financial sec-
tor and its globalisation are problematic as management of cri-
ses by central banks and governments is made more difficult.
Similarly, there is an increase in the risk of a greater depres-
sion, including a spiral of reduced indebtedness, weaker de-
mand and deflation similar to that of the great depression of the
1930s and Japan’s financial and property crisis of the early
1990s.
It is not good risk
management to allow
accumulation of debt
to drive growth
Ten questions about deflation, the financial crisis
and economic policy
1. Is inflation always preferable to deflation?
Inflation is an increase in the general price level in the econ-
omy, while deflation is ditto reduction. The change in price lev-
els is determined by the growth of the money supply in relation
to the growth of the economy (adjusted for the speed in which
money circulates). In 1968, Milton Friedman said that “inflation
is everywhere and always a monetary phenomenon”. Thus also
deflation.
In our last Swedbank Economic Outlook, we discussed the risks
of stagflation, i.e., a period of stagnation and high inflation. The
turnaround in the business climate and the fall in commodity
prices have now instead increased the probability of deflation. It
is common to differentiate between:
The turnaround from
stagflation to deflation
has been rapid

Global economy
Disinflation, i.e., a period of decreasing inflation resulting from such factors
as lower commodity prices and strong productivity development. During
such a period, months of mildly falling price levels can occur.
Deflation, falling prices with a deflationary dynamic which is made
permanent by weaker demand and expectations of prices continu-
ing to fall.
Low inflation, about 1-2 % (rather than having the goal of no in-
flation at all) has been prescribed in order to reduce the risk of
ending up a deflationary spiral. Wage formation is helped by in-
flation as nominal wages are not easily permitted to fall. Fur-
thermore, monetary policy is made more difficult as nominal in-
terest rates cannot be less than zero. Financial stability is also
greatly put at risk by deflation. Since the Second World War, the
central banks have seen their task as fighting inflation, and
have, overall, succeeded. During the 1800s, however, deflation
occurred much more frequently, and in contrast to the general
perception, there were also periods of growth and deflation.
There are several
good arguments as to
why deflation can be
dangerous – but it is
important to
differentiate between
different types of
deflation
Changes in the USA’s general price level, 1800-2008
S o u rce: R euters E coW in
Michael Bordo and Andrew Filardo (2005) divide deflation into
three types: Good, bad and ugly.
1873-96 – good deflation which became bad
1837-43 – bad deflation
1919-21 – bad deflation, ugly for some
1921-29 – good deflation
1929-33 – ugly deflation
1937-38 and 1948-49 – two episodes of bad deflation
Deflation, thus, does not need to be a problem in connection
with high productivity growth and the emergence of new sectors
(cars, telephones, radios, refrigerators and IT). Bordo and Fi-
lardo rather maintain that it is a matter of seeing each period of
deflation as unique (and as an effect of economic development
in general rather than the other way round). The focus should
be on the ugly deflation (the depression of the 1930s and Ja-
pan), but not only on this type.

Global economy
In the future, periods of deflation will increase. The emphasis of
monetary policy towards low inflation means that periods of de-
flation will occur more often. Possibly, the reallocation aspect
should also be included: Is it right that borrowers (indebtedness)
are always given a premium over lenders (savings) which oc-
curs with continuous inflation? Either the inflation target must be
raised to avoid deflation, or the view of deflation must be re-
examined so that it can also be desirable depending on what
creates it.
There is a strong
indication of more
periods of deflation in
the future – perhaps
not necessarily bad
2. Was fear of deflation exaggerated in the early 2000s and
what does asymmetric monetary policy mean?
Now that we know the answers, it is easy to conclude that fear
of deflation after the IT bubble had burst was exaggerated. As-
set prices did fall, as did companies’ investments, but the de-
cline was not sufficient in general over enough sectors and
enough countries for there to be a definite risk of weaker de-
mand and deflationary expectations. Instead, considerable high
productivity growth contributed to a period of “jobless growth”.
Incorrect analysis of
the risk of deflation in
the early 2000s …
Because fear of deflation is greater than the fear of inflation
among many central banks, they will pursue an asymmetric
monetary policy. The Federal Reserve in the USA is an exam-
ple of this. If inflation varies around (the unofficial) inflation tar-
get, the central bank will act more aggressively if there is a risk
of a downturn in price levels than with an equivalent upturn in
price levels. The Federal Reserve also tends to reduce interest
rates more when asset prices fall than it increases interest rates
when asset prices rise. The key interest rate was kept at a low
level for a long time after the IT crash. Monetary policy thus
contributed to increasing the growth of credit, indebtedness and
the risk of a subsequent major downturn in the business cycle.
Thus, the monetary policy of the central banks has also meant
an increased risk of ugly deflation.
… contributed to an
asymmetric monetary
policy, primarily in the
USA
3. Is it different this time – how uneasy should we be about
deflation?
As opposed to the beginning of the 2000s, the trend since 2007
has had components of a process leading towards “debt defla-
tion” according to the channels described above. There is
cause to compare the course of events with the 1930s in a
global sense, or the 1990s in Japan, although there are also dif-
ferences, primarily in how economic policy has been conducted
up to now. This time, we need to take the risk of deflation seri-
ously, because underlying developments point towards a con-
tracting financial sector, credit squeeze, expectations of weaker
demand and, in due course, also expectations of falling prices.
The three channels
between financial crisis
and deflation indicate
that things are different
this time
The turnaround from relatively high inflation to low inflation has
been rapid. In July, inflation in the OECD was 4.7 %, and in No-
vember it had fallen to 2 %. In the USA, inflation was negative,

Global economy
on an annual basis in November, and in many other countries
inflation is falling quickly.
Inflation in the USA, Japan and Europe (%)
S o u rc e : R e u te rs E co W in
During the forecast period, we expect inflation first to fall. After
that there will be a period of deflation. Part of this will be due to
the reversal in commodity prices and another part of it will be
due to weaker demand. Depending on how quickly and to what
extent the monetary and fiscal stimulus have an effect, confi-
dence will increase and there will be expectations of rising
prices. We consider that 2010 will also be a year of relatively
low inflation, although slowly rising. Japan is the exception, and
there deflation will continue both in 2009 and part of 2010.
In our main scenario,
we avoid ugly deflation
Global CPI forecast (%)
CPI Y/Y (%) 2007 2008 2009 2010
USA 2.9 3.7 0.2 1.5
EMU countries 2.1 3.3 0.7 1.4
of which: Germany 2.3 2.6 0.5 1.1
France 1.6 3.0 0.7 1.2
Italy 2.0 3.4 1.2 1.4
Spain 2.8 4.3 1.3 1.8
UK 2.3 3.5 0.3 1.2
Japan 0.1 1.5 -1.1 -0.2
China 4.8 6.2 2.5 3.0
India 6.3 8.3 6.5 5.0
The risk of ugly deflation arising increases the longer the period
of weak demand lasts, and the longer the structural problems
remain in the financial sector (bad loans, solvency problems)
and the less goal-oriented the economic policy is.

