The document summarizes that while economic recovery is underway globally, risks have increased due to signs of weakness in the US economy. Key interest rates and bond yields remain low. The Nordic countries are well positioned to benefit from the economic upturn due to fiscal responsibility and current account surpluses, though growth will vary across countries. Sweden has seen a surprisingly strong recovery so far.

1. Economic recovery but higher
risks, depressed key rates and
Nordic Outlook
bond yields
Nordic countries well equipped for
Economic Research – August 2010 upturn

2. Contents
International overview 5
The United States 16
Japan 22
Asia 23
The euro zone 25
The United Kingdom 31
Eastern Europe 32
The Baltics 33
Sweden 35
Denmark 43
Norway 44
Finland 48
Economic data 49
Boxes
Downside risks have increased 7
Stable commodity prices 8
Basel III postponed 9
Moving towards Japanese yields? 12
An unusual recovery 19
Falling unemployment even with slow growth 28
Stress tests dispel uncertainty despite shortcomings 30
Why is Sweden doing so well? 36
Major Swedish GDP revisions 38
Nordic Outlook – August 2010 | 3

3. Economic Research
This report was published on August 31, 2010.
Cut-‐off date for calculations and forecasts was August 27, 2010.
Robert Bergqvist Håkan Frisén
Chief Economist Head of Economic Research
+ 46 8 506 230 16 + 46 8 763 80 67
Daniel Bergvall Mattias Bruér
Economist Economist
+46 8 763 85 94 + 46 8 763 85 06
Ann Enshagen Lavebrink Mikael Johansson
Editorial Assistant Economist
+ 46 8 763 80 77 + 46 8 763 80 93
Andreas Johnson Tomas Lindström
Economist Economist
+46 8 763 80 32 + 46 8 763 80 28
Gunilla Nyström Ingela Hemming
Global Head of Personal Finance Research Global Head of Small Business Research
+ 46 8 763 65 81 + 46 8 763 82 97
Susanne Eliasson Johanna Wahlsten
Personal Finance Analyst Small Business Analyst
+ 46 8 763 65 88 + 46 8 763 80 72
SEB Economic Research, K-‐A3, SE-‐106 40 Stockholm
Contributions to this report have been made by Thomas Köbel, Klaus Schrüfer, SEB Frankfurt/M and
Olle Holmgren, Trading Strategy. Stein Bruun and Erica Blomgren, SEB Oslo are responsible for the Norwegian
analysis.
4 | Nordic Outlook – August 2010

4. International overview
Continued economic recovery but increased risks
will also reduce the need for unconventional monetary
US growth below trend for the next year policies.
Strong recovery in Sweden and Germany
In our judgement, the deceleration signals in the Ameri-‐
can economy will have consequences for the recovery
interest policies dynamic in the coming year. Renewed weakness in both
Dilemmas for Nordic central banks the labour and housing markets will block a traditional
recovery dynamic. We have thus adjusted our forecast
downward and expect GDP growth somewhat below
trend in the US during late 2010 and early 2011. This
will mean major economic strains, including persistent-‐
In recent months the world economic outlook has dete-‐
riorated, mainly due to clear signs of weakness in the
American economy. Increased worries about a slowdown At the global level, however, extremely loose monetary
in the United States and Asia, combined with contin-‐ policy and continued good growth capacity in many
parts of the world economy will contribute to decent
growth in the next couple of years. Fast-‐growing Asian
markets and sharply falling interest rates, among other economies will remain an important driving force,
things. The growth rate was unexpectedly strong in although some deceleration is on the way. We believe
many countries during the second quarter, and the
emergency response to the southern European crisis has tools to ensure an economic soft landing.
In the OECD, differences in the underlying balance
negative news.
situation have become increasingly important. Germany
-‐ and Sweden are among countries where the strength of
tations have fallen. It is becoming increasingly clear the upturn has been surprising. A strong German econ-‐
-‐ omy is not enough to keep up the momentum of the
nant problem for major central banks in the 32 member entire euro zone, though. There will thus be wide gaps
countries of the Organisation for Economic Cooperation within the currency area as the full effects of powerful
and Development (OECD). This is creating room for austerity programmes are felt in southern Europe.
continued record-‐low interest rates in the next couple
Global GDP growth
of years.
Year-‐on-‐year percentage change
We expect the US Federal Reserve (Fed) and the Euro-‐
2009 2010 2011 2012
pean Central Bank (ECB) to maintain today’s record-‐
low key interest rates throughout 2011 and to begin United States -‐2.6 2.6 2.2 2,9
cautious rate hikes only in 2012. Due to low key rates in Japan -‐5.2 2.5 1.5 1.5
-‐ Germany -‐4.7 3.3 2.1 1.8
tion expectations in the long term as well, government
China 8.7 10.0 9.0 8.0
bond yields will remain at historically very low levels in
the next couple of years. United Kingdom -‐4.9 1.7 2.0 2.2
Euro zone -‐4.1 1.6 1.3 1.5
There is a renewed focus on the potential for central
banks to stimulate their economies by means of quanti-‐ Nordic countries -‐4.4 2.5 2.4 2.4
tative easing (QE). We expect that because of low long-‐ Baltic countries -‐15.6 0.4 4.2 4.5
their balance sheets at current levels and thus not
Emerging markets 2.4 6.8 6.0 6.4
implement new QE programmes. The Basel Committee
on Banking Supervision has presented a proposal which
World, nominal -‐1.3 3.7 3.1 3.6
postponed, creating an economic stimulus effect that
Source: OECD, SEB * Purchasing power parities
Nordic Outlook – August 2010 | 5

