swedbank's global economic outlook, august 2011

Global Economic Outlook by Cecilia Hermansson 17 August 2011

Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46-8-5859 7740

E-post: [email protected] Internet: www.swedbank.com Responsible publishers: Cecilia Hermansson, +46-8-5859 7720. Magnus Alvesson, +46-8-5859 3341, Jörgen Kennemar, +46-8-5859 7730, ISSN 1103-4897

Global growth is slowing – without reforms the world economy is at risk

Since our spring forecast, economic growth, primarily in the US but more recently in the euro zone as well, has slowed. Turbulence in the financial markets has increased and confidence is falling. We have revised our global GDP growth forecast downward to 3.8% this year (4.1%) and expect it to remain just under 4% in 2012 and 2013.

Our main scenario, which we give a probability of 60%, does not include a new global recession, but does anticipate a slower recovery in developed countries due to budget austerity. Economically and politically, we seem to be “muddling through”. Emerging countries are driving the global economy.

The risk picture is weighted heavily to the downside. We give a less favourable scenario – where global GDP growth falls below 2% – a 30% probability. The debt crisis is worsening in the euro zone and causing a major stock market sell-off, currency worries and shrinking economies. Even emerging countries don't seem to be immune. On the other hand, we can’t totally exclude the possibility of stronger growth, upwards of last year's 5%. The probability is low, however, at 10%, and requires newfound faith in the political systems in the US, Japan and the euro zone.

This report identifies the needed reforms in the US, the euro zone, China, emerging countries and across national borders. The time for denial is over. We need economic policies that will best help us to overcome the debt crisis that Western countries are now going through and the overheating that worries emerging countries. The EMU is already a transfer union, and a fiscal policy coordinated with the Eurobond market would be a more effective solution. Extensive reforms are needed to strengthen growth prospects over time. Until then decision-makers will have to apply both the gas and the brakes.

Cecilia Hermansson

Contents: Page

1. Our main scenario: Modest growth in spite of everything 2 2. An increasingly complex risk picture 6 3. Economic policy: Few tools 9 4. Our assumptions about the commodity and financial markets 15 5. A lot depends on emerging economies 23

- USA 24 - China 28 - Japan 30 - India 32 - Brazil 34 - Euro zone 36 - UK 40

6. Conclusions for our home markets 42

2 Swedbank’s Global Economic Outlook • 17 August 2011

1. Our main scenario: Modest growth in spite of everything Since our spring forecast, the global economy has continued to muddle through while financial unrest has grown, which is clearly reflected in the recent stock market sell-off around the world. Two key factors are creating nervousness in the financial markets: the debt crisis in the US and Europe, and the risk of a new global recession.

The debt crisis is largely a question of a loss of faith in politicians to manage crises. In the US, it took a long time to negotiate a higher debt ceiling, at the same time that the medium-term debt reduction was insufficient and poorly structured without any tax increases. A debt downgrade by Standard and Poor’s followed soon afterward.

In the euro zone, the debt crisis has spread from Greece, Ireland and Portugal to larger countries such as Spain and Italy. Inadequate institutional frameworks and increased nationalism are undermining the euro cooperation and threatening the currency's future. Interest rate differentials between fiscally “sound” and “unsound” euro countries have been driven higher. Poor growth prospects due to the competitive weakness of many crisis countries also make it harder to manage the budget consolidation process.

Although the most recent rescue package caused Greek, Irish and Portuguese interest rates to fall, Spanish and Italian rates have instead risen. The only way to stop this was for the European Central Bank to buy bonds from these large countries, which is hardly a long-term solution.

Interest rate differential between German and other EU 10-year government bonds

Source: Reuters EcoW in

07 08 09 10 11

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2,5

5,0

7,5

10,0

12,5

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Italy

BelgiumFrance

SpainIreland

UKSweden

Portugal

Economic pessimism and the debt crisis have caused a major stock sell-off

The US debt crisis is the fault of politicians

The euro crisis is worsening as larger countries see interest rates rise

Swedbank’s Global Economic Outlook • 17 August 2011 3

The risk of a double dip recession has grown. In GDP terms, this means global growth of less than 2%. The nervousness stems partly from the purchasing managers indexes around the world, which are now dangerously close to a reading of 50, signalling that there is essentially no growth in industry, and partly from the risk that the stock sell-off will have a negative wealth effect and reduce confidence, in turn leading to lower global trade, consumption and investment.

Purchasing managers index in various countries/regions 2006-2011

Despite the worries in the financial markets, we haven’t changed our view that the global economy will “muddle through”, although we see growth prospects worsening compared with our spring forecast. We are also adding something new by extending our forecast to 2013.

Our growth revisions primarily concern the US and Japan, although the euro zone is also expected to grow more slowly. For the US, the key has been a significantly weaker than expected recovery this year, which can't be blamed on temporary factors alone, but stems more so from major structural problems in the labour and housing markets as well as an antagonistic political climate.

For Japan, the focus has naturally been on the earthquake disaster in March, which has reduced activity this year, but is very likely to raise it starting late this year and for several quarters to come as the reconstruction progresses. We have also had to revise our GDP growth estimates upward in several countries. Germany has strong momentum and is benefitting from demand from emerging countries, along with its relative fiscal strength, a fairly weak euro and low interest rates. Growth slowed more than expected during the second quarter, however, including in France.

S ource : R eu te rs E coW in

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U SA U K Japan Euroland C hina Ind ia G lobal

Growing fears of a double dip

In spite of everything, we are sticking by our main scenario, i.e., that the economy will “muddle through”, but with weaker growth compared with last spring

… but we have also revised the euro zone, through Germany and France, upward…

For 2011, we have revised the US and Japan downward...


China has surprised with stronger growth than we had projected. Even though we see a slowdown in activity going forward, we have revised our GDP growth forecast upward on the basis of the strong results. Many emerging countries are raising interest rates to reduce the risk of overheating, and this is gradually affecting demand. When developed countries grow more slowly, it also reduces the risk of a hard landing. In the event of a major slowdown, economic tools are available, since interest rates can be cut and the government budget can be allowed to expand.

Global GDP forecast

Sources: National statistics and Swedbank’s forecasts. Note: These countries represent about 70% of the global economy. To arrive at total GDP growth, approx. 0.3 percentage points should be added. The World Bank’s weights from 2009 have been used, which raises total figures by 0.1-0.2 percentage points compared with our spring forecast, when 2009 weights were used.

Developed countries aren't in the same position as emerging economies, since they have already used up their “ammunition” in connection with the financial crisis and the global recession in 2008-2009. We still feel, however, that a new slowdown in the global economy like the one we saw after the Lehman Brothers bankruptcy can be avoided. The global economy is better prepared today. The financial system, though far from fully repaired, is not as unbalanced. This time we don’t have as much debt-financed activity, but there is overcapacity still hanging around since the last recession. If the stock sell-off ends without too much damage to the financial sector and the real economy, the recovery can continue, though at a weaker pace.

Nonetheless, growth prospects can be considered fairly decent despite the concerns that currently exist and which the financial markets won't be rid of anytime soon. Following are a number of additional reasons why we believe that the global economy will avoid a new recession:

There is a greater awareness after the Lehman Brothers bankruptcy of the costs to the global economy of not addressing financial turbulence in time

GDP growth (%) 2010 2011 2012 2013 2010 2011 2012US 3,0 2,1 2,3 2,7 2,9 3,0 3,0

Euro zone: 1,8 1,7 1,3 1,3 1,7 1,5 1,5of which: Germany 3,6 2,9 1,8 1,6 3,6 2,4 1,9

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

UK 1,3 1,3 1,6 1,8 1,4 1,5 1,8

Japan 4,0 -0,2 2,8 1,4 4,0 0,6 3,0China 10,3 9,0 8,4 8,0 10,3 8,8 8,4India 10,4 7,8 7,5 7,5 9,1 8,0 7,5

Brazil 7,5 3,8 4,1 4,5 7,5 4,3 4,0Russia 4,0 4,5 4,4 4,2 4,0 4,6 4,5

Global GDP in PPP 5,0 3,8 3,9 3,8 4,9 4,1 4,2

Global GDP in US dollars 4,1 2,9 3,1 3,1 4,0 3,2 3,4

Autumn Forecast Spring Forecast

… while China has also surprised on the upside to date

Few economic tools are left in the West if economic conditions worsen…

… but a new Lehman Brothers-like crash can be avoided


The financial system, though not yet healthy, is less imbalanced today

Emerging countries would be affected by a slowdown, but still could resort to economic stimulus and gradually increase intraregional trade

Emerging countries are “catching up,” which means high growth

Slower global growth is contributing to lower demand for raw materials, which is slowing the rise in commodity prices, and in turn inflation

High productivity and lower cost pressures through wages and raw materials are raising corporate profits paving the way for investment and new hirings

Extremely low interest rates for several years will keep investment costs down

Major need for new investment in infrastructure, energy and climate

However, the recovery will still remain slow in the developed economies going forward, and here is why:

Continued debt restructuring in the private sector and low loan demand

Fading impact of economic stimulus

Negative impact on growth of budget consolidation

Higher benchmark interest rates, though further in the future

Little faith in the ability of politicians to resolve crises

High volatility in the financial markets is a cause of concern

Emerging countries will downshift when faced with overheating

Weak labour markets are hurting consumption

Stiffer regulation of the financial sector could make capital more expensive

Remaining capacity surplus on a global level

A lot depends on emerging countries to keep the wheels of the global economy turning. Yet it is essential for them that developed countries avoid a new recession and at least maintain some growth in order to preserve demand for imports from emerging countries.