Global economy
4. Which economic policy needs to be conducted in this
situation?
It is reasonable to
be pragmatic in this
situation
Since the financial crisis started in 2007, economic policy has
been directed towards both attempting to stabilise develop-
ments in the financial markets, and to counteract the downturn
in demand. All means and economic theories are permitted si-
multaneously. The degree of pragmatism is considerable. Un-
certainties about the future require a mix of different measures.
Below is given a highly simplified division according to a num-
ber of “schools”:
The monetarists (for example, Alan Greenspan) increase the
money supply in order to increase investment and consumption. In-
terest rate reductions, the supply of liquidity through purchases of
bonds by the central bank or the “money printing presses” are tools
intended to reduce instability in the financial markets, to reduce
credit restraint and increase demand in the economy.
The Keynesians (for example, Paul Krugman) increase demand
(both consumption and investment) through greater public expendi-
ture, lower taxes and lower interest rates.
The structuralists (for example, Edmund Phelps) prescribe support
for investment through lower interest rates and tax rebates to com-
panies rather than households. An increase in potential growth can
strengthen finances in the medium term. Warnings are given of
crowding out the private sector when the public sector grows rap-
idly (private sector is given less access to capital and also innova-
tion, etc.).
The conclusion is that a strongly expansive economic policy
needs to be conducted in order to minimise the risk of a long
period of falling demand and deflation. It is meritorious that
pragmatism prevails and that several tools are being used. Poli-
cies need to be coordinated – both within the country and be-
tween countries – in order to give the maximum possible effect.
On top of this, all forms of protectionism need to be resisted.
Can the expansive
policy reduce the risk
of protectionism?
5. Has the economic policy improved financial stability?
After the failure of Lehman Brothers, the financial markets
ceased functioning normally. A major capital injection for the fi-
nancial sector was demanded in order to create confidence and
improve the liquidity situation. A coordinated action in Europe
and also in the G20 countries created some confidence. In the
USA, action began slowly when Congress first refused the so-
called TARP initiative of USD 700 billion, but subsequently ap-
proved it. Between September and December last year, various
countries announced bank guarantees worth about USD 4 000
billion. The principal part of this (USD 3 340 billion) was attrib-
uted to Europe. So-called asset swaps, in which non-
functioning assets were purchased from financial institutions in
exchange for government bonds, were announced for a value
equivalent to USD 1 930 billion. Central banks have also re-
duced their key interest rates. Countries have established li-
quidity funds to a value of USD 1 690 billion (primarily in the
Large amounts have
been lent or put into
the financial system

Global economy
USA and the UK) and depositor guarantees have been in-
creased or stated to be unlimited (Austria, Denmark, Germany,
Iceland, Ireland and others).
Capital injections announced during 2008 (USD millions)
Announced Completed % Completed Announced
% of GDP
USA 595 760 172 461 28.9% 4.2
UK 60 575 38 376 63.4% 2.2
The Netherlands 42 376 23 400 55.2% 4.7
Belgium Germany 25 494 1 999 7.8% 0.7
22 658 16 228 71.6% 4.3
France 18 361 4 334 23.6% 0.6
Ireland 7 652 0 0.0% 2.7
Iceland 6 848 945 13.8% 36
Switzerland 6 000 0 0.0% 1.2
Austria 5 428 0 0.0% 1.3
South Korea 3 574 378 10.6% 0.4
Kazakhstan 3 470 0 0.0% 2.5
Saudi Arabia 2 680 2 680 100.0% 0.5
China 1 152 1 152 100.0% 0
Denmark 892 892 100.0% 0.2
Finland 885 885 100.0% 0.3
Latvia 434 0 0.0% 0.2
Japan 398 398 100.0% 0
Total 804 637 264 128 32.8%
Sources: Media reports and rating institutions, and our own calculations.
Not all countries have put a value on their operation (for example
Sweden, Portugal and Russia) and have therefore not been in-
cluded.
In addition to the above government interventions on the finan-
cial markets, capital injections were announced worth USD 900
billion during last year, of which about one third have been
completed. In the USA, this involves almost 600 billion, of which
about USD 170 billion reached AIG, JP Morgan Chase (for Bear
Stearns), Citigroup, Wells Fargo, Bank of America, Goldman
Sachs, Morgan Stanley. Additional funds are anticipated for
such institutions as Fannie Mae, Freddie Mac, AIG, Citigroup
and IndyMac. The above is an attempt to estimate the extent of
the capital injections for each country and how much has been
announced and been completed respectively. The picture is not
complete, but gives an indication of the magnitude.
As a result of these actions, public finances have worsened and
the balance sheets of central banks have grown with a large
proportion of risky assets. In the USA, assets more than dou-
bled and in the ECB, the increase was some 50 per cent.
The measures have
caused the balance
sheets of central banks
to grow

Global economy
The ECB’s and Federal Reserve’s assets in their balance sheets
(USD trillions)
w 2 w 8 w 1 4 w 2 0 w 2 6 w 3 2 w 3 8 w 4 4 w 5 0
0 8
thousandbillions
0 .7 5
1 .0 0
1 .2 5
1 .5 0
1 .7 5
2 .0 0
2 .2 5
2 .5 0
E C B
F e d e ra l R e s e rv e
Confidence in the financial markets has improved and interest
rate differentials have decreased compared with last autumn.
They are still higher than normal and there is also a risk of new
adverse outcome. A new wave of credit losses is anticipated in
the banking system when the recession worsens. New rescue
packages (up to now, the UK, but several other countries may
follow suit) come in a situation in which fear of a worsening fi-
nancial crisis is again increasing and share prices are falling.
The rescue packages
have produced results
– but the risk of a new
wave of unease and
new packages is
considerable
Interest rate differentials, percentage, between inter-bank rates and
treasury bills (3 months)
6. Key interest rates near zero – what other possibilities do
the central banks have to increase demand?
The USA and Japan have key interest rates close to zero. Dur-
ing the autumn of 2007 and the whole of 2008, the Federal Re-
serve lowered its key interest rate considerably, and about a
year later the European central banks followed.

Global economy
Key interest rates in the USA, the EMU area, the UK, Sweden and Japan (%)
S ource: R euters E co W in
00 01 02 03 04 05 06 07 08
Percent
0
1
2
3
4
5
6
7
S verige
U S A
E uroland
U K
Japan
There is still a larger gap than normal between risk-free gov-
ernment securities and market interest rates. The latter consists
of the risk-free interest rate, a risk premium for loans against
companies and households, for example, and inflation. The
central banks attempt to force this risk premium down which
remains at a high level as a result of the financial crisis and the
lack of confidence in the inter-bank market. The fact that people
have difficulty obtaining loans and must pay higher interest
rates (especially on long maturities) makes recovery of the
economy more difficult.
By buying long-term
bonds, central banks
attempt to bring down
the high risk premiums
When the key interest rate reaches zero, the central banks must
use other methods in order to ease conditions in the credit mar-
ket. Below is given a small selection from the American strat-
egy, which includes continued use of the central bank’s balance
sheet:
1. Communication: By communicating that the key interest rate will con-
tinue to be low for a long period of time, expectations are created,
which also affect long bond rates (all according to textbook).
2. Short-term liquidity for financial institutions (amended discount and ac-
cepted security with low liquidity for borrowing): This also includes cur-
rency swaps with other central banks, including the Swedish central
bank, in order to improve access to American dollars.
3. Liquidity direct to borrowers and investors with security which has good
creditworthiness with the aim of bypassing financial institutions which,
as a result of their solvency and liquidity problems, have tightened
lending.
4. Purchase of long-term bonds issued by the government housing loan
giants and their assets (mortgage-backed securities) and any long-
term government bonds.