5. International overview
We are sticking to the main scenario from our economic large negative contribution to growth in the second
analyses of recent years: the after-‐effects of the deep quarter, among other things due to stimulus measures
crisis will hamper economies for a rather long period. and a stronger US dollar.
Debt retirement in both the private and public sectors,
-‐ To ensure a sustainable recovery, it will now be crucial
tem, will mean slower growth for some time to come.
Low interest rates may ease the adjustment, but their consumption to take over when the inventory cycle
stimulus effect will be weaker than normal in today’s ceases to serve as an economic engine. The box entitled
ravaged economic environment. “Recovery at a crossroads” in the November 2009 issue
of Nordic Outlook discussed this take-‐over. One conclu-‐
Amid a fragile economic situation, international sion was that mid-‐2010 would be the critical period. But
economic policy makers face major challenges, for the outlook is mixed.
-‐
Capital spending took off in many countries early in
joint European institutions. Belt-‐tightening in southern
Europe will put the political system under severe strains investment level was exceptionally depressed. But
there, but political authority is being questioned even there are also factors that point towards a sustained
in leading industrial countries. In the US, for example, recovery.
President Obama’s popularity has plunged and this
-‐
autumn’s congressional election may lead to further
pressed, even in a longer time perspective. Unlike
restraints on the government’s ability to make and
normal economic expansions, the capital spending
implement decisions. In Germany, Chancellor Angela
level in the OECD countries remained rather low
Merkel’s position has weakened and her governing
during the boom years 2006-‐07.
coalition is going through a rough patch. In the UK, a
new and inexperienced coalition government is facing Balance sheets, especially in large American corpo-‐
painful spending cuts. rations, are much stronger than normal. This will
The ongoing slowdown trend in the global economy is system remains relatively fragile.
largely due to the fading of stimulus effects from the
Historical associations signal that capital spending
growth is more dependent on the change in capac-‐
movements have been pivotal to the recovery in the
ity utilisation than on its actual level. This indicates
manufacturing sector. Since most merchandise invento-‐
ries are traded across national boundaries, this means
relatively soon.
One important factor that may delay an upturn is that
-‐
As a percentage of GDP, current prices
14.5 14.5
ing loans. The credit market is performing sub-‐optimally
14.0 14.0 in this respect, both in the US and Europe.
13.5 13.5
US: Uniform pace of debt retirement
13.0 13.0
Per cent of disposable income
12.5 12.5
140 12
12.0 12.0
11
11.5 11.5 130
10
11.0 11.0 120 9
10.5 10.5 8
110
10.0 10.0 7
100
9.5 9.5 6
9.0 9.0 90 5
70 75 80 85 90 95 00 05 10 80 4
3
Source: US Department of Commerce 70
2
60 1
It is thus not illogical for all parts of the world economy
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
to begin their recovery with export-‐led growth. The
trend in net exports, when imports are also included, is Household debts (LHS) Household saving (RHS)
Source: Federal Reserve
another question. Early in the crisis, the effect of
international trade was to ease global imbalances. On the consumption side, the outlook is gloomier.
Domestic demand, and thus imports, fell sharply in There is still a major need for debt retirement. New US
countries with large domestic imbalances, such as the
US. In recent months, this pattern has reversed to some than previously reported. The adjustment process is
extent. For example, net US exports accounted for a thus occurring faster than expected. Given new labour
6 | Nordic Outlook – August 2010

6. International overview
market disappointments and a housing sector that again cent months, and we expect a 4.7 per cent upturn this
seems to be on its way down, the underlying prerequi-‐ year. Exports have recovered strongly after their sharp
sites for a normal American consumption recovery are
missing. In the UK, southern Europe and elsewhere,
-‐
ing. In Germany and Japan, consumers are cautious In the other Nordic countries, growth will be far more
despite their strong balance sheets. In Asian emerging moderate. The Danish economy is still being hampered
economies, there is an impending shift towards greater by the repercussions of the housing market crash.
emphasis on consumption, as illustrated by accelerat-‐ In Finland there is good potential for an export-‐led
ing pay increases, but this is too lengthy a process to manufacturing upturn similar to Germany and Swe-‐
den. So far, the upturn has been modest, but a weaker
economic engine. euro will contribute to an acceleration over the next
few quarters. In Norway, the economy has also been
Our overall conclusion is that, in part because of sub-‐ held back by an appreciating currency. A strong labour
a slower growth phase during the second half of 2010 to get domestic demand moving. Because of the very
mild downturn in 2008-‐09, resource utilisation is also
quarters, growth will again end up below trend. The high in Norway compared to other countries, and this
output gap will thus widen. At present, however, most will dampen long-‐term growth potential from the supply
indications are that growth will remain well above side.
recessionary levels.
GDP growth, Nordic and Baltic countries
Very strong recovery in Sweden Year-‐on-‐year percentage change
The Nordic economies have generally shown good resil-‐
2009 2010 2011 2012
ience against the global crisis. In Denmark, Sweden and
especially Finland, GDP indeed fell sharply during 2009, Sweden -‐5.1 4.7 2.9 2.3
but the impact on domestic demand was rather minor Norway -‐1.4 0.7 2.1 2.1
and the upturn in unemployment surprisingly small.
Denmark -‐4.7 1.8 1.8 2.2
central government debts are at a low level. Combined Finland -‐7.8 2.5 2.6 2.7
with sizeable current account surpluses, this is creating
a favourable platform for recovery. The weakening of Estonia -‐14.1 2.0 5.0 4.0
the euro is helping to ease competitiveness problems
which have hampered growth in Finland and Denmark Latvia -‐18.0 -‐1.5 4.0 5.0
to some extent. Lithuania -‐14.8 1.0 4.0 4.5
Baltics
In Sweden, growth has been surprisingly vigorous in re-‐
Source: OECD, SEB
Downside risks have increased
As earlier, our main scenario implies a relatively slug-‐ around 25 per cent, compared to 15 per cent in the
gish global recovery, with medium-‐term growth being May issue of Nordic Outlook. Conversely, the prob-‐
-‐ ability of upside surprises has naturally diminished.
Despite signs of strength in such countries as Germany,
a rapid recovery in the world economy is relatively un-‐
Since last spring, the risk picture has changed in likely without support from a more dynamic American
some respects. The crisis-‐ridden countries of southern economy.
Europe continue to face major challenges, but the GDP OECD countries
overall picture looks less threatening. With a credible Index 2000=100
bail-‐out mechanism in place and after the completion 127.5 127.5
of stress tests in the European banking system, risks 125.0
15% 125.0
122.5 122.5
that southern European problems might cause a global
120.0 120.0
recession have receded. The International Monetary
117.5 117.5
Fund (IMF) and euro zone countries have approved
115.0 25% 115.0
a second emergency loan disbursement to Greece, 112.5 112.5
another sign that the structural adaptation process has 110.0 SEB forecast 110.0
begun. 107.5 107.5
105.0 105.0
Yet the deterioration in the American economy has 04 05 06 07 08 09 10 11 12
increased the overall risks of a global recession. We
New crisis wave SEB's main scenario
now estimate the probability of such a scenario at Raprid recovery
Source: OECD, SEB
Nordic Outlook – August 2010 | 7

