Global Economic Outlook - August 2012

Global Economic Outlook by Cecilia Hermansson 21 August 2012

Ekonomiska sekretariatet, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 7740

E-post: [email protected] Internet: www.swedbank.se Ansvarig ugivare: Cecilia Hermansson, 08-5859 7720

Magnus Alvesson, 08-5859 1031,Jörgen Kennemar, 08-5859 7730, ISSN 1103-4897

The crisis in the euro zone is slowing the global economy and leaving it more vulnerable

The global economy received a temporary boost in the first quarter after the major central banks expanded their quantitative easing, but during the second quarter growth slowed once again. The euro zone is on the brink of recession, the US recovery is sluggish and emerging markets are feeling the impact of weaker demand from developed countries as well as the effects of their own economic austerity in order to mitigate signs of overheating.

The crisis in the euro zone and uncertainty about US fiscal policy will slow the global economy going forward. We have revised GDP growth downward to 3.0% and 3.1% for 2012 and 2013, from 3.1% and 3.4%, at the same time that the expected rise to 3.4% in 2014 assumes that the crisis is handled well and produces stronger institutions and closer integration in the euro zone. We give this muddling-through scenario a probability of 60%. Uncertainty about the euro zone crisis also affects the accuracy of our forecasts. We have assigned the scenario with slower development a probability of 35%, but only a 5% probability that the economy will outperform expectations.

Economic policy here at home has to address the crisis in our most important export market, which affects exports and investment. Moreover, strategies have to be developed to best deal with the prospect of a closer integration in the euro zone, when countries on the outside will risk falling behind. We expect that any anything-but-straight path to a banking union, fiscal policy union, economic policy union and political union will eventually be chosen, since the alternative is a crumbling currency union that will produce huge economic, social and (geo)political costs. It is in our interest that the euro survives and that Europe’s inner market continues to develop.

Cecilia Hermansson Contents: Page:

1. Imbalances are reducing global growth 2 2. Downside risks outweigh upside risks 6 3. Crisis in the euro zone 8 4. Our assumptions about the commodity and financial markets 14 5. Emerging economies are driving growth 23

- USA 24 - China 26 - Japan 28 - India 29 - Brazil 31 - Euro zone 33 - UK 36 - Nordic countries 38

6. Conclusions for our home markets 39

2 Swedbank’s Global Economic Outlook • 21 August 2012

1. Imbalances are reducing global growth At the beginning of 2012 the global economy strengthened more than expected, especially in Germany and Japan. Liquidity injections from central banks probably helped to hide actual conditions and delay the slowdown that arrived in the second quarter. Now there are clear signs of recession in parts of the euro zone and the UK, at the same time that the economies in the US, Germany, Japan, China, India and Brazil have cooled off.

We have revised our global GDP growth estimates downward for 2012 and 2013 to 3.0% and 3.1%, respectively, from 3.1% and 3.4% in the April forecast. Not until 2014 – and with considerable uncertainty – do we expect GDP growth to reach 3.4%, which is still weaker than in 2011.

Global GDP forecast

Source: National statistics and Swedbank’s forecasts. Note: The countries represent around 70% of the global economy. To gauge total GDP growth, add around 0.3-0.4 percentage points.

Due to the strong results early in 2012, current-year growth estimates for certain countries have been revised upward. This mainly applies to Japan and Germany. As a result, weaker development in the euro zone’s crisis countries ended up being more than compensated by stronger gains in Germany. In the US, the positive effect of lower gas prices on private consumption was offset by increased concerns about growth-inhibiting austerity measures set to take effect at the end of the year. While the US forecast for 2012 is unchanged, the euro zone’s has been revised upward slightly. At the same time growth has slowed

GDP growth (%) 2011 2012 2013 2014 2011 2012 2013US 1,8 2,1 1,7 2,3 1,7 2,1 2,3

Euro zone: 1,5 -0,4 0,1 0,8 1,4 -0,5 0,4of which: Germany 3,1 1,1 1,1 1,6 3,1 0,5 1,3

France 1,7 0,3 0,5 1,1 1,7 0,3 0,6Italy 0,4 -2,2 -1,0 0,2 0,4 -1,8 -0,3Spain 0,7 -2,0 -1,2 0,3 0,7 -2,0 -0,8Finland 2,8 0,7 1,4 1,8 2,9 0,8 1,7

UK 0,7 0,2 1,0 1,7 0,7 0,5 1,0Denmark 0,8 0,8 1,2 1,3 1,0 0,5 1,0Norway 1,5 3,3 1,6 2,2 1,7 2,0 2,5

Japan -0,7 2,2 1,3 1,2 -0,7 1,5 1,2China 9,2 7,9 7,8 7,6 9,2 8,1 8,0India 7,2 6,2 6,5 6,8 7,2 6,7 7,3

Brazil 2,7 2,0 3,9 4,1 2,7 3,1 3,5Russia 4,3 3,8 3,9 4,3 4,3 4,1 3,9

Global GDP in PPP 3,5 3,0 3,1 3,4 3,5 3,1 3,4

Global GDP in US dollars 2,6 2,2 2,3 2,7 2,5 2,2 2,6

August Forecast April Forecast

Growth in early 2012 was stronger than expected …

… because of which GDP growth estimates for some countries have been revised upward

Swedbank’s Global Economic Outlook • 21 August 2012 3

more than expected in the BRIC countries (China, India, Brazil and Russia), which necessitated a downward revision.

Our outlook for 2013 has been revised downward even more. Although US quarterly growth will rise in our forecast, the annual rate in 2013 will fall due to the weak start to 2012. The slow improvement in the labour market, troubled small businesses and, no less importantly, the negative effects of budget austerity, which will have to happen in some form, will choke off the recovery. In the euro zone, the recession in two crisis countries, Italy and Spain, is worsening, while the core countries are also seeing a slowdown due to the region’s weaker demand and growing instability in the financial market.

While we expect stimulus measures and economic reforms to strengthen growth in India and Brazil in the years ahead, China’s growth is headed in the opposite direction, though this is desirable in some respects. The shift in focus from investments and exports to private consumption will mean a slightly lower growth rate. This process entails big risks, and experience shows that a “fine-tuning” is hard to accomplish, even for politicians that are used to steering the economy centrally – and should be hard in an economy as large as China’s.

Actual growth in a number of countries

Whether global GDP growth of 3.4% in 2014 will be reached largely depends on crisis management in the euro zone and the speed of the debt restructuring of the public sector in the majority of developed countries. We expect the euro zone to continue to muddle through. Even if the institutional framework is strengthened, many problems will still exist, especially with debt levels being high, the crisis countries struggling competitively and reform needs so great. Growth will be weak or practically nonexistent during the forecast period.

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On the other hand, the US and Europe will continue to weaken in 2013…

… and emerging markets will also grow more slowly

A muddling-through scenario is important to growth in 2014


Another important question is how strong potential growth really is in developed and emerging markets given the economic climate since the financial crisis. By potential production and growth we mean the production and growth that are possible without creating serious imbalances in the economy: the production level at which supply meets demand and actual and projected inflation are in line with the central bank’s explicit or implicit targets.

Debt restructuring in the developed countries is likely to choke investment in every part of the world, which will impact productivity growth. In addition, potential growth could be held in check by increased structural unemployment, which is another reason why the skills that companies need are not available. This could be the case in both the US and Europe.

For emerging markets, the crisis in the euro zone and slow US recovery mean weaker export demand, but also a lower appetite for investment. As a result, there is a risk that investment and capital flows will dry up, adversely affecting productivity growth.

We have previously estimated potential global GDP growth at 4.2%, but this assumes that the US rises by 3.3%, the euro zone by 2.3% and Japan, China, India by 1.5%, 8% and 7%, respectively. Now it seems more likely that potential GDP growth will be less than 4%, and probably closer to 3.8%. Regardless of the debate on potential growth, there is reason to fear that a number of deficiencies and imbalances will suppress global growth in the years ahead:

1. The institutional crisis in the euro zone is affecting the willingness to invest. High debt levels in the public and private sectors in a number of countries are also impeding growth. Other factors affecting growth prospects include a democratic deficit, which is hurting future confidence, weak competitiveness in certain countries, a flawed inner market and generally inferior labour and product markets.

2. The fiscal crisis in the US and Japan, including the high public debt levels, is affecting the willingness to invest, hire and spend.

3. Economic policy is no longer as effective at stabilising economic swings: interest rates can’t be cut any lower in major developed economies, the marginal benefit of quantitative easing is low and shrinking, and automatic stabilisers aren’t totally effective when the need for budget consolidation increases. This raises the risk of protectionism and a currency war.

4. Weak balance sheets in banks in developed countries have led to credit austerity and continued financial instability. This is squeezing investment and growth.

5. Insufficient investment in education is creating problems in the labour market and reducing productivity growth. A lack of resources to invest in environmental and climate-smart technologies and infrastructure due to weak government finances will also affect long-term growth.

How high is potential global growth at this point?

Without scientific precision, we estimate that potential growth has shrunk from 4.2% to 3.8%


6. Growing income and wealth gaps mean that many people will never reach their potential due to educational, health and employment limitations. There is also a risk that several countries will have to deal with a “lost generation”, criminality and extremism.

7. Problems with capital allocation between and within countries. Undeveloped financial sectors in emerging markets are causing capital to flee and seek out more developed markets, where returns are lower. Low interest rates in developed countries could also distort capital allocation there.

In a climate of credit and budget austerity, with a weak risk appetite and reluctance to invest, politicians face growing challenges to maintain sound economic policies that increase efficiencies while also reducing income gaps, and which improve growth prospects in both the short and long term. Politicians who are willing and courageous enough to push through structural reforms that significantly improve the functioning of various markets and incentivise innovation and creativity will be more successful than those who focus solely on budget consolidation. Furthermore, the West has to adapt its welfare systems to available financing and acknowledge that huge annual budget deficits can no longer be accepted.