Global economy
The American central bank differentiates between the method
described above and the one that the Japanese central bank
used in 2001-2006. This is reasonable, because in the USA the
problem is the high risk premiums, and in Japan it was instead
deflation and weak demand which had already progressed a
considerable way. The USA is therefore prescribing “credit eas-
ing”, which involves a mix of loans and security in balance
sheets in order to make things easier for the credit market. In
Japan, it was rather a matter of “quantitative easing”, in which
the balance sheet was used to increase the banks’ reserves
and buy government bonds. In Japan, the tool was put into use
much too late when demand for credit was already low. The
country had already become enmeshed in the much-talked-
about liquidity trap. In the USA, the direction taken may be to
provide loans while demand still exists, which would make the
tool more effective.
There is a somewhat
greater chance of the
USA’s central bank
succeeding better than
its Japanese colleague
7. What is the magnitude of the fiscal incentives which have
been promised, and will they be effective?
When the key interest rate is zero and a central bank buys gov-
ernment bonds, the difference between monetary policy and fis-
cal policy has been erased. If demand for credit has already de-
clined strongly, monetary policy will not be effective. It is then a
matter of finding other methods to encourage demand so that
the debt-deflationary spiral does not take hold. Fiscal policy can
be better targeted in order to stimulate demand where it is lack-
ing.
When interest rates
reach zero, the
borders between fiscal
policy and monetary
policy are erased
However, fiscal policy has difficulty in supporting the business
climate, according to economic theory. In small, open econo-
mies, discretionary input (i.e., active directed fiscal policy) in-
volves a greater risk of leaking out to other countries. Actors
have expectations regarding the future and save more if public
debt is permitted to increase. Often agreements are also
reached too late regarding size and direction, when the busi-
ness cycle has already started to turn upwards. This time, there
is a considerable risk of a deeper and more drawn out down-
turn. Now, fiscal policy may be necessary as a supplement to
monetary policy.
Economists have often
been doubtful as to the
effectiveness of fiscal
policy as a stabilising
tool – but the crisis has
made many people
change their minds
about this

Global economy
Fiscal incentives for 2009 as a percentage of GDP left-hand scale, and
public debt as a percentage of GDP (debt ratio) right-hand scale
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
China US Spain France Germany Japan Sweden UK Italy
0
20
40
60
80
100
120
140
160
180
Stimulus package (% av GDP) lhs
Debt ratio (%) rhs
Source: Media information for incentive package and the OECD forecast for
public debt 2009 (China CIA factbook for 2007)
Previous experience shows that fiscal policy has produced
mildly positive effects in the more mature economies, while it
has instead had the opposite effect on emerging countries.
Higher public debt, for example, tends to contribute to higher
interest rates. When there are liquidity problems in households
and companies, fiscal policy tends to be more effective than
otherwise.
The IMF has demanded incentives throughout the world of 2 %
of global GDP. According to the above, China and the USA
have the greatest incentives as a proportion of GDP, but these
are preliminary assessments which also do not say anything
about the time of application and emphasis.
The major part of the American package is to be directed at in-
vestment in infrastructure. Usually, this takes a long time to get
started. As opposed to F.D. Roosevelt’s time, when labour was
required en masse to construct roads, etc., capital intensity is
now high. VAT reductions in the UK risk being mainly saved,
and are not targeted at those groups who need them most.
Much has happened
since Roosevelt’s
road construction
programme
Some measures which are perhaps more effective than others:
Allow the automatic stabilisers to work (falling tax revenues and
greater expenditure on social compensations);
Carry out discretionary measures in coordination with other countries
and in coordination with monetary policy;
Public investment tends to give a higher multiplier effect than other
measures (however, it is necessary to start in good time);
Tax reductions on working income have a greater effect on consump-
tion than such tools as VAT reductions;
Labour market policy measures and training input.

Global economy
The amount of input in each country must take account of the
size of the country and the size of the existing automatic stabi-
lisers. Therefore it is obvious that larger countries, such as the
USA and China, have advertised larger packages than, for ex-
ample, some European countries. Similarly, the public debt bur-
den initially also limits the possibilities of discretionary input, for
example, in Japan, Italy and some other countries.
It is not strange that
China and the USA
are making the
greatest input
8. What will happen after recovery comes?
It will be more difficult to assess the direction of monetary policy
during the next few years. What amount of incentives will be
applied through improvements in the balance sheets of the cen-
tral banks? There is a risk that too much liquidity will enter the
system which cannot be absorbed when the recovery comes.
Then it will be important not to wait too long with interest rate
increases when the economy has improved.
At the same time, an increased debt burden will require contin-
ued low interest rates (compare with Japan). The USA’s public
debt ratio will increase strongly over the next few years (and
also in the medium term) and would have done so without the
incentives which were announced recently. The debt burden of
households is also considerable. Incentives are such that low
interest rates should prevail. Consumers will probably continue
to be cautious for a long time, and this also indicates relatively
low inflation. There is also the possibility of rising asset prices
from time to time.
The higher the debt
burden, the more
important it is that
interest rates remain
low
In Europe, public debt is also rising in the wake of the incentive
package. Here, there are increasing tensions within the euro
area as regards financing these deficits. The rating institutions
have reduced creditworthiness on, for example, Spain and
Greece. Interest rate differentials compared with Germany are
rising, despite the fact that the countries share the same cur-
rency.
Watch interest rate
differentials in
Southern Europe!

Global economy
Interest rate differentials between the 10-year treasury bonds of some
euro countries and the German ditto (per cent)
S ource : R eu te rs E co W in
Governments must also be able to finance their growing budget
deficits. During 2009, the USA will need to borrow USD 2 000
billion, i.e., 14 % of GDP. The UK’s proportion of GDP will
amount to about 10 % (USD 215 billion). In Germany, govern-
ment bonds will be issued (USD 20 billion each week) for dou-
ble the amount of previous years. During the first quarter alone
it is estimated that USD 350 billion in European government
bonds will be auctioned on the market.
Enormous issues of
government bonds
are expected
In the future, unease will increase vis-à-vis countries being un-
able to cope with their commitments. Interest rate differentials
for Greece and Italy show that this is already the case for some
countries, but the unease can also apply to states in general.
The thin market, the so-called Credit Default Swaps (CDS) in
which the risk of non-payment is insured, also demonstrates in-
creasing unease as regards the USA and the UK. Nor are the
auctions attracting sufficient investors at the present low interest
rates. Competition for investors is increasing between the pri-
vate and public sectors.
The aftermath will also include the role of governments, which
has grown during the financial crisis. In step with nationalisation
of banks, the inflation of central banks’ balance sheets and a
great increase in borrowing requirements in the public sector,
the state will assume increasing importance during the next few
years. The question is, the extent to which the effects of crowd-
ing out the private sector will be, and how this will affect growth
in the long term. There is also the question of how the state will
effectively withdraw when recovery commences. Buchanan’s
theories on “public choice” and maximisation in the public sector
will perhaps gain ground again.
It will again be relevant
to talk about “crowding
out” of the private
sector
9. What has the finance crisis taught us?
The finance crisis has taught us that economic policy has been
very important as regards the origin of the crisis, and that it will
continue to be of considerable importance for resolving it. The
fact that the central banks are part of the problem is clear from
the above. Despite what many assumed, the financial markets

Global economy
are not self-regulating, but a sector as innovative and profit-
driven as the financial sector needs to be monitored with effec-
tive regulation.
The imbalances in the world are of considerable importance as
regards the origin of the crisis. International institutions are
weak and are not sufficiently coordinated to make a big differ-
ence. After the period of major incentives ends and recovery
starts, it will be of considerable importance to attempt to create
more sustainable growth models – not least for China and the
USA.
The lack of understanding of economic psychology, economic
history and the ways in which the financial markets function is
another lesson which is persuasive in, for example, central
banks, governments, regulators, banks, and rating institutions.
Incorrect use and reliance on models can also be counter-
roductive. Not everything can be included in models. Tail risks
must also be given greater attention and cannot be totally ig-
nored.
10. What reforms are required (financial policy and financial
sector) in order to create growth which is more balanced in
the future?
In our last issue of Swedbank Economic Outlook, we warned
that the world economy cannot grow out of this crisis. It is nec-
essary to have a period of correction of imbalances and high
indebtedness. The fact that major monetary policy and fiscal in-
centives are now needed is due to the increasing risk of a nega-
tive debt-deflation spiral. Not to attempt to alleviate the down-
turn would have very serious consequences for many people,
including bankruptcies, unemployment and social tension.
It is not reasonable to
attempt to grow out of
the crisis – but
incentives can alleviate
the downturn
If the unease is justified, there will be a long period of low
growth and low inflation. If the unease is unjustified, it is neces-
sary that the incentives be withdrawn much faster than was the
case in the early 2000s, so that a new, even greater crisis can
be avoided in a few years’ time. These major incentives create
the risk of new bubbles, above all if normality returns earlier
than expected.
The question is, however, whether normality is desirable. Nor-
mality in relation to what? During the last few years, growth has
been driven by high indebtedness, and this development has
not been sustainable either for the economy or the climate and
the environment. It is thus a matter of creating a more sustain-
able, balanced growth which is not driven by bubbles and “stop
and go” in economic policy. Below is a summary, not exhaus-
tive, in the form of a list of 20 important measures to minimise
the risk of new crises.
Back to normal is not a
desirable strategy

