Economic Outlook, Nordea, September 2010

Economic Outlook September 2010

Contents

3 September 2010 Economic Outlook

Data overview Key figures .............................6

Interest rates ..........................7

Exchange rates......................7

Visit us at: www.nordea.com/e-Markets

Editor Helge J. Pedersen, Head of Economic Research [email protected] Tel +45 3333 3126

Editorial deadline 24 August 2010

DENMARK Economy back on the growth track .................................................................................8

SWEDEN Swift recovery................................................................................................10

NORWAY Consumer spending disappoints ...................................................................12

FINLAND Recovery at fluctuating speed .......................................................................14

Nordic economies

USA Weak growth, but no new recession...............................................................16

EURO AREA Recovery continues as sovereign debt crisis smoulders................................18

UK Economy is losing steam...............................................................................20

Major economies

POLANDBright economic outlook, but less so.............................................................21

RUSSIA Growth returning but public finances strained ...............................................23

ESTONIA Recovery gaining strength.............................................................................25

LATVIA Towards brighter times ..................................................................................26

LITHUANIA Gradual economic recovery ...........................................................................27

HUNGARY Considerable uncertainty...............................................................................28

CZECH REPUBLIC A good start for the new government .............................................................29

CHINA Economic activity is slowing as intended by the authorities...........................30

INDIA Healthier - but not healthy - outlook for public finances .................................32

BRAZIL Overheating fears abating..............................................................................33

TURKEY Amazing recovery..........................................................................................34

Emerging Markets

OIL Risk appetite back in the limelight .................................................................35

METALS AND PULP Only temporary price dips .............................................................................36

Commodities

Data sources are Reuters EcoWin, national statistical bureaus and own calculations unless otherwise noted.

Data sources:

OVERVIEW Autumn mood................................................................................................. 4

Overview


Autumn mood Since the May issue of Economic Outlook we have seen increasing signs of growth having peaked this time around. Especially in the US and China there are clear signs of a slowdown. The Euro area, on the other hand, is still steaming ahead. The main reason is that the German growth engine has finally shifted into a higher gear sup-ported by the sharp EUR weakening earlier this year. Normally, when the US economy slows down, the Euro-pean economy will also slow down after a few quarters. Therefore, we expect Euro-area growth to slow towards the end of 2010 when the individual countries’ an-nounced fiscal policy tightening takes effect. No new global recession Our baseline scenario therefore factors in relatively mo-dest global growth over the coming year. But we do not believe that the world economy is heading for a new re-cession. First, for quite some time it has been clear that the US re-covery, which proved very strong towards the end of 2009, would lose momentum. The reason is that the up-swing in the manufacturing sector was mainly driven by inventory restocking. And the trend in final demand has not been convincing. Capacity utilisation and, in turn, the labour market remain weak, which put a damper on con-sumer confidence and housing market activity. Govern-ments are also beginning to phase out their lenient fiscal policies and this will also contribute to lower economic activity in the coming year. Against this backdrop, the risk of the US economy sliding into a new recession should not be underestimated. President Obama’s scope for manoeuvre in terms of launching new fiscal policy measures to stimulate the economy is restricted by the huge US budget deficit, but ultimately depends on the outcome of the mid-term elections in November and any resulting shifts in the political balance in Congress. Meanwhile, which is the good news, US households have consolidated their finances over the past years and there-fore, on a slightly longer-term horizon, they may again contribute strongly to growth. But we will probably have to wait until 2012 for that to happen. Second, we are not overly concerned about the slowdown in China because it is controlled by the government’s economic policy. Particularly fears of an overheating housing market have prompted the recent tightening of credit standards, which in turn has been a key factor be-hind the current growth slowdown. But we believe that the Chinese authorities will attempt to counter any sig-nificant slowdown by new fiscal policy measures, so over the forecast period (the years through 2012) growth should remain robust at just under 9%. Meanwhile, growth in the other BRIC countries (Brazil, Russia and India) will also remain at a high level. In this context it is noteworthy how the global growth pattern changes these years. Global manufacturing production and global trade

are back at the levels that prevailed before Lehman Brothers’ collapse in September 2008, which triggered the Great Recession. But this trend is largely driven by the Emerging Markets, especially the Asian economies. The old continents still have a long way to go to restore their economies to former levels of activity, and one of the key questions at present is whether a permanent structural shift has taken place. The Great Recession may have speeded up the deindustrialisation process in the Western world. Last, but not least, the best piece of news this summer – that the Euro area emerged unscathed from the sovereign debt crisis – supports our baseline scenario. If the debt crisis had escalated into a new financial meltdown, the risk of a new global recession would have been much higher. The EU’s and IMF’s joint EUR 750bn rescue package ensures that no country in the Euro area will end up having to suspend its payments, and the stress test of the major European banks has also contributed to easing fears. The ECB's efforts to get the money and capital markets working satisfactorily and to restore confidence among the financial players should also not be underes-timated. The bank has pursued an extremely loose mone-tary policy with historically low interest rates, unlimited supply of liquidity and purchases of government bonds. The ECB is facing huge challenges But the ECB is still facing huge challenges. The dual structure of the Euro-area growth pattern, with high growth in the northern part and low growth in the south-ern part, poses great challenges to the ECB when formu-lating its monetary policy. So far the ECB has taken a ve-ry pragmatic line, focusing on financial stability and growth. Its rhetoric towards politicians, meanwhile, has been increasingly harsh as the bank has demanded fiscal discipline and structural reforms. The need for the latter is most prominent in the southern European countries where a tough, but not unsolvable, task lies ahead. In this context it should be noted that up to now the IMF’s regu-lar statements on Greece’s austerity programme have been very positive. Most likely, any ultimate tightening of the extremely loo-se monetary policies in the Euro area and the US is not going to be sanctioned over the next 12 months or so. Capacity is still abundant and uncertainties about the up-swing are rife. Against this backdrop, the US Federal Re-serve recently announced that it will continue to purchase Treasuries for quite a while, and we do not expect the Fed to hike rates until Q4 2011. Consequently, the ECB is not likely to hike rates until around that time either, to avoid excessive EUR strengthening, which could stifle the recovery. From mid-2011 the US will again take the lead in terms of economic growth. The USD will strengthen again versus the EUR and throughout 2012 the Fed will hike rates slightly more aggressively than

Overview


the ECB. As a result, we see the USD appreciating ver-sus the EUR, bringing the EUR/USD cross to around 1.15 by the end of the forecast period. The expected monetary policy tightening will also cause long yields to rise, although not until late in the forecast period and probably not sharply. The low rate of inflation will continue to put a lid on interest rates, but we may still see wide yield spreads between the individual Euro-area countries going forward. Specifically, we expect both US and Euro-area long yields to remain around cur-rent levels in the coming 3-6 months when uncertainties about the economy will likely be rife. Then, when risk aversion declines, yields should edge up towards 3.50-3.75%, probably with the biggest increase in the US. Risk of new commodity shock The trend in commodity prices poses a risk to the growth and inflation outlook. The surge in commodity prices since last year and especially the sharp rise in oil prices have markedly lifted consumer price inflation, which, admittedly, is still below 2% in most countries. Recently, the forest fires in Russia have caused wheat prices to rise sharply, and this trend could spread to other food prices. Still, we are not overly concerned. Unlike a few years back when the labour market situation was different, the risk of consumer price rises leading to higher wage growth, triggering a price-wage spiral, is now very low. Late in the forecast period we see oil prices rising sharply to around USD 110/barrel, but even at this time we do not see a major risk of higher wage growth on ac-count of the pick-up in oil prices. However, there is cer-tainly a risk that such oil price rises could choke off the recovery. Historically, this has almost always been the case when oil prices have risen to such heights measured in terms of current prices. Healthy Nordic finances After a relatively slow start the Nordic economies have finally shifted into a higher gear. And there is a good chance that the ongoing economic upswing is sustainable because of the good starting point for public finances in all the Nordic countries ahead of the Great Recession. This means that the need for radical fiscal policy auster-ity measures is much smaller here than in most other countries. The Danish economy has returned to the growth path. The improvement has been aided by consumers now emerging from the shadow of the financial crisis and starting to loosen their purse strings again after being bolstered by income tax cuts and record-low interest ra-tes. Moreover, exporters have finally started to benefit from the decent global upswing. And public spending, while still making a positive contribution to growth, is passing the “growth baton” to the private sector. We ha-ve seen a clear improvement of the labour market situa-tion in 2010, but we do not expect the unemployment curve to finally break until early 2011. We see a modest

improvement of the housing market with increasing trad-ing activity and rising prices underpinned by the low level of interest rates. After a slow start in 2010, the Finnish economy began to gain momentum in the spring. Also, the outlook for the rest of the year is favourable. Next year, growth will begin to slow down relative to the brisk figures of H2 2010. In 2011, average GDP growth will be a little slower than this year. On the whole, the trend will be reasonably favourable in the next few years. Despite the broadness of the past recession, its impact has been fairly mild. GDP growth fell sharply, but the level of unemployment remained much lower than feared. Moreover, the general government deficit probably stayed below the EU’s 3% target, and next year the general government finances will again be close to balancing. In the May issue of Economic Outlook we revised down our forecast for growth in the Norwegian economy in 2010, and now we have to do it again. The main reason is that the Norwegian consumers seem to have been more prone to save rather than spend than we thought. Our view on the economy in 2011 is only marginally changed, and we still expect a modest upswing. The smaller-than expected pick-up in interest rates and higher-than-expected oil investment will to a great extent compensate for the more cautious-than-expected consumer behaviour. In 2012 we see growth accelerating sharply driven by stronger global growth and higher oil prices. With weaker growth in 2010 and prospects of interest rates outside Norway remaining low for a long time, any pick-up in Norwegian interest rates should be very modest. But Norwegian interest rates will begin to head higher before their Euro-area equivalents, and this should underpin a stronger NOK. The Swedish economy started to recover in mid-2009 and gained further momentum in 2010. GDP is seen growing by more than 4%. The export industry has bene-fitted from the improvement of global trade. Even if the international economy slows down, domestic demand will contribute to sustaining growth. Industrial produc-tion is rising and the order inflow indicates that the up-swing will continue. The labour market is improving, and public finances have strengthened along with rising em-ployment and is heading for balance already this year. The household sector is in good shape and car sales have surged. Inflation is subdued, but should pick up slightly in the next few years. The Riksbank started to hike the repo rate in July and further hikes are in the pipeline. We expect the repo rate to reach 1.25% at the end of 2010 and 3% in two years’ time Global Chief Economist Helge J. Pedersen [email protected] +45 3333 3126

Overview


Growth, % Inflation, %2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E

World1) 2.3 -1.0 4.1 3.5 4.1 World 4.7 0.7 2.5 2.2 2.1

BIG-32) 0.0 -3.5 2.1 1.8 2.4 BIG-3 3.3 -0.3 1.1 1.1 1.3USA 0.0 -2.6 2.5 2.0 3.0 USA 3.8 -0.3 1.6 1.4 1.3Japan3) -1.2 -5.2 2.4 1.8 2.0 Japan3) 1.4 -1.4 -1.4 -0.5 0.1Euro area 0.4 -4.1 1.6 1.4 1.8 Euro area 3.3 0.3 1.5 1.5 1.6

Germany 0.7 -4.7 3.0 1.8 2.2 Germany 2.8 0.3 1.2 1.4 1.6France 0.1 -2.5 1.6 1.5 1.8 France 3.2 0.1 1.6 1.4 1.7Italy -1.3 -5.1 1.0 1.1 1.5 Italy 3.5 0.6 1.6 1.7 1.6

Spain 0.9 -3.6 -0.6 0.0 0.8 Spain 4.2 -0.3 1.8 1.3 1.0Netherlands 1.9 -3.9 2.0 1.8 2.2 Netherlands 2.2 1.0 1.2 1.5 1.6Belgium 1.0 -2.8 1.8 1.6 2.0 Belgium 4.5 0.0 2.0 1.7 1.6Austria 2.2 -3.4 1.6 1.8 2.1 Austria 3.2 0.4 1.5 1.5 1.6Portugal 0.0 -2.6 0.8 0.7 1.0 Portugal 2.7 -0.9 0.9 1.1 1.2Greece 2.0 -2.0 -4.5 -2.6 1.0 Greece 4.3 1.3 4.4 1.3 1.0Finland 0.9 -8.0 3.5 3.0 3.5 Finland 4.1 0.0 0.8 2.0 2.5Ireland -3.0 -7.1 -0.5 1.0 2.5 Ireland 3.1 -1.7 -1.6 0.1 1.0

Denmark -0.9 -4.7 1.4 1.8 2.0 Denmark 3.4 1.3 2.2 1.8 2.0Sweden -0.4 -5.1 4.2 2.8 3.1 Sweden 3.4 -0.3 1.1 2.0 2.9Norway 1.8 -1.4 1.5 2.3 3.2 Norway 3.8 2.1 2.3 1.3 2.1Iceland3) 1.0 -6.5 -3.0 2.3 2.4 Iceland3) 12.4 12.0 6.2 3.8 3.3

UK -0.1 -4.9 1.5 1.5 2.0 UK 3.6 2.2 3.0 2.5 1.5Switzerland3) 1.8 -1.5 1.5 1.8 1.8 Switzerland3) 2.4 -0.4 0.7 1.0 1.0

Russia 5.6 -7.9 5.7 4.8 5.2 Russia 14.1 11.7 6.7 6.9 7.3Poland 5.1 1.8 3.4 3.0 3.7 Poland 4.4 3.8 2.7 3.1 2.3Estonia -3.6 -14.1 1.8 4.2 4.5 Estonia 10.6 -0.1 2.6 3.0 2.7Latvia -4.6 -18.0 -1.8 3.0 4.3 Latvia 15.3 3.6 -0.8 2.2 3.0Lithuania 2.8 -14.9 0.9 3.2 4.0 Lithuania 11.1 4.2 1.2 2.0 2.8

China 9.6 9.1 9.8 8.6 8.9 China 6.0 -0.7 3.3 3.0 3.0India 5.1 7.7 9.1 8.8 9.6 India 9.1 2.1 9.0 5.0 4.0Brazil 5.1 -0.2 7.6 4.6 5.1 Brazil 5.7 4.9 5.4 4.8 4.51) Weighted average of countries in this table. Accounts for 70.5% of world GDP. Weights calculated using PPP adjusted GDP levels for 2007 according to the IMF's World Economic Outlook

2) US, Japan and the Euro area

3) Source: IIMF WE O April 2010

Public finances, % of GDP Current account, % of GDP2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E

BIG-3 -2.9 -8.7 -8.2 -7.2 -5.6 BIG-3 - - - - -USA -3.2 -10.0 -9.5 -8.5 -6.2 USA -4.7 -2.7 -3.0 -2.5 -2.5Japan3) -4.2 -10.3 -9.8 -9.1 -8.5 Japan3) 3.2 2.8 2.8 2.4 2.1Euro area -2.0 -6.3 -5.8 -4.7 -3.5 Euro area -1.7 -0.8 -0.5 -0.2 -0.1

Germany 0.0 -3.3 -4.3 -3.3 -2.3 Germany 6.6 5.0 6.1 6.5 7.0France -3.3 -7.5 -7.9 -6.5 -5.8 France -2.3 -2.0 -1.9 -1.8 -1.6Italy -2.7 -5.3 -4.9 -3.5 -2.7 Italy -3.4 -3.2 -3.0 -2.9 -2.7Finland 4.2 -2.5 -2.5 -0.5 0.0 Finland 3.1 1.3 1.6 2.0 2.0

