SEB: Nordic Outlook: the World is heading towards better economic times – Increasing obalansrisker for the over-stimulated american economy

Sencykliska tillväxtkrafter lift global growth as being above the historical average throughout the forecast period 2017-2019. But the forecasts go a complex balancing act between dramatic political events and classic konjunkturfrågor as growth, endurance, resource situation and inflationskrafter. That is the message from the SEB’s economists in new Nordic Outlook. The statistics, in 2017 has given renewed support to a high-GDP-forecast for Sweden. Överhettningsriskerna are increasing and the Riksbank raises the repo rate two times by 2018 and three times 2019 to 0.75 per cent.

The activity has, despite the dark political cloud on the horizon, had been surprisingly positive in the majority of economies; for example in China, Japan, the eurozone and the Nordic-Baltic countries. The driving forces are increasingly strong labour markets, rising resource utilisation, increased trade and higher asset prices. In addition increased geopolitical risks are also major societal challenges in the form of economic inequality, ageing populations and the sectoral job losses due to digitalization and automation. GDP growth in the OECD area this year and 2018 2.1 per cent and is then to 1.9% in 2019.

Central banks face reduced deflationary and recessionsrisker. There are reasons for a continued expansionary monetary policy, but it becomes more difficult to argue for its more extreme forms. Since 2008, central banks have created a surplus of money of about 15 000 billion dollars, equivalent to 20% of global market capitalization, which increases to about 16 000 billion dollars by the end of 2018. Therefore, monetary policy during the forecast period, a continued expansionary direction but with the step towards the furthernormalization (the Fed), the drawdown/settlement of bond purchases (the ECB, the Riksbank), and the gradual rise in policy rates (the Fed, the ECB, Riksbank, Norges Bank, Bank og England). The phillips curve – which shows the relationship between unemployment and inflation/wage growth – is questioned as a policyankare and communicative tool for central banks, but studies by the IMF and the BIS, and our own estimates, the lands in the conclusion that the correlation persists, albeit weakened. Inflation will therefore be slowly rising 2017-2019 with the continuing challenges to reach the inflation target. The combination of improved growth prospects and the expansionary monetary policy gives further support to stock markets.

The USA’s labour market outweigh the Trumps utrikesretorik and lynnighet

Political turmoil surrounding the Trump-administration does not affect – as expected – the economy significantly and the tax cuts fail to materialise by 2017. GDP growth will be 2.2 per cent in 2017, and 2.4 percent in 2018 and then decline to 2.0 per cent in 2019 due to rising interest rates and increasing flaskhalssymptom. The debt ceiling is raised in the autumn but the White house may continue to difficult to push through its political programme. The labour market is strong with a job growth that is more than twice as fast for what is required to keep pace with population growth. Unemployment will fall to below 4 per cent and lönetillväxten moving slowly up towards 3.5 per cent at the end of the forecast period.

The Fed raises its key interest rate one more time this year, three times during the 2018 and again in 2019 to 2,50%, a level that is below what the Fed consider today as normal (about 3 percent). The monetary policy of the portfolio to be progressively phased out over a four year period and involves a careful monetary policy tightening. This provides support for a stronger dollar, but in pace with other central banks follow the Fed dropping the dollar in strength among other things, against the euro; at the end of 2019 is EUR/USD at 1.25. A weak dollar is good for the more indebted emerging economies.

Growing hopes for new impetus for EU – and eurointegration

Eurozone growth has been the clearest exclamation mark so far in 2017 and the recovery will be increasingly bredbaserad sectoral and geographical. GDP growth will be slightly above 2 per cent in 2017 and 2018 to slow marginally in 2019.The unemployment rate falls by about 1 percentage point to just over 8 per cent in 2019, which is close to the equilibrium level. A likely Merkel/the CDU-victory in the German elections in september, consolidating the image of a much more stable political situation than what was feared at the beginning of the supervalåret 2017, even if the Italian elections in the spring of 2018 still adds some uncertainty. In the future shifts the focus from national elections to an intensive agenda for change of EU and the euro area. A renewed German-French leadership takes a view on the EU elections in 2019, with the ambition to launch a flerhastighetssamarbete from 2025. Uppblossade tensions linked to excessive levels of federalist ambitions, for example between Denmark/Sweden and the heartlands, in combination with the disappointments regarding French structural reforms pose risks.

An improved budgetary situation p a g e economic adjustment programme, growth, and low interest rates allows for a slightly expansionary fiscal policy. If in addition the eurozone will increase the integration and taking steps towards a fiscal union, with Germany as the “guarantor” reduces the pressure on the ECB to keep minusränta and stödköpa bonds. During the autumn, the ECB decision to reduce the monthly purchases from 60 to 40 billion euros in the first half of 2018. Then the program terminated and the deposit rate is raised from -0,40 to sek-0.25%. In 2019, raised the refi rate from 0.00 to 0.50 per cent.