We are aware that the risks of an economic decline (or perhaps an improvement) are great. In some sense, the situation is worse today than after Lehman Brothers if the global economy were to truly slide into a new recession, since few economic tools are available to more developed countries – or they are no longer as effective. In the next section, we discuss alternative scenarios and what could trigger them. It’s also worth noting that it is very difficult to build an accurate scenario for the years ahead at a time of financial turbulence and when forecasting parameters change on a daily basis.

In summary, the recovery will continue in our main scenario, but it will be slower than in our spring forecast, and GDP growth will average less than 4% in 2011-2013. Emerging countries represent two thirds of growth during the period, at the same time that developed countries are struggling with the debt crisis, a crisis of political faith and structural problems after the financial crisis, all factors that are restricting growth.

The global economy is dependent on emerging countries, and vice versa

Huge swings make accurate forecasts difficult – risks have to be carefully analysed


2. An increasingly complex risk picture When the global economy is in a period of dramatic change, it is difficult to make reliable forecasts. The assumptions about various markets, political decisions and the reactions to them can quickly prove inaccurate.

In the following chapter we discuss a number of factors that can produce better or worse scenarios than our main scenario. What’s difficult is that the risk picture becomes more complex when risks affect each other. This makes it important not only to analyse risks individually, but also the dynamic between them. The risk picture is skewed, and the forecast risks on the downside are greater in number, more serious and larger than the risks on the upside.

We discuss two scenarios other than our main scenario, one with slower growth which we give a 30% probability, and a better scenario with a 10% probability. Our main scenario is also relatively uncertain, with a probability of 60%.

Main scenario/low growth scenario with global GDP growth of 3.5-4%

In our main scenario, we have projected global GDP growth in PPP terms of 3.5-4% in 2011-2013. In this scenario, the debt crisis doesn’t worsen appreciably in the developed countries, but budget austerity does further impact growth prospects. The political process, like the global economy, “muddles through”, as politicians react to the financial turbulence rather than being proactive. The market jitters will ease, but a significant rebound is not in sight. Emerging countries will manage to maintain growth reasonably well with stimulus measures and without major inflation problems.

A recession scenario with global GDP growth in PPP terms below 2% next year

A global economic slowdown is already evident, and after a delay the stock market sell-off could lead to even lower demand through negative wealth effects and a further loss of confidence among households and businesses. An accelerated slowdown cannot be checked with interest-rate cuts or more expansive fiscal policies in developed countries. On the contrary, we head toward a period of government debt restructuring which constrains growth.

A new recession in the US becomes more likely after the political crisis has worsened, US debt has been downgraded and households lose confidence, which translates into lower consumption. The labour and housing markets are already developing weakly, and if growth slows further we could see a negative spiral of lower confidence and growth as well as a weaker financial sector. The risk of deflation in the US economy will rise if

We also offer one better and one worse scenario – but the risk picture is complex and skewed

We give our main scenario with 3-4% growth a 60% probability, a better scenario 10% and a worse scenario 30%


growth slows significantly. The Federal Reserve can give asset prices a boost through quantitative easing, but can do little to strengthen the labour market or growth. Fiscal policy is too tight at present and too loose in the medium term, but American politicians lack the will and courage to do the opposite, which makes it difficult to lift the US out of a new recession.

A new recession in the US would worsen growth prospects in the rest of the world, including the BRIC countries. Another quantitative easing would again increase overheating problems in emerging countries due to increased capital inflows to them and to commodity markets. This would also make it more difficult for emerging countries to rely on an economic stimulus, which could spark higher inflation. As a result, they may not be able to “rescue” the world this time. Increased capital inflows could also lead to a currency war and protectionism. Chaotic currency corrections have been avoided so far, but could be the outcome if the dollar and/or euro weaken substantially.

An expanded debt crisis in the euro zone that spreads to Spain, Italy and even France would be the most important catalyst for a global recession by spreading to the banking system and real economy. This could be the result if political consensus and courage cannot be found to address a larger crisis. For example, the EFSF won’t be big enough if, in addition to Greece, Ireland and Portugal, Spain and Italy also have problems. This would require more than 1 500 billion euros, compared with the 440 billion euros the fund now has at its disposal. The next version of the fund, ESM, won't be enough either, at 700 billion euros. If the big euro countries have problems, responsibility will rest squarely with AAA-rated Germany, France and the Netherlands. The sovereign debt crisis would worsen at the same time that more banks go bankrupt or are rescued by already highly indebted governments. The euro’s collapse would no longer be unlikely if the political will can’t be mustered, which could be the case if responsibility rests squarely on Germany and the Germans tire of financing the rest of the euro zone’s overconsumption.

A huge stock sell-off and anxiety in the financial markets that spreads to the real economy and banking system would be the outcome of a major debt crisis in the euro zone and a new recession in the US.

Social unrest increases in the wake of high unemployment and a sharp decline in future confidence, particularly among young people. Violent protests, revolts and uprisings, especially in developed countries, pave the way for greater populism and nationalism.


This leads to even greater political impotence, which in turn accelerates the collapse of the euro.

An expanded crisis in connection with the democracy movement in the Arab world spreads to Saudi Arabia, causing oil prices to rise and threatening supplies.

Another reason why commodity prices could stay high in a negative growth environment is if emerging countries develop fairly strongly with high demand for raw materials, while developed countries continue to slide backward with an increased risk of a stagflation scenario.

Even if the effects on the global economy shouldn’t be overestimated, natural disasters, climate change, power shortages and other infrastructure problems, war and terror, and, not least, the “unknown factor” could also hurt future confidence and set back the economy, serving as a catalyst for a major slowdown in an already negative growth climate.

A high-growth scenario with global GDP growth upwards of 5% or more next year

Worries about a new recession turn out to be overblown, as evidenced by China's strong export data for June. Nervousness in the stock market eases and does not have a major impact on the economy. The recovery continues to gain momentum once sentiment changes from pessimism to optimism.

The financial system has repaired the large part of its balance sheets and is ready to begin lending again, at the same time that consumer debt restructurings wind down, which leads to increased credit demand.

Lower commodity prices and cost pressures create higher profits. With higher productivity and better confidence, the willingness to invest and recruit rebounds.

Decision-makers find the strength and courage to address the current crisis. Instead of reacting, they take the initiative with respect to the euro cooperation, the US medium-term budget consolidation and Japan’s longstanding debt crisis and political crisis. Confidence grows when measures have a tangible effect. Politicians collaborate nationally across parties and also succeed in achieving greater international coordination. Although the measures could weaken growth through austerity, there are greater positive effects from increased confidence, which creates a willingness to invest and consume.


3. Economic policy: Few tools The same crisis – but it has expanded to the public sector

When the financial crisis erupted in 2008, few people predicted that the debt problems in the private sector would spread to the public sector and that it would take years to overcome. An economic recovery may have begun in 2009, but with the stimulus programs it was hard to tell how self-sustaining it was and whether it was mostly just a bounceback after the severe recession.

Countries with balance sheet problems such as the US, the UK, Spain and Ireland have had a hard time recovering. The balance sheet recession they face requires major structural changes to the economy. The focus in their case is on debt restructuring and less willingness to borrow and consume. Countries without imbalances, such as Germany, Sweden and Finland, have recovered reasonably well, in no small part due to strong growth in Asia, Latin America, the Middle East and Africa.

The problem is that it is the larger industrialised countries (Germany accepted) that are now reporting huge budget deficits and swelling government debt. Countries that originally had problems with private debt are being joined by others with large public debt such as Greece, Italy, Belgium and France.

There are fears that the public debt crisis will work its way back to the private sector through the banking system and that the next crisis will include not only credit problems but also currency problems due to a collapse of the euro zone. There is also a risk that the private and public debt restructuring will adversely affect growth, without which any debt restructuring will be even more difficult.

Economic tools – then and now

The realisation that politicians and central bankers do not have the same ammunition to stop a new recession that they did in 2008/2009 is now baked into expectations. Back then benchmark rates were cut to nearly zero, quantitative easing reduced long-term interest rates and drove up stock prices, liquidity was supplied, and banks were rescued, at the same time that fiscal policy supported the economy through higher spending and/or lower taxes.

Stimulus packages were coordinated around the world, including with emerging countries, which gained a stronger voice through the G20. It was fairly easy to be a politician, and the financial markets appreciated the resolute efforts to support the financial sector, asset markets and the economy. Economic policy has now become more of a national concern, and in the absence of any tools it has become much more difficult to be a policymaker.

An important distinction from an economic standpoint is that interest rates are already low and that it is generally felt that

The 2008 financial crisis is still alive and has mutated

Nearly all industrialised countries have debt problems

The lack of ammunition is a cause of concern


another quantitative easing would have little effect. While an easing could lead to higher stock prices, they won't last if the global economy still shows signs of weakness. At the same time a quantitative easing produces higher capital flows to asset and commodity markets, with an increased risk of overheating. Furthermore, demand for government bonds is relatively high in countries with a balance sheet recession, since many investors have to seek out safe havens. This is also evident by the decline in long-term interest rates despite the stock market turbulence.

Another important distinction – including from a political standpoint – is that there is little or no support for a new fiscal stimulus. That includes countries where the financial market could finance one without exorbitant risk premiums, such as the US, Japan and the UK. For countries with balance sheet recessions, monetary policy isn't the important thing, since businesses and households have less interest in borrowing. Instead, there is more focus on fiscal policy, especially in combination with structural reforms, to raise growth potential.

