The world economy is muddling through

RECENT GLOBAL ECONOMIC SIGNALS HAVE BEEN MIXED. Economic conditions have generally continued to weaken in most places, but the United States has seen various bright spots in the economy, especially in the labour and housing markets. Most of the new central bank stimulus programmes since this past summer have been forceful and far-reaching, contributing to greater risk appetite in financial markets. For example, the European Central Banks Outright Monetary Transaction (OMT) bond-purchasing programme has pushed down sovereign yields and helped to ease the acute crisis in the euro zone. This has created a bit more manoeuvring room for crisis management in other fields, such as structural policy and deeper fiscal policy cooperation. OUR VIEW OF DEVELOPMENTS IN VARIOUS COUNTRIES has been reported in our Macro Updates of recent weeks. The adjustments in our main forecast compared to the August issue of Nordic Outlook are small. We have revised our US and euro zone forecasts marginally downward, while making a somewhat larger downward revision for Japan. We have also lowered our outlook for India and Japan somewhat for 2012. The overall impact of these changes on the global economy is small. We have revised our (PPP weighted) global GDP growth forecast downward by one tenth of a percentage point for both 2012 and 2013. We thus expect world economic growth to end up at 3.2% in 2012 and 3.5 % in 2013. Our assessment is that the risk picture has marginally improved, thanks to a more stable euro zone situation and a further reduction in the risk of a hard landing in China. Yet we are choosing to stick to our assessment in August that the probability of a recession scenario is 20%. We also estimate that the probability of a faster recovery is 20%. THE US ECONOMY IS CONTINUING TO GROW AT A MODEST PACE. Recent data have come in somewhat stronger than expected, but GDP growth looks set to remain around 2% in the third quarter. This is in line with our August forecast. Our GDP forecast for 2012 thus remains unchanged at 2.2%, while we have revised our 2013 forecast downward by one tenth of a point to 2.1%. We expect GDP to grow by 2.6% in 2014. The Federal Reserves commitments to a third round of quantitative easing (QE3) with no time limit and to keeping its key

TUESDAY 23 OCTOBER 2012

interest rate at the current low level until at least mid-2015 have further decreased recession risks. We believe that these stimulus measures must remain in place for a rather long time. It is true that unemployment has fallen rapidly in recent months, but other labour market measures are considerably gloomier, and the substantial improvement that the Fed is seeking is far from materialising.

Global GDP growth

Year-on-year percentage change (brackets: August Nordic Outlook)

2011 2012 United States 1.8 2.2 (2.2) Japan -0.7 2.2 (2.6) Germany 3.1 0.8 (0.8) China 9.3 7.7 (7.8) India 6.8 5.5 (5.8) United Kingdom 0.8 -0.3 (-0.4) Euro zone 1.4 -0.5 (-0.4) Nordic countries 2.4 1.5 (1.7) Baltic countries 6.4 3.6 (3.1) OECD 1.7 1.3 (1.4) Emerging economies 6.2 4.9 (5.0) The world, PPP* 3.8 3.2 (3.3)
Source: OECD, SEB

2013 2.1 (2.2) 0.8 (1.5) 0.9 (1.0) 8.0 (8.0) 6.0 (6.0) 1.3 (1.4) 0.1 (0.2) 1,8 (1.9) 3.7 (3.8) 1.5 (1.7) 5.3 (5.3) 3.5 (3.6)

2014 2.6 (2.6) 1.4 (1.5) 1.6 (1.5) 8.2 (8.2) 6.5 (6.5) 1.6 (1.6) 0.9 (0.9) 2.2 (2.2) 4.2 (4.4) 2.1 (2.2) 5.8 (5.8) 4.1 (4.1)

* Purchasing power parities

THE NOVEMBER 6 PRESIDENTIAL ELECTION IS RAPIDLY APPROACHING. President Barack Obama has lost his lead in public opinion surveys, which instead now indicate a dead heat. But incumbent presidents often tend to surge nicely in the final stretch. Recent labour and housing market upturns will also enable the Democrats to argue that the economic situation has improved, though at a slow pace. So we still believe that Obama will be re-elected. Our GDP growth forecast assumes that the US can largely avoid the fiscal cliff and that fiscal headwinds will be limited to 1.5% of GDP in 2013. A review of various conceivable congressional and presidential election outcomes shows that the risk of serious fiscal paralysis is actually worst if Obama wins the election. This is because we consider it likely that that Republicans will retain their majority in the House of Representatives. Yet regardless of the election outcome, we believe that a solution will be reached before the end of the first quarter of 2013. EURO ZONE UNCERTAINTY IS SOMEWHAT LESS... After the European Central Bank launched its new Outright Monetary

This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct of investment business in the UK.

Economic Insights

Transaction (OMT) sovereign bond-purchasing programme in September, the crisis entered a less acute stage. Yields on Spanish and Italian government debt have fallen. We also anticipate that Greece will finally receive the next instalment in its bail-out package even though its negotiations with the EU/ECB/IMF troika are still dragging on. Looking further ahead, however, Greeces future in the euro zone is very uncertain.

economic activity expected during the second half of 2012 has thus not materialised. Compared to the August issue of Nordic Outlook, we have revised our 2012 GDP forecast for China somewhat further downward to 7.7%, but there are positive signals that reinforce our assessment that China can avoid a hard landing. The PMI has stopped weakening, and consumer confidence has shown some improvement. Exports were surprisingly strong in September, although a weak import trend points towards the continued absence of any clear improvement in domestic demand. INDIA UNVEILED NEW ECONOMIC POLICY REFORMS IN MID-SEPTEMBER. These proposed reforms are a step in the right direction but are not far-reaching enough to change the picture of an Indian economy that is grappling with major structural problems. Both domestic demand and export remain weak, and the economic growth rate is now lower than during the 2008-2009 financial crisis. We expect Indias GDP to grow by a weak 5.5% this year, a downward revision of three tenths of a point compared to August. Because of our downward revisions for China and India, we now expect GDP growth in the emerging market sphere to reach 4.9% in 2012, compared our 5.0% forecast in August.

GDP growth, Nordic countries

BUT MOST ECONOMIC INDICATORS HAVE RECENTLY CONTINUED TO WEAKEN. Recent purchasing managers index (PMI) and economic sentiment indicator (ESI) readings nevertheless point towards a decline in GDP during the third quarter. But these indicators have been overly pessimistic about growth in recent quarters. The latest final hard data provide a brighter picture. While the labour market indeed continues to deteriorate, this trend is in line with expectations. Exports are still increasing at a decent pace, and any negative impact from the latest euro appreciation is not yet visible. Industrial production has remained resilient, providing an upside surprise in August, with retail sales also surpassing expectations. The tough fiscal austerity measures now being implemented in many euro zone countries, along with inflation well above the ECBs target, nevertheless continue to restrain consumption. Uncertainty about the euro zone will continue to contribute to caution among both households and businesses. Companies are holding off on capital spending while awaiting a more permanent solution to the euro zone crisis. Overall, this means that economic growth will remain very subdued during 2013 and 2014. Germany, whose economy looks set to avoid recession but remain weak, will provide some support to growth. CONTINUED CHINESE SLOWDOWN DURING THE THIRD QUARTER. Chinas economic growth rate has slowed for the seventh consecutive quarter, but so far the policy response to this cooling trend from Chinese authorities has been very limited. The reason is probably that the big leadership shift expected this November has led to more cautious economic policies. The rebound in
Year-on-year percentage change (brackets: August Nordic Outlook)