7. International overview
Baltic countries slowly on the way up New labour market patterns
The Baltic economies have now slowly begun to re-‐ In recent months, the differences in labour market
bound from the deep declines they experienced after trends between various countries have become more
the credit bubble burst. The three countries’ internal pronounced. In Germany and the Nordic countries, for
devaluation policy appears likely to be successful. Their example, the labour market situation has begun to
competitiveness has improved, mainly via pay cuts. Also improve, whereas the situation in the US is plagued by
making the situation easier is that the euro, to which new disappointments.
their currencies are pegged, has weakened and the
Divergent employment trends
currencies in several important competitor countries in Index = 100 januari 2008
Eastern Europe have appreciated. Their external bal-‐ 101 101
100 100
99 99
is coming to an end. They have also shown political
98 98
97 97
Estonia will join the euro zone on January 1, 2011. This 96 96
95 95
94 94
spread to Latvia and Lithuania. But there is a degree 93 93
of lingering uncertainty about the political situation in 92 92
91 91
90 90
89 89
Lithuania. Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
08 09 10
Looking ahead, we expect a modest growth rate of 4-‐5 Sweden US Germany Spain
Source: Reuters EcoWin
per cent, well below the previous trend. Continued pri-‐
vate sector adjustment needs, combined with a less ex-‐ During the economic downturn phase, the decline in
pansionary credit environment, will contribute to this. employment was substantially sharper in the US than,
for example, in Germany and the Nordic countries
investment projects among long-‐term foreign investors. despite a milder GDP decline. In part, this followed
We expect Latvia and Lithuania to have an opportunity traditional patterns coupled to such factors as how easy
to join the euro zone in 2014.
Stable commodity prices Oil prices will rise somewhat from current levels.
Commodity prices have followed the pattern of the At present, reserve oil production capacity is rela-‐
global recovery. A turnaround came early in 2009 and tively large. Increases in demand next year will not
was probably initially strengthened by China’s need to be large enough to change this. Saudi Arabia’s large
-‐
ity prices have tended to level off at the same time future price strategy of the Organisation of Petroleum
as global manufacturing has reached a more mature Exporting Countries (OPEC). Saudi Arabia can boost
phase, or somewhat ahead of this. production and squeeze oil prices if it turns out that
global growth is slowing too quickly. Iran and Iraq also
High commodity prices have major potential to increase the oil supply, but
Index, monthly date, USD
in the prevailing uncertain political situation, it is
500 500
hardly likely that any large production changes will be
450 450
implemented. We are thus assuming that Brent oil will
400 400
350 350
continue to trade in the USD 70-‐90/barrel interval.
300 300
Agricultural commodities will level off, but there is
250 250
a risk of further upturn in the short term. Extreme
200 200
weather in two key wheat-‐producing countries, Rus-‐
150 150
sia and Ukraine, led to a 70-‐80 per cent price spike
100 100
in July and August. Russia has decided to halt grain
50 50
00 01 02 03 04 05 06 07 08 09 10
exports during the rest of 2010, aimed at ensuring
domestic supplies and counteracting price increases to
Agriculture Industrial metals Energy
Source: HWWI consumers. This will pose risks of a new wave of price
increases and might spread to the maize (corn) and
Given our scenario of continued moderate global soya markets. But in our assessment, global wheat and
growth, with a slight weakening in the short term, other grain stockpiles are large enough to avoid price
continued price hikes are also likely to be modest. In shocks. This is very different from several few years
particular, a calmer growth dynamic in fast-‐growing ago, when low grain stockpiles led to major price
Asian economies points in this direction. hikes that affected food prices worldwide.
8 | Nordic Outlook – August 2010