The crisis in the euro zone leaves few alternatives other than austerity, even at a point when the recovery is unravelling. For crisis countries, risk premiums are soaring and they are finding hard to finance their deficits. In the US, the Tea Party movement has made another stimulus, e.g., to help the labour market recover more quickly, politically inexpedient. Instead, the emphasis has shifted to reducing the size of the government regardless of the potential impact.

Political leadership and economic advice

We have acknowledged that the job of politicians has been made more difficult by a lack of tools. In addition, the scope of the crisis has become more complex. When a crisis becomes less acute, the focus shifts to moral hazards. The economy cannot be stimulated without considering the driving forces, i.e., whether the system is encouraging market participants to create or avoid a similar crisis in the future. Crisis management now seems to mean biding time. In the euro zone, politicians won't react until the financial markets act, and usually ineffectually, which has led to a steady succession of new summit meetings.

A lot of attention is being paid to how voters will react to political decisions. This is especially true in Germany, where the reluctance to pay for the debt problems of its undisciplined neighbours has grown. Nationalism has been allowed to fester, and real problems are being obscured. Instead we hear a lot of sloganeering: “The euro is stable and secure” or “The euro won't collapse”. What aren’t being discussed enough are a vision and the benefits of an integrated Europe.

If crisis management has been a stumbling block for politicians, economists seem to disagree on the right advice, which certainty doesn’t make it easier for politicians. Some suggest that another quantitative easing is needed, while others want it to end. Some

A fiscal stimulus may be economically motivated…

… but there isn’t a political consensus

The crisis management capabilities of politicians leave much to be desired …

… but contradictory advice from economists hasn’t helped


want to see a fiscal stimulus, while others want to see rapid, far-reaching austerity programmes.

Another difference compared with 2008/2009 is the labour market. Unemployment has soared in many crisis countries, or taken longer to decline. Strikes, demonstrations and violent unrest are a sign of resignation, anger and fear. Many young people are at risk of becoming a “forgotten generation” with a lower standard of living for the rest of their lives. Income gaps and social tension are growing.

Political developments have become a source of growing concern when assessing the economy. In addition to economics and psychology, political science has to be included for a holistic perspective. A lack of faith in the political process is affecting the willingness to invest and consume and hurting stock prices.

One area that has to be better explored is the euro zone’s development from a democratic standpoint. Can political leaders agree on changes at summits without having to rely on commissions to voice objections and make improvements? How do you create confidence in such a process, which is now inexorably leading to greater supranationalism as a result of the debt crisis?

In the US and Japan, the bigger question is how political campaigns are financed and what it means to political decisions? In the US, it is never easy to raise taxes on the rich, who not insignificantly are the ones who pay for election campaigns. The divide between politicians and voters is growing, which is making it more difficult to reach effective economic policy decisions.

What’s a sensible policy from an economic perspective?

From an economic perspective, we suggest several measures below to reduce the risk of a new recession and slow the crisis in a few years’ time. We focus on developments in the US, the euro zone, China and other emerging countries. We also offer suggestions for better international accords.

USA

President Obama has to explain the seriousness of the recession (a balance sheet recession) that the US is in, why the usual tools aren't working and why fiscal policy is more important than monetary policy at this juncture.

Another fiscal stimulus targeting growth and jobs is needed in the short term, but with tighter budget consolidation in the medium term (the opposite of what is now being done). Greater clarity with regard to medium-term fiscal policy would strengthen confidence.

Taxes and spending eventually have to be balanced by expanding the tax base, eliminating deductions and increasing taxes on the wealthy. A reassessment of the social security system and defence spending is needed.

A new round of quantitative easing is reasonable only if there is another recession and deflation signals increase. The introduction of an inflation

Forecasters are becoming increasingly interested in political risks


target to increase the independence of the central bank could improve confidence.

Structural reforms are needed to improve the housing and labour markets, with a focus on encouraging hiring and employability, especially among the long-term unemployed.

Reshaping the political system is also important to the economy. This includes reforming campaign financing laws, changing the size of voting districts and increasing the effectiveness of Congress.

The euro zone

The currency union is irrevocable, which has to be realised. If a country is forced to leave (e.g., Greece), expectations are that its currency (drachma) will weaken, leading to capital flight and the spread of the banking crisis to other countries. This wouldn't apply to Germany, where expectations are the opposite, i.e., that the currency (D-mark) would strengthen and lead to capital flows from other countries. Of course in Germany’s case it would also mean lower exports due to a stronger currency and the crisis in the rest of the union. Rescuing one or more countries is less costly than breaking up the entire union.

The time for denial should be over within the euro zone, including Germany. The euro zone’s debt crisis is not only a liquidity crisis but also a solvency crisis. Aid packages have to contain better terms and write-offs. For Greece, for example, the percentage agreed to on July 21 is too small, since its debt ratio will reach 150% of GDP and it will lose a decade in terms of GDP growth.

The state of denial includes the euro zone’s banks. Excessive write-offs threaten their balance sheets and they therefore have to recapitalise in expectation of the next round of write-offs. The expansion of the European Financial Stability Facility (EFSF) is a step in the right direction, since it can now (if parliament ratifies the proposal) be used to support banks in crisis, not only countries in crisis.

It is also time for the crisis countries to stop denying reality. They are waking up too late after risk premiums have risen and their deficits can no longer be financed. The crisis countries have to surprise the financial markets with more extensive reforms and a greater focus on growth and competitiveness – Italy’s nominal growth must exceed the interest rates on its debt. Austerity programmes have to be reasonable based on effectiveness and income distribution, with a sensible balance between spending cuts and higher taxes. The emphasis must be on eliminating bureaucracies, inefficiencies, tax evasion and the informal sector. Privatisations are often necessary, not least to raise productivity.

The European Central Bank (ECB) has adopted a questionable attitude toward its responsibility as a lender of last resort. Although the ECB wasn't supposed to assume the responsibility of politicians to rescue governments in need, it has purchased nearly 100 billion euros in government bonds from Greece, Ireland, Portugal and most recently Spain and Italy. This is in addition to just over 400 billion euros in outstanding loans to banks in June, two thirds of which were to banks in Greece, Ireland, Portugal and Spain. The ECB is protective of its independence and now may have to ask governments in the euro zone for a recapitalisation. The question is how long the ECB can keep buying Italian and Spanish government obligations and where to draw the line, as well as what would happen if it withdraws its support?

The idea that the EFSF, with an estimated size of 440 billion euros (its lending capacity is now 225 billion euros), would be big enough even if Italy faced major problems is questionable. Instead, the fund would have to triple in size to 1 500 billion euros or more to handle a more serious crisis. The question then is whether France and Germany could maintain their high credit ratings, which they need to get the best interest terms. When


the European Stability Mechanism (ESM) takes effect in July 2013, conditions will be more stable with a lending capacity of 500 billion euros and a total facility of 700 billion euros. Of this amount, 80 billion euros will be paid through tax revenues and the rest of the capital can be called in or guaranteed.

The ECB’s bond purchases and risk of recapitalisation, as well as the EFSF and ESM stability facilities, clearly show that the euro zone has already developed into a transfer union in spite of denials by politicians. The question is what’s the best way to facilitate transfers, so that they are effective economically and acceptable politically. The currency union has to be complemented by greater fiscal coordination, a common bank regulator and a central bank that takes responsibility as a lender of last resort. That would help to instil the confidence in the common currency that politicians are hoping for.

A Eurobond market doesn't solve the immediate problem of the need for debt write-offs and support mechanisms. However, it would certainly go hand in hand with greater fiscal coordination and automatic sanctions if budget rules aren't followed. A proposal by the think tank Bruegel (“The Blue Bond Proposal” by Jacques Depla and Jakob von Weizsäcker) would pool Eurobonds up to 60% of GDP (about 5 600 billion euros) and assign this tranche – the blue bond – a lower interest rate than the current average. Thanks to the increased liquidity, even countries such as Germany might find the proposal appealing, and the euro’s position as a reserve currency would be strengthened. Member states themselves would have to manage debts in excess of 60% of their GDP. Lower liquidity and higher interest rates would be an incentive to reduce debt to 60%. This proposal addresses moral hazards and maintains budget discipline despite the joint Eurobond. In addition, an institution is needed to oversee the allocation of blue bonds, so that mismanaged countries are no longer allowed to participate. By extension, the federal budget has to expand as well and extend its focus beyond common agricultural and structural policy.

The currency union is an economic project that complements the EU’s integration and strengthens the region’s position in the global economy. At the same time it is just as much a political project, which requires a political commitment to support the cooperation. The problem today is that national concerns have taken precedence at the same time that democracy has been overshadowed. It wouldn't be unreasonable to transition from poorly prepared and less-than-transparent summits to commissions that are given more time, produce reports and allow for objections and discussions. Complementing the currency union with a fiscal union, a common bank regulator and a central bank that takes full responsibility will take time, but the important thing is that the process begins with a vision and openness.

China

A continued – and possibly faster – depreciation of the renminbi is needed to choke off inflation and strengthen domestic demand, which would also reduce global imbalances.

It is important that Chinese financial sector and financial markets develop and that renminbi becomes convertible, but a deft touch is required, as well as a change in China’s growth model. Greater openness is needed for foreign players in China’s financial sector, in addition to greater opportunities for the Chinese to do business abroad. The process is under way, and it is important that it continues.

