Swedbank analyses theSwedish and Baltic Economies.

1. Swedbank Economic Outlook
Swedbank Analyses the Swedish and Baltic Economies January 13, 2011
Recovery on track - next step is to entrench growth
Global development
Table of Content: • The speed of global recovery in 2010 exceeded our September forecast,
with GDP up by 4.6%. Tailwinds into 2011 are making us revise also
2011 upwards to just below 4%, while 2012 is marginally lower. Emerging
Introduction: Moving on to economies are still in the driver’s seat, while more advanced ones are
sustainable growth 2 struggling in the backseat with private and public deleveraging.
• The risk of a new recession and deflation has decreased, but many
Global: Despite the many risks uncertainties linger: the euro zone crisis, slow recovery in the US,
escalating commodity prices, and overheating in emerging markets.
- global recovery is on! 4
Sweden
• The rapid recovery of the Swedish economy continued during the fall of
Sweden: Rapid rebound - time 2010. Aided by rebounding external demand, household consumption
for forward-looking growth and investments surprised on the upside, and we estimate real growth in
reforms 6 2010 at 5.3 %.
• The outlook for 2011 and 2012 is characterised by a slow-down in growth
Estonia: First year in euro to 3.3 % and 2.5 %, respectively. Temporary boosts to activity, such as
inventory restocking, will dissipate. To lift real growth over the medium
zone 11 term, renewed efforts to reform the economy are needed.
Estonia
Latvia: Stronger than expected • Economic growth in 2010 was stronger than expected on support of
recovery, yet reforms are rapidly expanding exports. Although weak, domestic demand grew
needed 15 as unemployment declined and prices rose. The budgetary situation
remained strong.
• The economy will expand by 4-4.5% in 2011-2012 as exports will remain
Lithuania: Recession is over -
the driving force, albeit domestic demand is gradually strengthening
investments key to sustainable on support of investments and consumer spending. The major positive
recovery 19 effects of the euro adoption will be lower risks and stronger confidence.
Latvia
• Recovery in 2010 has been stronger than expected both due to quick
private sector adjustment and better growth in export markets – we
estimate that during 2010 GDP has grown by about 4% from the trough
in the fourth quarter of 2009.
• Faster than expected growth is forecast in 2011 (4%) due to stronger
exports and investments, while the 2012 outlook remains unchanged
(4.2%). Inflation will pick up, which is a major risk for euro adoption in
2014. This is still a muddling-through scenario, as the elections so far
has not brought fast and comprehensive structural reforms.
Lithuania
• GDP grew in the second and third quarters 2010, indicating the end of
the recession and the beginning of a new economic cycle. The recovery
has relied on strong exports, but, in addition, gross fixed capital formation
grown by 15% in the third quarter, mainly due to public investments .
• Growing exports, continuing restocking and strong pick up in investments
will drive faster growth in 2011. Next year due to recovered household
consumption GDP growth will accelerate further – from 3.0% in 2011
to 4.5% in 2012. Medium term challenges include public finances and
structural unemployment.
January 13, 2011 1

2. Introduction Swedbank Economic Outlook
Moving on to sustainable growth
After large falls in demand were global demand. Russia, although still risks are a big concern for forecasting,
experienced in 2008-2009 – especially underperforming, has been fortunate as political decisions – being uncertain
in the Baltic countries, but also in because energy and metal prices have and difficult to foresee – will have a
Sweden – the recovery started to take continued to increase. large impact on the economies.
hold last year. GDP increased more
Looking to this year, a large carryover While Sweden’s GDP level is already
than in our September forecast, mainly
for some of the countries, like back at the pre-crisis level, there is
due to a stronger global demand,
Germany, will support growth in 2011. still a long way to go for the Baltic
but also, domestically, because
In the US, a new stimulus package countries, where deleveraging and/
of better performances of labour
will add to growth but, with the or budget consolidation are limiting
markets and improved confidence
postponement of budget consolidation, the recovery. As demand fell by 15-
among companies and households.
risks are building up, affecting stability 20%, the recovery should have been
Sweden’s growth also benefited from
not only in the US, but also worldwide. stronger, but, as deleveraging is still
expansionary economic policies.
Momentum in the emerging markets is in focus, new lending will be lower
In the Baltic countries, reforms
set to slow somewhat, as the effects and domestic demand weaker than
focused on budget consolidation
from stimulus measures fade and during normal recovery periods. There
and competitiveness, as well as on
demand from the advanced economies are three main domestic risks in the
improvement of credit ratings and
weakens. We expect global GDP Baltic countries. First, political risks
the investment climate. The worst
growth to stay slightly below 4% in pose a threat to budgets and reforms.
is over, and all four countries must
2011 and 2012: compared with our Second, inflation pressures are being
now concentrate on creating better
September Outlook, this represents an generated by higher commodity prices.
preconditions for sustainable growth.
upward revision for 2011 and a slightly And third, labour market imbalances
For the export-oriented Nordic-Baltic downward revision for 2012. are worsening due to a combination of
countries, global demand is of the higher long-term unemployment and
We foresee that major central
utmost importance. During 2010, increased labour shortages in certain
banks will not raise policy rates until
global GDP seems to have grown sectors, as economic structures are
2012, and will need to use more
somewhat faster (4.6% compared with changing from loan driven to export
unconventional measures this year
4.4% in our September forecast), as oriented and as emigration continues.
