Economic Outlook, January 2011, Nordea Bank

■ Content

ECONOMIC
OUTLOOK
JANUARY 2011

In smooth waters
Nordic tiger economies
■ The economies in the Nordic region have now really shifted into
a higher gear, led by Sweden.

Strong international recovery
■ The US is finally pulling out of the crisis and Asia seems unstop-
pable. Europe is still fighting with the debt crisis, but Germany is
running at full steam.

OVERVIEW 04
IN SMOOTH WATERS
NORDIC ECONOMIES 08
SWEDISH ECONOMY ENTERS A NEW PHASE
MAJOR ECONOMIES 16
GERMAN WIRTSCHAFTSWUNDER 2.0
EMERGING MARKETS 23
RUSSIA REBUILDING GROWTH MOMENTUM
COMMODITIES 37
PUTTING THE RECOVERY AT RISK

2 ECONOMIC OUTLOOK │JANUARY 2011 NORDEA MARKETS

■ Content

Data overview OVERVIEW
In smooth waters .......................................................................................... 4
Key figures............................. 6
Interest rates ......................... 7
Nordic economies
Exchange rates ..................... 7
SWEDEN
Economy entering a new phase ..................................................................... 8

Editor NORWAY
Consumers support economy after all .......................................................... 10
Helge J. Pedersen,
Global Chief Economist DENMARK
helge.pedersen@nordea.com The course is set ......................................................................................... 12
Tel +45 3333 3126 FINLAND
Increasing economic activity ........................................................................ 14

Major economies
Editorial deadline
USA
14 January 2011 Towards a brighter tomorrow ....................................................................... 16
EURO AREA
Growth to continue in spite of sovereign debt crisis...................................... 18

Visit us at: Germany
Wirtschaftswunder 2.0 ................................................................................. 20
www.nordea.com/e-Markets
UK
Fiscal tightening really starts to bite ............................................................. 22

Data sources: Emerging Markets
Data sources are Reuters EcoWin,
national statistical bureaus and
POLAND
own calculations unless otherwise Political risks have increased ....................................................................... 23
noted. RUSSIA
Rebuilding growth momentum ..................................................................... 25
ESTONIA
Improving economic outlook ........................................................................ 27
LATVIA
Post-recession mood ................................................................................... 28
LITHUANIA
Economic recovery broadening .................................................................... 29
HUNGARY
Domestic recovery finally gaining traction .................................................... 30
CZECH REPUBLIC
Recovery gaining strength ........................................................................... 31
CHINA
Rebalancing process will gradually gain momentum ..................................... 32
INDIA
A growth story of its own ............................................................................. 34
BRAZIL
Time to scale back the loose fiscal policies .................................................. 35
TURKEY
Risk of overheating ...................................................................................... 36

Commodities
OIL
Oil price rally may put world economic growth at risk ................................... 37
METALS
Metal prices still trending up ........................................................................ 38


■ Overview

In smooth waters
Here at the onset of 2011 there is extra reason to pop the by far the largest economy and a key trading partner for
champagne corks, as the global economy came out of almost all the other countries.
2010 in even better shape than expected. The quite clear
signs of a slowdown during the summer luckily soon eva- The Euro area ended up in the eye of the hurricane last
porated and were replaced by renewed progress. This year as a result of the sovereign debt crisis, which will
was achieved partly as a result of the pragmatic and very likely continue to be a theme in financial markets
growth-oriented economic policy in both the US and the for a long time yet. However, we do not think that the
Euro area, but also partly because the underlying Euro area is on the brink of an imminent breakdown. One
strength in the Far East and other Emerging Markets reason is that the Euro-area countries have become more
economies proved sufficiently robust to withstand the ini- unified during the crisis, which most recently was dem-
tiated monetary policy tightening. Against this back- onstrated at the December summit with the adoption of
ground, we have revised up our 2011 growth outlook, but the permanent stability facility as a bailout for countries
this year nonetheless looks set to become very interest- threatened by bankruptcy. Moreover, the ECB has gained
ing. Not least because the upswing is challenged by the more power and is now the main source for ensuring li-
announced budget consolidation measures in most Euro- quidity in countries whose banking sectors are still under
pean countries and the surge in commodity prices. We severe pressure. And lastly it should not be underesti-
therefore see 2011 as a transition year with global mated that EMU is a decisive means to achieve the target
growth abating relative to 2010 before showing renewed set some 60 years ago of a political union in Europe.
strength in 2012. That project will not be abandoned based on one crisis.

US turnaround Given the fiscal policy tightening we project quite weak
Our growing optimism is largely based on the perform- growth in the Euro area during the forecast period, but
ance of the US economy. Recent economic indicators with great variance among the countries. Central and
have unequivocally pointed to an accelerating upswing, northern European countries will experience quite decent
which is now supported by additional fiscal policy eas- growth, while the crisis sentiment will linger south of the
ing: Congress has decided to extend the Bush administra- Alps and in Ireland.
tion’s tax cuts, which would otherwise have expired at
end-2010, and new stimulus measures in the form of new Asian bumper year
tax cuts of almost USD 200bn have been adopted. The rapidly growing Asian economies, headed by China,
seem unstoppable at the moment. This has heightened the
In addition, Fed Chairman Ben Bernanke has now really risk of overheating and led to significant monetary policy
proved to the world why his old nickname “helicopter tightening in both India and China. In China not least be-
Ben” was not randomly chosen. The printing press has cause of skyrocketing house prices. Still, we do not fear
been allowed to roll at an unprecedented speed and in an actual economic setback, as we expect that the Chi-
step with banks easing credit standards for the small and nese authorities will be able to steer the country safely
medium-sized enterprises that are so vital for US job through the twelfth 5-year plan with growth rates steady
creation, the likelihood increases of a strong, self- at the 8-9% mark. At the same time, growth rates in the
sustaining economic upturn in the world’s largest econ- other BRIC countries, Brazil, Russia and India, will re-
omy during the forecast period. In this connection the main at high levels.
ongoing consolidation of households’ financial position
over the past two years could turn out to be crucial, as Record-high commodity prices threaten upswing
consumer spending accounts for nearly 70% of overall The high growth in 2010 has triggered a veritable explo-
economic activity in the US. sion in commodity prices. We pointed to the risk of a
price shock in the September issue of Economic Outlook
Dual Europe and since then commodity prices have overall risen to a
While the US continues to pump out money to finally historically high level. This constitutes a clear risk for the
pull out of the economic crisis, the approach is entirely outlook for growth and inflation in the slightly longer
different in Europe. Here the Growth and Stability Pact term. The rapidly increasing oil price is particularly wor-
leaves no room for further fiscal policy easing. On the rying. Experience shows that when oil prices reach about
contrary, nearly all the EU countries will have to con- USD 115-120 USD per barrel, economic growth is sig-
solidate public finances, although the requirement varies nificantly curbed, as companies’ costs rise sharply and
greatly. The most severe belt-tightening in coming years households’ purchasing power is eroded. Oil prices cur-
is needed in the southern European countries, Ireland and rently hover around USD 100, and it cannot at all be ru-
the UK, while for example Germany needs much less led out that the upward trend will continue.
drastic measures. The latter is a major benefit for the
economic outlook for the old Continent, as Germany is


■ Overview

The rising commodity prices threaten to lift consumer from the improvement in global trade, but export growth
prices markedly in the developing countries where de- is expected to dampen from previous strong records.
mand for basic goods makes up a relatively large share of Households’ financial position is in good shape, boosting
overall consumer spending. This could lead to social un- private consumption. Investment started to pick up in
rest and restrictions on the countries’ commodity exports, 2010 and will increase further just like employment will.
in turn leading to further price increases and an economic However, there are now increasing risks of bottlenecks in
setback in the rest of the world. At this juncture trends in the labour market. Public finances have strengthened
commodity markets therefore constitute one of the main along with rising employment and are seen reaching the
risks to a stable and sustainable upswing in the global target of a 1% surplus of GDP as early as in 2011. Infla-
economy. tion will increase on the back of rising energy prices and
higher wages. The Riksbank hiked the repo rate four
Monetary policy – a catch 22 situation times in 2010 to currently 1.25%. Further hikes are in the
The mounting inflation via commodity prices entails hu- pipeline, leaving the repo rate at 2.5% in December 2011
ge challenges for the world’s central banks, as the timing and 3.5 % by the end of 2012.
of the anticipated monetary policy tightening is further
complicated. The diverse growth prospects for the indi- A strong finish to last year means that growth in Norway
vidual countries in the Euro area means that the ECB is in 2010 will be somewhat stronger than originally
already walking a tightrope, and the Fed’s double man- expected. Stronger momentum into 2011, somewhat
date to take both labour market conditions and inflation better labour market conditions and prospects of very
into account threatens to leave the otherwise notoriously robust growth in oil investment have also led us to revise
forward-looking central bank further behind the curve up our 2011 growth outlook. With stronger growth,
than what in any way feels comfortable. For as long as unemployment may have peaked, but we may have to
the extremely lenient monetary policy is still pursued, the wait until 2012 for unemployment to decline. Labour
risk increases that ample liquidity will cause bubbles to shortages are thus not likely to be a major problem.
emerge in financial markets, commodity markets and in Inflation looks set to remain relatively low although it
some countries also housing markets. In this way, the will edge higher. Norges Bank will cautiously normalise
world’s leading central banks appear to be caught in a interest rates in step with the pick-up in growth and
scary catch 22 situation. If interest rates are hiked too capacity utilisation. With the global low interest rate
soon and too aggressively, asset market bubbles could be regime, Norwegian rates will rise only moderately in
prevented, but the tentative upswing may be choked. If 2011, but the pace could increase in 2012. The NOK will
interest rates are hiked too late, the bubbles may emerge, remain relatively strong, but in trade-weighted terms it
with resultant fresh losses in the financial sector and the will be somewhat weaker than the strong levels around
real economy when price corrections start. the turn of the year.

We expect the ECB to hike its policy rate in Q3 this year After the massive setback in 2009, economic growth
but with full allotment of liquidity throughout 2011 due returned soundly to positive territory in Denmark in
to the persistent difficulties in procuring liquidity for the 2010. The contours of a broadly based upswing have
banks in the most debt-ridden countries. On the other emerged with five consecutive quarters of positive
hand, we do not expect the Fed to end its QE strategy un- growth so far. On the threshold to the election year of
til mid-2011, subsequently hiking rates towards the end 2011 consumers and businesses have stepped up a gear,
of the year. But the Fed will be more aggressive than the and the course is set for a continued rebound in the
ECB. Towards the end of the forecast period we there- Danish economy.
fore expect the fed funds rate to stand at 3%, while the
ECB’s policy rate will only be 2.5%. This will also con- The economic outlook in Finland is positive. Rapid ex-
tribute to further USD appreciation versus the EUR dur- pansion of important trading partners’ economies (Ger-
ing the forecast period where we will also see generally many, Sweden and Russia) suggests that demand for
higher long yields. Finnish exports remains strong, especially as demand is
expected to shift more towards investment goods. Fairly
Nordic tiger economies decent growth in private consumption is supported by
The Nordic economies have now really shifted into a high household confidence, a fall in savings and im-
higher gear, led by the Swedish tiger economy, which provement in employment. Following a rise in manufac-
has delivered impressive growth rates over the past year turing capacity utilisation rates, a gradual recovery in
and which looks set to become the show case for the en- machinery investment is expected. The projected favour-
tire OECD area in terms of policy and economy. But all able economic growth, 3% in 2011 and 3.4% in 2012, is
the Nordic countries are in a relatively favourable situa- not sufficient to turn the public sector financial deficit
tion thanks to their generally healthy public finances. into a surplus by 2012

After the deep recession in 2009 the Swedish economy Global Chief Economist Helge J. Pedersen
recovered sharply in 2010. The export industry benefitted helge.pedersen@nordea.com
+45 3333 3126


■ Overview

Growth, % Inflation, %
2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E
World1) 2.2 -1.0 4.3 4.0 4.2 World 4.7 0.7 2.6 2.7 2.5

BIG-3 2) -0.1 -3.5 2.4 2.4 2.6 BIG-3 3.3 -0.3 1.3 1.3 1.5
USA 0.0 -2.6 2.9 3.3 3.3 USA 3.8 -0.3 1.7 1.4 1.7
Japan 3) -1.2 -5.2 2.8 1.5 2.0 Japan3) 1.4 -1.0 -0.3 0.2
Euro area 0.3 -4.0 1.7 1.6 2.0 Euro area 3.3 0.3 1.6 2.0 1.7

Germany 0.7 -4.7 3.5 2.5 2.2 Germany 2.8 0.3 1.3 1.8 1.6
France 0.1 -2.5 1.6 1.5 2.0 France 3.2 0.1 1.7 2.2 1.8
Italy -1.3 -5.1 1.1 1.1 1.6 Italy 3.5 0.6 1.6 2.0 1.7
Spain 0.9 -3.7 -0.2 0.5 1.8 Spain 4.2 -0.3 1.8 1.8 1.0
Netherlands 1.9 -3.9 1.7 2.0 2.4 Netherlands 2.2 1.0 1.0 2.2 1.6
Belgium 1.0 -2.8 2.0 1.8 2.2 Belgium 4.5 0.0 2.3 2.4 1.6
Austria 2.2 -3.4 2.0 1.8 2.5 Austria 3.2 0.4 1.7 2.3 1.6
Portugal 0.0 -2.6 1.3 -1.0 1.0 Portugal 2.7 -0.9 1.4 2.1 1.2
Greece 2.0 -2.3 -4.3 -3.0 1.0 Greece 4.3 1.3 4.6 2.7 0.5
Finland 0.9 -8.0 3.0 3.0 3.4 Finland 4.1 0.0 1.2 2.5 2.1
Ireland -3.5 -7.6 -0.2 0.8 2.2 Ireland 3.1 -1.7 -1.6 0.3 1.0
UK -0.1 -4.9 1.7 1.8 2.0 UK 3.6 2.2 3.2 3.0 1.8

Denmark -1.1 -5.2 2.2 1.8 1.9 Denmark 3.4 1.3 2.3 2.0 2.0
Sweden -0.6 -5.3 5.5 4.5 2.8 Sweden 3.4 -0.5 1.2 2.7 3.0
Norway 1.8 -1.3 2.0 3.0 3.1 Norway 3.8 2.1 2.4 1.8 2.0

Russia 5.6 -7.9 4.1 5.4 5.7 Russia 14.1 11.7 6.9 7.7 7.5
Poland 5.0 1.7 3.9 3.8 4.1 Poland 4.3 3.7 2.5 3.4 2.2
Estonia -5.1 -13.9 2.4 4.2 4.0 Estonia 10.6 -0.1 3.0 3.6 2.5
Latvia -4.2 -18.0 -0.1 3.0 4.2 Latvia 15.3 3.6 -1.1 2.9 2.6
Lithuania 2.9 -14.7 1.2 3.0 3.8 Lithuania 11.1 4.2 1.3 2.6 2.4
Hungary 0.6 -6.5 0.9 3.2 3.4 Hungary 6.0 4.2 4.9 2.8 3.0
Czech Republic 2.3 -4.0 2.5 3.1 3.8 Czech Republic 6.3 1.0 1.5 2.7 2.3
Turkey 0.7 -4.7 7.5 5.1 5.5 Turkey 10.4 6.3 8.6 6.0 5.5

China 9.6 9.1 10.1 8.7 8.9 China 6.0 -0.7 3.3 4.5 4.0
India 5.1 7.7 9.2 8.7 9.3 India 9.1 2.1 9.2 6.0 5.0
Brazil 5.2 -0.7 7.6 4.5 4.7 Brazil 5.7 4.9 5.0 5.2 4.8
1) W eighted average of countries in this table. Accounts for 70.5% of world GDP. Weights calculated using PPP adjusted GD P levels for 2007 according to the IMF's World Economic Outlook
2) U S, Japan and the Euro area
3) Source: IIMF W E October 2010

Public finances, % of GDP Current account, % of GDP
2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E
BIG-3 -2.9 -8.7 -8.0 -7.1 -5.6 BIG-3 - - - - -
USA -3.2 -10.0 -8.9 -8.4 -6.1 USA -4.7 -2.7 -3.3 -3.2 -3.7
Japan 3) -4.2 -10.3 -9.6 -8.9 -8.1 Japan3) 3.2 2.8 3.1 2.3 2.3
Euro area -2.0 -6.3 -6.3 -4.6 -3.9 Euro area -1.5 -0.6 -0.3 -0.3 -0.2

Germany 0.1 -3.0 -3.5 -2.7 -1.8 Germany 6.7 5.0 4.9 5.1 4.8
France -3.3 -7.5 -7.7 -6.2 -4.8 France -2.7 -2.9 -2.5 -2.3 -1.9
Italy -2.7 -5.3 -5.0 -4.4 -3.5 Italy -3.4 -3.2 -3.0 -2.9 -2.7
UK -5.0 -11.4 -10.5 -8.0 -6.0 UK -1.6 -1.7 -2.5 -2.0 -1.5