8. International overview
employment was also sustained by special economic Rate of pay increases is stabilising
policy programmes. Year-‐on-‐year percentage change
4.5 4.5
4.0 4.0
increase in a number of European countries, while
remaining weak in the US, it is clear that other expla-‐ 3.5 3.5
nations for these labour market trends are needed. 3.0 3.0
One pattern seems to be that in countries with milder
2.5 2.5
rebounded faster. Because the need for restructuring 2.0 2.0
measures is smaller in these countries, when demand 1.5 1.5
takes off again, companies can rather easily begin 1.0 1.0
rehiring. 98 99 00 01 02 03 04 05 06 07 08 09
Euro zone US
Source: ECB, BLS
On the other hand, we see no major risks of a danger-‐
months. As long-‐term bond yields have fallen and
-‐
concerns about the economy have mounted, there has
ary increases has stopped falling. This will reduce the
-‐
-‐
ary forces of globalisation will lose energy compared to
not been especially dramatic. Rising energy and food
the previous decade. The level of wages and salaries in
prices have caused some upside surprises in Consumer
fast-‐growing emerging economies seems to be rapidly
on the way up, while currency appreciation and produc-‐
continued to fall.
tivity growth potential will help narrow previously wide
gaps in the cost situation.
forces caused by large output gaps will dominate the in-‐
Basel III postponed
During the summer, the Basel Committee for Bank-‐
study also shows that the level of the output gap has
ing Supervision approved various amendments to the
-‐
proposal it submitted late in 2009 for comments by
interested parties. The purpose of the reform package
being a consequence of rapid growth in individual years
is to strengthen the resilience of the banking sector by
tightening capital and liquidity requirements, and to
expansion, without the presence of underlying condi-‐
thwart excessive risk-‐taking, diminish gearing effects
tions related to factors such as capacity utilisation or
and reduce pro-‐cyclicality.
wage formation.
Core inflation is continuing to fall
Year-‐on-‐year percentage change leverage ratios, liquidity coverage ratios, net stable
3.0 3.0 funding ratios and management of counterparty risk.
SEB The details will be presented later this year, and a
2.5 2.5
forecast formal decision is expected in November.
2.0 2.0
Generally speaking, the standards have been eased,
1.5 1.5 while the deadline for implementing them has been
extended from December 2012 to January 2018. Our
1.0 1.0
-‐
0.5 0.5 enced by last spring’s sovereign debt crisis, combined
with the picture of a sluggish global economic recov-‐
0.0 0.0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
that remains weakened.
Euro zone US
Source: Eurostat, BLS, SEB
All else being equal, these amendments will have a
positive impact on our economic scenario. A slower
will continue downward in the coming year. Economic adjustment process will substantially reduce risks of
poorer access to capital and higher borrowing costs,
improvement in the labour market situation. The out-‐ which were inherent in the original proposal. Mean-‐
put gap will not close during our forecast period. Pay -‐
increases will thus be low and unit labour costs will also -‐
be pushed down by a recovery in productivity.
stability.
Nordic Outlook – August 2010 | 9

9. International overview
Central banks will wait until 2012 where differences in terms of resource utilisation, the
Increased worries about the economy, combined with
housing markets have pointed to a substantially higher
strong motives for continuing their extremely low inter-‐ key interest rate than that of the ECB. Having begun
est rate policies. Due to the economic slowdown in the its rate hikes as early as October 2009, Norges Bank has
gradually adopted a more cautious strategy. Due to con-‐
couple of years. The crisis-‐ridden countries of southern cern about the strong krone and the competitiveness
Europe will be strongly dependent on low interest rates of Norwegian manufacturers, the bank has not wanted
for a long time in order to deal successfully with imbal-‐ to open up an excessive interest rate spread over the
Asymmetric risks on the growth side will also help The Riksbank is now beginning to face a similar dilem-‐
ensure that central banks will be very cautious. The ma. Resource utilisation in Sweden is admittedly lower
consequences of interrupting a nascent recovery by than in Norway, but rapid economic growth is quickly
raising interest rates too early may be relatively large changing that situation. Unemployment has fallen rap-‐
idly, while home prices and household borrowing have
is sharply circumscribed in many countries and the continued upward as in Norway.
monetary policy arsenal is also relatively exhausted. We
Key interest rates
thus anticipate that the central banks in major OECD Per cent
countries will not begin hiking their key interest rates 7 7
until early 2012.
6 SEB 6
forecast
Key interest rates 5 5
Per cent
7 7 4 4
6 SEB 6 3 3
forecast
5 5 2 2
4 4 1 1
3 3 0 0
00 02 04 06 08 10 12
2 2
Euro zone Norway Sweden
Source: ECB, Norges Bank, Riksbank, SEB
1 1
In some respects, the Nordic central banks are playing
0 0
00 02 04 06 08 10 12 a pioneering role when it comes to learning from the
mistakes that preceded the crisis and then applying the
Euro zone US
Source: ECB, Fed, SEB new guidelines that are emerging from the international
A long period of extreme low interest rate policy entails monetary policy discourse. What the major countries
certain potential risks. Asset prices may once again be mainly perceive as problems in the distant future is
pumped up to unsustainable levels. Economic players starting to be fairly urgent in the Nordic countries.
may also be given an inaccurate picture of the normal Minutes of Riksbank policy-‐making meetings show major
disagreements of principle within the Executive Board,
allocation. In addition, the banking system may become which the bank does not try to hide either.
too dependent on liquidity supplied by central banks,
Our scenario is that the Riksbank will hike its key inter-‐
with a more poorly functioning interbank market as a
est rate at each monetary policy meeting until Febru-‐
consequence. The postponed launch of Basel III com-‐
ary 2011, when the rate will reach 1.50 per cent. After
plicates the situation of the central banks, eliminating
that, rate hikes will be more cautious. An international
instruments for controlling credit growth and asset
prices that might have eased the pressure on interest
stronger krona may be arguments for a more cautious
rate policy.
strategy. At year-‐end 2011 the repo rate will be 2.25
At present, the potential problems of low interest rate per cent, and at the end of 2012 it will be 3.0 per cent.
policy are relatively minor in relation to the macroeco-‐ Our forecast is thus lower than the Riksbank’s rate path
nomic risks of raising interest rates. but higher than market expectations.
Norges Banks deposit rate will remain at 2.00 per cent
Policy dilemma in Norway and Sweden
up until the second quarter 2011. A closing output gap
The differences in the conditions surrounding major
OECD central banks and the central banks in Norway
gradual hikes. At the end of 2011 we see the deposit
and Sweden are becoming increasingly clear. For a
rate at 2.75 per cent and at the end of 2012 at 3.75 per
long time, Norges Bank has had to deal with a situation
cent.
10 | Nordic Outlook – August 2010