We have revised our growth outlook downward for 2012 and 2013 compared with our April forecast. More importantly, growth will remain below its potential for several years to come. A number of imbalances in the global economy are stifling growth in the form of high debt levels, skewed capital allocation, institutional and political crises, confidence and democratic deficits, insufficient investment and growing income gaps.

The courage and willingness of politicians to implement reforms will be critical


2. Downside risks outweigh upside risks Uncertainty about global growth is very high, as has been the case in recent years, and forecast errors increase the further in the future we try to predict. Several risks should be emphasised, including political and psychological risks as well as economic. Assumptions about commodity prices entail risks associated with the weather and geopolitical tensions. We have given our “muddling-through” scenario a probability of 60%. In this scenario growth is weak. Even though the problems formulating economic policy and building institutions are numerous and monumental, the work is progressing slowly and gradually, just enough that a total collapse is avoided. Many issues are being addressed at the last moment, which feeds doomsday headlines that a collapse is nigh. Consequently, financial instability is high in this scenario as well.

However, there are also several more or less optimistic scenarios. We consider the downside forecast risks more probable than the upside risks. This applies to how likely it is that they will be realised and to the effects on the global economy if they are.

The probabilities are tied to whether any of the risks are realised, but keep in mind that the scale is fluid: How much will the crisis worsen and how far will commodity prices rise? The effects on the economy vary as a result. If all the downside risks are fully realised, the impact would of course be huge, compared with if one of the risks is partly realised and has a modest impact. This shows that the probabilities are of limited value, though they do provide an indication of whether we feel it is more or less likely that conditions will worsen relative to the main scenario.

1. Downside risks (35%)

A growing crisis in the euro zone, where Spain and Italy need support, but where the rescue funds prove insufficient and the European Central Bank (ECB) lacks the mandate to stabilise conditions. One or more euro countries are forced to exit the currency union, with negative consequences for financial stability and growth. The result: depression, deflation and mass unemployment in combination with a wounded financial sector (see chapter 3 on the euro zone crisis).

The US stumbles off a “fiscal cliff” after Congress fails to agree on a budget. As a result, taxes are raised at the same time spending is cut after the turn of the year. If fiscal austerity is fully implemented, GDP growth would be slashed by 4 percentage points and the US would fall into recession.

The failure of the US and Japan to consolidate their public finances in the medium and long term could affect confidence and create concerns. Their status as safe havens, and the reputations of the dollar and yen as safe haven currencies, could change. If nothing else, a reversal from historically low bond yields to very high yields in the wake of a collapse in confidence would make it that much more expensive to finance the government’s debt and could cause a recession.

Forecast errors increase the further in the forecast horizon we go

If all the downside risks are fully realised, the impact will be substantial


Attempts by Chinese officials to stave off inflation and a housing bubble may have been taken too far with the help of austerity and regulations. Sharp declines in land and housing prices would impact many sectors of the economy, including municipalities. A hard landing is possible in China if growth slows significantly, e.g., if exports are affected by the global crisis at the same time that overcapacity limits investment. If the monetary and fiscal stimulus is insufficient, there is also a risk that unemployment will rise and households will become more cautious. Very low GDP growth could also create political instability.

Higher commodity prices could be caused by new supply problems in food production, e.g., droughts and floods. Geopolitical tension in the Middle East could push oil prices higher than expected. Higher inflation reduces private consumption.

Emerging markets such as India and Brazil have tightened their economic policies to prevent runaway inflation and credit growth. Inflation has eased, allowing more room for stimulus. If commodity prices rise again, inflation will too, limiting opportunities for expansive economic policies. Capital outflows, currency depreciation and falling stock prices could also create financial instability in emerging markets.

Political risks create uncertainty on both the up- and downside. Increased political concerns in connection with the elections in Italy and Germany next year could reduce confidence in the euro zone. Power struggles in the US and China this year could affect political resolve.

2. Upside risks (5%)

Resolute action to address the euro zone crisis could strengthen confidence and shorten the recession in the region.

If supply problems are resolved at the same time that weaker demand keeps prices in check, it could help commodity-importing countries and companies. Lower inflation facilitates expansive economic policies.

A consumption boom in Germany could occur in the wake of lower unemployment and declining inflation. Higher real wages strengthen domestic demand and higher imports reduce the current account surplus. Slightly more expansive German economic policy would benefit the export-oriented euro zone countries now in crisis.

If emerging markets stimulate their economies more than expected, growth may rise in the short term, but with a greater risk of bubbles that burst in the medium term.


3. Crisis in the euro zone Below we discuss the euro zone’s immediate and more long-term problems as well as the solutions required and what is currently preventing decision-makers from choosing them. We also make an attempt to develop various scenarios for the euro zone’s future development.

Euro zone’s problems

The euro zone is wrestling with several types of problems, some more immediate than others. They are related in terms of how they arose and how they should be resolved.

The most pressing problem is increased financial fragmentation and the high bond yields that have resulted in Spain and Italy, which are putting both countries at risk and jeopardising the euro zone’s stability. These countries are in a recession, which could become a depression. Despite its debt reconstruction, Greece appears to be insolvent. There is a lack of confidence that the crisis can be addressed with the current support mechanisms that exist. This is creating fears that one or more countries will default on their debt payments and have to exit the currency union, which would then face the prospect of having to dissolve or undergo a major transformation. Such a process would mean huge costs within and outside the euro zone. If nothing else, the crisis has drawn attention to the institutional weaknesses that have plagued the currency union since its inception.

Another, more long-term problem is that several euro countries, including core countries, have high public debts – and in some cases private debt – as evidenced by the shaky condition of the banking sector. Restructuring public finances and cleaning up the banking system will take time and entails tremendous risks. Credit austerity, weak growth, high financing costs and volatility are affecting investment and consumption. With continued high bond yields, even countries that today are mainly looking at liquidity problems may prove to be insolvent. The institutional framework – the Stability and Growth Pact – was poorly designed, far too weak and did little to stop an escalating and unsustainable build-up of public debt.

The public sector’s gross debt as a percentage of GDP, 2013 forecast

Source: IMF

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Financial fragmentation and the crisis in Greece, Spain and Italy are the most pressing concerns

The public debt crisis and banking crisis are closely related


A third, more long-term problem is the divergence between the fairly well-functioning countries to the north and their competitively weaker neighbours with much bigger imbalances to the south. An undue focus on nominal convergence allowed the latter to join the currency union, and for several countries exceptions were made so they would meet the criteria. Low real interest rates and large capital inflows created a real estate and financial crisis in several countries, in some cases contributing to a bloated public sector. Rapid wage growth, coupled with low productivity growth, weakened the competitiveness of these countries and generated huge current account deficits. The need for structural reforms was widely ignored.

Current account balance as % of GDP

The mere existence of the currency union didn’t create the problems and imbalances described above, but it has made the situation worse and limits how the countries can resolve their problems. The crisis countries are at the mercy of the euro zone to collaboratively find a solution.

Other countries such as the UK, US and Japan are also struggling with debt, but the biggest concern is how the euro zone’s existing framework will handle the high levels of debt. In the US, some states are more competitive than others, but the transfers between them are larger, so when a local municipality occasionally files for bankruptcy the dollar isn’t in jeopardy. The credit risk to lend to these municipalities is increasing, however, and their financing costs will remain high for years to come.

Other countries that have faced financial and real estate crises in recent years include the US, UK, Iceland, Baltic countries and Denmark. The difference is that countries with their own central banks that aren’t members of the currency union have more tools at their disposal, e.g., currency depreciation, printing presses and increased lending. The confidence crisis in the euro zone stems from with the fact that its members have arrogated monetary policy decisions, even though the euro zone hasn’t developed the necessary crisis management resources and institutional framework.

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The currency union has made the crisis worse and makes it harder to resolve it

Other countries have developed similar bubbles and debt crises, but have other tools at their disposal


Which institutions are needed and how well are they working today?

A monetary union won’t work long-term without a fiscal and financial union, as well as a central bank that serves as a lender of last resort, in the opinion of many economists (see, e.g., Jean Pisani-Ferry, 2012). The optimal currency area theory also cites the need for increased financial and fiscal integration.

However, the EU Treaty contains a “no bail-out” clause, which prohibits countries from paying each other’s debts. The idea was to force them to manage their own finances and not turn to others for help. This refers to what is called moral hazard, i.e., that the crisis countries aren’t fully suffering the negative effects of their actions. The Stability and Growth Pact was counted on to reduce the risk that countries which join the currency union would break their pledge to maintain budget discipline. Unfortunately the reliance on group pressure proved misguided.

The ECB is prohibited from monetary financing, which means that the central bank can’t buy bonds from its member countries and monetise the debt. Aside from the moral hazard, there is a risk of accelerating inflation, currency depreciation and financial instability.

A financial union or banking union was never part of the plan, since member countries wanted to retain responsibility for “their banks”. But with a common monetary policy and interest rate convergence it will be hard to put national borders on banking. This has increased the need for a supranational banking authority, which should also be linked to a fiscal cooperation, considering that the balance sheets of the banks and governments are closely intertwined.

Note that although the treaty prohibits countries from assuming each other’s debts, the crisis has forced the euro zone to do just that through the European Financial Stability Facility (EFSF). The ECB also appears to be dabbling with monetary financing by buying government bonds on the second-hand market. One reason why the EU Treaty has been contravened is that the risk of an economic meltdown is seen as greater than the moral hazard and the risk of inflation.