Finland 4.2 -2.7 -3.1 -2.0 -1.3 Finland 3.5 2.7 2.0 2.0 2.1
Denmark 3.3 -2.8 -3.6 -4.5 -3.3 Denmark 2.7 3.6 5.3 4.2 3.8
Sweden 2.2 -1.0 0.1 1.1 1.7 Sweden 8.9 6.8 6.2 6.4 6.4
Norway 19.3 11.0 11.3 12.0 14.5 Norway 17.7 13.1 13.2 13.8 16.1

Russia 4.1 -5.3 -4.2 -2.8 -2.0 Russia 6.2 3.9 4.7 3.5 2.7
Poland -3.7 -7.2 -8.3 -6.0 -4.5 Poland -4.8 -2.1 -2.3 -3.1 -4.7
Estonia -2.8 -1.7 -1.5 -2.0 -1.5 Estonia -8.8 4.5 3.8 0.8 0.1
Latvia -4.2 -10.2 -7.9 -5.4 -3.0 Latvia -13.1 8.6 4.0 -0.1 -0.8
Lithuania -3.3 -9.2 -7.8 -5.8 -3.0 Lithuania -13.1 2.6 1.3 -0.2 -0.3
Hungary -3.7 -4.4 -3.8 -2.9 -3.0 Hungary -7.3 -0.5 2.2 -0.5 -2.0
Czech Republic -2.7 -5.8 -5.1 -4.5 -3.5 Czech Republic -0.6 -1.0 -2.5 -2.9 -3.5
Turkey -1.8 -5.5 -5.2 -4.5 -4.0 Turkey -5.8 -2.3 -5.6 -6.0 -6.0

China -0.4 -2.1 -3.0 -2.4 -1.9 China 9.6 6.1 5.2 4.4 3.7
India -6.0 -6.5 -7.0 -6.0 -5.0 India -2.2 -2.1 -2.9 -3.0 -3.0
Brazil -1.6 -3.2 -2.7 -2.5 -2.0 Brazil -1.8 -1.5 -2.5 -3.0 -3.0


■ Overview

Monetary policy rates Monetary policy rate spreads vs Euro area
14.1.11 3M 6M 12M 24M 14.1.11 3M 6M 12M 24M
US 0.25 0.25 0.25 0.75 3.00 US -0.75 -0.75 -0.75 -0.75 0.75
1
Japan 0.10 0.10 0.10 0.10 0.50 Japan -0.15 -0.15 -0.15 -0.65 -2.50
Euro area 1.00 1.00 1.00 1.50 2.25 Euro area - - - - -
Denmark 1.05 1.05 1.05 1.55 2.50 Denmark 0.05 0.05 0.05 0.05 0.25
Sweden 1.25 1.75 2.00 2.50 3.50 Sweden 0.25 0.75 1.00 1.00 1.25
Norway 2.00 2.00 2.25 2.75 4.00 Norway 1.00 1.00 1.25 1.25 1.75
UK 0.50 0.50 0.50 0.50 2.00 UK -0.50 -0.50 -0.50 -1.00 -0.25
Switzerland 0.25 0.25 0.25 0.50 1.25 Switzerland -0.75 -0.75 -0.75 -1.00 -1.00
Poland 3.50 4.00 4.25 4.75 4.75 Poland 2.50 3.00 3.25 3.25 2.50
Czech Rep. 0.75 0.75 1.00 1.50 2.00 Czech Rep. -0.25 -0.25 0.00 0.00 -0.25
Hungary 6.00 6.00 6.00 6.25 6.50 Hungary 5.00 5.00 5.00 4.75 4.25
Turkey 6.50 6.50 7.00 8.00 9.00 Turkey 5.50 5.50 6.00 6.50 6.75
Russia 7.75 8.00 8.25 8.75 9.00 Russia 6.75 7.00 7.25 7.25 6.50
China 5.81 6.06 6.31 6.31 6.31 China 4.81 5.06 5.31 4.81 4.06
India 6.25 6.75 7.00 7.00 6.00 India 5.25 5.75 6.00 5.50 3.75
Brazil 10.75 12.25 12.25 12.25 9.00 Brazil 9.75 11.25 11.25 10.75 6.75
1) Spread vs US

3-month rates 3-month spreads vs Euro area
14.1.11 3M 6M 12M 24M 14.1.11 3M 6M 12M 24M
US 0.30 0.40 0.50 1.15 3.25 US -0.69 -0.70 -0.75 -0.70 0.75
Denmark 1.21 1.35 1.50 2.10 2.90 Denmark 0.22 0.25 0.25 0.25 0.40
Sweden 2.00 2.50 2.75 3.25 3.60 Sweden 1.01 1.40 1.50 1.40 1.10
Norway 2.60 2.54 2.74 3.18 4.39 Norway 1.61 1.44 1.49 1.33 1.89
UK 0.77 0.85 0.95 1.30 2.35 UK -0.23 -0.25 -0.30 -0.55 -0.15
Poland 3.98 4.25 4.50 4.90 5.00 Poland 2.99 3.15 3.25 3.05 2.50
Czech Republic 1.20 1.25 1.50 1.95 2.40 Czech Republic 0.21 0.15 0.25 0.10 -0.10
Hungary 5.84 6.25 6.35 6.60 7.00 Hungary 4.85 5.15 5.10 4.75 4.50
Russia 4.06 4.30 4.55 5.00 6.00 Russia 3.07 3.20 3.30 3.15 3.50
Latvia 0.84 1.00 1.20 1.50 2.00 Latvia -0.16 -0.10 -0.05 -0.35 -0.50
Lithuania 1.30 1.50 1.80 2.00 2.30 Lithuania 0.31 0.40 0.55 0.15 -0.20

10-year government benchmark yields 10-year yield spreads vs Euro area
14.1.11 3M 6M 12M 24M 14.1.11 3M 6M 12M 24M
US 3.35 3.40 3.50 3.60 4.25 US 0.33 0.35 0.25 0.05 0.45
Denmark 3.27 3.20 3.40 3.75 4.20 Denmark 0.24 0.15 0.15 0.20 0.40
Sweden 3.24 3.30 3.40 3.70 4.00 Sweden 0.22 0.25 0.15 0.15 0.20
Norway 3.80 3.80 3.91 4.15 4.59 Norway 0.78 0.75 0.66 0.60 0.79
UK 3.61 3.60 3.70 3.80 4.10 UK 0.59 0.55 0.45 0.25 0.30
Poland 6.26 6.00 5.70 5.80 6.00 Poland 3.24 2.95 2.45 2.25 2.20
Czech Rep. 3.95 3.75 3.50 3.75 4.00 Czech Rep. 0.93 0.70 0.25 0.20 0.20
Hungary 7.90 8.20 8.00 7.75 8.00 Hungary 4.88 5.15 4.75 4.20 4.20

Exchange rates vs EUR Exchange rates vs USD

14.1.11 3M 6M 12M 24M 14.1.11 3M 6M 12M 24M
EUR/USD 1.303 1.25 1.25 1.20 1.20 -
EUR/JPY 108.6 108 113 118 126 USD/JPY 83.37 86.0 90.0 98.0 105
EUR/DKK 7.450 7.46 7.46 7.46 7.46 USD/DKK 5.717 5.96 5.96 6.21 6.21
EUR/SEK 8.850 8.60 8.60 9.00 9.00 USD/SEK 6.792 6.88 6.88 7.50 7.50
EUR/NOK 7.721 7.90 7.70 7.90 8.00 USD/NOK 5.925 6.32 6.16 6.58 6.67
EUR/GBP 0.833 0.81 0.83 0.80 0.77 GBP/USD 1.565 1.54 1.50 1.50 1.55
EUR/CHF 1.265 1.25 1.25 1.28 1.33 USD/CHF 0.971 1.00 1.00 1.07 1.11
EUR/PLN 3.844 3.80 3.80 3.90 3.70 USD/PLN 2.950 3.0 3.0 3.3 3.1
EUR/CZK 24.38 24.5 24.3 24.3 24.0 USD/CZK 18.71 19.6 19.4 20.2 20.0
EUR/HUF 276.0 275 275 280 270 USD/HUF 211.8 220 220 233 225
EUR/TRY 2.04 2.00 1.95 2.00 2.00 USD/TRY 1.57 1.53 1.50 1.53 1.53
EUR/RUB 39.39 37.1 36.4 35.0 32.8 USD/RUB 30.23 29.7 29.1 29.2 28.5
EUR/LVL 0.701 0.70 0.70 0.70 0.71 USD/LVL 0.538 0.56 0.56 0.59 0.59
EUR/LTL 3.453 3.45 3.45 3.45 3.45 USD/LTL 2.650 2.76 2.76 2.88 2.88
EUR/CNY 8.605 8.23 8.10 7.56 7.03 USD/CNY 6.604 6.58 6.48 6.30 5.86
EUR/INR 58.71 55.6 55.0 54.0 52.8 USD/INR 45.06 44.5 44.0 45.0 44.0
EUR/BRL 2.187 2.13 2.19 2.04 1.98 USD/BRL 1.678 1.70 1.75 1.70 1.65


■ Sweden

Economy entering a new phase
• Decent growth despite less stimulus years’ expansionary policy line with low interest rates
and tax cuts. The reduced stimulus in 2011 is offset by
• Strong labour market with risk of bottlenecks higher incomes via rising employment. Towards the end
• Repo rate to be hiked to 2.50% in 2011 of the forecast period, hourly wages will also increase
faster. At that time the anticipated tax breaks will also
Maturing business cycle boost household finances, with an increase in real dis-
The Swedish economy recovered in 2010. Both GDP and posable income of about 3% annually in 2011 and 2012
employment returned to pre-crisis levels, public finances despite sharply rising interest expenses. The household
balanced again and the Riksbank phased out the extraor- consumption climate is thus still favourable.
dinary support measures for the financial system.
Households’ improved finances are also reflected in the
We look for continued decent growth, implying an addi- housing market. The decline in home prices during the
tional increase in capacity utilisation. That will sharpen crisis was negligible and residential construction has re-
the focus on the economy’s capacity to grow. In our bounded strongly, which is a key reason why investment
view, the portion of idle resources in the economy should activity rose as early as during 2010. Several service sec-
not be overestimated – not least because there are signs tors expanded, and a reversal in manufacturing industry
that structural unemployment has risen. Moreover, the investment is by all accounts imminent. Continued in-
strong trend will lead to a reduction in the previously creases in production, high corporate profits and strong
massive stimulus measures, which will dampen growth confidence suggest that the broadly based upswing in in-
from last year’s record level. The Riksbank has already vestment activity will continue.
sanctioned a string of rate hikes and is expected to take
its foot further off the accelerator going forward. The fis- The strong rebound in foreign trade was a key factor be-
cal policy stance will shift from being highly expansion- hind the very high GDP growth in 2010. Indicators are
ary to neutral during 2011. Moreover, SEK appreciation still strong but the initial sharp upward move from the
will contribute to a less accommodative environment. depressed levels after the crisis seems to be over. Exports
will increase at a healthy clip in coming years, as export
The Riksbank will continue to raise interest rates in markets are expected to expand more rapidly than the
2012. But strong public finances will make it possible to past 15 years’ average.
implement fiscal policy reform of a corresponding SEK
15bn, mainly as tax cuts for households. All in all, GDP Tighter labour market
growth is estimated to exceed the long-term trend also in The robust economic growth has fuelled demand for la-
2012. bour. The steadily increasing number of vacant jobs and
companies’ still very optimistic hiring plans suggest that
Broadly based upswing the upturn will continue. We look for an increase in em-
Households have first and foremost benefited from recent ployment of around 2% in 2011, which is a steep in-
crease in a historical perspective.

Sweden: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (SEKbn) 2008 2009 2010E 2011E 2012E
Private consumption 1,460 0.0 -0.4 3.5 3.5 2.8
Government consumption 797 1.0 1.7 2.1 1.7 0.5
Fixed investment 612 1.4 -16.3 5.0 9.5 6.1
- industry 95 -0.2 -22.2 -5.5 13.9 8.9
- residential investment 121 -13.1 -23.3 17.5 14.0 8.0
Stockbuilding* 23 -0.5 -1.5 2.2 -0.1 -0.4
Exports 1,621 1.7 -13.4 11.0 7.0 6.4
Imports 1,388 3.5 -13.7 12.3 6.3 6.0
GDP -0.6 -5.3 5.5 4.5 2.8
Nominal GDP (SEKbn) 3,126 3,204 3,089 3,302 3,510 3,684

Unemployment rate, % 6.2 8.3 8.4 7.3 6.8
Employment growth 1.1 -2.1 1.0 1.9 1.0
Consumer prices, % y/y 3.4 -0.5 1.2 2.7 3.0
Underlying inflation (CPIF), % y/y 2.7 1.7 2.0 1.8 1.8
Hourly earnings, % y/y 4.6 3.0 1.2 3.2 4.2
Current account (SEKbn) 286 210 204 224 234
- % of GDP 8.9 6.8 6.2 6.4 6.4
Trade balance, % of GDP 3.6 3.2 2.7 3.1 3.4

General govt budget balance (SEKbn) 71 -30 4 40 62
- % of GDP 2.2 -1.0 0.1 1.1 1.7
Gross public debt, % of GDP 37.7 42.1 41.6 39.4 37.6
* Contribution to GDP growth (% points)


■ Sweden

Although employment had largely regained the ground Strong growth in Sweden’s export markets
lost as early as by the end of 2010, unemployment is still 20
% y/y Market Exports of % y/y
20

markedly higher than before the crisis. The reason is re- 15
growth goods
15
cent years’ unusually strong inflow to the labour force.
10 10
Changes in the unemployment insurance system, the in-
work tax credit and the health insurance reform have 5 5

probably resulted in more people entering the labour 0 0
market. For demographical reasons the labour force will -5 -5
expand at a much lower pace in future. The increase in
-10 -10
employment will therefore have a growing impact on un-
employment data going forward. -15 -15

-20 Forecast -20
The level of structural unemployment is subject to much 02 03 04 05 06 07 08 09 10 11 12

uncertainty. The labour market reforms are expected to
boost participation in the labour force and help reduce
Large room for spending
unemployment in the long term. However, there is reason
6 15
to believe that structural unemployment has risen near % y/y Real % of disp. income
income 14
term. According to our estimates, structural unemploy- 5
Savings ratio, 13
ment is currently some 7%, a level that actual unem- Consumption rhs
4 12
ployment will have reached by the end of 2011.
11
3
10
More rate hikes and continued SEK strength
2
It is worth noting that some pay deals will expire in the 9

autumn this year. However, the rounds of pay talks will 1 8

not peak until H1 2012. The coming pay talks will take 0
7

place against a very different backdrop than the previous 6
Forecast
round. Labour market conditions will be tighter, corpo- -1 5
02 03 04 05 06 07 08 09 10 11 12
rate profits have been record high and compensation for
previous crisis deals will likely be demanded. We expect
total wage increases to exceed 4% in 2012. Rapidly declining unemployment
4750 9.5
('000) Persons %
Wage increases are currently low, but with rising capac- 4700 9.0
ity utilisation wage costs, and in turn inflation, will in-
4650
crease during the forecast period. Near term higher en- 8.5
4600
ergy prices and more expensive food will contribute to 8.0
Unemployment, sa
CPIF inflation, the Riksbank’s favourite measure, being 4550
(rhs) 7.5
in line with the target in 2011. Much therefore suggests 4500
7.0
that the Riksbank will not only scale back its monetary 4450
policy stimulus measures but also adopt a more restric- 4400
6.5
tive policy line. We expect the repo rate to stand at 4350
Employment, sa
6.0
2.50% at the end of 2011 and 3.50% at the end of 2012. Forecast
4300 5.5
01 02 03 04 05 06 07 08 09 10 11 12
The high growth, the Riksbank’s rate hikes and the rela-
tively strong public finances contributed to the signifi-
cant SEK appreciation in 2010. The same factors suggest Inflation in line with target in 2011
continued SEK strength, while improved international 5
% y/y % y/y
5

economic conditions and stronger expectations of rate 4
CPI
4
hikes from other central banks pull in the opposite direc-
tion. We expect the SEK to trade at 9.00 against the EUR 3 3

on a 12-month outlook. 2 2

1 1
Torbjörn Isaksson CPIF
torbjorn.isaksson@nordea.com +46 8 614 8859 0 0

-1 -1
Note: CPIF is a measure of underlying inflation
-2 (CPI with constant mortgage rates) Forecast -2
02 03 04 05 06 07 08 09 10 11 12