Improvements to the social security system would reduce the need to save. Domestic demand could then increase and income gaps would eventually shrink.

Increased transparency about debt is important on the part of the national government, public authorities and regions. Officially, government debt as a share of GDP is less than 20%, but all indications are that total debt is higher, 50-70%. To understand how much room there is for a stimulus,


debt and inflation data have to be more transparent. Better GDP data is also needed.

Emerging economies

Supply and demand have to be better balanced to avoid overheating, e.g., in India.

Fiscal policy has to be tightened where signs of overheating are strong and growth is high, e.g., Brazil.

The peg to the dollar has to be removed to avoid external and internal imbalances, e.g., the Middle East.

Subsidies have to be reduced to improve economic drivers and reduce budget deficits. This includes increased use of environmentally friendly energy, e.g., the Middle East, India.

Efforts to reduce corruption must be intensified in a number of countries, including India, Brazil and China.

Across national borders

The separation of responsibility between the Basel Committee and the Financial Stability Board (FSB) is unclear, as is the line between the banking system and the shadow banking system.

Decisions to regulate capital flows and currencies are made at the national level despite international effects.

The G20 has lost steam. Greater efforts are needed to determine whether the Basel III capital requirements are sufficient (which seems doubtful), how banking activities should be managed across national borders (including large institutions and what happens when they fail), and the role of the International Monetary Fund (IMF) in managing global imbalances, volatile capital flows, exchange rate problems and uncertainties about the build-up of foreign exchange reserves.

The desire of China and other countries to use Special Drawing Rights (SDR) as a new currency isn't realistic; it would make more sense to prepare for a transition from the dollar as a reserve currency to a triumvirate of the dollar, euro and renminbi – a reality in about a decade given that China’s financial sector will continue to develop and that there is still confidence in the dollar and euro as global currencies.


4. Our assumptions about the commodity and financial markets In the following, we describe the assumptions that support our forecast with respect to the commodity, equity, fixed income and currency markets. The basis for our assumptions consists of growth and inflation estimates, psychological effects, political commitments and crisis management expectations. Uncertainty is great, and developments that significantly deviate from our assumptions could materially change the economic outlook.

Commodity markets The rise in commodity prices in 2010 and early this year has levelled off. A weaker global economy is lowering demand for commodities. Supply problems in commodity markets have also eased. Droughts and fires had earlier caused food production to drop, but supplies are now holding up better. The Arab Spring has entered a second phase, and is worrying the oil market less. The quantitative easing in the US has run its course, which has meant less investor interest in the commodity markets. We also believe that we have seen the worst of the dollar’s decline in trade-weighted terms, leaving producers no reason to still demand compensation for currency fluctuations.

Commodity prices (total), food prices and commodity prices excluding oil (index)

In our spring forecast we predicted that oil, which was trading around USD 115 at the time, would fall when uncertainty about the Middle East and the global economy eased. It took a while to prove true, and now the reason has more to do with weak global economic growth. We saw last spring that the risks were on the upside due to problems in the Middle East and Japan.

We therefore have to revise upward our previous estimate of USD 105 this year and USD 98 in 2012, since oil prices have held up longer than we expected. Instead we anticipate a price of USD 110 this year. As global growth slows, oil will gradually return to a level of just over USD 97 next year and USD 94 in

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Slower global growth means lower commodity prices

Oil price estimates have been revised upward since the spring forecast


2013. This is still relatively high and is based on continued strong demand in emerging countries, which are gradually increasing their consumption of raw materials.

Commodity prices and projections 2009-2013 (Brent crude oil in US dollars per barrel, food and metals in index 2010 = 100)

We expect price declines for industrial metals (by 3-6%) and food (by 4-7%) in 2012 and 2013, after they rose by 32% and 20%, respectively, in 2011. Supplies should remain steady while demand declines, producing a downward trend. The opposite is true of precious metals (primarily gold and silver), which will continue to rise in price in the immediate future due to jittery financial markets and the US credit downgrade.

The risk of lower commodity prices is related to a more pessimistic growth scenario and unease in the financial markets. There are also risks on the upside, which could be realised if we were to see faster global growth, another quantitative easing in the US and a further decline in the dollar. New supply problems in connection with disruptive weather and unrest in the Middle East, for example, could contribute to higher prices. It should also be noted that emerging countries are increasingly important to prices in more developed countries. Since activity will increase faster in Asia, Latin America and the Middle East than in more developed countries, commodity prices could still rise more than desired given weak growth prospects in the West.

Inflation and interest rates Lower commodity prices are expected to contribute to a much more favourable inflation outlook than in 2010 and 2011. Basically all we need are more stable food and energy prices for inflation to begin to fall on an annual basis. We think inflation will soon peak for now and turn lower in both developed and emerging countries.

The main factors affecting inflation in more developed countries are the budget consolidation and the weak labour market, which are slowing demand, including wage and price pressures. Europe and the US face similar situations, with a lower inflation outlook. We expect Japanese inflation to be temporary against the

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Precious metals rise – while industrial metals fall

The risks are still on the upside, and emerging countries are playing a more important role

A weak job market and budget consolidation are restraining price and wage pressures


backdrop of higher commodity prices, but once they fall we again see a period of deflation in Japan.

Inflation (CPI) in a number of countries 2004-2011

Emerging countries are finding it harder to rein in inflation. Tighter economic policies are helping to prevent an overheating, and capital inflows should also shrink due to the economic weakness and the end to quantitative easing. The key for many emerging countries is to expand their capacity, so that supply better meets demand.

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

Sources: National statistics and Swedbank’s forecasts.

We expect inflation to gradually fall from its current levels and that emerging countries as a group will avoid an economic hard landing. Weaker growth in industrial countries will also impact demand in emerging countries. India has already seen an improvement compared with when monsoon rains caused food prices to rise sharply. Brazil has to limit credit growth, and with lower global growth and commodity prices its economy should slow, reducing price pressures. Chinese inflation will soon peak,

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CPI 2010 2011 2012 2013US 1,6 3,2 1,7 2,0

Eurozone 1,6 2,8 2,0 2,0UK 3,3 4,1 2,5 2,0

Japan -0,7 0,2 0,7 0,5China 3,3 5,5 4,2 3,0India 9,2 8,5 6,5 5,2

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

Global CPI 2,8 4,2 3,0 2,6

Overheating risks are easing in emerging countries, but can’t be totally overlooked

In our main scenario, a hard landing is averted


but a further economic tightening may be needed to sustainably reduce inflation.

A more favourable inflation outlook will relieve central banks of the worry of stagflation in the West. On April 13 the European Central Bank (ECB) raised its benchmark rate by 25 bp to 1.25% after inflation rose to high levels, and followed it on July 13 with a new hike to 1.5% before pausing at its latest meeting in August.

US, British and Japanese central banks, on the other hand, have kept their key rates unchanged. In the British case in particular, this has been criticised, since inflation peaked at 4.5% in April and May before falling to 4.2% in June. The private consumption deflator has also risen in the US, to nearly 2%, but with prospects of lower growth and easing inflation, central banks can now wait even longer before tightening monetary policy. The Bank of England is waiting until the first half of 2013 to raise rates, and any increases after that are likely to start slowly.

Benchmark rates 2000-2010

In our spring forecast, we didn't think the Federal Reserve would have to raise rates until the second half of 2012, but due to weaker growth prospects and modest inflation it has decided to wait even longer. Chairman Ben Bernanke has now announced that the Fed won’t raise rates until at least mid-2013. This is the “easiest” way for the central bank to create more expansive monetary policy.

The continued shakiness of the US recovery and weakness of the labour market – combined with greater difficulty financing the budget deficit after the credit downgrade – is raising demands for a new quantitative easing of some sort (QE3). We don't rule one out, but expect that the Fed will want to see signs of deflation before taking such a step. It should also be noted that QE2 didn’t have much effect on long-term interest rates initially. In fact, they rose after the programme was announced. The subsequent


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The threat of stagflation will now become less evident

The ECB is pausing and others are delaying rate hikes

We do not expect a US rate increase before mid 2013

Little marginal benefit from an additional quantitative easing


decline was more likely the result of increased pessimism about growth.

In addition, long-term interest rates are already so low that the effects on the labour market of trying to push them lower still will probably be minimal. The costs to expand the central bank’s balance sheet, which would make exit strategies more challenging, aren't negligible either. The easing – if there is one – should perhaps be seen in light of concerns about financing the huge budget deficit of about 10% of GDP, the risk of a larger decline in the dollar, and most importantly the risk of deflation.

Given the worries about the euro zone’s growth and the sovereign debt crisis in the periphery countries – coupled with a lower benchmark rate in the US and slower inflation – the ECB may pause until the second half of 2012 before raising rates. Not until then do we anticipate a rate hike of 0.25 bp, to 1.75%, to be followed by another hike in the first half of 2013. The core countries of Germany and France may be the ones that have to resort to further austerity to keep inflation around the ECB’s target of just under 2%.

Benchmark interest rates 2011-2013

We don’t expect the BOJ to raise its benchmark rate during the forecast period. The risk of a new period of deflation is high, especially since budget cutbacks to stabilise debt and afford the reconstruction will impact economic demand. The BOJ would like to weaken the value of the yen and keep interest rates low for the same reason.