2011
Sweden Norway Denmark Finland Nordic countries
Source: OECD, SEB

2012
0.8 (1.3) 3.4 (3.7) 0.5 (0.5) 0.3 (0.6) 1.5 (1.7)

2013
1.5 (1.5) 2.6 (2.7) 1.4 (1.4) 1.3 (1.6) 1.8 (1.9)

2014
2.5 (2.5) 2.2 (2.3) 1.7 (1.7) 2.0 (2.0) 2.2 (2.2)

3.9 1.4 1.0 2.7 2.4

THE OUTLOOK FOR THE NORDIC ECONOMIES HAS WEAKENED SOMEWHAT IN RECENT MONTHS. This is especially true of Sweden, where we have lowered our GDP forecast for 2012 from 1.3% to 0.8%. The downturn in Swedish manufacturing indicators has accelerated, partly due to the strong krona. Signs of weakening in the labour market are now also increasingly evident. Growth prospects in Norway have declined slightly as well, and we are adjusted our 2012 GDP forecast downward from 3.7 to 3.4%. Norway still stands out, however, with GDP growth that is far higher than other Nordic and Western European countries. In Finland, the economy is hampered by listless external demand, and we have lowered our GDP growth forecast. We have not changed our forecasts for Denmark, where we expect GDP growth to reach 0.5% in 2012. Danish unemployment is climbing, and private consumption growth remains weak.
Hkan Frisn, +46 8 763 80 67, hakan.frisen@seb.se Andreas Johnson, +46 8 763 80 32, andreas.johnson@seb.se

US economy: Fiscal cliff in focus

US real GDP growth in Q2 was revised to an annualized rate of only 1.3% from 1.7% previously. While still sluggish, economic activity appears to have accelerated in September with ISM manufacturing and ISM non-manufacturing both improving and employment better than expected. Q3 real GDP is currently tracking 2% growth, largely in line with our previous forecast in Nordic Outlook published in August. Regarding Q4 and early 2013 we believe downside risks have increased in recent months. There is an appreciable risk of temporarily falling off the fiscal cliff. At the same time, core capital goods orders are decreasing, suggesting potentially slower capex. Moreover exports are stagnating while the inventory cycle is probably also turning negative. On the one hand, the Fed has initiated open-ended QE3 which, assuming the fiscal cliff is avoided, should help the economy expand by 2.0-2.5% in 2013 before accelerating in 2014. On the other, even if most Bush administration tax cuts are extended and most spending cuts under the sequester postponed, we should still expect fiscal drag of approximately 1.5 percentage points in early 2013, with, for example, the USD 126bn payroll tax cut probably expiring around the turn of the year.

THURSDAY 11 OCTOBER 2012 Mattias Brur SEB Economic Research +46 8 763 85 06

Key data Percentage change

2011 2012 2013 2014 GDP Unemployment Inflation Core inflation

Source: SEB

1.8 9.0 3.1 1.7

2.2 8.1 2.2 2.1

2.1 7.7 1.9 1.8

2.6 7.0 1.4 1.3

Economic Insights

REAL GDP GROWTH STEADY AT AROUND 2% BUT RISKS SKEWED TO THE DOWNSIDE
Our H2 real GDP forecast of around 2% is apparently tracking well. Traditional bell weather macroeconomic indicators including ISMs suggest growth remains reasonably resilient. Meanwhile the Citi surprise index, previously near zero, has recovered following positive payroll data. Several indicators, however, suggest downside risks are increasing. We particularly favour the Chicago Fed National Activity index (CFNAI) as it includes no fewer than 85 economic variables. It substantially disappointed in August, falling to -0.87, its lowest level since June 2009 and a warning sign, implying a three-month moving average of -0.47 (anything below -0.70 signals recession). Durable goods orders dropped 13.2% in August, one of the largest decreases since the series began, mainly due to the aircraft sector, although most others fell back. Still, we usually focus on core durable goods orders, which are currently down by 4.1% y/y. Order data suggest a capex slowdown is possible.

Economic Insights

US CONSUMPTION MARKING TIME

US auto sales have trended up with 14.9 million annualized in September, a post-March 2009 high, largely due to easier financial conditions and pent-up demand following two unprecedented years in which autos were taken off the roads and driveways of the US. Moreover, consumer plans to increase auto purchases suggest sales will continue to trend upwards. Currently, the Fed hopes the ongoing wealth effect will kick-start US consumer spending. Household net worth has increased to 527% of disposable income after bottoming at 477%. Still, before the last recession in 200809 the corresponding figure was around 650%. However, we do not regard a consumer spending boom as imminent. Core retail sales are decreasing while the savings ratio currently stands below 4%, hardly implying much pent-up demand. The corresponding figure was 6% when QE1 was announced in 2009 and just over 5% when QE2 was launched in 2010. Currently, disposable personal income is increasing by around 2% annually. Going forward we expect it to trend slowly higher with real consumer spending projected to expand by approximately 2%.

Economic Insights

HOUSING IS PERFORMING WELL

Arguably the US housing market was the root cause of the domestic and global recession and the main reason why this has been the most tepid recovery on record. However, the market is improving which is important for consumer behaviour: almost 65% of households own a home compared to 50% who owned stocks in 2010. Further, the median value of homes is around seven times greater than the median value of stockholdings. Due to tighter supply, home prices have risen according to all metrics we follow. Home price appreciations have lifted 1-1.5 million Americans out of negative-equity positions thus opening up the possibility for more people to refinance and take advantage of historically low interest rates. Mortgage applications for refinancing have increased to its highest level since 2008. Among those with a mortgage between 20% and 30% still suffer from negative equity. When you look at the supply of houses on the market it should continue to exert an inflationary impact on home prices. But the shadow inventory of homes held by banks will come on the market eventually, increasing both foreclosures and official housing inventory and capping potential house price gains.

Economic Insights

THE INVENTORY CYCLE AND THE TRADE SECTOR SOON NEGATIVE FOR GDP GROWTH
Business inventories have increased, driving the inventory/sales ratio to its highest level since 2009, suggesting companies are in the process of de-stocking. The Philadelphia Feds inventory index plunged to -22.7 in September which also suggests companies will sell out excess inventory for a while. The Midwest drought will adversely affect H2 growth through its direct effects on agricultural output and indirect effects on higher food prices and lower disposable incomes. The Euro-zone recession and slowdown elsewhere are hurting US exports. The ISM new export orders index suggests export growth may fall below zero on a year-on-year basis. Meanwhile, import growth is already negative which explains why the trade sector is currently not acting as a drag on GDP growth. The US is experiencing an unprecedented boom in oil production; in only four years oil output has increased by 25%. The mining and logging sectors have outperformed all others in terms of employment growth. In 2005 the US imported 60% of crude oil compared to around 40% today.

Economic Insights

THE LABOUR MARKET: IMPROVING BUT STILL ONE SICK PUPPY

September employment data exceeded expectations, with the unemployment rate falling to 7.8% from 8.1%, its lowest level since President Obama took office in January 2009. All consumer confidence indicators we follow gained ground in September, suggesting a real improvement. However, surprisingly, the broadest measure of labour underutilization, the U6, held steady at 14.7% as the number of involuntary part-timers rose sharply. The current divergence between the regular unemployment rate (U3) and U6 is unprecedented. Broadly, the labour market is climbing out of a very deep hole; with private employment 4.2 million less than in January 2008, employment will not recover to its previous peak for another three years given its current rate of recovery. A total of 12 million Americans are out of work or almost 23 million if those who have stopped looking are included. At 63.6% the labour force participation rate is at the same level it was 30 years ago. The number of citizens of working age outside the labour force is approaching 90 million. Still, the labour market is gradually improving as suggested by the preliminary 2012 benchmark upward revision of 386,000.