■ Norway

Consumers support economy after all
• Strong growth in demand and production relatively low level and wage growth gradually rising,
there are indications that consumption growth could be
• No inflation pressures and relatively low inflation relatively high in the next few years. But consumption in
• Norges Bank will progress cautiously early 2011 may show signs of weakness as high
electricity bills erode consumers’ purchasing power.
In 2010 we revised down our forecast for economic When electricity prices move lower during the spring,
growth as consumer spending growth looked set to be consumer spending may regain momentum and
weaker than originally assumed. But based on revisions periodically grow faster than the underlying trend.
to the historical data and a strong trend towards the end
of 2010, the pace of both demand and production growth A strong rebound in oil investment on the cards
appears to have been stronger than expected. In light of The decline in oil investment in 2010 have been sharper
the stronger momentum into 2011, the improved labour than expected, but judging from Statistics Norway’s oil
market situation and prospects of very strong growth in investment survey the rebound in 2011 should be that
oil investment, we have also revised up our growth fore- much stronger. Based on investment plan surveys, com-
cast for 2011, while our relatively optimistic view on mercial building starts data, the low interest rates and less
2012 remains intact. All in all, the scene is thus set for restrictive credit standards as well as the overall brighter
relatively strong growth in Norway in 2010-2012. economic prospects, business investment in the mainland
economy also looks set to rise, although several factors
With stronger growth, unemployment should have suggest that it will take place at a moderate pace. Invest-
peaked, we think. But a marked decline in joblessness is ment activity except in the manufacturing industry is al-
not very likely until 2012. Labour shortages and capacity ready at a relatively high level, and in many sectors there
constraints are not likely to be a major problem over the may still be idle capacity. Against the backdrop of low
next 18-24 months. Inflation looks set to remain rela- interest rates, a benign labour market outlook home
tively low although it will edge higher. Norges Bank will prices should pick up further in 2011. Higher home
cautiously normalise interest rates in step with the pick- prices will likely boost residential construction activity.
up in growth and capacity utilisation. With the global
low interest rate regime, Norwegian rates will rise only Good export growth; very strong import growth
moderately in 2011, with the central bank acting slightly We have revised up our growth forecasts for some of
more aggressively in 2012. Norway’s key trading partners. Still, growth in traditional
exports is not likely to be as strong as in 2010 when
Not so cautious consumers world trade started to recover from the crisis. As a result
Consumption growth in the autumn of 2010 was higher of a sharp increase in import-intensive domestic demand
than we had expected. Consumer confidence has components, growth in imports in 2011 will significantly
improved, and home prices rose sharply during the last outstrip that in exports.
months of 2010. With unemployment stabilising at a

Norway: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (NOK bn) 2008 2009 2010E 2011E 2012E
Private consumption 940 1.6 0.2 3.4 3.3 3.0
Fixed investment 504 2.0 -7.4 -6.7 7.0 5.1
- gross investment, mainland 376 -1.4 -11.7 -4.4 4.5 4.3
- gross investment, oil 113 5.5 9.9 -12.0 15.0 8.0
Stockbuilding* 33 -0.3 -2.6 2.7 0.0 0.0
Exports 1,040 1.0 -4.0 -1.8 1.0 1.5
- crude oil and natural gas 480 -2.0 -1.2 -6.0 -0.6 -0.6
- other goods 302 4.2 -8.2 5.8 3.0 4.3
Imports 691 4.3 -11.4 9.4 4.8 3.7
GDP 2,272 0.8 -1.4 -0.1 2.2 2.3
GDP, mainland 1,724 1.8 -1.3 2.0 3.0 3.1

Consumer prices, % y/y 3.8 2.1 2.4 1.8 2.0
Core inflation, % y/y 2.6 2.6 1.4 1.6 2.2
Annual wages (incl. pension costs), % y/y 6.0 4.2 3.5 4.0 4.3
Current account (NOKbn) 449.1 311.8 327.4 367.7 470.3
- % of GDP 17.7 13.1 13.2 13.8 16.1
Trade balance, % of GDP 19.1 14.8 13.6 13.8 16.1

General govt budget balance (NOKbn) 486.7 262.0 280.0 320.0 425.0
- % of GDP 19.3 11.0 11.3 12.0 14.5


■ Norway

Slightly higher, but moderate wage/price growth Consumers support the economy after all
Despite strong growth in 2011 and 2012, unemployment 122
Index Retail sales Index
122

is not likely to decline markedly until 2012 because the 121 121

labour supply will increase and employment growth will 120 120
119 119
be moderate. Many employers held on to their staff Trend ,
4M mov. avg.
118 118
during the downturn and they can now increase
117 117
production through more efficient resource utilisation
116 116
and increased average working hours.
115 115
114 114
We expect wage growth to pick up slightly over the next 113 113
few years as a result of a gradually tighter labour market 112 112
situation. But with a more balanced labour market, wage 111 111
growth will hardly be as high as before the financial cri- 07 08 09 10
sis. And with benign productivity growth and moderate
wage growth core inflation should remain relatively low,
Investment generally at a high level
although it will rise somewhat. The effect of the NOK
22 22
appreciation on prices of imported goods will gradually % Investment mainland firms %
% of production
fade. 20 Services 20

18 Goods excl. 18
Cautious normalisation manufacturing
In response to strong growth and prospects of rising 16 16
capacity utilisation Norges Bank will resume its gradual
14 14
normalisation of interest rates. But with low interest rates Total

internationally and low inflation Norges Bank should 12 12
progress cautiously in 2011. In 2012 the pace of rate 10 10
Manufacturing
hikes may be accelerated as interest rates globally will
begin to move higher and inflation and capacity 8 8
99 00 01 02 03 04 05 06 07 08 09 10
utilisation have increased.

NOK strength around end-2010 only temporary Productive employees limit employment growth
Around the turn of the year 2010 the NOK strengthened 5 5
% y/y % y/y
relatively sharply, with the import-weighted NOK beat-
4 4
ing Norges Bank’s projection. The rising oil prices, in-
creased risk appetite, wider interest rate differential ver- 3 3
Productivity,
sus other countries and the absence of foreign currency 3Q mov. avg.
2 2
purchases by Norges Bank probably induced investors to
take on large speculative NOK positions. When the be- 1 1
nign trend in NOK-positive factors fades, many market
0 0
players will want to trim their positions and the NOK
will weaken again. If, contrary to expectations, the NOK -1
Average working time,
-1
should strengthen in Q1, Norges Bank will likely revise 3Q mov. avg.
-2 -2
down its interest rate forecast in its next Monetary Policy 03 04 05 06 07 08 09 10
Report in March. Less confidence in further rate hikes by
Norges Bank may contribute to weakening the NOK in
Q2. Overall, we look for a weaker import-weighted NOK Strong NOK given the interest rate differential
compared to at the turn of the year. 0.50
% points NOK
9.25

0.75 9.00
Home prices vs NOK rate – a potential dilemma EUR/NOK, rhs

If interest rates globally remain low for a longer period 1.00 8.75

than we expect, Norges Bank will most likely progress 1.25
3M MM rate spread
8.50
vs Euro area
more cautiously to avoid excessive NOK strength and (reversed axis)
too low inflation, which could cause home prices to rise 1.50 8.25

excessively and credit growth to pick up again. If Norges 1.75 8.00
Bank when setting interest rates assigns more weight to
the risk of financial instability than it did before, a uni- 2.00 7.75

lateral rate hike and very strong NOK could be the result. 2.25 7.50
Apr Aug Oct Dec Feb Apr Jun Aug Oct Dec
09 10 11
Erik Bruce
erik.bruce@nordea.com +47 22 48 44 49


■ Denmark

The course is set
• Broadly based upswing taking shape engaged in labour market schemes) will not approach the
long-term structural level of around 120,000 persons (full
• Labour market finally to reverse this year time) until 2014 at the earliest.
• Still hope for consumer spending
In the years leading up to the crisis, wages in Denmark
• Public spending boom over rose significantly faster than in other countries.
Combined with weak productivity gains, this has eroded
After the massive setback in 2009, economic growth re- Danish companies’ competitiveness – however, the fact
turned soundly to positive territory in 2010. The contours that many Danish companies operate in markets not very
of a broadly based upswing have emerged with five con- sensitive to price increases has to some extent offset this
secutive quarters of positive growth so far. On the loss. As a result of the rising unemployment, Danish
threshold to the election year of 2011 consumers and wage growth is again on a par with wage growth abroad,
businesses have stepped up a gear, and the course is set but this also means that growth in real wages was largely
for a continued rebound in the Danish economy. flat in 2010. We expect this trend to continue in coming
years, with wage growth probably only just matching
Labour market finally to reverse this year inflation.
The crisis has taken a heavy toll on the Danish labour
market. In two years unemployment has more than Optimistic consumers
doubled, employment in the private sector has fallen by As neither tax cuts nor appreciable real wage growth are
170,000 and wage growth has roughly halved. But in sight, the outlook for consumer spending over the next
despite recent years’ gloomy trends, there are growing few years could seem a little worrying. But fortunately
signs of a near-term labour market reversal. In the private there are other signs of a fairly strong propensity and
sector we expect continued solid demand in Denmark’s ability to spend. It is worth noting that Danish house-
key export markets and rising activity in the domestic holds are quite optimistic about the future – the 12-month
market to lead to several businesses recruiting more expectations index is at a high level. Moreover, particu-
employees. Conversely, we look for a slight reduction in larly this year interest expenses should still be low, and
the number of persons employed in the public sector over the fairly strong wealth gains seen during both 2009 and
the coming years in order to ensure the necessary 2010 will also boost consumer spending. In addition,
consolidation of public budgets. All in all, we expect households increased their savings during the crisis and
unemployment to peak during the summer at less than thus have the option of putting a bit less aside and spend-
175,000 persons (full time), including those engaged in ing more in stead.
labour market schemes.
The improving labour market conditions will also lift
Subsequently, unemployment is likely to decline consumer spending decisively. An interesting wild card
gradually, although jobless numbers (including those at play is the possible reform of the early retirement

Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (DKKbn) 2008 2009 2010E 2011E 2012E
Private consumption 820 -0.6 -4.5 1.9 1.8 1.7
Government consumption 440 1.6 3.1 1.7 -0.4 0.4
Fixed investment 371 -3.2 -14.3 -4.5 2.3 2.6
- government investment 32 0.8 4.6 14.2 8.4 -7.1
- residential investment 107 -10.9 -16.9 -12.8 -0.8 2.0
- business fixed investment 233 -0.7 -15.8 -4.3 2.2 5.0
Stockbuilding* 25 -0.6 -2.0 1.1 0.2 0.1
Exports 885 2.8 -9.7 2.8 5.4 5.5
Imports 847 2.7 -12.5 2.7 5.2 5.2
GDP -1.1 -5.2 2.2 1.8 1.9
Nominal GDP (DKKbn) 1,695 1,741 1,657 1,709 1,778 1,832

Unemployment level, '000 persons 48.1 92.2 109.7 115.0 105.0
Gross unemployment level, '000 persons 74.2 129.0 164.5 170.0 160.0
Nominal house prices, one-family, % y/y -4.5 -12.0 3.0 0.0 2.0
Current account (DKKbn) 46.2 59.0 90.0 75.0 70.0
- % of GDP 2.7 3.6 5.3 4.2 3.8

General govt. budget balance (DKKbn) 56.9 -46.5 -62.0 -80.0 -60.0
- % of GDP 3.3 -2.8 -3.6 -4.5 -3.3


■ Denmark

scheme that could end up channelling several billions Labour market reversal underway
into additional spending during the forecast period. 200
'000 persons '000 persons
200

175 175
Public spending boom over Gross unemployment*
150 150
During the crisis the government pursued a highly
expansionary fiscal policy line with sharp increases in 125 125

both public-sector employment (and in turn public 100 100
spending) and public investment. However, after the 75 75
crisis abated, it has turned out to be very difficult to reign
50 50
in the rapidly swelling public expenditure and according
Unemployment*
to our calculations the government’s target of zero cost 25 25
growth in 2010 will be overshot by a hefty increase of 0
* Full-time unemployed Forecast
0
1.7%. The latest indicators suggest that the consolidation 03 04 05 06 07 08 09 10 11 12
of public budgets has finally started, though, and against Source: Statistics Denmark and own calculations
this background we expect public spending to contract by
0.4% in 2011, followed by growth of 0.4% in 2012. Optimistic consumers
20 20
Net balance Net balance
Expectation index,
This seems a very ambitious forecast in an election year, 15
3M mov. avg.
15
not least in a historical perspective with public 10 10
consumption expenditure notoriously rising more than 5 5
planned. In our view, though, this is a necessary
0 0
consolidation aimed at trimming the public budget deficit
-5 -5
and ensuring the required scope for expansion in the
-10 -10
private sector in the years ahead. But note at the same
time that if our forecasts are on the mark, the public- -15 Consumer confidence, -15

sector consumption pressure (public spending in per cent 3M mov. avg.
-20 -20
of GDP) will only ease to around 27% by the end of -25 -25
2012. This is still a very high level both in an 75 85 90 95 00 05 10

international context and a historical perspective. Source: Statistics Denmark and own calculations

Hope even for residential investment Public spending boom is over
After an extended period of sharp declines things are 31
% of GDP DKKbn
100

looking up for business investment, with a glimmer of 98
30
hope even for residential investment. Although capacity 95
utilisation in the manufacturing industry is still compara- 29
93
tively low, the cocktail of decent order intake and low in-
terest rates has resulted in a tentative pick-up in invest- 28 Public consumption,
constant prices, rhs
90
ment in machinery. With continued gains in exports and 88
27
domestic demand, business investment may contribute
85
positively to growth going forward. Even the very lack- 26
lustre residential investment activity may be revived, as 83
Public consumption
the free fall in housing starts came to a halt in 2010, and 25
Forecast
80
indications are for a tentative improvement during the 00 01 02 03 04 05 06 07 08 09 10 11 12

forecast period. Source: Statistics Denmark and own calculations

Residential investment bottoming
11000 27.5
Troels Theill Eriksen Dwellings DKKbn
troels.t.eriksen@nordea.com +45 3333 2448 10000 25.0
9000
22.5
8000 Gross capital formation, housing,
Jan Størup Nielsen 7000
constant prices, rhs 20.0
jan.storup.nielsen@nordea.com +45 3333 3171
6000 17.5
5000 15.0
4000
12.5
3000
Housing starts, advanced 1Y 10.0
2000
1000 7.5
94 96 98 00 02 04 06 08 10

Source: Statistics Denmark and own calculations


■ Finland

Increasing economic activity
• Growth will slow down in 2011 industries, as expected. This year, however, the export
focus will change. The increase in investment goods
• Both exports and domestic demand support growth orders in the euro area leads a rise in machinery and
• Fairly slow improvement in employment equipment exports from last year. Exports of the electro-
technical industry are also expected to grow after a few
• Household consumption grows faster than income weak years. Growth in paper exports will inevitably slow
down after the industry's rapid recovery, especially as the
The Finnish economy had a robust recovery in 2010. comparison levels are substantially higher. A similar
Total demand, which measures economic activity, is sluggish forecast applies to chemical industry exports.
estimated to have increased a little below 3.5% compared
to the previous year, and all its main elements (exports, Gradual increase in machinery and equipment
investment, and consumption) returned to the growth investment
track. GDP grew about 3%. The outlook for the next few Investments grew only a little last year. Construction
years is mainly favourable, despite the major problems in investment picked up clearly, but this was mostly offset
some European countries. The pick-up of the US by the decrease in machinery and equipment investment.
economy and the strong activity in Asia indicate a further Residential construction investment increased about
rise in international demand. Finland is therefore well- 25%, returning to the pre-recession peak levels, whereas
positioned for continued export-driven growth. Finland's non-residential construction faced a steep decline for the
most important export countries (Germany and Sweden) second year in a row. During the forecast years,
are doing well, Russia is recovering rapidly driven by the investment growth will pick up and the focus will also
rise in crude oil prices and the weakening euro supports change. Construction growth will slow down. The level
competitiveness in Finland. New manufacturing orders of residential construction investment will stabilise and
are increasing faster in Finland than in the rest of the EU. growth will clearly wane. Non-residential construction
will return to the growth track, albeit a fairly moderate
During H1 2011, the Finnish economy will grow clearly one, as free business spaces are still amply available.
slower than in H2 2010. On average, total production is, Machinery and equipment investment will increase, but
however, expected to increase 3% in 2011 and a little bit their quickest rise will most likely not be seen before
more than that in 2012. Growth is based on the increase 2012 when the industrial capacity utilisation rate is high
in both exports and domestic demand. enough. Lack of money dampens public sector
investment.
Exports leaning more on investment goods
This year, exports will grow faster than last year. Growth Consumption growth faster than income growth
of goods exports will slow down, but service exports will Private consumption growth has exceeded most
increase after a few years of decline. In 2010, growth of forecasts, and the pre-recession consumption peak may
goods exports and industrial production was based on the already have been surpassed in Q4 2010. As the economy
increased demand of raw materials and intermediate recovered, companies stopped temporary lay-offs and
goods manufactured by the paper, metal and chemical

Finland: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (EURbn) 2008 2009 2010E 2011E 2012E
Private consumption 90 1.7 -1.9 3.0 2.4 2.5
Fixed investment 38 -0.4 -14.7 1.6 4.0 5.3
Stockbuilding* 3 -0.8 -1.4 0.3 0.0 0.0
Exports 82 6.3 -20.3 5.5 6.6 7.7
Imports 73 6.5 -18.1 4.6 6.0 7.2
GDP 0.9 -8.0 3.0 3.0 3.4
Nominal GDP (EURbn) 179.7 184.6 171.3 178.3 188.3 199.2

