update - november 7, 2019

Update - November 7, 2019

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Completed: November 6, 2019, 17:00 Please see disclaimer at the end of the document, Distributed: November 7, 2019, 08:00

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• Summary 3

• Sweden 9

• G6 17

• Emerging Markets 28

• FX/FI 34

• Nordics 39

• Baltics 45

• Appendix 54

2 Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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• Global: The main scenario is that global growth stays low. In general, the revisions compared with the August forecast are small. While the forecast for the Eurozone and the UK is higher, some emerging markets, including India and Brazil, are revised downward.

• Rays of light in dark November skies: (i) Somewhat less downside risk than in August. Lower risk for escalating trade war and hard Brexit. (i) Resilient economic data in the U.S and many EU countries.

• Sweden: Low growth and somewhat weaker labour market going forward. Downturn but no recession. Inflation remains close to the target over next 12 months but then declines. The Riksbank hikes to 0.0 percent in December but then keep the rates unchanged throughout the forecast period. House prices expected to increase by 5% per year in 2020 and 2021.

• Norway: Lower growth ahead. The weak NOK is not expected to support the economy much since exports are less price sensitive. Norges Bank keeps rates unchanged, but tolerance for a further NOK depreciation is limited. We expect a slight appreciation of the krone ahead.

• Baltics: The economies are feeling the chill from the global downturn. Besides a more muted export growth, both household consumption and investments are expected to grow more slowly in the years to come. For all countries, the annual GDP-growth is expected to decline to 2.0-2.5 percent during 2020 and 2021, which is markedly below the pace in recent years.

• . Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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5 Summary Themes Sweden G6 EM FX & FI Baltics Nordics Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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The bright scenario The dark scenario

• Positive signals on trade war and Brexit

• Fed’s stimulus lifts the American economy

• Confidence indicators turn up and the

current slowdown is remains limited to the

industry, which also starts to recover 2020.

• Swedish growth picks up to around 2

percent per year. The labour market

strengthens.

• Persistent downturn in manufacturing spills

over to services and unemployment

increases in several countries.

• The central banks that can (Fed) increase

stimulus but it’s not enough to turn around

the development.

• Weak governments and, in some countries,

high government debt, limit fiscal policy.

• The Swedish economy enters a recession.

Unemployment increases considerably and

employment falls.

• Anxiety in the global financial markets leads

to rising market and mortgage rates and

falling real estate prices.

Intro Sverige G7 EM FX & FI Norden Baltikum

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• The Swedish economy is expected to grow somewhat below trend in 2020 and 2021. The labour market loses some momentum and wage growth will only increase marginally. Downturn but no recession.

• Inflation expected to stay close to 2 percent over the next 12 months but then gradually decline to its long-term average around 1.5 percent. The krona should remain weak, which will gradually contribute to higher import prices.

• We forecast that the Riksbank will raise the repo rate to 0.00% in December, then keep it there for the entire forecast period. This is largely in line with the Riksbank’s repo rate forecast.

• There are signs that the housing market is recovering. The recent uptick in prices is expected to continue. We pencil in annual house price growth at around 5 percent in both 2020 and 2021. Housing prices are supported by high demand, driven by persistently low interest rates among others, and lower supply resulting from a decrease in construction.

• We continue to call for a more expansionary fiscal policy in order to raise the economy’s long-run growth potential. But there’s an apparent risk that continued austerity will lead to insufficient investment in the climate, education, integration and infrastructure.

Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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• Weaker economic conditions, low inflationary pressure and global uncertainty, factors to keep the Riksbank on hold

• Threshold for rate cuts high.

• The probability for a rate hike is greater than an interest rate cut


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• US: The current US economic expansion is the longest in history, but growth is expected to decline weighted by global developments and trade tensions. However, the slowdown will be rather mild as the domestic economy is supported by lower rates from the Federal Reserve.The strong household consumption is expected to moderate as the labour market softens. Inflation pressures remains moderate. We expect one additional rate cut at the beginning of 2020.

• Euro area: Growth continues to be anaemic and is not expected to improve next year. While immediate threats from Brexit have abated, trade wars and uncertainty weighs growth down. Manufacturing sector, lead by Germany, is contracting, while services are growing moderately. Countries less dependent on exports such as France are expected to perform better in the next several years. A significant fiscal response would be effective in raising the economic potential given the level of interest rates, but is unlikely in the nearest future

• UK: The Brexit drama continues since the only the Commons has agreed upon is to leave the EU. The deadlock in the Commons, and to avoid no-deal, resulted in a new brexit extension to Jan. 31, which was approved. On Dec. 12 a general election will be held and hopefully it doesn’t result in a new deadlock. However, this risk exists and further delays from the EU can’t be taken for granted. We forecast modest growth and unchanged Bank Rate on the back of political uncertainty. Less likelihood of no-deal motivates our revisions from August.