Denmark 3.4 -2.8 -4.9 -4.6 -3.7 Denmark 2.0 4.0 3.5 2.8 2.8Sweden 2.2 -1.0 0.0 0.5 1.1 Sweden 8.8 7.2 6.4 6.6 6.8Norway 19.3 9.9 12.4 14.6 18.0 Norway 17.7 14.2 15.3 15.7 19.0Iceland3) -0.5 -12.4 -9.4 -5.3 N/A Iceland3) -15.8 3.8 5.4 1.8 1.6

UK -4.9 -11.5 -10.5 -8.0 -6.0 UK -1.5 -1.3 -1.1 -1.0 -0.5Switzerland3) 0.8 1.4 -1.0 -0.9 -0.9 Switzerland3) 2.4 8.7 9.5 9.6 9.8

Russia 4.1 -5.3 -5.2 -3.5 -2.8 Russia 6.2 3.9 5.0 4.5 3.0Poland -3.7 -7.1 -6.0 -5.0 -3.5 Poland -5.0 -1.6 -2.2 -1.6 -0.6Estonia -2.7 -1.7 -2.2 -1.9 -1.5 Estonia -9.1 4.6 4.0 2.0 0.8Latvia -4.1 -9.0 -7.2 -5.8 -3.0 Latvia -13.0 9.4 7.0 4.0 3.3Lithuania -3.2 -8.9 -7.8 -6.0 -3.0 Lithuania -11.9 3.8 3.0 2.5 1.5

China -0.4 -2.1 -3.0 -2.2 -1.8 China 9.6 6.1 4.5 4.1 3.7India -6.0 -6.5 -5.5 -5.0 -4.5 India -2.2 -2.1 -2.2 -2.0 -2.3Brazil -1.6 -3.2 -2.7 -2.0 -1.8 Brazil -1.8 -1.5 -2.5 -3.0 -3.0

Overview


Monetary policy rates Monetary policy rate spreads vs Euro area24.8.10 3M 6M 12M 24M 24.8.10 3M 6M 12M 24M

US 0.25 0.25 0.25 0.25 2.00 US -0.75 -0.75 -0.75 -0.75 0.00Japan 0.10 0.10 0.10 0.10 0.50 Japan1 -0.15 -0.15 -0.15 -0.15 -1.50Euro area 1.00 1.00 1.00 1.00 2.00 Euro area - - - - -Denmark 1.05 1.05 1.05 1.05 2.25 Denmark 0.05 0.05 0.05 0.05 0.25Sweden 0.50 1.00 1.25 1.75 3.00 Sweden -0.50 0.00 0.25 0.75 1.00Norway 2.00 2.00 2.00 2.25 3.50 Norway 1.00 1.00 1.00 1.25 1.50UK 0.50 0.50 0.50 0.50 2.00 UK -0.50 -0.50 -0.50 -0.50 0.00Switzerland 0.25 0.25 0.25 0.50 1.00 Switzerland -0.75 -0.75 -0.75 -0.50 -1.00Poland 3.50 3.50 3.75 4.25 4.75 Poland 2.50 2.50 2.75 3.25 2.75Czech Rep. 0.75 0.75 0.75 1.00 2.00 Czech Rep. -0.25 -0.25 -0.25 0.00 0.00Hungary 5.25 5.25 5.25 5.75 6.50 Hungary 4.25 4.25 4.25 4.75 4.50Turkey 7.00 7.00 7.00 8.00 8.50 Turkey 6.00 6.00 6.00 7.00 6.50Russia 7.75 7.75 7.75 8.25 9.00 Russia 6.75 6.75 6.75 7.25 6.75China 5.31 5.31 5.31 5.31 5.31 China 4.31 4.31 4.31 4.31 3.31India 5.75 6.00 6.25 6.50 6.50 India 4.75 5.00 5.25 5.50 4.50Brazil 10.75 11.75 11.75 11.75 11.75 Brazil 9.75 10.75 10.75 10.75 9.75

1) Spread vs US

3-month rates 3-month spreads vs Euro area24.8.10 3M 6M 12M 24M 24.8.10 3M 6M 12M 24M

US 0.32 0.40 0.50 0.80 2.35 US -0.57 -0.50 -0.50 -0.40 0.10Euro area 0.89 0.90 1.00 1.20 2.25 Euro area - - - - -Denmark 1.14 1.25 1.35 1.70 2.60 Denmark 0.25 0.35 0.35 0.50 0.35Sweden 1.03 1.45 1.65 2.05 3.15 Sweden 0.14 0.55 0.65 0.85 0.90Norway 2.64 2.55 2.55 2.79 3.80 Norway 1.75 1.65 1.55 1.59 1.55UK 0.72 0.75 0.75 0.80 2.30 UK -0.17 -0.15 -0.25 -0.40 0.05Poland 3.81 3.90 4.25 4.75 5.25 Poland 2.92 3.00 3.25 3.55 3.00Czech Republic 1.24 1.25 1.25 1.60 2.50 Czech Republic 0.35 0.35 0.25 0.40 0.25Hungary 5.34 5.30 5.60 6.25 7.00 Hungary 4.45 4.40 4.60 5.05 4.75Russia 3.75 3.80 4.00 4.50 6.00 Russia 2.86 2.90 3.00 3.30 3.75Estonia 1.18 1.05 1.00 1.20 2.25 Estonia 0.29 0.15 0.00 0.00 0.00Latvia 1.25 1.10 1.30 1.80 2.00 Latvia 0.36 0.20 0.30 0.60 -0.25Lithuania 1.70 1.80 2.20 2.50 2.80 Lithuania 0.81 0.90 1.20 1.30 0.55

10-year government benchmark yields 10-year yield spreads vs Euro area24.8.10 3M 6M 12M 24M 24.8.10 3M 6M 12M 24M

US 2.52 2.50 2.70 3.20 3.75 US 0.34 0.20 0.05 0.00 0.35Euro area 2.18 2.30 2.65 3.20 3.40 Euro area - - - - -Denmark 2.25 2.40 2.75 3.30 3.50 Denmark 0.07 0.10 0.10 0.10 0.10Sweden 2.32 2.45 2.80 3.35 3.75 Sweden 0.14 0.15 0.15 0.15 0.35Norway 3.12 3.12 3.38 3.87 4.25 Norway 0.94 0.82 0.73 0.67 0.85UK 2.88 2.90 3.20 3.75 4.10 UK 0.69 0.60 0.55 0.55 0.70Poland 5.43 5.50 5.60 5.70 5.75 Poland 3.24 3.20 2.95 2.50 2.35Czech Rep. 3.47 3.60 3.75 4.25 4.50 Czech Rep. 1.29 1.30 1.10 1.05 1.10Hungary 6.96 7.10 7.00 7.25 7.50 Hungary 4.78 4.80 4.35 4.05 4.10

Exchange rates vs EUR Exchange rates vs USD

24.8.10 3M 6M 12M 24M 24.8.10 3M 6M 12M 24MEUR/USD 1.261 1.32 1.27 1.20 1.15 -EUR/JPY 105.9 114 114 118 127 USD/JPY 84.02 86.0 90.0 98.0 110EUR/DKK 7.449 7.46 7.46 7.46 7.46 USD/DKK 5.908 5.65 5.87 6.21 6.48EUR/SEK 9.421 9.45 9.20 9.10 9.10 USD/SEK 7.472 7.16 7.24 7.58 7.91EUR/NOK 7.953 8.00 7.90 7.70 7.70 USD/NOK 6.307 6.06 6.22 6.42 6.70EUR/GBP 0.818 0.83 0.82 0.80 0.77 GBP/USD 1.541 1.59 1.55 1.50 1.49EUR/CHF 1.314 1.34 1.30 1.28 1.28 USD/CHF 1.042 1.02 1.02 1.07 1.11EUR/PLN 4.020 4.10 3.90 3.90 3.70 USD/PLN 3.189 3.1 3.1 3.3 3.2EUR/CZK 24.91 25.3 25.0 24.8 24.0 USD/CZK 19.75 19.1 19.7 20.6 20.9EUR/HUF 285.7 280 270 265 270 USD/HUF 226.6 212 213 221 235EUR/TRY 1.93 2.00 2.00 2.10 2.10 USD/TRY 1.53 1.59 1.59 1.67 1.67EUR/RUB 38.97 39.3 37.5 34.3 31.6 USD/RUB 30.91 30.0 29.5 28.6 27.5EUR/EEK 15.65 15.6 15.6 15.6 15.6 USD/EEK 12.41 11.9 12.3 13.0 13.6EUR/LVL 0.708 0.71 0.70 0.70 0.70 USD/LVL 0.562 0.54 0.55 0.58 0.61EUR/LTL 3.453 3.45 3.45 3.45 3.45 USD/LTL 2.738 2.62 2.72 2.88 3.00EUR/CNY 8.570 8.91 8.51 7.80 6.96 USD/CNY 6.797 6.75 6.70 6.50 6.05EUR/INR 59.13 59.4 57.2 52.8 51.8 USD/INR 46.90 45.0 45.0 44.0 45.0EUR/BRL 2.244 2.48 2.39 2.20 2.07 USD/BRL 1.780 1.88 1.88 1.83 1.80

Denmark


Economy back on the growth track • Consumers out of the shadow of the financial crisis

• Public sector passing the baton to the private sector

• Employment set to grow in 2011

• Tentative housing market pick-up

The Danish economy has slowly but steadily returned to the growth path. The improvement has been aided by consumers now emerging from the shadow of the finan-cial crisis and starting to loosen their purse strings again after being bolstered by income tax cuts and record-low interest rates. Moreover, exporters have finally started to benefit from the decent global upswing. And public spending is still making a positive contribution to growth, albeit on borrowed time. Public spending under pressure A sharp increase in public spending and investment du-ring the crisis has to some degree offset the decline in private-sector activity. The automatic stabilisers kicked in, with the economic setback leading to shrinking tax re-ceipts and rising transfer income expenses. Consequent-ly, public budgets have deteriorated sharply. We expect this year’s deficit to reach 4.9% of GDP, which is the largest deficit in 25 years. With the EU’s covergence programme as a guideline, the government has initiated a sweeping restoration plan, aiming at low growth in pub-lic spending from 2011 to 2013. However, given the past difficulty in reaching long-term goals, we expect the election year of 2011 to bring a moderate increase in public spending of 0.8%, while in 2012 we see a good chance of a minor drop once growth in the global eco-nomy accelerates again.

Private sector to drive growth in future The public sector is thus passing the “growth baton” to the private sector, which is to drive economic growth going forward. So far private consumption and exports have provided the first signs of the private sector being able to run with the baton. But we have not yet seen posi-tive growth in business investment and residential construction. Fortunately, the arrow points in the right di-rection for business investment. The manufacturing sec-tor’s order books are starting to fill up again concurrently with a rise in capacity utilisation. The conditions thus seem in place for an uptick in business investment as ear-ly as next year. At the same time destocking may stop as early as this year, which may contribute positively to growth. Residential investment, on the other hand, is un-likely to provide any help until 2012. In 2009 housing starts had plunged to a 59-year low and the number of completed units in 2010 therefore looks set to be the lo-west in the almost 60 years on record. Unemployment curve to break in early 2011 During the severe economic downturn, labour market trends have been subject to much mystery. At first glance total employment has dropped by just over 180,000 per-sons from its peak, while official unemployment figures have only edged higher by 70,000. The significant devia-tion is due to the combination of the surge in persons en-gaged in labour market schemes, a large number of per-sons not eligible for unemployment benefits and a shrinking labour force, with the pool of available labour being reduced by the outflow of foreign labour. Going forward the gross number of unemployed (including people in labour market schemes) is expected to increase moderately during the autumn. The increase will first and foremost be triggered by continued low capacity utilisa-

Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (DKKbn) 2008 2009 2010E 2011E 2012E

Private consumption 822 -0.2 -4.6 3.2 2.2 1.7Government consumption 439 1.6 3.4 1.2 0.8 -0.2Fixed investment 380 -4.7 -13.0 -6.0 3.7 2.7 - government investment 31 -2.9 12.4 19.3 1.0 -7.6 - residential investment 117 -14.2 -18.1 -8.9 -0.3 1.6 - business fixed investment 231 -0.1 -13.9 -9.0 5.6 5.3Stockbuilding* 10 0.3 -1.7 0.8 0.3 0.0Exports 886 2.4 -10.2 3.3 5.1 5.4Imports 845 3.3 -13.2 5.2 6.6 4.3GDP -0.9 -4.7 1.4 1.8 2.0Nominal GDP (DKKbn) 1,691 1,737 1,662 1,714 1,767 1,840

Unemployment rate, % 1.8 3.4 4.4 4.7 4.5Unemployment level, '000 persons 48.1 92.2 118.2 128.0 122.3Gross unemployment level, '000 persons 74.2 130.6 170.4 189.5 179.6Consumer prices, % y/y 3.4 1.3 2.2 1.8 2.0Hourly earnings, % y/y 4.5 2.9 2.4 2.1 2.2Nominal house prices, one-family, % y/y -4.5 -13.2 4.0 2.0 2.0Current account (DKKbn) 35.2 65.9 60.0 50.0 52.0 - % of GDP 2.0 4.0 3.5 2.8 2.8

General govt. budget balance (DKKbn) 59.8 -47.0 -85.0 -81.0 -68.0 - % of GDP 3.4 -2.8 -4.9 -4.6 -3.7Gross public debt, % of GDP 34.2 41.4 43.5 46.0 48.0

* Contribution to GDP growth (% points)

Denmark


tion, enabling businesses to scale up production without hiring additional manpower – beneficial for productivity but detrimental for unemployment. Moreover, the prospect of slightly falling employment in the public sector will re-duce the number of job vacancies and job-seekers’ chances of finding employment. With the unemployment curve set to finally break in early 2011, we expect employment to start climbing a bit next year, while unemployment will peak at an average of 128,000 full-time unemployed, or a gross unemployment rate of almost 7%. Prospect of low wage growth With unemployment set to remain high and only slowly declining in the years ahead, wage growth is likely to be very moderate. Not least in the public sector where slug-gish wage formation has deferred negative adjustments to 2011, the stage is set for very weak nominal wage growth in the coming years. This will inevitably put pressure on real wages and thus mean lower growth in consumers’ real purchasing power. Moreover, consumer spending will not be boosted by tax breaks and interest rate cuts to the same extent as this year, and we therefore expect consumer spending to grow at slightly lower rates in 2011 and 2012 than this year. Tentative housing market pick-up A good gauge of the health of the Danish economy is the trend in the housing market where in particular strong trading activity has many positive spill-over effects on the rest of the economy. The sharp drops in mortgage rates seen since end-2008 lent a welcome helping hand to the then badly ailing housing market. The combination of interest rate declines and falling house prices has gener-ally made it more affordable for first-time buyers and people upgrading to larger homes – as reflected in mod-erately rising trading activity. Prices per square meter have also begun to climb, but measured by housing af-fordability, it has not become more expensive to buy a home, as continued falling long mortgage rates have compensated for the higher home prices. The key driver in the Danish housing market has been the Greater Co-penhagen area – it has the lowest supply of homes for sale and the highest increase in trading activity and prices. Going forward we expect house prices to rise moderately. This year and the next, house prices will benefit from continued low interest rates, and growing employment may take over when interest rates start to move up. However, there are still many homes for sale and it is a buyer’s market in large parts of the country, so there are very slim chances of a nation-wide price surge. If house prices should rise sharply, they will most likely decline again once interest rates start to move higher. Troels Theill Eriksen [email protected] +45 3333 2448

Jan Størup Nielsen [email protected] +45 3333 3171

Order books no longer shrinking

96 98 99 00 01 02 03 04 05 06 07 08 09 10-25

-20

-15

-10

-5

0

5

10

15

20

25

30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30% y/y % y/y

Gross capital formation, machines and equipment, 2Q mov. avg.