Economic Insights

INFLATION IS WELL-BEHAVED
The Fed is doing open-ended QE but given a near-6% output gap our forecast is for inflation to continue to behave well. However, TIPS market-based inflation expectations are above 2.80% and rising, compared to previous QE rounds when inflation expectations were below 2% and falling. From this perspective, the Feds latest move was fairly radical, not being a response to a downturn in the economy but instead more an act of impatience with the economy. This stands in stark contrast to the period when the Fed spoke at length about how important it was to prevent inflation expectations from becoming unhinged. Now it obviously wants asset prices to increase, especially houses and shares, thus in a way using inflation to relieve the economy of its debt burden. While the market is currently relatively disinterested in gasoline prices, they are very high both in absolute and seasonal terms.

Economic Insights

THE FISCAL CLIFF, ELECTIONS AND MONETARY POLICY - INSIGHTS According to Intrade, President Obama remains the favourite to win the upcoming US presidential election. Certainly, going into his series of debates with Governor Romney most political experts expected the president to be re-elected. However, with Romney outclassing the president in the first of three debates, the polls show the Romney campaign has momentum. At the time of writing the average of the seven most recent polls gives President Obama only a 0.5 percentage point lead. If he is re-elected he will certainly have a mandate to impose tax increases on the wealthiest Americans and cut defense spending. However, the Senate race is open while the House is likely to remain in Republican hands implying a very real risk of continued policy gridlock. Indeed, there is a strong likelihood (more than is popularly supposed) that House Republicans will let Obama bear the responsibility for the inescapable recession likely to result from falling over the upcoming fiscal cliff, one which becomes even greater if Republicans take control of both chambers. If President Obama wins the election but the Congressional balance of power remains unchanged we regard an agreement before the year-end as 60% likely, increasing to 80% by the end of the first quarter of next year. Alternatively, if Obama wins the presidential election but Republicans take control of both chambers, these percentages fall to 35% and 65%, respectively. Conversely, if Mitt Romney wins we believe his party will be well placed to demand that most of the Bush administrations tax cuts be extended, at least on a temporary basis, especially since customarily Congress raises no budgetary objections during the earliest stages of a new presidency. If Romney wins and the Congressional balance of power remains unchanged we regard an agreement before year-end as 80% likely. If the Republicans take control of both chambers that percentage falls to 70%; the GOP then has an incentive to delay until the new Congress is installed. If Romney wins the battle for the White House and the Congressional balance of power stays the same, we regard an agreement before year-end as 80% likely, increasing to 90% by the end of Q1 2013. Alternatively, if Romney wins but the Republicans take control of both chambers these percentages become 70% and 90%, respectively. At its September meeting the Fed announced that it will leave the Fed funds rate at near-zero at least until mid2015 and pump USD 40bn into the economy each month for the foreseeable future. Indeed the FOMC is very aggressive as these excerpts show: If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In September, the unemployment rate fell below 8% for the first time in 44 months, although in our view that does not represent the substantial improvement the Fed seeks. The FOMC will be considering a broad range of labour market indicators and we know Bernanke pays close attention to the employment rate which presently suggests QE3 will continue for a very long time. Moreover, when Operation Twist ends in December the FOMC is likely to announce a new program, possibly of the same size (USD 45bn per month).

Japan: The economy is cooling

The Japanese economy is shifting into lower gear. On the back of the global slowdown exports are shrinking already. Moreover the subsidies that boosted ecocar sales and front-loaded consumption are behind us while reconstruction spending seems to have taken a breather. Leading indicators are suggesting that activity is decelerating. Consequently real GDP growth is revised down compared to August Nordic Outlook and we expect small quarterly declines in H2. Meanwhile the highest estimate for Q3 is 3.2% and the lowest is -3.9 QoQ% SAAR according to Bloomberg. Although the Bank of Japan added stimulus at its September meeting, against the weak economic backdrop and political pressure sooner rather than later the BoJ will act again in our view. A significant policy shift such as increasing the inflation target to 2% could be in the offing but the bank could also opt for another expansion of its asset purchase program. While action already at its next meeting on 30th October is possible we regard the meeting on November 19-20th as more likely. Former Premier Shinzo Abe is the new leader for Japans main opposition party, the Liberal Democratic Party (LDP) which has the lead in the polls although none of the parties seems likely to secure a parliamentary majority. Abe calls for early elimination of deflation via a higher inflation target. He has also called for more fiscal stimulus and closer ties between the government and the Bank of Japan. Abe and the current Premier Yoshihiko Noda of the Democratic Party of Japan (DPJ) try to outflank each other with tough security talk and they are both regarded as China hawks. Japan must hold a general election by May 2013. The consumption tax hike which is scheduled to take affect in 2014 could be scrapped as well which, in turn, would likely trigger rating cuts on the government debt. The shrinking surplus in the current account balance is not too alarming in our view. It is associated with reconstruction expenditures after the earthquake and despite the aging of the population we believe that the current account balance will stay in positive territory.
Key data

MONDAY 15 OCTOBER 2012 Mattias Brur SEB Economic Research +46 8 763 85 06

2011 2012 2013 2014 GDP* Unemployment** Inflation* Government deficit***

Source: SEB

-0.7 4.6 -0.3

2.2 4.4 0.1

0.8 4.4 0.3

1.4 4.1 0.4

-9.7 -10.5 -10.3 -10.0

*Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insights

Indicators such as machinery orders and OECD leading indicators are suggesting very little momentum in the Japanese economy. Real consumer spending almost stagnated in the second quarter and is expected to post a small decline in H2. Meanwhile export growth is already negative year-on-year and the trade sector will contribute negatively to GDP in 2012. Important questions about the prevailing economic structure, with net savings and large current account surpluses, are floating around. The shrinking of the current account balance is driven by the trade balance and is primarily associated with reconstruction expenditures after the earthquake. Since other components lead to big surpluses, in our view current account deficits seems improbable in the next couple of years. But if this assessment is wrong, the consequences are likely to be dramatic since Japan will be forced to import capital to fund its government debt.

Economic Insights

Although we believe that the current account balance will stay positive we acknowledge the risks associated with the JGB market. According to our forecasts gross government debt will reach 245% of GDP in 2014 and Japan has the heaviest public debt burden among developed nations. But most of the debt is owned domestically which means that the risk of a sovereign debt crisis and a Europeanstyle sell-off are relatively low. A headache, however, is the unstable political situation where the current Premier Noda has vowed to scrap the consumption tax hike which is scheduled for 2014. In other words, the chances are slim that Japan will put the fiscal house in order anytime soon and the government will run huge government deficits in coming years as well. Consequently the risk is high for a sudden rating cut which could trigger higher interest rates or even a fiscal crisis.

