SEB World economy hesitating at new crossroads by mvk911


World economy hesitating at new crossroads                                                               APRIL 3, 2012

A SENSE OF RELIEF AFTER THE ACTIONS OF THE                       conflicts. In the United States, the Federal Reserve seems
EUROPEAN CENTRAL BANK (ECB) dominated the mood                   to be in a relatively favourable position right now. The
of the world economy in the first quarter of 2012. By            economy is slowly gaining strength; for example,
launching unlimited three-year loans (the long-term              unemployment is falling and construction activity is
refinancing operation, LTRO) to euro zone banks, the ECB         increasing. In an environment of low inflation pressure
has gradually eased worries about a paralysing credit            and plenty of idle resources, the Fed still has enough
crunch. The March accord on new bail-out loans to                flexibility to emphasise the fragility of the upturn.
Greece and the agreement to enlarge the resources of             Announcing that key interest rates will remain low for an
euro zone bail-out funds have removed further short-term         extended period enables the Fed to push down the entire
concerns. Developments in the real economy and in                yield curve, while holding the door open for a third round
financial markets have confirmed our main message in             of quantitative easing (QE3). In the short term, there do
the February issue of Nordic Outlook (NO): that the              not appear to be especially big credibility problems related
recession will be limited to crisis-ridden euro zone             to inflation, asset price bubbles or soaring government
countries. In the updated forecasts for various regions we       debt, although the Fed must again face the issue of exit
have presented in recent weeks (Macro Update), our               strategies sooner or later.
revisions compared to NO have been small. We have
made upward revisions for Japan, Germany and Sweden,
among other countries, but our global growth forecast for
2012 remains unchanged at 3.5 per cent in 2012 and 4.0
per cent in 2013 (adjusted for purchasing power parity).
 Global GDP growth
 Year-on-year percentage change (February NO in brackets)

                    2010           2011        2012     2013
   United States      3.0            1.7 2.5 (2.5) 2.5 (2.5)
   Japan              4.4           -0.7   1.9 (1.7) 1.3 (1.2)
   Germany            3.6            3.0 0.7 (0.4) 1.4 (1.3)
   China             10.4            9.3 8.7 (8.7) 8.9 (8.9)
   United Kingdom     2.1            0.8 0.4 (0.3) 1.4 (1.4)
   Euro zone          1.8            1.5 -0.6 (-0.8) 0.8 (0.7)   THE SITUATION IN THE EURO ZONE IS MORE
   Nordic countries   2.9            2.5 1.0 (0.9) 1.9 (1.8)     COMPLICATED. It is possible to single out a number of
   Baltic countries   1.1            6.2 2.0 (2.0) 3.2 (3.2)     threats that may interrupt the current positive trend. If the
   OECD               3.1            1.7 1.4 (1.3) 1.9 (1.9)     recovery in Germany gains further momentum, south-
   Emerging markets 7.3              6.2 5.7 (5.7) 6.0 (6.0)     north decoupling may create difficulties for the ECB in
   World, PPP         5.2            3.9 3.5 (3.5) 4.0 (4.0)     terms of finding the right monetary policy trade-off. There
 Source: OECD, SEB                                               are also various types of political risks related to
                                                                 maintaining the crisis strategy that has now been
                                                                 launched. The Greek crisis now appears manageable,
THE WORLD ECONOMY NOW SEEMS TO HAVE                              without severe contagious effects. But it is too early to
REACHED A NEW CROSSROADS. The question is                        rule out risks that the process will lead to consequences
whether the positive trend can be strengthened, in an            that other euro zone countries find unacceptable. The
environment of continued debt consolidation needs and            Spanish government is facing a difficult balancing act. On
persistently high oil prices. To make continued upward           the one hand, it must overcome mistrust from the ECB
adjustments in our forecasts possible, it is essential that      and from other euro zone countries about whether the
the ultra-loose monetary policy of major central banks           government is willing and able to actually implement the
can be implemented without excessively large goal                austerity measures it has unveiled. On the other hand,
Economic Insights

there is a risk that domestic protests will grow to                turnaround, this illustrates the potential for a positive shift
unmanageable levels. Meanwhile increasingly clear                  in sentiment if external factors fall into place. Perhaps this
recessionary signals are illustrating the disadvantages of         is because companies were afraid of a repetition of the
further budget tightening. The imminent French                     2008-09 collapse and this kept them in a depressed mood
presidential election will also fuel uncertainty about the         for longer than the actual situation justified. The house
determination to fulfil the economic policy strategy that          price downturn that dominated much of 2011 seems to
the euro zone’s core countries have agreed to support.             have ended early in 2012, which is another important
Taken together, developments in the euro zone thus                 piece of the puzzle. The Riksbank’s key interest rate cuts
imply major challenges and risks.                                  have changed household expectations about future
                                                                   interest rates, while the stock market recovery has
                                                                   provided support. Although the home price upturn of
MARKET ECONOMIES has ensured greater stability in the
                                                                   recent months may not last, it confirms our forecast that
world economy over the past six months. Our main
                                                                   Sweden can avoid a hard landing in the housing market.
scenario implies a soft landing with GDP growth of 5.7 per
cent in 2012 and 6.0 per cent in 2013, but there are risks                              GDP growth in Sweden
that must be taken into account in this portion of the              2.5                                                                         10
global economy as well. A hard landing in the Chinese               2.0
                                                                                                              SEB forecast                       8
credit or property market still cannot be ruled out. India’s        1.5                                                                          7
economy is plagued by structural problems and high                  1.0
inflation pressure, which pose major challenges to                  0.5                                                                          4
economic policy makers. Unrest in the Middle East –                 0.0
especially Iran’s increasingly tense relations with other          -0.5                                                                          1
countries – risks driving up oil prices further. Such a            -1.0
development would not only threaten the immediate                  -1.5                                                                         -2
region but would also jeopardise the world economic                       Q1      Q3     Q1      Q3     Q1      Q3      Q1         Q3
                                                                                10             11             12                 13
recovery as a whole.                                                           Quarter-on-quarter percentage change (LHS)
                                                                               Year-on-year percentage change (RHS)
                                                                                                                     Source: Statistics Sweden, SEB
with our forecasts. The slowdown was primarily                     OF A DILEMMA FOR THE RIKSBANK. The growth,
attributable to exports, while domestic demand and the             unemployment and inflation outlook clearly point towards
labour market were relatively resilient. As in 2008-2009,          further key rate cuts. On the other hand, it is obvious that
the Nordic countries have been affected by the crisis in           the governor of the Riksbank and several other Executive
ways similar to Germany. This is especially true of Finland        Board members see a danger that additional rate cuts may
and Sweden, with their large and cyclically sensitive              further inflate home prices and household debts. This is
export sectors. In 2012, GDP growth in Denmark, Finland            especially true considering that various international
and Sweden – as in Germany – will end up close to 0.5 per          organisations, including the European Commission, have
cent. Because of the exceptional resilience of the                 raised a clear warning flag in these areas. Our conclusion
Norwegian economy, we predict growth in Norway will                is that the Riksbank will hold off on a further rate cut at its
exceed 2 per cent both in 2012 and 2013.                           April monetary policy meeting, but we are sticking to our
                                                                   forecast of rate later this year, although the probability of
 GDP growth, Nordic countries
                                                                   these has also diminished.
   Year-on-year percentage change (February NO in brackets)
                                                                                +46 8 763 80 67
                   2010             2011        2012      2013
   Sweden            6.1             3.9    0.7 (0.5) 1.9 (1.7)
   Norway           0.7               1.3    2.1 (2.1) 2.4 (2.4)
   Denmark           1.3             1.0    0.5 (0.5) 1.4 (1.4)
   Finland          3.6              2.7    0.7 (0.5) 1.7 (1.7)
   Nordic countries 2.9              2.5    1.0 (0.9) 1.8 (1.8)

