August 27, 2019

August 27, 2019

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Completed: August 26, 2019, 17:00 Please see disclaimer at the end of the document, Distributed: August 27, 2019, 08:00

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• Summary 3

• Themes 7

• Sweden 14

• G6 24

• Emerging Markets 36

• FX/FI 42

• Nordics 47

• Baltics 53

• Appendix 62

2 Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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• Global: The global economy enters a marked slowdown. The trade war and a hard Brexit weigh on growth. The Fed and the ECB respond with easing, stabilising markets but tools are limited and cannot boost the real economy. Euro area fiscal stimulus is added to the mix, which is expected to support growth from late 2020 onwards.

• Sweden: Weaker growth and labour market are expected going forward. Inflation remains close to but below the target. Stable price development continues in the housing market. The Riksbank will keep the rates unchanged throughout the forecast period. Fiscal policy has potential to support the economy but we expect only small stimulus.

• Norway: Growth remains robust, although the economy is already at or past the top of the cycle. We expect Norges Bank to hike once more in September and then stay put for the rest of the forecast period.

• Baltics: Growth in the Baltic economies moderates but remains robust. Estonia will see growth dip under the potential coupled with lower wage and price pressures. In Latvia both external and domestic demand will contribute to a slowdown, while robust domestic demand will hold the growth figures up in Lithuania.

Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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5 Summary Themes Sweden G6 EM FX & FI Baltics Nordics Summary Themes Sweden G6 EM FX & FI Baltics Nordics

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Trade war - why so resilient exports in the Nordics and Baltics

Sustainability indicators (Macro-ESG)

Swedish public debt dynamics


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Sweden Denmark Finland Norway

E: Environmental protection (SDGs # 2, 6, 7, 11, 12, 13, 14, 15) 73 78 72 70

S: Social inclusion (SDGs # 1, 2, 3, 4, 5, 8, 9, 10) 90 87 88 91

G: Governance and institutions (SDGs # 9, 16, 17) 97 95 94 96

↓ - Overall downward trend during last 5 years

*Benchmark is 90 or 10th percentile of EU28 in 2015. In total 43 indicators covering all SDGs,

aggregated to three pillars. Traffic lights: ≥90% for green, 70-90% for yellow

Source: Swedbank Research

↓ ↓

↓ ↓ ↓

↓ ↓↓

↓ ↓ ↓

• We have revisited our SSIs to better align with the widely recognised ESG diagnostic used globally and across sectors.

• The SSI, comprising 43 indicators in total, serve to identify areas in which we need and can expect both public and business investment in the coming years.

• Our indicators show that green action is still needed and soon.


Estonia Latvia Lithuania

E: Environmental protection (SDGs # 2, 6, 7, 11, 12, 13, 14, 15) 65 69 66

S: Social inclusion (SDGs # 1, 2, 3, 4, 5, 8, 9, 10) 72 67 66

G: Governance and institutions (SDGs # 9, 16, 17) 57 42 48

↓ - Overall downward trend during last 5 years

*Benchmark is 90 or 10th percentile of EU28 in 2015. In total 43 indicators covering all SDGs,

aggregated to three pillars. Traffic lights: ≥80% for green, 60-80% for yellow.

Source: Swedbank Research

↓ ↓

↓

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• Several countries still have a long way to go in reducing GHG emissions per capita.

• Our Macro ESG can help businesses and households make choices that resonate with overall long term growth prospects.

• We also advocate that green fiscal policy and QE can be effective in counteracting the downturn.


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• Due to a weaker global outlook and Swedish macro data, the GDP forecast is revised down to around 1 percent next year, but is expected to rise to 1.4 percent in 2021. Weaker business investment weighs on growth. The labour market loses momentum and wage growth moderates.

• Inflation will moderate and fluctuate between 1.5 and 2 percent during the forecast period. Continued high uncertainty about the underlying inflation pressure.

• The Riksbank is now expected to stay put throughout the forecast period. The short term risk profile is tilted towards more expansionary measures.

• Continued stability can be expected in the housing market, possibly with signs of cautious recovery. Housing prices are supported by high demand, driven by persistently low interest rates among others, and lower supply resulting from a decrease in construction. A weakening labour market situation constitutes a downside risk. Possible reforms constitute another risk, in either up- or downside.

• Fiscal policy will hopefully become somewhat more expansionary going forward. We see an opportunity for fiscal policy to do much more in a situation with low rates and robust public finances. This would be motivated by both stabilisation and structural policy arguments.


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• Weaker economic conditions, low inflationary pressure and increased global uncertainty indicate that the Riksbank is on hold

• Gradual downward revision of the repo rate path

• No rate cuts but increased readiness with both interest rates and asset purchases if needed

• Persistent SEK weakness an argument for the Riksbank not to ease more


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• Governor Kerstin af Jochnick has decided to leave board

• Af Jochnick has been a close ally to Governor Ingves and the majority

• Could tilt the balance within the governing board

• Review of the monetary policy framework and the composition of the governing board in the Riksbank Committee, 30 November

? Image source: Riksbank


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• US: The current US economic expansion is the longest in history, but the economic outlook has softened and growth is expected to decline weighted by global and political developments. However, the slowdown will be milder than in many other countries as the domestic economy is supported by further easing from the Federal Reserve. Inflation pressures have moderated and the Fed is eager to reach the target. We expect two additional rate cuts in 2019 and one in 2020.