10. International overview
The acute crisis in southern Europe last spring led to a adjustment needs.
in earlier recommendations from the OECD and IMF, for Low bond yields
example, has been to focus on credible medium-‐term The decline in long-‐term bond yields has been very
programmes, but implementation could be delayed sharp, and yields are now exceptionally low. American
10-‐year government bond yield has fallen from 4.0 per
obvious that many countries lacked such room for cent in April to 2.60 per cent, while equivalent German
manoeuvre. Large-‐scale austerity packages became bonds have now declined to an exceptionally low level
necessary, especially in southern Europe. In France and of 2.25 per cent.
Germany, however, austerity measures are rather small.
There have been several driving forces behind this
As a result, the total dose of austerity in the euro zone
yield trend: concerns about economic growth, falling
will be no more than about 1 per cent of GDP annually
in 2010-‐12.
key interest rates. The search for safe investments has
been better than expected. and growing government debts on both sides of the
probably be reduced to less than 3 per cent of GDP as -‐
early as 2011. The government had previously aimed at ing the economic crisis, savings in the OECD countries
achieving this level only in 2013. As for the effects of
the austerity packages in southern Europe, it is too ear-‐ the increased public sector borrowing requirement and
ly to draw any reliable conclusions. The improvements helped squeeze interest rates.
-‐
The box below discusses how asymmetric downward
suade the IMF and EU institutions to approve a second
disbursement of emergency loans. Most of the success
lead to long-‐term uncertainty about the ability of cen-‐
in stopping the bleeding has been on the expenditure
tral banks to normalise monetary policy. We expect this
uncertainty to help keep long-‐term yields depressed,
collection have yielded smaller results so far.
especially in the coming year. German 10-‐year yields
Given more pessimistic economic prospects, we are will bottom out at about 2.20 per cent around year-‐end
not likely to see further belt-‐tightening in the major 2010 and remain below 2.50 per cent well into next
OECD countries during the coming year. In the UK, the year. Only when it begins to be apparent that central
new government has admittedly decided to deal with banks can actually begin interest rate hikes do we be-‐
Japan, however, new stimulus measures are the focus will remain depressed, however. At the end of 2012,
of attention, although in our judgement such measures German 10-‐year government bond yields will stand at
will hardly be implemented. 3.20 per cent and American ones at 3.50 per cent.
Net lending Per cent
Per cent of GDP 7.0 7.0
2010 2011 2012
6.5 6.5
SEB
United States -‐10.9 -‐8.2 -‐5.9 6.0 forecast 6.0
Japan -‐9.8 -‐9.1 -‐8.5 5.5 5.5
5.0 5.0
United Kingdom -‐11.4 -‐9.4 -‐7.6 4.5 4.5
Euro zone -‐6.2 -‐5.5 -‐5.0 4.0 4.0
3.5 3.5
OECD -‐7.8 -‐6.7 -‐5.5
3.0 3.0
2.5 2.5
Source: OECD, IMF, SEB
2.0 2.0
99 00 01 02 03 04 05 06 07 08 09 10 11 12
weakly tightening effect in the next couple of years. US Germany
Source: Reuters EcoWin, SEB
that government debt will continue to grow. The sharp Cautious stock market valuations
downturn in government bond yields in major countries The stock market has recently reacted negatively to
signals of an American economic slowdown. Surpris-‐
force belt-‐tightening either. Not even threats of down-‐ ingly strong company earnings reports have not been
grading by credit rating agencies are likely to change enough to offset this. There are both threats and
the picture. Given continued weak economic condi-‐ opportunities ahead. The ‘simple’ phase when the
tions, high private saving and supportive central banks stock market was driven upward by positive surprises
Nordic Outlook – August 2010 | 11