China: GDP growth decelerated in Q3 but is close to hitting the low point
GDP grew by 7.4% year-on-year in the third quarter compared to 7.6% in Q2. (Chart 1) Growth slowed for the seventh consecutive quarter. We have cut our GDP forecast slightly to 7.7% in 2012. In 2013, GDP will increase by 8.0% and in 2014 by 8.2%. However, the September data beat expectations and reinforced our long-held view that China will avoid a hard landing. We expect GDP growth to accelerate slightly in Q4. The 18th National Communist Party Congress has been scheduled for November 8. A large share of the top decision making body will be replaced, Xi Jinping is expected to become General Secretary of the Communist Party and President, while Li Keqiang will become Premier. Uncertainty surrounding the leadership changeover and the Bo Xilai scandal has muted the governments response to the economic slowdown. The Peoples Bank of China (PBoC) has held its key interest rate at 6.0% percent since the rate cut in early July. Instead, the central bank is using reverse repurchase agreements to inject liquidity into the money market. We expect the PBoC to hold the key interest rate steady for the remainder of 2012. Purchasing managers indices (PMIs) have stopped worsening but are still below the 50 level. The official PMI improved somewhat to 49.8 in September. The arguably more reliable Markit/HSBC PMI also improved slightly. (Chart 2) Price pressures are weak. Headline inflation decelerated slightly to 1.9% in September while food inflation decelerated to 2.5%. Core inflation printed at 1.7%. (Chart 3) Inflation is expected to increase moderately in Q4. Exports provided an upside surprise in September and increased by 9.9% in year-onyear terms. Imports are still rising slowly, however. (Chart 4) Both industrial production and retail sales accelerated in September. (Chart 5) New bank lending was weak in September at 623 bn yuan compared to more than 700 in August. However, weak bank lending was offset by growth in other forms of credit and the money supply grew at the fastest rate since June 2011. (Chart 6) The housing market is still weak. Housing prices are falling in year-on-year terms but at a slower pace. (Chart 7) Of 70 cities tracked, 31 saw price gains in September and 24 saw falls. Real estate transactions have recovered since the bottom in April. (Chart 8) The yuan (CNY) has started to appreciate against the USD again. (Chart 9)
Key data Percentage change

THURSDAY OCTOBER 18, 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2011 2012 2013 2014 GDP* Inflation* USD/CNY** 9.2 5.4 6.29 7.7 3.0 6.28 8.0 3.5 6.25 8.2 3.8 6.20

* Percentage change. ** End of period exchange rate. Source: MacroBond, National Bureau of Statistics of China, SEB.

Economic Insights

CHARTS ON THE CHINESE ECONOMY

India: Reforms are a step in the right direction but not enough to change the fundamental outlook
GDP growth rebounded slightly in year-on-year terms in the second quarter and ended up at 5.5%. (Chart 1) Growth likely remained weak in the third quarter as both manufacturing and agricultural production have struggled. GDP growth rates are slower than during the 2008-2009 financial crisis. Reform proposals presented in mid-September include a hike in the administered domestic price of diesel and liberalisation of foreign investment in the retail and aviation sectors. The reforms are positive news but unlikely to be implemented as a whole. They triggered strong protests, both among the public and opposition parties. Tension is mounting within the ruling coalition. The risk of an early election has risen. The GDP forecast has been revised downward somewhat to 5.5% in 2012. GDP is expected to grow by 6.0% in 2013 and 6.5% in 2014. If the above reforms are implemented quickly, there could be some modest support for growth in 2014 and beyond. However, more substantial growth effects require a much broader set of reforms and growth is unlikely to pick up strongly in the next couple of years. Purchasing managers indices (PMIs) for both manufacturing and services have stabilised recently. The manufacturing PMI came out at 52.8 in September. (Chart 2) The lacklustre performance of the manufacturing sector continues, although there are signs of stabilisation; industrial production beat expectations in August and increased by 2.7% year-on-year. (Chart 3) Exports are still weak and the 3-month moving average is well below zero. (Chart 4) Car sales, a key barometer of the health of Indias economy, fell 5.4% year-on-year in September. (Chart 5) Wholesale price index (WPI) inflation rebounded to 7.8% in September; food inflation has decelerated in recent months. (Chart 6) The jump in WPI inflation has further reduced the room for more expansionary monetary policy. The key interest rate has been on hold since the cut in April. (Chart 7) We expect the Reserve Bank of India (RBI) to keep the interest rate at 8% for the remainder of 2012. The recent reform proposals have buoyed equity and currency markets. (Chart 8) However, global economic uncertainty and the current account deficit will continue to weigh down the rupee. (Chart 9)
Key data Percentage change

TUESDAY OCTOBER 16, 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2011 2012 2013 2014 GDP* Inflation (wholesale)* USD/INR** 6.8 9.5 53.0 5.5 7.5 53.5 6.0 7.0 51.0 6.5 7.0 50.0

* Percentage change. ** End of period. Source: IMF, MacroBond, Ministry of Commerce and Industry, SEB.

Economic Insights

CHARTS ON THE INDIAN ECONOMY

Euro zone: Muddling through

ECB:s new Outright Monetary Transaction (OMT) bond purchase programme, promising to buy an unlimited amount of government bonds on the secondary market, helped boost financial market sentiment. Yields have come down in Spain and Italy. However, there is still a lot of uncertainty surrounding the OMT programme and little indication that a Spanish bail-out application is imminent. Meanwhile, the focus is shifting back to Greece. A stand-off between international lenders and Greek authorities has put the 174bn bail-out programme in peril. Its aim of reducing Greek government debt to 120% of GDP by 2020 is too optimistic. Most euro zone indicators have worsened recently. The Composite Purchasing Managers Index (PMI) fell to 45.4 in September. The Economic Sentiment Index points to falling GDP in the third quarter but has recently been too pessimistic about growth. Hard data provide a somewhat more positive picture. Exports have continued to perform well, although the effects of euro appreciation have yet to feed through. Industrial production is showing resilience. Retail sales beat expectations in August. The labour market continues to deteriorate in line with expectations. Euro zone GDP is expected to fall by 0.5% in 2012, followed by a return to positive territory with marginal growth of 0.1% in 2013. In 2014 growth will accelerate to 0.9%. The forecast has been revised downward slightly for 2012 and 2013. Germany continues to sustain euro zone growth. The IFO business sentiment index decreased in September, but figures for trade and industrial production suggest that the economy made a good start to the third quarter and should expand. Indications of a worsening labour market have yet to affect the unemployment rate. Euro zone inflation accelerated in September but falling energy/food prices along with weak economic activity imply that headline inflation will decelerate before long. The ECB kept the refi rate on hold at its October meeting and the market only assigns a small probability of another rate cut during the remainder of 2012. No new major policy initiatives were presented and there was little more information on what conditions must be fulfilled before any OMTs are undertaken; there is still no good answer to how the ECB will decide whether OMTs are needed. GDP forecasts
Per cent 2012 Euro zone France Germany Italy Spain
Source: SEB

FRIDAY 12 OCTOBER 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

Key data Percentage change 2013 0.1 0.3 0.9 -0.6 -1.2 2014 0.9 0.7 1.6 0.3 -0.1
GDP* Unemployment** Inflation* Government deficit***
Source: Eurostat, SEB

2011 2012 2013 2014 1.4 10.1 2.7 -4.1 -0.5 11.2 2.5 -3.3 0.1 11.9 1.6 -2.7 0.9 12.3 1.5 -2.2

-0.5 0.3 0.8 -2.1 -1.7

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insights

INDICATORS AND GDP Most indicators worsened in September. PMIs for all of the big four economies are now well below the 50 level although there was an improvement for Germany. The Economic Sentiment Indicator (ESI) points to substantial falls in GDP but the indicator has been too pessimistic in recent quarters. Consumer confidence has decreased further and has deteriorated sharply in Germany. Confidence indicators remain depressed in the construction sector and fell further for industry and retail sales in September. Germanys IFO business sentiment index has decreased for 5 consecutive months and was just above the longterm average in September. The ZEW investor sentiment indicator improved, however. Euro zone GDP is expected to fall by 0.5 % in 2012. In 2013, GDP is expected to grow by 0.1% followed by acceleration to 0.9% in 2014. The forecast for 2012 and 2013 has been revised downward by one tenth of a percentage point compared to the August issue of Nordic Outlook. GDP is expected to fall by 0.3% quarter-onquarter in Q3.