Industrial production, % y/y -0.1 -19.9 4.7 5.5 6.0
Hourly wages, % y/y 5.5 4.0 2.4 2.7 3.0
Current account (EURbn) 6.4 4.7 3.5 3.7 4.2
- % of GDP 3.5 2.7 2.0 2.0 2.1
Trade balance (EURbn) 6.9 3.6 3.5 3.7 4.5
- % of GDP 3.7 2.1 2.0 2.0 2.3

General govt budget balance (EURbn) 7.7 -4.7 -5.5 -3.7 -2.6
- % of GDP 4.2 -2.7 -3.1 -2.0 -1.3
Gross public debt (EURbn) 63.0 75.0 85.0 94.0 102.0
- % of GDP 34.1 43.8 47.7 49.9 51.2


■ Finland

began to increase working hours. Coupled with low Rise in goods exports continues at a slower pace
interest rates and inflation, this has lifted the household 115
Index Index
115

purchasing power quite nicely, fortified consumer 110
2007=100 2007=100 110

confidence and cut saving, which was much favoured
105 105
during the recession. Developed
100 100
countries, sa
In 2011 and 2012, private consumption growth will slow 95 95
down somewhat. The most rapid growth will continue to 90 90
be seen within demand for durable goods. Especially this
85 85
year, growth in real wages and purchasing power of
Finland, sa
individual households will be modest due to accelerating 80 80

inflation. On the other hand, employment will improve, 75 Forecast 75
which will in turn increase the disposable income of the 05 06 07 08 09 10 11 12

household sector. In addition, households will continue
to save less, as consumption growth is faster than income
Machinery and equipment investment picking up
growth. Saving will not, however, drop below zero, as in
150 150
the exceptional period 2006–2008. Index Other housing Index
140 2005=100 investment, sa 2005=100 140

Fairly slow improvement in employment 130 130
During the recession, unemployment did not increase 120 120
nearly as much as generally feared. Companies held on to Machinery investment, sa
110 110
skilled labour by rotating temporary lay-offs and
avoiding dismissals, obviously aware of the fact that the 100 100
retirement of the baby boomers in the near future will 90 90
lead to labour shortage. Consequently, the number of
80 Dwellings investment, 80
working hours decreased much more than the number of sa
Forecast
employees. The same logic works in the forecast period 70 70
00 01 02 03 04 05 06 07 08 09 10 11 12
the other way around. When production volumes grow,
companies will first increase their productivity, then
working hours, before hiring new employees. The Unemployment rate gradually towards 7 per cent
unemployment rate is expected to decrease to around 7% 10.0 10.0
% Unemployment rate %
on average in 2012. The drop will be hampered by an
9.5 9.5
increase in the number of labour market entrants, a
typical trend during an upswing. 9.0 9.0
Finland, sa
8.5 8.5
The fairly low rise in wages on the horizon will in 8.0 8.0
principle curb the upward pressure on consumer prices.
7.5 7.5
However, there clearly is such pressure in the largest
sections of the consumer price index (housing, food 7.0 7.0
products and traffic), which cover almost half of the 6.5
Euro area, trend
6.5
index. Prices will be pushed upwards by more expensive
6.0 6.0
raw materials and energy as well as by the weakening 00 01 02 03 04 05 06 07 08 09 10
euro. Furthermore, housing costs will rise already in the
near term when market interest rates start to rise.
Consequently, consumer prices are estimated to rise New measures needed to tackle public deficit
2.5% in 2011 and about 2% in 2012. 10
% of GDP % of GDP
10

8 8
Current account surplus
Public sector finances a definite election theme
Compared to many other countries, the state of the Fin- 6 6

nish public sector is good, but considering the future ex- 4 4
penditure pressures it is all but that. The public sector de-
ficit was around 3% of the GDP last year. The deficit will 2
Public sector surplus
2

narrow in the forecast period, but without new measures 0 0
to cut expenditure, the speed seems to be too slow. The
-2 -2
pension system is clearly showing a surplus, but the cen-
tral government will continue well in deficit. -4 Forecast -4
99 00 01 02 03 04 05 06 07 08 09 10 11 12

Pasi Sorjonen
pasi.sorjonen@nordea.com +358 9 165 59942


■ USA

Towards a brighter tomorrow
• The economy is gaining momentum … Bush-era tax cuts from 2001 and 2003, which were oth-
erwise due to expire at end-2010, the package contains a
• … after further fiscal policy stimulus 2% point payroll tax reduction for all workers in 2011
• Higher job creation, but joblessness remains elevated and a 13-month extension of jobless benefits for long-
term unemployed. Moreover, companies can write down
• Monetary policy tightening at end-2011 this year’s investments in equipment faster.

Prospects for the US economy in 2011 are quite bright Consumer spending, accounting for 70% of GDP, will
and now appear more promising than just a few months likely make the biggest contribution to growth. In addi-
ago. After the slowdown in H1 2010 the economy is now tion to the tax cuts consumer spending will be boosted by
gradually shifting into a higher gear, and it will gain fur- steady growth in employment and low interest rates. Add
ther momentum this year from the new tax cuts adopted to this that the sharp increase in households’ propensity
in December. Fortunately, the fears of a new recession, to save in the wake of the crisis now largely appears to
which periodically dominated the market last year, have have come to a halt. A mere stabilisation of the savings
thus been proved unjustified – just as we expected. ratio will in itself lift consumption growth.

The strength of the recovery surprised on the upside in Stronger job growth but still high joblessness
H2 2010. This, coupled with new unexpected fiscal pol- The stronger growth in final demand is expected to give a
icy easing in 2011, has made us revise up sharply our boost to job creation. By mid-2011 private sector em-
growth forecast for this year. Following estimated ployment growth is expected to be above 150,000 jobs
growth in GDP of 2.9% last year we look for growth of per month on average compared to the more modest av-
3.3% in both 2011 and 2012. In the September issue of erage increase of 128,000 in the last three months of
Economic Outlook we saw growth in 2011 and 2012 at 2010.
2% and 3%, respectively. With a more favourable de-
mand composition the underlying improvement over the Especially small businesses, traditionally the key job-
next couple of years is expected to be even more pro- creating sector, are expected to add jobs after banks have
nounced than suggested by the GDP growth rates. Unlike eased credit standards for this sector. Conversely, public
in 2010 when stockbuilding contributed markedly to sector employment will remain subdued for some time to
growth, production should be driven by final demand go- come due to the pressure on state budgets.
ing forward. Specifically, we expect final demand growth
(GDP less inventory corrections) to increase from 1.3% Unemployment is not likely to drop noticeably until
last year to 3.4% this year and 3.3% in 2012. 2012. The reason is that a large number of those who
gave up finding a job and left the labour market during
The fiscal rescue package that Congress passed in De- the crisis will likely now again show up in the labour
cember should in itself lift GDP growth by around 0.5% force. We see unemployment declining to 9% by end-
point this year. In addition to a 2-year extension of the 2011 and 8% by end-2012.

USA: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (USDbn) 2008 2009 2010E 2011E 2012E
Private consumption 9,806.3 -0.3 -1.2 1.7 4.1 3.4
Government consumption and investment 2,674.3 2.8 1.6 1.1 0.6 0.5
Private fixed investment 2,266.1 -6.4 -18.3 3.8 6.5 8.0
- residential investment 628.6 -24.0 -22.9 -3.3 0.5 9.5
- equipment and software 1,112.6 -2.4 -15.3 15.3 10.5 8.3
- non-residential structures 524.9 5.9 -20.4 -14.1 -0.3 5.1
Stockbuilding* 29.1 -0.5 -0.6 1.6 -0.1 0.0
Exports 1,661.7 6.0 -9.5 12.0 10.5 8.9
Imports 2,375.7 -2.6 -13.8 14.1 10.0 8.5
GDP 0.0 -2.6 2.9 3.3 3.3
Nominal GDP (USDbn) 14,062 14,369 14,119 14,682 15,451 16,306

Consumer prices ex. energy and food, % y/y 2.3 1.7 1.0 0.8 0.8
Current account (USDbn) -668.9 -378.4 -484.5 -494.4 -603.3
- % of GDP -4.7 -2.7 -3.3 -3.2 -3.7

Federal budget balance (USDbn) -458.6 -1,413.6 -1,300.0 -1,300.0 -1,000.0
- % of GDP -3.2 -10.0 -8.9 -8.4 -6.1


■ USA

As joblessness thus looks set to remain above the struc- Most indicators suggest progress for the economy
tural level currently estimated at around 7%, inflation 140
Index Index
110

will likely remain weak. Rising energy and food prices 130 2008=100 2008=100
Retail sales (CPI deflated), rhs
will drive headline inflation higher short term, but in an 120 Core capital goods orders 105
economy where production is still some 5% below the 110
Exports ex gasoline
Housing starts
full-employment output level, inflation pressures appear 100
100
to be far out on the horizon. We consequently expect
90
core inflation to remain below 1% in 2011 and 2012. 95
80

Monetary tightening at the end of the year 70 90
The improved prospects for the economy should ease the 60
Federal Reserve’s concern in 2011. We see the first rate 50 85
hike coming in December this year. At that time the Fed 08 09 10
is also expected to start absorbing some of the excess li-
quidity in the economy to counter the risk of new asset
Household savings about to peak
bubbles.
12 12
% of disp. income Household % of disp. income
10 saving balance* 10
In light of the banks’ huge excess reserves and the low
starting point for interest rates the Fed will likely tighten 8
Average 1959-1995
8

monetary policy quite aggressively once it embarks on a 6 6
normalisation of interest rates. On a 2-year horizon we 4 4
see the Fed funds rate raised to 3%. 2 2

0 0
Risks on both sides
-2 -2
As usual, risks to our forecast are both on the upside and
the downside. The key upside risk is that we underesti- -4 -4
*Disposable income less consumption and residential investment

mate the pent-up demand among households and corpo- -6 Note: Shaded areas mark recessions -6
60 65 70 75 80 85 90 95 00 05 10
rates. Business investment in equipment rose sharply last
year, probably as a result of a string of investment deci-
sions being carried out that had been postponed during Rising employment, but still high joblessness
the crisis. This, coupled with the sustained low rate of 600 12
'000 %
capacity utilisation, makes us look for a minor slowdown Private payrolls, monthly Unemployment, rhs
400
in investment over the next two years. But in light of the change, 3M mov. avg.
10
seemingly rising demand, it cannot be ruled out that 200
more well-capitalised companies increase capacity and 8
0
payrolls more aggressively.
-200
6
An unexpected sharp increase in bank lending may also
-400
result in a stronger recovery than we expect at present.
4
-600
The key downside risk is that a further sharp decline in
-800 2
housing prices pulls the rug out from under the feet of 90 92 94 96 98 00 02 04 06 08 10
consumers. Given the current high household savings
level, the economy should be able to absorb an expected
drop in housing prices of around 5% from current levels, Low inflation
we think. But due to the persistent imbalances in the 6
% y/y % y/y
6

housing market an even stronger price decline cannot be 5 5
CPI
ruled out. 4 4

3 3
Also the rapid rise in commodity prices may lead to sig-
2 2
nificantly lower growth than we factor into our baseline
1 1
scenario, as may spill-over effects from the European The Fed's implicit target Core CPI
sovereign debt crisis. Lastly, the unsustainable course of 0 0

US federal and state budgets constitutes a risk factor on -1 -1

the downside. -2 -2

-3 -3
Johnny Bo Jakobsen 04 05 06 07 08 09 10
johnny.jakobsen@nordea.com +45 3333 6178


■ Euro area

Growth to continue in spite of sovereign debt crisis
• The sovereign debt crisis is likely to continue nerable member states, while the financial sector in the
Euro area as a whole seems to be on the mend. This
• Crisis now more contained to peripheral countries seems to pave the way for further relaxation of credit
• Highly uneven growth performance inside Euro area conditions, enabling renewed growth in lending to com-
panies and households.
• The ECB to hike in Q3 2011, but with full allotment
With regards to fiscal policy, we expect the tightening of
Sovereign debt crisis likely to continue fiscal policy to subtract about 0.8% point from Euro- area
The sovereign debt crisis is likely to continue in the Euro growth in 2011 and 0.5% point in 2012. The fiscal tight-
area over the next couple of years. During the latest ening will be concentrated in some of the more vulner-
round of turmoil, calls were made for political initiatives, able member states, while the fiscal tightening planned in
such as common Euro-area bonds, as a way to end the Germany will be fairly mild. Thus, the growth perform-
debt crisis swiftly. Most of these steps would represent a ance of the individual member states is likely to be quite
big leap towards a common fiscal policy in the EU. Con- uneven, with a high risk of further declines in economic
sequently, they have found only limited support in mem- activity in the more vulnerable member states, while
ber states, with Germany as the most vocal opponent. Germany will still experience fairly robust growth. The
Over the forecast horizon it will thus be the hard slog of outlook for the German economy is described in further
fiscal austerity and structural reform that offers the best detail in a separate chapter.
prospect of curbing the debt crisis. This is unlikely to
bring immediate results, and market jitters are highly Obviously, the sovereign debt crisis represents one of the
likely to recur. Such a situation could easily force another main risk scenarios. A drastic drop in the relative market
member state to seek financial support from the Euro- values of Spanish or Italian government bonds would
pean Financial Stabilisation Fund (EFSF) and the IMF, have much more widespread repercussions for the Euro
even if the country would under normal circumstances area’s financial sector, even if there was no actual de-
not be facing a funding crisis. fault. This could easily lead to a renewed tightening of
credit conditions, which could choke the recovery. Sec-
Debt crisis mainly affects peripheral countries ondly, the tightening of fiscal policy could have a larger
In our main scenario, we do not expect the debt crisis to effect on growth than estimated. The tightening of fiscal
threaten financial stability in the Euro area as a whole. policy coincides with very weak real income growth due
First of all, the EFSF ensures that a funding crisis for one to low wage gains and surging energy and food prices,
of the more vulnerable member states will not lead to and this could easily undermine consumer confidence.
sovereign default, as long as the crisis can be contained
to the smaller and medium-sized member states. Setting Exports continue to drive growth
up a package for Portugal will be fairly easy under the Compared to our previous forecast we have revised Euro-
current framework, and even a package for Spain should area growth for 2011 slightly up. This is primarily ex-
be manageable even though it could require as much as plained by the fact that the outlook for export demand is
EUR 400bn. In addition, the latest round of turmoil has much better than previously expected. Looking ahead
primarily affected the financial sectors in the most vul- export demand is likely to continue growing, albeit at a

Euro area: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (EURbn) 2008 2009 2010E 2011E 2012E
Government consumption 1,803 2.3 2.4 0.7 0.4 0.3
Fixed investment 1,970 -1.0 -11.3 -0.9 2.5 3.2
Stockbuilding* 39 -0.2 -0.8 1.2 0.0 0.0
Exports 3,735 0.7 -13.1 10.0 7.1 6.3
Imports 3,600 0.6 -11.8 10.2 6.2 5.6
Net exports* 135 0.1 -0.8 0.0 0.4 0.4
GDP 0.3 -4.0 1.7 1.6 2.0
Nominal GDP (EURbn) 9,022 9,240 8,952 9,198 9,489 9,829

Consumer prices, % y/y (HICP) 3.3 0.3 1.6 1.8 1.7
- core inflation 2.4 1.3 0.9 1.2 1.1
Hourly labour cost, wages and salaries % y/y 3.2 1.5 1.5 1.5 1.6
Current account (EURbn) -134 -51 -30 -27 -10
- % of GDP -1.5 -0.6 -0.3 -0.3 -0.2