Are there any permanent solutions and what are their limitations?

What are the more permanent solutions to the euro zone’s problems? The financial market has put its faith in the ECB to manage the crisis, since the central bank has the ability to print money in emergencies. Politicians who have a responsibility to their taxpayers back home, e.g., in Germany, prefer to focus on long-term problems by demanding reforms and budget consolidation and in that way increase confidence in the financial market and keep pressure on crisis countries to take responsibility for their own economies. These politicians are demanding that stronger institutions be put in place before more

A currency union isn’t enough – financial and fiscal unions are needed as well

The EU Treaty has prohibited the necessary crisis solutions ...no bail-out clause...

… no monetary financing in the ECB …

… and the banks were regulated and supervised nationally

The crisis has forced politicians to circumvent the EU Treaty


support is offered the crisis countries. The fact that the ECB can no longer buy government bonds before the crisis country in question has negotiated a program with the EFSF is one way for Germany to tighten rules and encourage reforms, at the same time that the ECB in this way – as long as Spain doesn’t ask for a bailout through the EFSF – gives up an instrument that could reduce the immediate crisis (at least temporarily).

There is a tug-of-war between the need for short-term solutions to support the financial market and crisis countries and those who’d rather ensure that the institutions are strong enough for the long term. The tug-of-war is also evident by the need to promote growth, which isn’t always consistent with the need for reform and budget consolidation. While the financial market doesn’t sufficiently understand the political process and importance of taking a long-term view of the currency union, politicians lack a thorough understanding of how the financial market works.

There are short-term problems and there are long-term problems, but both have to be addressed now. It takes time to increase competitiveness and reduce government spending, so reforms will have to be implemented immediately. This could mean deregulation, labour market and pension reform, tax reform and privatisations. Growth would also be positively impacted in the short term, not least from the increased confidence, which would fairly quickly give the economy a jolt. It is also possible that the institutions will first have to be strengthened before the crisis countries receive help. Anything else would be unsustainable. The euro countries wouldn’t be able to withstand another Greek crisis, which means that the framework first has to be changed before Spain can expect to reduce its high bond yields.

The euro countries are slowly working toward an optimal solution for the euro’s survival, where the monetary union incorporates fiscal policy and a financial union that allows the central bank to serve as a lender of last resort and lays the foundation for a common bond market, a so-called Eurobond market.

There are several long-term advantages to a eurobond market, and it could be designed so that every country “wins” by being a part at the same time the moral hazard is reduced. A eurobond market would increase the effectiveness of the European bond market thanks to the increased volume, but it wouldn’t alleviate the immediate crisis. Redistributing the public debt burden from countries with large debts to those with smaller debts is hardly going to improve the euro's image and isn't reasonable if there are enough private assets in the crisis country to possibly redistribute the burden to.

To achieve the optimal solution as outlined above requires a strong commitment to keep the currency union intact and to democratic principles, which may take more time, but in the long run will be more sustainable. By kicking the can down the road, the euro zone’s politicians are not only putting off important decisions in the hopes others will make them, but are also neglecting to find a balance between support and reform

Crisis management is a tug-of-war and balancing act

Short- and long-term problems both have to be addressed now!

This fall's working groups will demonstrate whether the euro zone has taken a step closer to the optimal solution

A eurobond market would be positive in the long term, but doesn’t resolve the immediate problems

The euro zone’s democratic deficit is a huge risk


pressure and to design institutions that work better than those created when the currency union was formed. The 17 euro countries, with their varying national interests, also face the challenge of agreeing on major changes that, despite their reluctance, now appear to be imminent. The fact that politicians have been slow to address the crisis and have focused on solutions unrelated to the central problems (credit ratings agencies, Tobin tax, etc.) has probably only made it worse.

The process to strengthen these institutions is under way based on Herman Van Rompuy’s draft, where the vision incorporates four building blocks: 1) an integrated financial framework, 2) an integrated budgetary framework, 3) an integrated economic policy framework, and one that is especially difficult, 4) ensuring the necessary democratic legitimacy and accountability of the decision-making process. Working groups will formulate the details of this plan at the same time that the ECB has appointed working groups to stipulate the forms of bond purchases, provided that the crisis countries follow the programs prescribed by the EFSF/ESM rescue funds.

Some immediate questions:

1. Will Greece need another bailout since its primary surplus will still have to be very high, and will official lenders accept this? Is it enough that Greece demonstrates a greater commitment to reform for the euro countries? Would other euro countries accept that Greece’s debt ratio would be lower than 120%? The alternative is to give Greece more time to implement the consolidation program, although such a solution also has to be financed.

2. Are other euro countries insolvent and how is this being handled? Though Greece’s debt reconstruction may be unique, the actions have probably contributed to Spain and Italy's high bond yields, since the financial market sees a higher risk. It is reasonable for banks to take losses, but the problem is that the crisis would then spread to other countries. Next in line could be France and Belgium.

3. There is a risk that the ECB will no longer have the instruments to address the crisis if the situation worsens in Spain and Italy. It would take time to find support through the EFSF before the ECB could begin buying bonds? It is important to consider the ECB’s independence; the relatively young central bank is more vulnerable to political pressure. The ECB has said that a program through the EFSF is necessary but not sufficient for it to buy bonds. It claims that it can make its own independent decisions (at least on paper). An alternative would have been if the EFSF, or eventually the ESM if and when it becomes a reality, had been given a banking license to enlarge the fund. Now the ECB is expected to follow bailout programs and boost the bailout funds by buying bonds.

4. Germany has to accept higher inflation to allow the crisis countries in southern Europe to adjust their debt levels and become more competitive. Otherwise they face a risk of deflation. Higher prices and wages will reduce Germany's current account surplus, which would also make it easier for the crisis countries to reduce their deficits. The question is how far Germany is prepared to go, probably not further than maintaining price stability for the euro zone as a whole.

For the vision to have lasting value will require a more democratic process


There is great uncertainty whether the working groups will succeed in creating institutions given the needs that exist, whether politicians in the euro zone will be able to agree on the proposals and whether the national parliaments will approve the changes. Even then it would take some time before the proposals are implemented.

Unless the currency union is more closely integrated, and if instead the next the best solution is chosen, i.e., to develop the ESM and combine it with the ECB’s various tools, there is a risk that the financial market will continue to doubt the euro’s survival. While it is difficult to see any alternative to the optimal solution, the integration could vary in terms of degree, i.e., how far the budget framework is integrated. And what would a banking union look like in terms of supervision, intervention for troubled banks and a deposit guarantee?

What will happen? There are at least four possible future scenarios looking forward:

1. Our main scenario has a probability of slightly over 50%. The muddling-through scenario is a slow, nonlinear process that leads to a further integration of fiscal policy, the financial sector and economic policy. Thanks to stronger institutions, reforms in crisis countries and budget consolidation, confidence improves. The crisis eases, but the efforts to improve growth prospects, reduce the debt burden and improve competitiveness take a long time.

2. Greece exits the euro zone after difficulty agreeing on reforms and budget consolidation, and after the euro countries decide not to provide more money to help reduce Greece’s debt burden. The initial impact on Greece is significant. It is unclear how the euro zone is affected, but the risks are on the downside. The probability of this scenario is just under 50%.

3. Additional countries beside Greece have to exit the euro zone after the debt crisis and political and social conditions worsen, with higher unemployment as a result. The currency union is maintained but with fewer member countries. The costs to restore the national currencies in some countries are high and the spillover effects on the other countries are likely to be great. The probability of this scenario, i.e., that Greece and all the other crisis countries exit the currency union, is lower at around 15% in our opinion.

4. The currency union is totally dissolved. It seems unlikely that all the countries will decide to reintroduce their national currencies, but political decisions can have surprising outcomes sometimes, so we give this scenario a probability of 5%. The political, geopolitical, social and economic effects would be huge: Europe's inner market would dissolve and large parts of the EU cooperation would have to begin anew.

The challenges for the euro zone are gigantic. A great deal is at stake. There is still a political commitment to rescue the euro. The alternative to greater integration is continued weak confidence in the EU's crisis management capabilities with the risk that the financial fragmentation will be long-lasting and that the costs for the crisis countries to adapt will be extremely high.

The integration has to go further – the question is how far member countries are prepared to go

There is a long way to go before any decisions are made and implemented


4. Our assumptions about the commodity and financial markets Since our April forecast, commodity prices have fallen at the same time that stock prices, after gains and losses, are unchanged on a global basis and long-term interest rates for the major economies have been further reduced. (The opposite is true of crisis countries such as Spain and Italy). The euro has weakened against the dollar. In the following, we describe our assumptions about the financial and commodity markets, which serve as the basis for our forecast for 2012-2014.

Commodity markets After rising significantly during the first quarter, oil prices (Brent) retreated during the second quarter in the face of a weaker economy, lower risk appetite and less geopolitical volatility (Iran, Strait of Hormuz). Then, in July and August, the trend again turned higher. A shortage of North Sea oil, a ruptured pipeline in Turkey, and the war and turbulence in Syria and Sudan pushed prices higher, at least short-term. Demand has also risen due to the slowdown in ethanol production from rising corn prices. In the US, WTI oil has fallen in price after inventories rose and production steadily increased. As a result, the difference between Brent and WTI oil again is high at around $20 a barrel.

We expect prices to decline in line with the weaker global economy, which is impacting demand. China's economy is of great importance to oil prices, and even though activity is now growing more slowly demand will continue to rise – though not as quickly. Next year Japan will restart its nuclear power plants, which should reduce global demand slightly.