 Source: OECD, SEB

Survey published by the National Institute of Economic
Research in late March demonstrated sharply improved
optimism, especially in manufacturing. Although other
leading indicators have not shown such a clear

U.S. economy on a firmer footing                                                                             20 MARCH 2012

• A slowdown in real GDP growth seems increasingly likely in Q1 and we estimate that real
  GDP grew at a 2 percent annualized rate in the first quarter, compared to 3.0 percent
  in Q4. But the weaker first-quarter growth wouldn’t rule out stronger performance in
  subsequent quarters, and since many soft indicators of final demand is strengthening –
  our 2012 and 2013 GDP forecasts remain unchanged at 2.5 percent. The
  unemployment rate is sliding gradually to 7.4 percent at the end of 2013.
• Although we believe that the recovery is on a firmer footing it is not going to be a straight
  line up by any means. Unseasonably warm weather may have boosted activity while high
  oil and gasoline prices are beginning to cut into consumer’s purchasing power and growth
  prospects in general. Fortunately there are offsets: the looming credit squeeze was averted
  and the tail risk of a severe recession in Europe is decidedly lower. Financial conditions
  are much easier compared to a few months ago. Employment growth has been
  stronger than expected as well, but wage growth remains subdued.
• Arguably too much fiscal tightening too fast is the biggest risk in 2013. Under current law                     Mattias Bruér
  the fiscal tightening is around 4.5 percent of GDP – easily enough to break any recovery.                   SEB Economic Research
                                                                                                                 +46 8 763 85 06
  Even if only 2 percentage points of tightening actually occurs, it’s still the second largest in
  modern history. Don’t look for any clarity until after the November election when action is
  needed on a smorgasbord of contentious economic issues, among others the expiring
  Bush era tax cuts and the “sequester” which automatically slash federal outlays. This is
  why Fed chairman Bernanke is talking about a “fiscal cliff” at year’s end. Our assumption
  is that the fiscal headwind will be little more than 1 percent in 2013 which is not
  enough to break the recovery. But expect a messy process with possible
  macroeconomic as well as debt rating related concerns along the way.
• Our inflation forecasts are revised higher this year on oil. But the upturn is judged to
  be temporary and in 2013 both headline and core inflation will be running well below the
  target. Consequently, we stick with our forecast of additional QE although it is a close

                                                             Key data
                                                             Percentage change
                                                                                                 2010 2011 2012 2013
                                                              GDP                                   3.0     1.7    2.5    2.5
                                                              Unemployment*                         9.6     9.0    8.2    7.6
                                                              Inflation                             1.6     3.1    2.2    1.3
                                                              Core inflation                        1.0     1.7    1.9    1.3
                                                              * Per cent of labour force, yearly averages

                                                             Source: SEB
Economic Insight

•   Currently there is a huge split between the demand side and supply side in the U.S. economy. The supply side
    is all good: employment growth is around 250k a month and aggregate hours worked is 3.5 percent above the Q4
    average. So what the supply side is suggesting is that growth is running above 4 percent at an annualized rate. The
    demand side is a different story: real consumer spending has practically no momentum and both capital spending
    and net exports are tracking negative GDP contributions. According to the demand side data alone real GDP
    growth could be closer to zero right now. But the housing market is in better shape which is one reason why the
    recovery may end up being more sustainable than last year. The glass half full group would point out that housing
    only is 2 percent of the U.S. economy, however.
•   Soaring oil and gasoline prices are advancing on the worry list. It is not the level but the change in prices that
    influences growth, and the rule of thumb we use is that a persistent USD 10 dollar increase in the oil price lowers
    real GDP growth by 0.2 percent year one as well as year two. So compared to the October lows we may be looking
    at a 0.8 percent drag on real GDP growth in 2011 if oil prices stay where they are for a year all else being
    equal (somewhat smaller effects when using yearly averages). Fortunately there are offsets since financial
    conditions are much easier today compared to a few months ago and should no longer hurt growth.
•   Higher oil prices will push up inflation temporary but further out inflation is expected to run below the
    level the Fed is shooting for. As long as inflation expectations are behaving well the Fed will probably look
    through any oil-related bounce in inflation. Remember that in January the Fed said that the funds rate is going to be
    held to the floor “at least through late 2014” and six of the 17 Fed officials don’t believe they will raise rates until
    2015-16. So we remain of the view that the available policy options are 1) an unchanged accommodative monetary
    policy stance or 2) additional easing. Higher inflation is making more asset purchases a harder sell but more easing
    may come, especially if the economy starts fraying at the edges. Since Q1 real GDP growth is poised to disappoint
    we are reluctant to change our forecast of additional policy easing. What has been floating around recently is
    “sterilized QE” which could have the potential to stimulate the economy while at the same time subdue worries
    about future inflation. As an aside, Bernanke again described U.S. growth as “frustratingly slow” last week.
    Meanwhile markets may be in the process of pricing out QE and pricing in an early tightening cycle.

Economic Insight

            •   The trend in real consumer spending is running at a low level and our models do not suggest much improvement
                over the near term. Despite faster employment growth and the long and generous arm of Uncle Sam, who
                contributes 20 percent of the income pie, weak income growth is holding down consumer spending.
            •   Whilst growth in real disposable income has trended below real consumption growth since the beginning of 2011,
                the drop in the savings rate and the fading fuel shock supported consumption last year. But these tailwinds may be
                turning: driven in part by the ratio of household net worth to personal income falling from 650 percent at the bubble
                heights to 500 today, our savings model suggests that an uptrend in the savings rate is fundamentally
                motivated. When this ratio was at current levels in the past, the savings rate was within the 7-10 percent band with
                near consistency. The labor market is the key; stronger employment growth should ultimately fuel income and
                spending. A signpost of the current hardship: the number of Americans receiving food stamps is above 46 million.
            •   Usually the unseasonably warm weather is an argument that the bears are pushing, arguing that the economy has
                been artificially strong as a result. But the flip side is that excluding energy, real consumption growth is above 2
                percent. In our view what is driving consumption right now is almost exclusively auto related where fleet sales
                represent most of the buying. Meanwhile 89 percent of the consumption pie is shrinking and we would like to see
                a more broad-based expansion in any event.


Economic Insight

    •   The unemployment rate has fallen by 0.8 percentage points since August, to 8.3 percent. More private jobs have
        been created since November than in any three-month period since 2006.
    •   Aggregate hours worked are up 3.6 percent at an annual rate over the last three months. As a standalone
        number this is suggesting real GDP growth at around 4.5 percent in Q1.
    •   But real GDP growth is tracking around 2 percent in Q1 so productivity must be contracting in the current
        quarter just as it did a year ago. Whenever this happens, companies move to protect their squeezed profit margins
        and respond the following quarter by slowing hiring. Looking back over the past decade this happened every time,
        and monthly payrolls, on average, come in 70k lower the following quarter. This is why we caution against
        extrapolating current employment trends into the future.
    •   The progress on the unemployment front has been much faster than justified by the classic Okun’s law, but that is
        implicitly assuming that trend GDP growth rate has not changed much. But remember that trend GDP growth is the
        sum of labor force growth and productivity growth. While the growth in the labor force has recently picked up, the
        productivity trend is running slightly above zero right now. Putting these numbers together they are suggesting that
        trend GDP growth has been running below 1 percent for a year now. That can explain the better labor market
        outcomes even with “frustratingly slow” growth. Going forward, however, what the pick up in labor force growth is
        suggesting is that the lower speed limit is only temporary. Thus, going forward we expect much slower progress
        against unemployment even if real GDP growth will be better than last year’s 1.7 percent.