Global economy
List of economic policy measures, including regulatory changes:
1. Change the unilateral focusing of central banks on consumer prices (see also growth of credit,
asset prices)
2. Take a more composite view of deflation so that monetary policy does not contribute to bubbles
3. Central banks: Avoid interest rates that are too low for too long
4. Increase understanding of economic, psychological and financial behaviour (also in models)
5. Improve knowledge of the economy and financial markets (also in schools)
6. Increase teaching of economic history
7. Include the finance sector in models of the real economy, and improve understanding of how the
interaction takes place
8. Improve risk control and reduce system risks
9. Strengthen regulation and monitoring of the financial sector so that innovations are followed up
10. Change the incentive system in the market and increase long-termism
11. Increase the importance of liquidity in the financial system
12. Reduce pro-cyclical finance markets
13. Include measures of leverage in regulations
14. Improve insight in financial products
15. Simplify financial products
16. Reform rating institutions so that market discipline improves
17. Coordinate economic policy at global level with all countries involved
18. Do not over-regulate
19. Counter the use of shadow balance sheets
20. Review and coordinate the international institutions’ role in improving the economic world order
Three scenarios for growth prospects
Three growth scenarios are sketched out below, together with
the probability of them being realised.
1. Long drawn-out recession
The financial markets will continue to wrestle with major
problems, but the trend will proceed slowly in the right direc-
tion. Economic incentives will provide the desired effect.
Demand in the more mature economies is considerably de-
pressed by the need, primarily of households, to correct their
balance sheets. The labour market will worsen. Housing
markets will bottom out during the forecast period, first in the
USA, and with some delay also in Europe. Recovery will,
however, take time and it is only after the forecast period
(2011) that the peak of GDP level of early 2008 will be
achieved.
We estimate the probability
of this growth scenario in
which growth falls rapidly
and a recession occurs, and
the period of “bottom level”
is drawn out and recovery
slow, at 45 %.
2. Stagnation and deflation Japanese style
In this scenario, new problems arise in the financial markets
which further increase credit tightening. This can involve
bankruptcies and falls in the value of currency values or as-
set prices with considerable effect on other actors. Eco-
nomic policy will be more or less without effect, nevertheless
key interest rates will be kept around zero and fiscal policy
will be strongly expansive with growing deficits and debt
burden in the public sector. The trend towards deflation will
be unstoppable.
of the world economy being
driven into a period similar
to that in Japan over the last
decade at 30 %.
3. Faster recovery and back to normal
It can already be concluded that the downturn in the global
economy will be more prolonged than in the last recessions
of 1997 and 2001. Many of the indicators show similarities
with the recession of the 1980s or the downturns in connec-
of recovery occurring earlier
and more strongly than we
expected at 25 %

Global economy
tion with the oil crises in the 1970s.
Similarly, recovery can be faster than anticipated in our main
scenario. It is a matter of the effects of the expansive eco-
nomic policy being positive and sentiment improving, for ex-
ample, as a result of the USA’s new president. In the same
way as the downturn was strong and fast, the upturn could
be comparable.
Forecast risks should be given attention
Because there are relatively small differences between the
probabilities of our scenarios, a picture emerges of considerable
uncertainty in the work of forecasting. As with the latest fore-
casts, it is reasonable to place considerable emphasis on the
forecast risks.
The more pessimistic scenario:
• Renewed, greater unease in the credit markets, which would involve
the trend going “the wrong way.” Tightening of credit would increase
and the downturn in the real economy would deepen.
• A major reduction in demand in the emerging countries, primarily in
countries which have, up to now, been dependant on exports or which
have large deficits in their balance on current account and/or budget.
Considerably worsened labour market situation.
• A transition to weak demand and price falls which start a period of
stagnation and deflation.
• Large, more uncontrolled oscillations in major currencies.
• Economic policy is only an insufficient incentive (for example, within
Europe) or does not give the desired effect (USA, Asia, Europe).
• Reduced appetite for government bonds and a greater risk that coun-
tries suspend payments, thus driving up long bond rates.
• Protectionism in various forms, which further reduces world trade and
worsens growth prospects for the future.
• Sentiment becomes increasingly negative, which becomes self-fulfilling
and produces a more sustained period of recession.

Global economy
The more optimistic scenario:
• Economic policy has a greater positive effect than in our main scenario
and recovery is more rapid than expected.
• Sentiment improves more than in our main scenario and contributes to
the turnaround. The new president of the USA can create a greater
confidence in the future. News in real time which is spread throughout
the world influences actors simultaneously and strongly.
General risk factors – also beyond the forecast period:
• A new period of inflation, new bubbles in asset prices and growing gov-
ernment debt, which must be worked out in due course. Similarly, diffi-
culty in handling the “exit” of the government from the financial sector.
In this risk picture, the elbowing out of the private sector by the state is
also included, together with an upturn in long market interest rates.
• Gigantic budget deficits which create the need for greater public sav-
ings for many years ahead with negative consequences for growth and
financial markets.
• Political uncertainty in connection with forthcoming parliamentary elec-
tions (for example, Germany, Japan and India during 2009 and the UK
not later than May 2010).
• Social tension in many countries as a result of greater income and
wealth gaps and/or recession.
• Increasing effect on world resources and climate effects, which affect
the economy, health and geopolitics.
• Attacks and similar terrorist action and major, more drawn out war and
trouble spots which affect confidence in the future, and financial and
commodity markets.
• The entirely unknown factor (the unknown unknown).
A summary of our forecast assumptions
• It is presumed that the financial crisis will be resolved slowly during the
forecast period. No new major trouble spots will occur in our main sce-
nario. The negative effects on the real economy will get stronger.
• Economic policy will be strongly expansive. Key interest rates at a very
low level during most of the forecast period and only during the second
half of 2010 will the Federal Reserve raise its key interest rate and the
Europeans will follow suit. Fiscal incentives will amount to 3-4 % of
GDP per year in China and the USA, and 1-2 % of GDP in a number of
European countries. The measures will be introduced after some delay
but will give some positive effect during the forecast period.
• The American dollar will strengthen in relation to the euro, as it is an-
ticipated that the euro countries will develop less well in relative terms.
Beyond the forecast period, the probability of a weakening of the dollar
will increase, on account of the trend of government finances.
• Commodity markets will continue to show falling prices. The oil price
will stabilise and will rise somewhat, but weak demand will have a con-
straining effect during the forecast period.