11. International overview
in sales and improved leading indicators is over. The sons why they may continue to do so. SEB Enskilda’s
next phase will be characterised by a maturing mar-‐ company analyses indicate a 56 per cent increase
ket for industrial products, with major macroeco-‐
nomic challenges, especially in the US. Companies Nordic countries and 17 per cent next year. Strong
growth in key Nordic markets, Germany and Asia
rather than cost savings, in order for share prices to
continue rising. of years. Low company valuations also allow room
for good share price increases. Shares on the Nordic
So far the stock exchanges in the Nordic and Baltic exchanges are now trading at a price-‐earnings ratio
countries have generally performed better than ex-‐ -‐
changes elsewhere this year. There are several rea-‐
Moving towards Japanese yields?
The key interest rates set by central banks are at
exceptionally low levels. But bond yields are also low for a rather long time. The market’s assessment
historically very low, with American 10-‐year Treasuries of what should be viewed de facto as a normal key
yielding 2.6 per cent and equivalent German bonds 2.2 interest rate will probably move downward as the
per cent. By way of comparison, a Japanese 10-‐year period of low interest rates is extended. In addition,
it is reasonable to assume that new regulatory tools
between 1 and 2 per cent for the past 13 years. for dealing with such problems as pro-‐cyclical forces
Above we discussed the forces that have pushed down banks to maintain low interest rates and to instead
long-‐term yields to these levels. One crucial question devote monetary policy energy to price stability.
is how long they will last, and to what extent today’s
interest rates in the Western world are abnormally low Japan’s average GDP growth since the early 1990s is
or completely normal. This can be analysed in terms 1.2 per cent. Even if we assume that growth moves
of normal key interest rates and the normal steepness higher, for example close to 2 per cent, there is still
of the yield curve. reason to believe that continued imbalances justify
a lower real interest rate than 2 per cent. If we also
The level of a normal key interest rate can be based
on the level of the real interest rate plus for example 1 per cent, the normal key interest rate
expectations. A proxy for the real interest rate is will be pushed down further. In a medium-‐ term per-‐
long-‐term GDP growth. Given the need to adjust spective, the normal key interest rate might be in the
imbalances, there is reason to expect lower growth 1.5-‐2.5 per cent interval.
potential, which will push down the real interest rate.
is based on the level of the
low. Given asymmetric negative risks for both growth normal key interest rate. The historical average for
the steepness of the yield curve (10-‐year yield minus
the key interest rate) has been about 130 basis points.
interest rate.
Japanese interest rate squeeze environment may justify lowering the risk premium.
Short-‐ and long-‐term interest rates in US and Japan If in our example we assume that this premium is
10 10
9 9 halved, the differential between the key interest rate
8 8 and the low-‐term yield will be about 100 basis points
7 7
6 6
(130 minus 25 basis points).
5 5
4 4 Based on this reasoning, long-‐term bond yields would
3 3
be at 2.5-‐3.0 per cent. Arguments that the market
2 2
1 1 will adjust expectations of a normal key interest rate
0 0
88 90 92 94 96 98 00 02 04 06 08 10
year perspective, where the elements of similarities
Japan: 10-­year government yield with the Japanese situation may be clear. What may
Japan: Key interest rate
US: Key interest rate be regarded as abnormally low interest rates, viewed
US: 10-­year government yield in a historical perspective, may be rather normal
Source: Reuters EcoWin
interest rates viewed in a future perspective.
Given exceptionally low key interest rates during the
12 | Nordic Outlook – August 2010

12. International overview
low their historical average. Worth adding is that the rates). In the short term, uncertainty about the
ratio between share prices of listed companies and global economic recovery will dominate the for-‐
their book values is 25 per cent below its 10-‐year eign exchange market, but we believe that market
average. positioning is now more neutral than for a long time,
which will restrain movements in the future. We thus
Stock market indices, 2010 see various reasons why the trend towards smaller
Spain (MadSE)
Japan (Nikkei 225) continue.
Norway
U.K. (FTSE100) The risk aversion evident in the market over the past
USA (S&P500) few months has led to heavy demand for defensive
Germany (DAX) currencies like the JPY and CHF. Shrinking interest
Sweden
rate spreads against the US and euro zone will lead
Finland
to continued upward pressure on these currencies,
Denmark
Iceland (OMX) but the Swiss central bank has not repeated its
Lithuania (OMX) foreign exchange market interventions of last spring,
Estonia (OMX) despite an ever-‐stronger CHF. Nor do we regard this
Latvia (OMX) as likely in the future. In Japan, the issue of inter-‐
-‐30 -‐20 -‐10 0 10 20 30 40 50 vention is heating up. Our assessment is that if the
USD/JPY exchange rate approaches its historical
low of just under 80 (in 1995), this will be critical in
The yield on listed shares in the Nordic countries determining whether the Bank of Japan intervenes in
during the next couple of years looks set to be at the foreign exchange market.
almost 4 per cent, or twice the yield on 5-‐year go-‐
vernment bonds. This also illustrates the exchange’s Overall, our forecast implies small movements in
cautious valuations. But valuation analyses are leading currencies during the coming year. The EUR/
not better than the forecasts that are used in the USD exchange rate may again fall below 1.20 in the
next six months, driven by continued low risk ap-‐
have rebounded above their previous record levels petite in the world economy, then rise somewhat.
in 2007/2008. The uncertain macroeconomic envi-‐ In the long term we expect the EUR/USD rate to be
ronment raises the question of whether this pace at levels around 1.20-‐1.30. The US economy will
admittedly remain weak and continue to show ex-‐
focus again on fundamental valuations, a number of ternal trade imbalances, but on the other hand the
basic questions about future developments must be euro system is facing long-‐lasting uncertainties and
answered. quandaries. The yen will gain some strength against
P/E ratios in Nordic exchanges the USD in the short term but will then decline as
35.0 35.0
the interest rate spread between Japan and other
countries widens again in the future.
30.0 30.0
EUR and USD
25.0 25.0 Real effective exchange rates. Index 100 = average 1980-‐2010
140 140
20.0 20.0
130 130
15.0 15.0
120 120
10.0 10.0 110 110
100 100
5.0 5.0
90 90
0.0 0.0
96 98 00 02 04 06 08 10 12 80 80
70 70
1980 1985 1990 1995 2000 2005 2010
Fair valuations, more stable currencies
In the past year, the foreign exchange market has USD EUR
Source: Bank of England
undergone a normalisation process after major tur-‐
The question of further quantitative easing by cen-‐
tral banks is a source of uncertainty in the foreign
crisis. Many currencies have again reached more
exchange market. If the Fed or Bank of England were
neutral levels, based on long-‐term valuation mod-‐
to expand their balance sheets further, it would
els. Today the G3 currencies (EUR, USD and JPY) are
weaken the dollar and pound, but this is not our
close to historical average levels in trade-‐weighted,
main scenario at present.
Nordic Outlook – August 2010 | 13