                                                                                                                 Person (millions)

Japan: the economic recovery is ongoing                                                                     21 MARCH 2012

• Real GDP fell 0.75 percent in 2011; the weakest growth in the G7 countries. But leading
                                                                                                                 Mattias Bruér
  indicators and hard data are suggesting above-trend growth at the same time as                                 SEB Economic Research
  reconstruction spending is providing support. Real GDP will grow 1.9 percent and 1.3                           +46 8 763 85 06
  percent in 2012 and 2013, respectively.
• Recent hard data is suggesting that the recovery has become more entrenched: e.g.
  machinery orders, industrial production and retail sales were all above expectations.
• After the Bank of Japan intervened earlier this year, the yen has weakened for six weeks
  running and the yen is at its weakest level since last spring (summer) against the dollar (euro).
  That is good news for competitiveness. Exports have not responded yet, but that is a matter of
  timing only since there are lags involved.
• Reflecting the better tone to economic data, the weaker yen and the JPY 65 trillion Asset-
  Purchase Program, the Nikkei has trended higher for six weeks in a row. But have a look
  and see on the development since the beginning of 2011; over this time period the Nikkei has
  traded below other major indices so maybe it can play catch-up; the price-to-book value is still
  looking cheap. Just to add some color, the all-time-high was posted in 1989, and the level
  today is 75 percent below the highs.
• For the first time in 31 years, Japan showed a trade deficit last year, and in January it posted
  its largest trade deficit ever. This raises questions about the prevailing economic structure
  with large current account surpluses and net savings. If also the current account surplus turns
  into deficit, the consequences may be dramatic since Japan would be forced to import capital
  to finance its gargantuan debt load.
• The unemployment rate has drifted higher since September, and was sitting at 4.6 percent
  in January. If our GDP forecast becomes reality, the unemployment rate should stabilize and
  decline somewhat in 2012-13.
• Japan is massively dependent on foreign oil; arguably a sharp upturn in oil prices is the
  biggest near-term risk now when the tail risk of a severe recession in Europe is lower.
• While inflation in year-on-year terms edged above the zero line in January, core inflation
  (excluding fresh food) will probably not follow suit for some time yet.
• The structural challenges are enormous indeed: the debt/GDP ratio has risen to a gargantuan
  230 percent. Meanwhile the share of the population that tops 65 years of age is at 25
  percent and it will keep rising.

                                                           Key data
                                                           Percentage change
                                                                                              2010 2011 2012 2013
                                                            GDP*                                4.4      -0.7      1.9      1.3
                                                            Unemployment**                       5.1     4.6      4.4      4.2
                                                            Inflation*                          -0.7     -0.3      0.1     0.2
                                                            Government deficit***               -9.3 -10.3 -11.0 -11.0
                                                            * Percentage change, ** Per cent of labour force, *** Per cent of GDP

                                                           Source: SEB
Economic Insight


 thousand billions

                                 thousand billions

                   billions        millions
                                                           Economic Insight

                   billions        Percent

    millions   thousand billions

    millions   thousand billions

China: Weak start for 2012 but no hard landing                                                                   26 MARCH 2012

• Distortions due to the Lunar New Year imply that data for January and February are
                                                                                                                Andreas Johnson
  difficult to interpret but it is clear that activity in the Chinese economy has been                          SEB Economic Research
  weak at the start of 2012. GDP growth in the current quarter is likely to be weak. The                        +46 8 763 80 32
  recent development puts a downside risk to our above-consensus GDP forecast                         
  of 8.7 per cent growth in 2012. However, due to data distortions caused by the Lunar
  New Year and models indicating a rebound in activity in April we maintain our forecast for
  the time being.
• Headline inflation fell to 3.2 per cent in February. Food inflation dropped from 10.5 per
  cent in January to 6.2 per cent. (Chart 1)The large drop in inflation reflects the timing of
  the Lunar New Year and headline inflation might rebound somewhat in March, a higher
  than expected fuel price increase adding further upward pressure. Lower inflation
  provides opportunities for policy loosening in order to stimulate growth.
• Most indicators point to weak growth. A preliminary reading of HSBC’s manufacturing
  Purchasing Manager’s Index (PMI) for March decreased to 48.1, putting the recent
  rebound in doubt. (Chart 2) The official PMI for March is likely to follow suit and end up
  close to or even below 50. Conditions in manufacturing are weak but not consistent
  with a hard landing. Leading indicators points to growth below trend. (Chart 3)
• Export and import data are distorted due to the Lunar New Year but export growth is
  trending downwards. (Chart 4) The trade balance hit a deficit of 31.5 bn USD in
  February, the largest single-month deficit on record. (Chart 5)
• Retail sales are holding up well but industrial production showed the lowest reading
  since July 2009 in January/February (Chart 6) Total loans picked up slightly in
  February. (Chart 7)
• The gradual cooling of the housing market continues; house prices were flat in
  February compared to a year ago. (Chart 8) Construction activity is still strong but project
  starts are weak. The government is not ready to relax property market controls yet.
• The depreciation of the yuan towards the USD has slowed down in 2012. (Chart 9)
  Premier Wen has stated that the yuan might be close to an “equilibrium exchange rate”.

                                                          Key data
                                                          Percentage change
                                                                                               2010 2011 2012 2013
                                                            GDP*                                10.4      9.3       8.7     8.9
                                                            Inflation*                           3.3      5.4       4.4     4.5
                                                            USD/CNY**                           6.59     6.29     6.00    5.82
                                                            * Percentage change. ** End of period.
                                                          Source: National Bureau of Statistics of China, Reuters, SEB.
Economic Insight


Euro zone: The risk of a severe recession has
diminished                                                                                                      21 MARCH 2012

 • ECB support has averted a credit crunch and stabilised bond markets. The Greek
   debt-restructuring (Private Sector Involvement, PSI) was reasonably successful, paving
   the way for the second bailout programme and thereby avoiding a disorderly Greek
   default for now.
 • With the exception of the labour market, some of the recent data has surprised on
   the upside, including Q4 GDP, new orders and retail sales. Indicators have
   stabilised or recovered slightly although current levels still indicate a fall in activity.
   The labour market continues to deteriorate and the recent development has put an
   upside risk to our unemployment forecast. Consumer spending remains weak and
   contributed to the Q4 fall in GDP.
 • In light of the recent data, a stabilisation in financial markets and better prospects for
   Germany, we revise our GDP forecast for the euro zone slightly upwards compared to
   Nordic Outlook February. GDP is expected to fall by 0.6 per cent in 2012 followed by
   a return to positive territory with a weak recovery of 0.8 per cent in 2013. The risk
   of a more severe recession in the euro zone has diminished.
 • Inflation was 2.7 per cent in February and is expected to moderate during 2012 although
   the HICP-forecast has been revised upwards due to rising energy prices. Inflation is
   expected to be above the ECB target in 2012 but below the target in 2013.
 • The ECB is not expected to make any major changes to its monetary policy stance for the
    time being. We expect the refi rate to remain at 1.0 per cent and no new LTROs are
    expected in the coming months. Having avoided a credit crunch and so far stabilised
    the situation in bond markets the ECB seems content with the support it currently offers.
    The ECB also needs some time to evaluate what they call the “extremely complicated”
    effects of the LTROs. The policy stance can be interpreted as ECB having put the ball
    firmly in the governments’ court; long-term solutions to the euro-crisis rest with
Andreas Johnson, SEB Economic Research, +46 8 763 80 32