Global economy
Forecast assumptions
Outcome --->---> ---> Forecast--->--->
2006 2007 2008 2009 2010
Oil price, Brent USD/
65 73 97 50 60barrel yearly average
Outcome Forecast --->---> ---> --->
22 Jan 2009 30 Jun 2009 31 Dec 200930 Jun 2010 31 Dec 2010
Minimum lending rates
-Federal Reserve 0.25 0.25 0.25 0.25 0.75
-Bank of Japan 0.10 0.10 0.10 0.10 0.10
-ECB 2.00 1.50 1.50 1.50 1.75
-Bank of England 1.50 0.50 0.50 0.50 1.00
Currencies
-EUR/USD 1.29 1.20 1.13 1.10 1.00
Trends in individual countries and regions
Below we give a summarised picture of economic development
in the USA, Japan, China, India and the euro countries. The UK
and the Nordic Area are also included. Russia and Eastern and
Central Europe will however, be looked at in our Baltic report, to
direct investment, which also affects the prospects
t
clude efficiencies and readjustment to more sustainable growth.
untries
slacken off
wnturn and
the upturn
–
glimmers of hope!
be published later.
The emerging economies will put the brakes on – this applies
not least to China, Russia and many other countries in Europe.
Brazil has as yet, gone against the current and has even in-
The BRIC co
creased growth, but during the forecast period this will slacken.
In a first wave of the financial crisis, mature countries with
strong connections to the global financial markets are primarily
affected. In a second wave, countries with a large proportion of
commodities in their exports are affected. In a third wave, ex-
port-dependant countries are affected by falling demand for
manufactured goods. For most countries it is also a matter of
less foreign
of growth.
The USA has led the downturn in the world economy. Probably
the USA will also experience recovery first and this will spread
to the rest of the world. This also means that growth in the USA
will be less than its potential for many years to come because
corrections in balance sheets take time and households are re-
sponsible for a large part of the economy. Europe will be hit
relatively hard because the region is dependant on foreign trade
and investment. Asia will also be affected; not least Japan, bu
The USA will lead in
both the do
also China and India will find their growth prospects reduced.
There are glimmers of hope: The imbalance in savings be-
tween the USA and Asia will lessen. Cost pressures and price
increases will be restrained. Utilisation of the world’s resources
will be reduced, which will benefit the environment. The need
for structural change will be recognised in many companies in
order to better survive competition, and this will hopefully in-
Despite the gloom
there are some

Global economy
USA – households drive the downturn
The main components of the forecast:
1. The USA will experience a deep, drawn-out recession, driven by house-
holds and the finance and property sectors.
2. At the end of 2009, a cautious recovery will commence, driven by public
and private investment.
3. Economic incentives will soften the downturn.
4. Forecast risks include new financial unease, the housing market, deflation
and weak confidence in the future. Beyond the forecast period, problems
of the risk of a weaker dollar will increase in the wake of large public defi-
cits.
Since December 2007, the USA has officially experienced a re-
cession driven by trends in the property and financial markets.
The recession started with the downturn in the labour market
last year, when the number of employed fell by almost 2.6 mil-
lion persons, of whom 75 % lost their jobs between September
and December. During the autumn, industrial production also
declined strongly, as did consumer confidence.
The downturn in
the labour market is
alarming
It thus appears that there is a clear turnaround since the culmi-
nation of the financial crisis last September. During the first half
of last year, the economy grew at 2.3 % per annum. Reasons
included tax rebates, which temporarily increased disposable
household income, and a good export trend in the light of the
weaker dollar. During the second half of the year, GDP growth
fell. The recession became clearer, not least when the financial
crisis contributed to the contraction of household consumption
and investment by businesses, at the same time as growth in
exports slackened when the dollar strengthened and the out-
look in the rest of the world became less favourable.
The USA’s purchasing manager index and employment trend
S o u r c e : R e u te r s E c o W in
8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8
Index
2 5
3 0
3 5
4 0
4 5
5 0
5 5
6 0
6 5
7 0
Person(millions)
- 0 .7 5
- 0 .5 0
- 0 .2 5
0 .0 0
0 .2 5
0 .5 0
0 .7 5
1 .0 0
1 .2 5
1 .5 0
In k ö p s c h e fs in d e x
F ö r ä n d r in g a v a n ta le t
s y s s e ls a tta
Purchasing managers’ index
Change in the number of
persons employed

Global economy
How serious is this recession compared with previous reces-
sions in the USA? Up to now, it is similar to the average of the
last six recessions, but it will last longer than the two most re-
cent ones (1991 and 2001). On the other hand, it is much
milder than the great depression of the 1930s, even if as yet we
have not seen the end of it. Major incentives and more success-
ful attempts to stabilise the financial markets should make a dif-
ference.
Up to now, this
recession resembles
previous ones
Up to now, industrial production has fallen for 16 months in suc-
cession by a total of 7½ %, which can be compared with the re-
cessions of 2001 (17 months and 6.9 %), 1981-82 (19 months
and 9.1 %) and 1973-75 (16 months and 15.3 %). By compari-
son, industrial production fell for 36 months in the 1930s by a
total of about 55 %. If the labour market often indicates the
starting signal for a recession, growth in industrial production
signals the end of a recession. We are not there yet, but it is an
indicator to monitor carefully.
We expect that the economy will continue to contract during the
first half of this year, but that there will subsequently be a slow
recovery. This year the American economy will contract by
about 1½ % and next year there will be prospects for growth of
about one per cent. It should however, be noted that with such
a course of events, the fourth quarter GDP level of 2010 will not
exceed the top level achieved during the second quarter of last
year.
The downturn in the
economy will weaken
during the second half
of the year – without a
clear recovery
What then is going to propel the American economy during the
forecast period? Not least because the financial sector and
property, which have driven household wealth and consump-
tion, will more probably restrain growth. The fiscal incentives
and expansive monetary policy will in due course have an ef-
fect, even if it is difficult to know how sizeable the effect will be.
With this, confidence in the future will also improve. Nor should
the Barack Obama effect be underestimated in turning around
the negative sentiment, even though expectations are high. In-
centives of about USD 800 billion are intended to create 3.5-4
million new jobs, but these hopes may not be realised and
could create a loss in confidence. The challenges for the new
president are considerable.
There are great hopes
that Barack Obama
can create confidence
in the future
Companies that have relatively sound balance sheets at the
beginning of the recession, and which concentrate more on in-
put and investment goods, can see a brighter outcome, albeit
slowly. On the other hand, it takes longer for companies close
to consumers and those affected most by the financial crisis, for
example, in the retail trade, construction and the property sec-
tors and in the financial sector. Company bankruptcies will in-
crease in a number of sectors, and additionally the recession
will also hasten structural change (sourcing, relocation, techno-
logical development, etc.).
Consumer-oriented
companies have a
hard time
When households have corrected their balance sheets and the
housing market starts to experience greater activity after a pe-

Global economy
riod at the bottom of the recession, there will also be possibili-
ties for greater growth in private consumption. We estimate that
this development will take off soon after the forecast period.
Meanwhile, the household savings ratio will improve. Dispos-
able income will be restrained by rising unemployment and a
weak wages trend, but one positive aspect is lower inflation
(lower petrol prices and food prices).
Japan – will not avoid recession
The main features of the forecast:
1. Japan will again experience a recession and mild deflation.
2. A stronger yen and weaker foreign demand will restrain exports.
3. Fiscal incentives will not achieve the required effect – instead the business
cycle in the outside world will determine when recovery can start.
4. Domestic forecast risks, including the currency, fiscal policy, reform policy
and the result of a new parliamentary election.
For the first time in seven years, Japan’s economy has entered
into a recession, after the second and third quarter of last year
showing a contracting GDP. The most important motor for
growth in the Japanese economy – exports – is faltering.
Growth in exports slackened last year in step with the business
climate in the outside world, and the yen strengthened. The fall
in housing investment has flattened out. On the other hand,
business investment will continue to contract. Companies’ profit
margins have also been affected negatively by the stronger
yen, and also by high commodity prices during parts of last
year. The car manufacturer, Toyota, also expects a year of loss
– the first in 70 years!
The Japanese export
motor falters
Japan’s industrial production (index) and companies’ perception
of the profit situation (per cent)
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8
Percent
-3 5
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
Index
8 0
8 5
9 0
9 5
1 0 0
1 0 5
1 1 0
1 1 5
< ---- B u s in e s s s e n tim e n t o n
p ro fit m a rg in
M a n u fa c tu rin g p ro d u c tio n -->
Japanese households will continue to consume carefully, and
the prevailing business climate and financial situation do not in-
dicate an unexpected lift. During last year, the total workforce