General govt budget balance, % of GDP -2.0 -6.3 -6.3 -4.6 -3.9


■ Euro area

more moderate pace as the catch-up in world trade is fad- Wide divergence between member states
ing out. Exports will still be supported by the EUR, 130 Index
Economic sentiment Index
120

which we expect to weaken further over the forecast ho- 120 110
rizon. In addition, there is increasing evidence that the Italy
France Germany
continued growth in industrial production is leading to a 110
100
rise in business investments, which will provide further 100
dynamism to the recovery. 90
90
Spain
Obviously a truly self-sustained recovery in the Euro area 80
80
will depend on more dynamic growth in private con-
70 70
sumption. Our expectation of slightly stronger consump-
Greece
tion growth is primarily based on a decline in household 60 60
savings following a restoration of net financial wealth af- 04 05 06 07 08 09 10

ter the great recession.
Business lending follows normal cyclical pattern
With regards to inflation, the surge in energy and food
8 18
prices has now pushed headline inflation above the % y/y % y/y
16
ECB’s target, but the ample spare capacity continues to 6 14
exert downwards pressure on core inflation. In our main GDP, 12
4 advanced 3Q
scenario, where we expect oil prices to hover around cur- 10
rent levels, headline inflation should consequently de- 2 8
6
cline somewhat during the forecast horizon. 0 4
2
ECB will begin to normalise policy in 2011 -2
Lending to non-financial 0
The sovereign debt crisis and the wide disparity in eco- -4
companies, rhs -2
nomic conditions among the individual member states -4
are likely to pose a significant policy dilemma for the -6 -6
92 94 96 98 00 02 04 06 08 10
ECB in 2011. On the one hand, the general normalisation
of money markets in the Euro area and the gradual reduc-
tion in spare capacity suggest that monetary policy could Household savings likely to decline
be returned to a stance more in line with a normal cycli- 17.0 105
% of disp. income % of GDP
cal low, rather than the very accommodative stance
16.5 110
adopted during the great recession. On the other hand, it
Household net
is quite clear that banks in some of the peripheral mem- 16.0
financial wealth, rhs
115

ber states still find it virtually impossible to obtain fund- 15.5 (reversed axis) 120
ing other than trough the Euro System. Thus, the ECB 15.0 125
could provoke a serious deterioration for the banks in the
14.5 130
peripheral member states if it returned to offering fixed
amounts of liquidity at variable rate auctions. It was ex- 14.0 135
actly for this reason that the ECB decided to continue 13.5 Household savings 140
with full allotments at the refinancing operations in Q1
13.0 145
2011. 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Looking forward, we now expect the ECB to continue
with full allotments at its liquidity operations at least Only basis for small hike in ECB rates in 2011
throughout 2011. This will imply that money market 5
% Model for ECB interest rates %
5

rates will continue to trade below the ECB’s refi rate
4 4
throughout the year. Instead, we expect the ECB to
tighten financial conditions by hiking the refi rate by 25 3 3
bp already in September 2011. Based on our macroeco-
nomic forecast we expect this to be followed by quarterly 2 2
Actual ECB Model,
rate hikes of 25 bp, leaving the refi rate at 2.25% towards refi-rate R²=0.73
1 1
the end of the forecast horizon, still a level consistent
with fairly weak economic conditions.
0 0
Model 2: Based on the difference between acutal unemployment and
the OECD's NAIRU estimate
Anders Matzen -1 Forecast -1
anders.matzen@nordea.com +45 3333 3318 99 00 01 02 03 04 05 06 07 08 09 10 11


■ Germany

Wirtschaftswunder 2.0
• Fiscal policy and exports led to swift recovery at just over 1%. Consequently, Wirtschaftswunder 2.0
will most likely have a much shorter duration than the
• Unemployment has returned to pre-crisis levels post-war boom initiated in the 1950s.
• Outlook for private consumption strongest in years
Export resilience despite challenges
• Fiscal tightening will be relatively mild In the next couple of years, we expect export growth to
slow down substantially despite strong growth in the
A new economic miracle in Germany global economy and further weakening of the EUR.With
The German economy has roared back after the great re- import growth marginally higher, due to strong domestic
cession. Apart from an expansionary fiscal policy, the demand, the growth contribution from net exports will
boom has been driven by exports, as strong external thus be fairly limited. Much has been made of Germany’s
competitiveness has allowed German companies to fully advantageous export composition, where a relatively
exploit the rebound in world trade. Unemployment has high share of capital intensive goods, has allowed the
already dropped to the same level as before the crisis, manufacturing industry to take advantage of the boom in
and this suggests that private consumption may finally emerging markets. A large part of the export boom since
begin to evolve more dynamically than seen over the past the economy bottomed out in the summer of 2009 has
decade. Thus, the German government is only planning a been driven by a rebound in exports to other Euro-area
relatively modest tightening of fiscal policy over the member states, however. Consequently, the tightening of
coming years, which will only partly reverse the signifi- fiscal policy in other Euro-area member states and the
cant easing of policy over the past two years. Combined UK is bound to weigh on export demand. Indeed, Ger-
with bright prospects for business investment, the Ger- man export orders to the Euro area are now declining,
man economy is well placed to enjoy a self-sustained re- while export orders to non-Euro-area countries are boom-
covery largely based on domestic demand. ing.

Looking at the German economy in a longer-term per- Private consumption at last looking brighter
spective, it is important to remember that the current high Considering that private consumption was largely stag-
level of growth is largely explained by catching up fol- nant over the previous decade it is quite natural to har-
lowing the deep recession. Unlike other crisis-hit econo- bour a great deal of scepticism towards the idea of con-
mies, Germany did not rely on a booming housing mar- sumption-driven growth in Germany. Nevertheless, the
ket prior to the recession. Instead, the recession in Ger- prospects for private consumption growth are now brigh-
many was largely caused by a drop in world trade and ter than anytime since the German reunification. Con-
inventory destocking, which primarily hit industrial pro- sumer confidence has already returned to the highs seen
duction. Hence, there is no need for a painful adjustment before the crisis and optimism in the retail sector is at a
process, where the real estate sector and associated em- record high. Looking forward, continued employment
ployment is cut down to size which would dampen po- growth and the prospect of slightly higher wage gains
tential growth substantially. Indeed, Germany seems to over the coming years indicate that real disposable in-
be enjoying the benefits of the labour market reforms in comes will grow relatively robustly, even though high
the early 2000s, which contributed to lower unemploy- energy and food prices will eat up some of the gain. In
ment from more than 5 million in 2005 to less than 3 mil- addition, households’ concern over unemployment has
lion today. At some point the resource slack is likely to already been reduced to pre-crisis levels and the net fi-
be absorbed, however, and this will probably lead to a nancial assets of households have been largely restored
significant slowdown in growth. Based on the demo- following the financial crisis. Consequently, there are
graphic outlook for Germany, with a gradually shrinking good prospects for a decline in household savings, which
labour force, most estimates put long-term growth rates

Germany: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (EURbn) 2008 2009 2010E 2011E 2012E
Fixed investment 456 1.8 -10.0 5.7 5.1 4.2
Exports 1,145 2.0 -14.3 14.2 7.6 5.1
Imports 971 2.9 -9.4 13.3 7.0 5.5
GDP 0.7 -4.7 3.5 2.5 2.2
Nominal GDP (EURbn) 2,436 2,478 2,395 2,501 2,600 2,699

Current account, % of GDP 6.6 5.0 5.8 6.0 5.4
General government budget balance, % of GDP 0.1 -3.0 -3.5 -2.7 -1.8
General government gross debt, % of GDP 66.3 73.4 73.8 73.7 72.8


■ Germany

will lend further support to private consumption. Industry took the biggest hit during the recession
175 175
EURbn Gross value added EURbn
Fiscal tightening relatively mild
150 150
Despite the fact that the German government’s budget Finance

deficit is likely to fall below 3% of GDP already in 2011, 125 125

the German government has stuck to its plans to tighten 100 Services Industrial 100
fiscal policy in 2011-14. Still, the cuts in the annual production
budget deficit will actually be fairly modest, implying a 75 75

total tightening of fiscal policy of around 1.3% of GDP 50 50
over the next four years, and the stance of fiscal policy
Construction
will still be easier in 2014 than before the onset of the 25 25

crisis in 2008. The plan is generally focused on a reduc- 0 0
tion of expenditures and subsidies, while taxes on house- 00 01 02 03 04 05 06 07 08 09 10
holds are maintained at current levels, and the govern-
ment clearly hopes that the targeted savings will have a
Rebound in exports largely driven by Euro area
relatively small impact on private consumption and in-
4 4
vestment. We estimate that fiscal policy will pull GDP EURbn
Asian countries
EURbn

growth down by 0.2-0.5% point over the coming years. 2 New EU member states 2
OPEC
0 0
The real miracle happened in the labour market
The strong rebound in economic activity since the -2
UK, Denmark,
-2
through in the summer of 2009 has earned much acco- Sweden
-4 -4
lade, but even more astonishing is the relatively mild im- United States
pact on the labour market of the deep economic contrac- -6 -6

tion. This has often been explained by the strong surge in -8
Euro Area
-8
the number of employees on short-term working
schemes, Kurzarbeit, where more than 1.4 million em- -10 Note: change in German exports relative to June 2008
-10
08 09 10
ployees were enrolled in such schemes in the summer of
2009. Still, Kurzarbeit only accounted for approximately
375,000 full-time employees at its peak, and the total Best outlook for consumption in years
number of employees on Kurzarbeit has now fallen to 15 30
Index Balance
pre-crisis levels. Hence, there is little reason to fear that 10 Consumer confidence 20
the German labour market has just “pushed forward” the 5
adjustment following the great recession. 0
10

-5 0
On the other hand, the fact that unemployment has al- -10 -10
ready returned to pre-crisis levels could lead to concerns -15 -20
over accelerating wage growth. This may already be
-20
visible in the smaller wage negotiations taking place in -30
-25
2011, with wage demands typically calling for increases -40
-30 Ifo retail sector sentiment, rhs.
between 4% and 6%. The benchmark negotiations in the
-35 -50
metals sector will take place in March 2012, at which 92 94 96 98 00 02 04 06 08 10
point the labour market is likely to be even stronger.
Combined with a positive upward drift in wages, this
would result in wage increases above 3% annually. This Short-term work sharing has declined
should not be too detrimental to the economic outlook, 1750
('000) persons mio. persons
5.25
Unemployment, rhs.
since the wage share of national income is near the his- 1500
5.00
torical low reached before the crisis. In fact slightly 4.75
stronger wages gains over the coming years could be just 1250
4.50
the right medicine for Germany and the Euro area as a 1000 4.25
whole, as it will support private consumption growth and
4.00
help other Euro-area member states to regain competi- 750

tiveness. 3.75
500
Kurzarbeit 3.50
250
Anders Matzen 3.25
anders.matzen@nordea.com +45 3333 3318 3.00
0
01 02 03 04 05 06 07 08 09 10


■ United Kingdom

Fiscal tightening really starts to bite
The UK economy has continued on a seemingly robust Business surveys point to weaker growth
growth path in recent quarters, driven by the domestic 60
Index % q/q
2

sector. But much of the surprisingly strong growth over PMI composite *
56
the past year has been due to inventory building, and also 1
construction growth has been unsustainably strong. Both 52 GDP, rhs
factors should unwind and point to weaker growth in the 0
near term. That said, we do expect some of the strength 48
to persist and because of higher carry-over from 2010 we -1
have revised up our projection for GDP growth for 2011 44

from 1.5% to 1.8%, while the forecast for 2012 is un- -2
40
changed at 2.0%. This relatively sluggish outlook reflects
the gradual normalisation of credit conditions, efforts to 36 * Weighted average of the manufacturing and service sector data -3
reduce private sector indebtedness and the impact of the 04 05 06 07 08 09 10

government’s fiscal consolidation.
Consumer confidence remains weak
In 2011 net foreign trade is expected to be the largest
25 10
contributor to growth, as the domestic economy is likely Net % % y/y

to slow sharply with the fiscal consolidation beginning in Household spending, rhs 8
15
earnest, knocking around ½% point from GDP growth 6
5
through a combination of spending cuts and direct tax 4
and VAT increases. The 2.5% points hike in the standard -5
2
rate of VAT to 20% at the start of 2011 and a weakening -15
labour market will contribute to falling real household 0
Consumer confidence index,
incomes. Against this background and due to the wealth -25 3M mov. avg., -2
effect from declining real house prices we expect to see -35
advanced 6M
-4
consumer spending soften this year.
-45 -6
86 88 90 92 94 96 98 00 02 04 06 08 10
As companies were reluctant to cut staff during the re-
cession, it is possible that the UK recovery will see little
job creation. As growth slows in the near term, unem- Sustained unemployment on the cards
ployment is likely to rise again, peaking above 8% in 9 9
% y/y %
2011. A sustained decline in unemployment is not ex- 8 8
pected until late in the forecast period. However, because
7 7
the increase in VAT is likely to boost the rate of inflation Unemployment rate (ILO)
6 6
by just over 1% point in 2011, inflation is not expected to
fall below the 2% target before 2012. Unless the econ- 5 5

omy falters dramatically, the Bank of England will pro- 4 4
bably not engage in a new round of quantitative easing. 3 Average earnings excl. 3
bonuses, 3M mov. avg.
However, the first rate hike is not likely until early 2012. 2 2

1 1
Johnny Bo Jakobsen
0 0
johnny.jakobsen@nordea.com +45 3333 6178 01 02 03 04 05 06 07 08 09 10

United Kingdom: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (GBPbn) 2008 2009 2010E 2011E 2012E
Private consumption 896.0 0.4 -3.2 1.3 1.0 1.5
Government consumption 296.1 1.6 1.0 1.2 -1.4 -2.2
Fixed investment 249.5 -5.0 -15.4 3.5 4.3 4.1
Stockbuilding* 5.8 -0.4 -1.2 1.1 0.1 -0.1
Exports 374.0 1.0 -10.1 5.2 6.2 8.2
Imports 417.0 -1.2 -11.9 7.9 3.4 4.6
GDP -0.1 -4.9 1.7 1.8 2.0
Nominal GDP (GBPbn) 1,404.8 1,445.6 1,395.0 1,456.3 1,509.4 1,570.9

Current account, % of GDP -1.6 -1.7 -2.5 -2.0 -1.5


■ Poland

Political risks have increased
• Below-consensus growth in 2011 We expect investment to recover in earnest in 2011. Ca-
pacity utilisation in the manufacturing sector has some
• Heightened risks ahead of October general elections way to go before returning to pre-crisis levels, but is at
• Monetary tightening cycle started levels that normally prompts increasing investment. The
recovery may be supported, if uncertainties related to the
• Stronger PLN in the near term Euro-area sovereign debt crisis recede.
Below-consensus growth in 2011 Political risks have increased
We change our projection of weaker momentum in the General elections are due not later than October, which is
economy at the beginning of the year to one involving probably the reason why the incumbent government is re-
somewhat higher growth for the year, although still be- luctant to tighten fiscal policy significantly at present.
low consensus, followed by stronger growth again in The outcome of the elections is crucial as the Civic Plat-
2012. Moreover, we now flag heightened political risks form will need sufficient support not only to stay in
ahead of the October elections. The government is reluc- power, but also to make constitutional changes to allow
tant to tighten fiscal policy significantly and its debt is EMU membership when, or if, it is found beneficial for
approaching critical levels. Monetary policy tightening is the country. There is no need to rush for EMU member-
expected to come earlier than previously thought, but the ship at the moment, but it is still a key objective and a
cumulative tightening is likely to be less than in previous crucial anchor for economic policy.
tightening cycles.
Government debt may come very close to the 55% of
Growth may disappoint GDP mark during the year, which prompts fiscal policy
World trade and global manufacturing activity has been tightening by rule. The debt level could be breached if
somewhat stronger than we had anticipated and the Ger- growth surprises on the downside, privatisation revenues
man economy in particular is powering ahead. Conse- come in lower than planned or if the PLN weakens sig-
quently, the weakness that we see coming from fiscal nificantly and hence increases the PLN value of foreign
tightening at home and in many Euro-area economies and currency denominated government debt. According to
from monetary policy tightening by the National Bank of Reuters, the Ministry of Finance sold EUR on the Polish
Poland (NBP) is likely to kick in a little later and at that markets in the final days of December to support the
point the economy will be somewhat stronger than previ- PLN, which could be an indication that government debt
ously thought. The PMI manufacturing readings have is closing in on the limit and the Ministry was adding a
been really strong and imply strong growth momentum safety margin. Moreover, privatisation revenues, in-
in Q4 last year and going into 2011. Industrial production tended to finance the budget deficit without adding to the
numbers and actual export numbers have been slightly debt stock, came in lower than planned last year. Risks to
less bullish, though still strong. this year’s privatisation plans are on the downside as
well.
Private consumption probably grew strongly at the end of
last year, but is expected to gradually lose momentum In the final days of last year, the government also an-
this year. The small VAT hike with effect from 1 January nounced plans to change the pension system, also to fi-
will have some adverse effects, as will the general in- nance the budget deficit without increasing the level of
crease in inflation. Moreover, wage growth has continued government debt. Of the 7.3% of gross wages that wage
to slow and the unemployment rate has started to in- earners so far have been obliged to pay into private pen-
crease again. On the other hand, credits to households sion funds, the government wants 5% points redirected
accelerated towards the end of last year. The labour mar- into the state pension administration to finance the gov-
ket is key for consumer spending in the medium term and ernment deficit starting from April. Such a measure
is expected to support stronger growth again in 2012.