  GDP forecasts                                           Key data
  Per cent                                                Percentage change
                         2011     2012     2013                                               2010 2011 2012 2013
                                                          GDP*                                  1.8      1.5     -0.6      0.8
  Euro zone               1.5      -0.6      0.8
                                                          Unemployment**                       10.1     10.1     10.6     11.1
  France                   1.7     -0.3      0.8
                                                          Inflation*                            1.6      2.7      2.3      1.6
  Germany                 3.0       0.7      1.4
                                                          Government deficit***                -6.4     -4.4     -3.5     -3.0
  Italy                   0.5      -1.9      0.2
                                                          * Percentage change, ** Per cent of labour force, *** Per cent of GDP
  Spain                   0.7      -1.5      0.3
  Source: SEB                                             Source: SEB
Economic Insight

• Most indicators have stabilised or recovered slightly but are still at levels pointing to a fall in activity. The
  ESI (Economic Sentiment Indicator) rose for the second consecutive month in February but still points to a fall in
  GDP. The composite purchasing managers’ index (PMI) fell to 49.3 in February.
• The German Ifo-index rose for the fourth consecutive time in February and is well above the long-term average.
  The ZEW investor sentiment also continues to recover and in March reached its highest level since June 2010.
• Euro zone GDP fell by 0.3 per cent in Q4, in line with the forecast in Nordic Outlook February and slightly better
  than the consensus forecast of -0.4 per cent due to better than expected performance in Germany and France. The
  decrease in GDP was driven by consumer spending and investment. Italy entered a technical recession in Q4 as GDP
  fell for the second consecutive quarter.
• Euro zone GDP is expected to fall by 0.6 per cent in 2012 followed by a weak recovery of 0.8 per cent in
  2013. The forecast for Germany has been revised upwards to 0.7 per cent.

    GDP growth, quarter-on-quarter
    Per cent
                                 Q4         Q3       Q2
    Euro zone                   -0.3        0.1      0.1
    France                       0.2        0.3      -0.1
    Germany                     -0.2        0.6      0.3
    Italy                       -0.7       -0.2      0.3
    Spain                       -0.3        0.0      0.2
    Source: Eurostat, national statistical offices

Economic Insight

• Unemployment in the euro zone rose to 10.7 per cent in January and the figure for December was revised
  upwards. The number of unemployed increased by 185 000; the ninth consecutive monthly increase, bringing the
  total number of unemployed in the Euro-zone to 16.9 million. January’s weak development along with revisions
  puts an upside risk to our labour market forecast.
• Unemployment rose sharply in several of the peripheral and southern euro zone economies in January; the
  unemployment rate in Greece reached 19.9 per cent.
• The German labour market is still strong but the rate of unemployment has stopped declining.
• Euro zone unit labour costs are rising slowly after the fall in 2009 and 2010. Unit labour costs in Spain continue to
• Manufacturing new orders rebounded in December and beat expectations. Industrial production was very weak
  at the end of 2011. Industrial production recovered slightly in January, increasing by 0.2 per cent compared to
  the previous month, but is still well below the recent high in August 2011.

Economic Insight

• The liquidity provided by the two LTROs (22 December and 29 February) has avoided a serious credit crunch and
  diminished the need for the ECB to intervene in secondary government bond markets. The ECB kept its monetary
  strategy unchanged in March. No more three-year loans are expected in the months to come and the refi rate
  will remain at 1.0 per cent during the forecast period. In ECBs latest forecast, the GDP forecast for 2012 was
  revised downwards to -0.1 per cent and the inflation forecast was revised upwards.
• Yield spreads between German government bonds and other euro zone countries have come down since
  the beginning of the year but remain elevated. The Greek PSI was successful with a 95.7 per cent participation
  rate and a Greek disorderly default was avoided. Bank lending is still weak although there was an improvement in
  January. The annual growth rate of M3 rose to 2.5 per cent in January.
• The euro has started to weaken again since the beginning of March providing some stimulus for exports.
  Financial stocks have surged by around 20 per cent since the beginning of 2012.
• Inflation was 2.7 per cent in February. The HICP forecast was revised upwards to 2.3 per cent in 2012 and 1.6
  per cent in 2013. Core inflation will bottom out at 1.2 per cent in autumn 2012 and reach 1.5 per cent by end-2013.

UK economy: still weak                                                                                       22 MARCH 2012

• While we maintain a bearish bent on the UK economy, the consensus 2012 GDP
  estimates actually ticked higher to 0.6 percent in March. Meanwhile the Bloomberg
  average is lower, at 0.2 percent for 2012. We predict GDP growth of 0.4 percent in
  2012 and 1.4 percent in 2013, respectively. Recent data, e.g. on industrial production                    Mattias Bruér
  and retail sales suggests that the economy is still weak although some other indicators                   SEB Economic Research
                                                                                                            +46 8 763 85 06
  fuel recovery hopes.
• The market is currently looking for 0.4 percent GDP growth at an annual rate in the first
  quarter, which implies zero growth compared to the fourth quarter. A flat economy is
  consistent with the message from NiESR’s huge macroeconomic model (a pretty
  amazing creature that we have used in the past) and our own forecast.
• The private sector continues to add to payrolls while jobs are cut in the public sector.
  Since the labor force is growing, the unemployment rate is on a rising trend and at
  8.4 percent it is sitting at its highest level since 1995. The unemployment rate is
  expected to drift gradually higher in 2012-13. It is already well above the NAIRU which is
  why regular pay is trending below 2 percent year-on-year. But the downward pressure on
  real wages from inflation is diminishing which will help the recovery to take hold in
• Inflation continues to decline from the high-water mark in September, and fell from 3.6
  percent in January to 3.4 percent in February. While the fall was somewhat smaller than
  expected, the trajectory is in line with the MPC’s latest projections. On the margin, our
  inflation forecasts are revised higher on oil but we still look for below-target inflation
  in 2013. The dovish set of MPC minutes, with two members pushing for more stimulus,
  suggest that the door to more QE is still ajar.

                                                      Key data
                                                      Percentage change
                                                                                          2010 2011 2012 2013
                                                        GDP*                                 2.1     0.8       0.4      1.4
                                                        Unemployment**                       7.9      8.1      8.7     8.8
                                                        Inflation*                           3.3     4.5       2.8      1.5
                                                        Government deficit***             -10.3     -8.5      -7.0    -6.0
                                                        * Percentage change, ** Per cent of labour force, *** Per cent of GDP

                                                      Source: SEB
Economic Insight



Economic Insight


                 Real exchange rate                                                      M4 growth still negative
                    Index, 2000 = 100                                                     Year-on-year percentage change
  125                                                               125    20.0                                                         20.0
  120                                                               120    17.5                                                         17.5
  115                                                               115    15.0                                                         15.0
  110                                                               110    12.5                                                         12.5
  105                                                               105    10.0                                                         10.0
  100                                                               100     7.5                                                          7.5
  95                                                                 95
                                                                            5.0                                                          5.0
  90                                                                 90
                                                                            2.5                                                          2.5
  85                                                                 85
                                    Weaker                                  0.0                                                          0.0
  80                                                                 80
                                                                           -2.5                                                         -2.5
  75                                                                 75
  70                                                                 70    -5.0                                                         -5.0
        74 77 80 83 86 89 92 95 98 01 04 07 10                                    84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