Economic Insights

LABOUR MARKET AND INDUSTRY The labour market continues to weaken and unemployment in the euro zone has reached a new record level of 11.4%. The number of unemployed has risen for 16 months running and was 18.2 million in August. Employment has been decreasing in year-on-year terms for three consecutive quarters. Unemployment in the peripheral euro zone economies has increased further. The Irish labour market shows signs of stabilisation, however. The unemployment rate reached 25.1% in Spain during August. The German labour market is still holding up well; the rate of unemployment has held steady at 6.8% since December 2011. However, there are signs of weakening; vacancies have been decreasing since January. Euro zone industrial production has been resilient and registered a monthly gain in July. Capacity utilisation edged down in Q3, however, and has been below the long-term average since the end of 2008. Low capacity utilisation will help drive inflation lower.

Economic Insights

FINANCIAL AND MONETARY INDICATORS, INFLATION Sovereign bond yields in Spain and Italy fell sharply in the first half of September following the unveiling of the OMT programme. Italian yields have recently stabilised just above 5% while Spanish ones remain below 6%. ECB loans to commercial banks have changed little; there is EUR 1.1 trillion in outstanding loans due earlier Long Term Refinancing Operation (LTROs). No new such ECB low-cost lending initiatives appear to be in the cards. There is still no real recovery for bank lending despite the LTROs. In August, the year-on-year growth rate was barely positive for lending to households and lending to non-financial firms decreased by 0.8%. M3 growth was disappointing as well and decelerated to 2.9%, moving further away from the ECB target of 4.5%. The resilience of exports likely reflects past falls in the exchange rate but demand from Asia has been steady as well. The recent rise in the euro suggests that conditions for exporters will worsen. Inflation accelerated to 2.7% in September (flash estimate) but the increase is unlikely to be the start of an upward trend. Food and energy inflation are likely to fall during the coming months, while weaker economic activity and reduced capacity utilisation will help to push down inflation. HICP inflation is forecasted at 2.5% in 2012, 1.6% in 2013 and 1.5% in 2014. Core inflation will fall further to 1.4% at the end of the forecast period.

UK economy: GDP growth returns to positive territory

GDP will decline by 0.3% in 2012 but on a quarterly basis growth should return to positive territory in H2. The economy will expand by 1.3% in 2013 which is close to our assessment in August Nordic Outlook as well as the IMFs new forecast of 1.1%. Headline inflation fell to 2.2% in September which was the lowest print since the end of 2009. Meanwhile core inflation held steady at 2.1%. Going forward we expect inflation to edge lower and stay below the inflation target of 2% for the most part in 2013-14. The strong employment growth is surprising since GDP growth has been weak, but the Olympics have boosted the figures. Going forward, we expect employment growth to run out of steam and the unemployment rate to edge higher again. Sluggish growth and inflation below the inflation target in the medium term suggest that Bank of England will expand its asset purchase program again before yearend.

WEDNESDAY 17 OCTOBER 2012 Mattias Brur mattias.bruer@seb.se SEB Economic Research

Key data Percentage change

2011 2012 2013 2014 GDP* Unemployment** Inflation* Government deficit**

Source: SEB

0.9 8.2 4.5 -8.5

-0.3 8.2 2.7 -8.2

1.3 8.4 1.8 -7.3

1.6 8.5 1.5 -5.8

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insights

Consumer confidence is at its highest level since 2011 but confidence in the household sector is much lower compared to most business surveys. Meanwhile in the manufacturing sector PMI fell to 48.4 in September and the services PMI fell as well but remains well above 50. That being said, since the beginning of September economic data has generally surprised on the high side. According to the housing price indices we follow the year-on-year trends have been broadly flat since 2010. But since inflation has been relatively high, in real terms UK house prices are actually deflating significantly. Reflecting the Olympic Games and the extra bank holiday, economic activity has been volatile in recent months. But compared to May the last data point unaffected by distortions both industrial production and exports are weaker today. A GDP bounce-back in Q3 notwithstanding, what this is suggesting is that the underlying trend is still weak.

Economic Insights

GDP is 14% below the level it would have reached had the severe recession in 2008-2009 not occurred and the economy continued to grow at its long-run rate. Nevertheless, according to OECD the output gap is 4.2% of GDP and according to the OBR it is just 2.6%. In our view the output gap is at least as big as the OECD estimate suggests. In other words, the UK economy has probably a potential to grow above trend for several years without inflation taking off. Despite continuing job cuts in the public sector, overall employment is heading higher since private sector employment has risen by 800,000 over the last year. Recently, however, indicators of employment in the private sector have weakened which is suggesting that private sector employment growth is slowing down. The strong employment growth is surprising since GDP growth has been weak, but arguably the Olympics have boosted the figures. Going forward, we expect employment growth to run out of steam and the unemployment rate to edge higher.

Sweden: Summer optimism has been reversed

The downward revision of second quarter GDP, combined with fading short-term growth indicators, have led us to revise our 2012 GDP forecast downward to 0.8% (from 1.3% in the August issue of Nordic Outlook). This means that our GDP forecast for 2012 is back to the level predicted in May, reversing the upward revision in August. Our forecasts for 2013 and 2014 are unchanged at 1.5% and 2.5% respectively. Slowdown but not a recession continues to be the main scenario. Slightly expansionary fiscal policy and low interest rates will sustain growth, while strong real income growth and lower mortgage rates will help household consumption. Still, GDP growth is expected to be only marginally above zero in the second half of 2012. The labour market continues to slow. Labour market indicators are slowing gradually and in many cases are now close to levels where unemployment can be expected to rise. We predict that unemployment will increase above 8% in the first half of next year. CPIF inflation will be well below the Riksbanks forecast throughout the forecast period, mainly due to lower core CPIF (ex food and energy). Lower mortgage rates are expected to push headline CPI below zero in the first half of 2013. Government finances appear to be slightly weaker than expected but remain exceptionally strong in an international comparison. Lower than expected tax revenues in 2012 indicate that the central government deficit will rise to 1% of GDP. The general government financial deficit will be less than 1.0% every year in 2012-2014. The Riksbank will cut its key interest rate in December and February to 0.75%, but stay on hold in October. Low inflation and rising unemployment are driving forces.

WEDNESDAY OCTOBER 17, 2012 Olle Holmgren SEB Trading Strategy olle.holmgren@seb.se +46 8 763 80 79

Key data

2011 2012 2013 2014 GDP* GDP working day adjusted* Unemployment** Inflation* Government savings***
Source: SEB

3.9 3.9 7.5 3.0 0.1

0.8 1.2 7.6 1.0 -0.5

1.5 1.5 8.0 0.3 -0.8

2.5 2.6 8.0 1.4 0.2

* Percentage change ** Per cent of labour force *** Per cent of GDP

Economic Insights

GDP SLOWING BUT NOT FALLING Manufacturing sentiment has declined after a summer fling, but the extent of the slowdown is still mixed, according to various indicators. Low PMI is a downside risk, while the National Institute of Economic Research survey remains more optimistic. Weak merchandise exports, but firm manufacturing output during the summer. The strong krona is putting downward pressure on exports, but the high percentage of exports to relatively strong Nordic countries and Germany is supportive. Manufacturing indicators are largely in line with Germany. Sentiment in the service and retail sectors has worsened, but is still at growth levels. Declining housing starts are putting downward pressure on the construction sector. Rising investments in utilities and infrastructure are providing some support, but construction sector confidence is at cyclical lows.