Since our spring forecast, long-term market rates (10-year government bonds) have retreated. British long-term rates have dropped below the low levels seen in 2010, and rates in Germany and the US are well on their way. A more downbeat economic outlook, lower commodity prices and lower inflation are keeping the trend pointed downward. Just as importantly, the stock market sell-off is causing many investors to flee to safety, which is also keeping US and European long-term interest rates low.

Despite the credit downgrade, funding costs are now declining, a trend we also saw when Japan’s credit was downgraded in 2002. Investors still turn to the US when stocks are volatile. Over the forecast period, 10-year government bonds will rise by about 100 bp in Europe, 75 bp in the US and 50 bp in Japan.

16 aug 11 31 dec 11 30 jun 12 31 dec 12 30 jun 13 31 dec 13Federal Reserve 0,25 0,25 0,25 0,25 0,25 0,75ECB 1,50 1,50 1,50 1,75 2,00 2,00Bank of England 0,50 0,50 0,50 0,50 1,00 1,50Bank of Japan 0,10 0,10 0,10 0,10 0,10 0,10

Japan is still struggling with deflation and a strong yen

Growth pessimism and the stock sell-off are reducing bond yields


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

Demand for safe havens – government bonds from financially sound countries – will increase in the years ahead as Basel III creates pressure to better capitalise banks. While this will contribute to lower bond yields, the costs to maintain more capital in the banking system are likely to mean permanently higher margins, which in turn will lead to higher market rates. The impact of Basel III is difficult to determine, however, especially since a more stable financial sector could also help to reduce risk premiums and thereby lower interest rates. This shows just how much uncertainty there still is regarding the effects of Basel III.

Exchange rates Since our spring forecast, the dollar has continued to weaken in nominal terms, and a number of emerging countries have seen their currencies appreciate. Brazilian Finance Minister Guido Mantega, for one, is concerned. Developed countries such as Switzerland and Japan have also tried to keep their currencies from appreciating by loosening monetary policy and intervening in currency markets. Such interventions aren't usually very effective or long lasting. In real terms, the Japanese yen isn't especially overvalued either from a long-term perspective, although the recent change has been a complicating factor for a number of companies.

Source : R euters EcoW in

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The dollar has weakened since our spring forecast, putting pressure on emerging countries


Nominal exchange rates in relation to the US dollar, index 2008-08-15 = 100

We anticipate that the debt crises in the euro zone and the US will keep the dollar-euro exchange rate fairly stable initially, after which the dollar could appreciate against the euro on the basis of slightly stronger growth and possibly how the debt crisis is managed.

US dollar, trade-weighted in nominal terms

A further credit downgrade could reduce interest in the dollar, especially as emerging countries gradually diversify their currency portfolios and turn to other investments.

Exchange rates 2011-2013

Source: Reuters EcoWin

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16 aug 11 31 dec 11 30 jun 12 31 dec 12 30 jun 13 31 dec 13EUR/USD 1,44 1,42 1,38 1,35 1,35 1,30RMB/USD 6,38 6,16 6,00 5,79 5,64 5,44USD/JPY 77 80 83 85 87 90EUR/GBP 0,88 0,88 0,85 0,83 0,8 0,77

Debt problems in the US and euro zone – euro/dollar exchange rate fairly stable at this point

If the euro zone tackles its debt problems but the US doesn’t, the dollar could fall


China continues to allow the renminbi to appreciate against the dollar by about 6% per year in nominal terms. Since China’s inflation is higher than the majority of its trading partners, the appreciation is even higher in real terms. Efforts to internationalise the renminbi continue. Without a well-functioning financial market and a convertible currency, China is still dependent on the dollar, euro, yen and other international currencies.

The Japanese yen is weakening in the wake of a shrinking trade surplus and a slightly larger interest rate differential vis-à-vis Europe and the US. Our assumption that the US won’t replace QE2 with QE3 should also contribute to a weaker yen.

Stock prices Even before the recent slide, stock markets in developed countries had performed modestly at best. While markets in emerging countries nearly returned to their 2007 peak, stocks in the US, euro zone and Japan have a long way to go. Recent market jitters are the product of lower global growth expectations, the debt crisis in developed countries, the US credit downgrade and a severe crisis of confidence in the ability of decision-makers to manage crises. Political risks are especially difficult to evaluate, which is creating uncertainty and nervousness.

Corporate profits could be affected by poorer growth prospects, though on the other hand cost pressures are easing due to lower commodity and input goods prices. Negative news will garner a bigger reaction than positive news. Considering the challenges in handling the debt crisis and euro cooperation, this will continue to frustrate the market for some time to come. It is impossible, however, to determine by how much and for how long the markets will be hurt.

Equity prices in emerging countries ( MSCI EM), USA (S&P 500), the euro zone (FTSE EZ 300) and Japan (Nikkei 225) 2007-2011, index January 2007 = 100

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When the crisis subsides, the yen should weaken

Political risks are influencing market psychology right now


5. A lot depends on emerging economies The global economy has downshifted to a lower gear. The recovery continues, but not as quickly as in 2010, a rebound year after the financial crisis and global recession. The risk picture has also become more negative. This year growth is being slowed by higher commodity prices, the Japanese disaster and the continuing balance sheet correction. Tighter economic policy will then be an increasing drag on growth.

Annual GDP growth (%) in several major countries/regions

We expect the slowdown in emerging countries to be modest and that this group will remain the biggest contributor to growth (65-70%). Their growth has trended below the historical average, and without fiscal and monetary ammunition, reforms will be needed to speed their structural transformation and improve the medium-term outlook. Emerging economies have to implement reforms that immediately reduce the problem of overheating and create more sustainable domestic demand. That would also help to reduce global imbalances.

US current account balance and China’s currency reserves

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The global economy has now shifted into a lower gear

Emerging countries account for over two thirds of global growth


The US – structural problems are impacting the economic outlook

Major downward revision of GDP growth against the backdrop of weaker economic data and growing pessimism – growth is too weak to significantly impact unemployment

The debt ceiling agreement is welcome, but the political process was a failure

Debt restructuring is starting slowly, but the long-term cuts seem inadequate to stabilise the debt burden

The optimism surrounding the US economy late last year was illusory. Rising unemployment, higher inflation, falling housing prices and political discord on fiscal policy have left Americans anxious. During the first half of 2011 GDP growth has been weaker than expected – 1.8% at an annual rate and 0.8% at an annualized rate – which is also less than considered normal in a recovery, when there is usually available capacity. We also now know that the recession was deeper than indicated by previous data, with GDP falling by 5.1% in 2008-2009 rather than 4%.

US GDP and inflation (annual change %), and unemployment (% of labour force)

Temporary factors partly explain the slower development, including the earthquake in Japan, unusual weather and shrinking confidence in the ability of US politicians to solve the budget and debt ceiling problems. The more important thing, however, is that the structural problems in the US economy haven’t been resolved and that the labour, housing and credit markets aren’t working normally in the wake of the financial crisis. Balance sheets still need correcting. Without another fiscal stimulus, the US economy will continue to trend below its historical growth.

Source: Reuters EcoWin

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Private consumption deflation

A deeper recession in 2008-2009 and a slower recovery in 2010-11

Both structural and temporary factors explain the economic doldrums


In addition to the economic crisis, a political crisis is under way. A growing number of experts are characterising the political system as dysfunctional. There is little willingness to compromise, and the goal for politicians to get re-elected often overshadows the goal to help the country grow. After the financial and real estate crises, the US has to find a new identity in economic, political, cultural and geopolitical terms. American households can no longer be the growth engine for the global economy. Defence spending will shrink and will affect the ability of the US to respond in global hot spots. At home, a structural transformation is needed, at the same time that the government’s role is shrinking since tax hikes won't be tolerated by Congress. Income gaps are growing, and it is becoming harder to help those who have dropped out of the system. The negative confidence spiral has to be broken.

Household and corporate expectations for the next half year (Conference Board)

We expect GDP growth to top out at 2.1% this year. Activity will increase during the second half year as gas prices fall slightly and the Japan Effect tapers off at the same time that political concerns ease, giving future confidence a needed boost. This represents a significant downward revision from our spring forecast of 3% and reflects the downturn in future confidence in recent months in pace with weaker GDP and job numbers.

We still expect the growth engine in the form of consumer spending to falter, at the same time that other components in the supply balance aren’t able to raise growth above its average. In 2012, an election year, GDP growth will reach 2.3%, before climbing to 2.7% in 2013, when confidence could grow with new leadership. Monetary and fiscal policy will be tighter, however, which will keep growth below 3%.


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The US faces both an economic and a political crisis


The US Congress has had major problems agreeing on how to consolidate the budget in the years ahead. The increase in the debt ceiling was contingent on spending cuts, and at the last minute Republicans and Democrats agreed to raise the ceiling by USD 2.1- 2.4 trillion by the end of 2012, which means that it won’t be an issue in next year’s election campaign.

The debt ceiling will initially be raised by USD 400 billion, then by another USD 500 billion unless blocked a Congressional resolution. The remaining USD 1.2-1.5 trillion will be part of a packaged agreement agreed to by a committee of representatives from both parties and containing spending cuts, tax reforms and other debt reductions. In the first years there will be little in the way of cutbacks, and consolidation has instead been pushed off to the future. While this may seem reasonable given the weak recovery, it creates uncertainty, since another Congress will have to implement today’s decision.

Total government debt now exceeds 100% of GDP, while the federal debt as a share of GDP is just over 70%. Had nothing been done, it would have risen to 90% of GDP by 2030 and then about 200% in 2060, after the healthcare reform, which reduces the debt burden by about 100% of GDP between 2011 and 2060.