                                             Source: Reuters EcoWin, SEB                                          Source: Reuters EcoWin, SEB

Sweden: Growth forecast largely on track                                                                        26 MARCH 2012

 Growth forecast largely on track. The sharp decline in Q4 GDP shows that Swedish                             Olle Holmgren,
  growth is slowing, but exaggerates the underlying weakness. The growth forecast has                          SEB Trading
  been revised upward slightly to 0.7 per cent in 2012 and 1.9 per cent in 2013                                Strategy
  (previous forecast 0.5 per cent and 1.7 per cent for 2012/13). Signs of stabilisation in the
  Euro zone are supportive, although many problems remain that will affect Sweden.
  Growth is likely to be well below trend over the next two years.                                             +46 8 763 80 79
 The sharp decline in Q4 GDP constitutes a downside risk. However, the outcome
  doesn’t seem to reflect the underlying trend as sentiment indicators signal a slowdown
  rather than a recession.
 Downside risks for the household sector have decreased with rising sentiment and
  signs of a relief in the housing market.
 The labour market is slowing down but indicators point to a mixed picture. Employment
  has been weak in the beginning of 2012 but unemployment has so far leveled out in line
  with our forecast. Furthermore, short-term indictors have only declined moderately. All in
  all, our forecast of gradually rising unemployment from mid-2012 is largely on
 CPIF inflation is expected to rise slightly in 2012 from the present low level, partly
  due to rising petrol prices. Headline CPI is heading lower due to declining mortgage rates.
 The Riksbank is expected to continue to cut rates to 1 per cent in 2012 due to
  rising unemployment and low inflation. The April rate decision is likely to be a close
  call but we continue to expect the Riksbank to remain on hold and wait for more
  indications on the extent of the slowdown and where the housing market is heading.
 The forecast for government savings has been lowered slightly but Swedish public
  finances are still extremely strong in an international comparison.
                     Swe: GDP                             Key data
 10                                               2.5     Percentage change
  8                                               2.0
                                                                                             2010 2011 2012 2013
                    % y/y
                                                           GDP*                                 6.1      3.9       0.7     1.9
  4                                               1.0      GDP working day adjusted*            5.9     4.0        1.1     1.9
                                    % q/q (RHS)
  2                                               0.5      Unemployment**                      8.4       7.4       7.6     8.1
  0                                               0.0      Inflation*                           1.2      3.0       1.3     1.0
  -2                                              -0.5     Government savings***               0.0       0.3      -0.5   -0.4
  -4                                              -1.0     * Percentage change, ** Per cent of labour force, *** Per cent of GDP

  -6                                              -1.5    Source: SEB
         10         11         12           13
Economic Insight

 Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector have
  stabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat
  in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment.
 Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak in
  January. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs also
  for other service sectors.
 Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and
  in the public sector. Confidence in construction has declined considerably and housing investments are predicted to
  decline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012
  according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.

                    Swe: Manufacturing sentiment                                                     Swe: Economic sentiment and confidence in the service
  20                                                                                         40
                                                                                                   120                                                                     60
                                                                                             30    115                                                                     50
                                                                                             20    110                                                                     40
   0                                                                                         10    105                                                                     30
                                                                                              0    100                                                                     20
  -10                                                                                               95                                                                     10
                                                                                                    90                                                                      0
  -20                                                                                        -20
                                                                                                    85                                                                    -10
                                                                                             -30    80                                                                    -20
                                                                                             -40    75                                                                    -30
  -40                                                                                        -50         03      04   05    06   07    08      09     10        11
            98        00        02         04        06        08            10        12
                                                                                                              Economic Sentiment (business + consumer confidence)
              Confidence indicator                       Inflow of new orders                                 Sentiment in the service sector (RHS)

            Swe: Production, % y/y, 3-month average                                                               Confidence in the retail sector
  15                                                                                         15
                                                                                                   40                                                                      40
  10                                                                                         10
                                                                                                   20                                                                      20
   5                                                                                          5
   0                                                                                          0     0                                                                      0

   -5                                                                                         -5   -20                                                                    -20
  -10                                                                                        -10
                                                                                                   -40                                                                    -40
  -15                                                                                        -15
  -20                                                                                        -20   -60                                                                    -60

  -25                                                                                        -25   -80                                                                    -80
            04        05        06        07        08        09        10        11                      07           08        09         10             11        12

              Industry               Service sector                                                       Durable goods          Mostly food            Total

                       Swe: Confidence in construction                                                   Swe: Housing starts and residential fixed
   75                                                                                        75                   investments, % y/y
                                                                                                   175                                                                    175
   50                                                                                        50
                                                                                                   150                                                                    150
   25                                                                                        25    125                                                                    125
        0                                                                                     0    100                                                                    100
                                                                                                    75                                                                     75
   -25                                                                                       -25    50                                                                     50
   -50                                                                                       -50    25                                                                     25
                                                                                                     0                                                                      0
   -75                                                                                       -75
                                                                                                   -25                                                                    -25
  -100                                                                                      -100   -50                                                                    -50
      96         98        00        02        04        06        08    10        12              -75                                                                    -75
                                                                                                         00 01 02 03 04 05 06 07 08 09 10 11
                 Building activity, expectations
                 Order books, outcome                                                                      Housing starts         Residential investments
                 The confidence indicator                                                                                                           Source: Reuters EcoWin

Economic Insight

 Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in the
  stock market. Car registration and retail sales are holding up well, while consumer confidence has recovered.
  Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was one
  explanation. There has been a downward revision to the household savings ratio implying that household savings
  almost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective.
 The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing
  price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3
  months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 per
  cent over the next two years but downside risks have decreased.
 Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast.
  Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will
  continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment is
  likely to start rising from mid-2012.

                        Swe: Consumer confidence                                                  Swe: Mortgage lending rates and the repo rate
                                                                                                  9                                                                   325
  30                                                                           75
                                                                                                  8                                                                   300
  20                                                                           50                 7                                                                   275
                                                                                                  6                                                                   250
  10                                                                           25                 5                                                                   225
                                                                                                  4                                                                   200
       0                                                                           0              3                                                                   175
                                                                                                  2                                                                   150
  -10                                                                         -25
                                                                                                  1                                                                   125
  -20                                                                         -50                 0                                                                   100
                                                                                                 -1                                                                    75
  -30                                                                         -75                -2                                                                    50
            04      05        06         07        08    09    10       11                                 07         08        09       10            11        12

                Consumer confidence                                                                        3 - month mortgage lending rates            Spread
                SEB, housing price indicator                                                               Repo rate

                Swe: House Prices, index 2005 = 100                                                       Swe: Household savings ratio, % of income
  160                                                                         160                15                                                                     15
  150                                                                         150
                                                                                                 10                                                                     10
  140                                                                         140

  130                                                                         130                     5                                                                 5
  120                                                                         120
                                                                                                      0                                                                 0
  110                                                                         110

  100                                                                         100
                                                                                                  -5                                                                    -5
   90                                                                          90                                                       Own financial savings
                                                                                                          Ex manatory pension savings
            05          06         07         08        09    10    11
                                                                                                 -10                                                                    -10
                                                                                                          93     96        99    02      05           08     11
                 SCB, houses                        Valueguard houses
                 Valueguard, Flats

   Swe: Employment according to the NIER survey                                                                    Swe: The labour market
  4                                                                          30
                                                                                                                           3-month average
                                                                                                 9.0       Unemployment, %
  3                                                                          20
  2                                                                          10                                                                                       4650
  1                                                                           0                  8.0
                                                                                   Net balance

  0                                                                          -10                 7.5                                                                  4600
  -1                                                                         -20
                                                                                                 7.0                                                                  4550
  -2                                                                         -30
  -3                                                                         -40                                                                                      4500
  -4                                                                         -50                 6.0                            Employment, 1000s (RHS)
           04      05        06         07     08       09    10    11                           5.5                                                                  4450
                                                                                                           07     08       09    10     11       12         13
            Employment, % y/y
            Planed employment, business sector (RHS)

Economic Insight

 Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiations
  remain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some
  signs of negotiation strains but we expect wage agreements to be reached with out any major strikes.
 The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIF
  inflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF ex
  food and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength
  and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however
 Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicates
  that the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1
  per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbank
  will take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a
  stabilisation in the housing market will be more important than the lower than expected Q4 GDP.

