New macro forecast: Sweden well prepared for the autumn storms

The global economy may be at a crucial inflection point, and mature market
economies now risk stalling after only a brief and tepid recovery following the
financial crisis. The exceptionally expansionary economic policy subsequent to
this near-death experience has stabilised activity short term, but this comes at
a cost. As budget deficits widened sharply, government indebtedness has become
unsustainable in many countries. Against this background, the western world may
be in for many years of growth well below historical averages. More than ever
before, the global economy is now dependent on emerging markets, in particular,
China.
 
US economic growth slowed significantly in the first half of this year. While
temporary factors played a role, the slowdown is likely also due to structural
problems. In addition, uncertainty about the economic outlook is now an
important obstacle to a more robust recovery. It does not help that the Fed has
become harder to read and fiscal policy has become less predictable. However, in
our view, prevailing domestic economic conditions are likely not bad enough to
trigger a double dip in the US.
 
The entry of Italy, Spain and France into the sovereign debt crisis is forcing a
new round of fiscal tightening in the eurozone. On top of this, eurozone banks
are now in the midst of a much worse crisis of confidence than post-Lehman,
implying a looming credit crunch that will add to weaker growth. The EUR will
likely weaken, as the ECB will have to do what it takes to keep the financial
system from collapsing. In this scenario, the weaker eurozone members will get
even weaker, while the stronger members will still enjoy robust demand from
emerging markets and get an additional boost from a weakening currency.
 
The crisis in the eurozone is deepening and growth expectations have been scaled
down accordingly. The ECB has to make a u-turn and do its utmost to keep banks
and governments afloat. At the end of the day, we believe that the ECB will have
no choice but to follow in the footsteps of the US Fed. Against this background,
we expect the EUR to weaken against the USD. In the absence of a weaker euro,
the eurozone may be looking at a Japanese scenario.
 
Japan has surprised somewhat on the upside lately. The impact of the earthquake
earlier this year was more limited than most analysts initially feared. Japan's
fundamental problems are, however, unchanged. These challenges are further
aggravated by the strong yen, a consequence of global economic fears. The
authorities are fighting a losing battle to keep the yen down, as history tells
us that intervention seldom works.
 
Emerging markets have been a key driver in the global economy in recent years.
Asia, in particular, has been remarkably buoyant considering the gloom
elsewhere. As financial fragilities have resurfaced in the form of sovereign and
banking indebtedness in Europe, the question of whether or not emerging markets
will continue to propel the global economy forward has become crucial. While not
immune to problems in the developed western economies, we believe that emerging
markets will remain strong. They will provide markets for countries which are
well-positioned in global markets, and in contrast to the US, Europe and Japan,
they can relax economic policy if need be.
 
Sweden has strong domestic credentials, but is nevertheless a small vessel on
the choppy global economic ocean. Global weakness near-term and lingering
effects from the debt crises are set to curb traditional export markets. Strong
fundamentals promote decent domestic demand, but the recovery is about to end.
Despite the ongoing sharp slowdown, the Swedish economy is in pretty good shape,
but global economic risk is currently very high. Luckily, both the Swedish
government and the Riksbank have the muscles to fight a downturn. Contrary to
many other countries, Sweden has some room for policy easing.
Jan Häggström, Chief Economist
For information: +46 8 701 10 97, +46 70 761 4366
 
Press Release with tables: 
http://hugin.info/1225/R/1543215/472719.pdf
 
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