• Euro area is caught in the trade war crossfire. European manufacturing which depends on external demand is in recession in many countries. Strong services sector and labour markets so far more than compensated industrial slump, but it will turn south as well if global conditions do not improve. ECB is preparing for further monetary stimulus starting September, but it will only have a limited impact. Expansionary fiscal policy would be more effective.

• UK: The economy is expected to hit another recession, fuelled by Brexit uncertainty. The new Cabinet consists of hard-core Brexiteers, who prefer a no-deal ahead of a bad deal. The parliament could still try to stop a no-deal, but time is quickly running out and we see it increasingly unlikely that it will succeed. Our baseline scenario is thus a no-deal Brexit followed by a general election. In this scenario, the UK will return to WTO rules.


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33

Major changes

Complete by 31 October?

YES

MPs back deal?

Seek (longer)

delay?

YES NO NO

Brexit with new deal

YES NO

Delay

No new deal

No new deal

Minor changes

MPs pass adjusted deal?

Brexit with adjusted

deal

No new deal

31 Oct

YES NO

Referendum

General election

Vote of no confidence

UK and EU agree delay?

No-deal Brexit

Cancel Brexit

31 Oct

No new deal

MPs block no deal?

YES NO

YES NO

Delay

EU’s

requirements for

accepting a delay

(no. 2 & 3)

Likely

Sources: BBC and Swedbank Research


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3 Sep Parliament returns. Labour propose no-

confidence motion

4 Sep

(or 3 Sep if vote as soon as

Commons return,

uncertain if possible)

No-confidence voted upon, government loses

18 Sep (or 17 Sep) 14-day period ends without an alternative

government

19 Sep

Government chooses election date (no

maximum period before an election needs to be

held)

20 Sep Parliament dissolved

25 Oct (or 24 Oct)

Earliest possible polling day if Boris Johnson

ignores convention that elections take place on

a Thu. (24 Oct is a Thu. Only doable if no-

confidence vote is conducted on 3 Sep )

31 Oct

Brexit date. Earliest possible polling day if Boris

Johnson sticks to convention of an election on a

Thu (i.e. 24 Oct is not feasible)


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• Emerging markets: As global economic and market uncertainty is intensifying, the EM outlook is taking a hit. The US-China trade war has escalated. Capital outflows have re-emerged and slowed external demand is weighing on exports. Inflation is falling and central banks have begun easing. The larger economies’ contribution to global growth will dampen.

• China: In 2019, we expect the slowdown in the Chinese economy to accelerate, driven by both cyclical external and structural domestic factors. As a result, this year’s growth will fall to 5.9%, below the government’s target, and down from 6.6% in 2018. In 2020-2021, we expect the slowdown to continue, though cushioned somewhat by further policy stimulus, with annual growth averaging 5.5-5.7%.

• India: Growth has been lower than expected in 2019, due to weaker investment, and is expected to fall this year relative to last year. A weak banking sector weighs on the outlook.

• Brazil: Growth contracted in the first quarter of 2019, due to weaker investment, and is expected to remain low this year. A lengthy reform process is holding back growth pick-up.

• Russia: Economic growth will slow to 1.1% in this year, but is expected to improve to 1.8% in 2020. Monetary and fiscal policies will become more supportive, but weak foreign demand and expected decrease in oil prices will continue to limit growth.


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• Renewed monetary policy easing as the Fed lowered the key interest rate while the signals from other leading central banks are becoming softer. In the USA, we expect three rate cuts during the forecast period. The ECB is also expected to lower the deposit facility rate by 20 bp to -0.6 percent during the autumn, while further QE is in the cards. The Riksbank is expected to resist the international trend, but preparedness is high and the signals are becoming softer. We expect an unchanged policy rate throughout the forecast period.

• The uncertainty remains, which together with more active central banks constitutes further downward pressure on long-term interest rates. It is only in the middle of next year that a very protracted phase with rising interest rates will begin. Bond rates in Sweden and Germany remain in negative territory for much of the forecast period.

• Weak international development puts pressure on both the Swedish and Norwegian krona. We expect those currencies to remain weak throughout the forecast period, despite the fact that neither the Riksbank nor Norges bank eases monetary policy.

• Oil prices have softened over the last months amid lower expectations of the global economic outlook and the escalation of the trade war. OPEC cuts and heightened geopolitical tensions have not been sufficient to counteract heightened market uncertainty. We expect excess supply of oil throughout 2020, which will dampen prices further.


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• Long term rates are held back by softer monetary policy and political concerns

• QE and the other central banks' measures regarding the balance sheet continue to be a significant factor for both interest rate and FX markets.

• Bond rates in Sweden and Germany remain negative for much of the forecast period.