                             Swe: CPI, % y/y                                                          Swe: CPIF, % y/y
  3.5                                                              3.5         2.5                                                               2.5
  3.0                                                              3.0
                                                                               2.0                                            Riksbank           2.0
  2.5                                                              2.5
               CPIF                                                                                                    SEB
  2.0                                                              2.0         1.5                                                               1.5
  1.5                                                              1.5
                                                                               1.0                                                               1.0
  1.0                                                     CPI

  0.5                                                              0.5         0.5                                                               0.5
                    CPIF, ex food and energy
  0.0                                                              0.0
         10             11               12         13                         0.0                                                               0.0
                                                                                     10          11               12           13

                      Swe: Hourly wages, % y/y                                            Swe: Capacity utilisation indicators
   5.0                                                                   5.0    2                                                                  2
                                  Total economy
   4.5                                                                   4.5
                                                                                1                                                                  1
   4.0                                                                   4.0
   3.5                                                                   3.5
                                                                                0                                                                  0

   3.0                                                                   3.0   -1                SEB's, indicator                                  -1
   2.5                                                                   2.5
                Business sector
                                                                               -2                                                                  -2
   2.0                                                                   2.0                                       Riksbank, RU-indicator
              Corrected for historical bias (Riksbank's estimate)
   1.5                                                                   1.5   -3                                                                  -3
         01 02 03 04 05 06 07 08 09 10 11                                            03     04   05     06        07    08    09     10     11

                    Swe: Lending to households                                  Swe: Government bond spread vs Germany, bps
                                                                               40                                                                40
  15                                                                     15    30                                                                30
                                                                               20                                                                20
  13                                                                     13
                                                                               10                                                                10
  11                                                                     11     0                                                                 0
   9                                                                      9    -10                                                               -10
                                                                               -20                                                               -20
   7                                                                      7
                                                                               -30                                                               -30
   5                                                                      5    -40                                                               -40
                                                                               -50                                                               -50
   3                                                                      3
                                                                               -60                                                               -60
         02    03     04     05     06    07   08   09   10   11
                                                                               -70                                                               -70
                % m/m, annualised, SA, 3 month average                                07         08          09          10         11    12
                % y/y

Norway: Activity running at a solid clip                                                                                              2 APRIL 2012

 Activity indicators for the first couple of months of the year suggest that overall activity                                      Growth
  has started the year on a stronger-than-expected footing. The solid impression fits
  with what respondents reported in the most recent report from Norges Bank’s regional
  network: output “increased fairly rapidly” in winter while expectations ahead was for                                             Inflation
  some moderation (as they tend to be), consistent with growth in mainland GDP – i.e.
  excluding oil/gas and shipping – at near 3% year-on-year rate in the first half of 2012.
 Relative to February’s Nordic Outlook, we lift the forecast for growth in mainland GDP
  in 2012 to 2.6% from 2.3% while leaving the forecast for 2013 unchanged at 2.9% for
  now. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 which
  nonetheless implies stronger growth than in 2011. We see upside risks to the forecasts.

 The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wage
  growth to stem deteriorating competitiveness in export industries. The trend-setting
  negotiation for manufacturing blue-collar workers has broken down with the official
  mediator stepping in. Pay increases might be slower than in 2011: according to media
  reports, labour unions will trade it for a common paternal leave in the private sector to be
  paid for by government. Actual wage inflation in manufacturing is likely to be stronger
  than agreed in the central negotiations due to wage drift (local pay), reflecting tight
  labour markets. Moreover, wage growth in the dominant public sector might not slow as
  much. In all, we expect overall wage growth to ease from 4.2% in 2011 to 3.9% in
  2012, yielding a solid increase when adjusted for inflation.

 Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at its
  mid-March monetary policy meeting, citing still-lingering concern for global growth and
  lower inflation due to NOK appreciation. The bank lowered its optimal rate path quite
  markedly, putting any rate hike off to Q3/13. We think a hike will come next spring at the
  latest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.

Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway

          Growth is seen holding near trend                                          Key data
       Mainland GDP and Norges Bank’s regional network                               Percentage change
 8                                                                             4                                        2010 2011 2012 2013
 6                                                                             3      GDP                                  0.7      1.6      2.1     2.4
 4                                                                             2      Mainland GDP                         1.9     2.6      2.6      2.9
 2                                                                             1      Unemployment*                        3.6      3.3      3.3     3.2
 0                                                                             0
                                                                                      Inflation                            2.5      1.2      1.5     1.9
                                                                                      Core inflation                       1.4     0.9       1.5     1.9
 -2                                                                            -1
                                                                                      Government balance**               10.8     13.6     11.5
 -4                                                                            -2
      03    04    05     06     07    08     09    10        11        12
                                                                                      * Per cent of labour force, ** General government, per cent of GDP,
      Mainland GDP, % change year-on-year (LHS)                                       forecast 2012 MoF (Oct. 2011)
      Regional network output indicator, index (RHS)
      Output expectations 6 mth ahead, index (RHS)                                   Source: SEB
                                            Source: Norges Bank, Statistics Norway
Economic Insights

 Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by
  fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption
  of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked
  payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012.
 The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently
  mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly
  winds from abroad. The 13-point jump in the PMI from December to a 4 ½-year high of 59.7 in March and an even
  stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery.
 Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but
  following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging
  orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong
  labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period
  which marked the previous high.
       Consumption has firmed in early 2012…                                              … as turn in confidence has suggested
                           3-month average
  16                                                                         4     10.0
  12                                                                         3
   8                                                                         2
                                                                                    5.0                                                                          30
   4                                                                         1
   0                                                                         0      2.5
  -4                                                                         -1
  -8                                                                         -2

 -12                                                                         -3    -2.5                                                                          -10
       03     04    05     06     07      08   09    10         11                         98 99 00 01 02 03 04 05 06 07 08 09 10 11
       Consumption of goods, % change year-on-year (LHS)                                    Private consumption, % change year-on-year (LHS)
       % change from 3 mth. earlier (RHS)                                                   Consumer confidence, net balance (RHS)
                                                       Source: Statistics Norway                                                    Source: Ecowin, Statistics Norway

   Choppy momentum in manufacturing, but …                                         … sharp recovery in PMI suggests solid outlook
                           3-month average
  24                                                                         6     75                                                                                75
                                                                                   70                                                                                70
  16                                                                         4     65                                                                                65
                                                                                   60                                                                                60
   8                                                                         2     55                                                                                55
                                                                                   50                                                                                50
   0                                                                         0
                                                                                   45                                                                                45
                                                                                   40                                                                                40
  -8                                                                         -2
                                                                                   35                                                                                35