New orders, manufacturing ex. ships,2Q mov. avg., advanced 1Q

Source: Statistics Denmark and own forecasts Easier said than done to manage public spending

02 03 04 05 06 07 08 09 10 11 12-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0% of GDP% of GDP

Actual government consumption growth Planned government consumption growth

Nordea forecast

Source: Statistics Denmark, the Finance Ministry and own forecasts Unemployment curve to peak in early 2011

00 01 02 03 04 05 06 07 08 09 10 11 120

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225Persons ('000)

Forecast

Persons ('000)

Unemployed

Gross unemployed

Source: Statistics Denmark and own forecasts Home buyers starting to come back

99 00 01 02 03 04 05 06 07 08 0919

20

21

22

23

24

25

26

27

28

60

70

80

90

100

110

120% of disp. income

DanBolig house sales,12M mov. avg.

Housing burden, rhs

Index2004=100

Source: Nordea and Danbolig

Sweden


Swift recovery • GDP growth is high, but will slow in 2011

• Rising capacity utilisation

• Repo rate hike to 2% in 2011

The Swedish economic recovery is taking place at a fast pace. Domestic demand started to recover already in mid-2009 and when the export sector shifted into a higher gear in H1 2010, the recovery gained further mo-mentum. We see GDP growth above 4% this year. The global economy is expected to go through a calmer re-covery period in the coming quarters, and this will also affect the Swedish economy with a time lag. However, thanks to benign domestic conditions GDP growth may still remain fairly strong also next year. With rising global demand we see Swedish GDP growth accelerating again in 2012. Increased demand for Swedish exports Global trade has recovered fast over the past year and this has provided a strong boost to Swedish exports. The new orders data continue to improve, which points to sustained strong growth during the remainder of the year. But gradually the lower global growth momentum will likely spill over to Swedish exports. Even so, by mid-2011 we expect Swedish goods exports to be back at the levels prevailing before the crisis began two years ago. Longer out, our forecast is fraught with uncertainty. As notably the US economy is expected to strengthen, global demand should pick up again with positive spill-over ef-fects on the Swedish export industry towards the end of the forecast period. Domestic economy a key growth driver Households have contributed strongly to the recovery. Consumer spending began to pick up already in mid-

2009. There is much to indicate that private consumption will remain a key growth driver going forward. Not least the improved labour market situation has resulted in ris-ing household income. In addition, we expect household tax cuts for some SEK 15bn over the next two years. And as household savings already are at a high level and con-sumer confidence is good, we think households will be more inclined to spend the additional income. The trend in home prices has flattened this year after last year’s in-crease. New regulations on loan limits, uncertainty about the property tax and a Riksbank signalling rate hikes in the pipeline may have contributed to this. Interest rates will no doubt rise going forward, but as the interest rate rise will be relatively modest and the conditions for households are generally very good, the effect on both home prices and consumption should be limited. In contrast to the flattening home prices, residential in-vestment has rebounded. This shows that households are still active in the housing market. And rising residential investment was a key factor behind the upswing in busi-ness investment in Q2 2010. The increase was broadly-based, with both the manufacturing sector and certain service sectors expanding. The increased investment ac-tivity reflects rising production, higher corporate earn-ings as well as strong business confidence. Investment activity is expected to remain strong going forward. Rapid decline in unemployment As a result of the fast, broadly-based economic upswing, demand for labour has increased. The growing number of vacancies and companies’ very optimistic hiring plans, suggest that the upswing will continue. So far the rise in employment has not fed through to the jobless numbers in earnest. The reason is that the supply of labour has in-creased sharply over the past year, and one explanation

Sweden: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (SEKbn) 2008 2009 2010E 2011E 2012E

Private consumption 1,460 -0.1 -0.8 3.0 2.5 2.5Government consumption 797 1.3 1.7 1.1 0.9 0.7Fixed investment 612 1.7 -16.0 3.8 6.5 7.0 - industry 95 2.7 -22.3 -2.8 12.4 11.3 - residential investment 121 -9.5 -23.4 15.6 9.8 6.3Stockbuilding* 23 -0.5 -1.5 1.5 0.0 0.0Exports 1,621 1.4 -12.4 11.4 6.7 6.0Imports 1,388 2.9 -13.2 12.6 7.2 6.0GDP -0.4 -5.1 4.2 2.8 3.1Nominal GDP (SEKbn) 3,126 3,214 3,108 3,264 3,397 3,564

Unemployment rate, % 6.2 8.3 8.4 7.7 7.1Employment growth 1.2 -2.1 0.9 1.1 1.0Consumer prices, % y/y 3.4 -0.3 1.1 2.0 2.9Underlying inflation (CPIF), % y/y 2.7 1.9 1.9 1.4 1.9Hourly earnings, % y/y 3.9 3.0 2.3 3.0 4.0Current account (SEKbn) 283 224 210 225 244 - % of GDP 8.8 7.2 6.4 6.6 6.8Trade balance, % of GDP 3.8 3.5 3.1 3.3 3.5

General govt budget balance (SEKbn) 71 -32 -1 17 40 - % of GDP 2.2 -1.0 0.0 0.5 1.1Gross public debt, % of GDP 37.6 41.5 38.1 37.6 36.2


Sweden


for this is that the number of persons participating in la-bour market schemes has increased. As these schemes are increasingly focused on job finding, both the labour supply and unemployment have risen. The in-work tax credit and the health insurance reform may also have helped attracting more people to the labour market. The pace of labour supply growth should decline sharply go-ing forward as the number of people participating in la-bour market schemes stabilises. Hence, the pick-up in employment will increasingly show through in the job-less numbers. There is significant uncertainty about the long-term equi-librium level for unemployment, but we think that it has risen over the past years. No doubt, it will take some time before unemployment is back at the low pre-crisis levels, but historically a jobless rate of 6-7% has been tanta-mount to difficulties for the companies in recruiting staff. The shortage of labour is increasing and had already reached levels around the historical average in Q2 2010, which might be an indication that the structural unem-ployment rate (NAIRU) has risen. Rising inflation over time The growing labour shortage is a function of the high growth and is one of several signs that the Swedish re-covery is fast. Also the pick-up in investment illustrates that capacity utilisation is increasing as the companies appear already now to feel a need for increased produc-tion capacity. With rising activity, public finances are improving and probably balance as early as this year. Strong public finances point to further fiscal stimulus measures in the years ahead. Inflation pressures are currently modest, but the rising capacity utilisation impacts on the outlook for inflation longer out. And the level of inflation will most likely be very different ahead of the next round of pay talks which by all accounts will start during the autumn of 2011. We see much stronger pay rises in 2012 compared to this year’s historically low wage growth. As a result, domes-tic cost pressures will rise. This environment will not make it difficult for the Riksbank to find arguments sup-porting a repo rate hike from the current very low level. We see the repo rate at 1.25% at the turn of this year and at 2.00% at end-2011. The Riksbank’s rate hikes will likely cause the SEK to strengthen – bringing the EUR/SEK cross to just over 9 over the next 12 months The election presents a risk The risks to our forecasts are mostly related to the global economy. The domestic risks include the upcoming gen-eral election. A change of government or an unresolved parliamentary situation after the election may trigger SEK weakening in the short term. Also the equity mar-kets are uncertainties that could hit household finances. Torbjörn Isaksson [email protected] +46 8 614 8859

Swedish exports rise in tandem with global trade

94 96 98 00 02 04 06 08 10 12100

125

150

175

200

225

250

275

300

325

350

55

65

75

85

95

105

115

125

135

145USDbn

Forecast

Global trade, advancedeconomies, fixed prices

Swedish exportsof goods, sa., rhs

SEKbn

Household income increases

02 03 04 05 06 07 08 09 10 11 125

6

7

8

9

10

11

12

13

-1

0

1

2

3

4

5

6% y/y

Forecast

Consumption

Real incomeSavings ratio,rhs

% af disp. income

Lower unemployment; increased labour shortage

00 01 02 03 04 05 06 07 08 09 10 11 125.5

6.0

6.5

7.0

7.5

8.0

8.5

9.04

9

14

19

24

29

34

39

44 Forecast

Share of companiesreporting labourshortage (reversed axis)

%

Unemployment,rhs

% of labour force

Inflation will rise over time

02 03 04 05 06 07 08 09 10 11 12-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5% y/y

Note: CPIF is a measure of underlying inflation (CPI with constant mortgage rates)

CPIF

CPI% y/y

Forecast

Norway


Consumer spending disappoints • Low growth and inflation – 2012 will be better

• No interest rate hike until well into 2011

• NOK to strengthen in 2011 on the back of rate hikes

Growth disappoints – but will improve in 2012 In the May issue of Economic Outlook we revised down our growth forecast for 2010, and now we have to do it again, mainly because the Norwegians have been more prone to save rather than to spend than we thought. But we see no reason to revise down our GDP growth forecast for 2011. The pick-up in interest rates looks set to become smaller than we expected, which will add stimulus to consumer spending. Higher oil sector invest-ment next year than originally assumed will also help underpinning GDP growth. For the first time we now publish our forecast for 2012. We see global growth rising in that year, which will boost Norwegian export growth and result in higher oil prices and a further increase in oil sector investment. Corporate profitability will pick up, the labour market will tighten slightly and wage growth will edge higher. This will underpin consumer spending growth while Norges Bank accelerates its monetary policy tightening. Consumers more cautious The significant rate cuts in 2008 and 2009 sharply boosted household income growth. To begin with, con-sumers chose to save the additional income. When their savings had reached a fairly high level, consumers al-lowed themselves to spend more of the additional income in 2009. And consumption rose sharply. We had ex-pected the low level of interest rates and reduced eco-

nomic uncertainty to put a floor under consumer spend-ing growth. But consumer spending growth remained weak during the first six months of this year. To some extent we see this as a sign that consumers are more prone to save than we had assumed. Tighter credit stan-dards for households may also have contributed to dampen consumption growth. However, we still stick to our view that consumer spend-ing growth will gradually pick up. Real disposable in-come growth is relatively high, the level of unemploy-ment is moderate and interest rates are low. Oil sector investment rising Oil sector investment has fallen somewhat from the high level in early 2009, but there is now every indication that investment is rising again. Oil companies' investment plans point to markedly higher investment activity in 2011 than in 2010. This means better times for the oil services industry. The improvement is already beginning to show through in current production numbers and cor-porate surveys. In 2012 we see oil prices moving higher again. More projects will become profitable, and oil sec-tor investment may increase further. Also the mainland economy is showing signs of rising corporate investment. Low interest rates, looser credit standards and brighter prospects for many industries all point towards rising investment activity. But the already high investment level suggests that the pick-up will be moderate. Housing investment growth, meanwhile, will likely be stronger. Home prices have increased, and sus-tained low interest rates and low unemployment point to a sustained, albeit smaller than originally expected, in-crease in home prices during the rest of 2010. In 2011 we see only a minor, if any, increase in home prices.

Norway: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (NOK bn) 2008 2009 2010E 2011E 2012E

Private consumption 940 1.6 0.2 2.3 2.2 3.0Government consumption 447 4.1 4.7 3.0 2.0 2.0Fixed investment 504 2.0 -9.1 -2.6 5.6 5.7 - gross investment, mainland 376 -1.4 -11.7 -1.8 3.5 4.3 - gross investment, oil 113 5.5 2.4 -5.0 12.0 10.0Stockbuilding* 33 -0.3 -2.2 2.0 0.0 0.0Exports 1,040 1.0 -4.0 -0.4 0.8 1.5 - crude oil and natural gas 480 -2.0 -1.2 -3.2 -0.6 -0.6 - other goods 302 4.2 -8.2 5.0 2.5 4.3Imports 691 4.3 -11.4 7.8 3.9 3.7GDP 2,272 0.8 -1.4 0.7 1.7 2.4GDP, mainland 1,724 1.8 -1.4 1.5 2.3 3.2

Unemployment rate, % 2.6 3.2 3.6 3.9 3.7Consumer prices, % y/y 3.8 2.1 2.3 1.3 2.1Core inflation, % y/y 2.6 2.6 1.5 1.5 2.1Annual wages (incl. pension costs), % y/y 6.0 4.5 3.4 3.8 4.3Current account (NOKbn) 466.6 337.4 395.5 429.5 582.9 - % of GDP 17.7 14.2 15.3 15.7 19.0Trade balance, % of GDP 19.1 14.8 15.7 15.7 19.0

General govt budget balance (NOKbn) 484.7 234.7 320.0 400.0 550.0 - % of GDP 19.3 9.9 12.4 14.6 18.0


Norway


Slowing export growth Traditional goods exports rose sharply in H2 2009, but there are now clear signs of slowdown in this area. More subdued economic growth in Norway's key trading part-ners and a continued erosion of competitive power point to sustained moderate export growth at least until the global economy gains further momentum in 2012. Balanced labour market and low inflation There are signs that unemployment has peaked, but with our expectation of moderate growth we do not see the la-bour market situation tighten any time soon. A lower rate of increase in public sector employment after the past years’ strong growth points in the same direction. Despite rising economic growth in 2012 we expect the drop in joblessness to be fairly modest. Companies were careful not to lay off too many people during the down-turn, to limit the need for new hirings once activity picks up again. Growing labour supply when the economy im-proves will also dampen the fall in unemployment. Before the financial crisis the labour market was over-heated with very high wage growth. But as the labour market situation became more balanced, wage growth slowed. We expect sustained relatively moderate wage growth in the coming years, although it may pick up slightly in 2012. This will contribute to putting a lid on price increases and keep inflation below the 2.5% target. But the dampening effect of the NOK’s appreciation over the past one to two years will fade and cause core infla-tion to rise slightly. Interest rates to stay low for some time yet Despite the expected relatively low GDP growth, stable capacity utilisation and moderate inflation level in 2010 and most of 2011, we see interest rates rising slightly in 2011 and more in 2012. The rate of increase from the current low level will accelerate over the forecast period. We expect Norwegian long yields to largely track Euro-area equivalents, with no major changes to yield spreads. NOK appreciation – over time Rates hikes or expectations of imminent rate hikes are not on the cards for 2010, and we see EUR/NOK trading around 8.00 during the rest of the year. Changes in inter-national investors’ risk appetite may periodically result in relatively wide fluctuations, though. In H1 2011 we ex-pect Norges Bank to hike its policy rate while the ECB signals unchanged interest rates. When the market is con-vinced that Norges Bank will indeed hike rates, the NOK may strengthen quite sharply. We expect sustained NOK strength throughout 2012 despite rate hikes also from the ECB. As global economic growth becomes more robust, we see rising risk appetite and much higher oil prices, which will underpin a strong NOK Erik Bruce [email protected] +47 2248 7977

Declining retail sales

07 08 09 10111

112

113

114

115

116

117

118

111

112

113

114

115

116

117

118Index2005=100

Retail sales Index2005=100

Trend (4M centered mov. avg.)

Corporate investment remains at relatively high level

01 02 03 04 05 06 07 08 0980

100

120

140

160

180

200

80

100

120

140

160

180

200Investment mainland Index

Jan 2001=100

Firms

Dwellings

Index Jan 2001=100

Is the labour market starting to improve?