Poland: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (PLNbn) 2008 2009 2010E 2011E 2012E
Private consumption 702 5.3 2.4 3.2 2.6 2.8
Gross fixed capital formation 254 9.6 -0.9 -2.2 12.5 7.6
Exports 480 5.8 -5.9 10.1 4.5 7.5
Imports 513 6.1 -13.2 10.7 4.1 9.1
GDP 5.0 1.7 3.9 3.8 4.1
Nominal GDP (PLNbn) 1,177 1,275 1,344 1,415 1,516 1,611

General government budget balance, % of GDP -3.7 -7.2 -8.3 -6.0 -4.5


■ Poland

merely serves to buy time and adds to uncertainty about Strong momentum
what the government might do to avoid implementing 2.25
% q/q Index
60

proper tightening measures and key structural reforms 2.00
PMI, manufacturing, rhs 56
1.75
before the elections.
1.50
52
1.25
The general government budget deficit is unlikely to 1.00 48
meet the Maastricht criteria earlier than to allow EMU 0.75
membership in 2015. However, there is no desire cur- 0.50
GDP growth, sa
44

rently to join before that anyway. We keep 2015 as the 0.25
40
0.00
expected entry date even if risks appear to be skewed
-0.25 36
significantly towards a later rather than an earlier entry -0.50
date at the moment. -0.75 32
05 06 07 08 09 10
Monetary tightening cycle started
The NBP has hiked banks’ reserve requirements and is
Private consumption grew strongly at end-2010
likely to hike interest rates for the first time very soon.
10 30
Inflation is expected to increase towards the upper limit % y/y % y/y

of the inflation target of 2.5% +/-1% point in the coming 8
20
months. Moreover, core inflation, which excludes food 6 Private
and energy prices, will soon start to trend upwards. We 4
consumption
10
expect total inflation to decrease slightly later in the year,
2
but risks are skewed to the upside due to the current
strong growth momentum and the lenient fiscal policy. 0 0

-2
The PLN has become a key element of monetary policy. Retail sales, rhs -10
-4
With government debt hovering around the ceiling and
inflation risks on the upside, the NBP is likely to allow -6 -20
00 01 02 03 04 05 06 07 08 09 10
some strengthening of the PLN in the near term. We
therefore move the expected interest rate hikes forward to
reflect that the NBP is likely to actually support a some- Investment to recover in earnest in 2011
what stronger level of the PLN. NBP chief Belka has said 25 90
% y/y %
several times that the bank does not have a target range
20 86
for the PLN, but merely seeks to act against excessive
moves in either direction. Still, a key argument against 15
82
hiking interest rates during the autumn was concern 10
Capacity utilization,
78
about excessive PLN strength. Therefore, we still believe 5
manufacturing, rhs
that the cumulative interest rate hikes will be somewhat 74
0
lower than in previous hiking cycles.
70
-5
Investment
Stronger PLN in the near term -10 66
While we see a moderate strengthening of the PLN in the
-15 62
near term for the above-mentioned reasons, we see some 00 01 02 03 04 05 06 07 08 09 10
risks in the medium term. Political risks are getting more
important and the public debt and deficit could become a
focal point. Moreover, the ECB and the Fed will have to Inflation has surprised on the upside
tighten monetary policy at some point, which could trig- 20.0
% %
20.0

ger capital outflows from Poland. The PLN is still seen 17.5 17.5
as a strong-fundamentals currency, though. NBP's key rate
15.0 15.0

12.5 12.5
Anders Svendsen
Anders.svendsen@nordea.com +45 3333 3951 10.0 10.0
NBP's inflation projection
(Oct 10)
7.5 7.5

5.0 5.0

2.5 2.5
Inflation
0.0 0.0
00 01 02 03 04 05 06 07 08 09 10 11 12


■ Russia

Rebuilding growth momentum
• Private domestic demand drove economy in H2 2010 Excessive domestic borrowing in 2011 poses some risks
of crowding-out effects in the domestic market. Yet gov-
• Consumers to get more appetite in 2011 ernment officials have said they will try to avoid these
• Interest rate cycle has turned negative effects by borrowing more in foreign markets,
as the planned USD 7bn of foreign issuance can be
Domestic demand picking up speed stretched to USD 15bn. In our view, the excess liquidity
The economy did not grow as fast as expected in H2 globally and high demand for extra yield abroad, making
2010 mostly due to the shock to the agriculture sector, a perfect environment for cheaper funds, will lure the
which because of the summer drought and heat wave government into more foreign issuance than currently
contracted more than 20% in Q3 alone. This reverberated planned. Overall, with the debt-to-GDP ratio of just 11%
negatively with consumers, as confidence was hit and re- this year, and around 16% in 2013, Russia looks very at-
tail sales growth was a bit slower in the autumn on rising tractive compared to other sovereigns, which will greatly
food inflation. Still, household consumption was the contribute to supporting foreign appetite for government
main growth engine in H2. bonds.

We see the negative effects from the summer anomaly as That said, it is very likely that the overall borrowing re-
temporary, and expect consumer confidence and spend- quirement will not be that excessive at all, provided oil
ing to recover on rising real wages and a low unemploy- prices remain above the government’s baseline of USD
ment level. Inflation, having outstripped the credit and 75/bbl, which might help reduce the deficit more than
deposit rates, will help push consumers to opt for more budgeted in 2011. But a large reduction is unlikely, still,
spending. Alongside domestic consumption, fixed capital since the government promised further increases in pub-
investment is now recovering fast, and will be the key lic sector wages and social benefits. With the elections on
growth driver, as bank lending is set to expand above the agenda at the end of 2011 and in early 2012, the risks
15% in 2011. That said, the reviving domestic demand are towards government spending more than the other
will lead to increasing imports, which are set to rebound way around.
after the large drop during the crisis, helped by a stronger
rouble. Meanwhile, exports, while bolstered in value Credit flow improves
terms by high oil prices, will still be constrained by oil Developments in the banking sector have been very en-
and gas sector capacity, and remain dependent on foreign couraging recently, as total credit to households and
demand. companies, including small businesses, surprised on the
positive side, expanding more than 10% in 2010. This
Budget to rely heavily on domestic issuance was encouraged by the positive dynamics in the banking
Helped by higher revenues, the budget deficit in 2010 sector, where overall profits in 2010 increased more than
was lower than the official target of 5.3% of GDP stipu- five times compared to 2009, and the share of non-
lated in the federal budget law. The budget draft for performing loans decreased in Q4 2010.
2011-13 points towards a planned reduction in the fiscal
deficit from 3.6% in 2011 to 2.9% in 2013. The bulk of The supply-side conditions for further robust credit ex-
financing (70-80% of the deficit in 2011) is expected to pansion are good, as interest rates to consumers and
come from domestic borrowing, which is in strong con- companies have reached historical lows, which will sup-
trast to last year’s pattern where the government relied on port domestic consumption and corporate investment ac-
the oil Reserve Fund as a key source (about 60%) of fi- tivity in the coming quarters. As the economy acceler-
nancing. In addition, the budget plan pencils in about ates, the demand for credit will also increase further on
USD 10bn coming from the new privatisation plan. companies’ needs to finance investments projects. A con-
tinuation of the government support programme for

Russia: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (RUBbn) 2008 2009 2010E 2011E 2012E
Fixed investment 6,984 10.0 -16.5 4.4 7.8 7.0
Exports 10,029 0.5 -4.6 8.8 5.1 5.8
Imports 7,138 15.0 -30.2 20.0 13.2 8.8
GDP 5.6 -7.9 4.1 5.4 5.7
Nominal GDP (RUBbn) 33,258 41,445 39,064 45,300 51,430 58,440

Central govt budget balance, % of GDP 4.1 -5.3 -4.2 -2.8 -2.0


■ Russia

mortgage loans, with their provision in roubles at a single Changing pattern of budget deficit financing
relatively low 11% interest rate level and an initial con- 2000
RUBbn Sources of financing budget deficit RUBbn
2000

tribution maximum at 20% of housing value, will support 1750 1750
Reserve fund
this household credit segment. We therefore expect total 1500
Domestic debt
1500
Privatisation
bank credit portfolio expansion to continue, with further External debt
1250 1250
15-18% growth seen for 2011.
1000 1000
Monetary tightening has begun
750 750
After the supply-side shock to food prices following the
500 500
summer drought, inflation has not shown any respite, and
the government changed the forecasts for 2010 from 250 250
6.5% in the summer to over 8.5% towards the end of the 0 0
year. The government’s official forecasts for next year 10 11 12 13

are also too optimistic, in our view, with inflation ex-
pected at just 6-7% in 2011. We see risks of higher infla-
Easy credit to support consumption next year
tion, as price increases will become more broad-based, -20 20
Household
especially if oil prices remain high and capital flows to -15
% y/y
consumption,
%
18
Russia resume. At the beginning of 2011 inflation will be -10 reversed scale
-5 Personal lending rate, 16
bolstered by tariff hikes in the service sector, as well as 0 6M advanced, 14
government spending at the end of 2010. Later in the 5 rhs.
12
year additional inflationary pressures will also start to 10
15 10
build on the demand side, as the output gap is set to close 20
8
by the end of 2011. 25
30 6
35 4
The Central Bank of Russia (CBR) has already indicated 40
its concern over inflation and started to tighten monetary 45 2
50
policy by raising the outright deposit rates. We expect 06 07 08 09 10 11
0

further tightening to come, and the CBR will gradually
narrow the interest rate corridor by raising the deposit
rates more and faster than the refinancing rates, which at Interest rate normalisation cycle has begun
current ample rouble liquidity levels are still too high to 30
% %
30
serve as the “key” rates of the CBR. Since the monetary
25 25
tightening cycle has begun, money market rates – Mos- MOSPRIME 3M
prime, RUONIA – will continue edging higher.
20 20

More gains for rouble seen ahead 15 15
The rouble has moved a step further towards becoming a Refinancing
rate
more flexible currency, as the CBR widened the floating 10 10

intervention band from RUB 3 to 4 in the autumn. Fur- Repo rate 1D
5 5
ther widening and a reduced presence in the foreign ex-
Depo rate O/N
change market in the coming years are stipulated in the 0 0
CBR’s guidelines for monetary policy for 2011-13. Its Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
08 09 10
goal is to move towards a floating exchange rate system,
which it needs in order to be able to pursue an independ-
ent monetary policy (changing interest rates). As a result, Rouble basket set to strengthen further
43 43
the currency will be more influenced by market trends, Basket Basket
hence higher volatility should not come as a surprise. 41 41

39 39

We expect the rouble to continue strengthening, which is 37 37
both a structural story common to growth markets, and 35 35
also a medium-term trend supported by favourable global 33 33
market conditions and oil prices, which we, as our base-
31 RUB basket 31
line scenario, expect to remain above USD80/bbl and (55% USD and 45% EUR)
29 29
move toward USD 110/bbl in the coming two years.
27 27

25 Forecast 25
08 09 10 11 12
Aurelija Augulytė
aurelija.augulyte@nordea.com +45 3333 6437


■ Estonia

Improving economic outlook
The recovery has proceeded faster than initially antici- Private consumption still lagging exports
pated, with growth reaching 5% y/y in Q3, indicating Es-
tonia has been able to benefit markedly from the global
upturn. Growth expectations are boosted by the adoption
of the euro, which supports confidence in the economy
especially by attracting foreign investment.

The recovery is still highly dependent on foreign de-
mand. In Q3 exports rose close to the 2008 highs, erasing
the last of the almost 24% drop during the downturn. Im-
ports have recovered roughly a third of their collapse,
supported by reviving foreign demand and the impor-
tance of intermediate products. Inventories have also re-
cently started to contribute strongly to growth. As inven-
tories get filled, this trend could moderate. Overall, a
Labour markets gaining strength gradually
global recovery is vital for the upswing to continue, as
10 150
the revival in domestic demand remains fragile. ('000) Vacancies ('000) Persons
140
9
130
8
Household demand remains constrained by the weak la- 120
7 110
bour markets. However, positive signs are seen in the re- Unemployment, rhs
6 100
latively high consumer confidence, the modest wage 90
growth and the reduction in unemployment. Although the 5
80
initially rapid decline in unemployment is slowing down, 4 70
60
unemployment is likely to decline steadily over the next 3
50
couple of years. Reducing structural unemployment on 2
40
e.g. the industrial sector is a challenge, especially consid- 1 30
Vacancies
ering the continued rise in long-term unemployment. 0 20
00 01 02 03 04 05 06 07 08 09 10

Inflation is a concern, especially as the euro adoption is
feared to induce further price pressure. The high inflation Inflation supported especially by food prices
can largely be attributed to the rise in food and energy
prices as well as tax hikes, which are expected to be of a
temporary nature. Domestic price pressure could emerge
through the reviving economy, but the slowly declining
unemployment is likely to restrain wage increases. Thus,
we only see a modest acceleration in inflation.

Annika Lindblad
annika.lindblad@nordea.com + 358 9 1655 9940

Tönu Palm
tonu.palm@nordea.com + 372 628 3345

Estonia: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (EURbn) 2008 2009 2010E 2011E 2012E
Private consumption 8.7 -5.4 -18.4 -1.3 3.8 4.3
Government consumption 2.6 3.8 0.0 -1.7 1.0 1.5
Fixed investment 5.5 -15.0 -32.9 -10.0 11.0 6.5
Exports 10.7 0.4 -18.7 16.5 6.3 5.5
Imports 12.4 -7.0 -32.6 18.0 6.1 5.8
GDP -5.1 -13.9 2.4 4.2 4.0
Nominal GDP (EURbn) 15.8 16.1 13.9 14.4 15.5 16.5

Current account, % of GDP -8.8 4.5 3.8 0.8 0.1


■ Latvia

Post-recession mood
A cautious rise in the level of GDP confirms that the re- Exports close to pre-crisis levels
cession has finally passed, with GDP having risen quar- 2.50
LVLbn Main components of GDP, sa. LVLbn
2.50

ter-on-quarter for three consecutive quarters. The strong 2.25 2.25

Q3 y/y growth also surprised on the upside. So far the 2.00 2.00
main driver has been exports, which have corrected al- 1.75 1.75
most the entire decline seen during the downturn. A sta- 1.50 1.50
bilisation is also seen in consumption and investment. In GDP
1.25 1.25
addition, growing inventories have recently supported 1.00 1.00
growth. We see the gradual recovery continuing, with 0.75
Private consumption
0.75
domestic demand contributing increasingly to growth. 0.50 0.50
Exports
0.25 Imports 0.25
The domestic economy remains weak, with the still frag- 0.00
Fixed investment
0.00
ile gains in the labour market and confidence restraining 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

spending. Employment will improve fairly slowly, as un-
employment is largely structural due to the different
Strict fiscal consolidation still ahead
composition of growth than before the downturn, but
60 1
combined with the outflow of the labour force the unem- 55
% of GDP % of GDP
0
ployment rate is seen declining moderately. The weak- 50 -1
ness in domestic demand is expected to constrain infla- 45 -2
tion as well, with prices rising only modestly.Fiscal con- 40 -3
General govt deficit/surplus, rhs -4
solidation has amounted to an impressive 15% of GDP 35
(forecast: Nordea)
30 -5
during the past few years. A budget for 2011 was ap-
25 -6
proved, which is projected to cut the deficit to 5.4%. 20 Govt consolidated gross debt -7
However, increases in public revenues account for about 15
(forecast: EU Commission)
-8
two thirds of the consolidation and some cuts on the ex- 10 -9
penditure side appear to be postponed to 2012. In addi- 5
Forecast
-10

tion, the IMF and the EU are looking for further struc- 0 -11
00 01 02 03 04 05 06 07 08 09 10 11 12
tural reforms. All in all, euro adoption in 2014 is still
possible, but only if substantial fiscal consolidation is
achieved in 2012 and the recovery continues as expected. Financial markets eased in 2010
33 1300
% bp
The financial markets took a break in 2010 after the 2009 30 1200

roller-coaster ride, with CDS rates at low levels and the 27 1100
1000
FX market stable. The main risks to stability are related 24
900
to the expiry of the IMF/EU programme at the end of 21
800
2011. Despite this, Standard & Poor’s recently upgraded 18
700
15
Latvia’s credit rating to BB+, reflecting the improved CDS, 2Y, rhs
600
12
economic growth and lower-than-expected public debt. 500
9 400
Rigibor 3M
6 300
Annika Lindblad 3 200
0 100
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan
09 10 11
Andris Strazds
andris.strazds@nordea.com + 371 67 005 252

Latvia: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (LVLmn) 2008 2009 2010E 2011E 2012E
Private consumption 9,196 -5.2 -24.1 -0.4 3.0 4.0
Government consumption 2,575 1.5 -9.2 -8.5 -1.0 1.0
Exports 6,259 2.0 -14.1 8.6 6.4 6.0
Imports 9,220 -11.2 -33.5 8.3 7.0 6.8
GDP -4.2 -18.0 -0.1 3.0 4.2
Nominal GDP (LVLmn) 14,780 16,188 13,083 12,939 13,702 14,634

Consumer prices, % y/y 15.3 3.6 -1.1 2.9 2.6
Current account, % of GDP -13.1 8.6 4.0 -0.1 -0.8


■ Lithuania

Economic recovery broadening
The economic recovery is slowly broadening in Lithua- Exports driving the recovery
nia. So far the main growth driver has been exports, but
in Q3 a significant improvement in investment was also
seen. In addition, inventories have swung into growth
over the past few quarters, contributing clearly to the
economic upswing as well. All in all, GDP has remained
at bottom levels so far, but we expect a gradual increase
over the forecast horizon.

We see GDP growth accelerating to around 3% y/y over
the next couple of years, as the domestic economy gradu-
ally gains strength. Due to the high dependence on for-
eign demand in the recovery, the main risks to our fore-
cast are a slowdown in growth in Lithuania’s main trade
partners - the EU and Russia. Although exports to Russia
Unemployment rate seems to have peaked
and Germany are very important, comprising over 20%
of total exports in 2010, also the other Baltics, Poland
and the Nordics remain significant trade partners.