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• Oil prices have softened over the last months amid weakened sentiment about the global economic outlook and escalation of the trade war

• OPEC cuts and geopolitical tensions have not been sufficient to counteract heightened market uncertainty

• We expect excess supply of oil throughout 2020, which will dampen prices further


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• Norway: Growth is remaining above trend, but there are signals that we are at or already past the peak for now. Oil investments boost growth this year, but should abate already in 2020. Inflation is above target and a historically weak NOK cushions negative external impulses, factors that enable Norges Bank to hike again in September to 1.50%. We see this as the last hike from the central bank in this cycle.

• Denmark: The outlook for domestic demand remains good as there are no evident economic imbalances. However, weaker developments abroad and particularly in the Euro area as well as the uncertainties surrounding Brexit are important risks ahead.

• Finland: Economic growth will slow to 1.4% in this year and to 1.2% in 2020. The growth will come primarily from the domestic demand. Labour market will continue to improve, but with considerably subdued pace. Wage growth is expected to pick up.


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• Norges Bank has continued its effort to normalise the policy rate, hiking three times this cycle already.

• At the interim policy meeting in August, the Bank maintained its hiking bias but added that uncertainties had risen.

• Our baseline scenario is that September will be the last hike in this cycle, as 2020 is destined to be clearly weaker in terms of growth momentum.


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• The Danish economy has enjoyed robust growth in recent years as business investments and household spending have expanded and exports have grown.

• The outlook for domestic demand remains good as there are no evident economic imbalances.

• However, weaker developments abroad and particularly in the euro area remain an important risk ahead.


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• Estonia: Economy has been resilient in the weakened external environment in the first half of 2019. However, sentiment indicators and production expectations have worsened. This will limit business investments despite persistently low interest rates. We expect, that GDP growth will slow. In the next two years, Estonian economy will grow below its potential. Demand for labour and, thus, pressure on wages and prices should ease. The slowing real growth of wages will impede the growth of private consumption.

• Latvia: Economic growth is expected to moderate this year to 2.8% on softer domestic demand, as EU funds inflow slows and purchasing power growth loses steam. Given deteriorating global outlook, the growth forecast for 2020 is revised down to 2%. Weaker external demand will hurt export performance, and poorer sentiment will affect the real economy as households and businesses review their consumption and investment plans.

• Lithuania: Strong and well-balanced growth is not yet losing the momentum as previously expected, hence we have revised our GDP forecast up to 3.7% in 2019. Strong wage bill growth, lower inflation and taxes, and higher pensions support consumption. Moreover, net migration has turned positive and is easing labour market tightness. However, the economy is not immune to global problems and we expect growth to slow down sharply to 2% in 2020. Healthy domestic demand will support growth next year, but sectors dependent on external demand are likely to perform worse.


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Sweden Josefin Fransson Maria Wallin Fredholm Laimdota Komare Kjetil Martinsen

Anna Breman Assistant Economist Economist Head of Rates and FX Strategy Norway

Global Head of Macro Research [email protected] [email protected] [email protected] [email protected]

Group Chief Economist +46 8 585 903 05 +46 700 92 87 +371 6744 42 13 +47 9244 72 09

[email protected]

+46 8 700 91 42 Åke Gustafsson Estonia Lithuania Marlene Skjellet Granerud

Senior Economist Tõnu Mertsina Nerijus Mačiulis Economist

Andreas Wallström [email protected] Chief Economist Estonia Deputy Group Chief Economist [email protected]

Head of Forecasting +46 8 700 91 45 [email protected] Chief Economist Lithuania +47 479430 53 32

Deputy Head of Macro Research Sweden +372 888 75 89 [email protected]

andreas.wallströ[email protected] Knut Hallberg +370 5258 22 37

+46 8 700 93 07 Senior Economist Liis Elmik

[email protected] Senior Economist Greta Ilekytė

Robin Ahlén +46 8 700 93 17 [email protected] Economist

Junior Economist +372 888 72 06 [email protected]

[email protected] Alexandra Igel +370 5258 22 75

+46 8 700 93 08 Economist Marianna Rõbinskaja

[email protected] Economist Vytenis Šimkus

Cathrine Danin +46 8 700 93 03 [email protected] Senior Economist

Senior Economist +372 888 79 25 [email protected]

[email protected] Maija Kaartinen +370 6945 71 95

+46 8 700 92 97 Economist Latvia

[email protected] Agnese Buceniece Norway

Jana Eklund +46 8 700 92 73 Acting Chief Economist Latvia Öystein Börsum

Senior Econometrician [email protected] Chief Economist Norway

[email protected] +371 6744 58 75 Chief Credit Strategist Norway

+46 8 585 946 04 [email protected]

+47 9950 03 92

Swedbank Macro Research

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What our research is based on

Swedbank Macro Research, a unit within Large Corporates & Institutions, bases the research on a variety of aspects and analysis. For example: A fundamental assessment of the cyclical and structural economic, current or expected market sentiment, expected or actual changes in credit rating, and internal or external circumstances affecting the pricing of selected FX and fixed income instruments. Based on the type of investment recommendation, the time horizon can range from short-term up to 12 months.

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August 27, 2019