Not unexpectedly, there are persistent debt problems in many countries. The shift from one economic growth engine to another is occurring more sluggishly than desired: private consumption and capital spending are not successfully filling the void emerging as the positive effects of fiscal stimulus programs and inventory build-up fade away.
The global recovery is continuing, but its loss of momentum is creating uncertainty − despite new promises from the US Federal Reserve (Fed) of new quantitative easing measures if needed. The US economic deceleration is unwanted and risky, while Asia's deceleration is proceeding as planned. Differences in the underlying balance situation are now increasingly important to the economic and financial outlook. Within the euro zone, divergences in growth and employment are widening, creating policy challenges. Two countries have delivered upside surprises in 2010 − Sweden and Germany.
In the OECD countries, economic growth is expected to end up at 2-2.3% during the next couple of years, or somewhat below trend. We estimate the probability of a new global recession at 25%. Inflation will continue downward, but the world will avoid deflation. Fiscal stimulus is largely off-limits to many countries, which opens the way for continued ultra-loose monetary policy; we expect both the Fed and the European Central Bank (ECB) to keep their key interest rates at today's low levels throughout 2011. The fragile recovery and weak governments are slowing the global reform agenda, and questions about future economic and fiscal policy frameworks and regulations are being postponed.
The Swedish economy has provided upside surprises in recent months. We expect GDP growth to reach 4.7% in 2010, then decelerate to 2.9% in 2011 and 2.3% in 2012. Lower interest rates, tax cuts and a rapid upturn in exports − combined with the absence of falling home prices − have made possible a strong rebound in both output and employment after the deep recession. Unemployment will continue to fall from today's 8%. The SEK 30-40 billion in room for reforms during 2011-2014 identified by the government can be spent without affecting the credibility of Sweden's stable central government finances.
"In a short period, conditions surrounding Sweden's Riksbank have changed. An ever-larger share of idle economic resources is being placed in service, especially in the labor market. The easing and postponement of the Basel Committee's proposal for credit market standards and governance will place greater responsibility for stabilization policy on the Riksbank," says Robert Bergqvist, SEB's Chief Economist.
"At its next four policy meetings, we expect the bank to raise its key interest rate, which will reach 1.50% by February 2011. But inflation will remain low, and the risks to economic growth are on the downside due to international uncertainty. An excessively wide spread between short-term interest rates in Sweden and other countries may also strengthen the krona too much. So the Riksbank will slow down its rate-hiking. At the end of 2011 the repo rate will be 2.25% and at the end of 2012 it will be 3.00%. The krona will strengthen to 9.00 per euro at year-end and to 8.75 at the end of 2011."
"Debt retirement will continue to hamper recovery in many countries. In the United States, the adjustment in household savings now seems to be happening faster than expected, with a savings ratio that will reach 8% next year," says Håkan Frisén, SEB's Head of Economic Research and Editor-in-Chief of Nordic Outlook.
"This will lay the groundwork for a more stable upturn ahead, but over the next couple of years it will block a normal recovery dynamic. Even though the Fed is providing back-up by promising more monetary stimulus, the US economy will continue struggling with weak labor and housing markets, hard-pressed small businesses and weak public finances both at the federal and state level. The weak economy has helped erode confidence in President Obama, and the Democrats are likel