In many respects, the global economic recovery has strengthened in recent months. Crisis policies have fulfilled their task: stabilizing economic and financial systems. But now that the world is permitted to lift its gaze, not unexpectedly there are mounting worries about how government finances will be restored to an even keel quickly enough, and how changes in the global credit market will affect access to capital and cost of capital. Our conclusion is the same as previously: growth will be hampered. We expect GDP in the OECD countries to grow at close to trend levels in 2010-2011, which will suffice in order to stabilise the job market in many countries. Yet there is a great risk that unemployment will get stuck at higher levels.
China will remain a driving force in the world economy. The country will admittedly need to tighten its credit market in order to counteract bubble tendencies in asset prices, but there is hardly any danger of inflation and overheating. China has the tools to dodge imbalances and will thus serve as a stabilising force for its region and for the world.
Generally speaking, the risk of inflation in the world economy is small. Since fiscal policies must be tightened and the credit situation is expected to be tough, interest rate policy will remain gentle in many countries; the US Federal Reserve (Fed) and the European Central Bank (ECB) will not hike their key interest rates until around the end of 2010. In the euro zone, collaboration is being thoroughly tested in an environment of high unemployment, where a number of countries no longer have access to effective economic policy instruments. The euro will continue to weaken.
Sweden stands well equipped when other countries are forced to undergo restoration of sound central government finances. In some respects, we can thank the lessons and the methods used to combat the 1990s economic crisis for this situation. GDP growth will be 3.1 per cent in 2010 and 2.7 per cent in 2011 (2.8 and 2.7, respectively, in calendar-adjusted terms). Household consumption capacity will benefit from fiscal expansion (SEK 15 billion more in the 2011 government budget), great sensitivity to interest rates and unusually high savings. In addition, Sweden's industrial structure should prove to be an advantage during the international recovery phase. Unemployment will peak at 9.5 per cent during the second quarter of 2010, half a percentage point lower than our November forecast. Collective pay agreements will end up at around 2 per cent for the year and pose no threat to inflation; productivity will rebound. The Riksbank will raise its repo rate during the second half of 2010, starting in July. The Swedish central bank's key rate will reach 1.5 per cent in December and 3.0 per cent in December 2011.
"Of course it is hardly news that many countries are caught in a troublesome fiscal situation," says Robert Bergqvist, SEB's Chief Economist. "In the case of various euro zone countries, for example, there is now little room for economic policy manoeuvring if growth curves should begin pointing downward when interest, currency and fiscal policy measures are not available. This worries many financial market players."
"The recovery is surrounded by storm clouds, but there is still growth momentum. Interest rate policies will remain expansionary as long as there are risks of reversals, and depressed production levels in manufacturing represent a potential for rapid increases," says Håkan Frisén, SEB's Head of Economic Research and editor in chief of Nordic Outlook. "Labour market weakening has been milder than expected. This is encouraging, since it reduces the risks of long-term damage to the economy. Meanwhile it is likely to take time before we see unemployment falling to more reasonable levels."
Nordic Outlook is sticking to its assessment that internal and external forces will affect the global banking/credit systems in a way that will have monetary policy consequences.
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