04 05 06 07 08 09 10-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

Labour supply

Employment

% y/y% y/y

Growth in imported goods prices about to bottom

05 06 07 08 09 10-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Note: 4M centered mov. avg.

% y/y % y/y

Import weighted NOK6M advanced

Prices on imported goods, rhs

Finland


Recovery at fluctuating speed • Growth will peak during the winter

• Speed still reasonably good in the next few years

• Surprisingly low unemployment – sluggish decrease

• General government close to balance next year

After a slow start in 2010, the Finnish economy started to pick up in the spring. Based on preliminary data, the total production increased more than 4% in Q2 compared to one year ago. Also, the outlook for the rest of the year is favourable. Growth will continue to accelerate, and towards the end of the year GDP growth may reach 6-7%. During the next year, growth will begin to slow down from the brisk figures of H2 2010. In 2011, GDP will on average grow a little slower than this year. On the whole, the trend will be reasonably favourable in the next few years. Despite the broadness of the past recession, its impact has been fairly mild. GDP took a huge drop, but the level of unemployment remained much lower than feared. Moreover, the general government deficit never exceed-ed the EU’s 3% target, and next year general government finances will again be close to balancing. The reason for the fairly mild impact is that the sharp drop in GDP was mainly the result of a decrease in capital-intensive exports. The international financial crisis remained distant for households and many Finnish SMEs, and the low interest rates and favourable income trend quickly returned confidence and propensity to consume. Moderate export growth after a leap Export growth picked up speed in early 2010, and the outlook for the rest of the year remains good – especially

when the impact of the weakened currency starts to show. This year’s growth leap is proving stronger than previously expected with the export of base metals and forest industry as the main driver. Export growth will naturally fade next year, as available capacity will diminish and the comparison levels will have risen substantially. The leading indicators are already showing that growth will peak next winter. Nevertheless, we forecast that the global economy will grow at a decent speed in the next few years and drive Finnish exports. Residential construction growing briskly In the next few years, the recovery of exports will also be reflected in companies’ machinery and equipment investments, which will, however, continue to contract this year along with office and commercial construction. On the other hand, residential construction has grown so much that, on the whole, construction investment is now growing. Part of the increase in residential construction is based on fiscal stimulus, but the demand outlook is favourable also after the subsidised construction starts to slow down. Consequently, residential construction is, after a slump, rising quickly above the previous peak. The momentum of residential construction is based on the activity of the housing market, supported by the low interest rate level. When the recession hit Finland, the housing market stagnated for a while and prices fell, but the turn towards the better already coincided with the equity market. The momentum will continue to be strong next year, as the rise in interest rates will be moderate in the next few years and the labour market situation is improving. Growth in housing supply will probably curb a price rise but not stop it.

Finland: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (EURbn) 2008 2009 2010E 2011E 2012E

Private consumption 91 1.7 -1.9 2.4 2.6 3.0Government consumption 39 2.4 1.2 0.5 0.5 1.0Fixed investment 38 -0.4 -14.7 0.7 4.1 5.0Stockbuilding* 3 -0.9 -1.5 0.6 0.0 0.0Exports 82 6.3 -20.3 10.0 6.9 8.0Imports 73 6.5 -18.1 7.5 6.3 7.8GDP 0.9 -8.0 3.5 3.0 3.5Nominal GDP (EURbn) 179.7 184.6 171.3 179.0 188.3 197.9

Unemployment rate, % 6.4 8.2 8.5 8.1 7.7Industrial production, % y/y -0.3 -17.8 10.0 5.0 6.0Consumer prices, % y/y 4.1 0.0 0.8 2.0 2.5Hourly wages, % y/y 5.5 3.9 2.7 2.3 2.5Current account (EURbn) 5.8 2.3 2.8 3.8 4.0 - % of GDP 3.1 1.3 1.6 2.0 2.0Trade balance (EURbn) 6.9 3.5 3.9 4.5 5.0 - % of GDP 3.7 2.0 2.2 2.4 2.5

General govt budget balance (EURbn) 7.7 -4.3 -4.5 -1.0 0.0 - % of GDP 4.2 -2.5 -2.5 -0.5 0.0Gross public debt (EURbn) 63.0 75.4 85.0 91.0 97.0 - % of GDP 34.1 44.0 47.5 48.3 49.0


Finland


Consumption to grow moderately Private consumption has also recovered favourably this year, driven by both consumers’ confidence and growth in disposable income. When the recession hit Finland, households increased their savings considerably and the savings ratio peaked higher than ever since 1995. The dip in private consumption was, however, minor, as disposable income increased heavily in 2008–09. Consequently, the previous consumption peak will be exceeded already this year. Next year, growth in private consumption will continue to be moderate. The rise in real wages will be small, but real disposable income will on the whole grow a couple of per cent. The savings ratio will probably decrease due to low interest rates and strong confidence. However, the savings ratio will be higher than in the past 10 years on average. Employment will recover slowly The unemployment rate rose clearly less than feared during the recession. Part of the small rise in unemployment is explained by the substantial reduction in the workforce; one reason being growth in the number of retirees. Nevertheless, employment has already started to grow. It is, however, doubtful that employment would increase briskly in the next few years even though decent economic growth supports a moderate increase in employment. During the recession, companies held on to skilled labour and often used temporary lay-offs. Consequently, the surprisingly small rise in employment will probably be followed by a relatively mild fall in the unemployment rate. Lately, inflation has fluctuated due to changes in energy and food prices as well as in taxation. Fundamentally, the price rise has, however, slowed down after the recession, and the relatively slow wage growth will also restrain price pressures in the next few years. Inflation will remain around 2% in the next few years. Positive surprise in public finances The spotlight will be on fiscal policy during the winter, as Finland prepares for the parliamentary election in the spring. The main point of interest will be taxation. As a result, the total tax rate may rise rather than fall even though the government is not planning on tightening in-come taxation. Cost cuts cannot be avoided in the 2012 budget although the overall situation of the Finnish pub-lic sector is quite good. This year will be another year with the general government deficit not exceeding 3% of GDP and in 2011 balance is quite close. The target is, however, to balance central government finances, which means that the total general government surplus must be more than 2% of GDP. Reijo Heiskanen [email protected] +358 9 165 59942

Growth moderates next year

00 01 02 03 04 05 06 07 08 09 10 11 12-10

-8

-6

-4

-2

0

2

4

6

8

10

75

80

85

90

95

100

105

110

115

120

Forecast

Economic sentiment indicatorIndex

GDP, rhs

% y/y

Consumers more upbeat than industry

00 01 02 03 04 05 06 07 08 09 10-40

-30

-20

-10

0

10

20

30

-10

-5

0

5

10

15

20

25Net balance

Manufacturing confidence, rhs

Consumer confidenceNet balance

Unemployment peaked at surprisingly low level

99 00 01 02 03 04 05 06 07 08 09 106

7

8

9

10

11

6

7

8

9

10

11%

Euro zone

%

Finland

Unemployment rate, sa.

Inflation to hover around 2%

98 99 00 01 02 03 04 05 06 07 08 09 10-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5% y/y

Inflation, HICP

Inflation, CPI

% y/y

USA


Weak growth, but no new recession • Weak, but still positive growth in the short term

• Risk of recession – depends on home prices

• New stimulus measures from Fed later this year …

• … should boost growth in 2011 and 2012

As we projected in the May issue of Economic Outlook the US recovery has lost momentum over the past few months. After having shown solid growth towards the end of 2009 and in early 2010, economic activity slowed down sharply in Q2 2010 and the leading indicators point to a further slowdown in the short term. Up to now the decline in GDP growth has mainly been due to the fact that the pace of the inventory restocking, which was initiated after the sharp reduction in invento-ries during the financial crisis, has gradually slowed. And as final demand, ie GDP less changes in inventories, has failed to gain momentum, there is every indication of weak GDP growth in the short term. The reason is that the restocking of inventories now appears to be largely completed and that fiscal policy, after having lifted eco-nomic activity markedly since early 2009, has a signifi-cant contractionary effect as of Q3 2010. The reason why fiscal policy acts as a drag on activity is that many federal growth initiatives expire and the in-come tax rate imposed on the super rich will increase next year. Also the pressure on state budgets will con-tinue to put a damper on public demand as almost all states are required to keep their budgets balanced. In light of the huge federal budget deficit of almost 10% of GDP and the mid-term elections for Congress in No-vember, a new major fiscal policy stimulus package this

year is not very likely. With the slowdown in growth and the headwind that the economy still has to overcome, the risk of a new recession has risen to a level where it should not be ignored. Especially the trend in home prices may be decisive for how hard the landing will be. However, in our view the economy will avoid a double-dip. Accordingly, after weak GDP growth of 1-2% (an-nualised) in H2 2010 and in early 2011 we expect the economy to shift into a higher gear. We expect the lead-ing indicators to start signalling higher growth in about six months’ time. Specifically, we see GDP growth at 2.5% this year, 2% in 2011 and 3% in 2012. New recession? One of the reasons why we consider it most likely that the economy will avoid a new recession is that the most cyclical demand components already are at very low lev-els. The most extreme example of this is residential con-struction where a further decline of the magnitude nor-mally seen during a recession is physically impossible. But also car sales, business investment in equipment and non-residential construction have dropped to levels which mean that the stock of these assets after deprecia-tion is actually declining or growing very slowly. Against this background it will probably take a very severe shock, perhaps of a financial nature, to trigger a new sharp drop in demand and, in turn, a new recession. Such a shock cannot be ruled out, but it does not form part of our base-line scenario. When it comes to US households, it is also worth noting that they have increased their savings markedly in the wake of the crisis. Just before the recession set in at the beginning of 2008 household savings accounted for only 2% of disposable income, but in Q2 2010 the savings ra-

USA: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (USDbn) 2008 2009 2010E 2011E 2012E

Private consumption 9,806.3 -0.3 -1.2 1.4 2.1 2.9Government consumption and investment 2,674.3 2.8 1.6 0.7 0.0 0.0Private fixed investment 2,266.1 -6.4 -18.3 4.5 7.2 7.3 - residential investment 628.6 -24.0 -22.9 -1.1 4.0 9.4 - equipment and software 1,112.6 -2.4 -15.3 15.0 10.2 8.4 - non-residential structures 524.9 5.9 -20.4 -12.6 0.6 0.9Stockbuilding* 29.1 -0.5 -0.6 1.4 0.0 0.1Exports 1,661.7 6.0 -9.5 12.5 7.7 9.9Imports 2,375.7 -2.6 -13.8 11.7 6.8 8.0GDP 0.0 -2.6 2.5 2.0 3.0Nominal GDP (USDbn) 14,062 14,369 14,119 14,747 15,328 16,088

Unemployment rate, % 5.8 9.3 9.7 9.8 9.3Industrial production, % y/y -3.3 -9.3 5.0 2.4 4.3Consumer prices, % y/y 3.8 -0.3 1.6 1.4 1.3Consumer prices ex. energy and food, % y/y 2.3 1.7 1.0 0.8 0.5Hourly earnings, % y/y 3.8 3.0 1.8 1.6 1.5Current account (USDbn) -668.9 -378.4 -442.4 -383.2 -402.2 - % of GDP -4.7 -2.7 -3.0 -2.5 -2.5

Federal budget balance (USDbn) -458.6 -1,413.6 -1,400.0 -1,300.0 -1,000.0 - % of GDP -3.2 -10.0 -9.5 -8.5 -6.2Gross public debt, % of GDP 69.2 83.4 92.9 91.9 99.1


USA


tio had increased to 6.2%. This means that the blow to consumer spending may be somewhat less severe in case of a new negative shock to households. In the event of a new shock now, households could more easily than previously absorb it by cutting their savings instead of their spending. However, the banks’ sustained tight credit standards still limit the ef-fect of this buffer. Our baseline scenario is based on the assumption that the savings ratio will rise a bit further to around 7% driven by a 5-10% drop in home prices from current levels. This increase in the savings ratio should leave room for sus-tained, albeit for some time still weak, growth in con-sumer spending. The reason is that households’ purchas-ing power is improving thanks to inter alia declining in-terest expenses. But the risk is that a new major decline in home prices could trigger a new wave of defaults, which in turn could force banks to tighten credit standards even further and once again pull the rug from under the economy. With supportive financial conditions and indications of sustained high global growth, although at slightly weaker levels than currently, there are indications of continued solid progress in corporate earnings and investment as well as exports. Particularly signs that earnings and em-ployment in small businesses are finally on the mend give rise to hopes that this important part of the economy will be able to gradually take over as growth engine. More stimulus from the Fed With the prospect of sustained low and declining core in-flation and high unemployment we expect the Fed to take further steps to stimulate growth soon. We believe that such steps will be in the form of more purchases of US Treasury bonds. This additional stimulus will likely pave the way for higher growth in 2011 and 2012. When, eventually, the economy starts to gain momentum, it may initially do so quite quickly, among other things because of the – by that time – significant pent-up demand among house-holds and companies. Against this backdrop, and to begin a normalisation of monetary policy to prevent new bubbles from emerging, the Fed will probably hike rates quite aggressively once it gets started. Still, we do not expect the first rate hike until Q4 2011 Johnny Bo Jakobsen [email protected] +45 3333 6178

Sluggish growth in final demand

06 07 08 09 10-10

-8

-6

-4

-2

0

2

4

6

8

-10

-8

-6

-4

-2

0

2

4

6

8

Note: Shaded area marks recession

% q/q (ar)

GDP Final sales (=GDP less change in inventories)

% q/q (ar)

Growth indicators heading south

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1030

40

50

60

70

-20

-10

0

10

20

30 Index point Index

ISM manufacturing, rhs

ISM new orders minus ISM inventories,advanced 2 months

Cyclical demand components already at low levels

50 55 60 65 70 75 80 85 90 95 00 05 1018

20

22

24

26

28

30

32

18

20

22

24

26

28

30

32% of GDP

* Private consumption of durable goods, residential investment and fixed business investmentNote: Shaded areas mark recessions

Business cycle sensitive demand *% of GDP

Markedly higher savings ratio represents a buffer

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10-2

0

2

4

6

8

10

12

14325

375

425

475

525

575

625

675 Note: Shaded areas mark recessions

% of disp. incomeHouseholds

Net worth, reversed

% of disp. income

Savings rate, rhs

Average 1959-2000: 8%

Euro area


Recovery continues as sovereign debt crisis smoulders • Debt crisis is smouldering after large policy response