Global economy
declined, not least part-time workers and temporary employees
who have greater difficulty in the labour market.
The Japanese yen appreciated in real terms by 28 % between
July 2007 (at which time it was at its weakest since 1985) and
November last year. In nominal terms against the dollar, the yen
is now at its weakest for 13 years. A stronger yen is normally
connected to an improved export trend – but not this time. Nor
has household consumption increased as a result of the
stronger currency. On the other hand, import prices may de-
cline, and then the risk of deflation will increase.
A stronger yen causes
additional difficulties
Japan’s Prime Minister – Taro Aso – has seen opinion figures
worsening since he succeeded Yasuo Fukuda in September.
Although the banking sector is relatively solid, Japan is affected
by the global recession because of its considerable export de-
pendence.
Economic policy must become more expansive. The key inter-
est rate is already at a low level (0.1 %). Therefore, the gov-
ernment is proposing a fiscal package of 23 000 billion yen
(about USD 258 billion), of which 4 000 billion is “new money”
equivalent to less than 1 % of GDP. Additionally, greater credit
possibilities are being given to companies (3 000 billion yen).
There is considerable uncertainty as to how these funds will as-
sist the economy, but perhaps a greater fall than would other-
wise occur will be prevented. For several years already, Japan
has experienced ineffective fiscal incentives, which have driven
up the public debt ratio to 170 % of GDP.
Japan does not have
good experience of
previous incentive
packages
We expect Japan’s recovery to be built on improvements in the
outside world, primarily driven by the USA. Also, parts of the
rest of Asia may contribute to exports helping in due course. Af-
ter the stagnation of 2008, we expect Japan’s economy to con-
tract by about 2 % during 2009 and in 2010 to grow by a me-
diocre 0.2 %, in step with a mild improvement in the economies
of the outside world.
Japan appears to be the country which has the greatest risk of
again becoming caught in a deflationary spiral. Domestic de-
mand has fallen while the share of exports has progressively
increased (now 17.6 % of GDP). At the same time, demograph-
ics are important because an aging population consumes less.
Also, purchasing power of the population is less. Companies
are increasingly investing in their sales in foreign markets when
the domestic market stagnates. Companies within the areas of
health and care are missing out on business opportunities, be-
cause the markets continue to be regulated despite the fact that
this demand could potentially grow. With this, there is room for
reform to increase domestic demand to strengthen productivity
in the service sector, increase IT usage and implement deregu-
lation of the service markets. Also, more foreign direct invest-
ment would be beneficial for the economy (at present it consti-
tutes only 3 % of GDP which is the lowest proportion of all the
OECD countries).
New risk of a period
of deflation –
the work of reform
must be speeded up

Global economy
China – noticeable fall in temperature
1. Overheating 2007 will be transformed into rapid slow-down 2009-2010
2. Gigantic incentive package and interest rate reductions can be of some
benefit
3. China must change its growth model and allow domestic demand to be of
greater importance for the economy
4. Domestic forecast risks include the property market, the labour market and
economic policy
The period of double-digit growth in China is over for the time
being. At present, the country is growing officially at a respect-
able 9 % per annum. This development is desirable because
overheating was the dominant risk factor just a few years ago
(13 % growth in 2007 if the official statistics are correct). Now
the risk, to a major extent, is that China will put the brakes on
excessively.
For several years, exports grew at about 20 % in fixed prices,
but are now slackening off, and in December fell by 2.8 %. Car
sales and activities in the housing market are also falling (but
note that regional differences are considerable). As the factors
which drove growth in China are now weakening, prospects for
the Chinese economy are also now worsening. At the same
time, employment and wages trends are weakening in the cit-
ies, which will restrain retail trade.
Important to question
the sustainability
of China’s growth
strategy
It is reasonable to question China’s growth model. It is based
on considerable export-dependence and on the USA continuing
to run a large deficit in its balance on current account. China’s
producers are rated more highly than China’s consumers. Dur-
ing the next few years we will see attempts to move more de-
mand to the domestic economy.
China’s exports in USD and sales of cars (numbers of)
(annual percentage change, two months’ moving average)
S o u rc e : R e u te rs E co W in
The Chinese administration is conducting a more expansive fi-
nancial policy to sustain growth and to cope with the serious

Global economy
social tensions that often arise in recessions. Because the gov-
ernment has acted with some degree of panic and acted early,
there is cause to suspect that growth in the economy has al-
ready fallen more than the official figures show. The growth in
industrial production (5.4 % in November) is the slowest in
seven years.
An incentive package of USD 586 billion (about 15 % of GDP)
has been presented and will apply for two years. The package
is aimed at infrastructure, health and education and also in-
cludes tax reductions and investment in social insurance. It is
unclear what direction it will take, and also how much is “new
money” (perhaps half), how quickly it can be put into effect and
where the money is coming from (only one quarter from the
central administration, and the rest from state banks and com-
panies and local administration, which are already experiencing
economic difficulties).
Major incentives
indicate that the
administration
considers the situation
to be serious
China’s administration will probably proceed more carefully in
appreciation of the renminbi with the objective of safeguarding
exports. Monetary policy is also directed at stimulating lending
by reducing interest rates and reserve requirements in the
banking system. China’s most important key interest rate has
fallen from 7.5 % in September last year to 5.4 %. Inflation
came down from about 8 % in the spring of 2008 to 2.4 % in
November on an annual basis. Thus, inflation is no longer the
focus of the risk situation. Rather, there is unease about a pos-
sible collapse of private investment if the slow-down in the prop-
erty market threatens bank lending. A large number of bank-
ruptcies and many redundancies are other major risks which af-
fect the economy. There is anecdotal information about facto-
ries being closed down and enraged Chinese who have lost
their jobs.
Without its expansive economic policy, China’s growth rate
would slow to 5-6 % this year. Probably the incentives will have
some form of effect, increasing the possibilities of growth to
about 7-7½ % in 2009-2010. This is also a challenge, because
China needs at least 8 % growth per year to absorb newcomers
to the labour market. It is also the Chinese administration’s
growth target in this period of global recession.
A growth rate which
is too low will risk
creating social
tensions

Global economy
India – moderate downturn
1. India is affected by reduced capital flows in the wake of the financial crisis,
and weaker global demand for Indian products.
2. A faster pace of reform would keep growth of domestic demand more
buoyant – fiscal incentives are not enough.
3. Forecast risks also include parliamentary election, inflation, currency and
share prices.
India’s banks have got through the global financial crisis well,
and the country’s external debt is manageable. Nevertheless,
India has been affected negatively. The stock exchange lost
60 % of its value last year, and foreign investors became more
hesitant about the Indian market. Indian companies could no
longer finance themselves on the international financial mar-
kets. In total, this caused the Indian rupee to lose about 20 % of
its value against the dollar last year.
Share prices and
investment are
affected by the
financial crisis
Over the last five years, India grew at an average of 8.9 % per
year, not least as a result of the high and increasing investment
ratio (now about 35 % of GDP). During the third quarter of last
year, growth fell to 7.6 %. Industrial production stagnated and
exports are now declining for the first time in seven years. Infla-
tion will continue to show high figures, even though they will be
somewhat lower, and the budget deficit will grow to about 8½ %
of GDP. This is disquieting, not least because the fiscal incen-
tives up to now have not been very effective. A new package is
now being introduced comprising about USD 4 billion, or ¾ % of
GDP. Earlier this year, monetary policy was being tightened to
fight inflation, but during the autumn, the Indian central bank
lowered its key interest rate from 9 % to 5½ % and has shifted
focus from inflation to growth.
We anticipate that GDP growth will continue to decline to 5½-
6 % in 2009-2010. Domestic demand is relatively good. There
has not been much will to reform so far, but if it does occur as a
result of the recession, growth prospects may be somewhat im-
proved. Changes in public finances, subsidies (which amount to
3 % of GDP) and privatisation of state companies (including
banks) would contribute to better growth prospects. Similarly,
the country needs far-reaching reforms to improve the infra-
structure. The government’s plans include investment at pre-
sent amounting to 8 % of GDP per year for five years, but such
enormous resources will probably not materialise.
Reform policy could
strengthen domestic
demand
Risks in the forecast include India’s dependence on interna-
tional finance, a major downturn in global business which would
reduce demand for India’s products, including IT services, and
trouble between India and Pakistan. The parliamentary election
in 2009 is also an element of uncertainty.

