Changes in economic environment Macro overview and outlook for 2013-2014

Mārtiņš Kazāks, PhDDeputy Group Chief EconomistChief Economist in LatviaSwedbank

27 March, 2013

2

Global 2012 was the year of the ECB bazooka… what next?

© Swedbank 3

GDP growth: has been weak and will remain such in the near future, euro area in recession also in 2013…

-9

-6

-3

0

3

6

9GDP annual growth, %

Sweden Germany

Euro area USA

Average for 2000-2007

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012

China Russia

Source: Ecowin, Swedbank forecasts

2013f 2014f

© Swedbank 4

Confidence: the worst is behind us, but the recent scare is still to show up in the macro data…

30

40

50

60

70

Purchasing manager's index in manufacturing

Sweden USA

Germany Eurozone

above 50 denotes expansion

30

40

50

60

70

2007 2008 2009 2010 2011 2012 2013

China Russia

Source: Reuters EcoWin

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Financial markets: fragility and uncertainty to remain as economies are weak, QE widens, speculations on exit strategies loom and Basel 3 closes in…

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014 2015

Monetary policy and stress in financial markets

TED spread, pp

ECB policy rate, %

3m LIBOR, euro area, %

Source: Reuters Ecowin, Swedbank forecasts

2013f 2014f

Average for 2000-2007

Game changers of 2012:• ECB bazooka and EU political resolve• US housing market recovery, fiscal

cliff turns into a fiscal slope• China power handover rather smooth

so far, less hard landing risks

© Swedbank 6

Financial markets: flushing liquidity builds fertile soil for bubbles and punitive side effects… permanently higher inflation targets?

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013 2014

Government 2Y bond yields, %

Average for 2000-2007

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013 2014

Government 10Y bond yields, %

02468Germany, EUR Sweden, SEK Italy, EUR Spain, EUR

Source: Reuters

© Swedbank 7

Financial markets: deleveraging and credit squeeze still out there, especially among weaklings…

-20

-10

0

10

20

30

40

50

60

2003 2005 2007 2009 2011 2013

Germany

Spain

Italy

Diffusion index of credit standards (for enterprises, past 3 months)

Source: ECB lending survey

Tightening

3Q12-1Q13: expectations for next 3 months

© Swedbank 8

Outlook for 2013-2014: more balanced tail risks, but still plenty of challenges…

Muddling through

65%(60%)

Worse20%

(35%)

Better15%(5%)

GDP growth, % 2012e 2013f 2014fUSA 2.2 2.0 2.3

-0.4 -0.3 0.7of which Germany 0.9 0.2 1.5

China 7.7 7.9 7.5Russia 3.6 3.7 4.1

Euro area

• Policy challenges will be handled, but at the last minute

– Increased fin.mkt volatility, widening SP and IT spreads

– US political gridlock

– Higher commodity prices

– Geopolitical risks, e.g. China and Japan

+ Higher confidence in the EU and US

+ Emerging market stimulus

+ More positive results from QE

+ Lower commodity prices

© Swedbank 9

Outlook for 2013-2014: overall quite weak and still on life support but with some brighter spots...

© Swedbank 10

Baltics So far so good, but how to keep growing fast and sustainably?

© Swedbank 11

GDP growth: balanced, broad based and still keeping up good speed...

-20

-15

-10

-5

0

5

10

15

2004 2005 2006 2007 2008 2009 2010 2011 2012

EstoniaLatviaLithuania

-3%

-4%

-12%

Source: Eurostat

Real GDP growth, %

2013f 2014f

-12-8-4048

2004 2005 2006 2007 2008 2009 2010 2011 2012

LV, QoQ

4Q 2012, % below the peak

© Swedbank 12

Growth model: consumption has strengthened, the underlying long term growth will remain to be driven by exports…

Manufacturing and retail trade, annual growth in %

6

-12

-40

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013

Estonia

2012 vs. 2007, %

6080100120140 Manufacturing output Retail trade turnover w/o motor vehiclesSource: Eurostat

9

-25

-40

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013

Latvia

13

-15

-40

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013

Lithuania

© Swedbank 13

Labour market: improving as employment and wages rise but unemployment falls, future risk is too slow productivity growth…

Unemployment rate (jobseekers), annual growth of wages and productivity, %

2006 2007 2008 2009 2010 2011

Unemloyment rate Real average gross wage Productivity per full-time equivalent

Source: Eurostat, national statistics

-15

-10

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012

Estonia

-15

-10

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012

Latvia

-15

-10

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012

Lithuania

© Swedbank

Deleveraging: how far to go and when does it end?