than expected in September. How to
activity in the euro zone, the UK, and Swedish domestic risks are also
exit from these measures remains a
emerging markets like India, China, geared towards the labour market,
large risk to stability, as do currency
and Brazil strengthened more than characterised by the same combination
tensions, protectionism, and, most of
expected. Overall, developments of lingering unemployment and higher
all, the sovereign debt issues in the
in the Baltic Sea region have been labour shortages. Other domestic risks
euro zone. Our main scenario includes
more favourable than in other parts of include the effects on households
a rescue package for Portugal, while
Europe, as the situation has stabilised from making monetary policy less
similar packages for Spain and other
faster in the Baltic countries; Germany, expansionary, as the debt ratio has
countries are regarded as major
Poland, and the Nordics have been increased, along with interest rate
forecast risks. Overall, the political
able to make the most of a stronger sensitivity. Even if house prices are not
expected to fall dramatically, Sweden’s
Macro economic indicators, 2009- 2012 credit and housing markets are
2009 2010e 2011f 2012f
Real GDP growth, annual change in %
becoming more vulnerable to external
Sweden (calender adjusted) -5.2 5.3 3.3 2.5 risks, and household consumption,
Estonia -13.9 2.8 4.2 4.5 especially, could face a larger
Latvia -18.0 -0.5 4.0 4.2
Lithuania -14.7 0.5 3.0 4.5 slowdown than expected in our main
Unemployment rate, % of labour force scenario.
Sweden 8.3 8.4 7.7 7.5
Estonia 13.9 17.0 14.3 12.5 Sweden’s rebound was even
Latvia 16.9 18.9 16.5 14.5 stronger than we expected in
Lithuania 13.7 17.7 15.5 14.0
September, and, during the autumn,
Consumer price index, annual change in %
Sweden -0.3 1.3 2.2 2.4 both domestic demand – including
Estonia -0.1 3.0 3.7 3.2 inventory restocking – and external
Latvia 3.5 -1.1 3.0 2.5 trade recovered at top speed. GDP
Lithuania 4.5 1.3 2.0 2.5
Current and capital account balance, % of GDP in calendar-adjusted terms is now
Sweden (current account) 6.9 6.1 6.1 5.9 expected to grow by 5.3% during
Estonia 7.3 7.0 5.5 4.5 2010, creating a carryover to 2011
Latvia 12.0 6.9 3.8 0.1
Lithuania 7.7 4.2 2.7 2.5 and thus resulting in an upward
Sources: National statistics authorities and Swedbank. revision for that year to 3.3% (2.4% in
January 13, 2011 2

3. Introduction Swedbank Economic Outlook
September). However, the quarterly to inflationary pressures but these expect the budget deficit to come down
rate of expansion will slow after last will dampen gradually. In the longer to 3% of GDP in 2012, thus satisfying
year’s bounceback. The main drivers term, foreign support for investments the Maastricht criteria. Hence, inflation
of growth in 2011 are the higher in Estonia is likely to increase due is expected to be the most difficult goal
household consumption, supported by to a perceived higher stability and to fulfil.
a better labour market performance; predictability of the economy. Fiscal
Lithuania’s recession has also ended,
the stronger confidence; and a further policy is disciplined, and the budget
and GDP in 2010 is expected to have
recovery of investments. Net exports situation will be better than the
shown marginal growth of 0.5%. The
will be marginally higher. In 2012, government plans throughout the
outlook is improving as GDP will grow
GDP growth is set to slow somewhat forecast period. The main fiscal risks
by 3% in 2011 and 4.5% in 2012.
more than the September forecast, are geared towards social spending
Exports explain last year’s better
to 2.5% (2.9%). The most important and developments in labour markets
performance, as well as inventory
reason for this is the slower growth and municipal budgets. Increasingly,
restocking, which added extensively
of exports due to higher unit labour higher inflation is likely to be a major
to growth. For 2011, investments are
costs and a slightly stronger krona. challenge for policy makers, with
set to grow somewhat faster, while
The Riksbank will raise the policy rate possible negative consequences for
general government consumption
marginally faster during the spring of growth and competitiveness.
will decrease more than previously
2011, reaching 2,25% at end- 2011
Latvia already experienced a recovery envisaged. We have revised upwards
and 3% at end- 2012. Fiscal policy will
last year, despite the negative GDP the inflation rate for 2011 and 2012
become tighter, and there is still room
growth, which was due to a carryover as commodity prices have increased
for targeted reforms improving the
effect from 2009. During the first more than expected, and excise duties
functioning of the labour market.
nine months of 2010, the economy on tobacco and diesel fuel will add
Estonia’s GDP growth has also been grew by 3%, mainly due to stronger to inflationary pressures. Like Latvia,
revised upwards for 2010, from 2.2% exports and inventory restocking. The Lithuania has the goal of becoming a
in the September Outlook to 2.8%. A labour market has also improved in member of the EMU in 2014, which
stronger export performance explains line with the stronger growth climate, means that all Maastricht criteria must
most of the difference. For 2011 and and unemployment is falling from the be fulfilled in 2012. While we foresee
2012, we are keeping the overall peak of above 20% at the beginning that the government can manage
GDP growth basically unchanged, but of 2010. Going forward, GDP will to reduce the budget deficit to 3%
exports are now forecast to speed grow by 4% and 4.2% in 2011 and of GDP in 2012 , the inflation rate
up in line with a stronger global 2012, respectively. Growth in 2011 could become a greater hindrance.
demand, while domestic demand is stronger than the September Labour productivity will increase, but
will increase more slowly than in the forecast (3%) as a result of a better not as fast as during 2010, and more
September forecast. A more subdued global demand situation, as well as measures are needed to improve
investment growth and the effects stronger investments. Household competitiveness.
on households of higher inflationary consumption, although remaining
Many challenges for sustainable
pressures explain the downward subdued, will slowly pick up in line with
growth remain, and all four
revision of domestic demand. GDP lower unemployment and stronger
countries should continue to
will grow by approximately 4.5% in confidence. Inflation is also increasing,
focus on reforms that will add to
both years. Estonia has now become but the government will focus on
longer-term competitiveness by
the 17th member of the Economic holding price pressures down as Latvia
supporting education and research
and Monetary Union (EMU). In the is still aiming to join the EMU in 2014.
and development, improving the
short term, price increases will add Fiscal improvements continue, and we
functioning of labour markets,
Quarterly real GDP levels( quarterly peak =100) 1/ increasing competition on domestic
105
product markets, and strengthening
100 the business climate. The times when
loan-driven economies could generate
95
success stories are over. Only by
90 creating an environment for companies
that are dynamic and environmentally
85
and economically sound may the
80 standard of living grow in a sustainable
way.