Global economy
The EU – a strong decline in exports
1. The export-dependent euro countries are affected by weaker growth in the
world in general, which is also causing investment to contract. In some
countries, consumption is also falling.
2. Further interest rate reductions and fiscal incentives will materialise, but
after some delay as resource utilisation capacity has declined.
3. The UK is faced with its greatest recession for several decades and is
making input both in monetary measures and fiscal measures. The Nordic
countries will manage somewhat better than the euro countries on aver-
age.
The euro area: The financial crisis has its epicentre in the USA,
but the euro area is also affected very severely. During the au-
tumn, a number of European banks (ING, Fortis, Hypo Real Es-
tate, Commerzbank and Dexia) were rescued or restructured
with the help of state intervention. The European Central Bank
has attempted to stabilise the financial markets by providing li-
quidity, lowering the key interest rate, and governments have
also issued credit guarantees.
In Europe it is also
recognised that
the financial crisis
requires action
Households and companies, confidence in the future, net balance
9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8
Netbalance
-3 5
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
5
1 0
B u s in e s s s e n tim e n t
H o u s e h o ld
s e n tim e n t
The euro countries’ GDP fell in both the second and third quar-
ters of last year by 0.2 % on a quarterly basis. The recession
has been caused partly by lower foreign demand, and partly by
weaker domestic demand, primarily from households. The un-
derlying explanation is the global financial crisis which has af-
fected the real economy, housing and share markets. The sup-
ply of credit has become more difficult, and household wealth
has fallen, and this has resulted in weaker domestic demand.
During part of 2008, households were also affected negatively
by high mortgage rates and rising energy and food prices. In
pace with declining confidence in the future by households,
sales in the retail trade have declined. In the second quarter of
last year, growth in households’ real disposable income was the
lowest since 2003.
The trend of household
income is weakening…

Global economy
After a period of healthy development in the labour market (in
Germany the best since the 1970s) employment is now slowing
down sharply. In Germany, unemployment rose in December
for the first time in three years to 7.6 % and in the euro area as
a whole, unemployment during the greater part of 2008 rose
from 7.2 % in February to 7-8 % in November. Companies’ em-
ployment plans indicate a continued weakening of the labour
market. At the end of the forecast period, it is expected to ex-
ceed 10 %. This fits well with the more pessimistic outlook for
exports and investment.
… the labour market
situation is worsening
There are also glimmers of hope: Inflation has started to fall,
which benefits both companies and households. The fiscal in-
centive package is signalling growth, while the automatic stabi-
lisers are working. Monetary policy will be more expansive with
lower key interest rates as a result. We do expect, however,
that the recession will continue to be felt, and that the financial
incentives will certainly make the downturn less painful but will
not manage to stop it. During 2009, the economies of the euro
countries will contract in total by 2 %, and during 2010 there will
be a slow recovery, in which GDP will grown by 0.7 %.
Mainly exports and
investment are falling
in the euro countries
Despite the fact that Germany does not show the same need for
correction on financial and property markets than, for example,
Ireland and Spain, the economy will slow rapidly when domestic
demand does not manage to compensate for weaker foreign
demand.
The UK: The British economy has been especially hard hit by
the financial crisis because the country – in common with the
USA – had important driving forces for growth from the finance
and property markets. Several British banks have been rescued
by the government, and the housing market continues to show
falling prices. Unemployment is rising in both the industrial and
service sectors. Households’ confidence in the future is weak
and is affected by negative wealth effects and weaker income
prospects. Investment is also slowing and exports are declining.
Credit has contracted. During the second quarter of last year,
the economy stagnated and during the third quarter, GDP de-
clined by 0.6 % compared with the previous quarter.
The UK had its own
epicentre in the mort-
gage debt crisis
The British central bank has lowered its key interest rate to a
record low level of (1.5 %) and the pound has depreciated by
about 30 % against the dollar and about 20 % against the euro
since the beginning of 2008. Further interest rate reductions are
expected, although the currency trend will also be followed
closely. Inflation has begun to decline, but in November was still
at about 4 %. During 2009 and 2010, inflation is, however, ex-
pected to be less than 2 %.
Historically low
interest rate levels
can help to some
extent …

Global economy
The government’s support package of 20 billion pounds con-
tains a disputed reduction in VAT. Because the budget deficit
has already grown as a proportion of GDP from about 3 % in
2007 to about 5 % in 2008, unease is also growing in respect of
sustainability of public finances (government debt as a propor-
tion of GDP exceeds 50 %) and room for further incentives is
limited. We expect that the UK’s economy will contract by 2¼ %
this year and subsequently a recovery will start, so that GDP
will increase by 0.4 % in 2010.
…and VAT reductions,
but the question is
whether people will
save to a great extent
instead of consuming
The pound compared with the dollar and the euro (index 01-01-2008=
100) and the British central bank’s key interest rate (%)
The Nordic Area: The Nordic countries have an advantage due
to relatively healthy government finances to start off with, and
surpluses in their balances on current account. On the other
hand, they are sensitive to lower market growth because they
are small, open economies. Also, these countries have built up
a high level of indebtedness in households, house prices have
risen and the financial sector has been affected by the global
crisis.
Country/GDP growth January forecast
2007 2008 2009 2010
Denmark 1.6 -0.6 -1.3 0.7
Norway 0.7 4.1 0.2 1.5
Finland 4.5 1.5 -1.5 1.0
Denmark already experienced the recession last year. Worsen-
ing of market growth in the rest of Europe meant that the reces-
sion will be prolonged during 2009, and a slight recovery is de-
pendent on developments outside the country. The country is
experiencing a credit squeeze and also high key interest rates
in order to defend the Danish krone – a situation which has
worsened households’ confidence in the future. Fiscal incen-
tives of about 1 % of GDP will soften the downturn somewhat.

Global economy
Finland’s economy slowed down during the second half of last
year. Exports and investments were affected by slower growth
in the world in general. Households are favoured by a more ex-
pansive fiscal policy (1.2 % of GDP) and the worsening of the
labour market can also be mitigated by this. Recovery is com-
pletely dependent on developments in the world in general.
Norway is expected to use more of the oil fund money to stimu-
late the economy. A lower oil price will affect the will to invest in
the oil sector, and can also bring down the Norwegian krona,
which would benefit other exports. The housing market is un-
dergoing a correction.
Cecilia Hermansson

Sweden – summary
Sweden – outlook and risks
Sweden is a small, open economy. A severe recession in the
world economy affects Swedish exports and investment rela-
tively profoundly for this reason. This year, export volumes will
fall by 3.5 % and investment by a full 7.5 %. Also, next year in-
vestment will continue to contract because capacity utilisation
continues to be low. The trend in household income will be rela-
tively favourable, but uncertainty in the labour and property
markets will cause buffer saving to increase. Private consump-
tion will stabilise this year and will strengthen somewhat next
year. GDP is thus expected to decline by 1.8 % this year, but to
grow somewhat during 2010 by 0.8 %.
Less favourable
developments in the
world in general give
Sweden less favourable
prospects for growth
Contributions from various components to GDP growth (per cent)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2008 2009 2010
Net exports
Inventories
Gross fixed investment
Public consumption
Private consumption
The forecast risks are primarily to do with the world economy in
general and the financial markets. Domestic risks include the
downturn spreading into other sectors. For example, there is
cause to expect a more marked downturn in the vehicle indus-
try, which has both recessional and structural problems, than in
IT and telecommunications which underwent structural im-
provements in the early 2000s when the IT bubble burst. An-
other risk is the speed with which households correct their bal-
ance sheets. We expect growth which will be primarily built on
indebtedness growing more slowly than disposable income. A
third risk is the extent and direction of fiscal policy. We expect
some restraint as budget discipline is high on the government’s
agenda, and reduced creditworthiness and higher bond rates in
Southern Europe are a deterrent.
The crisis may spread,
correction of debt by
households, and the
formulation of fiscal
policy – these are three
important domestic
forecast risks
With this, the Swedish economy will be stimulated by fiscal pol-
icy in common with other European countries. Nor will monetary
policy be very different. The Swedish Riksbank will reduce its
key interest rate to 1 %, and the ECB will reach bottom with
1.5 %. The krona has weakened, but we expect a slow
strengthening against the euro during the forecast period.
Restraint by the Swedish
government contributes
to incentives on a euro
scale