Total commodity prices, food prices and commodity prices excluding oil (index)

In April we assumed that oil would average $119 a barrel this year and $113 next year. With our revised assumptions, we are now forecasting a price of $110 this year, falling to $104 next


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Big swings in oil prices …

… but we now assume that prices will be lower this year than last year


year. In 2014 oil prices are expected to average $111 a barrel, but uncertainty is obviously very high.

Metal prices have fallen and are expected to continue to trend lower through the end of next year, after which we should see a recovery as the economy and industrial production gain strength once emerging markets have seen the results of their expansive policies. This is also a reflection of production cutbacks by the mining industry, which will eventually push prices higher. Fairly sluggish metal prices have to be seen in light of continued weak global investment growth.

The biggest drama this summer was reserved for food prices. Corn, barley and soy bean prices have all skyrocketed due to droughts (the US, Russia) and floods (Russia). Even if prices gradually ease, they will probably be higher at the end of the forecast period than they are right now. There is growing competition between food production and biofuels, which will lead to shrinking grain inventories and higher food prices in coming quarters. Moreover, export embargos and other trade restrictions could exacerbate imbalances in the global food markets.

Outcome and forecast for commodity prices 2010-2014 (Brent crude, food and metals in US dollar converted to index 2010 = 100)

In April we warned that weather could disrupt food production, which it did. The risk of higher (and lower) commodity prices still remains. This also applies to oil prices, since supplies will remain uncertain for geopolitical reasons. Keep in mind that higher commodity prices usually have a bigger impact on growth when supplies decrease rather than when higher demand drives up prices.

Inflation and interest rates Despite the recent rise in oil and food prices, commodity prices are expected to be lower in 2012 than in 2011, because of which inflation could fall. The recession in parts of Europe, mainly the euro zone and the UK, is also easing price pressure from domestic demand and the labour market. In some countries,

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Metal prices continue to trend lower in the wake of weaker investment

Dramatic rise in food prices

Many risks associated with commodity forecasts

Lower commodity prices are keeping inflation in check


such as Spain, tax hikes are keeping inflation relatively high despite weak demand.

Rate of inflation (CPI) in a number of countries 2006-2012

In India and Brazil, inflation has begun to rise again, which is a problem given the limited opportunities for more expansive economic policy. The rise in inflation is a sign of insufficient capacity and requires investments, including in education, to alleviate resource shortages and infrastructure bottlenecks. In the US, Europe and especially Japan, there is a greater risk of deflation if the negative forecast risks are realised. This also applies to China. In our main scenario, inflation falls, stabilising at around 2% in the US and Europe, while Chinese inflation stays within the comfort zone. Japan would instead see slight deflation as oil imports gradually decrease and economic conditions normalise.

Inflation outlook measured by the annual increase in CPI (%)

Source: National data and Swedbank’s forecasts.

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OutcomeCPI 2011 2012 2013 2014US 3,1 2,1 2,0 2,2

Euro zone 2,7 2,0 1,8 2,0o/w Germany 2,3 1,9 1,7 2,0

France 2,1 2,0 1,8 2,0Italy 2,8 2,7 2,0 2,2Spain 3,2 1,9 1,6 2,2Finland 3,4 2,2 2,0 2,0

United Kingdom 4,5 2,5 1,9 2,0Denmark 2,8 2,4 1,7 2,0Norway 1,3 1,5 1,8 2,0

Japan -0,3 0,1 -0,1 0,0China 5,5 3,0 3,5 4,0India 8,5 7,2 6,6 6,0

Brazil 6,6 5,0 5,2 5,0Russia 8,4 4,6 6,6 6,9

August Forecast

Emerging markets continue to struggle with inflation problems, while developed countries have to avoid deflation


Lower inflation means higher real interest rates. Since benchmark rates can’t be cut much more in most developed countries, low inflation essentially serves as economic austerity. Among emerging markets, Brazil, India and China still have room for rate cuts, but not much (0.25–0.50% in the next two-three quarters), since overheating risks still exist. These countries could complement monetary easing with fiscal easing, however – a measure most politicians in the developed countries can only dream of.

Policy interest rates 2008-2012

The European Central Bank (ECB) cut its benchmark rate from 1.00% to 0.75% on July 11 and in all likelihood it will cut rates again in the third (or possibly fourth) quarter, especially since inflation is slowing and expectations that the ECB will address the crisis have increased since the July 26 statement by Central Bank President Mario Draghi: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough”.

Benchmark interest rates 2012-2014

The impact of another rate cut shouldn’t be overestimated, however. When it comes to Spanish and Italian bond yields, which have reached record levels and are threatening the stability of the euro zone, other tools are needed. The ECB, which on August 2 decided to announce the following, is trying to calm the markets:

The ECB can again buy government bonds on the second-hand market, but only if the country needing such support has sought help from the rescue funds, EFSF or ESM, which can buy them directly when issued, i.e., in the primary market. Remember that it is necessary but not sufficient that the country has a bailout program, since the ECB wants to maintain its independence.


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Policy Interest Rates 17-aug-12 31-dec-12 30-jun-13 31-dec-13 30-jun-14 31-dec-14Federal Reserve 0,25 0,25 0,25 0,25 0,25 0,50ECB 0,75 0,50 0,50 0,50 0,50 0,50Bank of England 0,50 0,50 0,50 0,50 0,75 1,00Bank of Japan 0,10 0,10 0,10 0,10 0,10 0,10

Interest rates will continue to decline in emerging markets

The ECB can and should cut rates slightly more


The ECB is now focused on government bonds with shorter maturities. As a result, 2-year bonds have fallen by about 2.5 bp, while 10-year bonds remain high. There is a risk, however, that the financial market will remain nervous, since the loans will often have to be refinanced. At the same time there is pressure on countries that need help to implement reforms and consolidate their budgets.

Working groups will formulate the details of the bond purchases, which includes the question of seniority, so that the ECB doesn't make it harder for other creditors to get paid back in the event of a debt reconstruction. Another question is whether or not the loans will be sterilised. If they won’t be any longer, quantitative easing becomes a more important consideration. Working out the details will take time. Even getting countries to seek support can take time. There is no assurance either that the euro zone’s governments will approve the ESM. The fact that the Bundesbank doesn't support the ECB’s plan could mean that purchases by the central bank won't be quite as large as the financial market expects.

The ECB already has about 212 billion euros in crisis country bonds on its balance sheet, but its bond-buying plan to date has been tapped very little and with great reluctance. Mario Draghi recommended other solutions when he took over as Central Bank President, and greater focus has been placed on unlimited lending to commercial banks at a 1% fixed rate for three years (about 1 trillion euro) in order to 1) reduce credit austerity and improve lending opportunities, 2) indirectly help the crisis countries by having banks buy their bonds, and 3) indirectly help to strengthen the balance sheets of these banks through the profits they can make by investing in these bonds.

Long-term interest rates (2-year government bonds)

The ECB will actually now be less of a lender of last resort than before August 2, since the bond purchases now require programs whose terms could take time to draft/meet. The strategy keeps the pressure on reform and ensures that the ECB’s purchases won't fill a “black hole”. As a result, countries that can't print their own money are still at risk of not

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Buying bonds isn't a sustainable tool

The new strategy is more sustainable – but still risky


being able to finance their debt if interest rates rise too much (the limit is usually said to be 7%). Since the financial market recognises this dilemma, interest rates on the long end continue to rise at the same time that shorter rates have fallen after expectations of the purchases by the central bank.

The UK, US and Japan, through their central banks – the Band of England (BoE), the Federal Reserve (Fed) and the Bank of Japan (BoJ) – have resorted to quantitative easing by buying government bonds or other assets on the second-hand market. We expect an additional easing during the second half-year in all three countries. The US is likely to focus on buying mortgage and government bonds. The UK is continuing to buy bonds, but there are those who suggest buying other assets (e.g., Adam Posen, who is now stepping down from the Monetary Policy Committee, which sets monetary policy in the Bank of England). Japan has been buying equities and other assets for some time, but hasn't found these measures effective. The financial markets are happy right now, but their joy will be short-lived and they will soon be demanding another easing.

In other words, quantitative easing and fixed-rate loans have been shown to have a diminishing marginal impact. Long-term interest rates are already relatively low in the US, the UK and Japan, as well as in Germany, and in the euro zone’s crisis countries the problem is quite different. There is a limit on how much of their bonds can be held on the balance sheets of commercial banks and central banks.

Long-term interest rates (10-year government bonds)

Since our April forecast, 10-year bond yields in the US, UK, Germany and even Sweden have continued to decline, touching historic lows. Bonds from these countries with shorter maturities have negative returns. Investors seem to think it is more important to get their money back than to get a positive return. Among the reasons for the low bond yields are:


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A new round of quantitative easing is expected this fall from the BoE, Fed and BoJ …

… but will probably have a diminishing marginal impact

Negative returns on government bonds – is it more important to get your money back than to get a return?


1. Benchmark rates are low, and central banks have announced that they will stay that way. Since long-term rates reflect expectations for future short-term rates, long-term rates are also falling.

2. Quantitative easing has put further pressure on long-term bond yields.

3. There are expectations of low inflation and slow growth, as well as the risk of deflation and liquidity traps.

4. Investors are focused on short-term risks (Spain and Italy), while medium-term risks (US, Germany) have been toned down. As a result, investors are seeking what seem like safe investments, but which are only in a relative sense. There is also some question whether investors have become more focused on catastrophic risks since the financial crisis, which is creating a greater need for safety than return.

We expect long-term bond yields to remain low, but that the last point above could create a new set of expectations if the crisis in the euro zone eases somewhat. That could shift the focus to the medium-term problems in the US, which should raise interest rates, since there is little expectation that the country is headed toward a period of Japanese-like deflation. Consequently, interest rates will probably remain low, though rise slightly, and if the emphasis changes from the euro crisis to the US budget crisis they might rise even more. German interest rates are affected by both the flight-to-safety argument, which is keeping rates down at this point, and its future payment responsibility for the entire euro zone, which is pushing rates higher in the slightly longer term.