• Lower export demand will dampen growth

• Fiscal tightening will subtract modestly from growth

• The ECB will keep rates unchanged until Q4 2011

Sovereign debt crisis is still smouldering Since the last issue of Economic Outlook, the sovereign debt crisis in Greece almost turned into a full-blown fi-nancial crisis, threatening the prospects for a continued recovery in the Euro area and indeed the future of the monetary union itself. This triggered a forceful and un-precedented response from EU institutions, the Interna-tional Monetary Fund (IMF) and member states. In addi-tion to the IMF/EU rescue package to Greece, an EUR 750bn rescue package was created to help any other member states, which might experience funding difficul-ties. The European Central Bank (ECB) initiated a pro-gramme of purchasing sovereign bonds in an attempt to restore normal trading conditions in bond markets and prevent the crisis from spreading to the financial sector. Later on, the Euro area member states agreed to conduct and publicise an EU-wide stress test of the banking sys-tem. At the time of writing, the sovereign debt crisis is smoul-dering. Calm has returned to most sovereign bond mar-kets and the stress test has succeeded in creating greater transparency about the exposure to sovereign risk in the financial sector, even though many observers have criti-cised the test for being too lenient. Thus, funding condi-tions for Euro-area banks have generally improved over the summer, and this has significantly reduced the risk that banks will engage in a new round of tightening of credit conditions for companies and households. How-ever, intra-Euro-area bond spreads have not returned to pre-crisis levels and markets are still highly sensitive to news, which indicates a change in fiscal outlook for indi-

vidual member states. A new flare-up of the debt crisis is therefore one of the key risk scenarios in our forecast. Recovery still dependent on export growth Even though the debt crisis wrecked havoc in financial markets, the Euro area as a whole experienced the fastest growth in four years during Q2. The strong growth was driven by the German economy, which surged on the back of strong export demand and a catch-up in construc-tion activity after the cold winter. France and Italy ex-perienced far more modest albeit still decent growth rates, while the countries hardest hit by the debt crisis have seen very weak, or in the case of Greece, sharply negative GDP growth. Meanwhile, indicators suggest that both private consumption and fixed investments only grow very modestly or even stagnate. This implies that the Euro area will be highly vulnerable to the ongoing slowdown in global growth, even though short-term indi-cators suggest that economic activity continues to expand quite rapidly into Q3. In addition, the growth contribu-tion from inventories is likely to fade over the coming quarters, just as fiscal policy begins to weigh on growth in Germany, France and Italy. Thus, we expect economic growth to be quite moderate over the winter and next spring before renewed acceleration in global growth will lift economic activity in the Euro area as well. Fiscal policy only moderately restrictive The sovereign debt crisis has pushed the most vulnerable member states to undertake a drastic tightening of fiscal policy already in 2010 with similar cuts envisaged for 2011. This has often left the impression that fiscal policy will be highly detrimental to growth over the coming years. However, the tightening of policy announced in Germany and Italy is far more modest, while the prospect of drastic fiscal tightening in France also seems modest ahead of presidential elections in 2012. Given the relative importance of the core countries, we estimate fiscal

Euro area: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (EURbn) 2008 2009 2010E 2011E 2012E

Private consumption 5,175 0.3 -1.2 0.2 0.8 1.1Government consumption 1,803 2.2 2.7 0.9 0.5 0.8Fixed investment 1,970 -0.9 -10.8 -1.6 2.5 3.0Stockbuilding* 33 0.1 -1.0 1.2 0.2 0.0Exports 3,735 0.7 -13.2 8.6 6.2 5.7Imports 3,596 0.9 -11.9 8.8 5.7 4.9Net exports* 139 -0.1 -0.8 0.0 0.3 0.4GDP 0.4 -4.1 1.6 1.4 1.8Nominal GDP (EURbn) 9,013 9,258 8,968 9,104 9,259 9,405

Unemployment rate, % 7.6 9.6 10.1 10.0 9.7Industrial production, % y/y -2.4 -13.8 7.0 2.0 3.5Consumer prices, % y/y (HICP) 3.3 0.3 1.5 1.5 1.6 - core inflation 2.4 1.3 0.9 0.8 0.9Hourly labour cost, wages and salaries % y/y 3.1 1.5 1.4 1.4 1.5Current account (EURbn) -162 -68 -45 -27 -10 - % of GDP -1.7 -0.8 -0.5 -0.2 -0.1

General govt budget balance, % of GDP -2.0 -6.3 -5.8 -4.7 -3.5Gross public debt, % of GDP 69.4 78.7 83.3 86.6 89.2


Euro area


tightening to subtract between 0.5 and 0.7% point from growth in 2011 and slightly less in 2012. On the other hand, it should be remembered that the recent deprecia-tion of the trade-weighted EUR, and our forecast of a fur-ther depreciation against the USD and the currencies of other trading partners could add considerably to eco-nomic activity through increasing exports. Combined with the very low level of interest rates, financial condi-tions will thus remain very supportive of growth. Commodity prices push headline inflation up The depreciation of the EUR since the start of the year has pushed headline inflation up through higher com-modity prices. Over the coming months we expect food prices to deliver a significant contribution to inflation, leading to a peak in headline inflation just around 2% at the beginning of next year. Meanwhile, core inflation seems to have stabilised near 1%, as VAT hikes counter-balance the downward pressure associated with the high degree of slack in labour markets and still ample spare capacity in the manufacturing sector. Looking further into the forecast horizon, we expect commodity prices to continue pushing headline inflation upwards, while the relatively weak labour markets should keep wage growth in check. Thus, even though labour markets appear to be stabilising, unemployment is still at the highest level in more than 10 years and we only ex-pect unemployment to be fall more substantially in 2012. This development masks enormous differences, where unemployment in Germany is only marginally above the trough seen in the summer of 2008, while unemployment in Spain has more than doubled in the same period. Pragmatism is paramount at the ECB Although the ECB decided to purchase sovereign bonds, the central bank has been careful to sterilise the bond purchases by attracting term deposits of a similar magni-tude in order to demonstrate that the move would not stoke inflation. The sovereign debt crisis also caused the ECB to put the unwinding of its extraordinary liquidity support on a temporary standby, but with the expiry of the EUR 442bn 1-year Long Term Refinancing Opera-tion at the beginning of July, the process has been re-sumed. Still, the fact that banks in Southern Europe and Ireland increasingly rely on the ECB for funding indi-cates that it will be difficult for the ECB to end the pro-cedure of full allotment at the weekly refinancing opera-tions in the near future. Hence, our financial forecast as-sumes that short-term money market rates will continue to trade below the ECB’s refi rate until sometime next summer. Towards the end of 2011, we expect the ECB to begin the first in a series of quarterly 25 bp rate hikes bringing the refi rate to 2% on a 2-year horizon. Anders Matzen [email protected] +45 3333 3318

Slowdown in global growth likely to hit exports

98 99 00 01 02 03 04 05 06 07 08 09 10-25

-20

-15

-10

-5

0

5

10

15

20

25

30

30

35

40

45

50

55

60

65% y/y

Euro area exports, rhs

Global PMI exportorders

Index

Private consumption growth remains modest

99 00 01 02 03 04 05 06 07 08 09 10-35

-30

-25

-20

-15

-10

-5

0

5

-5

-4

-3

-2

-1

0

1

2

3

4

5% y/y Index

Retail sales

Consumer confidence, rhs.

Food price inflation on the way up

98 99 00 01 02 03 04 05 06 07 08 09 10-30

-20

-10

0

10

20

30

40

50

-2

-1

0

1

2

3

4

5

6

7% y/y

HICP, food

CRB food prices, 6M advanced, rhs.

% y/y

Increased reliance on ECB lending in crisis countries

04 05 06 07 08 09 100

100

200

300

400

500

600

700

800

900

1000

0

100

200

300

400

500

600

700

800

900

1000EURbnEurosystem lending to MFIsEURbn

Ireland Portugal Spain Greece France Germany Italy Rest

United Kingdom


Economy is losing steam So far the UK economy has shown surprisingly good re-silience to January’s VAT hike to 17.5%. The increase in production (GDP) is, however, mainly attributable to a slower pace of inventory destocking as final demand, i.e. GDP less changes in inventories, has been subdued. The very lenient monetary policy coupled with sustained global demand growth and the earlier weakening of the GBP points to sustained positive growth. But the pace of growth will most likely be more modest going forward. Business and consumer confidence indicators already suggest that the economy has lost steam over the past few months. And going forward the banks’ still tight credit standards and the government’s severe tightening of fiscal policy are expected to dampen growth. According to the new government’s programme, fiscal policy looks set to be tightened by some GBP 120bn over the next 6-year period, ie at an annual average rate of 1.4% of GDP. The strongest impact on household pur-chasing power is bound to come from the permanent VAT hike to 20% with effect from 1 January 2011. The VAT hike alone will reduce consumers’ spending power by 1¼%. UK companies are still benefiting from the improvement in competiveness prompted by the sharp GBP weakening in 2008. However, it is noteworthy that UK export growth has not outstripped that of other countries. This is a sign of structural weaknesses in the export sector, which could dampen the upswing. Also, we expect the GBP to strengthen versus the EUR over the forecast ho-rizon. As the companies were reluctant to cut staff during the recession, a more long-lasting decline in unemployment is not likely until late in the forecast period. Conse-quently, we do not see the Bank of England sanctioning its first rate hike until early 2012. Johnny Bo Jakobsen [email protected] +45 3333 6178

Indicators point to weaker growth

04 05 06 07 08 09 10-3

-2

-1

0

1

2

36

40

44

48

52

56

60% q/q

* Weighted average of the manufacturing and service sector data

GDP, rhs

Index

PMI composite *

Severe fiscal tightening in the pipeline

Fiscal year starting

08 09 10 11 12 13 14 150

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14% of GDP% of GDP Public sector net borrowing

Cyclical contrib. to budget deficit Structural budget deficit

Sustained high unemployment on the cards

88 90 92 94 96 98 00 02 04 06 08 10-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12%% y/y

Unemployment rate (ILO), rhs

Average earnings incl. bonuses, 3M avg.

United Kingdom: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (GBPbn) 2008 2009 2010E 2011E 2012E

Private consumption 896.0 0.4 -3.3 0.5 0.7 1.3Government consumption 296.1 1.6 1.2 2.2 -1.0 -2.2Fixed investment 249.5 -5.0 -15.0 3.8 1.7 3.8Stockbuilding* 5.8 -0.4 -1.1 0.7 0.3 0.1Exports 374.0 1.0 -10.6 4.1 5.2 8.0Imports 417.0 -1.2 -12.4 6.1 1.9 4.2GDP -0.1 -4.9 1.5 1.5 2.0Nominal GDP (GBPbn) 1,404.8 1,445.6 1,392.7 1,464.5 1,519.5 1,581.1

Unemployment rate, % 5.7 7.6 7.9 8.4 8.2Consumer prices, % y/y 3.6 2.2 3.0 2.5 1.5Current account, % of GDP -1.5 -1.3 -1.1 -1.0 -0.5General govt budget balance, % of GDP -4.9 -11.5 -10.5 -8.0 -6.0Gross public debt, % of GDP 52.0 68.1 78.6 86.6 92.6


Poland


Bright economic outlook, but less so • New president

• New fiscal measures from 2011, including VAT hike

• Labour market data encouraging

• Higher inflation next year

A new president has been elected, which has allowed the government to announce new fiscal measures. Upcoming elections mean that major reforms will have to wait until next year. As a consequence, in our baseline scenario EMU membership has been postponed to 2015. The eco-nomic outlook remains bright, but less so due to slower external demand, the fiscal measures and a slower im-provement in domestic demand so far this year compared to what we had expected. The labour market is improv-ing, though. We expect growth between 3% and 4% in the coming years. Inflation is bottoming out and will be higher next year. This could pave the way for a first in-terest rate hike late this year. A new president and new fiscal measures The presidential election turned out as polls had sug-gested with a small victory for the Civic Platform (PO) candidate Bronislaw Komorowski. One advantage of President Komorowski compared to his late predecessor is that he is from a governing party, meaning that we can now expect full cooperation between the government and the president’s office. In fact, the government announced new fiscal measures shortly after the presidential elections. These measures include a 1% point increase in the basic VAT rate to 23% and higher preferential VAT rates. Moreover, a new fis-cal rule has been implemented, which means that discre-tionary spending cannot rise by more than 1% point above the rate of inflation. Discretionary spending is roughly a fourth of total government spending. Finally, the government intends to find more companies to priva-tise in 2011 to 2013, which should bring in PLN 20bn on top of the PLN 37bn planned for 2009-10. The new fiscal measures are an attempt to bring the gen-eral government budget deficit below 3% of GDP by

2013, as agreed with the European Commission. They are also an attempt to prevent government debt from ex-ceeding the crucial 55% of GDP mark, which would prompt much tougher fiscal tightening than currently en-visaged. However, the new measures should not be seen as the complete and permanent solution to the fiscal problems. Indeed, privatisations only improve the budget in the short term and reforms are still needed. We believe more reforms will be announced, but perhaps not until af-ter the general elections next year. We had hoped for a bolder move on reforms already this summer due to the strong public support for the PO and seemingly also for fiscal consolidation. That could probably, with the economic recovery that we foresee, have brought the public deficit below the Maastricht cri-terion in 2012 and allowed for EMU membership in 2014. This was not the case, and in our forecast we there-fore postpone EMU membership to 2015, which also seems to be in line with the government’s own vision. Bright economic outlook, but less so The economic outlook remains bright. We see growth at between 3% and 4% over the coming years. However, we have “reduced the brightness” a bit for several rea-sons. First of all, we expect some slowdown in the key export markets next year, as fiscal tightening starts to kick in and as the inventory rebuilding-led global manu-facturing activity boom runs out of steam. Secondly, the VAT hike will have some adverse affect on private con-sumption growth next year, especially if it forces the Na-tional Bank of Poland (NBP) to hike interest rates. Thirdly, data for domestic demand in the first quarter of 2010 showed that the recovery could be somewhat slower than we had expected and, although mostly com-pensated for by strong growth in foreign demand this year, it may lead to slower GDP growth next year than previously expected. The labour market data still look encouraging, especially when it comes to companies with nine or more employ-ees, where employment growth started to pick up speed during the first half of the year. Moreover, unemploy-ment in the whole economy has continued to move

Poland: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (PLNbn) 2008 2009 2010E 2011E 2012E

Private consumption 702 5.7 2.3 1.8 1.8 2.1Government consumption 211 7.4 1.9 2.5 0.8 0.7Gross fixed capital formation 254 9.6 -0.8 -4.4 4.8 6.6Stockbuilding* 34 -1.1 -2.6 1.0 0.4 0.1Exports 480 7.0 -9.5 10.4 4.2 5.6Imports 513 8.1 -13.5 10.6 3.0 4.4GDP 5.1 1.8 3.4 3.0 3.7Nominal GDP (PLNbn) 1,177 1,275 1,344 1,422 1,508 1,599

Unemployment rate, % 9.8 11.0 12.2 11.4 10.8Consumer prices, % y/y 4.4 3.8 2.7 3.1 2.3Current account, % of GDP -5.0 -1.6 -2.2 -1.6 -0.6General government budget balance, % of GDP -3.7 -7.1 -6.0 -5.0 -3.5


Poland


downwards since winter and it now seems likely that the trend will remain downwards, although the pace of im-provement may be moderate. Wage growth continues to be slow, but wages are still growing even when adjusted for inflation. We expect real wages to continue increas-ing, albeit at a slow pace. Inflation near the bottom Annual inflation has fallen steadily since the middle of 2008, but is probably now close to bottom. Food and en-ergy prices have started increasing because of the floods, Russian fires and rising oil prices. Core inflation, which excludes food and energy prices, has also slowed during this period and is expected to continue moderating throughout the year. The VAT rate hike next year is ex-pected to push inflation 0.3% point higher in 2011. To-wards the end of this year and in the beginning of 2011, we expect inflation to increase towards the upper end of the NBP’s inflation target range of 1.5-3.5% before fal-ling back towards the middle of the range during 2012. We still expect the first rate hike from the NBP soon, but must admit that we have had to postpone it slightly once again. We now expect the first move late this year. The arguments are the same, though: we and the NBP expect higher inflation next year, and the growth numbers for Q2 and Q3 this year are likely to be strong. The problem (for the forecast) has been external factors including the deaths of the former president and the central bank chief and the Euro-area debt crisis. At present, some monetary policy committee members are warning about interest rate hikes later this year and the new NBP chief Belka seems slightly more hawkish than his predecessor. On the other hand, we do expect a global economic slow-down and hence the balance of the risks to our estimate of the timing of the first rate hike points to a later rather than an earlier hike. PLN to weaken near term, strengthen next year NBP chief Belka seems to have changed the central bank’s view on the PLN. At least he has said that the NBP does not have targets for the PLN. Current fears of a new US recession and worsening indicators out of Europe later in the year could have a negative effect on risk appetite, leading to renewed weakening of the PLN. But relatively high growth in Poland compared with the Euro area, earlier rate hikes and foreign capital coming in from privatisations and other direct investment and the EU funds should lead to a moderate appreciation of the PLN during next year and in 2012. Anders Svendsen [email protected] +45 3333 3951