Swe: GDP and economic sentiment

125 116 106 97 0 88 79 69 60 01 02 03 04 05 06 07 08 09 10 11 12
% q/q (RHS) Economic sentiment (NIER)

3 2 1

-1 -2 -3

Merchandise exports to different regions Percentage of total merchandise exports, 2010 Germany European Union GIIPS countries France Germany Nordic countries Outside the EU United States China Japan
Source: Statistics Sweden, SEB

Sweden 56 5 5 10 22 44 6 4 1

59 11 10 5 41 7 6 1

Economic Insights

HOUSEHOLD SECTOR AND LABOUR MARKET The household sector has remained relatively firm, with rising retail sales and consumption. Unexpectedly low inflation means already strong real income growth will be even higher. Mortgage rates declining fast due to both rate cuts and lower STIBOR/mortgage bond spreads. Private consumption is expected to grow by 1.5-2.5% annually in 2012 and 2013. The housing market continues to be more resilient than expected. Prices have increased over last 3-4 months and short-term indicators remain firm. Lower mortgage rates will reduce short-term downside risks to prices even further. Lending to households is trending lower, and residential construction is declining. Employment continues to trend higher but at a decreasing pace. Unemployment is now showing signs of rising. Compared to our forecast, both job creation and unemployment have been marginally higher. Short-term indicators, such as employment plans in the NIER survey, continue to decline at a steady pace and are now at levels where unemployment can be expected to rise. We think unemployment will rise to slightly above 8% in the first half of 2013, with the upturn in unemployment coming slightly earlier than we assumed in August.
Household income and consumption
Year-on-year percentage change 2011 Consumption Income Savings ratio, % of disp. income 9.7 10.9 11.3 11.7
Source: Statistics Sweden, SEB

2012 1.5 2.8

2013 2.0 2.3

2014 2.3 2.8

2.0 3.0

Swe: Labour market

4700 4650 4600 4550 4500 4450
Unemployment, % (RHS) Employment, 1000s

9.0 8.5 8.0 7.5 7.0 6.5 6.0

07

08

09

10

11

12

13

14

5.5

Economic Insights

INFLATION, CAPACITY UTILISATION AND THE RIKSBANK Surprisingly low inflation in August and September was driven mainly by lower prices on imported goods. There was downward pressure on the CPIF forecast, which was already well below the Riksbanks estimates. Headline CPI is expected to decline below zero, driven by declining mortgage rate costs. Swedens already low resource utilisation is set to decline further. The Riksbank will cut its repo rate to 1% in December and 0.75% in February, but stay on hold in October. The low inflation rate and rising unemployment will continue to pressure the Riksbank to cut rates going into 2013. A possible renewed acceleration in household lending is an upside risk to our repo rate forecast. We expect the National Debt Office to raise its forecast for central government borrowing by SEK 7-8 bn per year to SEK 40bn in 2012 and SEK 22bn in 2013, equivalent to 1.1% and 0.6% of GDP, respectively. The total public sector deficit will be below 1.0% of GDP in 2012-2013, while we expect a small surplus in 2014. Swedish public sector finances remain extremely strong in an international perspective; debt levels will decline as a share of GDP.

Swe: Interest rate costs for own homes

Contribution to CPI, %-points y/y 3 2 1 0 -1 -2 -3 07 08 09 10 11 12 13 14 3 2 1 0 -1 -2 -3

Swe: Capacity utilisation indicator

2 1 0 0.0 -1 -0.5 -2
Riksbank, RU-indicator

1.5 1.0 0.5

-1.0 11 12 -1.5

-3

03

04

05

06

07

08

09

10

Swe: Central government borrowing requirement, SEK bn

Rolling 12 months

200 100 0 -100 -200 -300 02 03 04 05 06 07 08 09 10 11 12

200 100 0 -100 -200 -300

Denmark: Domestic economy on crutches

Second quarter GDP, released after Nordic Outlook in August, dropped 0.4 percent compared to the previous quarter. Private consumption was flat and sentiment, retail sales and car registrations point to a similar trend in the second half of 2012. Transfers from a retirement reform were used to bring down debt, with rising unemployment and falling real wages providing headwinds. Both housing and corporate capital spending dropped significantly in the second quarter, the latter a partial reversal from a jump at the beginning of the year. Given lacklustre domestic demand it was surprising that imports rose markedly, weighing on GDP. Public consumption rose for a second consecutive quarter, suggesting that fiscal policy is finally starting to ease. Spending is trailing targets as we expected, but the gap is widening to an extent that there are downside risks to our 2012 growth forecast. Exports posted a surprisingly strong gain, counterbalancing domestic weakness. Regionally it was broad-based, and trade data show that the positive trend continued in the third quarter. Manufacturing also shows signs of third quarter stabilisation.
GDP
Percentage change

THURSDAY OCTOBER 18, 2012

Jakob Lage Hansen X-asset Research +4533281469

8 6 4 2 0 -2 -4 -6 -8 92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Year on year Quarter-on-quarter

Source: Reuters EcoWin

Key data Percentage change

2011 2012 GDP* Unemployment** Inflation* Government deficit**

Source: SEB

2013 2014 1.4 4.8 1.8 -1.5 1.7 4.6 1.6 -0.5

1.0 4.1 2.7 -1.8

0.5 4.8 2.5 -3.0

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Fiscal policy easing, but trailing budgets

Quarter-on-quarter percentage change

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Public consumption
Source: Reuters EcoWin

Economic Insight

The current account surplus remained near Junes record level in July and August. Waning net flows in August from goods and income (interest, dividends and wages) were counterbalanced by rising services. The large and rising surplus is putting positive pressure on the krone vs. the euro, with portfolio flows to fundamentally sound Danish assets adding periodic pressure. However, aggressive intervention and interest rate cuts by the Danish central bank in May and June have taken the positive pressure off the currency. As the ECB cut its deposit rate to zero, the Danish deposit rate entered negative territory, which seems to have added further negative pressure. Easing euro zone tensions have also been a factor. The krone has weakened to territory where the central bank typically provides support. In September the bank bought kroner, and the currency has a limited downside versus the euro from this point. The second line of defence is increasing the deposit rate, but we are not there yet as there has only been marginal intervention. Danish government bonds are still in demand, with negative rates at the short end of the curve.