Exchange rates Since our April forecast, the flight-to-safety argument has increasingly applied to the currency market as well. With the growing concerns in the euro zone, capital has fled the region and the euro has fallen against the dollar. We expect it to continue lower against the dollar for much of the forecast period due to weak growth prospects and continued financial instability. The Swiss central bank has intervened to stop the franc from rising too much in value and had success. The franc is back at the same level as the beginning of 2011. To avoid having too many euros in its portfolio, the central bank is selling off some, which is weakening the euro, and at the same time buying Swedish and Norwegian kronor as well as the Canadian and Australian dollars, which is strengthening these currencies. The rising trend in these currencies isn’t over, since the crisis in the euro zone is continuing and the Swiss central bank (and other central banks and individual investors) isn’t done with its diversification process yet.

The flight to safe currencies is overshadowing the currency market


Nominal currency trends in relation to the US dollar, index 2008-08-15 = 100

China is not letting the renminbi appreciate quite as quickly and has even let it weaken against the US dollar, though it has appreciated against the euro. We now expect the appreciation against the dollar to continue, but at a slower pace than in 2011. The Brazilian real has also weakened against the dollar, which can be seen as a result of weaker growth, higher inflation and lower benchmark rates as well as the government’s attempts to weaken the currency with the help of taxes on capital inflows. Weaker currencies in emerging markets reduce the risk of more talk about a currency war, but increase the risk of rising inflation in these countries.

Exchange rates 2012-2014

Equities The global stock markets (according to MSCI Global) have slightly passed the level they were at when the April forecast was published. After declining, equities bounced back once expectations of another quantitative easing rose. Unlike in 2011, US stock markets have been the top performers, while the trend is negative in emerging markets, the euro zone and Japan – especially in comparison with the first half of 2011, before concerns rose during the summer months. Although we are hesitant to forecast stock prices, it can generally be said that macroeconomic conditions have weakened, making it harder for companies to increase their profits, and it’s uncertain that this has been fully discounted. If we don't see another quantitative easing in the US, UK and Japan at the same time that the ECB doesn't live up to the expectations it has created (Bazooka), there is a risk that pessimism will gain the upper hand.

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FX 17-aug-12 31-dec-12 30-jun-13 31-dec-13 30-jun-14 31-dec-14EUR/USD 1,23 1,16 1,18 1,20 1,22 1,25EUR/GBP 0,79 0,77 0,76 0,75 0,75 0,75RMB/USD 6,36 6,30 6,20 6,08 5,98 5,85USD/JPY 79 80 83 88 90 90

China is not allowing its currency to appreciate as quickly, a trend that will probably continue for a while

Major swings in equities and confidence indicators reflect expectations of more quantitative easing


Stock markets in the emerging world ( MSCI EM), US (S&P 500), euro zone (FTSE EZ 300) and Japan (Nikkei 225) 2007-2012, Index January 2007 = 100

In summary, we anticipate lower commodity prices in 2012 than in 2011, but for oil and metals we see an increase in 2013 and 2014. Food prices will continue to rise in 2012 before turning lower. Interest rates will be cut slightly in emerging markets and the euro zone, at the same time they remain low in Japan, UK and US. Another round of quantitative easing is expected during the second half-year, which will keep long-term interest rates low and stimulate equities. Low interest rates, weak growth and inflation, and a growing need for “safe harbours” for investors’ money will help to keep long-term interest rates low in the US and Germany.

Note that an extrapolation of recent events could prove risky, but on the other hand it is hard to find much of an argument for rapidly rising interest rates and a stronger euro in these precarious circumstances. Further in the future – in 2014 –conditions may change and interest rates could rise faster than we have assumed.


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5. Regions/countries: Few tools available During the second half-year growth will slow in the global economy, and not until next year do we expect a gradual recovery. Unemployment is increasing mainly in the euro zone, at the same time that it is becoming harder to reduce it in the US. Fiscal austerity is expected mainly in Europe and the US. On the other hand China and Brazil will tap expansive fiscal policies, at the same time that monetary policy is also being loosened by cutting interest rates.

Unemployment (%) in several countries/regions

In the current recession developed countries have had to tighten their belts and have mainly resorted to monetary policy in the form of quantitative easing, the effectiveness of which is probably low, while emerging markets have to take a more cautious approach to fiscal and monetary expansion to avoid inflation and other imbalances. Capacity shortages in India and Brazil, for example, mean that these economies are quickly hitting a ceiling and that inflation is rising. Many countries want to keep real effective exchange rates from appreciating, as has been the case for Japan and China since 2008, while the opposite has happened in the euro zone. With or without interventions, the goal is that the currencies will depreciate.

Real effective exchange rates in a number of countries/regions, index

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Unemployment is already high, but is expected to rise further in the euro zone

When the tools run out, hope rests on exchange rates


USA – living a dangerous fiscal life

The slow recovery is continuing and GDP will grow slightly below and above 2% per year during the forecast period.

Unemployment has risen, which should force the Federal Reserve to act with a new program to ease monetary conditions.

If taxes are raised and automatic spending cuts take effect after the turn of the year, the US will fall off a “fiscal cliff” and see another recession. We expect Congress to reach some kind of resolution and avoid most of the austerity.

The US economy is continuing its modest recovery. After a strong quarter at the end of last year, GDP growth slowed to 0.5% and 0.4% during the first two quarters of 2012. A slowdown in the wake of the unstable political climate and weaker global economy are further darkening the outlook for the second half of the year, because to which GDP growth is estimated at 2.1% for 2012. Despite a slight rise in quarterly growth from 0.3% to 0.6% next year, annual growth is expected to slow to 1.7% before eventually rising to 2.3% in 2014.

Among the factors hurting the recovery, besides the global economy, are debt consolidation in the household and banking sectors and continued high unemployment, which is slowing domestic demand. Uncertainty about fiscal policy and the confrontational political climate are also affecting confidence among households and businesses.

US small business owners and their future confidence and hiring plans

However, optimism has strengthened among small business owners compared with recent years, but from a historical perspective small businesses are still struggling and remain cautious in their hiring plans. In the wake of a cooler global economy, the purchasing managers index has fallen below the


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Debt reconstruction, the global economy and political (and fiscal) uncertainty are slowing the recovery


50 mark in the last two months, which suggests that growth has had a hard time gaining traction recently.

After the number of working Americans increased by a monthly average of 226 000 in the first quarter of this year, hiring slowed and the increase for the second quarter was only 73 000. It is too early to say whether the July figure, 163 000, is the start of a more positive trend. Employment growth is relatively good, but the labour supply is increasing as well. Unemployment has risen in recent months to 8.3%, from 8.1% in April. The forecast calls for a slow decline in 2013 and 2014 to 7%, since GDP growth will remain below its potential throughout the period.

The housing market has improved slightly, but from extremely low levels. Housing prices (Case-Shiller) have now returned to the lows of May 2009. Sales of existing homes have risen by nearly 30% since bottoming out in July 2010, but represent only 60% of the number sold in 2005. Housing construction has noted a slightly upward trend since last year, but to only about a third of the number of homes built before the crisis. Though it isn't reasonable to expect the numbers to return their previous levels, thus far the recovery has been shaky and underwhelming and a large inventory of unsold homes still remains.

US household consumption has risen, but cautiously. Retail sales had trended lower since the beginning of the year, but rose in July. Weak incomes and a lack of confidence are keeping consumers from spending, as evidenced by the savings ratio, which has now risen to 4%. Lower inflation and higher unemployment suggest that the Federal Reserve will have to further ease monetary policy. We anticipate some form of quantitative easing during the second half-year, while interest rates remain at their current low levels for much of the forecast period.

A more expansive fiscal policy designed to improve the labour market would probably be more effective considering that long-term unemployment remains high. Instead, fiscal policy will be tightened. By how much depends on the decisions made after the presidential election, but if nothing is resolved GDP growth will drop by 4 percentage points and the US will find itself in another recession after falling off the fiscal cliff. We expect Congress to delay the tax hikes and reduce the spending cuts. Not everything will be put on the back burner, however, and fiscal policy will probably shave 1 percent off GDP growth next year.

The presidential election on November 6 between Obama/Biden and Romney/Ryan is expected to be very close. The current administration is feeling heat from the rising unemployment and a lack of fiscal clarity, but the opposition will have a hard time garnering support for tax cuts for the wealthy and spending cuts for the poor while facing continued uncertainty about the medium-term budget, given the threat of a fiscal collapse in a few years.

The housing market is showing glimpses of improvement, but the gains are from low levels

If a consensus is reached, fiscal austerity will slice 4 percentage points off of GDP growth


China – slowdown and new stimulus

China’s economy is cooling. Exactly how much is hard to say, but we expect GDP growth to fall to 7.9% this year and that the goal to rebalance the economy will be at least partly met, with growth slowing in 2013 and 2014 as well.

If the risk of a hard landing increases, Chinese politicians will choose the easy way out, i.e., increasing investment, though this could create new imbalances and an even harder landing further in the future.

China’s slowdown has accelerated. The second quarter saw GDP growth of 7.6%, which means relatively slow quarterly growth of less than 2%. Other signs of the slowdown include electricity production, which has levelled off; significantly slower growth in industrial production, which is more in keeping with a weak purchasing managers index; lower inflows of foreign direct investment; and decreased demand for commodities in the global market.