Resident credit stock, %

14

-20

-10

0

10

20

30

40

50

60

2008 2009 2010 2011 2012

Estonia

2008 2009 2010 2011 2012

Latvia

-40

-20

0

20

40

60

80

100

120

2008 2009 2010 2011 2012

Lithuania

-200020022222

Household and corporate loans as % of GDP Households, annual growth Non-fin.corp., annual growth

Source: national central banks, Eurostat

-2% YoY growth, if net of Parex and LKB

© Swedbank

Real estate: ups, this is a tough one... can afford it but do you need one?

Residential real estate market indicators

0

300

600

900

1200

1500

1800

2007 2008 2009 2010 2011 2012

Talinn

+7%

0

300

600

900

1200

1500

1800

2007 2008 2009 2010 2011 2012

Riga

+7%

0

300

600

900

1200

1500

1800

2007 2008 2009 2010 2011 2012

Vilnius

+2%

Number of transactions Price, EUR/ m2

Source: Source: Swedbank, CSBL, State Land Register

15

2012 over 2011

© Swedbank

Real estate: affordability has improved, but real interest rates are high...

16

40

60

80

100

120

140

160

180

200

2005 2006 2007 2008 2009 2010 2011 2012

Swedbank housing affordability index

Tallinn

Riga

Vilnius

Sources: National central banks, ECB, National statistical departments, Lithuanian Centre of Registers, Latvian State Land Service and National Real Estate

Cadastre, Estonian Land Board and Swedbank.

-15

-10

-5

0

5

10

15

2005 2006 2007 2008 2009 2010 2011 2012 2013

Households, real

NFI, real

Households, nominal

NFI, nominal

Note: Forward looking inf lation; new lending rates for NFI are average for new lending rates for loans up to 1 year. Household rates are for mortgages

LV: lending rates (new lending in EUR), %

Source: Bank of Latvia, CSBL, Swedbank

© Swedbank 17

And competitors are out to fight: invest to maintain hard earned competitiveness gains!

-20

-15

-10

-5

0

5

10

15

IE LV GR LT ES

PT

EE

SE

SK PL

DK

CZ IT NT

FR AT SI

DE

BE

HU FI

UK

LU RO

BU

Source: DG ECFIN

Competitiveness * improvement (-), worsening (+), 2012 vs. 2008, %

* measured as real ef fective exchange rate def lated with unit labour costs

-45

-30

-15

0

15

30

45

-60

-40

-20

0

20

40

60

2007 2008 2009 2010 2011 2012 2013 2014

Estonia LatviaLithuania

Real gross fixed capital formation, annual growth %

Source: Reuters Ecowin

As % of GDP (9M 2012)

© Swedbank 18

Outlook: global muddling through is kind of ok for the Baltics, but certainly there is no reason for complacency…

2012e 2013f 2014f

Estonia

GDP grow th, % 3.0 3.1 4.5

CPI grow th, % 3.9 3.2 2.7

Real gross monthly w age grow th, % 2.0 2.8 3.9

Unemployment rate, % 10.3 10.0 9.4

Latvia

GDP grow th, % 5.4 4.1 5.0

CPI grow th, % 2.3 1.9 3.5

Real net monthly w age grow th, % 1.4 2.7 2.9

Unemployment rate, % 15.0 13.6 11.6

Lithuania

GDP grow th, % 3.3 4.0 4.0

CPI grow th, % 3.9 3.2 2.7

Real net monthly w age grow th, % -0.2 1.6 2.0

Unemployment rate, % 13.2 11.5 10.0

Source: national statistics and Swedbank f orecasts (Jan 2013)

© Swedbank 19

GLOBAL: getting better, but not out of the woods yetstill muddling through, subpar growth, tougher competition, moodiness and financial market fragility, low interest rates

BALTICS: sustain competitiveness and keep growingproductivity growth is the key, need for investment, still the same growth model (i.e., export driven)

… CRISES DO PASS AND WHAT DO YOU DO THEN?

© Swedbank 20

Thank you!

For detailed analysis, see: Swedbank Economic Outlook http://www.swedbank.lv/eng/docs/materiali.php?nmid=0&naid=2

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