Federal budget revenues, expenditures and balance

The medium-term plan that would have been needed to stabilise the debt burden in the second half of this decade is thought to be at least USD 4 trillion, or about 20% of GDP. Revised growth prospects also will mean greater difficulty stabilising the debt as a share of GDP. The plan now calling for cuts of just USD 2.1-2.4 trillion doesn’t go far enough. The US therefore risks another credit downgrade. A lower rating could raise funding costs, add to financial turbulence and weaken the dollar considerably.

The job market will be the focus of the campaign leading up to the presidential election in November 2012. No president has been re-elected in the last 50 years with unemployment higher than 7.2%. In July it was 9.1%, which is still higher than at the


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“You can always count on Americans to do the right thing – after they’ve tried everything else”

- Winston Churchill

Gross public debt is now greater than GDP

Twice as large a budget consolidation could be needed


beginning of 2011 even after declining slightly from June. It was also just a modest decline compared with the October 2009 peak of 10.1%. Compared with before the crisis, unemployment has more than doubled to 14 million. When you include those who are working part-time not by choice and those who are no longer actively looking for work, 29 million Americans are now counted as unemployed, about half of whom can also be considered long-term unemployed.

The housing market has yet to bounce back. Housing construction appears to have hit bottom, but will remain there for some time. The same applies to new home prices and sales, which have been fairly stagnant and where the latter are back at their 1998 level. Low interest rates should have helped the housing market more, but households are continuing to fix their balance sheets at the same time that the credit market is having problems with new lending. Another critical factor is the vast inventory of unsold housing, which will keep prices low for some time to come.

Housing market

Inflation measured by CPI has risen due to higher energy and food prices, although core inflation (excluding energy and food) has also begun nearing uncomfortable levels, at just under 2%. On the other hand, we expect that when food and gas prices decline, inflation will ease, giving the Federal Reserve a respite before launching a period of rate hikes. We don’t anticipate the first hike until the second half of 2013, in line with the Fed’s announcement.

This summer QE2 ended. Since deflation concerns have eased, we don’t anticipate another quantitative easing. Although a gloomier growth outlook and higher unemployment are now raising demands for a new easing to keep interest rates low and strengthen asset prices, the Fed isn’t likely to consider one until there are signs of deflation. Besides, another quantitative easing may not have much impact on growth and jobs, and the side

Source: R euters EcoW in

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Demands for QE3 are gaining steam


effects on global inflation, commodity prices and capital flows to emerging countries can’t be overlooked.

China – growing faster than planned

GDP growth has surprised on the upside, but is expected to slow in quarters to come

Inflation will peak this year and drop to 3-4% in 2012-2013

The goal to “rebalance” the economy will take time and require more reforms

Expectations that China’s GDP growth will more visibly slow did not come to fruition earlier this year when GDP rose in the first two quarters by 9.7% and 9.5% at an annual rate. Despite lower credit growth and higher inflation, the economy continued to grow at a rapid pace.

The wheels of the Chinese economy have since begun to slow slightly. This was caused by the rise in interest rates in order to check inflation and is also evident in the purchasing managers index, which indicates slower economic activity. Slower import growth is also a sign of weaker domestic activity. A slight slowdown is already evident on an adjusted quarterly basis, but as usual there is reason to be cautious in interpreting these sometimes dubious data.

However, we are revising GDP growth upward by 25 bp to 9.0% this year on the basis of stronger results. GDP growth will then fall to 8.4% in 2012 and 8.0% in 2013. This means that the goal in China’s latest five-year plan of average GDP growth of 7% per year in 2011-2016 in all likelihood will not be reached.

Growth in GDP, industrial production and auto sales


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The wheels of the Chinese economy are now rolling more slowly


Since the National Party Congress in March, the Chinese government has increasingly focused on reducing the risk of overheating. Since October, bank reserve requirements have been raised nine times and the benchmark rate has increased by 125 bp. Lending has fallen to previous levels of around 15% in annual terms. Lending rates are still negative in real terms, however. Inflation jumped to 6.5% in July, but is expected to drop now that commodity prices aren’t rising as quickly as before. The government’s new goal of 4% this year (instead of 3%) isn’t likely to be met. Our estimates are for 5.5% this year and 4.2% next.

Housing prices could still fall significantly compared with the slower growth rate to date. Various statistical sources provide a mixed picture of housing, which is contributing to considerable uncertainty. According to official sources, stress tests will show that China’s banks can handle a price decline of 50%, though it is unlikely that all the indirect effects on regional growth have been analysed, and the impact on the economy and China's regions is probably greater than on financial stability. A soft landing is still more likely than a hard landing, and the risk of overheating now appears to be easing.

Growth in consumer prices and lending

At the beginning of the year, when the price of oil was higher, China reported a trade deficit for the first time in seven years. It has since rebounded to a trade surplus, which also means larger capital inflows but in turn could generate inflation when China buys up foreign currency. If commodity prices start to rise again, the surplus would shrink. This shows how pointless it is to draw any conclusions whether China has begun a path toward “rebalancing” and consistently higher domestic demand based on these earlier data.

The goal of an economic rebalancing should mean a lower current account surplus, but this year it is again likely to exceed 4% of GDP. Reforms are needed to strengthen the social security system, raise household incomes and reduce the incentives to save. Moreover, the financial system has to be

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cent

7 ,5

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2 7 ,5

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C o nsu m e r p rices --->

< --- C re d it expa ns ion

The focus is now on reducing inflation

How ambitious are China’s stress tests?

Many (extensive) reforms are needed to boost domestic demand


opened up. Many factor prices have to be better deregulated as well, at the same time that China allows its currency, the renminbi, to continue to appreciate in real terms, through both a nominal appreciation and higher domestic costs. If the goals of the 12th five-year plan are to be taken seriously, reforms have to be accelerated.

Japan – recovery after the disaster

GDP is expected to decline this year and then trend significantly higher next year with the reconstruction

The debt ratio of 230% has to be cut with the help of taxes and fees, since spending as a share of GDP is already low

The yen has strengthened in nominal terms, but not as much in real terms – interventions may not help much

The Japanese economy shrunk by 0.7 per cent at an annual rate during the first quarter, despite that the earthquake and tsunami which jolted large parts of the northeast happened as recently as March 11. Besides the diminishing effects of the 2010 rebound, export growth has been slowed by production stoppages and a stronger yen, which has also helped to keep import growth high. The Japanese current account balance has swung to the deficit side, which cannot be compensated by domestic demand, since consumption and investment are both decreasing.

Annual change in Japan’s national accounts (%)

GDP fell less than expected in the second quarter, by 0.9% at an annual rate (0.3% quarterly). The decline in the first half year is partly a reflection of the total collapse in foreign trade and partly because domestic demand has dried up. At its low point, industrial production fell by about 15% before a recovery began. In mid-May the nuclear power plant in Hamaoka was shut down for safety reasons and manufacturers such as Toyota, Honda and Suzuki were faced with power shortages. As a result, energy issues also factor into economic risks, as do the yen’s strength, the global economy, fiscal policy and the political situation. Basically it is a question of how quickly production chains can be

S o u r c e : R e u te rs E c o W in

Q 1 Q 3 Q 1 Q 3 Q 1 Q 3 Q 1 Q 3 Q 10 7 0 8 0 9 1 0 1 1

Per

cent

- 4 0

-3 0

-2 0

-1 0

0

1 0

2 0

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4 0

Im p o r ts

In v e s tm e n ts

E x p o r ts

P u b lic C o n s u m p t io n

P r iv a te C o n s u m p t io n

G D P

The decline in GDP for the second quarter was milder than expected


restored and of the faith of the Japanese in their economy and politics.

We feel that an economic trough was reached during the second quarter, but that annual GDP growth won’t be positive until the fourth quarter. As a whole, GDP will fall by 0.2% this year before rising by 2.8% next year as reconstruction progresses. The growth drivers are public and private investment. In 2013 we expect Japan’s growth to trend downward to its historical average of just under 1.5%.

If demand remains weak, the problems associated with deflation will worsen. If, on the other hand, fiscal policy is used to stimulate demand, there is a risk that the debt burden will grow even higher than the current 230% of GDP. The budget deficit this year already exceeds 10% of GDP. After parliament passed a reconstruction budget of 4 trillion yen (about USD 50 billion or 0.8% of GDP) in May, it adopted a 2 trillion yen supplementary budget on July 25. Another supplementary budget is expected. The goal, however, is not to increase the debt burden. Instead, funds will come from other areas of the budget, though it is uncertain how. Estimates of what the earthquake will cost in fiscal terms over several years vary between 2 and 4% of GDP. As the Japanese age and the workforce shrinks, savings will decline, raising pressure to tighten fiscal policy and avoid higher interest rates on government debt. Even if the current account deficit proves temporary, Japan has to prepare for a less favourable debt environment. A budget consolidation could start with a VAT hike of at least 5-10%, especially since the current level is low even by international comparison. At the same time other sources of revenue have to be found, since public spending is already relatively low as a share of GDP.