Euro vs. Danish krone and central bank interventions

40 30 20 10 0 -10 -20 -30 -40 -50 -60 99 00 01 02 03 04 05 06 07 08 09 10 11 12 FX purchases (DKK billions, LHS) EUR/DKK (RHS)
Source: Danmarks Nationalbank and Bloomberg

7.47

7.46

7.45

7.44

7.43

7.42

Norway: Mixed indicators but still outperforming

Recent indicators have been mixed regarding momentum the economy. On the demand side, private consumption of goods stalled in summer. Moreover, real exports of goods dropped sharply from the second to the third quarter: while maintenance stoppages dented petroleum exports (shipments of crude oil plunged in September), weakness spread to other goods exports as well. News on the supply-side show accelerating housing starts and surprisingly firm manufacturing production in summer, but sharply lower oil and gas extraction and electricity production. The just-released report from Norges Banks regional network was reassuring, however. While momentum reportedly eased slightly relative to early summer, overall activity continued to expand at a solid clip: output saw a fairly marked increase in the three months to September. The aggregate output indicator derived from the report isnt an exact predicator for actual GDP, but suggests on the face of it that growth in mainland GDP excl. oil/gas and shipping was running at approx. 3% year-on-year in Q3 (if not marginally higher): such a rate would represent moderation from the sturdy 3.7% gain in the year to Q2. Moreover, expectations were for a very modest slowing though trend-like growth over the final quarter of 2012 and the first one in 2013. Although the regional network report certainly suggests otherwise, we take note of weaker-than-expected consumption and exports in Q3 and shave our full-year forecasts marginally. Hence, overall GDP should expand 3.4% in 2012 and 2.6% in 2013 while mainland GDP should be up 3.3% and 3.0%, respectively. The forecasts assume recovering private consumption and exports of goods towards end-2012. (A full review will follow after the release of the Q3 national accounts due November 20.) Norges Bank should keep its key deposit rate unchanged at 1.50% at the October 31 monetary policy meeting. However, the new Monetary Policy Report is likely to see a subtle change to the optimal rate path, removing any probability of a rate hike before year-end but still factoring in a first hike before mid-2013.

FRIDAY 19 OCTOBER 2012

Stein Bruun
SEB Norway +47 21 00 85 34

Erica Blomgren
SEB Trading Strategy +47 22 82 72 77

Norges Banks network reports solid growth

Year-on-year percentage change, index
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 Mainland GDP (LHS) Regional network output indicator (RHS) Output expectations 6 mth ahead (RHS) 10 11 12 4 3 2 1 0 -1 -2

Key data Percentage change

2011 2012 2013 2014 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 1.4 2.4 3.3 1.2 0.9 14.2 3.4 3.3 3.1 0.8 1.2 13.9 2.6 3.0 3.2 1.9 1.6 12.0 2.2 2.9 3.2 2.0 2.0

* Per cent of labour force, ** General government, per cent of GDP, forecast 2012-13 MoF (October 2012) Source: SEB

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Retail sales measured in volume terms and on the ex-autos measure declined 0.2% in August from July when the level was unchanged. Meanwhile overall consumption of goods a broader gauge including auto and electricity held steady, but the July-August average was still 0.4% lower than in Q2 which saw a sturdy 1.6% quarterly gain. Absent a strong rebound in September, consumption of goods is thus in for the first quarterly decline since the start of 2011. At that time, a sharp jump in electricity prices dented households spending power and consumption. This time around, the marked downshift remains puzzling even taking into account that a payback always was in the cards following the spurt in the second quarter. Hence, households income remained strong as of Q2: in inflationadjusted terms, real disposable income thus gained a very solid 5.0% year-on-year. For the time being we would thus argue that the marked downshift in goods consumption should prove transitory. Momentum in manufacturing production saw a surprising acceleration in summer with the 3 mth/3 mth change of 2.6% as of August the strongest in four years. The investment goods sector is in the lead, spurred by surging investment in the petroleum sector: according to the September investment survey, oil companies operating at the Norwegian continental shelf thus put planned investment up 26.4% in 2012 relative to the actual outcome in 2011.
Retail sales stalled in summer
Percentage change, 3-month average
16 12 8 4 0 -4 -8 05 06 07 08 09 10 Real retail sales excl. autos, year-on-year (LHS) From 3 mth. earlier (RHS) 11 12 4 3 2 1 0 -1 -2

amid still-strong fundamentals

Year-on-year percentage change, per cent (2Q average)
10.5 9.0 7.5 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 03 04 05 06 07 08 09 10 11 Real disposable income excl. share dividends (LHS) Household saving rate (RHS) Household saving rate excl. share dividends (RHS) 12 14 12 10 8 6 4 2 0 -2 -4

Source: Statistics Norway

Source: Statistics Norway

Manufacturing output has been surprisingly solid

Percentage change, 3-month average
24 16 8 0 -8 -16 05 06 07 08 09 10 11 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 12 6 4 2

Investment goods sector remains the strongest

3-month average. Index 2005=100
175 160 145 130 175 160 145 130 115 100 85 05 06 07 08 09 10 11 12 Investment goods Intermediate goods Consumer goods
Source: Statistics Norway

0 -2 -4

115 100 85

Source: Statistics Norway

Housing starts have re-accelerated

40 35 30 25 20 15 03 04 05 06 07 08 09 10 Housing starts in 1.000, 12 mth. aggregate Housing completions in 1.000, 12 mth. aggregate 11 12 40 35 30 25 100 20 70 15 40 220 190 160 130

Record-high investment in petroleum sector

NOK bn
220 190 160 130 100 70 40 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Actual and planned investment oil/gas extraction and pipelines
Source: Statistics Norway

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION The LFS unemployment rate eased a notch to 3.0% on average in June-August, holding within the narrow range seen in the previous few months and below the 3.4% rate in Q4/11. In addition, registered unemployment declined again in September, though held at 2.5% of the labour force (on our seasonally adjusted data) for the fifth consecutive month. However, following still-solid growth up until late spring, the level of employment was marginally lower in June-August than in the previous 3-month period. In contrast, the respondents in Norges Banks network reported ongoing job growth with all sectors expecting to add workers in Q4 although at a slower pace. Core inflation remains benign and has yet to show any trend-change: Septembers 1.1% year-on-year rate on the CPI-ATE measure excl. taxes and energy was thus marginally below the average since last autumn. Overall CPI inflation was running even lower at 0.5% year-on-year, dented by a sharp 20% drop in electricity prices. Imported prices as measured in the CPI saw a sharper drop in September while domestic core inflation has trended up over the past year which fits with solid domestic demand for a period of time and still-existing cost pressure. The uptrend has been led by services while the rent component remains suspiciously soft amid a red-hot housing market: although rent inflation picked up marginally to 1.6% in September, it was only half the rate in late 2010.
Employment has slowed, unemployment low
3-month average
5 4 3 2 1 0 -1 -2 05 06 07 08 09 10 Employment, % change year-on-year (LHS) LFS unemployment rate, 3 mth. average 11 12 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 05 06 07 08 09 10 11 Employment, % change from 6 mth. earlier (LHS) Regional network employment indicator (RHS) Employment expectations next 3 mth. (RHS) 12

Continued demand for labour

3-month average, Index
2.1 1.8 1.5 1.2 0.9 0.6 0.3 0.0 -0.3 -0.6 -0.9

Source: Statistics Norway

Source: Norges Bank, Statistics Norway

Still no trend-change in core inflation

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 -2 02 03 04 05 06 07 08 09 10 Consumer prices CPI excl. taxes and energy 11 12 7 6 5 4 3 2 1 0 -1 -2 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5

Domestic inflation up over the past year

Year-on-year percentage change
6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 02 03 04 05 06 07 08 09 Core CPI domestic goods and services Core CPI imported consumer goods 10 11 12

Source: Statistics Norway

Source: Statistics Norway, SEB

Home price inflation shows signs of stabilising

25 20 15 10 5 0 -5 -10 03 04 05 06 07 08 09 10 11 Existing home prices, % change year-on-year (LHS) Existing home prices per sqm in NOK 1.000 (RHS) 12 34 31 28 25 22 19 16 13
7 6 5 4 3 2 1 0 -1