75
Latvia Lithuania Sweden Estonia
70
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Cecilia Hermansson
Sources: National statistics authorities and Swedbank.
1/ Each quarter of the year is compared to the highest level of that quarter’s GDP.
January 13, 2011 3

4. Global Swedbank Economic Outlook
Despite the many risks - global recovery is on!
Global economic growth has surprised growth, and preparations for the response. As austerity measures
on the upside. Industrial production election in 2012 may include some are implemented and credit growth
and foreign trade have shown strong stimulus, thus – and not without risks is restrained, demand could weaken
signs of recovery, helped by stimulus – postponing the medium-term budget more than expected. An upside risk
measures and inventory correction. consolidation. could materialize if structural reforms
are carried out, improving confidence,
Countries – where governments, Emerging markets will continue
productivity, competitiveness, and the
companies, and households have to show strong growth, although
functioning of markets.
been spared from repairing balance losing some momentum when the
sheets, such as in most of northern bounceback and stimulation period Second, there is still a risk of a
Europe, and in many of the emerging end, and because many advanced double dip on the US housing market,
markets – have recovered faster than economies will continue to show aggravating credit availability and
expected. On the other hand, crisis- weaker demand. In some countries, unemployment. The local government
struck economies in southern Europe like China and India, there is a need fiscal situation may also worsen,
are continuing to struggle with austerity to combat overheating by tightening which would threaten employment
measures, wider interest rate spreads, economic policies, and thus growth and overall growth. The political
and a lack of growth. The recovery in will slow. Although higher than in our weaknesses on the federal level may
the US and the UK is also slower than September forecast, GDP growth will also continue until the election in late
what is usual after normal recessions, stay below 4% in both 2011 and 2012, 2012.
pointing to lingering difficulties on the slowing from 4.6% in 2010.
Third, the inflation risks in many
labour, credit, and housing markets.
Even if the continued recovery has emerging markets may force politicians
Compared with our September reduced the risk of a double dip and to tighten economic policies more than
forecast, global growth is expected to a deflation scenario, many other desired, which could cause a hard
be higher in 2011, as 2010 showed a risks are contributing to forecast landing. There are still asset bubbles
stronger-than-expected recovery. The uncertainties. that could burst, like on the Chinese
main difference is the strong German real estate markets, where housing
First, the economic and financial
bounceback, where a large carryover prices are increasing again despite
situation in the euro zone could
into 2011 will motivate an upward tighter policies.
worsen as problems in Greece and
revision. The disparity within the
Ireland spread to Portugal and Spain. Fourth, large capital flows to emerging
euro zone continues; hence, growth
In addition, the political situation markets have caused some countries
in some countries has been revised
will be affected, both domestically, to introduce capital controls. Currency
downwards. The extension of the
with the risk of riots, and in the euro tensions have also increased, and the
Bush tax cuts and the unemployment
zone, if crisis management fails to coordination among G20 countries
benefits will add somewhat to US
provide a proactive and sufficient has weakened, increasing the risks of
protectionism and currency wars.
GDP forecast 2010 - 2012 (annual percentage change) 1/ Fifth, major central banks are still
January 2011 September 2010
creating entry strategies; thus,
2009 2010 2011 2012 2010 2011 2012
there could be problems with their
US -2.7 2.8 2.6 2.7 2.8 2.2 2.5
exit strategies during the forecast
EMU countries -4.1 1.8 1.6 1.5 1.4 1.1 1.6
period. Also, there is a risk of
Of which: Germany -4.7 3.6 2.5 2.0 3.0 1.4 1.7
financial turbulence when terminating
France -2.6 1.6 1.6 1.5 1.3 1.5 1.7
unconventional policies, and, in
Italy -5.0 1.1 1.0 1.1 0.5 0.9 1.3
Spain -3.7 -0.4 0.3 1.0 -0.7 0.5 1.6
addition, central banks could lose
UK -5.0 1.7 1.8 2.0 1.1 1.6 1.9 independence.
Japan -5.2 3.2 1.5 1.3 3.2 1.4 1.5 Last, but not least, commodity prices
China 8.9 10.1 8.5 8.1 9.8 8.5 8.1 have risen faster than expected,
India 5.7 8.8 8.2 7.5 8.0 7.5 7.8 partly due to policy measures leading
Brazil -0.2 7.5 4.8 4.5 7.2 5.0 5.0 to higher liquidity like in the US,
Russia -7.9 4.0 4.3 4.5 4.3 4.5 5.0 partly due to a faster global recovery.
Global GDP in PPP -0.7 4.6 3.9 3.8 4.4 3.6 3.8 There is a risk that higher energy and
Global GDP in US$ -2.0 3.7 3.1 3.0 3.5 2.8 3.1 commodity prices will dampen profit
margins, raise consumer prices, and
Sources: National statistics authorities and Swedbank.
reduce growth in many parts of the
1/ Countries representing around 70 % of the global economy. The World Bank weights from 2009
(purchasing power parity, PPP) have been used.