Japan’s debt problems are complicated by low GDP growth and deflation. The recent spurt of inflation is the result of higher commodity prices, which are considered temporary. The benchmark interest rate is essentially zero (0-0.1%), and we expect it to remain at or near zero throughout the forecast period. The reasons are continued deflation or zero growth in consumer prices, as well as fiscal austerity and a strong yen at least in nominal terms (but not as much in real terms). Although the Bank of Japan (BOJ) is trying to weaken the yen, it is questionable whether the interventions are being effective. Its expanded asset purchase program and efforts to support increased lending by credit institutions have increased the bank’s balance sheet from just over 20% to 26% of GDP since the financial crisis. In comparison, the Fed’s balance sheet has grown from about 5% to 15% of GDP.

The political situation has worsened. Prime Minister Naoto Kan has managed to stay in power through the summer only by promising to step down in August when the supplementary budget has been approved, bonds have been issued to finance the deficit in the upcoming budget year, and a bill has been passed to expand renewable energy. It is unlikely that Kan will try to get re-elected considering his lack of support among the

Debt ratios continue to rise, while deflation remains a complicating factor

The BOJ could enact even more expansive policies to try to weaken the yen


general population and in his own party. If would be helpful if the Japanese had more faith in their politicians, but Kan is the sixth prime minister in as many years to fail to build support. Critics argue that the government hasn’t acted quickly enough in the reconstruction and hasn’t adequately handled the nuclear accident or energy policy.

India – austerity is slowing growth

GDP growth has been revised downward to 7.8% this year and 7.5% next year and in 2013. To raise growth to the same rate as before the financial crisis, around 9%, will require more reforms.

Monetary policy is being further tightened slightly, and the high rate of inflation will fall later in the year.

The budget consolidation continues, but with very modest goals. The budget deficit will rise to 5-5.5% of GDP.

The Indian economy suffers from capacity shortages. Insufficient reforms, weak infrastructure and an underperforming educational system are hampering production and the supply of skilled labour, while also exacerbating overheating problems.

During the first five months of the year consumer prices rose by an average of 9% on an annual basis. Although inflation is expected to moderate later this year in pace with oil prices and more stable weather produces better harvests, high inflation remains a concern and is raising demands for more austerity.

As we predicted last spring, the Indian central bank, RBI, has continued to tighten monetary conditions, at the same time that politicians have avoided taking greater responsibility by addressing fiscal policy.

The benchmark interest rate was raised as recently as July 26, by 50 bp to 8%. This is the eleventh rate hike in 18 months, totalling 3.25 percentage points. One or more rate hikes is not out of the question to keep commodity prices from spreading to core inflation in the strong demand climate that still exists among both urban and rural households.

Higher interest rates and prices are creating greater cost pressures for companies, but on the other hand the real interest rate is only slightly positive. The recent slowdown in the investment rate is probably also the result of the weaker global growth, higher commodity prices, lower capital inflows after the Arab Spring, and declining future confidence.

Higher cost pressures could hurt private investment, which is crucial to strengthening productivity and competitiveness. An accelerated reform process is needed to eliminate bureaucracy for businesses and reduce corruption.

Capacity shortages are causing inflation problems

India’s central bank is trying to choke off inflation by raising interest rates


Last year GDP grew by slightly over 10%, which was more than expected. Since then the trend has been downward, and in the first quarter GDP fell to 7.7% at an annual rate – a figure we see continuing for the rest of the calendar year. We anticipate that tighter monetary policy will slow growth with a slight delay, at the same time that fiscal policy is also tightened, though only slightly. Higher price and cost pressures are hurting domestic demand, which is one reason why we see the growth rate falling to 7.5% in 2012 and 2013. Private consumption will remain the most important growth engine.

Interest and exchange rates

India’s fiscal deficit was 4.7% of GDP in the last budget year (1 April 2010 to 31 March 2011). Higher tax revenues as a result of stronger economic activity and spending cuts may explain why the outcome was better than anticipated.

Heading into this budget year and the next, the deficit is expected to be 5-5.5% of GDP as growth slows and subsidies increase due to higher oil prices. Through privatisations, the national debt could continue to decline as a share of GDP, from 45% in 2011 to 42% in 2013.

State elections in May resulted in victories for the governing Congress Party in three of five states. This will give the government greater opportunity to shape the reform process without having to negotiate with other parties. More reforms are needed for growth to return to a long-term rate of around 9%, since supply problems are currently restricting potential growth.

Preparations are now under way for the state elections next year and then the parliamentary elections in 2014. The focus is on corruption scandals (MP bribery, Commonwealth Games, telecom licenses), which have damaged confidence in the sitting government. Given the lack of alternatives, however, this hasn't hurt its chances of retaining power.

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o E

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och

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7 ,5

8 ,0

8 ,5

9 ,0

P o licy In te res t ra te

U S D /IN R (righ t)

E U R /IN R (righ t)

Fiscal policy could be tightened


Brazil – growing overheating problems

Austerity is reducing potential growth this year to below 4%, but the effects should ease and slowly contribute to a slightly higher growth rate in 2012 and 2013.

Additional rate hikes can't be ruled out in order to curb rapid price increases and credit growth

Economic risks include a stronger real, a weaker global economy and lower commodity prices, as well as a greater slowdown in the wake of austerity measures.

Although GDP grew slightly faster in the first quarter than the second half of last year, we expect Brazilian economic activity to continue to cool due to tighter economic policy. Domestic demand will still be able to grow more or less in line with the historical trend, especially because of the rapid increase in investment. The World Cup in 2014 and Summer Olympics in 2016 are contributing to the investment boom, but are also creating stronger import growth.

Real GDP growth (annualized quarterly and annual growth rates)

Households, by way of slower credit growth, will feel the effects of austerity the hardest, which will lead to lower personal spending. Brazilian exports are currently benefitting from the high commodity prices, but when they fall export prospects will worsen for this commodity-dependent country.

Brazil will generally continue to develop positively, but will slow slightly to accommodate capacity shortages as well as fast price and credit growth. We are revising GDP growth downward this year to 3.8% after last year's rapid 7.5%, before it reaches

Commodity-oriented Brazil is facing a slowdown when global commodity prices decline


slightly higher levels of upwards of 4.3% when austerity is phased out.

Which characterises Brazil as an overheated economy? The labour market is very tight, unemployment is record low and it is hard to find skilled workers, which is keeping pressure on wages. Higher commodity prices and demand that exceeds supply in many markets are also pushing consumer prices higher, which in turn are generating wage growth.

Inflation, now around 6.5% on an annual basis, is expected to decline as commodity prices ease, although more rate hikes may be needed to more aggressively reduce price pressures. Since April 2010 the benchmark rate has been raised by 3.75 percentage points to 12.5%, and it isn’t out of the question that we could see one or two more rate hikes before the austerity period is over.

The risk if interest hikes are raised too high is that capital inflows from abroad will increase and that the currency, the real, will appreciate more than is desirable. During the financial crisis, a weaker real helped to support the recovery, but since late 2009 the real effective exchange rate has risen beyond the levels from before the crisis.

Policy interest rate (%) and real effective exchange rate (index)

One factor suggesting further rate hikes is high credit growth. While debt is relatively limited at this point, it is increasing, and a large share of spending is being done with high-interest-rate credit cards. Another factor is that fiscal policy isn’t being tightened enough to prevent an overheating. Capping the budget deficit at 3% of GDP during periods of high growth isn’t ambitious enough, and in the event of a new recession, fiscal policy won’t be able to support the economy.

The political focus is on the new president, Dilma Rousseff, and her decisions. Since her chief of staff and three ministers had to step down due to corruption allegations, she and her new staff


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During periods of high growth, a budget surplus should be attainable


have distanced themselves from the previous president, Lula. It is important that the president can now show that she is still interested in accelerating the reform process. Otherwise she will face criticism when the country sees its competitive strength wane. At the least, corruption has to be stopped.

Euro zone – focus on crisis management

GDP growth is expected to slump from 1.7% this year to 1.3% in 2012-2013 with more budget austerity

Inflation pressure is on the decline, and the ECB is likely to take a calmer approach to raising interest rates

Reform work in the euro zone as a whole and in individual countries will be critical in order to weather the storm, rescue the euro and make the region more competitive

The euro zone’s decent growth last year and increase to 2.1% annually in the first quarter of 2011 have been overshadowed by the sovereign debt crisis in several countries and crisis of confidence in the entire euro zone’s political and institutional systems. Problematic countries such as Greece, Ireland, Italy, Spain and Portugal certainly have much weaker growth prospects than the euro zone’s economic engines, Germany and France.

Annual GDP growth in the euro zone and some of its member states (%)

Compared with our spring forecast, we expect German GDP growth to be significantly higher this year, at 2.9%. The euro zone as a whole will grow by nearly 1.7%, compared with 1.5% in our spring forecast, but after that signs point to a slowdown to 1.3% in 2012-2013 due to fiscal austerity, weaker confidence among households and businesses, and slower growth in industrial production in response to lower global demand. The purchasing managers’ index indicates that industry is no longer

Good growth numbers have been overshadowed by the crisis

We are revising GDP growth downward for 2012 – but Germany grew more than expected at the start of this year


growing as quickly as before, reflecting supply chain problems after the Japanese catastrophe and slower global demand.

We believe that the chances of the euro weakening against the dollar are not as high any longer after the Federal Reserve’s pledge to keep interest rates low for the next two years. A depreciation will have to wait. The risk of a euro collapse and actions to rescue countries in crisis are discussed in the chapter on economic policy, where we also suggest measures to ease concerns about the euro zone’s debt crisis.