13. International overview
Commodity-‐producer currencies with relatively high exchange rate will reach 9.00 at the end of 2010.
valuations are extra sensitive to the global slow-‐ After that, we foresee room for a slight further ap-‐
down. Yet the trend towards appreciating currencies preciation, with the EUR/SEK rate standing at 8.75
in emerging economies will continue, driven by such by late 2011.
factors as the search for higher returns.
The economic policy framework
Since June, when China’s central bank resumed Both the European Union (EU) and the Group of 20
the appreciation of the yuan against the USD, the (G20) countries are continuing their efforts to improve
Chinese currency has strengthened by less than 1 per
cent. Worries about
have contributed to this caution. In addition, the European Commission presented a proposal on June
CNY has strengthened by more than 5 per cent in the 30 for strengthening economic policy coordination. Its
past year in trade-‐weighted terms as a consequence overall purpose is to strengthen budget discipline in the
of the USD recovery. However, we expect an increase
in the pace of appreciation to about 5 per cent,
resulting in a USD/CNY exchange rate of 6.00 by the 1. Macroeconomic surveillance (warning system: score-‐
end of 2012. This forecast is nevertheless dependent
on the movements of the USD against other curren-‐ on debt levels 4. Wider sanctions 5. Economic policy
cies; Chinese authorities are very likely to keep close coordination
track of the yuan’s movements in terms of a trade-‐
weighted basket. Adjustments to the imbalances
-‐
in real exchange rates will also occur by means of
gration. The basic idea is to enable the Commission
rapid wage increases in China. The ongoing internal
revaluation process will thus determine the size of
making in a way that does not challenge the sovereignty
nominal changes in the exchange rate.
of national parliaments on budget policy issues: by
SEB EUR/SEK model means of collaboration in the form of problem analysis,
12.0 12.0 consistency tests and recommendations.
11.5 11.5 Already under way is an equivalent Mutual Assessment
Process (MAP) for the G20 countries, which will be
11.0 11.0
coordinated by the IMF. MAP is a key element of the G20
10.5 10.5
sustainable and balanced economic growth at global
10.0 10.0 level. The G20 meeting in Seoul on November 11-‐12 will
provide an important opportunity to gauge the level of
9.5 9.5
potential coordination and the pace of reform.
9.0 9.0
07 08 09 10
The economic crises have also fuelled an intensive
international debate concerning the role of central
Regression Actual
Source: Reuters EcoWin, SEB
banks. This debate is being pursued within the G20 and
other forums under IMF leadership. There seems to be
The Swedish krona and the Norwegian krone have
a consensus that price stability will remain the overall
recently demonstrated great stability. Underlying
economic strength and rising key interest rates have
risks should be integrated into goal formulation to a
prevented the weakening that normally occurs in
greater extent.
troubled times. Looking ahead, we expect the two
currencies to continue trending higher. By year-‐end
2012 the EUR/NOK exchange rate will be 7.80. In continue to lie outside of interest rate policy. This will
the short term, however, we see reasons for a slight require new instruments with a clearer macroeconomic
weakening of the krone to 8.20 per euro at the close connection. These will mainly consist of regulations and
of 2010, among other things because Norges Bank is
continuing its cautious strategy of emphasising the systemic crises and reducing pro-‐cyclical elements in
risks of an excessively strong currency. lending. Concrete examples are capital requirements
that are both constant and variable over time, forward-‐
The strengthening of the Swedish krona also risks
looking reserves for loan losses and liquidity ratios.
being halted by international worries, as well as
by increased political uncertainty related to the The UK has taken a major step by placing its regula-‐
September 19 parliamentary election. We neverthe-‐ tory authority under the umbrella of the central bank.
less expect such effects to be very short-‐lived, and Within the Bank of England, an independent Financial
we are sticking to our forecast that the EUR/SEK
14 | Nordic Outlook – August 2010

14. International overview
Policy Committee (FPC) is now being established along-‐
side the existing Monetary Policy Committee (MPC).
The FPC will oversee economic developments and
identify macro trends that may threaten economic and
Our conclusion is that the interesting reform task in the
area of economic-‐policy is continuing, but that its ambi-‐
tions and pace seems to have been lowered. A fragile
economic situation, but also the weakened authority of
political leaders in many countries, is contributing to
this.
Nordic Outlook – August 2010 | 15

