Strategy & Macro Research - Swedbank Economic Outlook 8 April, 2014

Strategy & Macro Research

Swedbank Economic Outlook

Update April 2014

Swedish economy stands out but not for long

The global economy continues to diverge, with the US as an engine and where emerging markets grow at a slower pace. Risks have risen significantly: a Chinese slowdown, threats of European deflation and Russia's geopolitical expansion. The Swedish economy will slow in 2015 when households come under pressure from higher interest expenses and taxes.

US households bear a heavy burden in the global economy

Mature economies in North America and Europe will remain the pillar of global economic development in the next two years. In the US, fiscal policy and the winter weather are loosening their grip on economic activity, and in the Eurozone growth has bottomed out. The trend in the emerging economies is expected to be more volatile, and our Nordic neighbours are losing momentum.

Growth becoming more uncertain as global tensions rise

Despite increased global growth in our main scenario, risks have risen significantly this spring. Russian aggression in our neighbouring region raises the risk not only of slower trade and higher energy prices, but also greater uncertainty among households and companies as well as in financial markets. We have revised Chinese growth downward, but imbalances have grown and an accelerated slowdown cant be ruled out. In the Eurozone, prices continue to trend lower and the likelihood of Japan-like deflation is no longer zero.

Swedish economy stands out in 2014, before reality catches up in 2015

The growth burst late last year has been followed by slower expansion in 2014, but Swedish growth of 3% is still standing out. The improvement in household finances, thanks to tax cuts, lower interest rates and energy prices, and job growth, is the main driver of domestic demand. With rising interest rates and high debt levels, the trend will slow next year and be only partly compensated by rising business investment. High unemployment, and in particular a growing share of structural unemployed, will be the main challenge in the short and medium term, and the government after the September election will have to address the issue with a limited fiscal room.

Magnus Alvesson Head of Economic Forecasting Magnus.alvesson@swedbank.se +46 70 610 3341 Anna Fellnder Chief Economist Anna.fellander@swedbank.se +46 76 788 0811 April 8, 2014 Please see important disclosures at the end this document document Please see important disclosures at the end ofof this Page 1 of 7

Strategy & Macro Research - Update April 2014

Global recovery threatened by crisis spots

Global conditions will be moderately supportive, with strong growth in some export markets (the US), but slower in others (EMU and Norway). Risks are rising, in particular in connection with growing Chinese imbalances, but also related to the Russia-Ukraine conflict. At this point, this would mainly impact the Baltic countries. We expect the Swedish economy to slow in 2015 after rapid growth in late 2013 and in 2014. This is mainly due to domestic imbalances such as growing household debt, but also due to pressures on Swedish competitiveness. Fiscal policy is expected to tighten, but monetary policy will be slower to change due to low inflation and the interest rate sensitivity of households.

Steady global growth not without risks

US economy picks up after harsh winter
We are revising our global growth forecast marginally lower for the next two years, but between countries the changes are more substantial. The harsh US winter took a toll on the economy in the first quarter of 2014, all of which wont be fully recuperated. For the rest of the year and into the next, however, we see solid US growth driven primarily by domestic demand. Herein lies the biggest weakness as well. Household finances are becoming stretched, with a falling savings rate. With no pick up in employment or increased borrowing, private consumption will slow. The US residential sector is also meeting resistance. Housing affordability is decreasing, and lower demand is likely to slow down construction. Eurozone growth is set to gradually pick up in 2014 after two years of negative growth. Conditions have especially improved in southern Europe, including Italy and Spain as well as France, where the Purchasing Managers Index has recovered rapidly in recent months. The German economy is solid but remains vulnerable to a Chinese slowdown and increased trade sanctions vis--vis Russia. The EMU faces the additional challenge of a threat of deflation and weak banking system. The ongoing stress tests of major banks could cause a renewed lack of confidence in the banking system, which would have spill-over effects on sovereigns as well.
Swedbanks global GDP forecast 1/ (annual percentage change)
USA EMU countries Germany France Italy Spain Finland UK Denmark Norw ay Japan China India Brazil Russia Global GDP in PPP 2/ Global GDP in i US$ 2012 2,8 -0,6 0,9 0,0 -2,4 -1,6 -1,0 0,2 -0,4 3,3 1,4 7,7 4,8 1,0 3,5 3,0 2,5 1,9 -0,3 0,5 0,3 -1,8 -1,2 -1,4 1,7 0,4 2,1 1,5 7,7 4,6 2,3 1,3 2,9 2,3 2013 (1,9) (-0,4) (0,6) (0,1) (-1,9) (-1,2) (-1,2) (1,9) (0,4) (1,8) (1,7) (7,7) (4,0) (2,4) (1,3) (2,8) (2,3) 3,0 1,3 2,0 1,1 0,4 1,0 0,2 2,8 1,6 1,8 1,4 6,9 5,5 2,2 0,8 3,4 2,9 2014f (3,2) (1,1) (2,1) (0,6) (0,1) (0,9) (0,8) (2,9) (2,0) (1,7) (1,8) (6,9) (6,3) (2,8) (2,0) (3,5) (3,0) 3,1 1,9 2,2 1,9 1,4 1,8 1,3 2,4 2,0 2,1 1,0 6,5 6,8 2,5 0,8 3,7 3,3 2015f (3,1) (1,9) (2,2) (1,9) (1,4) (1,8) (1,8) (2,4) (2,1) (2,1) (0,9) (7,1) (5,8) (3,9) (2,3) (3,8) (3,4)