During the global financial crisis China’s economy slowed due to lower external demand, and stimulus programs accounted for 13% of GDP over a two-year period. Now domestic demand is slowing, but the crisis in the euro zone is also contributing to weaker growth in China. Investment, especially in the housing sector, has cooled in the face of the growing risk of a housing bubble.

This changes the ways that China can utilise economic policy to stimulate the economy compared with the last slowdown. China’s central bank has already loosened lending conditions (interest rates, reserve requirements), and lending growth is rising again, though this also increases the risk that housing and land prices will also significantly rise again. The stimulus packages in 2008-2009 created imbalances which had to be corrected. This won’t be easy to repeat.

China’s industrial production, inflation and housing prices in Beijing, annual growth rate

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External demand had previously slowed China’s growth – but now it's mainly internal demand


In the aftermath of the stimulus packages, there is now a need for bailouts of local governments, entrepreneurs and property owners. In fact, the debt problem is probably greater than official data indicate. Loose monetary conditions skewed capital allocation, and the investment wave that has been driving China’s growth was allowed to get out of hand.

The country has now taken a step forward by shifting the focus from investment and exports to private consumption. The problem is that when the risk of a hard landing increases, Chinese politicians tend to fall back on their habit of stimulating through investments and exports. This explains the renewed interest in infrastructure investments, though they won't be as big as before, at the same time that there will be less appetite in the private sector considering the overcapacity that already exists. It will take a long time to rebalance growth to private consumption. Higher wages, transfers and improved conditions for households will gradually increase private consumption to around 35% of GDP, moving toward the global average, which in some countries is that double that figure. Political leaders will therefore try to stimulate growth the usual way, without totally succeeding, which will contribute to a slower growth rate in the years ahead. One sign – other than infrastructure investment – is the reluctance to let the currency appreciate further against the US dollar (it is still rising against the euro), in order to protect the export sector. However, this could hurt the relationship with the incoming US administration. President Obama has avoided calling China’s exchange rate policy manipulative, while Romney has threatened during the election campaign to take a different tack.

We expect China’s central bank to cut interest rates at some point this year, especially since prices are beginning to fall at a monthly rate. Reserve requirements are being further reduced and the renminbi has been allowed to appreciate more slowly against the dollar than in 2011. The depreciation against the dollar recently may have accelerated capital outflows, which recently exceeded inflows. This surprisingly caused China’s currency reserves (of about $3 trillion) to shrink.

China has many major challenges to address besides rebalancing its economy: the environment and climate change, demographics and the pension system, healthcare reform, financial deregulation and a growing income gap. The power shift in the Politburo this fall will mean the replacement of several members. Xi Jinping and Li Keqiang are expected to succeed Hu Jintao and Wen Jiabao as president and prime minister next March. It is unlikely that the effects of this shift will be evident initially; changes will be made slowly. Our forecast is for GDP growth of 7.9% this year before it continues to slow to 7.8% in 2013 and 7.6% in 2014. The expectation is that China’s politicians will resist the pressure to significantly stimulate the economy, which would cause bubbles, and instead continue to rebalance gradually. If not, growth could be higher this year and next, at the same time that a hard landing inches closer as new imbalances build up and have to be corrected.

Infrastructure investment is increasing again, but not as much as in 2008-2009

There is going to be a power shift in the Politburo this fall and a new Chinese president in March – but without any major differences


Japan – strong yen and weak demand

After stronger-than-expected growth at the beginning of the year, we are revising GDP growth for 2012 upward to 2.2%, but there are already signs of a slowdown and that growth will fall to 1.3% and next year and 1.2% in 2014.

Japan’s trade deficit is the result of high energy imports, weaker global demand and a strong yen. We expect the yen to weaken during the forecast period.

Notwithstanding the Bank of Japan’s quantitative easing, structural reforms are needed to strengthen confidence in the budget and create greater economic dynamism.

After rising by 1.3% in the first quarter, growth has slowed to 0.3%. Public spending and investment, including in the form of reconstruction after the tsunami, earthquake and nuclear disaster, contributed positively to growth, while net exports contributed negatively. Private investment increased more than expected, and households have benefitted from subsidies for green cars – a measure that has increased private consumption, but where the impact will be felt in the opposite direction later in the year.

Because of the stronger-than-expected gains at the beginning of the year, we have revised our GDP growth estimate upward for 2012 from 1.5% to 2.2%. Considering that the government's contribution to growth is gradually being phased out and net exports will remain negative due to the relatively high costs of energy imports and weaker global demand, mainly from Europe and China, the growth rate is projected to fall to 1.3% in 2013 and 1.2% in 2014, in line with estimated or potential growth.

One reason for the high energy bill is that nearly all 54 of Japan’s nuclear power plants have been idled, which has resulted in higher oil and gas imports, the costs of which have risen by an estimated $100 million per day. During the first half-year Japan reported a trade deficit for the first time in three decades, other than during the financial crisis.

During the summer two nuclear power plants were restarted, which led to major protests, not to mention political consequences for Prime Minister Yoshihiko Noda, whose popularity has weakened. Moreover, the veteran politician Ishiro Ozawa resigned from the ruling Democratic Party of Japan (DPJ) in July and formed a rival party together with MPs who were unhappy with tax policy, including a highly debated VAT hike from 5% to 10%, which now looks like it will be passed. Japan is still struggling with a primary deficit (budget deficit excluding interest payments on government debt) of about 8%, however, which means that there still aren't any strong measures available to reduce the public debt burden (gross debt is expected to reach 240% of GDP by 2013).

We have revised our GDP growth estimate upward this year, but the outlook beyond that is weaker

Nuclear power and tax policy are the source of political tension


Another reason for the trade deficit is the relatively strong yen. The nominal effective exchange rate is hovering significantly above its long-term average, while the real effective exchange rate is only slightly above the average. The combination of weaker global demand and a strong exchange rate is putting pressure on companies, which have surprisingly been more willing to invest than expected.

Nominal and real effective exchange rates

We expect the Bank of Japan to continue to grow its balance sheet by buying assets. A small supplementary budget is expected before the end of the year to stimulate the economy, especially since the global economy is slowing and the governing party needs more support in the upcoming election next year. Deflation is coming back after a period of slight inflation against the backdrop of higher commodity prices. The most important things Japan can do to make its economy more dynamic are to put a stop to deflation expectations, consolidate its medium-term budget in order to reduce the future debt burden, especially for young people, and strengthen the role of women in the workplace. Japanese direct investment abroad has increased owing to the strong yen, but it is also important to welcome more foreign direct investment in Japan.

India – drought and reform fatigue

We have revised our GDP growth estimate downward from 6.7% to 6.2% for 2012, and from 7.3% to 6.5% for 2013. If the reform-weary political climate persists, growth won’t reach beyond 7% during the forecast period.

There are indications that inflation is again rising, which makes it harder for the central bank to loosen monetary policy. One or two rate cuts are possible next year if inflation drops again. India’s public finances are being


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N o m in a l E ffe c tiv e E xc h a n g e R a te In d e x R e a l E f fe c tiv e E x c h a n g e R a te In d e x

Quantitative easing is expected, but the most important thing is structural reform


weakened by food and energy subsidies. There isn’t much room left to stimulate the economy.

The annual GDP growth rate slowed significantly in 2011, from 9.2% in the first quarter to 6.1% in the last quarter. The trend continued in the first quarter of this year, when GDP grew by 5.3%. The decline is slightly larger than expected and can be attributed to weaker global demand, unusually weak monsoon rains, which affected agricultural production, capacity shortages and the effects of the previous tightening of monetary policy.

Inflation measured in wholesale prices has fallen lately, while consumer prices are again pointing higher. High energy prices and slightly higher food prices after the recent drought will push inflation higher, forcing the Reserve Bank of India to take a wait-and-see approach after cutting interest rates in the first quarter. Weaker growth will eventually mitigate inflation, allowing for rate cuts later in 2013.

India’s policy interest and inflation rates as well as the growth rate for industrial production

We expect GDP growth to remain below 7% throughout the forecast period. For the current year we are revising our projection downward from 6.7% to 6.2% against the backdrop of a weaker agricultural outlook. For 2013 we project growth of 6.5%, instead of 7.3% in the April forecast. With the current reform-weary political climate and a modest global recovery, India's GDP growth is projected to rise to 6.8% in 2014.

As a result, India’s economy will continue to underperform. The pace of reform could increase after the former finance minister, Pranab Mukherjee, became president and Prime Minister Manmohan Singh, who has shown a greater interest in modernising the Indian economy, has taken over the role of finance minister. The situation has been complicated, however, by revelations of new corruption scandals in which the prime minister has been implicated. The most important reforms involve deregulating production and the labour market in order to increase capacity and economic dynamism, while reducing


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Weak monsoon rains and tighter monetary policy are hurting growth

If Indians remain reform-weary, growth won’t reach beyond 7% in 2012-2014


corruption, increasing transparency and revising tax policy on agricultural production.

The problem is that the government has demonstrated a lack of budget discipline to date. The drought could lead to higher subsidies, further swelling the deficit. There are few means available to stimulate the economy through fiscal policy, at the same time that monetary policy is limited by prospects of higher inflation. India faces capacity shortages (as the power outages affecting 600 million people in late July demonstrate) and should increase investment in the medium term. About 10% of GDP should be invested per year to maintain GDP growth of 8%. India also has to invest in education, reducing poverty and healthcare. The resistance to reform has to stop, and the bar has to be set higher.

Brazil – focus on investments

Tighter economic policy, a less competitive industrial sector and capacity shortages have reduced Brazil’s economic growth, which we forecast at 2% this year.

In addition to rate cuts and a weaker real, the economy is being helped by a long-term stimulus package to increase capacity. Infrastructure investments are a high priority.