January 13, 2011 4

5. Global Swedbank Economic Outlook
world. The effects of higher commodity Commodity prices , 2002 - 2012 (indices)
500
prices will be more severe in countries Food Metals Oil
where food and energy make up a 450
relatively large share of consumption, 400
and where competition on product 350
markets is weak. 300
Analysing our forecast assumptions, 250
commodity prices – especially food 200
prices, but also some metals - have
150
increased faster than we expected in
100
September. Our oil price assumption is
50
raised from US$82 per barrel to US$87
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
in 2011, and kept unchanged at US$90
Sources: Ecowin and Swedbank projections.
in 2012. Upside risks are involved
as the oil price could continue above
US$100 if oil producing countries do push up demand for earlier repo rate world economy remain, not least
not increase production. hike, not least among German policy in advanced economies with large
makers. deleveraging needs. During 2011 and
The inflation outlook varies between 2012, global growth will be driven
emerging and advanced countries, The US dollar strengthens in 2011-
by emerging markets. Structural
and is the foundation for monetary 2012 against the yen and the euro,
reforms should be added to stimulus
policy assumptions. Chinese inflation as the situation in the euro zone
measures, where these are still being
will slow from 5% to 3.5% in 2012. is regarded as more uncertain
introduced (like in the US), and also
In India and Brazil, inflation will stay by financial markets, and growth
to austerity measures in crisis-struck
above 5%, despite tighter policies. prospects are weaker there and in
economies in Europe. The best way to
Policy interest rates in many emerging Japan than in the US. China continues
alleviate the debt burden is to enhance
countries will continue upwards. In the with the appreciation of the yuan
growth by improving productivity,
euro zone and in the US, inflation will against the US dollar, but slowly, at
entrepreneurship, and innovation, thus
be lower, around 1.5%, as domestic some 4-5% per year. More important,
creating room for more employment.
demand stays weak. Federal Reserve though, is the higher Chinese wage
With stronger political leadership,
and the ECB will postpone their first growth and inflation, which will
chances of a stronger global outlook
policy rate hikes until 2012 and keep appreciate the yuan in real terms.
will improve.
unconventional measures for a longer Hence, the muddling-through
period. There is an uncertainty in the Cecilia Hermansson
scenario we presented in September
euro zone as higher inflation may is still alive. The challenges for the
Interest and exchange rate assumptions
Outcome Forecast
11 Jan 30 Jun 31 Dec 30 jun 31 Dec
2011 2011 2011 2012 2012
Policy rates
Federal Reserve, USA 0.25 0.25 0.25 1.00 1.50
European Central Bank 1.00 1.00 1.00 1.50 1.75
Bank of England 0.50 0.50 0.75 1.00 1.25
Bank of Japan 0.10 0.10 0.10 0.10 0.10
Exchange rates
EUR/USD 1.30 1.24 1.22 1.20 1.20
RMB/USD 6.62 6.50 6.35 6.20 6.05
USD/JPY 83 85 90 100 105
Sources: Reuters Ecowin and Swedbank projections.
January 13, 2011 5

6. Swedbank Economic Outlook
Sweden: Rapid rebound – time for forward-looking
growth reforms
The Swedish economy is recovering consumer durables. In addition, the financial sector stability would also be
faster than we had earlier anticipated. economic stimulus is being wound negatively affected by rapid price falls
During the autumn, both domestic down as monetary policy rates are in the housing market. On the upside,
demand and external trade rebounded being raised and the impact from fiscal a faster international recovery would
sharply, resulting in a pronounced policy is dissipating. We also expect benefit well-positioned and stable
upturn of economic growth. In the third global economic conditions to loose Swedish companies.
quarter of 2010, real growth reached momentum in 2011, although we have
Exports make up lost ground
6.9%, compared with the same period raised the growth forecasts somewhat
in 2009. Short-term indicators suggest from our September outlook. Factoring Swedish exports are picking up, and
that growth continued in the fourth in the large statistical carryover from the loss of market shares in 2009
quarter, albeit more slowly in quarterly 2010, this implies annual growth rates has, despite the appreciation of the
terms. We estimate that overall of 3.3% in 2011. For 2012, the annual Swedish krona, been restored faster
growth for 2010 was 5.3% (calendar rate drops to 2.5% despite the slightly than expected. Export volume for the
adjusted), significantly higher than higher quarterly growth rates. first three quarters in 2010 increased
in our September projection. This by 9.9% in annual terms. To a large
The risks to the forecast mainly
outcome implies that the Swedish extent, the rebound in exports is
stem from abroad, but strains are
economy has, in only eight quarters, being driven by growing demand for
also building up domestically. A
made up for the output loss sustained intermediate and investment goods – a
deterioration of the sovereign debt
during the downturn; this compares situation that is favourable to Sweden.
crisis in Europe would severely affect
favourably with the almost five years
Swedish growth prospects through In 2011, market growth for Swedish
needed to recover from the financial
falling demand and financial sector exports is expected to decelerate
crisis in the early 1990s.
turbulence. Domestically, the main when the global rebuilding of
We foresee that the quarterly rate of risk can be attributed to eroding inventories dampens and fiscal policy
expansion will dampen during 2011 competitiveness. Labour market tightens. Export market growth for
and 2012. A sizable share of the bottlenecks, with subsequent wage Swedish industry is, nevertheless,
rebound in 2010 was due to temporary increases, together with a stronger expected to be stronger in 2011
factors. Inventory restocking boosted krona, would weaken Swedish than we earlier anticipated, partly
growth, and private consumption grew companies’ positions on external due to spillover effects from the
against large declines of, in particular, markets. Household consumption and strong rebound in 2010; meanwhile,
development in 2012 has been revised
Key Economic Indicators, 2009 - 2012 1/ slightly downwards due to a weaker
2009 2010e 2011f 2012f momentum in the global economy.