Services in the lead, rents suspiciously slow

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 05 06 07 08 Services: wages dominating factor Norwegian-produced cons. goods 09 10 Other services Rents 11 12

Source: Norw. Ass. of Real Estate Agents

Source: Statistics Norway, SEB

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS The Norwegian economy contrasts sharply from peers with solid growth, tight labour markets, abundant credit, rising home prices and household debt, and very sound public finances. Still, some pundits expect Norges Bank to cut the 1.50% key rate again. We highly doubt it. Admittedly, core CPI inflation is well below the 2.5% medium-term target and slightly below (0.2%-point) Norges Banks trajectory. The inflation forecast should be revised lower in the October Monetary Policy Report, implying a slightly lower optimal rate path as do a stronger-than-assumed NOK. This should be partly outweighed by markedly lower money market premiums which implicitly correspond to a 25bps rate cut. On net, the new rate path should eliminate the 20% probability for a hike before year-end but we expect it to still show a first hike by mid-2013. Norges Bank has long argued that significant NOK appreciation could trigger rate cuts, but the bank seems to have become more tolerant recently. In a speech in September, Governor Olsen thus added another parameter: It would only be relevant if the NOK moves significantly away from what Norwegian economic fundamentals suggest and at the same time threatens the credibility of the inflation target. This suggests that any renewed rate cut aimed at weakening the krone is not in the cards.
Norges Bank likely to subtly revise the rate path
Per cent
7 6 5 4 3 2 1 0 03 04 05 06 07 08 Norges Bank deposit rate Optimal rate path, MPR 1/12 09 10 11 12 13 14 15 Optimal rate path, MPR 2/12
Source: Norges Bank, SEB

Spread versus Bunds has tightened recently

Weekly average
7 6 5 4 3 2 1 0 05 06 07 08 09 10 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 11 12
Source: Reuters, SEB

7 6 5 4 3 2 1 0

150 125 100 75 50 25 0

EURNOK range-bound lately

Weekly average
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 05 06 07 08 09 EUR/NOK (LHS) USD/NOK (RHS) 10 11 12 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

but continued trade-weighted appreciation

Weekly average
116 112 108 104 100 96 92 88 84 05 06 07 08 NOK trade-weighted (LHS) 09 10 11 12 NOK import-weighted (RHR)
Source: Reuters, SEB

112 108 104 100 96 92 88 84 80

Source: Reuters, SEB

Overall credit growth remains stable despite

Year-on-year percentage change
25 20 15 10 5 0 -5 03 04 05 06 07 08 09 10 11 12 Domestic credit growth Domestic credit to households Credit to non-financial companies 25 20 15 10 5 0 -5 45 30 15 0 -15 -30 -45 -60 -75

banks reporting tighter lending standards

Net balance
45 30 15 0 -15 -30 -45 -60 -75
Q4 07 Q2 Q4 08 08 Households Q2 09 Q4 Q2 Q4 Q2 09 10 11 11 Non-financial businesses Q4 11 Q2 Q4 12 12(e)
Source: Norges Bank

Source: Statistics Norway

Economic Insights

For more in-depth analysis and comments, please follow the links
NOK Views: Norwegian Economics: Norwegian Economics: Norwegian Fixed Income: Norwegian Economics: Norwegian Economics: Norwegian Economics: Norwegian Economics: Norwegian Economics: Norwegian Economics: NOK FX Survey: You are long!
Norges Bank's network reports still-solid growth

Oct 16, 2012 Oct 17, 2012 Oct 15, 2012 Oct 11, 2012 Oct 10, 2012 Oct 8, 2012 Oct 5, 2012 Sep 29, 2012 Sep 20, 2012 Sep 6, 2012

Weak exports add evidence to downshift in Q3 NBG outperformance vs Germany overdone? Core inflation continues to run soft Budget proposal as balanced as you could expect Firm momentum in manufacturing production Retail sales stalling, unemployment remains very low Mum on policy signals, not mulling FX interventions Norwegian oil sector investment powers on

Finland: GDP fell in Q2, weak second half of 2012

Weak global demand is taking its toll on Finnish growth (Chart 1). In the first quarter of 2012 GDP grew by 0.9%, followed by a fall of 1.1% in the second quarter. With continued international weakness and our outlook for major export markets (Sweden, Germany, Russia) revised downward, it will be a close call whether Finland manages to avoid a new recession (two consecutive quarters of falling GDP) or not. In the second quarter exports, household consumption and capital spending all fell compared to the first quarter. Weak household consumption was expected, as the first quarter was boosted by unusually high new car registrations due to tax changes. During the past year, Finnish exports have performed worse than Germany and Sweden. Leading indicators have weakened for most sectors of the economy in recent months (Chart 2) and performance during the second half of the year will remain weak. Manufacturing output has basically been unchanged for a year, and given the weak international trend it is difficult to find a trigger for a near term increase (Chart 3). Although a weak trend during the rest of 2012 was already in the pipeline according to the August Nordic Outlook, performance since then has been weaker than expected. We are revising our GDP forecast to 0.3% in 2012, 1.3% in 2013 and 2.0% in 2014.
Key data Percentage change

FRIDAY 19 OCTOBER 2012 Daniel Bergvall Economic Research +46 8 763 85 94

2011 2012 2013 2014 GDP Unemployment* Inflation 2.7 7.8 3.3 0.3 7.8 3.2 -0,8 1.3 8.3 2.3 -0.5 2.0 8.3 2.1 -0.2

Government fiscal balance** -0.5

Source: SEB

* Per cent of labour force, ** Per cent of GDP

Economic Insights

LABOUR MARKET WEAKENING, CONSUMERS GETTING MORE WORRIED Capital spending fell in the second quarter (Chart 4). Capacity utilisation is still at a high level, and bank lending to both companies and households is rising at a steady pace. Investments are expected to start rising again in the second half of the year, although at a slow pace. Domestic demand has been less resilient than we had expected. Consumer confidence has fallen and so has consumption (Chart 5). Retail sales have improved somewhat compared to the poor second quarter and are again rising, albeit at a slow pace. We expect moderate growth in household consumption ahead. In recent months, unemployment has been on the upside of our forecast (Chart 6), reaching 8.0% in August, up from 7.6 per cent in June, after showing resilience during the first half of the year. A continued increase in unemployment will put pressure on household consumption. Vacancies are dropping, but not alarmingly so. Unemployment will rise by an additional 0.5 percentage point during the autumn and winter before levelling off and then slowly falling again late next year. Inflation has been stickier than expected and is edging upward (Chart 7). In September inflation stood at 3.4%, reducing the purchasing power of households. HICP inflation is expected to average 3.2% in 2012. Wages and salaries are increasing faster than in 2011, but real disposable income is rising only slowly. Still, wage increases will give a much needed boost to household income and consumption. Relatively low government debt has boosted financial market confidence. The government budget balance never went below the EUs -3% of GDP limit during the crises and came in at -0.5% of GDP in 2011. Government debt is below 50% of GDP. The government deficit will increases somewhat this year due to a weaker economy, but will not drop below -1% of GDP. Although rising somewhat in recent months, yields on government bonds are at low levels in a historical perspective, but higher than in countries like Sweden and Germany. Despite euro zone worries, Finnish sovereign bonds are viewed as a safe investment and the country is still AAA-rated.