Mikael Johansson SEB Economic Research March 6 2003

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Mikael JohanssonSEB Economic ResearchMarch 6
2003
WAR - AND THEN?
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WAR IS LIKELY

• US ambition is clear
• Escalation continues
• European dissent strengthens Bushs resolve
• War in March, with or without UN
• Saddam will fall within a month
• but risks abound of worse scenarios

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OIL PRICE IS SPIKING
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RELIEF RALLY WILL COME

• When the shadow of war disappears and the oil
  price falls
• the most pessimistic scenarios will be priced
  out
• Stock markets, bond yields and USD will rise
• Tactical re-allocation
• BUT Disappointments will follow...

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US OVER-INVESTMENTS AND UNDER-SAVING
6
US CONFIDENCE MOVES IN DIFFERENT DIRECTIONS
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US INVESTMENTS DELAYED
Capacity utilisation in industry, per cent (LHS)
Investments excl construction, y/y (RHS)
8
US SAVINGS ADJUSTMENT NOT COMPLETED
Savings ratio (LHS)
Net wealth ratio (RHS)
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US GDP
Annualised percentage change
Per cent
Per cent
8
8
6
6
Forecast SEB
4
4
2
2
0
0
-2
-2
2004
2003
2002
2001
2000
1999
Sources EcoWin, SEB
10
JAPAN FIRST RAYS OF LIGHT?

• The third recession in a decade - finally
  receding?
• Deflation, bond yield rally
• Conflicting demands on economic policy
• Koizumi Gorbatchev - not Thatcher
• BoJ will reflate next year
• Bond yields will turn up - new strains on
  financial system

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UK HOUSE PRICE BUBBLE ABOUT TO BURST
1985-1994
1995-2003
1985
1989
1987
1991
1993
1998
2000
2002
1996
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UK A FRAGILE RECOVERY

• Lower home prices means weaker private
  consumption
• Manufacturing is recovering slowly from recession
• Public finances are weakening
• GDP growth 2.0 2003, 2.3 2004

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EURO ZONE GERMANY A DRAG ANCHOR

• Domestic stagnation, weak employment
• Remaining pains from unification
• Rigid labour market
• Germany cannot devalue - and stabilisation policy
  is insufficient
• Several years of reforms and cost-cutting
  necessary
• Political crisis - but no U-turn yet

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GERMANY EMPLOYMENT
Index 1991100
110
110

108
108
106
106
104
104
Euro zone excl. Germany
102
102
Germany
100
100
98
98
96
96
01
00
99
98
97
96
95
94
93
92
91
Sources OECD, SEB
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EURO ZONE BUDGET PROBLEMSPublic sector
financial savings 2002
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ECONOMIC POLICY RE-EXAMINED IN EMU

• Budget problems in several countries
• Credibility threatened
• Stability pact will be reformed
• Sustainable debt in focus
• Separate cyclical and structural deficits
• ECB Moving towards a symmetric - higher -
  inflation target?
• But the first pillar will (unfortunately) remain

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FINANCIAL MARKETS GREAT UNCERTAINTY

• Huge span between best and worst case
• Deflation, house price fall and protracted war
• Relief rally can be catalyst for recovery
• Means uncertainty...
• herd behaviour and volatility

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LOW KEY RATES
Per cent
Per cent
Forecast
SEB
US Fed funds
EMU Refi rate
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BOND YIELDS
Forecast SEB
US
Germany
20
EUR/USD
Forecast
SEB
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SWEDEN INERT - IN STEP WITH EURO ZONE

• Tax hikes, appreciating SEK and sluggish global
  economy delay the recovery
• Disposable income growth slows down, but savings
  will level out and consumption is supported
• Unemployment will rise, inflation low
• Budget The good times are over

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SWEDEN GDP
Y-o-y change
Per cent
Per cent
6
6
5
5
Forecast SEB
4
4
3
3
2
2
1
1
0
0
-1
-1
04
03
02
01
00
99
98
97
96
Sources EcoWin, SEB
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SWEDEN EMU REFERENDUMSEP 14

• Dead race now - outcome uncertain
• UK will say Wait and see
• German crisis and Convention federalism may
  strengthen No side
• Yes More resources and PM Persson
• Unions (LO) and SDP will make a deal on buffer
  funds

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SWEDEN TIME TABLE IF YES

• ERM entry already this autumn
• Central parity EUR/SEK 8.70
• Fluctuation band of /- 2,25
• Assessment of Maastricht criteria during spring
  2005
• Council decides in summer of 2005
• Euro introduction (Big Bang) 2006

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DENMARK GDP AND INFLATION
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THE BALTICS STILL STRONG

• Robust domestic demand - risk of overheating in
  Estonia
• Growing real wages, low interest rates lifts
  private consumption
• EU-membership, low interest rates supports
  investments
• Eastern and Central European markets relatively
  strong
• A down side risk German stagnation!

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THE BALTICS GDP
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LITHUANIA HARVEST TIME!

• After the Iraqi war Not much euro appreciation
  left, oil price at optimal levels (20-25 USD)
• Underlying trends Confidence after budget
  consolidation, households regain purchasing
  power, growing price pressure but low, modest
  current account deficit