While exports are already at pre-crisis levels, household
consumption and investment still have a long way to go.
Positive developments have been seen in consumer con-
fidence, which fuel expectations of rising private con-
sumption and industrial production, which mainly reflect
the upturn in exports. The declining unemployment rate
and abating decline in wages support consumption. We
believe the unemployment rate to have peaked already,
with the decline continuing into 2011. Households’ un-
employment expectations have also declined markedly
from their highs, indicating improvement in the labour Demand strong especially from Russia
market. 1.1 6.0
LTLbn Exports from Lithuania LTLbn
In Lithuania the parliament extended fiscal consolidation 1.0 5.5
measures for 2011 and the budget was approved with a 0.9
deficit of 5.8% of GDP, a significant improvement from 0.8
5.0

an expected 8.1% in 2010. Cutting the deficit below 3% 0.7 Russia 4.5
of GDP in 2012, and thus adopting the euro in 2014, still 0.6 4.0
requires significant fiscal consolidation and a strong eco- 0.5 Total, rhs
3.5
nomic recovery. 0.4
Latvia
3.0
0.3
Annika Lindblad 0.2 2.5
0.1 2.0
05 06 07 08 09 10

Zygimantas Mauricas
zygimantas.mauricas@nordea.com + 370 5 2657 198

Lithuania: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (LTLmn) 2008 2009 2010E 2011E 2012E
Private consumption 63,736 3.7 -17.7 -4.0 3.2 4.5
Government consumption 17,638 7.3 -1.9 -1.7 0.0 1.2
Exports 53,371 11.6 -12.7 12.0 6.5 5.4
Imports 66,537 10.3 -28.4 14.0 6.8 5.5
GDP 2.9 -14.7 1.2 3.0 3.8
Nominal GDP (LTLmn) 98,669 111,190 92,016 94,316 99,030 104,970

Current account, % of GDP -13.1 2.6 1.3 -0.2 -0.3


■ Hungary

Domestic recovery finally gaining traction
The new government is pushing ahead with measures to Growth picking up
stimulate the economy and kickstart the recovery, disre- 10.0
% q/q % y/y
10.0

garding widespread concerns about fiscal sustainability 7.5
GDP growth, rhs.
7.5
and financial stability. As a consequence, the risk pre- 5.0 5.0
mium on Hungarian assets has increased and the rating 2.5 2.5
agencies now have the country only one notch from junk
0.0 0.0
status and with a negative outlook. Another consequence,
-2.5 -2.5
however, is that the domestic recovery is finally gaining
traction. -5.0 -5.0

-7.5 -7.5

Scaling back the pension reform and taxing specific in- -10.0 GDP growth, -10.0
annualised rate
dustries heavily form part of the measures to finance the -12.5 -12.5
government budget for 2011. These measures may have 00 01 02 03 04 05 06 07 08 09 10

severe adverse long-term effects and increase the risks
related to obtaining foreign financing to repay the emer-
Private consumption recovering
gency loans from the IMF and other international credi-
12.5 0
tors starting from 2012. We expect compensating struc- % y/y Net balance
10.0
tural reforms to improve market confidence once the do- -10
mestic recovery is sustainable, though. 7.5 Consumer confidence,
advanced 6M, rhs -20
5.0
Private consumption increased in Q3 last year after more 2.5 -30
than two years of consecutive falls and the consumer 0.0 -40
confidence indicator points to further gains in Q4. Per- -2.5
Private consumption
sonal income tax cuts in 2011 will bring additional -50
-5.0
spending growth. However, consumer spending remains -60
-7.5
dependent on the development of CHF/HUF due to the
large share of CHF-denominated mortgage loans. Hence, -10.0 -70
00 01 02 03 04 05 06 07 08 09 10 11
risks remain. We expect GDP growth to be just below
3% in 2011 and slightly higher in 2012.
Two rate hikes late last year
The central bank hiked interest rates twice towards the 14 14
% %
end of last year, as inflation moved above the upper limit 13
MNB's key rate
13
12 12
of the inflation target of 3% +/- 1% point and because of 11 11
the expected fiscal policy easing. Moreover, the hikes 10 10
Inflation
may have been provoked by the government’s threat to 9 9
8 8
replace part of the Monetary Policy Committee and in- 7 7
crease the inflation target. Tensions between the govern- 6 6
ment and the central bank are obvious and could inten- 5 5
4 4
sify ahead of the replacement of four members of the 3 3
Monetary Policy Committee whose terms expire in 2 2
Core inflation
March. 1 1
0 0
05 06 07 08 09 10 11
Anders Svendsen
Anders.svendsen@nordea.com +45 3333 3951

Hungary: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (HUFbn) 2008 2009 2010E 2011E 2012E
Private consumption 16,559 -0.6 -6.8 -1.3 3.4 2.9
Fixed investment 5,381 2.9 -8.0 -3.5 4.5 7.0
Exports 20,444 5.6 -9.6 14.7 4.6 7.5
Imports 20,044 5.8 -14.6 11.2 5.0 7.7
GDP 0.6 -6.5 0.9 3.2 3.4
Nominal GDP (HUFbn) 25,408 26,543 26,094 27,608 29,374 31,254

Current account, % of GDP -7.3 -0.5 2.2 -0.5 -2.0


■ Czech Republic

Recovery gaining strength
The economic outlook remains bright and we have added Growth picking up
a bit to the growth forecast for this year. Uncertainties 10.0
% y/y GDP growth % y/y
10.0

have risen, though. The central bank seems convinced 7.5 7.5
that the economy will perform much worse than what is Czech Republic
generally expected and new political risks have surfaced 5.0 5.0

during the autumn. 2.5 2.5
Euro area

We expect growth to be just above 3% this year. The 0.0 0.0

main reason for the upward revision is the improved out- -2.5 -2.5
look for the main export markets and a faster-than-
-5.0 -5.0
expected recovery of private consumption. We still be-
lieve that foreign demand growth will slow in the begin- -7.5 -7.5
ning of this year, but not by as much as we originally 01 02 03 04 05 06 07 08 09 10

thought. Private consumption is likely to continue recov-
ering at a moderate pace. The labour market is still rather
Labour markets still weak
weak, but consumer confidence and retail sales have
10 11
shown significant improvements. Investment is also % y/y %

about to start recovering in earnest, as capacity utilisation 9 Unemployment rate, rhs
Wages
10
and credit conditions are recovering. 8
9
7
Fiscal policy will have a dampening effect on growth in 8
6
2011 as the new government’s budget deficit target is set 7
to 4.5% of GDP. Pension reform is high on the agenda 5
for 2011. However, the government lost its majority in 4
6

the upper house of parliament in October, where espe- 5
3
cially the smallest coalition partner, the VV, lost support.
Therefore, we see heightened political risks relating to 2 4
04 05 06 07 08 09 10
the government’s chances of meeting next year’s deficit
target and implementing reforms.
Credit conditions recovering
Inflation is hovering around the central bank’s 2% target. 80 80
% y/y Loans % y/y
Core inflation is likely to remain subdued due to the 70 70
Households, mortgages
weak labour market and the appreciation of the CZK. 60 60

Therefore, the central bank appears content with keeping 50 50
40 40
interest rates very low and its own rate path does not fac-
30 30
tor in the first hike until the second half of the year. Food 20 Households, total 20
and energy prices could push inflation higher in the near 10 10
term, though. We believe the central bank is too pessi- 0 0
mistic on growth and think that the first interest rate hike -10
Non-financial corporations
-10

could come in Q2. We only expect moderate rate hikes -20 -20
-30 -30
this year.
-40 -40
00 01 02 03 04 05 06 07 08 09 10
Anders Svendsen
anders.svendsen@nordea.com +45 3333 3951

Czech Republic: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (CZKbn) 2008 2009 2010E 2011E 2012E
Private consumption 1675 3.5 -0.1 1.3 2.4 3.0
Fixed investment 890 -1.5 -7.9 -1.3 5.0 8.0
Exports 2803 5.6 -11.4 13.6 5.0 6.5
Imports 2655 4.3 -10.6 14.2 4.8 6.0
GDP 2.3 -4.0 2.5 3.1 3.8
Nominal GDP (CZKbn) 3535 3689 3626 3772 3978 4212



■China

Rebalancing process will gradually gain momentum
• Solid growth despite monetary policy tightening our main scenario) could be elevated inflation, asset bub-
bles or a trade war.
• GDP set to grow by 8%-9% in 2011 and 2012
• New 5-year plan will ignite rebalancing process Investments to remain important
Investments will remain the most important driver of the
• CNY revaluation expected to continue economy in the forecast period, underpinned by renewed
strong infrastructure projects as the projects in the new 5-
China’s economy strengthened late last year following year plan probably will be initiated soon after the plan
the intended slowdown in the first half of 2010. Thus, takes effect. The public sector is furthermore inclined to
China’s economy enters 2011 with more momentum, support growth because the government is to be replaced
which is likely to be accompanied by more monetary pol- in two years’ time (new National People’s Congress,
icy tightening. The end result will in our view neither be Central Committee and Politburo in late 2012, new Presi-
an overheated economy nor an economy hurt by too dent in March 2013) and likely wants to ensure a positive
much tightening. Instead we expect growth to slow posthumous reputation.
somewhat from recent years’ double-digit growth but
remain relatively solid in the 8%-9% range in both 2011 Housing construction activity will be lower in the com-
and 2012. Meanwhile, the process towards a more bal- ing years. The effect from the many measures taken to
anced economy will likely gradually gain momentum, as dampen house price increases and speculative activity
we expect the authorities to live up to the stated goals in has been limited and less than anticipated. Thus, more
the new 5-year plan for 2011 to 2015. targeted measures as well as general monetary tightening
are likely to be pursued until house and property prices
New 5-year plan to ignite rebalancing process stabilise and even fall in the big cities where they in-
The new 5-year plan will be submitted to Congress for creased the most. However, the dampening effect on con-
final approval in March 2011 but the overall elements struction activity will to some extent be counterweighed
have already been announced, pointing to increased focus by the authorities’ highly profiled programme to con-
on changing the growth pattern. For instance, the key ob- struct affordable or social housing. The programme
jectives of the plan include “...driving economic growth seems to have gained momentum recently with 2.2 mil-
higher via domestic demand and achieving a more equal lion of economic housing and subsidised rental units re-
income distribution.” This rebalancing process towards portedly under construction. The total number of units
more sustainable and consumption-led growth is to be pledged by the authorities under the programme has re-
achieved trough various structural changes and reforms: cently been increased to 15.4 million by the end of 2012.
1) Higher wages also for low-income consumers (higher
minimum wages and agricultural sector reforms). 2) Im- Household sector the future growth driver
proved social security and health care system. 3) Contin- Private consumption will gain importance in the coming
ued urbanisation. 4) Increased service sector competition. years, with the biggest change happening beyond the
5) Increased regional focus: moving growth also to the forecast period. But already in the forecast period we see
western parts of China. private consumption growth outstripping overall GDP
growth slightly, meaning that private consumption’s cur-
It should be noted that many of the plan’s elements were rently relatively low share of GDP slowly will begin to
also goals in the now expiring 5-year plan. But reforms increase. In the very short term, however, indicators of
were delayed first by the inflation spike in 2007-08 and household consumption such as retail sales and consumer
then by the global recession. In the absence of any severe confidence point to subdued private consumption growth.
shocks, the economic rebalancing process should be on The expected deflation of the housing bubble should not
track from here on. Likely triggers of further delays (not

China: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (CNYbn) 2008 2009 2010E 2011E 2012E
Private consumption 9,360 8.6 10.4 9.4 9.5 10.0
Fixed investment 10,544 10.4 21.2 11.0 10.0 9.5
Stockbuilding* 548 0.5 -0.2 0.0 0.0 0.0
Exports 10,210 13.9 -9.1 12.0 10.0 10.0
Imports 7,872 15.2 -2.7 12.0 13.0 12.0
GDP 9.6 9.1 10.1 8.7 8.9
Nominal GDP (CNYbn) 26,309 30,686 33,535 38,029 43,048 48,602



■China

hurt household consumption much, as households’ lever- GDP growth to remain relatively solid
age is very low. The ratio of issuance of home mortgages
to the value of homes sold is only around 35% because
many homeowners initially paid very little for their
homes and obtained subsidies during the transition from
socialist allocation to a more market-based housing mar-
ket

The export sector will continue to expand as the devel-
oped world’s economies continue their recovery. And the
gradual revaluation of the CNY will only have a limited
dampening effect on exports. A huge share of imports is
inputs to production of export goods, and imports thus
follow exports. Imports to domestic demand still primar-
ily consist of commodities and to some extent also ma-
Private consumption will gradually gain importance
chinery and equipment, but once private consumption
becomes the main growth driver, the consumer goods
market will take off too.

Inflation has taken off
With high economic growth, inflation has taken off and
broken the 5% mark. It is primarily food price increases
that are pushing up inflation, and the higher prices are
mainly due to seasonal supply disruptions. But supply
shocks are not the only explanation: the higher prices are
also due to increased demand, indicating general infla-
tionary pressure. And also non-food inflation has in-
creased somewhat recently. The high inflation has been
addressed by the authorities both via direct price controls
and monetary policy tightening. The former will only Also non-food inflation has increased somewhat
work temporarily but should ensure that the inflation ac-
celeration ends before summer this year. The latter
should dampen inflation back below 4% in late 2011. But
in general, China is bound for somewhat higher inflation
in future than in the past. In line with this, the govern-
ment’s inflation target is raised in the new 5-year plan to
4% from 3%. The main reason for the higher inflation is
stronger wage growth, despite the fact that wage in-
creases seem to go hand in hand with strong productivity
gains and thus should not be that inflationary.

More monetary tightening and CNY revaluation
The monetary tightening will likely continue with hikes
in lending rates, reserve requirement rate hikes and lower
lending targets and quotas. Also the gradual revaluation Inflation points to continued CNY revaluation
of the CNY versus the USD is expected to continue. His- 10
% y/y % 2M/2M ar
15

torically, the revaluation pace has been closely correlated 9
13
8
with inflation, and alone for this reason, revaluation 11
7
should continue because inflation will likely stay ele- 6
Pace of CNY
9
revaluation, rhs
vated. Other reasons are that the international pressure on 5
7
China likely will persist and that a stronger CNY will 4
Inflation 5
support changing the growth engine from exports to do- 3

mestic demand and from being investment-driven to be- 2 3
1
ing driven by private consumption. 1
0
-1
-1
Bjarke Roed-Frederiksen -2 -3
bjarke.roed-frederiksen@nordea.com +45 3333 5607 06 07 08 09 10


■ India

A growth story of its own
The story of strong and healthy economic growth is still Households set to accelerate consumption
intact. Growth will slow down this year compared with 22
% y/y % y/y
22

2010, but pick up again in 2012 to close to 9%. Invest- 20 20
18 18
ment growth will likely cool off further, but remain in
16 16
double-digit territory. Private consumption is set to ac- 14
Investment
14
celerate as the big rural population gains from the much 12 12
better harvest this year than last year. And urban house- 10 10
GDP
holds will prosper as wage increases stay strong. India is 8 8

in a good position to sustain high economic progress in 6 Private consumption 6
4 4
the coming years, among other factors due to its favour-
2 2
able demographics, its big pool of labour and foreign in- 0 0
vestors’ eagerness to bring in know-how and capital. In- -2 -2
dia is thus set to generate higher GDP growth than China 05 06 07 08 09 10

in 2012.
Inflation expected to take off again before long
Strong domestically driven growth is often accompanied
18 18
by demand-driven inflationary pressure. The central % y/y % y/y
16 16
bank’s preferred inflation measure, wholesale price infla-
14 14
tion, is finally falling, but it will likely bottom as early as CPI, all India, industrial worker
12 12
this summer and increase throughout 2012. Despite the
10 10
projected better harvest this year, which gives some relief
8 8
to food prices, the high food price inflation seems to have
6 6
become structural. One explanation is that the improved
living standards of part of the population have changed 4 4

the consumption pattern structurally to include a more 2
Wholesale price inflation
2

protein-rich diet, the production of which is far more soft 0 0

commodity-intensive. This has not gone hand in hand -2 -2
05 06 07 08 09 10
with adequate efficiency gains in the agricultural sector.