Real GDP (calendar adjusted) -5.2 5.3 3.3 2.5 The projected world market growth for
Industrial production -17.9 13.5 7.0 5.0 Swedish industry of 6½-6¾% in 2011
CPI index, average -0.3 1.3 2.2 2.4 and 2012 is below the long-term trend.
CPI, end of period 0.9 2.5 1.4 2.4 Continued deleveraging in several
CPIF, average 2/ 1.9 2.1 1.4 1.6 OECD countries will have a restraining
CPIF, end of period 2.7 2.4 0.5 1.7 impact on demand. The emerging
Labour force (15-74) 0.2 1.1 0.7 0.5 markets are expected to account for
Unemployment rate (15-74), % of labor force 8.3 8.4 7.7 7.5 the largest export market growth,
Employment (15-74) -2.1 1.0 1.4 0.7
although we anticipate a gradual
Nominal hourly wage whole economy, average 3.4 2.2 2.4 2.9
deceleration there due to a more
Nominal hourly wage industry, average 2.9 2.6 2.6 3.0
restrictive economic policy.
Savings ratio (households), % 12.9 11.6 10.4 10.2
Real disposable income (households) 3/ 1.6 2.4 1.5 1.7 We foresee overall export growth in
Current account balance, % of GDP 6.9 6.1 6.1 5.9 2011 of 6.8% in volume terms. An
General government budget balance, % of GDP 4/ -0.7 -0.3 0.0 0.6 improved outlook for global demand
General government debt, % of GDP 5/ 41.9 39.9 37.7 35.5 and decreasing unit labour costs due
Sources: Statistics Sweden and Swedbank. to a higher productivity growth will
1/ Annual percentage growth, unless otherwise indicated. mitigate the impact of a stronger krona.
2/ CPI with fixed interest rates.
3/ Based on short-term earnings statistics For 2012, we foresee a weakening
4/ As measured by general government net lending. in export performance when the
5/ According to the Maastricht criteria.
competitiveness of the Swedish
January 13, 2011 6

7. Sweden Swedbank Economic Outlook
industry worsens due to a stronger Real GDP levels and growth, 1980 - 2012
3500 6
krona and rising unit labour costs. Growth (% real; rhs) Level (real)
3300
We expect export growth in that year 4
3100
of 5.5%, implying losses of market
2900
shares for Swedish companies. The 8 quarters
2
2700
growth contribution from foreign trade
2500 0
will be limited by the strong growth in
2300
imports. Following an expansion in -2
2100
2010 of 12.5%, import growth in 2011
1900
and 2012 is expected to decelerate to 18 quarters
-4
1700
7.3% and 6.4%, respectively. 1500 -6
Broad recovery in fixed 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Sources: SCB and Swedbank projections.
investment
The recovery in investments has during 2011, followed by a deceleration falling back in 2012.
strengthened in line with increasing in 2012 when the industrial capacity is
production and a higher utilisation rate. Inventory restocking is expected to
larger.
Housing shows the largest pickup, have contributed 2.3 percentage
together with the services sector, while The rebound in real estate investment points to GDP growth in 2010,
industry investments are lagging. in 2010 was more pronounced than significantly more than expected.
Large public investment projects in we had anticipated. This will also have Companies’ needs for growing stocks
infrastructure also contributed more to spillover effects in 2011. Because of of intermediate and finished goods
the investment rebound in 2010 than this rebound, as well as an improving in industry explain to a large extent
we expected. labour market and tax reductions this boost from inventories. This is
for renovations, we foresee double- a sharp reversal from 2009, when
With private sector output continuing digit investment growth in real estate the destocking process started and
upwards, there will be a growing need during 2011. For 2012, we anticipate industrial production fell significantly.
to expand capacity. Together with a gradual slowdown in real estate We foresee a further rebuilding of
strengthening confidence, favourable investments when the interest rates stocks during the forecast period due
financing terms and rising profits will be higher. Supply constraints, such to the low current levels, growing
will trigger an increase in business as a lack of qualified labour, are also industrial production, and higher
investments. Total investment is expected to limit growth in real estate investment growth. The momentum
expected to grow by 8.2% in 2011 investment. is, however, expected to slow, and
and 8% in 2012, which means that the contribution to GDP growth from
investments will exceed the pre-crisis Ongoing and investments brought
inventories will be zero during 2011
2008 level by the end of the forecast forward in infrastructure and new
and slightly negative in 2012.
period. We expect an uptick in the projects by local governments will
momentum of industrial investment boost public investment in 2011 before Sustained, but slow, labour
market improvements
The labour market continues to
Swedbank’s GDP Forecast – Sweden
recover, but at a slower rate than
Changes in volume, % 2009 2010e1/ 2011f1/ 2012f economic growth. By November of last
Households' consumption expenditure -0.4 3.6 (3.0) 2.9 (2.6) 2.0 (1.8) year, the Swedish economy had added
Government consumption expenditure 1.7 2.0 (1.7) 0.9 (1.0) 0.4 (0.4) more than 90,000 jobs compared
Gross fixed capital formation -16.4 4.7 (4.3) 8.2 (5.5) 8.0 (6.7) with the same month in 2009, and
private, excl. housing -19.1 1.4 (4.3) 9.4 (6.7) 10.9 (8.3)
the unemployment rate had fallen to
public 4.2 3.5 (-3.6) 0.5 (-1.3) -0.5 (-0.4)
7.8% (seasonally adjusted). However,
housing -23.3 19.7 (13.5) 11.7 (7.7) 5.5 (6.9)
Change in inventories 2/ -1.7 2.3 (1.8) 0.0 (0.0) -0.3 (0.0) compared with the rapid expansion
Exports, goods and services -13.4 11.1 (11.2) 6.8 (5.6) 5.5 (6.4) of GDP, employment is lagging.