We expect GDP to rise by 3.9% in 2013 and 4.1% in 2014 as investments grow and global demand and commodity prices rise slightly.

Brazil’s economy has benefitted from the high commodity prices in recent years, culminating in 2010, when GDP grew by 7.5%, a figure that also received a boost from the recovery following the financial crisis. Throughout the previous decade the middle class was the primary beneficiary of the programs instituted by former president Lula (the so-called Lula model included reforms, a stronger labour market, higher wages, increased lending and public transfers to households).

Since then growth has slowed. There are several reasons why. The industrial sector has lost ground competitively partly due to a stronger real. Meanwhile economic policy has been tightened at the same time that commodity prices have fallen and global demand has slowed. We expect GDP to grow by 2.0% this year, a downward revision of 1.1 percentage point from the April forecast.

The power outages affecting 600 million people in late July underscore the need for infrastructure investment

Industry has lost ground competitively and economic policy has been tightened


Brazil’s national accounts, from the user side, annual percentage growth

The problem with the Lula model was that there wasn't enough focus on businesses and the conditions necessary to strengthen competitiveness, including an educated workforce and infrastructure investment. Capacity shortages have pushed inflation higher again and forced the central bank to raise its key benchmark rate to 12.5%, before cutting to the current 8% owing to slower growth and falling inflation. Another one or two rate cuts are possible, but it is troublesome that inflation is rising again. Unemployment has continued to drop and now amounts to 5.8%, compared with 11.5% in 2004.

President Dilma Rouseff realises that the country has major investment needs, at the same time that fiscal stimulus can complement the looser monetary policy. A $65 billion stimulus package was launched recently to invest in roads, rails, airports and ports. Shipping a container from Brazil is twice as expensive as from China, and productivity has to be improved. Productivity has increased by 1.5% per year in the last decade, compared with 4% in China.

The stimulus package now being launched has a long-term focus. Just over half will be tapped within five years, while the project as a whole will be spread over 25 years. Brazil is hosting the World Cup in 2014 and the Summer Olympics in 2016, which also require huge investments. Investment currently corresponds 19% of GDP, but will increase closer to 22%, which is needed to reach a growth rate of around 4%. The country will receive some help from foreign direct investment, which grew to $67 million in 2011 from $48.5 million in 2010, but the positive trend could be broken if the global investment appetite runs out and Brazil cannot provide a sufficient return on capital. In the wake of higher soybean prices, a weaker real, gradually increasing global demand and the positive effects of stimulus programs, we expect GDP growth to again rise and reach 3.9% in 2013 and 4.1% in 2014. Downside risks include global demand, in addition to the

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The Lula model focused more on households than businesses

The stimulus package is a long-term measure that is needed to raise potential growth


domestic bottlenecks that are impeding growth in both infrastructure and the labour market.

Euro zone – without reforms, the slump will be even worse

The euro zone is technically on the brink of recession and the crisis countries in southern Europe, including Cyprus and Slovenia, may all end up needing bailout programs during the forecast period. Of most immediate concern for the region is Spain, which we expect to seek help this fall.

The ECB will be able to offer support by buying short-term government bonds. Besides the support through the ESM and ECB, Spain will have to continue to reform, however.

Germany and to some extent France have been able to withstand the crisis to date, but we expect shrinking GDP numbers during the second half-year. France in particular will have to work on its budget and competitiveness to avoid a crisis like the one in southern Europe.

The euro zone’s GDP shrunk at a quarterly rate of 0.2% in the second quarter after having stabilised during the first quarter. On the other hand we also saw a decline in the fourth quarter of last year, so even though the region isn't it technically in recession (as defined by two consecutive quarters of shrinking GDP), the data point to a region in severe crisis – not only institutionally and politically but also economically and socially. Compared with the second quarter 2011, the euro zone has shrunk by 0.4%.

Annual GDP growth in the euro zone and several of its member nations (%)

The differences in growth rates between euro countries were again significant in the second quarter. The most positive quarterly growth, according to Eurostat, was in Slovakia (0.7%), followed by Germany and Estonia (0.3%) and the Netherlands (0.2%), while France’s GDP held steady, which was better than expected. As in previous quarters, Portugal, Cyprus and Italy


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The euro zone is on the brink of recession and the crisis is worsening

Italy is shrinking, while Germany is unexpectedly growing


shrunk the most – by 1.2%, 0.8% and 0.7%, respectively – though Belgium and Spain also declined. Finland’s negative growth of 1% was also unexpected, but could be revised upward (see the chapter of the Nordic countries below).

The downturn in the euro zone, especially in the crisis countries, was expected and should be seen against the backdrop of budget cutbacks, credit austerity and concerns about the future, which are reducing confidence among businesses and households. Rising unemployment is affecting household buying power, which is creating a vicious cycle of lower demand, layoffs, budget constraints, cutbacks and lower demand, etc.

We have revised our GDP growth estimate downward for Italy and Spain and upward for Germany based on worse and better results than expected. The negative drivers will persist, and this year GDP is expected to shrink by 0.4% with negative quarterly growth in the third and fourth quarters. Next year we anticipate a stabilisation or marginally positive growth, but on a quarterly basis the recovery will be modest at best. Growth will remain weak in 2014 at below 1%. In all likelihood growth will be practically nonexistent in coming years and the region will shrink in the short term before stabilising.

To achieve this stabilisation, however, the crisis will have to be managed convincingly. The focus now shifts to the working groups that are focused on greater integration and designing monetary support for countries that have programs with EFSF/ESM, and which will be critical to the crisis management model the region chooses. Some help could also come from a weaker euro and slightly lower oil prices.

Ten-year bond yields continue to diverge between safe economies like Germany and crisis countries such as Spain, Greece, Portugal and Italy. Ireland’s interest rates have come down in the last year and are closing in on Italy's. After the latest move by the ECB on August 2, there are expectations of larger purchases of government bonds with shorter maturities, because of which two-year bonds have declined but remain high.

We anticipate that Spain will apply for a program with EFSF/ESM when the details have been worked out and announced by the ECB. Italy will likely wait to see what happens in Spain, but if the economic and political crisis worsens it may have to go the same route. Spain can apply as soon as September or October. It will also be critical whether ESM is given the go-ahead. The first step is the approval of the German Constitutional Court, after which several other national parliaments will have their say. It is important that the period until these decisions are made is relatively calm. If any new emergencies require attention, European inventiveness will again be put to the test.

The focus shouldn't be on individual quarters, but rather that the region won't grow for some time

A stabilisation would require that the crisis is managed well and confidence increases

Spain and possibly Italy will have to apply for bailout programs


Difference between Germany’s and other countries' 10-year bonds

In Germany, the weak purchasing managers index and industrial production output in the second quarter reflect the major challenges facing exporters, especially since key markets such as southern Europe as well as China and other emerging markets are slowing. In spite of this, exports remained fairly good during the second quarter. Confidence among companies and households has fallen, so GDP growth of 0.3% was unexpectedly strong. Lower inflation and relatively low unemployment may encourage households to keep spending, but we don’t expect a consumption boom. Although fiscal policy won't be tight, a national debt of around 80% of GDP doesn't leave much room for expansion. Germany’s contribution to the euro zone will be to manage the crisis well and accept slightly higher wages and inflation, so that its current account deficit shrinks through slightly stronger imports of goods from crisis countries. Chancellor Angela Merkel has to do what's best for the euro zone, while at the same time focusing on the election in September of next year. Her support remains strong, according to surveys, but if the crisis in the region worsens it will be hard to maintain it.

Support for Francois Hollande of France has slid since he took office. The honeymoon is over. The auto industry crisis is contributing to doubts whether the new government’s economic policy can meet the challenges the country faces. France is losing ground competitively and needs more entrepreneurs and investment. That could make it difficult to introduce a marginal tax rate of 75% on incomes over 1 million euro a year, as expected in 2013. This would affect 3 000 households, but could impact the willingness of many others to invest. Additional measures include higher wealth and inheritance taxes, an extra tax on corporate dividends, a rise in taxes on stock options and surcharges on banks and petroleum stocks. There is instead a risk that investors and entrepreneurs will flee France. On the other hand, tax cuts are planned for small businesses at the same time that a state-owned investment bank will be established for new and small businesses. Whether that's

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Germany will have to accept slightly higher inflation and wage growth

France’s higher taxes on entrepreneurs and capital may prove risky


enough to reverse the trend of high labour costs that are hurting France's competitiveness is hard to tell at this point. We expect growth to remain low and that the government will have to tighten fiscal policy to meet the budget target in the fiscal pact, something that wasn't explained to voters before the election.

In the crisis countries of Greece, Cyprus, Italy, Spain, Portugal and even Slovenia and Ireland, the situation is precarious. GDP is shrinking (Ireland has not yet released its numbers) at the same time that unemployment is rising, confidence is falling and demand is slow. Greece is in a depression, and Portugal could be soon. Structural reforms are needed to complement budget cutbacks, without which there will be no foundation for growth in the slightly longer term. Greece is struggling to convince the troika and the euro zone’s politicians that it is following the reform program and should be given an extension. This could be discussed further down the road, or another write-off when the country is insolvent, but first the new government has to prove its commitment to reform. Spain is struggling with a lack of budgetary discipline by regional authorities, falling housing prices and rapidly rising unemployment. The pace of reform in Italy has slowed, at the same time that political parties are positioning themselves ahead of the election next May. Whether former President Berlusconi intends to continue to pursue his political career is still hanging over the country. The most important thing for Italy is to restore its reform efforts and create confidence at home and abroad, something Berlusconi can hardly guarantee.

UK – the recession deepens

We have revised our GDP growth estimate downward after a weaker-than-expected start to 2012. The euro zone's crisis, budget austerity and slightly weaker competitiveness are slowing growth and deepening the recession.