Sweden - summary
Swedish exports will develop somewhat less negatively than,
for example, Germany’s, as Germany has a higher proportion of
vehicles in its exports. Our composition of exports includes a
larger component of telecommunications, IT and services which
can develop somewhat more strongly in relative terms. Neither
Sweden nor Germany has excess investment in the construc-
tion industry, but a decline is nevertheless included in the fore-
cast when financial and business trend developments have
worsened. Investment will fall somewhat faster in Sweden than
in Germany. Household consumption will develop marginally
more strongly in Sweden, as disposable incomes will strengthen
somewhat more.
In what way will Sweden differ from the euro countries? In the
short term during the forecast period: Marginally. On a some-
what longer perspective beyond the forecast period and after
recovery has got under way: Sweden will then be stronger as
the need for adjustment in public finances is absent. The Swed-
ish composition of business is also well adapted for increasing
demand for input and investment goods and commodities.
Equal in the short term,
but Sweden will be
stronger when the
economic climate
improves
Cecilia Hermansson

Foreign trade
A severe bout of flu in exports
The volume of Swedish exports of goods & services rose by
about 4 % on an annual basis during the first three quarters of
last year. The deteriorating global financial crisis and deepening
international recession did, however, mean a considerable turn-
around in Swedish exports during the two last quarters of last
year. Not least, this applied to the important engineering exports
which increased by a mere 1.5 % on an annual basis during the
third quarter compared with 9.6 % in the previous quarter. An
important contributory factor is the strong fall in the volume of
exports of road vehicles and other investment goods.
Engineering exports
lose momentum
Export values of different groups of commodities, percentage change
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08
Percent
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
Total
varuexport
Tjänsteexport
Personbilar
Total exports
of goods
Exports of services
Passenger
cars
The export of services which was previously so expansive, and
grew by 10-15 % per year for four years in a row, has almost
levelled out, and increased by only about 1 % in volume during
the first three quarters of last year. The turnaround is a result of
demand for company services declining when exports of goods
grow more slowly. Foreign trade statistics for October and No-
vember show that exports of goods continued to weaken, for
which reason we estimate that total export volume growth for
the full year of 2008 to be only 2 %. This is the weakest trend
since 2002 and much lower than we forecast in the September
forecast (4.5 %).
Weakest growth in
exports since 2002
Up to now, the downturn in exports has been concentrated to
the North American market where export values have continu-
ally fallen since 2006. Deliveries to the European market, which
account for about 70 % of Swedish exports of goods, continued
to increase, although less strongly. The slow-down is not least
due to the Spanish market, and also to markets in the Nordic
Area, which in terms of volume are larger, and which have
shown signs of weakening. Exports to China, Poland and Rus-
sia continued to grow strongly.
The slackening off of
exports is spreading to
more markets

Foreign trade
Two years of weak export growth
Swedish export prospects for the coming year have considera-
bly worsened because of the financial crisis and the consequent
weaker global business climate. This is also reflected in com-
panies’ export orders which declined strongly during the last
months of last year.
Assuming our international assumptions are correct (given on
pages 23-24) world market growth for Swedish exports will de-
cline by an estimated 1.5 % this year after an increase of 4 %
last year. There are parallels with the recessionary year of
2001, when global world trade declined, and demand for in-
vestment goods declined after the IT bubble burst. A decisive
difference compared with that time is that we expect a deeper
recession as regards volume export markets which are impor-
tant for Sweden. In the OECD countries, which receive 80 % of
Swedish exports, it is estimated that the market will decline by
about 3 % this year. This means that the global market for
Swedish companies will be much weaker during 2009 than in
the early 2000s.
Lower growth of world
markets for Swedish
companies during 2009
World market growth for Swedish exports
-4
-2
0
2
4
6
8
10
12
14
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
For next year, we expect world market growth for Swedish in-
dustry to grow by about 3.5 % in step with a slow recovery in
the global business climate. This is, however, a way long from
the growth rates of 2000-2008 when the world market for Swed-
ish companies grew at an average of 6.5 %. Continued moder-
ate global investment growth in the wake of the financial crisis
and low global resource utilisation will limit export opportunities
for Swedish companies.
Expectations of a weak
recovery in 2010
Total Swedish export volumes are expected to decline by 2-3 %
during 2009, which is a greater decrease than in the two last re-
cessions. We expect that exports of processed goods will de-
cline rapidly during 2009 on account of the weak investment
business climate, and this also occurred during the recession-
ary year of 2001. This applies above all to deliveries of transport
equipment and telecommunications products which are sensi-
Constrained global
investment will stunt
Swedish export industry

Foreign trade
tive to changes in investment demand. At the same time, tight
financial conditions make financing of new investment more dif-
ficult, which will reduce export growth further.
The commodities markets are characterised by overcapacity
and an increasing supply of commodities, bringing down com-
modity prices. This indicates further production reductions dur-
ing the coming year. Swedish exports of commodities, which
mostly go to the EU countries, are expected to decline this year
as a result of the worsening recession. The weakening of the
Swedish krona in relation to the euro and the dollar does give
some competitive advantage, however, in relation to the most
important competitors in Europe. Exports of services are ex-
pected to contract during 2009 when the growth of world trade
slackens. This applies not least to transportation services, fi-
nancial services and also a decline in international tourism.
The fact that competitiveness improved in 2009 on account of
the weakening of the Swedish krona during last year, and lower
increases in labour costs is, however, insufficient to compen-
sate for the strong decline in global demand. Swedish compa-
nies anticipate losing market share. Since 2000, Sweden has
gained market share in only three years (2000, 2003 and 2004)
and we consider it less likely that increased share can be taken
in a contracting market.
The gradual strengthening growth of world markets and, in the
long-term, increased demand for input and investment goods
during the course of 2010, is expected in due course to improve
Swedish exports. At the same time, we expect competitiveness
to improve on account of lower increases in unit labour costs
and, despite the strengthening of the Swedish krona, neverthe-
less a relatively weak krona. Prospects for Swedish export of
services could improve. We therefore expect Swedish exports
to increase by 2-3 % in volume next year. This does, however,
require greater resource utilisation in the world economy,
greater propensity to invest and a financial market which func-
tions better. Here there is considerable uncertainty, and the risk
of a weaker recovery in exports can be considered highly likely.
Swedish exports will
recover during 2010
when global demand
slowly improves
Structural change in the vehicles industry
intensifies
The Swedish transport equipment industry is responsible for
about 13 % of Swedish exports of goods, and last year em-
ployed about 140 000 persons according to Bil Sverige. The
sector is faced with major challenges, as is also the case in a
number of other countries. The global financial crisis and sub-
sequent recession have led to a considerable decline in de-
mand for passenger cars and lorries throughout the world. At
the same time, demands on car companies to develop products
which further reduce energy consumption and carbon dioxide
emissions are increasing. Greater environmental awareness
The downturn in the
passenger car industry
is due both to the recession
and to structural change

Swedish Economic Outlook

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