Imports, goods and services -13.6 12.5 (13.5) 7.3 (6.7) 6.4 (6.4) Instead, the number of working hours
GDP -5.6 5.6 (4.3) 3.3 (2.4) 2.1 (2.6) is increasing. This suggests that slack
GDP, calendar adjusted -5.2 5.3 (4.0) 3.3 (2.4) 2.5 (2.9) that had accumulated is now being
Domestic demand 2/ -3.1 3.1 (2.7) 3.1 (2.5) 2.5 (2.2) used up. Also, productivity levels have
Net exports 2/ -0.8 0.1 (-0.2) 0.2 (-0.1) -0.1 (0.4) been rising quickly, and, in tandem
Sources: Statistics Sweden and Swedbank. with low wage increases, unit labour
1/ The figures from our forecast in September 2010 are given in brackets. costs have fallen. As many companies
2/ Contribution to GDP growth.
now are faced with making new hirings
January 13, 2011 7

8. Sweden Swedbank Economic Outlook
instead of rehiring previously laid-off Productivity and unit labour cost, 2001 - 2012
personnel or increasing hours, we 7 5
expect employment creation to slow 6 4
down. 5
3
4
The challenge to reduce the 2
unemployment rate over the medium 3
1
term is significant. Primarily, due to 2
0
demographic factors the labour force 1
is set to grow over the next couple 0
-1
of years. Furthermore, although the -1 Unit labour cost Productivity (rs) -2
number of long-term unemployed -2 -3
has started to fall, the share of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: SCB and Swedbank projections.
unemployment remains steady.
Thus, as unemployment reduces
employability it will be increasingly of 5-6%.1 To continue to reduce the As the service sector, which often
harder to reduce the unemployment unemployment level, targeted policy entails lower productivity levels, is
rate. Employment expansion so far measures, such as improved skills growing as a share of the economy,
has also been uneven across sectors. matching, tailored training, and skills renewed reform efforts are necessary
This means that in sectors that are enhancement, are necessary. to increase the growth dynamics of the
expanding, eg. construction and IT, it Swedish economy. If not, there is a risk
may become difficult to find qualified Restrained wage developments
that competitiveness worsens and the
personnel, while many unemployed are continuing to benefit Swedish
growth potential becomes constrained.
will not have the right skill set for competitiveness, but this could be
those jobs that are created. This could reversed when the wage agreements Households continue to drive
lead to labour shortages despite high start to expire in 2012. Wage increases growth – at their own peril
overall unemployment rates. in the overall economy are estimated
Household consumption picked up
to have increased by 2.2% in 2010,
Based on recent developments, we in the third quarter, adding to the
below our expectations, while wages
are revising our labour market outlook. already significant growth contribution
in the industry sector are likely
Employment is set to grow by 1.4% in in 2010. While the contraction of
to have exceeded our projection.
2011 before slowing to 0.7% in 2012. real consumer spending for 2009
With falling unit labour costs and
The stronger job creation is a result was revised upwards from -0.8%
strong productivity growth, Swedish
of the faster-than-expected economic to -0.4%, third-quarter growth was
competitiveness has improved
recovery, and we now expect to 3.5% compared with the same period
significantly. Looking forward,
reach pre-crisis employment levels in 2009. Thus, the relatively strong
however, we expect productivity
by mid-2011. The annual average expansion continues. At the same
growth to fall, while wage drift and
unemployment rate will fall to 7.7% time, the limited growth of wages has
rising wage demands will increase
in 2011 and 7.5% in 2012. At the end dampened real disposable income
costs. Productivity in the Swedish
of the forecast period, we expect the growth, and households have dipped
economy was high prior to the crisis,
unemployment rate to dip below 7%, into their savings.
in large part due to investments in
significantly lower than during the IT and deregulation of the economy. Looking forward, improved labour
height of the recession but still far market performance is expected to
from the estimated equilibrium level 1 See Anders Forslund raise real disposable income. The
(Fiscal Policy Council, 2008). strong economic rebound has led to
both increased employment and to
Labour market indices, 2005 - 2012
5 100 9.5
growing numbers of hours worked.
9.0
Despite a slightly higher inflation,
5 000
8.5
this will lead to a stronger real wage
4 900
8.0
development and work related income
4 800
7.5
will increase. At the same time, the
4 700
7.0
favourable policy mix that has so
4 600
6.5
far supported household income
4 500
6.0
and spending levels is about to be
4 400 5.5
reversed. Apart from reduced tax rates
4 300 5.0
on pensions, the pre-crisis lowering
jan-05 sep-05 maj-06 jan-07 sep-07 maj-08 jan-09 sep-09 maj-10 jan-11 sep-11 maj-12 of in-work tax rates is unlikely to be
Employment ('000, sa) Labour force ('000, trend) Unemployment rate (rate in %, sa, rhs)
continued in the same magnitude,
Sources: SCB and Swedbank projections.