Eurozone growth has bottomed out

1/ October 2013 f orecast in parenthesis; Countries representing around 70 % of the global economy . 2/ Weights f rom World Bank 2011 hav e been used. Sources: National statistics and Swedbank.

Potential China slowdown looms large

Emerging economies still show the highest growths rates, in particular China and India, while we expect others such as Brazil to face significant headwinds in the next two years. The imbalances in China, including indebtedness, rapidly rising housing prices and the expansion of the shadow banking sector, are a major concern and risk, however. A sharperthan-expected slowdown in Chinese growth would have ripple effects in the first instance on other export-dependent emerging markets but also on the overall global economy. Recently, however, the Chinese authorities have announced a stimulus package, including infrastructure investments, to boost growth.

April 8, 2014

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Strategy & Macro Research - Update April 2014

Finland struggles with domestic and external pressures
In our more immediate neighbourhood, the Nordic countries, Denmark continues to tread water, still reeling from its housing crash, while Norway is slowing owing to less investment in the oil and housing sectors. In Finland, an already precarious situation is made worse by the recent turmoil in the Russian economy. The Finnish economy is struggling with excessive cost levels while at the same time being exposed to the Russian market and dependent on few sectors and companies. Recent fiscal adjustments have caused political strains, which will take a toll on growth in the short term. We also expect the Baltic countries to be affected by less trade with Russia, though growth rates will remain positive. In Estonia, inflation will slow this year and pressures on the labour market will abate somewhat, Next year competitiveness will improve. Latvia experienced slower-than-expected growth at the end of 2013, which, when combined with the impact on trade and confidence of the Russia crisis, has caused growth forecasts to be revised downward for both 2014 and 2015. The impact on the Lithuanian economy is slightly lower, but still negative. With less inflationary pressure, Lithuania is expected to meet all Maastricht criteria and join EMU in 2015. Overall, the Baltic economies will continue to grow, but somewhat slower than previously forecast. Global policy is becoming more supportive. The fiscal policy drag is decreasing in the US and EMU, and monetary policy remains expansionary. We expect a gradual tightening by the Federal Reserve as bond buying ends by October this year (or at the latest December). Although Fed Chair Janet Yellen suggested that the fed funds rate could be hiked as soon as six months after the quantitative easing ends, the slow decrease in unemployment will, in our view, delay this move until mid-2015. The European Central Bank (ECB), on the other hand, will remain loose with a bias towards easing. As a result, we expect US market interest rates to continue to rise with the US government 10-year bond reaching 3.80 percent by year-end 2015. Eurozone rates will lag, and we expect the US dollar to gain in value relative to the euro.

Slower growth due to the Russia crisis

Economic policy will become slightly less supportive

Interest and exchange rate assumptions, %

2014 7-Apr Policy rates Federal Reserve, USA European Central Bank Bank of England Bank of Japan Governm ent bond rates Germany 2y Germany 10y US 2y US 10y Exchange rates EUR/USD USD/CNY USD/JPY EUR/GBP
So urces: Reuters Eco win and Swedbank.

2014 2014 2015 2015 30 Jun 31 Dec 30 Jun 31 Dec 0,25 0,25 0,50 0,10 0,30 1,90 0,70 3,00 1,34 6,2 103 0,82 0,25 0,25 0,50 0,10 0,40 2,10 1,10 3,40 1,30 6,1 107 0,80 0,50 0,25 0,50 0,10 0,65 2,35 1,70 3,60 1,25 6,0 107 0,78 1,00 0,50 0,75 0,10 0,90 2,60 2,10 3,80 1,25 5,9 110 0,78