Lower inflation is allowing for looser monetary policy and this fall the central bank will expand its quantitative easing. Fiscal policy may have to be loosened slightly if the recession continues and worsens.

The UK’s recovery since the financial crisis has been weak with several quarters of negative growth, including last three quarters. At an annual rate GDP fell by 0.8% in the second quarter, which was worse than expected. Growth is being impeded by fiscal austerity, credit austerity and the previously relatively high inflation, which has made households less willing to spend. We have revised GDP growth downward to 0.2% for 2012 and 1.1% for 2013 (from 0.8% and 1.7%). In 2014 growth will reach 1.8%, a modest growth rate from a historical perspective.

The crisis countries are growing in number – Cyprus and Slovenia also face problems

GDP has shrunk in the last three quarters


Inflation and policy interest rate

Inflation has trended significantly lower this year, reaching 2.6% in July. This leaves households with more money to spend. To achieve the inflation target of 2%, the Monetary Policy Committee of the Bank of England recently decided to add another £50 billion in quantitative easing, mainly in the form of government bond purchases. In total, the QE program is now at £375 billion. The bank rate will be maintained at 0.5% in 2012 and 2013, before a period cautious hikes begins in 2014.

Due to the recession, the government has slowed the pace of its austerity program by maintaining wages in the public sector and stimulating investment. If the recession continues, the IMF feels it would help to increase public spending.

Manufacturing shows continued signs of a slowdown. The purchasing managers index is below 50 and the sector is being pressured by weak demand from the euro zone. The pound has been relatively stable against the dollar but has strengthened against the euro, further crimping competitiveness. In addition, productivity has grown more slowly of late, since employment has improved to a surprising degree at the same time that production has declined. In spite of this, unemployment remains high at 8.2%.

Consequently, households remain cautious and are returning to their normal behaviour now that the Olympics are over. The economic impact of the Olympics is considered fairly small in the short term, especially since many tourists were discouraged from coming due to logistical problems. In the longer term the costs will probably outweigh the benefits, but hopefully the festivities will provide a slight boost in confidence, the importance of which to growth shouldn’t be underestimated.

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Lower inflation facilitates monetary policy and increases the willingness of households to spend

A stronger pound and weak productivity growth are making British industry less competitive


Nordic countries – not spared from the euro zone’s crisis

Denmark is cutting its spending at a time when the economy is weaker than normal. Norway’s households, housing market and oil investments are contributing to continued positive growth. The slumping Finnish economy is due to a combination of lower global demand and weaker competitiveness, and hopes have turned to a weaker euro.

The Nordic countries are strongly affected by the global economy through demand for export products, exchange rates and commodity prices. However, relatively low unemployment and a strong social safety net are contributing to decent domestic demand, or in the case of Norway strong demand but with a growing risk of imbalances.

The Danish economy grew by 0.4% during the first quarter after having shrunk in the previous two quarters. By moving public investments forward and increasing transfers to the household sector through the reformed pension system, consumption and investment have risen during the first months of the year. Current debt reductions by households after the housing bubble burst in connection the global financial crisis in 2008/09, coupled with a deteriorating labour market, mean, however, that private consumption will be weak throughout the forecast period. With a shaky housing market, it will take time before construction investment picks up. At the same time fiscal policy will be tightened next year to alleviate the growing budget deficit. The weak global economy, especially in the euro zone, which receives nearly 60% of Danish exports, will limit Denmark's economic growth to 0.8% this year. Gradually rising external demand should push GDP to slightly over 1% in both 2013 and 2014, which remains below the country’s long-term growth trend of about 1.6%.

GDP growth in the Norwegian economy was 1.4% during the first quarter. Measured an annual rate, growth was 4.1%, which (together with Iceland’s 4.2%) is the fastest growth in the region. Stronger domestic demand is the main driver of growth through higher consumer spending and rising investments in the oil industry and housing sector. The strength of the economy, together with the high oil prices, has created upward pressure on the Norwegian krone, which has led to a lower inflation rate but is also a competitive disadvantage for exporters. We expect domestic demand to remain a growth engine throughout the forecast period driven by strong labour market and low nominal interest rates. GDP will rise by 3.3% in 2012 before slowing to 2.0% next year when net exports are expected to contribute negatively to growth. For 2014 we expect GDP growth of 2.5% as external demand strengthens slightly. The challenge for the Norwegian economy is the growing imbalances in the real estate market. The low nominal interest rates and significant rise in

Denmark appears to have climbed out of recession

A strong Norwegian krona and growing imbalances in the housing market are forecast risks


housing prices have led to a rapid increase in Norwegian household debt, which isn’t sustainable. Major swings in commodity prices are another risk factor for the economy.

The recovery in the Finnish economy accelerated during the first quarter after having stood still during the fourth quarter of 2011, but then GDP declined again in the second quarter by 1% at a quarterly rate, resulting in a modest increase of 0.6% on an annual basis. Higher consumption and investment accounted for the majority of the increase, while net exports contributed negatively. The Finnish electronics industry’s problems with lost market share and growing global competition are a contributing factor to the slower growth rate for exporters than in Sweden and Denmark in recent years. The depreciation of the euro provides a competitive advantage, however, especially for the forestry industry. We expect the Finnish economy to grow by an average of 0.7% in 2012. GDP growth will slow during the second half of the year due to the weaker global economy and uncertainty about the consequences of the fiscal crisis in the euro countries. For next year and 2014 we expect GDP growth in Finland to gradually improve to 1.1% and 1.8%, respectively, provided that the economic problems do not worsen in the euro zone.

6. Conclusions for our home markets

The most important export market for Sweden and the Baltic countries is in severe crisis, which will take a long time to resolve. It is natural, therefore, that we would be affected in various ways during this period. This includes deteriorating export opportunities with weaker demand and greater difficulty competing, since the real effective exchange rate depreciates in the euro zone. It also means less willingness to invest by companies in the euro zone as well as here at home, where concerns are causing investments to be delayed. The relatively good situation in which we find ourselves can also hurt the pace of reform.

Another important aspect is that the euro zone has to focus on the crisis and lacks the strength to address other strategic concerns, e.g., Europe’s relationship with emerging markets and a closer integration in the area of services. We are also affected indirectly if the euro zone and the EU lose momentum in this respect.

On the other hand, the efforts to unify the euro countries in a banking union, fiscal union, economic policy union and political union could mean a closer integration, with countries that don’t belong to the euro zone on the outside looking in. Estonia is a member of the euro zone, Latvia and Lithuania have signed the so-called Euro Plus Pact, while Sweden to date has only said that it supports the fiscal pact. The question therefore is how we should approach the crisis and the prospect of growing differences between the euro countries and other EU countries. It’s only natural that financial professionals issue forecasts how they think the euro zone’s crisis will be handled and whether a

Finland is struggling with competitive problems in combination with weaker demand – the weaker euro may help slightly

The severe crisis in the euro zone is affecting us in several ways

It is important to formulate a policy that addresses the current crisis as well as the prospects of a closer integration between euro countries


particular country could be forced to exit the currency. What is more striking is that senior politicians in Finland, Latvia and even Sweden have made such pronouncements publicly. Perhaps they are trying to win over a few euro-sceptic voters. It would seem more important to take political responsibility for supporting those who are trying to resolve the crisis without breaking up the currency union.

It makes sense that the euro countries are trying to create a banking union, since they share a single currency, their banks operate across national borders, and there is a strong connection between governments’ and banks’ balance sheets. Countries outside the euro zone don't have to and probably won't join such a banking union, but will have to accept that a closer integration is now becoming a reality. In some areas, the cooperation could include non-euro countries. The important thing for non-euro countries is to formulate strategies for those areas.

There seems to be little agreement on the costs of dissolving the currency union, but they will probably be huge. There is not only the issue of the instability that would arise from a return to national currencies, but also the more long-term effects for the EU, the inner market, the cooperation on several levels and Europe's relationship with the rest of the world. It is in our interest as well that the currency union survives this crisis.

Cecilia Hermansson

The costs to dissolve the currency union are likely to be huge – it is also in our interest to avoid seeing that happen

Ekonomiska sekretariatet 105 34 Stockholm, tfn 08-58 59 1028 [email protected] www.swedbank.se Ansvarig utgivare Cecilia Hermanssont, 08-5859 7720. Magnus Alvesson, 08-5859 3341 Jörgen Kennemar, 08-5859 7730 ISSN 1103-4897

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Economic Research Department

Sweden

Cecilia Hermansson +46 8 5859 7720 [email protected] Group Chief Economist Chief Economist, Sweden

Magnus Alvesson +46 8 5859 3341 [email protected] Head of Economic Forecasting

Jörgen Kennemar +46 8 5859 7730 [email protected] Senior Economist

Anna Ibegbulem +46 8 5859 7740 [email protected] Assistant

Estonia

Annika Paabut +372 888 5440 [email protected] Acting Chief Economist

Elina Allikalt +372 888 1989 [email protected] Senior Economist

Teele Reivik +372 8887925 [email protected] Economist

Latvia

Mārtiņš Kazāks +371 67 445 859 [email protected] Deputy Group Chief Economist Chief Economist, Latvia

Lija Strašuna +371 67 445 875 [email protected] Senior Economist

Lithuania

Nerijus Mačiulis +370 5 258 2237 [email protected] Chief Economist, Lithuania

Lina Vrubliauskienė +370 5 258 2275 [email protected] Senior Economist

Vaiva Šečkutė +370 5 258 2156 [email protected] Senior Economist

Global Economic Outlook - August 2012

Economy & Finance

Transcript of Global Economic Outlook - August 2012