To dampen inflation, the central bank will likely sanction Disclosed FX interventions have been very muted
rate hikes of a total of 75 bp this year and also raise the 0.8 350
USDbn USDbn
reserve requirement rate further. The high inflation 0.7
300
should make the central bank more tolerant of INR ap- 0.6
Foreign reserves, rhs
preciation, and in fact, intervention has become very in- 0.5
250
0.4
frequent since mid-2009. We expect few, if any, meas-
0.3 200
ures to prevent further INR strengthening and therefore 0.2
expect the strong growth story to be reflected in contin- 0.1 150
ued INR appreciation. Note, however, that India (and the 0.0
100
INR) is one of the Emerging Market economies that -0.1

could suffer – not gain – from too high global commod- -0.2
FX interventions, net 50
-0.3
ity prices, especially oil prices.
-0.4 0
00 01 02 03 04 05 06 07 08 09 10
Bjarke Roed-Frederiksen
bjarke.roed-frederiksen@nordea.com +45 3333 5607

India: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (INRbn) 2008 2009 2010E 2011E 2012E
Private consumption 28,157 8.2 5.4 7.0 6.5 7.1
Fixed investment 16,305 4.0 7.2 12.0 13.0 15.0
Exports 9,843 21.1 -9.1 13.0 15.0 14.0
Imports 12,198 31.9 -8.4 10.0 12.0 13.0
GDP 5.1 7.7 9.2 8.7 9.3
Nominal GDP (INRbn) 49,479 55,744 61,183 72,446 83,102 94,947

Wholesale prices, % y/y 9.1 2.1 9.2 6.0 5.0


■ Brazil

Time to scale back the loose fiscal policies
Economic growth stays remarkably high as strong credit Overheating indicators in the red
growth and a sustained loose fiscal policy support do- -9
Abs change y/y %
11

mestic demand. The flip side is that demand by far ex- -8
10
-7
ceeds supply, with many overheating indicators in the Unemployment rate, rhs 9
-6
red. The unemployment rate is seemingly hitting new re- -5 8
cord lows every month, and inflation is moving swiftly -4
Inflation, rhs
7
towards the 6.5% upper end of the inflation range. The -3
6
lack of capacity will eventually dampen domestic de- -2

mand growth, but in the short term, the main effects will -1 5
0
be even higher inflation and a deterioration of the trade 4
1 Change in
balance and current account. We do, however, expect a 2 unemployment rate, sa (reversed) 3
soft landing with economic growth slowing only to 3 2
around the potential growth rate at a little below 5% this 05 06 07 08 09 10

year before increasing a tad again in 2012.
Growth to slow to around potential
The optimal way to combat the overheating tendencies
10 10
would be to scale back the loose fiscal policy, for in- 9
% y/y % y/y
9
stance by cutting transfers and subsidies or reversing tax 8 Potential GDP growth (HP filtered) 8
cuts. But the new government with newly elected Presi- 7 7
6 6
dent Rousseff has so far not shown much desire for fiscal
5 5
tightening and economic reforms, and the budget deficit 4 4
is expected to remain between 2% and 3% of GDP. 3 3
Meanwhile, monetary policy will have to carry the bur- 2 2
1 1
den of cooling down the economy and we expect interest
0 0
rate hikes during the winter and spring. Also alternative -1 -1
Actual GDP growth, sa
measures for instance with a view to limiting credit -2 -2
Forecast
growth will probably be introduced as rate hikes lead to -3 -3
00 01 02 03 04 05 06 07 08 09 10 11 12
unwanted currency strengthening. As inflation recedes
again, it should be possible to lower interest rates during
2012. We expect long-term strengthening of the BRL Hikes now, cuts in 2012
supported by still relatively strong growth, high interest 20 20
% y/y %
rates and increasing global commodity prices. The main 18 18
BRL risk is the ever-looming risk of a sudden turnaround 16 16
in global risk sentiment that would hurt especially the 14
SELIC policy rate, rhs
14
BRL hard. One domestic risk is the possibility of more 12 12
capital restrictions in order to dampen inflows and BRL 10 10
appreciation, but with an increasing current account defi-
8 8
cit and huge direct investment needs, it is after all neces- Inflation targets
6 6
sary for Brazil to continue to attract foreign capital.
4 IPCA inflation 4
2 2
Bjarke Roed-Frederiksen
0 0
jbjarke.roed-frederiksen@nordea.com +45 3333 5607 06 07 08 09 10 11

Brazil: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (BRLbn) 2008 2009 2010E 2011E 2012E
Private consumption 1,594.1 5.7 4.2 7.0 4.8 4.6
Government consumption 539.1 3.1 3.9 4.0 3.5 3.5
Gross fixed capital formation 464.1 13.6 -10.4 26.0 7.0 6.5
Stockbuilding* 23.6 0.9 -2.0 0.2 0.0 0.0
Exports 355.7 0.4 -10.3 10.0 9.0 7.0
Imports 315.2 15.3 -11.5 30.0 13.0 7.0
GDP 5.2 -0.7 7.6 4.5 4.7
Nominal GDP (BRLbn) 2,661.3 3,031.9 3,257.1 3,721.5 4,129.4 4,587.8



■ Turkey

Risk of overheating
Economic activity expanded sharply in 2010 and the Strong growth
economic policy mix with tighter fiscal policy and lower 20
% y/y OECD's leading indicator, % 6M/6M ar
30

interest rates to deter capital inflows has worked rea- 25
advanced 6M, rhs
15 20
sonably well. Fundamentals are still looking strong going
15
into 2011, but the economy is increasingly showing signs 10
10
of overheating and hence tighter economic policies will 5 5
be required during the year. With general elections 0
scheduled for June, fiscal policy is unlikely to be tight- 0 -5

ened significantly, which leaves monetary policy as the GDP -10
-5
-15
key policy tightening tool.
-10 -20
-25
We see growth around 5% this year with the domestic -15 -30
economy as the key driver. Domestic demand grew really 00 01 02 03 04 05 06 07 08 09 10

fast during 2010, fuelled by easy credit conditions, espe-
cially in the latter part of the year. Credit conditions are
Credit growth supports domestic demand
likely to support domestic demand also this year despite
20 200
the central bank’s tightening of banks’ reserve require- % y/y % y/y
175
ments and probable interest rate hikes in H1 2011. 15 150
Private consumption
125
10
The June general elections will most likely allow the cur- 100
rent AKP government to continue in office. Such an out- 5 75
50
come will be taken positively by the markets unless the 0 25
AKP gets enough seats in parliament to make constitu- Consumer loans, rhs 0
tional changes on its own. In that case, we believe that -5
-25
the “old” fear of an underlying religious agenda could -10 -50
spook the markets. -75
-15 -100
01 02 03 04 05 06 07 08 09 10
The central bank met last year’s inflation target of 6.5%
by end-year and inflation may drop further in the first
half of 2011. The target for the end of this year is 5.5%. Current account deficit widening rapidly
Still, we believe that inflation is the key risk factor, not 2 2
USDbn Balance of Payments USDbn
least due to the central bank’s recent willingness to toler-
1 1
ate large temporary deviations from the inflation target.
The rapid widening of the current account deficit due to 0 0

the strong domestic economy and amble foreign liquidity -1 -1
begs a weaker currency and makes it all the more diffi- -2 -2
cult for the central bank to tighten monetary policy
-3 -3
enough to anchor inflation.
Services, net
-4 Goods, net -4
Income, net
Anders Svendsen -5 Current transfers, net -5
anders.svendsen@nordea.com +45 3333 3951 Balance, total
-6 -6
03 04 05 06 07 08 09 10

Turkey: Macroeconomic indicators (% annual real changes unless otherwise noted)
2007 (TRYbn) 2008 2009 2010E 2011E 2012E
Private consumption 601 -0.3 -2.2 6.8 4.5 5.3
Fixed investment 181 -6.2 -19.1 15.9 5.9 7.5
Exports 188 2.7 -5.3 9.8 6.9 8.0
Imports 232 -4.1 -14.3 10.7 5.9 6.5
GDP 0.7 -4.7 7.5 5.1 5.5
Nominal GDP (TRYbn) 843 951 953 1,106 1,229 1,365

Public sector balance, % of GNP -1.8 -5.5 -5.2 -4.5 -4.0


■ Oil

Oil price rally may put world economic growth at risk
The underlying oil price trend is expected to move higher Oil price forecast – baseline (Brent – USD/barrel)
and accelerate in late 2011 as world economic growth Q1 Q2 Q3 Q4 Year
2008 96.3 122.8 117.2 57.5 98.4
gains momentum and global oil demand is anticipated to
2009 45.7 59.9 68.9 75.5 62.5
outpace non-OPEC supply growth. In turn, this will 2010E 77.4 79.3 77.0 87.8 80.4
heighten the pressure on OPEC to increase production 2011E 92.0 94.0 95.0 97.0 94.5
and OPEC’s spare capacity is expected to decline. In the 2012E 98.0 100.0 105.0 110.0 103.3

short term there is a risk that the oil price may fall below
the underlying trend as renewed concerns about vulner- Oil price scenarios – baseline, high and low prices
able Euro-area economies or weaker growth signals from 160
USD per barrel USD per barrel
160

major oil consuming countries such as China may weigh 140 140
High price
on risk appetite.
120 120

Oil production has outstripped new discoveries since the 100 100

1980s. The average size of new fields is shrinking and 80 80
the marginal costs on new fields outside OPEC are 60
Baseline scenario
60
mounting. Adequate and timely investments are vital to Low price
40 40
secure sufficient capacity expansion to compensate for
the natural decline in existing fields and to meet the fu- 20 20
ture demand for energy. We expect to see an upswing in 0
Forecast
0
upstream oil investments in 2011 as lower exploration 02 03 04 05 06 07 08 09 10 11 12

and development costs and higher oil prices have im-
proved the investment climate. Cost inflation is expected
Oil price and upstream oil & gas investment budgets
to pick up as prices on input factors such as materials,
600 120
drilling rigs and labour are expected to rise. The marginal USDbn USD per barrel
550 110
cost of production is expected to increase as a growing Upstream oil & gas 100
500
share of oil production is moving offshore and to greater investment budgets
90
450
depths and declining non-OPEC conventional production 80
400
is replaced by high-cost unconventional oil such as Ca- 70
350
nadian tar sand. Limited potential to expand non-OPEC 60
300
production capacity increases the pressure on OPEC 50
250
countries to invest as the cartel holds around 75% of the 40
200 Brent crude, rhs.
world’s proven oil reserves. 30
150 20

World economic activity, urbanisation and population 100 10
00 01 02 03 04 05 06 07 08 09 10
growth are vital oil demand drivers. The centre of eco-
nomic gravity and oil demand is expected to continue to
shift eastward with China, India and the Middle East as Brent crude & National Balancing Point natural gas
frontrunners. Transport fuel is expected to increase its 160 160
GB pence per Therm USD per barrel
share of total oil consumption in these regions going
140 140
forward. Strict domestic price control regimes especially Brent crude, rhs.
in Asia and the Middle East, have sheltered consumers 120 120

from rising oil prices and supported strong demand 100 Natural gas, 1-Pos 100
growth for transportation fuels. Many countries have 80 80
now gradually started to increase the pass-through of oil
60 60
price changes to end-users or abolish subsidies com-
pletely. US shale gas production and strong growth in 40 40
global LNG capacity revolutionised the global gas mar- 20 20
kets and led to a decoupling of oil and gas prices. If the
0 0
gas glut remains for a period, ample gas reserves, in- 97 98 99 00 01 02 03 04 05 06 07 08 09 10
creasing flexibility in the gas market and stricter envi-
ronmental requirements could increase the significance
of natural gas in the global energy market and dampen oil
demand growth.

Thina M. Saltvedt
thina.margrethe.saltvedt@nordea.com +47 2248 7993


■ Metals

Metal prices still trending up
As we expected, base metal markets have fluctuated Metal prices approaching all-time highs
widely since the previous edition of Economic Outlook. 5000
Index Index
5000

Prices accelerated in October, fell back in November and 4500 4500
then re-accelerated in December, reaching year-high lev- 4000 4000
els for the LME index. Key factors behind the price in- 3500 3500
creases were improving physical market fundamentals Metal price (LME)
3000 3000
for several metals, increased risk appetite and encourag-
2500 2500
ing economic indicators.
2000 2000

The physical market fundamentals for copper have tight- 1500 1500

ened rather rapidly, primarily driven by non-Chinese de- 1000 1000
mand growth. Price action has surprised on the upside, 500 500
recently reaching new nominal all-time highs. According 00 01 02 03 04 05 06 07 08 09 10

to the International Copper Study Group, supply barely
kept up with demand in 2010 and commercial inventories
Copper fundamentals expected to remain strong
have come down significantly. This year we expect a
500 450
tighter supply-demand balance, resulting in further in- Index Index
450 Jan 2004=100 Jan 2004=100
ventory draws as the potential for increasing production 400

is limited. Prices should stay high and volatile, stimulat- 400
350
ing demand substitution into other metals. 350 Copper
300
300
250
Aluminium prices have also been volatile in 2010, but 250
ended the year slightly higher. Inventories have trended 200
200
downwards, but are still well above normal industry lev- 150
150 Aluminium
els. After a strong production recovery, supply growth
100 100
will probably slow this year. Meanwhile, we expect con-
tinued strong demand growth. We thus expect the alu- 50 50
04 05 06 07 08 09 10
minium market to tighten gradually. Prices could there-
fore rise, leaving aluminium among the best performing
base metals over the coming years. Zinc fundamentals improving, but still weak
500 500
Index Index
Nickel has been one of the best performing base metals 450 Jan 2004=100 Jan 2004=100 450
in 2010. Key factors have been an improving supply-
400 400
demand balance driven by a strong increase in stainless
350 350
steel production. A number of new supply projects are
planned to come on steam, but delays are probable. With 300 300
Zinc
expected robust growth in demand, the nickel market 250 250

may stay relatively tight for a while. This will likely re- 200 200
sult in volatile and high price levels until production 150 150
catches up with demand. 100
Nickel
100

50 50
Fundamentals for zinc remain among the weakest in the 04 05 06 07 08 09 10
base metal complex. Prices have been volatile in 2010,
ending the year slightly lower. According to the Interna-
tional Lead and Zinc Study Group, supply has out-
stripped demand in 2010 leading to steadily rising inven-
tories. Going forward, we expect zinc demand to rebound
in step with rising economic momentum. Supply will
probably still outweigh demand this year, but a supply
deficit can occur already in 2012. Current prices reflect a
move towards a balanced market, but we still expect zinc
to underperform relative to other base metals.

Bjørnar Tonhaugen
bjornar.tonhaugen@nordea.com +47 2248 7959


■ Economic Research Nordea

Economic Research Nordea
Denmark: Sweden:
Helge J. Pedersen, Global Chief Economist Annika Winsth, Chief Economist Sweden
helge.pedersen@nordea.com, tel. +45 3333 3126 annika.winsth@nordea.com, tel. +46 8 614 8608

Johnny Bo Jakobsen, Chief Analyst Torbjörn Isaksson, Chief Analyst
johnny.jakobsen@nordea.com, tel. +45 3333 6178 torbjorn.isaksson@nordea.com, tel. +46 8 614 8859

Anders Matzen, Chief Analyst Bengt Roström, Senior Analyst
anders.matzen@nordea.com, tel. +45 3333 3318 bengt.rostrom@nordea.com, tel. +46 8 614 8378

Anders Svendsen, Chief Analyst Andreas Jonsson, Senior Analyst
anders.svendsen@nordea.com, tel. +45 3333 3951 andreas.w.jonsson@nordea.com, +46 8 534 910 88

Troels Theill Eriksen, Senior Analyst Carolinne Bjerking, Junior Analyst
troels.theill.eriksen@nordea.com, tel +45 3333 2448 carolinne.bjerking@nordea.com, tel. +46 8614 800 03

Jan Størup Nielsen, Senior Analyst
jan.storup.nielsen@nordea.com, tel. +45 3333 3171 Estonia:
Tönu Palm, Chief Analyst
Bjarke Roed-Frederiksen, Analyst
tonu.palm@nordea.com, tel. +372 628 3345
bjarke.roed-frederiksen@nordea.com, tel. +45 3333 5607

Aurelija Augulyte, Analyst Latvia:
aurelija.augulyte@nordea.com, tel. +45 3333 6437
Andris Strazds, Senior Analyst
Ianna G. Yordanova, Assistant Analyst andris.strazds@nordea.com, tel. +371 67 096 096
ianna.yordanova@nordea.com, tel. +45 3333 3901
Lithuania:
Christine A. Hansen, Assistant Analyst
Zygimantas Mauricas, Analyst
christine.a.hansen@nordea.com, tel. +45 3333 3901
zygimantas.mauricas@nordea.com, +370 5 2657 198

Finland:
Russia:
Martti Nyberg, Chief Economist Finland
Dmitry A. Savchenko, Analyst
martti.nyberg@nordea.com, tel. +358 9 1655 9941
dmitry.savchenko@nordea.ru, +7 495 777 34 77 4194
Pasi Sorjonen, Chief Analyst
pasi.sorjonen@nordea.com, tel. +358 9 1655 9942

Annika Lindblad, Analyst
annika.lindblad@nordea.com, tel. +358 9 1655 9940

Norway:
Steinar Juel, Chief Economist Norway
steinar.juel@nordea.com, tel. +47 2248 6130

Erik Bruce, Chief Analyst
erik.bruce@nordea.com, tel. +47 2248 4449

Thina M. Saltvedt, Senior Analyst
thina.margrethe.saltvedt@nordea.com, tel. +47 2248 7993

Katrine Godding Boye, Senior Analyst
katrine.godding.boye@nordea.com, tel. +47 2248 7977
Bjørnar Tonhaugen, Senior Analyst
bjornar.tonhaugen@nordea.com, tel. +47 2248 7959


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Economic Outlook, January 2011, Nordea Bank

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Economic Outlook, January 2011, Nordea Bank