0,25 0,25 0,50 0,10 0,17 1,54 0,41 2,73 1,38 6,2 104 0,83

Risks are on the rise

A trade war due to the Russia-Ukraine crisis cannot be ruled out
In January we were quite confident that the global economy was heading toward a steady recovery, and although our view is more or less unchanged, negative risks have increased. The main revision compared to our January forecast is the geopolitical tensions that resulted from Russias annexation of Crimea. The sanctions imposed by Western countries on Russia are not as yet having a significant impact on the global economy. But should the conflict escalate to include broader trade sanctions, including energy, the effect on energy prices and confidence would have a noticeable impact on growth. We also believe that the risk of deflation in the Eurozone has increased somewhat due to the downward price pressures we have seen in the early part of 2014. The consequences of a broad and persistent fall in prices, i.e., deflation, would be serious for the Eurozones recovery, but our expectations are that inflation will start to rise in 2015. Finally, there is still a risk of an uncontrollable downturn in the Chinese economy, which would have significant consequences on commodity dependent emerging markets in particular, though we still expect only a moderate downturn in real Chinese growth.

Threats of eurozone deflation and China crisis remain

April 8, 2014

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Strategy & Macro Research - Update April 2014

Sweden strong 2014 followed by a tighter 2015

Strong finish in 2013 is continuing in 2014, but not without risks
Last year ended with surprisingly strong growth, and even though the gains were broadbased, with positive surprises in spending, investment and export demand, inventory buildup still accounted for a significant share. We expect growth to remain positive in 2014. Global conditions will be favourable, not least growth in important export markets such as the US and, to a lesser extent, Norway and the Eurozone, but risks have increased as well. For Sweden, the biggest risk is of a Chinese slowdown, which would affect external demand through German exports. An escalation in the trade war with Russia (causing higher energy prices) and deflation in the Eurozone would also have significant consequences.
Key Economic indicators, 2012-2015 1/
2012 Real GDP (calendar adjusted) Industrial production CPI index, average CPI, end of period CPIF, average 2/ CPIF, end of period Labour force (15-74) Unemployment rate (15-74), % of labor force Employment (15-74) Nominal hourly w age w hole economy, average Savings ratio (households), % Real disposable income (households) Current account balance, % of GDP General government budget balance, % of GDP 3/ General government debt, % of GDP 4/
1 / A nnual percentage gro wth, unless o therwise indicated. 3/ A s measured by general go vernment net lending.

2013e 1,5 -1,3 0,0 0,1 0,9 0,8 1,1 8,0 1,1 2,6 12,0 2,6 6,1 -1,4 41,0

2014f 2,9 4,5 0,1 0,7 0,6 1,0 0,9 7,9 1,0 2,8 11,8 2,8 5,9 -1,7 41,1

2015f 2,7 5,0 1,9 2,4 1,6 1,8 0,6 7,4 1,2 3,2 10,5 0,8 5,8 -0,7 39,9

1,3 -3,0 0,9 -0,1 1,0 1,0 0,8 8,0 0,6 3,0 12,1 3,4 6,6 -0,7 38,3

2/ CP I with fixed interest rates. 4/ A cco rding to the M aastricht criterio n. Sources: Statistics Sweden and Swedbank.

Housing investment revised upward, net exports unchanged

As a whole, we expect calendar-adjusted growth to reach 2.9% in 2014, before slowing to 2.7% in 2015. Exports will continue to recover, but will be offset by growing imports, and the contribution from foreign trade will remain low. We are revising business investment upward, especially in terms of housing, and as capacity utilization rises capital spending will increase as well. Household finances continue to be the main growth engine, especially in 2014, as tax cuts, low interest rates and gradual job growth have a positive effect on disposable income. As a result, spending is on the rise. We expect fiscal and monetary policy to be tightened in 2015, however, leaving households with less room for spending. Real disposable income is increasing at a considerably slower pace and households are dipping into their savings to maintain their spending level.
Swedbank's GDP Forecast - Sweden
Changes in volum e, % Households' consumption expenditure Government consumption expenditure Gross fixed capital formation private, excl. housing public housing Change in inventories
1/

2012 1,6 0,3 3,3 7,5 4,0 -11,2 -1,3 0,7 -0,6 0,8 1,3 1,5 0,6

2013e 2,0 2,0 -1,3 -2,6 -3,2 5,8 0,2 -0,9 -1,2 1,5 1,5 1,2 0,1 (1,8) (1,2) (-0,8) (-3,0) (-0,8) (7,7) (-0,3) (-1,5) (-2,2) (1,0) (1,0) (1,1) (0,2) 2,8 0,9 5,3 4,6 1,3 0,3 3,9 4,7 2,8 2,9 2,6

2014f (2,9) (0,9) (5,7) (5,5) (1,5) (0,3) (3,5) (3,7) (3,1) (3,2) (2,7) (0,1) 2,3 1,6 7,4 8,4 3,7 6,8 0,0 6,5 7,3 2,9 2,7 2,9 0,0

2015f (2,6) (1,1) (6,8) (8,9) (1,9) (3,8) (-0,0) (6,5) (7,2) (3,0) (2,7) (2,9) (0,1)

11,6 (10,1)

Exports, goods and services Imports, goods and services GDP GDP, calendar adjusted Domestic demand Net exports 1/
1/

-0,1

1 / Co ntributio n to GDP gro wth.