Strong growth in Q2 and Q3

05 06 07 08 09 1032

36

40

44

48

52

56

60

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25% q/q Index

GDP growth, sa

PMI manufacturing, rhs

Slow recovery in consumption

00 01 02 03 04 05 06 07 08 09-20

-15

-10

-5

0

5

10

15

20

25

30

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0% y/y % y/y

Retail sales, rhs

Private consumption

Inflation to rise

04 05 06 07 08 09 10 11 120

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7% %

Inflation

NBP's key rateNBP's inflation projection

(Jun 10)

Flows to support the PLN

07 08 09 10-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0% of GDP

Current account balance

Portfolio

Broad basic balance

FDI

% of GDP

Russia


Growth returning but public finances strained • Continued economic recovery in Q2

• Government finances in focus

• RUB to strengthen over the long term

Economy reviving The economy has rebounded during the first half of the year. GDP was reported to have grown by 5.2% y/y in Q2, bringing the growth rate to 4.1% y/y for the first half of the year. In addition to growing exports we see domes-tic demand supporting the economy clearly in H2 2010. Especially exports and imports have grown briskly as global demand has revived. However, going forward pri-vate consumption will increasingly contribute to boosting growth. The weakness in consumption so far can largely be attributed to the still weak labour markets and the un-certainty related to the strength of the recovery of the economy. The credit markets have started to recover slowly in recent months, with bank lending to both cor-porates and households returning to modest growth. However, demand for loans is still weak and household deposits are growing briskly. Slowly falling unemployment, growing real wages and gradually easing credit conditions are expected to stimu-late private consumption. Hence, we see the economy growing relatively strongly this year, with more moderate growth over the remainder of the forecast horizon as problems within e.g. investment, infrastructure and the credit markets constrain growth over the longer term. In addition to lingering worries about the sustainability of growth in household spending, investment remains at depressed levels. Uncertainty about the recovery and the weak credit markets weigh on investment in the econ-omy, whereas foreign investment is also restrained by uncertainty about both the political situation and legisla-tive issues. On the other hand, the construction sector fi-nally returned to growth in Q2, further strengthening the view of an ongoing domestic recovery. The government has continued with efforts aimed at im-proving the investment climate, with the most recent

changes including a reduction in the number of operating permits and licences required by starting companies. This is hoped to speed up the process of starting a business as well as reduce corruption and bureaucracy. However, only time will show how well the law is implemented. Fiscal stimulus needs to be reversed Reversing the abundant fiscal stimulus packages and bal-ancing the budget will be one of the government’s main challenges in the next few years. Critique from interna-tional organisations such as the IMF has targeted the sig-nificant increase in permanent spending, especially on the social sector during the crisis. Reversing the perma-nent increases in e.g. pensions is difficult and unlikely ahead of the 2012 presidential elections. Despite a clear decline in revenues, spending has continued to increase, leading to a budget deficit of over 5% of GDP in 2009. A deficit around 5% is projected for 2010 as well, but this requires that oil prices remain around current levels. The deficit will mainly be financed by public debt as the Reserve fund holding oil revenues from previous years is to be gradually depleted over the next year. Borrowing will be increased especially on the domestic markets. All in all, a balanced budget is not expected until 2015, pro-vided that oil prices rise modestly. The non-oil deficit, i.e. the deficit less oil revenues, reached 13% of GDP in 2009, highlighting the importance of oil prices for the state budget. While higher-than-budgeted oil prices could lead to a smaller deficit, lower-than-anticipated prices could widen the deficit further, exposing the budget to significant uncertainty. To plug the hole in the budget the government will for example continue with its privatisation plan. An amended list has been approved by the Finance Ministry, with minority stakes in 11 companies including Sberbank and Rosneft being sold in 2011-2013. To what extent the plan will be implemented remains to be seen in the next couple of years. In the second half of the year for example the accelerat-ing real wage growth, the accommodative fiscal policy and the drought are pointing towards higher inflationary pressures. The high share of food prices in the consumer

Russia: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (RUBbn) 2008 2009 2010E 2011E 2012E

Private consumption 16,193 11.2 -7.6 4.8 7.5 7.8Government consumption 5,745 2.5 2.0 2.0 2.0 2.0Fixed investment 6,984 10.0 -16.5 0.2 5.0 8.0Exports 10,029 0.5 -4.6 12.5 9.0 8.0Imports 7,138 15.0 -30.2 12.0 11.0 9.3GDP 5.6 -7.9 5.7 4.8 5.2Nominal GDP (RUBbn) 33,258 41,445 39,064 43,908 49,045 55,176

Unemployment rate, % 5.6 7.5 7.2 6.5 5.8Consumer prices, % y/y 14.1 11.7 6.7 6.9 7.3Current account, % of GDP 6.2 3.9 5.0 4.5 3.0Central govt budget balance, % of GDP 4.1 -5.3 -5.2 -3.5 -2.8

Russia


price index means that the drought could lift inflation in the coming months. However, the government has indi-cated its willingness to sell wheat reserves in order to limit domestic price pressures and therefore only a tem-porary acceleration in inflation due to the drought is ex-pected in the autumn. Interest rates at historically low levels In August 2010 the Mosprime 3M rate was at levels be-low 4% – the lowest level seen since early 2005 and a significant easing from the peak of around 30% in early 2009 as the fears from the financial crisis have eased. The refinancing rate cuts by the central bank have amounted to 525 bp – bringing the refi rate to 7.75%. The rate cutting cycle is expected to have come to an end in May. We do not expect to see interest rate hikes until 2011 despite the looming inflationary pressures in the second half of the year. Rouble volatility still significant The RUB has fluctuated within a relatively tight range during the summer, as the sovereign debt problems in Europe, the recovering economy and the fluctuating oil price have increased the currency’s volatility. The rouble is very vulnerable to changing risk sentiment in the inter-national markets, while the RUB fundamentals still point towards a strengthening currency. The rising oil prices, clear interest rate differential and increasing inflationary pressures support our view of a stronger rouble. We maintain our forecast that in the long term the rouble will strengthen against the basket (45% EUR, 55% USD) although a risk of short-term weakness remains. Volatility in the short term cannot be under-stated, as fluctuations in global risk-taking appetite can lead to major capital outflows from or inflows to Russia. The stabilisation of the rouble has made intervention on the currency market less necessary, and the rouble has remained firmly within its fluctuation band (33.40-36.40). However, the central bank continues to monitor the markets and intervenes when necessary to prevent the rouble from strengthening too rapidly. Annika Lindblad [email protected] +358 9 1655 9940

Economy rebounding

00 01 02 03 04 05 06 07 08 09-12-10-8-6-4-202468

101214

2750

3000

3250

3500

3750

4000

4250

4500

4750 % y/y

Growth, rhs

GDP

Level, constant prices

RUBbn

Public expenditure rose briskly during the crisis

00 01 02 03 04 05 06 07 08 09 100

100

200

300

400

500

600

700

800

900

1000

1100

0

100

200

300

400

500

600

700

800

900

1000

1100RUBbn

Note: 6M mov. avg.

Revenue

RUBbn

Expenditure

Inflation set to accelerate

03 04 05 06 07 08 09 10 11-6

-3

0

3

6

9

12

15

18

21

24

5

6

7

8

9

10

11

12

13

14

15

16

17% y/y

Real wages,18M advanced, rhs.

Inflation

% y/y

Higher oil price supports the rouble

May08

Aug Nov09

Feb May Aug Nov10

Feb May Aug30405060708090

10011012013014015016028

29303132333435363738394041

RUB USD per barrel

Oil price, rhs

RUB basket, reversed scale

Estonia


Recovery gaining strength GDP has remained relatively stable over the past year as exports have supported the economy, while private con-sumption and investment continued their downtrend until Q1 2010. Overall strong global trade is vital for the re-covery of the economy, and setbacks in especially the Nordic countries and Russia would clearly affect the re-covery of the Estonian economy. We see the economy re-turning to growth in 2010, with the recovery gaining fur-ther foothold in 2011 as also domestic demand perks up. It will, however, take several years to offset the decline in GDP that took place in 2008 and 2009. The high unemployment rate is one of the main problems facing the authorities over the next couple of years. Al-though some labour market indicators have pointed to-wards some easing in unemployment, the unemployment rate is still high and especially long-term unemployment as well as youth unemployment remains elevated. How-ever, an improved labour market situation is necessary for sustainable growth in private consumption.Inflation has recently started to give rise to concern again, reach-ing 3.5% y/y in June, driven to a large extent by energy, fuel and food prices. Further upward pressure on prices may be seen as the domestic economy recovers and wages start growing again. There is also a risk of food and energy prices rising further. Hence, the authorities also face a challenge in limiting price pressures in the economy. As expected, Estonia will join the Euro-area in January 2011, with focus now on the practical preparations. Euro adoption is expected to increase confidence in the econ-omy both at home and abroad, likely resulting in in-creased foreign investment. The positive atmosphere re-garding euro adoption already shows through in the con-sumer confidence indicator, which has improved signifi-cantly over the past year. Despite ensured Euro-area membership the authorities are expected to continue pur-suing a strict fiscal policy in order to balance the gov-ernment budget. Annika Lindblad [email protected] + 358 9 1655 9940

GDP stabilising as exports continue to improve

95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

15

20

25

30

35

40

45

10

15

20

25

30

35

40

45EEKbnEEKbn

GDP

Exports

Confidence back at levels seen in late 2007

03 04 05 06 07 08 09 10-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

-25

-20

-15

-10

-5

0

5

10

15

20

25Index% y/y

Consumer confidence, sa, rhs

Retail sales

Situation on labour markets slowly improving

00 01 02 03 04 05 06 07 08 092

5

8

11

14

17

20

23

-10

-5

0

5

10

15

20

25 %

Average monthly wages

Unemployment rate, rhs

% y/y

Estonia: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (EEKmn) 2008 2009 2010E 2011E 2012E

Private consumption 135,178 -4.7 -18.4 -0.7 4.5 4.8Government consumption 41,228 4.1 -0.5 -1.0 0.5 1.2Fixed investment 84,425 -12.1 -34.4 -6.0 7.5 6.8Exports 177,910 -0.7 -11.3 8.0 7.0 6.8Imports 205,572 -8.7 -26.7 6.8 7.0 7.0GDP -3.6 -14.1 1.8 4.2 4.5Nominal GDP (EEKmn) 244,503 248,149 212,912 222,280 238,284 255,441

Unemployment rate, % 5.5 13.8 18.0 16.2 14.8Consumer prices, % y/y 10.6 -0.1 2.6 3.0 2.7Current account, % of GDP -9.1 4.6 4.0 2.0 0.8General govt budget balance, % of GDP -2.7 -1.7 -2.2 -1.9 -1.5

Latvia


Towards brighter times The economic recovery continued in Q2, with GDP gro-wing quarter-on-quarter for the second consecutive quar-ter. The pick-up in GDP has so far been fairly modest, but the cycle seems to have bottomed. Exports have so far been the main driver of the recovery, as expected, with Latvia benefiting from the recovery in the other EU countries as well as Russia. The domestic economy is seen improving in the second half of the year, although consumption is likely to remain weak due to the still ele-vated unemployment, the tight credit markets and the weak income development. Nevertheless, the improving consumer confidence indi-cates that domestic demand is on the recovery track as well. We see the economy returning to year-on-year growth in 2011 on improving exports and strengthening consumption, with growth gaining further momentum in 2012. However, it will take years for the economy to reach the levels seen a couple years back. Latvia has currently no need to draw all the available funds from the international loan package, which stabi-lises confidence in the economy. Latvia has already ac-cumulated some reserves from the loan but retains the option of drawing more funds if the economy deteriorates further. The stability of the government finances has taken the pressure off the currency as well as the gov-ernment. In the second half of the year the main event is the par-liamentary elections in early October. The party of the current PM is doing relatively well in the opinion polls despite the tough austerity measures already taken. In addition, the likely lack of unpopular decisions to im-prove state finances before the elections coupled with the strengthening recovery could boost support further. The new government will formulate the 2011 budget, but with the economy on a recovery track the government is expected to try to continue cutting the deficit as planned over the next couple of years. Annika Lindblad [email protected] + 358 9 1655 9940

GDP gradually returning to growth

00 01 02 03 04 05 06 07 08 09-12

-10

-8

-6

-4

-2

0

2

4

6

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3 % q/qGDP, saLVL bn

Level

q/q growth, rhs

Unemployment still elevated

00 01 02 03 04 05 06 07 08 09 10-40

-30

-20

-10

0

10

20

30

5

8

11

14

17

20

23

26 % y/y

Unemployment rate

Retail sales, rhs%

Devaluation speculations have calmed down

Jun07Oct

08Feb Jun Oct

09Feb Jun Oct

10Feb Jun

0.690

0.693

0.696

0.699

0.702

0.705

0.708

0.711

0.714

0.690

0.693

0.696

0.699

0.702

0.705

0.708

0.711

0.714LVL LVL

EUR/LVL spot

EUR/LVL ceiling

EUR/LVL floor

Latvia: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (LVLmn) 2008 2009 2010E 2011E 2012E

Private consumption 9,196 -5.4 -22.2 -3.6 3.8 4.8Government consumption 2,575 1.5 -8.7 -7.5 -1.0 1.0Fixed investment 4,975 -15.6 -37.5 -16.0 6.8 7.0Exports 6,259 -1.3 -15.4 6.4 8.0 7.3Imports 9,220 -13.6 -35.4 5.8 8.5 7.8GDP -4.6 -18.0 -1.8 3.0 4.3Nominal GDP (LVLmn) 14,780 16,243 13,244 12,900 13,570 14,493

Unemployment rate, % 7.5 17.1 21.5 20.0 18.2Consumer prices, % y/y 15.3 3.6 -0.8 2.2 3.0Current account, % of GDP -13.0 9.4 7.0 4.0 3.3General govt budget balance, % of GDP -4.1 -9.0 -7.2 -5.8 -3.0

Lithuania


Gradual economic recovery The economy showed brisk quarterly growth again in Q2, supporting expectations of a firming recovery. How-ever, this was from a very low base, with GDP barely above the level seen in Q2 2009. Nevertheless, we expect the economy to return to modest year-on-year growth this year, with momentum firming over the next two years as the economic recovery becomes more broadly-based. As expected, exports have continued to improve rapidly, pulling along import demand. Stronger exports have con-stituted the main boost to GDP, with especially exports to Russia improving significantly. But with investment and private consumption still contracting, the economy as a whole is still weak and very dependent on continued export demand to support its recovery.With wages still declining and unemployment elevated, household spend-ing has yet to gain proper traction. A stabilisation of un-employment and a gradual turnaround in wages is, how-ever, expected in the second half of the year, providing the economy with the necessary momentum for modest but stable growth in 2011-2012. The government finances have evolved in line with ex-pectations, with the budget deficit still at 8.1% of GDP in Q2. At the same time public debt has grown significantly to 35.6% of GDP in Q1 2010 from 18.9% in Q1 2009, with further increases foreseen. Overall, we expect to see the budget deficit contracting gradually over the next two years as the economy recovers and expenditure is cut. Keeping the debt and the deficit at reasonable levels is also important in order to stop debt servicing costs from rising significantly. Estonia is adopting the euro in 2011. In Lithuania, the largest challenge currently seems to be the budget deficit, which will not fulfill the Maastricht criteria before 2012, enabling euro adoption in 2014 at the earliest. In addi-tion, inflation has earlier posed a problem for member-ship, and containing price pressures will remain a chal-lenge over the next couple of years as well, as the econ-omy continues to recover Annika Lindblad [email protected] + 358 9 1655 9940

GDP stable but at the bottom

00 01 02 03 04 05 06 07 08 0911

12

13

14

15

16

17

18

19

20

21

-14

-12

-10

-8

-6

-4

-2

0

2

4

6LTLbn

Growth

GDP% q/q

Level, rhs

Retail sales still contracting

02 03 04 05 06 07 08 09 10-40

-30

-20

-10

0

10

20

30

0

3

6

9

12

15

18

21% y/y

Retail sales, rhs

Unemployment rate

%

Exports to Russia have revived briskly

05 06 07 08 09 102000

2500

3000

3500

4000

4500

5000

5500

100

200

300

400

500

600

700

800

900LTL mio.Exports, from LithuaniaLTL mio.