One reason for being more positive about growth compared with our spring forecast is that the ECB now expects to ease off on further rate hikes. After the Fed calmed fears of an interest rate hike, the ECB can also delay austerity measures. An inflation rate of around 2.8% in April has now declined to 2.5%. We anticipate weaker demand when austerity measures further reduce price and wage pressures, though with some differences between countries. Crisis countries such as Greece will see inflation continue to fall from its previous highs. Germany and France, on the other hand, which have a greater impact on the euro zone average, have a more stable but higher inflation outlook due to stronger demand. Inflation will reach an average of 2% in 2012 and 2013.

Inflation in the euro zone as a whole and in individual euro countries 2007-2011

The strength of the labour market varies by country. While Germany today has its lowest unemployment in two decades, Spain, with its rigid job market, has its highest since 1997, placing it on top of the euro zone's less than flattering statistics. The reform process that has begun in Spain is necessary, but the risk is that unemployment could rise further before it eventually slows.

The ECB can now put off further rate hikes

Germany has succeeded in reducing unemployment, while Spain’s is rising to new highs


More reforms are needed in other countries as well to make the labour market more flexible and to change the pension and social insurance systems. Another important factor is the informal sector, which often has a significant presence in southern Europe and means that more people may be working than official data suggest.

Unemployment in the euro zone as a whole and individual countries 2007-2011

It is critical that the issue of youth unemployment is addressed, so that entire generations aren't lost during the crisis years and to avoid damaging future confidence. Educational investment will be needed, but the difficulty in finding the funds – considering the austerity plans now on the table to reduce fiscal deficits – may force a delay.


07 08 09 10 11

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5,0

7,5

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17,5

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22,5 Austria Germany Eurozone Spain Finland France Greece Ireland Italy Portugal Netherlands

More reforms are needed to improve the labour market –especially for young people


Government gross debt (right) and budget balance (left) as a share of GDP% 2011

Those countries that have been capital importers in the euro zone since the euro was created, i.e., most of the crisis countries, have larger current account deficits and fiscal deficits than capital exporters such as Germany, the Netherlands and Finland. Then there are countries that have maintained large government debts for decades such as Italy and Belgium. France is also knocking on the door of the crisis group, but can avoid a major crisis if it launches a tough consolidation phase.

The key to the euro zone’s problems is the debt issue, both public and private, and the resulting problems for banks, as in Portugal and Ireland, or mainly in the public sector, as in Greece. Another point of emphasis is growth and competitiveness, where crisis countries, including Italy and Spain, could find it harder to consolidate when growth prospects are weak. A third factor is that consolidation work has been put off too long. After the ECB applied pressure, Italy has sped up its budget consolidation to achieve a balance in 2013 instead of 2015.

Another focus is on divergence within the euro zone. It is only natural that there are differences, but it was hoped that the monetary cooperation would negate the need for fiscal cooperation if countries abided by the stability and growth pact (which they didn’t) and if they gradually harmonised economically. Fiscal and structural policies have differed between Germany on the one hand, where reforms have strengthened the labour market and productivity while keeping cost pressures under control, and the crisis countries on the other, which have utilised low interest rates to spur consumption and investment but haven’t reforming their markets to be more competitive.

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Slovenia

Luxemburg

Estonia

The focus is on the debt crisis, growth, competitiveness, budget consolidation and reforms

The divergence is great within the euro zone – we anticipate “German” policies in more countries


Current account balance in a number of euro countries 2009 and 2011, % of GDP

For the euro zone as a whole, it is critical that the reform work continues and intensifies. After several years of weak growth – and given that the euro zone is riding out the storm by strengthening its institutions – opportunities for a more competitive region may improve.

UK – tough times continue

We are revising our GDP growth forecast downward to 1.3%, 1.6% and 1.8% for the years 2011-2013. Foreign trade and investment are the primary growth drivers.

Tight fiscal policy, continued debt restructuring and falling housing prices are crimping household spending. Structural policies have to focus on opportunities for new growth engines and stronger productivity.

The British economy has performed weakly in light of high inflation, falling housing prices, a lack of credit, private debt restructurings and the government’s huge austerity programme, which over all are impeding private consumption. The repercussions of the financial crisis are clearly negative, and the recovery has been slow to date.

In the first quarter of this year GDP grew by 0.5% at an annual rate, and during the second quarter growth fell to 0.2%. The Japanese disaster, poor weather and the Royal Wedding have been mentioned as temporary factors that have slowed activity, but without them growth probably would have been only slightly stronger. Productivity growth has been weak since employment has held up relatively well, at the same time that adjustments have instead been achieved through slower income growth, though this is also affecting demand.

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Austria

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Ireland

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France

Italy

Spain

Portugal

Cyprus

Greece

2011

2009

Reforms are critical if the euro is to survive

GDP has been weaker than expected …


GDP and the various components in the national accounts 2005-2011

We have revised our GDP forecast for this year downward to 1.3% from 1.5% last spring after the first half-year turned out to be weaker than estimated. Growth, which will then see rising to 1.6% next year and 1.8% in 2013, will be driven by increased investment through higher earnings as well as the boost to net exports from a weaker pound (at least initially before it is likely to appreciate against the euro).

We expect private consumption to remain weak during the forecast period. When the fiscal austerity is phased out, interest rates will instead increase as the Bank of England raises its benchmark rate. Since we at the same time see inflation easing, real interest rates will rise and reduce demand. Lending has also been held in check because of the tough position the banking system finds itself in. Meanwhile, the financial sector's importance as a growth engine has been undermined and will take time to repair. The housing market hasn't stabilised either, and we expect it will be a while before housing prices rise significantly.

Inflation and interest rates 2005-2011

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The government led by Prime Minister David Cameron has been criticised for its tight fiscal policy: “Too much too soon”. At the same time interest rates have remained low despite anxiety about debt in the euro zone, the high rate of inflation at home and the budget deficit. Stabilising the government's finances will create confidence, especially if the global economy were to deteriorate even more. The risk is that loan demand won’t decrease as quickly as expected. In combination with lower growth, this would limit opportunities to reduce the budget deficit.

The huge budget consolidation also means that monetary policy will remain expansive longer than otherwise would have been the case. At this point there will be no quantitative easing, but the benchmark rate is being held at around 0.5%. We don't expect rates to be raised until the first half of 2013, when the recovery has gained a better foothold.

In the meantime inflation will decline since commodity prices are levelling off, the pound has rebounded after weakening, and VAT hikes have ended. Underlying inflation, where the consumer price index is adjusted for energy, food, alcohol and tobacco, is currently 2.7%, compared with a consumer price index that has now begun to drop from a peak of 4.5% in April and May, reaching 4.2% in June. Continued low demand pressure suggests that inflation will be kept in check in upcoming quarters. The central bank has been right to keep a cool head.

6. Conclusions for our home markets There is little doubt that future confidence has weakened around the world since our spring forecast, with a stock sell-off in the wake of increased growth and debt worries. Those who believe that nothing has happened are overlooking the impact of psychology and politics on the economy. GDP growth has slowed more than expected in the US and the euro zone, while Japan and China have developed more strongly. The purchasing managers index points to a global slowdown. Households and businesses could dampen consumption and investment.

Central banks should put off further rate hikes as growth and inflation dampen. Even countries without budget austerity may have to adjust their rate hikes to avoid currency appreciation.

Finance ministers may have to be more cautious with stimulus programmes that entail permanent budget changes. On the other hand – if conditions allow – a demand stimulus could prove useful, e.g., to prevent unemployment from rising again. The most important thing is that automatic stabilisers are allowed to work. In the face of a steady stream of crises (really the same crisis which has mutated), open economies have to have crisis management plans in place. The financial sector is often the most vulnerable, although IT and auto production have also been at risk in recent years. Businesses and governments therefore need to have both margins and preparedness plans.

… despite that the budget consolidation hasn't truly gotten under way

The outlook has worsened this summer

It is important that there is a possibility of more expansive economic policy


The balance sheet recession in the US, the UK, Spain and Ireland is complicating the recovery. We need better data on balance sheets in the private sector. Wealth and debt statistics have not improved in the same way as the national accounts. To provide a better foundation for economic policy, statistical authorities should improve this type of balance sheet data.

Effective guidelines for fiscal and monetary policy can help to facilitate crisis management: inflation targets, budget targets, spending caps and rules for the financial sector. The Swedish housing market is vulnerable to increased unemployment and further stock sell-offs. Higher mortgage rates can't be ruled out either, even if the Riksbank takes a pause before raising rates again, since the banking system could face financing difficulties.

EU member states that do not participate in the EMU have to carefully following developments in the euro zone while also trying to promote the cooperation in terms of both support and policy design. After the crisis the euro zone could very well be stronger than expected, and it would be unfortunate if the gap between the EMU countries and the EU countries increases too much. From a longer-term perspective, the currency union –along with fiscal coordination and bank regulation – is decisive to Europe’s ability to compete with other strong regions. The euro zone’s success is just as important for its member states as for EU member states, and by extension for our standard of living.

Cecilia Hermansson

We need better data to evaluate the risk of a balance sheet recession

Despite good rules, the housing market remains vulnerable

It is important to understand the EMU’s importance from a larger growth perspective

Swedbank Economic Research Department SE-105 34 Stockholm Telephone +46-8-5859 7740 [email protected] www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46-8-5859 7720. Magnus Alvesson, +46-8-5859 3341 Jörgen Kennemar, +46-8-5859 7730

ISSN 1103-4897

Swedbank, Global Economic Outlook is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s Global Economic Outlook.

swedbank's global economic outlook, august 2011

Economy & Finance

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