15. The United States
Recovery continuing, but at a slower pace
Faster debt retirement Many signs of deceleration
Aside from slower GDP growth and a lukewarm labour
New labour and housing market slump
market, various indicators have weakened in recent
Sustained upturn in capital spending
lower than at the beginning of 2010. The ISM purchasing
managers’ index for manufacturing has fallen during the
Fed will not hike its key rate until 2012 past few months, while the service sector index has lev-‐
elled off, but both indices remain well above 50, which
The American economic recovery is now becoming retail sales, which recovered strongly early this year
but have stagnated during the past months.
contribution from the inventory cycle diminishes.
The improvement in the labour market has slowed in Small firms are lagging behind
Index
recent months, and the housing market has become
65 30
time home buyers has expired. GDP rose 1.6 per cent 60 25
in the second quarter on an annualised basis, a clear 55
20
50
higher imports provided a strong negative contribution 15
45
to growth and inventory build-‐up also slowed, compared
10
40
showed strong growth, however. 35 5
Yet the low Federal Reserve key interest rate is still 30 0
86 88 90 92 94 96 98 00 02 04 06 08 10
propping up the economy. We thus believe that the
recovery will continue, but at a slower pace than esti-‐ ISM Manufacturing (LHS) NFIB (RHS)
Source: ISM, NFIB
mated in our May forecast.
forecast is on the downside. The slowdown has opened small businesses. While the ISM, which is dominated
the way for the Fed to provide further economic stimu-‐ by large companies, continues to show a rather bright
lus by expanding its balance sheet and postponing key picture of the situation, the National Federation of In-‐
rate hikes until 2012. dependent Business (NFIB) index of small business senti-‐
Slower GDP growth
Quarterly percentage change, annualised loans and that depressed construction companies weigh
5 5 heavily in the NFIB index.
4 4
3 3 Higher saving holds back consumption
2 2 The latest national accounts show substantially weaker
1 1 consumption and higher saving than the previously
0 0
-‐1 -‐1 savings ratio was 6.1 per cent, an upward revision of
SEB forecast
-‐2 -‐2 several percentage points. A higher level of saving indi-‐
-‐3 -‐3 cates a faster pace of adjustment in household balance
-‐4 -‐4 sheets. In the long term this will set the stage for a
-‐5 -‐5 sustainable recovery in consumption, but over the next
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
couple of years we believe that the need to pay down
09 10 11 12
Source: BEA, SEB debts will cause the savings ratio to continue upward a
bit, thereby holding back consumption.
16 | Nordic Outlook – August 2010

16. The United States
Our current assessment is that the savings ratio will accelerated their home purchases to take advantage of
the tax credit. Once this effect has faded, the number
. This is also of home sales transactions will stabilise. During 2011 we
consistent with our model projections, which have sig-‐ thus expect slightly rising home prices.
nalled for some time that the savings ratio will rise to
The housing market recovery decelerates
a level closer to the average for the past 50 years. We
Index 2004:1 = 100
thus believe that overall consumption will increase 140 140
135 135
downward revision compared to our assessment in 130 130
the last Nordic Outlook. 125 125
120 120
Uniform pace of debt retirement 115 115
110 110
Per cent of disposable income
140 12 105 105
11 100 100
130
10 95 95
120 9 90 90
110 8 04 05 06 07 08 09 10
7
100 S&P Case-­Shiller 20 FHFA
6 Source: OFHEO, Standard & Poor's
90 5
80 4 The July issue of the Fed’s Beige Book points out that
3 the commercial real estate market remains weak.
70
2
Assessments of future trends ranged from continued
60 1
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
decline in activity to weak growth, but one bright spot
is that corporate capital spending on commercial real
Household debts (LHS) Household saving (RHS) estate appears to have stabilised.
Source: Federal Reserve
Housing market unsteady again Company capital spending a bright spot
Despite record-‐low interest rates, pushed down partly One bright spot during the recovery this year is capital
by the Fed’s mortgage bond purchases, and a subsidy in spending by businesses, which has climbed sharply in
the form of a USD 8,000 federal tax credit to home buy-‐ 2010. During the second quarter, the annualised in-‐
ers, the housing market recovery has not really taken crease was 17.6 per cent. This growth in capital spend-‐
off in earnest. In May 2010, the S&P/Case-‐Shiller home ing focused on machinery and software. Commercial
price index was only some 5 per cent higher than when real estate investments were stable. The sharp increase
it bottomed out one year earlier. The number of home during the second quarter was partly a consequence of
sales and housing starts are also at historically very low earlier very depressed levels. Our assessment is thus
levels. In July the number of housing starts was only that capital spending growth will slow during the rest
546,000, less than one third of the July average from of the year, but in a longer perspective there are fac
2003 to 2005. Despite the low number of homes being tors that indicate good capital spending growth. In a
historical perspective, the capital spending ratio in the
months. In July, inventory rose to 12 months. Such a business sector remains very low. Meanwhile companies
high level will help hold prices and new construction
down. Because the home buyer tax credit expired at stronger than during any previous economic downturn.
the end of April, both residential construction and the Capacity utilisation and company capital spending
number of contracted home sales have weakened mark-‐ Per cent
edly during the past few months. Mortgage applications 90.0 40
are at a record low. The National Association of Home 87.5 30
85.0 20
also declined. 82.5
10
80.0
0
77.5
in the housing market. We anticipate that the rapid -‐10
75.0
decline in the number of sales will drive down prices 72.5 -‐20
during the next few months. Housing market activity 70.0 -‐30
will also be hampered by the slow recovery in the la-‐ 67.5 -‐40
70 75 80 85 90 95 00 05 10
bour market, but low mortgage rates should be able to
Capacity utilisation (LHS)
mortgage rate has decreased from around 5 per cent Company capital spending, annualised Q growth (RHS)
Source: BEA, Federal Reserve
in April to just below 4 per cent. Many households also
Nordic Outlook – August 2010 | 17