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• Who will cooperate with whom? DUP has rejected Tories last key votes. Will DUP support Tories after the election?

• Labour and LibDem fight for Remain votes. The Brexit party and Tories fight for the Leave votes.

• The opposition doesn’t want Corbyn as PM, which makes cooperation difficult

• Questionable if EU would grant a 4th extension


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• Emerging markets: As global economic and market uncertainty continues, the EM outlook is taking a hit. The US-China trade war has seen a renewed truce but the conflict will remain for a long time. Capital outflows have re-emerged and slowed external demand is weighing on exports. Inflation is falling and central banks have begun easing. The larger economies’ contribution to global growth will dampen.

• China: We expect a gradual slowdown to continue, as the Chinese government prioritises structural reform over high growth figures. Despite a de-escalation in the trade conflict, trade tensions and most of the tariffs currently in place will continue to weigh on growth. PPI weakness weighs on the industry but moderate stimulus will support the economy.

• India: Growth has been lower than expected in 2019, has declined broadly, and is expected to fall this year relative to last year. A weak banking sector weighs on the outlook.

• Brazil: Growth slowed in the first half of 2019, due to weaker investment, and is expected to remain low this year. The approved pension reform adds some positive sentiment ahead.

• Russia: Economic growth will slow to 1.0% this year, but is expected to improve to 1.8% in 2020. Monetary and fiscal policies will become more supportive, but weak foreign demand and expected decrease in oil prices will continue to limit the growth.


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• Monetary policy easing holds up as the global manufacturing sector remains in recession and geopolitical issues have not been solved in any meaningful way. Yet, negative tail risks for the global economy has seemingly eased as probabilities of a no-deal Brexit and further trade war escalations have been reduced. Fed has reduced the key interest rate three times, while now signalling a more wait-and-see approach. In the USA, we expect only one further rate cut during the forecast period. The ECB is expected keep their policy instruments unchanged, but risks remain tilted to the downside. The Riksbank is expected to hike policy rates once in December, to 0%, and remain on hold from then.

• Uncertainty persists, and the full potential effects of negative spillovers from manufacturing to service sectors are still unknown. This, together with active central banks constitutes continued downward pressure on long-term interest rates. Bond rates in Sweden and Germany remain in negative territory for much of the forecast period.

• Weak international development puts pressure on both the Swedish and Norwegian krona. We expect those currencies to remain weak throughout the forecast period.

• The Brent oil price has remained remarkably stable at close to USD 60/bbl ever since the beginningof August. We expect excess supply of oil through 2020, which will lower prices.


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• Long term rates are held back by soft monetary policy and political concerns

• QE and the other central banks' measures regarding the balance sheet continue to be a significant factor for both interest rate and FX markets.

• Bond rates in Sweden and Germany remain negative for much of the forecast period.


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• Apart from the price spike in the wake of the mid-September attacks on Saudi oil facilities, the Brent oil price has remained remarkably stable at close to USD 60/bbl ever since the beginning of August.

• OPEC cuts and geopolitical tensions have not been sufficient to counteract heightened market uncertainty.

• We expect excess supply of oil throughout 2020, which we believe will lower prices.


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• Norway: Growth is deemed as solid, but slowing more towards trend. Oil investments boost growth this year, but should abate already in 2020. Weaker external impulses act as a drag on other manufacturing and exports. Inflation remains above target and a record weak NOK cushions negative external impulses. Norges Bank has already normalised monetary policy, having hiked four times to 1.50%. We see this as the last hike from the central bank in this cycle, but risks are tilted upwards.

• Denmark: The outlook for domestic demand remains good as there are no evident economic imbalances. However, weaker developments abroad and particularly in the Euro area as well as the uncertainties surrounding Brexit are important risks ahead.

• Finland: Economic growth will slow to 1.3% in this year and to 1.1% in 2020. The growth will come primarily from the domestic demand. Labour market will continue to improve, but with considerably subdued pace. Wage growth is expected to pick up.


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• Norges Bank has continued its effort to normalise the policy rate, hiking four times this cycle already.

• At the interim policy meeting in October, the Bank maintained its hiking bias amid a record weak NOK.

• Our baseline scenario is for unchanged rates ahead, but solid growth and a weak NOK could lead to another hike already in the spring.


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• The Danish economy has enjoyed robust growth in recent years as business investments and household spending have expanded and exports have grown.

• The outlook for domestic demand remains good as there are no evident economic imbalances.

• However, weaker developments abroad and particularly in the euro area remain an important risk ahead.


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• Estonia: Economic growth was still very strong in the first half of the year, but it’s slowing. Construction output has dropped, the decline in industrial production has intensified and retail sales’ growth peaked already in spring. Sentiment indicators and production expectations have worsened. We expect, that GDP growth will slow to 3.2% in this year and to 2.1% in 2020 . Demand for labour and, thus, pressure on wages should ease. The slowing real growth of wages will impede the growth of private consumption.