So urces: Statistics Sweden and Swedbank.

Low inflation softens the Riksbank

April 8, 2014

We are revising our inflation forecast downward from our January forecast. Weak wage pressure, continued low import prices, a stronger Swedish krona and increased price
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Strategy & Macro Research - Update April 2014

pressure through e-commerce are constraining price increases. As a result, we expect the Riksbank to lower its repo rate path and delay the rate hikes. We cannot rule out a repo rate cut later this year if inflation continues to surprise on the negative side and if the governments Financial Stability Board takes action to dampen the household debt burden.

Interest and exchange rate assumptions

Outcom e Forecast 2014 2014 2014 2015 2015 07-apr 30 Jun 31 Dec 30 Jun 31 Dec Interest rates (%) Policy rate 10-yr. gvt bond Exchange rates EUR/SEK USD/SEK KIX (SEK) 1/ 0,75 2,10 9,0 6,6 104,7 0,75 2,40 8,9 6,6 103,4 0,75 2,60 8,7 6,7 102,6 1,00 2,90 8,7 6,8 102,6 1,25 3,20 8,6 6,9 102,2

1 / To tal co mpetitiveness weights. Trade-weighted exchange rate index fo r SEK.

Despite a stronger krona Sweden remains competitive

So urces: Reuters Eco win and Swedbank.

We expect the krona to continue to rise in trade-weighted terms (KIX) during the forecast period with competitive pressures on Swedish exports offset by strong productivity gains and relatively modest wage increases. This means that the real exchange rate at the end of last year was at the same level as before the financial crisis in 2008-09. The krona is expected to appreciate mainly against the euro and the Norwegian krone, while losing ground against the US dollar.

April 8, 2014

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Strategy & Macro Research - Update April 2014

Contacts
Macro Research
Olof Manner olof.manner@swedbank.se Head of Macro +46 (0)70 567 9312 Magnus Alvesson magnus.alvesson@swedbank.se Head of Economic Forecasting +468 5859 33 41 Teele Reivik teele.reivik@swedbank.ee Economist +372 888 79 25

Anna Fellnder anna.fellander@swedbank.se Chief Economist Sweden +468 700 99 64

Knut Hallberg knut.hallberg@swedbank.se Senior Economist +468 700 93 17

Kristilla Skrzkalne kristilla.skruzkalne@swedbank.lv Economist +371 6744 58 44 Lija Strauna lija.strasuna@swedbank.lv Senior Economist +371 6744 58 75 Laura Galdikien laura.galdikiene@swedbank.lt Senior Economist +370 5258 22 75 Vaiva ekut vaiva.seckute@swedbank.lt Senior Economist +370 5258 21 56

Harald-Magnus Andreassen harald.magnus.andreassen@swedbank.no Chief Economist Norway +472 311 82 60

Jrgen Kennemar jorgen.kennemar@swedbank.se Senior Economist +468 700 98 04

Tnu Mertsina tonu.mertsina@swedbank.ee Chief Economist Estonia +372 888 75 89

ke Gustafsson ake.gustafsson@swedbank.se Senior Economist +468 700 91 45

Nerijus Maiulis nerijus.maciulis@swedbank.lt Chief Economist Lithuania +370 5258 22 37

Anna Breman anna.breman@swedbank.se Senior Economist +468 700 91 42

Mrti Kazks martins.kazaks@swedbank.lv Deputy Group Chief Economist Chief Economist Latvia +371 6744 58 59

Cathrine Danin cathrine.danin@swedbank.se Economist +468 5859 34 92

Strategy
Anders Eklf anders.eklof@swedbank.se Chief FX Strategist +468 700 91 38

ystein Brsum Ott Jalakas ott.jalakas@swedbank.se Head of Strategy +468 700 99 12 Synne Holbk-Hanssen synne.holbaek-hanssen@swedbank.no Reserach Assistant +47 23 23 82 63 Hans Gustafson hans.gustafson@swedbank.se Chief EM Economist & Strategist +468 700 91 47 Liis Elmik liis.elmik@swedbank.ee Senior Economist +372 888 72 06 oystein.borsum@swedbank.no Senior Economist +479 950 03 92 Jerk Matero jerk.matero@swedbank.se Chief IR Strategist +468 700 99 76

April 8, 2014

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Strategy & Macro Research - Update April 2014

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