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- Our new report on the economy signals a slow down but also great uncertainty
Our new report on the economy signals a slow down but also great uncertainty
26-01-2012 12:56
In our latest report on the global and Swedish economies, we have revised growth downwards, in both Sweden and abroad, compared with our October forecast.
We now anticipate the world economy growing by just over 3% this year and next year, that the Euro zone will, in principle, see two lost years in economic terms, and that the Swedish economy will almost come to a stand still this year with a calendar adjusted growth of 0.6% before recovering next year when GDP will rise by 1.8%.
A few reflections are in order. Our forecast is unusually uncertain. Of course, certain forecasters usually say exactly this, but when you look at our scenarios, we can see that there is remarkably little difference between our main scenario and the worse scenarios. There are clearly big risks on the down side.
What is more, the global forecast is based on how we view developments in the Euro zone, and it is here the greatest uncertainly lies, as the outlooks are highly dependent on what decisions the policy makers take within the Euro zone, e.g. politicians and representatives of the European Central Bank. Rather than economists, we need the help of political scientists and psychologists to try to understand in which direction the Euro zone is heading, or perhaps even better, a combination of all three.
We give our main scenario a 55% probability and build further on the optimism that has emerged in recent times when it comes to crisis management and above all the ECB's greater willingness to provide liquidity support to the region. Even though it is risky to draw conclusions from such short trends as these, there are signs that crisis management was given more urgency towards the end of last year, and that the ECB has greater confidence in the Euro politicians with the finance packages, the bringing forward of the ESM to the middle of this year (rather than in next year as previously planned), and even the new governments in the crisis countries – who have speeded up the political reform process and are tackling government finances.
We give a 40% probability to poorer scenario that very largely resembles last year's backward steps, i.e. not that much less likely than our main scenario. Here there is scope for set backs when it comes to the finance packages, Greek negotiations on private involvement and reform programmes, and even that the support measures prove to be inadequate if the larger countries suffer more serious problems, such as e.g. Italy, Spain and France.
We also have a scenario, with just a 5% probability, that includes a breakdown of the currency union. We envisage the costs of a collapse to be far greater than the costs of saving the partnership. That the probability is not zero is due to there being a risk that the political process fails in one or several of the stronger or weaker countries respectively. In the case of the former, the currency would appreciate and threaten competitiveness, and in the latter case, if the crisis country chose to leave, it would suffer a slump, capital flight and a collapse in government administration and the bank system.
Hitherto, Sweden has managed quite well in terms of both growth and employment. However, GDP appears to have shrunk in the fourth quarter, primarily in terms of export orders, industrial output and a weakening in confidence factors. A great deal points to another fall in GDP in the first quarter of this year. Technically speaking, we anticipate a recession but with growth in GDP on an annual basis in both 2012 and 2013. This is not the case in the crisis countries in Europe where e.g. Greece is expected to enter its sixth year of recession next year.
We need to avoid becoming fixated on the technical concept of recession, as we do not have the same imbalances as the crisis countries and have the opportunity to witness a recovery that will gain in strength. However, there is a risk that economic policy will be too austere, that the Swedish RIksbank elects to stick to its current repo rate, and that the government becomes far too cautious in its fiscal policy.
Finally, there is nothing wrong with a touch of humility when it comes to the outlook for Sweden compared with the rest of Europe. We are in a better position, although on the other hand, we are vulnerable to poorer economic growth outside Sweden due to our significant export sector. How the housing market develops and household debt can also put the economy at risk as we move forward. The fact that things are better for us than many other countries today, is no guarantee of favourable growth in a few years time. It is a case of continuously pursuing an economic policy that reduces the risk of imbalances and bubbles in an economy. Sweden has come a long way in that respect, but we are not home and dry just yet.
Cecilia Hermansson
