Divergent trends in the world economy will continue

CLEAR SIGNALS OF A US RECOVERY COMBINED WITH A DEEPENING EURO ZONE DEBT CRISIS have figured
prominently in recent economic developments. In the updated forecasts for various regions that SEB has presented in the past week under the heading Macro Update, we have adjusted GDP growth in the United States upward to 2.3% in 2012, while we now expect the euro zone economy to shrink by 0.6%. Strong fourth quarter 2011 GDP figures have led to an upward revision of this years Chinese growth. Taken together, this means that we now anticipate marginally higher global growth compared to our November forecast in Nordic Outlook.
GDP for 2012
Consensus forecasts at various dates, %
4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 Jan Mar US May Jul 11 Euro zone Sep Nov 12 Sweden
Source: Consensus Economics

THURSDAY JANUARY 19, 2012

mid-1990s, when the euro project began to take shape in earnest, the growth differential has not exceeded 2.2 percentage points. One reasonable question is thus whether these 2012 scenarios are compatible, or whether they are a consequence of the unwillingness of forecasters to predict which force is stronger: American recovery signals or a deepening European debt crisis.
GDP growth in US and euro zone
Differences in percentage change
3.0 2.5 2.0 1.5 1.0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: BEA, Eurostat, SEB

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50

0.5 0.0 -0.5 -1.0 -1.5

THE DOMINANT MACROECONOMIC TRENDS HAVE GRADUALLY CHANGED IN NATURE DURING THE PAST YEAR. Early in 2011 the focus was largely on countries with good fundamentals that showed strong growth and high resource utilisation. Central banks in Norway, Sweden and elsewhere typically announced key interest rate hikes at a predetermined pace in this environment. Early in March the European Central Bank (ECB) also signalled that it was shifting its monetary policy in a less expansionary direction, due among things to the strength of the German economy. Over the past six months, however, the deepening euro zone crisis and its secondary effects throughout Europe have now led to a change in relative economic outlook, to the advantage of the United States. Our updated forecast implies a US-euro zone growth differential of 2.9 percentage points in 2012. The latest compilation of consensus forecasts (Consensus Economics) also shows that this differential has now widened and now stands at 2.5 percentage points. Such a wide gap is unusual in a historical perspective. Since the

HOWEVER, WE CAN POINT TO A NUMBER OF FACTORS THAT JUSTIFY A HIGHER US GROWTH FORECAST. The US has a significantly higher underlying growth rate than the euro zone, while current resource utilisation is far lower. This implies greater potential for a cyclical recovery. Previous experience also indicates that the US is usually ahead of the euro zone in recovery phases. Aside from these more normal economic arguments, we can single out factors connected to the profound crisis. Both the US and Europe are facing perhaps their most farreaching challenges of the post-war period. The pattern in which the US finds it easier to rebound after deep crises is again beginning to manifest itself and may have various explanations. The problems in Europe tend to be more complex, since financial crises are interwoven with political tensions between different countries. Another factor is divergent economic policy strategies. The 1930s depression traditionally serves as the ultimate horrific vision for US economic policy makers. The hyperinflation of the early 1920s fulfils the corresponding function in Germany. This classic dividing line has again become relevant and is especially noticeable in central bank strategies.

Economic Insights

EMERGING MARKET (EM) ECONOMIES HAVE GOOD PROSPECTS OF BEING RELATIVELY RESILIENT IN THE FACE OF INTERNATIONAL TURMOIL. Their growth is admittedly slowing compared to previous hectic levels, but our main scenario implies a soft landing with annual GDP growth of 5.5-6% in 2012 and 2013 in the EM economies. Risks of a hard landing in the Chinese credit and real estate markets have nevertheless increased, while Eastern European economies are increasingly affected by Western problems, especially in the banking sector.

IN SWEDEN, THE DOWNWARD ADJUSTMENT HAS BEEN ESPECIALLY APPARENT IN THE PAST SIX MONTHS. For a long time, exceptionally high GDP growth in 2010 and 2011 created expectations that the Swedish tiger economy would permanently outshine other comparable countries. Early signs of falling home prices nevertheless caused private consumption to lose momentum as far back as early 2011, amplifying the effects of the weaker export outlook. The quarter-on-quarter pattern is now a bit difficult to interpret after an unexpectedly strong third quarter GDP figure. We predict a clear fourth quarter downswing (see chart below), after which the economy will be in a stagnation phase during most of 2012. Year-on-year GDP growth will fall gradually, bottoming out at -0.1% in the third quarter of 2012.
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Q1 Q3 10 Q1 Q3 11 Q1 Q3 12 Q1 Q3 13 SEB forecast 10 9 8 7 6 5 4 3 2 1 0 -1 -2

Global GDP growth

Year-on-year percentage change 2010 United States 3.0 Japan 4.4 Germany 3.6 China 10.3 United Kingdom 1.8 Euro zone 1.8 Nordic countries 2.9 Baltic countries 1.1 OECD 2.9 EM economies 7.3 The world, PPP* 5.1
Source: OECD, SEB

2011 1.8 -0.7 3.0 9.1 1.0 1.5 2.5 6.4 1.7 6.2 4.0

2012 2.3 1.6 0.3 8.4 0.4 -0.6 1.0 2.3 1.3 5.5 3.4

2013 2.2 1.2 1.2 8.7 1.7 0.7 1.9 3.3 1.8 5.8 3.8

* Purchasing power parities

THE NORDIC COUNTRIES HAVE BEEN CLEARLY AFFECTED BY THE EURO ZONE CRISIS. Effects due to lower exports, weaker optimism and wealth effects via falling share prices are more important than underlying good fundamentals. In Sweden and Norway, currency rate appreciation against the euro will contribute to further pressure on exports. In 2012 we expect GDP growth in Denmark, Sweden and Finland to end up around 0.5%, which implies a slight downward revision compared to Nordic Outlook in November. Strong domestic demand will keep growth higher in Norway.

Source: Statistics Sweden, SEB

GDP growth in the Nordic countries

Year-on-year percentage change 2010 Sweden 5.6 Norway 0.3 Denmark 1.7 Finland 3.6 Nordic countries 2.9
Source: OECD, SEB

During 2013 we expect Swedish growth to recover gradually to a near-trend rate. Continued key interest rate cuts will be needed in order to avoid even weaker economic performance. Due in part to gradually rising unemployment over the next couple of years, we believe that to some extent the government will reassess its current cautious fiscal strategy. Broader stimulus measures will thus be implemented, with tax cuts being supplemented by expanded local government social welfare programmes, infrastructure spending and labour market policy measures. hakan.frisen@seb.se +46 8 763 80 67

2011 4.3 1.3 1.1 2.7 2.5

2012 0.5 2.1 0.7 0.5 1.0

2013 2.0 2.4 1.4 1.7 1.9

Links to Macro Update for: US, euro zone, UK, Japan, China, Russia, Sweden, Norway, Denmark, Finland and Lithuania.