Russia

Latvia

Total, rhs

Lithuania: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (LTLmn) 2008 2009 2010E 2011E 2012E

Private consumption 63,736 3.6 -16.8 -3.5 4.0 5.0Government consumption 17,638 7.9 -1.1 -0.3 0.3 0.8Fixed investment 27,919 -6.5 -39.0 -10.8 7.3 7.8Exports 53,371 12.2 -15.3 6.2 7.5 7.3Imports 66,537 10.5 -28.9 6.7 7.8 7.5GDP 2.8 -14.9 0.9 3.2 4.0Nominal GDP (LTLmn) 98,669 111,498 99,568 101,659 106,945 113,682

Unemployment rate, % 5.8 13.7 17.0 16.0 14.8Consumer prices, % y/y 11.1 4.2 1.2 2.0 2.8Current account, % of GDP -11.9 3.8 3.0 2.5 1.5General govt budget balance, % of GDP -3.2 -8.9 -7.8 -6.0 -3.0

Hungary


Considerable uncertainty The economic outlook has brightened, but it has also be-come more uncertain. There are uncertainties regarding the negotiations with the IMF to extend the existing agreement, which expires at the end of October. Finan-cial markets are uncertain as both the government debt and the share of FX loans are high. And economic policy is a worry too, as both fiscal and monetary policy are constrained by financial stability considerations until the market’s confidence improves. The recession ended in the second half of last year, nota-bly as demand from other countries returned. Exports should remain a significant driver of the economy at least until year-end. Beyond this point, demand from notably the Euro area should be more moderate in the wake of the announced fiscal tightening moves. We are starting to see some bright spots in domestic demand, though. Con-sumer confidence points to growth in private consump-tion in Q2 this year, which would be a first since early 2008. Wage growth has moreover accelerated, while em-ployment has almost stabilised. Changes to personal in-come taxes starting from next year are expected to give a fairly strong boost to consumers’ purchasing power. The weakening of the HUF against the CHF amid a still very high share of CHF-denominated loans may be a signifi-cant drag on domestic demand, though. All in all, we an-ticipate very modest growth this year and growth of around 3% next year. It will probably require structural reforms to keep growth much above 3% on a more per-manent basis, but it seems that we will have to wait until next year to see what the government intends to do. At this juncture both fiscal and monetary policy are con-strained by financial stability considerations. With the weakness of the HUF and the wider CDS spreads on Hungary, any chance of further monetary easing moves has evaporated. There is also a greater risk that the cen-tral bank could be forced to raise rates. We expect the Fi-desz government to meet the government budget deficit targets of 3.8% of GDP this year and 2.9% of GDP next year. Anders Svendsen [email protected] +45 3333 3951

Economic recovery

00 01 02 03 04 05 06 07 08 09-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0% y/yGDP% q/q annualised

Private consumption improving

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-70

-60

-50

-40

-30

-20

-10

0

10

-3

-2

-1

0

1

2

3

4% q/q Index

Private consumption

Consumer confidence, rhs

Monetary policy rate and inflation

00 01 02 03 04 05 06 07 08 09 10 110123456789

1011121314

0123456789

1011121314 % %

Inflation

MNB's key rate

Core inflation

Hungary: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (HUFbn) 2008 2009 2010E 2011E 2012E

Private consumption 16,559 -0.6 -6.7 -1.4 2.9 2.5Government consumption 2,430 -0.3 1.0 3.0 -3.0 1.5Fixed investment 5,381 0.4 -6.5 -2.8 4.0 6.0Exports 20,444 5.6 -9.1 11.1 4.6 7.5Imports 20,044 5.7 -15.4 10.1 4.1 7.7GDP 0.4 -6.2 0.9 2.9 3.0Nominal GDP (HUFbn) 25,408 26,543 26,094 27,686 27,375 31,137

Unemployment rate, % 7.8 10.0 11.3 11.0 10.8Consumer prices, % y/y 6.0 4.2 4.9 3.2 3.0Current account, % of GDP -7.1 0.1 0.3 -0.1 0.5General government budget balance, % of GDP -3.8 -4.0 -3.8 -2.9 -3.0

Czech Republic


A good start for the new government The recovery has picked up speed during the first half of 2010 and the near-term outlook remains bright. However, exports are the primary driver of the strong momentum and hence the pace of the recovery going forward is likely to mirror that of the key export markets. Therefore, we expect more moderate growth during 2010. The domestic economy has started to recover as well, though. Private consumption seems to have gained mo-mentum in the first half of the year where especially re-tail sales have shown a significant improvement. The un-employment rate has started to fall after having peaked earlier this year. During next year, domestic demand is likely to gradually replace exports as the main source of growth. The May general elections have given birth to a majority ODS-TOP09-VV government, which took office in the middle of July. The new government looks strong and its new programme will be a major step forward for the economy if everything is carried out. This autumn’s ne-gotiations on the government budget for 2011 give grounds for high expectations, as the negotiations seem to have been going on without major disputes between the coalition partners. The 2011 budget sees the general government deficit at 4.6% of GDP, with a deficit target below 3% in 2013. The austerity measures include public sector wage cuts and cuts in welfare benefits. We also expect reforms of the pension and health care systems, though not necessarily this autumn. The new government does not have an EMU target, but we now expect mem-bership around 2016. Inflation is likely to increase gradually going forward and since the domestic economy is expected to improve, we would expect the Czech National Bank (CNB) to start discussing the timing of monetary stimulus withdrawal not too far into next year. However, the timing could well be determined by the scale of the slowdown in the rest of Europe, and the CNB’s latest inflation report implied un-changed interest rates until the second half of 2011 Anders Svendsen [email protected] +45 3333 3951

Ongoing recovery

01 02 03 04 05 06 07 08 09-6

-4

-2

0

2

4

6

8

-6

-4

-2

0

2

4

6

8% y/y

Euro area

GDP growth% y/y

Czech

Improved outlook for investment

00 01 02 03 04 05 06 07 08 09 1072

74

76

78

80

82

84

86

88

90

92

94

-12-10-8-6-4-202468

101214

% y/y %

Investment

Capacity utilisation, rhs

Private consumption has gained momentum

02 03 04 05 06 07 08 09 10-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-2

-1

0

1

2

3

4

5

6

7% y/y % y/y

Retail sales, rhs

Private consumption

Czech Republic: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (CZKbn) 2008 2009 2010E 2011E 2012E

Private consumption 1687 3.5 -0.1 1.5 2.4 3.0Government consumption 718 1.0 4.2 1.5 1.0 1.0Fixed investment 890 -1.5 -9.2 2.0 6.0 8.0Exports 2803 5.6 -11.4 10.9 8.5 7.5Imports 2655 4.3 -10.6 10.0 8.5 8.0GDP 2.3 -4.0 2.2 3.0 3.5Nominal GDP (CZKbn) 3535 3689 3628 3767 3969 4190


China


Economic activity is slowing as intended by the authorities • Economic growth has peaked

• Construction activity will be hurt but households OK

• Dampening measures to be reversed if needed

• CNY revaluation expected despite slow start

Authorities will intervene again if necessary Economic growth has peaked and the economy is clearly losing momentum. But even though the days of double-digit GDP growth will soon be over, growth will likely remain relatively solid in the 8-9% range in 2011 and 2012. The main reason behind the slowdown in growth is the fading boost from the government fiscal package from late 2008 and the gradual tightening of monetary policy, which has been pursued over the past 12 months. Thus, the slowdown is intended and policy-induced, and there-fore the macroeconomic outlook also to a large extent depends on the authorities’ desire to either tighten further or to scale back the tightening measures and come up with additional stimuli to the economy. We expect the authorities to feel comfortable with the current slowdown and with a future development in line with what we out-line in our forecast. Should growth decline more than what the authorities find appropriate, offsetting measures are likely to be taken, and the balance of risks to our growth forecast is thus skewed slightly to the upside. The housing boom has ended The until now very strong positive contribution to GDP growth from construction investment will decline during the forecast period even though the construction sector still does not seem to be hit by the various measures taken to curb speculation in the property market and dampen house price increases. In April, the required minimum down payment for purchasers of second homes was lifted from 40% to 50% and interest rates on loans to purchasers of second homes were raised. Also new rules on who can buy homes and how many they are obliged to buy were imposed. These measures almost immediately led to lower turnover in the housing market and could very well lead to plummeting property prices going for-

ward. Any severe negative effects on private consump-tion from the house prices drop should be avoided, though, as households’ leverage is low. Property devel-opers might experience some losses, and so might the banks financing the developers. But overall, this should be manageable as the majority of banks are still state-owned. All in all, we feel confident that the property bubble will likely deflate – but not burst. The negative effect on construction investment activity will to some extent be offset by the government’s re-cently announced programme to construct 5.8 million units of affordable (low-cost or low-rent) flats and houses. Household sector keeping up The authorities have a goal of changing the growth model to become more consumption driven and less driven by public investment and exports. The process toward this will continue with for instance further re-forms of the pension and health care systems, liberalisa-tions in the service sector and wage and employment supportive measures on the labour market. It will, how-ever, be a gradual process that will last for several dec-ades, and private consumption’s share of GDP is not ex-pected to increase meaningfully from the current 36% in the forecast period. That said, while overall investment is already slowing, the household sector seems to be holding up for now and should remain sound in the forecast period. Retail sales growth is still robust (though the retail sales figures are not adjusted for price increases and also include govern-ment and companies’ purchases) And the perhaps more reliable private consumption indicator, consumer confi-dence, is still increasing and the service PMI has not fol-lowed the manufacturing PMIs down during the summer, also indicating fairly strong household performance. Days of ballooning trade balance surpluses over The export sector remains important, and even though the global recovery seems more fragile than earlier and despite the expected gradual revaluation of the CNY, ex-ports will likely not reverse the past 18 months’ gains.

China: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (CNYbn) 2008 2009 2010E 2011E 2012E

Private consumption 9,360 8.6 10.4 9.4 9.5 10.0Government consumption 3,519 8.5 7.2 9.8 9.5 9.0Fixed investment 10,544 10.4 21.2 11.0 10.0 9.0Stockbuilding* 548 0.5 -0.2 -0.2 0.0 0.0Exports 10,210 13.9 -9.1 11.0 10.0 10.0Imports 7,872 15.2 -2.7 12.0 12.0 12.0GDP 9.6 9.1 9.8 8.6 8.9Nominal GDP (CNYbn) 26,309 30,686 33,535 37,928 42,328 47,365

Unemployment rate, % 4.2 4.3 4.2 4.0 4.1Consumer prices, % y/y 6.0 -0.7 3.3 3.0 3.0Current account, % of GDP 9.6 6.1 4.5 4.1 3.7General government budget balance, % of GDP -0.4 -2.1 -3.0 -2.2 -1.8


China


Neither will imports, primarily due to the high import content of exports. But when the pick-up in private con-sumption gradually sets in, it should further boost im-ports. The trade balance will likely remain in surplus, but apart from a seasonal uptrend in the second half of this year, the surplus should diminish during the forecast pe-riod. Inflationary pressure fading Inflation will hover around the government’s inflation target of 3%. The inflationary pressure appears to have eased somewhat as inflation primarily is elevated due to high food price increases that should be temporary. The reported strong wage increases seem to go hand in hand with strong productivity gains and should thus not be that inflationary. While the Chinese authorities have tightened monetary policy in many ways, including tighter lending legisla-tion and reserve requirement hikes, the main policy inter-est rate has not been hiked. In the current situation where the economy is losing momentum, we do not expect more monetary tightening. CNY revaluation has had a slow start China announced in mid-June that it would “enhance the exchange rate flexibility”, but so far this has led to less appreciation of the CNY than one could have expected. The CNY was gradually revalued by 0.7% versus the USD in the second half of June but kept almost flat throughout July. In the first half of August, the USD/CNY was pushed upwards again, reversing a big chunk of the June revaluation. The purpose of this latter move was probably to send the signal to financial mar-kets that the CNY from now on can move in both direc-tions and that there is no one-sided bet for investors in the currency market. We expect a gradual revaluation of the CNY versus the USD by a little above 10% in two years’ time. This re-quires a faster pace of revaluation than at present which for instance could be triggered by renewed pressure on China and threats of trade wars. Bjarke Roed-Frederiksen [email protected] +45 3333 5607

No more double-digit GDP growth

05 06 07 08 09 10 11 120

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16% y/y % q/qGDP

y/y

q/q sa. annualised,(estimated), rhs

Construction investment has yet to slow

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-2

0

2

4

6

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10

12

14

0

5

10

15

20

25

30

35

40

45% y/y

Constructioninvestment,residential

% y/yHouse prices,nationwide, rhs

The future belongs to the household sector

04 05 06 07 08 09 1095

100

105

110

115

6

8

10

12

14

16

18

20

22

24

26

28% y/y

Retail sales, nominal, 3M mov. avg.