 -16                                                                         -4    30                                                                                30
       01 02 03 04 05 06 07 08 09 10 11                                                    04     05      06     07     08     09       10          11
        Manufacturing production, % change year-on-year (LHS)                              PMI manufacturing (RHS)     PMI new orders (RHS)
        From 3 months earlier (RHS)                                                                                                                    Source: Ecowin
                                                       Source: Statistics Norway

  The upturn in housing starts has levelled off..                                  .. but orders suggest much more in the pipeline

  80                                                                        40     11                                                                            160

                                                                                   10                                                                            140
                                                                                    9                                                                            120
  40                                                                                8                                                                            100
  20                                                                                7                                                                            80
                                                                            25      6                                                                            60
                                                                                    5                                                                            40
                                                                                    4                                                                            20

 -40                                                                        15      3                                                                            0
       01 02 03 04 05 06 07 08 09 10 11                                                   99 00 01 02 03 04 05 06 07 08 09 10 11 12
       Housing starts 3 mth. average, % change year-on-year (LHS)                          Housing starts in 1.000, quarterly average (LHS)
       Housing starts in 1.000, 12 mth. aggregate (RHS)                                    Nominal orders new residential buildings, 2Q earlier (RHS)
                                                       Source: Statistics Norway                                                             Source: Statistics Norway

Economic Insights

 The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy.
  Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from
  September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS
  unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year.
 Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure –excl.
  taxes and energy – was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank
  for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on
  import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in
  the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015.
 Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets
  Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt,
  but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new
  household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
  Employment growth continues to run strongly                                                    Wage growth to moderate slightly in 2012
                                 3-month average
  5                                                                               6.0     10                                                                                    0

  4                                                                               5.5                                                                                           1
                                                                                  5.0                                                                                           2
                                                                                  4.5      6
  2                                                                                                                                                                             3
  1                                                                                        4                                                                                    4
  0                                                                                                                                                                             5
 -1                                                                               2.5                                                                                           6

 -2                                                                               2.0      0                                                                                    7
          01 02 03 04 05 06 07 08                      09      10      11                        87     89 91 93 95 97 99 01 03 05                     07        09    11
           Employment, % change year-on-year (LHS)                                                    Wage growth, % change year-on-year (LHS)
           Unemployment, % of labour force (RHS)                                                      LFS unemployment rate, reversed (RHS)
                                                                                                                                                       Source: Statistics Norway
                                                              Source: Statistics Norway

  Core inflation shows no definite trend-change                                                        Imported goods are denting inflation
                      Year-on-year percentage change                                                            Year-on-year percentage change
  7                                                                                 7     6.0                                                                               6.0

  6                                                                                 6     4.5                                                                               4.5
  5                                                                                 5
                                                                                          3.0                                                                               3.0
  4                                                                                 4
                                                                                          1.5                                                                               1.5
  3                                                                                 3
  2                                                                                 2     0.0                                                                               0.0
  1                                                                                 1     -1.5                                                                              -1.5
  0                                                                                 0
                                                                                          -3.0                                                                              -3.0
 -1                                                                                 -1
 -2                                                                                 -2    -4.5                                                                              -4.5
          02    03    04    05      06   07   08      09       10      11                             02   03    04    05   06    07    08     09     10         11
                                                                                                       Core CPI domestic goods and services
          Consumer prices     CPI excl. taxes and energy
                                                                                                       Core CPI imported consumer goods
                                                              Source: Statistics Norway                                                                Source: Statistics Norway

          Existing home prices continue to climb ..                              home completions lag household formation
  25                                                                               35     50                                                                                50

  20                                                                                      40                                                                                40
  15                                                                                      30                                                                                30

  10                                                                               25     20                                                                                20

      5                                                                                   10                                                                                10
      0                                                                                    0                                                                                0
  -5                                                                                      -10                                                                               -10

 -10                                                                               10     -20                                                                               -20
           01 02 03 04 05 06 07 08 09 10                                11                            02   03    04    05    06     07    08     09         10        11
            Existing home prices, % change year-on-year (LHS)
                                                                                                 No of households, change y/y     Housing completions            Net balance
            Existing home prices per sqm in NOK 1.000 (RHS)
                                               Source: Norw. Ass. of Real Estate Agents                                                   Source: Norges Bank, Statistics Norway

Economic Insights

 Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian
  economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK
  index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered
  markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end
  2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a global
  recovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike
  rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year.
 The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals
  relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges
  Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a
  7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation
  inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated
  supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.
           Norges Bank sees rates lower for longer..                                          NOK is expected to remain stronger
                                        Per cent                                                                                 Index
 8                                                                                       8   95                                                                              95

 7                                                                                       7   93                                                                              93
 6                                                                                       6
                                                                                             91                                                                              91
 5                                                                                       5

 4                                                                                       4   89                                                                              89

 3                                                                                       3   87                                                                              87
 2                                                                                       2
                                                                                             85                                                                              85
 1                                                                                       1

 0                                                                                       0   83                                                                              83
           02 03 04 05 06 07                08    09 10 11 12 13 14                                     2010         2011          2012       2013        2014
            Norges Bank deposit rate               Optimal rate path, MPR 1/12                         NOK import-weighted           NOK assumption MPR 1/12
            Optimal rate path, MPR 3/11                                                                NOK assumption MPR 3/11
                                                                 Source: Norges Bank, SEB                                                            Source: Norges Bank, SEB

              Low rates spur stronger credit growth                                              Tight spread vs. Germany didn’t hold for long
                         Year-on-year percentage change                                                                   Weekly average
 25                                                                                  25      9                                                                           200
 20                                                                                  20
                                                                                             7                                                                           150
 15                                                                                  15      6
 10                                                                                  10                                                                                  100

     5                                                                               5       3
                                                                                             2                                                                           50
     0                                                                               0       1
                                                                                             0                                                                           0
  -5                                                                                 -5
                                                                                                      01 02 03 04 05 06 07 08 09                     10       11
            01 02 03 04 05 06 07 08 09 10 11
                                                                                                       NOK 10-year government bond yield, % (LHS)
         Domestic credit growth            Domestic credit to households
                                                                                                       Spread vs. Bunds, basis points (RHS)
         Credit to non-financial companies                  Source: Statistics Norway                                                                     Source: Reuters, SEB

         NOK marginally weaker after latest rate cut..                                                  .. but is still stronger than at end-2011
                                   Weekly average                                                                         Weekly average
 10.5                                                                               9.0      116                                                                         112

 10.0                                                                               8.5      112                                                                         108
     9.5                                                                            8.0      108                                                                         104
     9.0                                                                            7.5      104                                                                         100
     8.5                                                                            7.0
                                                                                             100                                                                         96
     8.0                                                                            6.5
                                                                                                 96                                                                      92
     7.5                                                                            6.0
                                                                                                 92                                                                      88
     7.0                                                                            5.5
                                                                                                 88                                                                      84
     6.5                                                                            5.0
     6.0                                                                            4.5          84                                                                      80
              2004 2005 2006 2007 2008 2009                   2010    2011                             2004 2005 2006 2007          2008 2009 2010 2011
                                                                                                        NOK trade-weighted (LHS)       NOK import-weighted (RHR)
               EUR/NOK (LHS) USD/NOK (RHS)                                                                                                                Source: Reuters, SEB
                                                                     Source: Reuters, SEB

Denmark: Muddling through still on track                                                                                     28 MARCH 2012

• Growth moved sideways in the last part of 2011 as export growth slowed and public                                              Growth
  consumption kept contracting. The fiscal stance is set to reverse providing an important
  growth impetus this year.
• Private consumption grew at the end of the year. Even though consumer confidence has
  improved on the margin it still points to sluggish consumption in 2012.
• Housing investments started stalling at the end of 2011 after a strong beginning to the year.                                  Labour-market
  House prices have resumed the decline and the housing market sees low turnover.
• Fixed investments have held up fairly well and capacity utilization suggests some room for
  investments in 2012.
• Manufacturing has staged a rebound alongside PMIs, in line with the global tendency.
  However, the latest readings suggest slowing momentum in the short term.