Brexitprocessen continues to be surrounded with a big question mark. Households squeezed by the erosion of purchasing power due to inflation which had risen when the pound lost value. The uncertainty halves the growth in 2018 to about 1 percent compared with the 2017 among other things, due to weaker investment. In the autumn of need to London and Brussels to agree on the rights of citizens and how much London is going to pay for leaving the EU. Although there is the possibility for even a new election.

EM economies gears up for avmattningsperiod

The curves are pointing upwards for the emerging economies (which account for about 60 percent of the world economy in PPP terms) and the GDP-switches total, up from 4.3 procenti 2016 to around 5.0 per cent 2017-2019. Beijing orkestrerar now a part kreditstyrd braking with the goal of a stable economy to facilitate political succession. China’s GDP growth will be 6.8 per cent this year, well above the target of about 6.5 per cent, but falls to the 6,4 respectively, 6.1% in 2018 and 2019. Inflation is expected to be below the informal inflation target of 3 percent. The yuan strengthened during the forecast period from 6,70 to 6,40 against the dollar at the end of 2019. The indian growth accelerates towards levels close to 8% when some reforms are implemented. Russia and Brazil are on the way out of their recessions, but the growth rate of GDP stays around 2% in the coming years due to a lack of reform and the brazilian political instability. Our forecast for emerging economies is based on an oil price (Brent) at 55-60 dollars a barrel, with clear downside risk.

Positive tillväxtsignaler from the nordic and baltic economies

The upturn in the world economy, not least in Europe, contributes to the new tillväxtförbättringar in the Nordic and Baltic countries. The Finnish economy is growing by 2-2,5% per year in 2017-2019 and get extra help of a more stable outlook for Russia. In Denmark will be household consumption, an increasingly important growth engine when the previously tight conditions in the credit market eased; GDP will grow by 2-2,5% per year in 2017-2019. Even in Norway, the picture becomes more positive; the oljesektorns investment recovers and framtidsförväntningarna is positive. GDP will increase by 1.5-2.0 percent per year. In Estonia lift exports growth to a high of 3.6 percent in the year and will then slow down slightly when inflation dampens private consumption. Latvia’s high GDP growth is based bottlenecks in the long term, and rising wage; the growth slopes back from 4.1 per cent in the year to 3.1 per cent in 2019. In addition to exports, investment is a key driver in Lithuania; labour force decreases. The growth slowing down from 3.7 per cent this year to about 3 per cent in 2019.

Sweden at full speed but lack of policy coordination increases the risks significantly

A bredbaserad Swedish growth get the fuel from the pro-cyclical fiscal policy, an extreme monetary policy and a weak exchange rate. We expect that GDP will grow by 3.2 per cent this year, 2.8% in 2018 and 2.4% in 2019. Housing investment remains a key driver, while private consumption is developing quieter and new measurement methods make that public konsumtionsvolym stagnates despite record job growth. Increasingly serious recruitment problems, particularly in the construction industry and the public sector, hampering the growth in the latter part of the forecast period.Despite the rapidly increasing supply of labour is expected the unemployment rate to fall below 6 percent by 2018. Lönetillväxten lift to 3.5 per cent in 2019. An unexpected strong labor supply allows for a longer period with growth above trend and create budgetary fiscal space for new investments. But the signs of an unbalanced bopris and debt trends are clear.

The government consolidates for a valvinst 2018 in a confused domestic political landscape. The government’s autumn budget is expected to contain 30 billion in reforms/stimulus. Absent tax increases means a more expansionary and pro-cyclical fiscal policies. Yet the fall of public debt to just over 35 per cent of GDP in 2019, i.e. in line with the “skuldankaret”. A budget surplus of about 1 percent of GDP per year in 2017-2019 and the Riksbank’s repayment to the Swedish national debt office drives down the debt. A reduced obligationsutbud puts downward pressure on Swedish bond rates.

Even if inflation rises slightly not reached the target of 2 per cent full, despite the economic boom. Increasingly tight resource situation and the normalization in the world still means that the Riksbank will raise interest rates in april 2018 and will then implement a further four interest rate hikes during the 2018-2019 to 0.75 per cent. Monetary policy is extremely expansionary in a strong economy increases the risks of large economic shocks on the term p g a inflated hushållskulder and bopriser.

The crown is in the day 5 per cent undervalued against the euro and the dollar. When the Riksbank increases approaching the strengthening of the Swedish krona. EUR/SEK traded to 9,35 at the end of 2017 and to 9,00 in the end of 2018. In an environment with a strong euro on the global stage rebounds EUR/$ up to 9.20 in 2019. After a rebound in the autumn, is expected to USD/SEK traded to the 8.20 at the end of 2017 but then drops to 7.50 to the respective 7,35 at the end of 2018, and 2019. The negative effect on exports is mitigated by the stronger global economic conditions.

Key figures: International & Swedish economy (figures in brackets are forecasts from the NO may 2017)

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Nordic Outlook

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Source: SEB via Globenewswire