• Latvia: Economy has seen pronounced and broad-based slowdown this year. Domestic demand has softened on fading boost from the EU funds, increased uncertainty and moderating purchasing power growth, while weakening growth in trade partner economies has weighed on exports. We have revised down 2019 growth forecast to 2.3%. Further domestic demand softness will drag the GDP growth down to 2% in 2020 before rebounding to 2.5% in 2021.

• Lithuania: Economy remained on the path of strong and balanced growth in 2019, but expansion is expected to slow down substantially next year. Manufacturing volumes have held up so far, but weakness in euro area is likely to dampen exports. Labour market is starting to send worrying signals that should be monitored closely. Consumption and investments are likely to be the main drivers of growth in the nearest future, but both are at risk if uncertainty undermines confidence.


TM

AB

VS

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Sweden Josefin Fransson Kjetil Martinsen Marianna Rõbinskaja Lithuania

Anna Breman Assistant Head of Rates and FX Strategy Norway Economist Nerijus Mačiulis

Global Head of Macro Research [email protected] [email protected] [email protected] Deputy Group Chief Economist

Group Chief Economist +46 8 585 903 05 +47 9244 72 09 +372 888 79 25 Chief Economist Lithuania

[email protected] [email protected]

+46 8 700 91 42 Knut Hallberg Marlene Skjellet Granerud Latvia +370 5258 22 37

Senior Economist Economist Līva Zorgenfreija

Andreas Wallström [email protected] [email protected] Chief Economist Latvia Greta Ilekytė

Head of Forecasting +46 8 700 93 17 +47 479430 53 32 [email protected] Economist

Deputy Head of Macro Research Sweden +371 6744 58 44 [email protected]

andreas.wallströ[email protected] Maija Kaartinen Finland +370 5258 22 75

+46 8 700 93 07 Economist Heidi Schauman Agnese Buceniece

[email protected] Chief Ecomist Finland Senior Economist Vytenis Šimkus

Robin Ahlén +46 8 700 92 73 [email protected] [email protected] Senior Economist

Economist + 358 503 281 229 +371 6744 58 75 [email protected]

[email protected] Maria Wallin Fredholm +370 5258 51 63

+46 8 700 93 08 Economist Estonia Laimdota Komare

[email protected] Tõnu Mertsina Economist

Cathrine Danin +46 700 92 87 Chief Economist Estonia [email protected]

Senior Economist [email protected] +371 6744 42 13

[email protected] Norway +372 888 75 89

+46 8 700 92 97 Øystein Børsum

Chief Economist Norway Liis Elmik

Jana Eklund Chief Credit Strategist Senior Economist

Senior Econometrician [email protected] [email protected]

[email protected] +47 9950 03 92 +372 888 72 06

+46 8 585 946 04

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This report has been compiled by analyst(s) at Swedbank Macro Research, a unit within Swedbank Research that belongs to Swedbank Large Corporates & Institutions (“LC&I”). Macro Research are responsible for preparing reports on economic developments in the global and domestic markets. Macro Research consists of research departments in Sweden, Norway, Finland, Estonia, Latvia, and Lithuania.

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Sweden Denmark Finland Norway

E: Environmental protection (SDGs # 2, 6, 7, 11, 12, 13, 14, 15) 73 78 72 70

S: Social inclusion (SDGs # 1, 2, 3, 4, 5, 8, 9, 10) 89 88 89 91

G: Governance and institutions (SDGs # 9, 16, 17) 97 95 94 96

↓ - Overall downward trend during last 5 years

*Benchmark is 90 or 10th percentile of EU28 in 2015. In total 44 indicators covering all SDGs,

aggregated to three pillars. Traffic lights: ≥90% for green, 70-90% for yellow

Source: Swedbank Research

↓ ↓↓

↓ ↓ ↓

• We have revisited our SSIs to better align with the widely recognised ESG diagnostic used globally and across sectors.

• The SSI, comprising 44 indicators in total, serve to identify areas in which we need and can expect both public and business investment in the coming years.

• Our indicators show that both green and social action is still needed and soon.

Estonia La tvia Lithuania

E: Environmental protection (SDGs # 2, 6, 7, 11, 12, 13, 14, 15) 65 71 66

S: Social inclusion (SDGs # 1, 2, 3, 4, 5, 8, 9, 10) 71 66 66

G: Governance and institutions (SDGs # 9, 16, 17) 57 42 48

↓ - Overall downward trend during last 5 years

*Benchmark is 90 or 10th percentile of EU28 in 2015. In total 44 indicators covering all SDGs,

aggregated to three pillars. Traffic lights: ≥80% for green, 60-80% for yellow.

Source: Swedbank Research

↓ ↓

↓

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update - november 7, 2019

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