Consumer confidence,advanced 3M, rhs

Index

Inflationary pressures appear to have eased

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0

4

8

12

16

20

24

28

-4

0

4

8

12

16

20

24

28

Total

% y/y

Non-food

Food

Inflation % y/y

India


Healthier - but not healthy - outlook for public finances Economic activity has rebounded and GDP growth is back at the potential rate. The domestically driven recov-ery is led by investment whereas private consumption has yet to pick up. But the scene is set for a revival also of household consumption in the coming years. The big rural population will gain from a presumably better har-vest this year than last year as the total rain during the monsoons is set to be higher and closer to the norm. Consequently, just as India was relatively unaffected by the global recession in 2008-09, the economy is this time around set to sustain sound growth despite the currently slowing pace of the global recovery. Public finances are supported by the removal of the huge petrol subsidies. And subsidies on diesel, kerosene and LPG (bottle gas) have been lowered and might be re-moved as well going forward. Government income has received a (temporary) boost from the auction of 3G mo-bile licenses that provided revenues of INR 1tr (1½% of GDP), three times more than budgeted. On the other hand, revenues from the privatisation of public compa-nies should undershoot the budget. The inflation rate will be lifted by at least 1% point by the energy price hikes and will remain elevated at close to 10%. The expected normalisation of agricultural pro-duction compared to last year’s bad harvest should, how-ever, ease the upward pressure from food price increases. The spike in global wheat prices should have a very lim-ited impact as India is self-sufficient and as exports of wheat are banned. Underlying all this, the general infla-tionary pressure persists amid strong economic growth. Monetary policy is already being tightened, and more is in the pipeline as long as inflation does not fall meaning-fully. The high inflation should result in the central bank allowing a further appreciation of the effective exchange rate. This, coupled with our expectation of a stronger USD versus the EUR long term, should mean that the INR could strengthen further versus the EUR, but not necessarily versus the USD. Bjarke Roed-Frederiksen [email protected] +45 3333 5607

Full speed again driven by investment

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14

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12

14

16

18

20% y/y

Investment

% y/y

GDP

Private consumption

“Normal” monsoon to boost rural consumption

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-20

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-10

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0

5

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15

20

25

30

-25

-20

-15

-10

-5

0

5

10

15

20

25 Food production and monsoon rainfall

Long termweatherforecast

Deviation in rainfallfrom normal*

% points % y/y

*Deviation of cumulative rainfall from average (LPA) rainfall. Advanced 1 year

Foodgrains production, rhs

One-offs support public finances this year

Apr May Jun Jul Aug Sep Oct Nov Dec-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0INRtrn

2007-2008

2009-2010

Government fiscal balance(fiscal year, cumulative)

2006-2007

INRtrn

2008-2009

2010-2011

India: Macroeconomic indicators (% annual real changes unless otherwise noted)2007 (INRbn) 2008 2009 2010E 2011E 2012E

Private consumption 28,157 8.2 4.9 6.0 6.5 7.0Government consumption 5,153 16.7 10.5 8.0 7.0 7.0Fixed investment 16,305 4.0 7.2 12.0 13.5 15.0Exports 9,843 20.9 -9.8 13.0 15.0 15.0Imports 12,198 31.7 -7.4 10.0 12.0 12.0GDP 5.1 7.7 9.1 8.8 9.6Nominal GDP (INRbn) 49,479 55,744 61,183 72,257 82,250 93,439

Wholesale prices, % y/y 9.1 2.1 9.0 5.0 4.0Current account, % of GDP -2.2 -2.1 -2.2 -2.0 -2.3General government budget balance, % of GDP -6.0 -6.5 -5.5 -5.0 -4.5

Brazil


Overheating fears abating We have revised up our GDP growth forecast for 2010 by more than 1% point, primarily because of the very impressive growth at the beginning of the year. Eco-nomic activity is slowing as the monetary policy rate hikes sanctioned this year are kicking in. The strong do-mestically driven upswing was after all not sustainable as the economy expanded at a rate above its potential rate, and as such the slowdown is not entirely bad. Economic activity will continue to slow next year, back to around the potential growth rate at slightly below 5% before increasing somewhat again in 2012. Not least the expected increases in global oil and commodity prices should support the economy via its huge commodity ex-ports. There is, however, a risk that growth slows more dramatically. One trigger of this could be if global com-modity prices start falling as a consequence of a more abrupt slowdown in global demand than we forecast. Incumbent President Lula’s preferred candidate for the 3 October presidential election, Dilma Rousseff, has taken a comfortable lead in the polls ahead of the opposition’s candidate, José Serra. There should be no major differ-ences between the two candidates seen from a market perspective, but Rousseff has advocated in favour of a lower central bank inflation target. A victory to Rousseff should also ensure continued strong public support for growth in the short term. Serra, on the other hand, is seen as more market friendly in the longer term due to his stronger focus on fiscal discipline. The fears of the economy overheating are expected to abate and capacity utilisation and unemployment will likely stabilise. Thus, the central bank is soon done hik-ing interest rates. The BRL is vulnerable to swings in global risk appetite and we could see some weakening in the remainder of this year amid worries about the strength of the global recovery. From next year on the BRL should strengthen again supported by the still rela-tively strong growth and high interest rates. Bjarke Roed-Frederiksen [email protected] +45 3333 5607

Growth slowing from very high level

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-6

-2

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6

10

14

18

22

-3-2-10123456789

10% y/y % y/y

GDP

Industrial production, rhs

Fears of the economy overheating should fade

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78

79

80

81

82

83

846

7

8

9

10

11

% %

Capacity utilisation, sa, rhs

Unemployment rate, sareversed

Inflation threat subsiding – only few hikes left

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16

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22

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4

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10

12

14

16

18

20

22% y/y

SELIC policy rate, rhs

%

Inflation targets

IPCA inflation

Brazil: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (BRLbn) 2008 2009 2010E 2011E 2012E

Private consumption 1,594.1 7.0 4.1 7.9 4.6 4.9Government consumption 539.1 1.6 3.7 3.3 3.5 3.3Gross fixed capital formation 464.1 13.3 -10.0 20.0 9.0 11.0Stockbuilding* 23.6 0.5 -1.5 0.0 0.0 0.0Exports 355.7 -0.8 -10.3 18.2 11.2 10.7Imports 315.3 18.0 -11.5 30.1 16.3 14.9GDP 5.1 -0.2 7.6 4.6 5.1Nominal GDP (BRLbn) 2,661.3 3,004.9 3,242.6 3,700.7 4,109.9 4,581.5



Turkey


Amazing recovery The recovery has been quite amazing. Led by manufac-turing production, the economy expanded at a double-digit annual rate at the beginning of the year, and eco-nomic activity returned almost to the pre-Lehman level. For the whole of 2010, we expect growth to be above 6%. Looking ahead, export growth will slow because of slowing foreign demand beginning late this year and con-tinuing into 2011. However, domestic demand is also re-covering strongly and should support growth of around 5% in 2011. The unemployment rate has fallen half way back to the lows from early 2008 as employment has in-creased every quarter since the middle of 2009. Wages have also increased during this period although inflation increased more at the beginning of the year. Still, the la-bour market will offer strong support for private con-sumption in the remainder of the year. Credits to house-holds showed strong growth going into Q3 with a 25% annual increase in July, and consumer confidence is back a pre-Lehman levels. Political risks are significant with two key events ahead. First, parliament will vote on the government’s proposed constitutional amendments on 12 September, which, ac-cording to the AKP, are designed to strengthen democ-racy and bring the constitution closer to EU standards. At present, it is not clear whether the amendments will be passed. Second, general elections are to be held by July next year. Polls currently put the Republican Peoples Party (CHP) close to the AKP, increasing the risk of a looser fiscal policy ahead of the election. Inflation risks have diminished, as inflation fell from double-digits earlier in the year to around 7.5% currently and households’ inflation expectations embarked on a moderate downtrend. The central bank’s (CBRT) target for end-year inflation of 6.5% is likely to be reached, whereas we still see risks related to next year’s target of 5.5% by year-end. The CBRT turned more dovish during the summer and we have postponed the first interest rate hike until next year and have reduced the total rate hike in 2011 to 150 bp. Anders Svendsen [email protected] +45 3333 3951

Recovering

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125

150

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225Indeks 2000=100

Indeks 2000=100

Export

GDP

Investment

Private consumption

Slower momentum ahead

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20% y/y % 6M/6M ar

GDP

OECD's leading indicator,advanced 6M, rhs

Inflation risks have diminished

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5.0

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22.5

25.0

27.5 % %

Monetary policy rate

Inflation

Household's inflation expectations 12-months ahead

Turkey: Macroeconomic indicators (% annual real changes unless otherwise noted) 2007 (TRYbn) 2008 2009 2010E 2011E 2012E

Private consumption 601 -0.3 -2.3 6.0 4.2 4.9Government consumption 108 1.7 7.8 2.5 2.0 1.0Fixed investment 181 -6.2 -19.2 7.9 6.3 6.0Exports 188 2.7 -5.4 9.8 6.7 7.2Imports 232 -4.1 -14.4 10.7 6.5 8.0GDP 0.7 -4.7 6.2 4.8 5.0Nominal GDP (TRYbn) 843 951 954 1,091 1,211 1,332

Unemployment rate, % 11.0 14.0 14.2 12.5 12.0Consumer prices, % y/y 10.4 6.3 8.2 6.2 5.0Current account, % of GDP -5.8 -2.3 -4.5 -5.0 -6.0Public sector balance, % of GNP -1.8 -5.5 -5.2 -5.5 -5.0


Oil


Risk appetite back in the limelight Oil prices are expected to move only moderately higher in the first part of the forecast period as the slowing mo-mentum in the world economy will influence oil demand growth and thereby the pace at which the oil sup-ply/demand balance tightens. In the second part of the forecast period world economic growth is expected to re-gain momentum. The increase in the underlying oil price is then expected to accelerate. In the short term, there is a risk that prices may fall below the underlying trend as fears of a new recession in the US may intensify and weigh on risk appetite. In the medium term, oil prices may surprise on the upside if the rebound in the world economy and the demand for oil is stronger and the in-crease is more rapid than expected. Non-OPEC supply has so far in 2010 surprised on the positive side. Russia managed to ramp up production in 2009, but we expect the expansion potential to be limited if high taxes are not removed to encourage investment in new oil fields. OPEC’s spare capacity is expected to be at comfortable levels in the first part of the forecast period as new capacity will come on stream predominantly in Saudi-Arabia. Iraq, Venezuela and Nigeria have the po-tential to expand production, but political unrest in Nige-ria and lacking investment in Venezuela limit the short-term prospective. The development of the Iraqi oil indus-try will be essential to meet future oil demand. The long-term theoretical potential is substantial, but in the short term political instability and lack of infrastructure ham-per project developments. OPEC’s spare capacity is ex-pected to start dwindling again in late 2011 in line with the uptick in world economic growth. Timely and ade-quate investment in new capacity is vital to meet the fu-ture need for energy. We do not expect any significant and lasting limitations on deep-water drilling as a conse-quence of the accident in the Gulf of Mexico, but stricter environmental and safety standards may extend project lead times and increase development costs. Oil demand is sensitive to global economic growth and industrial activity. The recovery of oil demand is ex-pected to loose momentum in the short term as economic growth in key oil consuming countries is expected to slow. In China monetary tightening and fading effects of the huge fiscal stimulus packages are expected to moder-ate growth in oil demand in the short term, while in the US the housing market and high unemployment will weigh on end-user demand. Global oil demand growth is expected to accelerate again in 2011 in line with the pick-up in world economic activity and international trade. Thina M. Saltvedt [email protected] +47 2248 7993

Oil price forecast – baseline (Brent – USD/barrel) Q1 Q2 Q3 Q4 Year

2008 96.3 122.8 117.2 57.5 98.4

2009 45.7 59.9 68.9 75.5 62.5

2010E 77.4 79.3 77.0 79.0 78.22011E 81.0 85.0 87.0 90.0 85.82012E 95.0 100.0 105.0 110.0 102.5 Oil price scenarios – baseline, high and low price

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Forecast

Baseline scenario

High price

USD per barrel

Low price

USD per barrel

Brent oil price and the OVX index

Dec09 10

Feb Mar Apr May Jun Jul Aug

25

28

31

34

37

40

43

46

4966

69

72

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78

81

84

87

90 Index

Brent crude 1M

OVX volatility, reversed, rhs.

USD per barrel

Brent oil prices in USD and EUR

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160EUR per barrelUSD per barrel

Brent Crude, rhs

Brent Crude

Metals and pulp


Only temporary price dips Industrial metal prices dropped in early summer after the strong spring rally. The key factor stopping the rally was weakened risk appetite. Furthermore, signs of slowing growth in China and the US and obviously the government debt crisis in the Euro area gnawed at the market’s confidence. In late summer, metal prices started to rise again after the situation on the debt market calmed down. Nevertheless, fears of a global double dip have persisted, keeping the market unsettled. Half of base metal demand stems from the emerging markets. Hence, base metal demand growth is based almost entirely on them. The structure of global growth will continue to favour base metal demand. However, the global growth sprint seems to have peaked now. Despite this, we expect the global economy to grow at a decent speed. The pace will slow down in the emerging markets, too, but it will still be brisk. Industrial metal demand will grow fairly strongly across the board. The global recovery also started to tighten the metal market in the winter, and inventories on the whole started to shrink. Supply has, however, already reacted to the price rise and the recovery in demand. Consequently, the supply of most metals will be able to meet demand in the next couple of years. The most obvious exception is copper, as the supply of this type of metal will most likely increase more slowly than for other metals, keeping the market situation for copper tighter. Despite the moderate market balance, base metal prices are unlikely to fall permanently. In the slightly longer term, the market will probably face supply shortages again, sustaining high price expectations. When prices drop, investor interest will rebound quickly. Based on past experience, China will also start to fill its inventories when the price level starts to look attractive. In the next six months in particular there may still be strong fluctuations in the market, as the market is digesting data on the pace of growth, focusing on China and the US. We estimate that economic growth will regain momentum already during 2011, also boosting the metal market. Over the next couple of years, prices are therefore likely to rise. Reijo Heiskanen [email protected] +359 9 165 59942

Markets will stay nervous

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Metal prices (LME)

Index

Metal prices show the way

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Global industrial production, rhs

Metal prices (LME)

%, y/y

Copper supply to remain tight

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Aluminium

Copper

Jan 2004=100Jan 2004=100

Pulp price at a record high

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Denmark:

Helge J. Pedersen, Global Chief Economist [email protected], tel. +45 3333 3126

Johnny Bo Jakobsen, Chief Analyst [email protected], tel. +45 3333 6178 Anders Matzen, Chief Analyst [email protected], tel. +45 3333 3318

Anders Svendsen, Chief Analyst [email protected], tel. +45 3333 3951

Troels Theill Eriksen, Senior Analyst [email protected], tel +45 3333 2448

Jan Størup Nielsen, Senior Analyst [email protected], tel. +45 3333 3171

Bjarke Roed-Frederiksen, Analyst [email protected], tel. +45 3333 5607

Ianna G. Yordanova, Assistant Analyst [email protected], tel. +45 3333 3901

Christine A. Hansen, Assistant Analyst [email protected], tel. +45 3333 3901

Finland: Martti Nyberg, Chief Economist Finland [email protected], tel. +358 9 1655 9941

Reijo Heiskanen, Chief Analyst [email protected], tel. +358 9 1655 9942

Annika Lindblad, Analyst [email protected], tel. +358 9 1655 9940

Norway: Steinar Juel, Chief Economist Norway [email protected], tel. +47 2248 6130

Erik Bruce, Chief Analyst [email protected], tel. +47 2248 4449

Thina M. Saltvedt, Senior Analyst [email protected], tel. +47 2248 7993

Katrine Godding Boye, Analyst [email protected], tel. +47 2248 7977

Sweden: Annika Winsth, Chief Economist Sweden [email protected], tel. +46 8 614 8608

Torbjörn Isaksson, Chief Analyst [email protected], tel. +46 8 614 8859

Bengt Rostöm, Senior Analyst [email protected], tel. +46 8 614 8378

Rickard Hellman, Junior Analyst [email protected] tel. +46 8 6148726

Economic Research Nordea:

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the cur-rent views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of fu-ture results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets. Nordea, Markets Division Nordea Bank Norge ASA 17 Middelthuns gt. PO Box 1166 Sentrum N-0107 Oslo +47 2248 5000

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Nordea Bank Finland Plc Aleksis Kiven katu 9, Helsinki FIN-00020 Nordea +358 9 1651

Nordea Bank Danmark A/S 3 Strandgade PO Box 850 DK-0900 Copenhagen C +45 3333 3333

Economic Outlook, Nordea, September 2010

Economy & Finance

Transcript of Economic Outlook, Nordea, September 2010