although a another lowering has been
January 13, 2011 8

9. Sweden Swedbank Economic Outlook
suggested for 2012, and transfers precautionary savings can be expected by 2.5% at the end of the year. In
from the government will decline in to fall off as household confidence light of this, we expect the Riksbank
line with falling unemployment and improves, supporting increasing to raise policy rates at a faster pace,
the tightening of health benefits. The consumption levels. and to effectuate two additional hikes
minority government has strongly of 25 basis points during the first half
Put together, we expect the household
committed itself to fiscal policy of 2011. The output and employment
saving ratio to continue to decline in
restraint and does not seem to have gaps are closing faster than expected,
2011 and 2012, but will remain at a
parliamentary support for any major which shortens the way toward a
relatively high level. It soared during
demand enhancing policies. Also, the normalisation of monetary policy, which
the crisis as precautionary savings
normalisation of monetary policy will strengthen the krona and dampen
surged. A combination of increasing
make a dent in household finances. inflationary pressures. The consumer
consumption, limited growth of
As the share of mortgages at flexible price index with fixed interest rates
disposable income, and improving
rates was 59% in September 2010, (CPIF) is expected to reach 1.7% at
confidence will lead households to
compared with 43% in October 2008, the end of 2012. There have also been
draw down on savings. However, as
increasing interest rates will reverse concerns that the exceptionally low
interest rates increase, we expect
the beneficial impact that low rates interest rates are fuelling asset prices,
amortisation to pick up, supporting
have had on consumers’ budgets. including those in real estate. For
a relatively high saving ratio and
Even though consumer behaviour has 2012, the pace of rate hikes will slow,
dampening consumption growth.
stabilized economic activity during the and we forecast a policy rate of 3% by
recent turbulent years, vulnerabilities
Monetary policy – a balancing the end of the year, i.e., unchanged
are building up. We forecast household
act from our September forecast.
debt levels to reach close to 180% of The Riksbank has continued on The Riksbank will need to perform
disposable income and debt service its path towards a normalisation of several balancing acts over the next
to rise quickly with policy rate hikes. monetary policy. In October, the policy couple of years. Primarily, as economic
Increasing utility prices, in particular rate was raised to 1.0%, but the policy activity is again picking up, there is
of electricity during another cold spell rate path was revised downwards at a risk that a too rapid normalisation
this winter, and rising inflation due the same time amidst concerns over of monetary policy will prematurely
to food and commodity prices will the international economic recovery. strain economic growth. The Swedish
limit household budgets and curb In December, another increase of 25 economy is likely to have become
consumption spending. basis points took place, but with no more interest rate sensitive as the debt
change in the policy rate path. While burden has increased, in particular
Although consumer spending is
referring to the strong economic amongst households. Higher interest
expected to grow more slowly during
growth and improvement in the labour rates will affect consumption behaviour
the next two years, it will remain
market, the Riksbank noted that the more now than before the crisis.
an important source of growth. A
underlying inflation rate was still low, Regarding whether the Riksbank
significant share of the increase in
despite higher utility and commodity should be more proactive in preventing
consumption during 2010 was due to
prices. asset price bubbles, we believe that
pent-up demand for durables such as
cars. As households are returning to there is a role for monetary policy to
Against the background of a stronger-
their desired levels of consumption “lean against the wind” to prevent,
than-expected economic recovery and
of capital goods, we expect real e.g., housing prices from becoming too
rising food and energy prices, inflation
spending to increase at a slower rate excessive. In that sense, the on-going
began accelerating in 2010 and
in 2011 and 2012. At the same time, normalization of the monetary policy
consumer prices (CPI) had increased
is welcome. In general, balance-sheet
concerns should also be addressed
Household income , consumption and saving, 1998 - 2012
through financial supervision measures
14
Real disposable income
and appropriate fiscal policy measures.
12 Private consumption This way, policy interventions will be
Saving ratio
10 Saving ratio (excl. occupational and premium pensions)
more targeted, through, e.g., loan-to-
8
value ratios or mandatory amortisation
of highly leveraged house purchases,
6
or through a phase-in of a reduction of
4
the mortgage interest tax deduction.
2
0
Fiscal policy – towards
-2
surpluses
-4 The rapid economic recovery has
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 improved fiscal balances. A better-
Sources: SCB and Swedbank projections.
January 13, 2011 9

10. Sweden Swedbank Economic Outlook
than-expected income development Interest rate and currency outlook
and solid private consumption are Outcome Forecast
supporting the revenue side, and 2011 2011 2011 2012 2012
11 Jan 30 Jun 31 Dec 30 Jun 31 Dec
expenditures are being limited by
the reforms of the health insurance
Interest rates (%)
system, lower spending on Policy rate 1.25 1.75 2.25 2.50 3.00
unemployment policies, and reduced 10-yr. gvt bond 3.20 3.20 3.20 3.40 3.60
interest payments on the public debt. Exchange rates
Following data revisions, the budget EUR/SEK 8.87 8.70 8.65 8.60 8.55
deficit for 2009 is now reported at 0.7% USD/SEK 6.85 7.02 7.09 7.17 7.13
of GDP, among the lowest in Europe. TCW (SEK) 1/ 122.1 120.3 120.1 118.9 118.2
For 2010, we estimate that the budget Sources: Reuters Ecowin and Swedbank.
deficit was 0.25% of GDP, slightly less 1/ Total Competitiveness Weights (TCW: i.e. trade-weighted exchange rate index for SEK).
than in our September report. Public
debt is estimated at 40% of GDP. minister has suggested that further support demand, but rather for active
lowering of the income tax could be labour market policies directed at
Fiscal policy is likely to become less
implemented provided there sufficient resolving skills mismatch problems and
supportive of economic activity. The
fiscal resources. We estimate an strengthening the job skills of those
government remains committed to
additional fiscal expansion for this currently unemployed. For the medium
restoring the public sector balances
year of SEK 10 billion. Public debt will, term, to maintain the competitiveness
and reducing public debt to create
nevertheless, continue its downward of the Swedish economy, in particular
buffers for a future crisis. Furthermore,
path, aided by privatisation revenues. as the Swedish krona is strengthening,
a weak parliamentary situation will
Estimating that privatisation will bring higher productivity growth will be
limit the scope for continuing the bold
in about SEK 25 billion over 2011- essential. This is a challenge, but key
reforms on the income side, as well
2012, out of a potential SEK 100 reform policy areas would include
as the health insurance reforms that
billion, we foresee public debt reaching continued liberalisation of product and
characterised the government’s first
about 35% of GDP by the end of the labour markets, and renewed efforts
term. We thus expect a balanced
forecast period. to stimulate R&D and also to increase
budget for 2011, followed by a surplus
both quality but also the number of
in 2012. The government is committed Faced by increasing labour market
students in the Swedish education
to reducing the tax rate on pensions, matching problems and slowing
system.