Jakob Lage Hansen, SEB X-asset Research, +45 33281469

                                                                    Key data
                                                                    Percentage change
                                                                                                               2010 2011 2012 2013
                                                                             GDP*                                 1.3      1.0      0.5       1.4
                                                                             Unemployment**                       4.2      4.1      4.3      4.2
Percent (Y-Y)

                                                                             Inflation*                           2.2      2.7       1.7      1.8
                                                                             Government deficit**                -2.6     -3.0     -4.5      -2.5
                                                                             * Percentage change, ** Per cent of labour force, *** Per cent of GDP

                                                                    Source: SEB
                                                                    Percent, 12M

                                                                                                                                                     Net balance
Percent (Y-Y)

                                                      Net balance
Economic Insight

• The unemployment rate has kept falling. The drop in public employment is moderating, but this year is unlikely to
  see a marked improvement in labor markets in general as growth is subdued. Consumers’ expectations of
  unemployment have turned less negative, but they still point to higher unemployment in the near term.
• The growth in exports is waning as Denmark’s main trading partners have delivered slower growth. A weaker
  effective exchange rate is offering some counterbalance.
• The large current account surplus has persisted and the foreign reserves have grown as the central bank has
  defended the peg to the euro. However, some of the positive pressure on the krone has come off as the negative tail
  risk in the Eurozone has fallen. The krone level is still relatively strong and the negative policy spread to Euroland
  has thus been maintained. The resulting low mortgage yields are providing a cushion for consumers.
• The government has launched another bank package lifting real estate loans off the balance sheets of the large
  corporate lender FIH. It will also create a special credit institute extending credit to “well run” agricultural companies
  who face tight credit as the sector in general has experienced large capital losses on land putting pressure on banks.
                                                                                                                                                             Housing investments and prices
                 30                                                                                 15                                    40

                 20                                                                                 10

                 10                                                                                  5

                                                                                                                          Percent, 12M
                                                                                                         %-points (12M)
 Percent (12M)

                  0                                                                                  0

                 -10                                                                                -5

                 -20                                                                               -10

                 -30                                                                               -15                                    -30
                       91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11                                                              93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

                          Non-residential investments      Capacity utilisation                                                                        Housing investments          House prices
                                                                                                                                                                                                                     Source: Reuters EcoWin
                                                                                                                           Percent, 12M


                                               Exchange rate                                                                                                     Danish rates and FX reserves
                                                                                                                                          7                                                                                          500
                                                                                                                                          6                                                                                          450
                 100.0                                                                                                                                                                                                               250
                  97.5                                                                                                                                                                                                               200

                                                                                                                                          1                                                                                          150

                                                                                                                                          0                                                                                          100
                                                                                                                                                  04    05        06         07         08         09           10     11       12
                      90      92     94     96      98     00    02      04       06    08    10     12
                                                                                                                                                   Danish lending rate       Mortgage rate (0-1Y incl. costs)
                             DKK effective exchange rate                                                                                           ECB repo rate             Currency reserve, DKK
                                                                                  Source: Reuters EcoWin                                                                                                             Source: Reuters EcoWin

Finland: Recent data confirms slowdown                                                                       2 APRIL 2012

• The slowdown for major trading partners is affecting the sensitive Finnish economy with
  exports ending last year, and starting 2012, on a weak note. Leading indicators have
  bottomed out in December 2011/January 2012 and has since showed some
  improvements, although they remain at low levels. As has been the case through the
  crisis, the service sector sees the outlook as brighter than manufacturing and
• With exports representing roughly 40 per cent of GDP, the economy will feel more of the
  international slowdown; the structure of production with focus on capital and
  intermediate goods hold back the development. In 2011, export volumes was more than
  15 per cent lower than 2008 and the near term outlook is weak. Monthly data in current
  prices showed unchanged exports in January 2012. We expect export volumes to stay flat
  compared to 2011.
• The labour market continues to look strong but will be affected negatively ahead. We
  adjust our GDP forecast for 2012 and 2013 slightly upwards to 0.7 and 1.7 per cent
  respectively from 0.5 and 1.7 per cent respectively in Nordic Outlook, February 2012.
  Given this forecast, GDP will just reach its pre-crisis (2008) level in 2013.
Daniel Bergvall, Economic Research, +46 8 763 85 94

                                                         Key data
                                                         Percentage change
                                                                                             2010 2011 2012 2013
                                                          GDP                                  3.6         2.7     0.7       1.7
                                                          Unemployment*                        8.4         7.8     7.8      8.0
                                                          Inflation                             1.7        3.3    2.0       1,9
                                                          Government fiscal balance** -2.5                 -1,5   -1.7      -0.5
                                                          * Per cent of labour force, ** Per cent of GDP
                                                         Source: SEB
Economic Insights

• Except for Q3, growth was weak in 2011 and in the last quarter GDP just barely increased (+0.1% q/q). The
  development towards the end of the year was in line with Statistics Finland’s monthly GDP indicator and EU
  Commission indicators.
• The deteriorating outlook took its toll on business confidence last year, but since the turn of the year, there has
  been a slight improvement and stabilisation in confidence. Services are above zero, but for manufacturing and
  construction indicators still point at contraction. The indicators for all three sectors are below long term averages.
  Even though the sharp dip in exports late last year was a statistical oddity, the development since then has been
  weak but more stable.
• After shaking off the worst of the recession fear late last year, confidence among consumers has improved and was
  unchanged in March compared to February. Consumer confidence has bounced back since the weak readings late
  last year. Consumer confidence and consumption weakened towards the end of 2011 but retail sales for January and
  February points towards an improvement ahead (up on average 5.5 per cent on an annual basis). Overall, consumer
  spending is expected to hold up relatively well, supported by the labour market.
• Bank (MFI) lending to households and especially to non-financial corporations are rising, reaching just above 8 per
  cent on an annual basis in February for the latter. Investments were second after household consumption in
  contributing to GDP-growth last year although capacity utilisation is still at a low level, although rising. Capital
  spending is expected to level off and increase only slightly in 2012.
• The economy is slowing down, but the labour market still develops favourably. Vacancies are still trending higher
  and unemployment continues to fall. In February unemployment stood at 7.4 per cent, down from 8.1 per cent a
  year earlier. We expect unemployment to continue to level off at this level and rise again from mid-year.
• Inflation has been stuck around 3 per cent in January and February but is expected to fall, giving a boost to
  household real income that together with the labour market will support consumer spending.

Economic Insights

• A government surplus in the years leading up to the crisis has put Finland in a better position than many other
  economies. General government net lending is expected to worsen somewhat in 2012 compared to 2011, but will
  not drop below -2 per cent of GDP. In a euro zone perspective this puts Finland in a favourable position with no or
  small need for the government to implement front-loaded budget tightening that would further erode growth
  prospects. Instead fiscal policy can be neutral in the short term.
• Noteworthy is that the abated tolerance of high government debt has not affected relatively low indebted
  Finland; on the other hand, long term government yields have dropped more than 100 bps in the last year. At the
  same time though, the 10-year government bond spread to Germany has doubled from approximately 25 to 50 bps.


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