and on restaurant meals, but the productivity growth, the government
effects on the budget will in our view should increase the priority of
be compensated for by the stronger targeted labour market policies and
economic development. In addition, structural reforms to enhance medium-
we maintain that the spring budget bill term growth and reduce long-term Magnus Alvesson
is likely to include additional spending unemployment. Currently, we see Jörgen Kennemar
of SEK 15 billion. For 2012, the prime little need for broad-based policies to
Inflation and exchange rate indices, 2008 - 2012
5.0 150
TCW CPI yoy in % CPIF yoy in %
145
4.0
140
3.0 135
130
2.0
125
1.0
120
0.0 115
110
-1.0
105
-2.0 100
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12
Sources: Riksbanken, SCB and Swedbank projections.
January 13, 2011 10

11. Swedbank Economic Outlook
Estonia: First year in euro zone
The Estonian economy is recovering recovery of domestic demand. The expected this autumn, but domestic
from the crisis faster than expected current status of the global economy demand less. The main reason behind
with the support of swift export does not allow us to expect as strong the latter projection is the weak gross
growth. The unemployment rate has a positive effect as occurred after capital formation in the third quarter
fallen more quickly than previously previous expansions of euro zone; of 2010; also contributing has been
forecast; nevertheless, households however, an outcome better than the early and snowy winter, which
are not eager to spend, even though currently expected is possible. means that investment activity remains
consumption in recent months subdued through winter months.
The most significant risk for our
has been somewhat stronger than In 2011, investment growth will be
scenario is global economic
expected. Investment growth has stronger, as successful sectors have
development. As Estonia is very open
been weaker than expected as public reached already now their capacity
economy, external conditions, whether
sector spending on investments has constraints, and the public sector and
improving or deteriorating, will affect
been smaller than planned. Headline its companies—it is hoped-- resume
the economy through demand and
inflation jumped to over 5% in their stalled infrastructure investments.
prices.
November as fuel and food prices on
Consumer spending at the end of 2010
global markets are growing rapidly;1 Of medium-and long-term risks,
was slightly stronger than previously
base inflation – albeit rising – remains companies’ investment policies and
estimated, but we expect the setback
at a more modest level (November’s labour outflows remain among the
in early 2011 to be deeper and longer,
annual growth was 1.2%). The budget main risks that could affect the current
due to the higher inflation compared
situation is better than forecast, growth outlook either positively or
to our autumn forecast. Price growth
while lending growth remains below negatively. Of domestic risks we
and unemployment rate will keep
expectations. consider the price growth to be the
real incomes low and spending
greatest. The shortage of qualified
Estonia has become the 17th member modest. Hence, we have lowered the
labour is another domestic risk factor.
of the euro zone. We do not expect a consumption outlook for 2011 and
strong immediate effect on economic Exports continue to drive GDP 2012.
developments from membership, growth
Export growth to recede in 2011
but rather longer-term support for
We have upgraded our GDP growth
investments through an improved and The second half of 2010 continued
forecast for 2010 from 2.2% to
more stable business environment. to surprise us with strengthening
2.8%, as export growth has strongly
This support, in turn, will promote export growth rates – exports (in value
exceeded our expectations. Growth
employment, income growth, and the terms) of goods expanded by 41%
expectations for 2011 and 2012
and services by 9% in August-October
1 For a more detailed discussion on infla- remain broadly the same, as exports
in annual comparison. The pre-crisis
tion, see the Swedbank November monthly are forecast to grow more than we
report on Estonia.
level of goods exports was exceeded
in the third quarter although the
exports of services remained slightly
below that of the peak recorded in
Key Economic Indicators, 2009 - 2012 1/ 2008. This rapid expansion is the main
2009 2010e 2011f 2012f
reason why we decided to increase
Economic growth -13.9 2.8 4.2 4.5
our growth forecast for 2010.
GDP, bln euro 13.9 14.5 15.8 16.7
Average growth of consumer prices -0.1 3.0 3.7 3.2 The recovery of exports is strongly
Unemployment level 13.9 17.0 14.3 12.5 dependent on economic developments
Real growth of gross monthly wage, -4.9 -3.0 0.0 2.7 and demand in Finland, Sweden,
Exports of goods and services -19.9 22.5 11.5 10.5 and Germany, as most Estonian
Imports of goods and services -30.6 22.0 11.5 11.5
manufactures are subcontractors to
companies in these countries. The
Trade and services balance, % of GDP 5.9 6.5 6.0 6.0
production and exports of capital
Current and capital account, % of GDP 7.3 7.0 5.5 4.5
goods are expanding the fastest;
FDI inflow, % of GDP 8.7 7.5 10.0 10.5
hence, the positive investment outlook
Gross foreign debt, % of GDP 125.5 118.0 111.0 108.0
in those above-mentioned countries,
General government budget, % of GDP -1.7 -0.3 -0.5 0.3
but also in their export markets, is the
General government debt, % of GDP 7.2 7.0 6.7 7.8
key for being more optimistic about
Sources: Statistics Estonia and Swedbank.
Estonian exports.
1/ Annual percentage change unless otherwise indicated.
January 13, 2011 11