OREANDA-NEWS. May 30, 2011. The latest issue of Nordic Outlook, a SEB quarterly on the economic situation of Scandinavia, takes a somewhat more cautious attitude as to the growth trends of world economy compared to February, reported the press-centre of SEB Bank.

Hardo Pajula Economist of SEB
The latest issue of Nordic Outlook, a SEB quarterly on the economic situation of Scandinavia, takes a somewhat more cautious attitude as to the growth trends of world economy compared to February. Although in Stockholm the growth forecasts of a majority of leading countries were revised down, the changes made were not outstanding: SEB decreased the growth prognosis of the world economy from 4.5% in February to 4.3% and the next year’s growth prognosis from 4.6% to 4.5% (both are cases of gross production based on purchase power parity). The main spanners in the works of economic growth during the last three months were: 1) the US demonstrating weaker first-quarter economic results than expected; 2) the earthquake in Japan; 3) the escalating debt crisis in the periphery of Europe; and 4) the skyrocketing price of oil due to the Arab uprisings.

According to the economists of the SEB group the rewriting of the debt contracts of Greece has become unavoidable by now and it is highly probable that the same scenario is waiting for Ireland and Portugal. In addition, it is likely that Spain will sooner or later apply for a rescue package from Brussels and the IMF. As for Greece, the SEB department of economic studies in Stockholm foresees as most probable a scenario in which the creditors’ claims will be exchanged for new securities backed up by eurozone governments, implying that 50% of private investors’ claims will be written off.

Economic growth hopes in Sweden and the Baltic region are driven by export
While the growth prognosis for Sweden’s economy remained the same, authors of the report foresaw that rising interest payments of home loans and escalating prices of food and energy carriers will slow down private consumption in the following two quarters, so that the role of export as the driver of economic growth becomes increasingly important.

However, the high growth rate of export is expected to continue its increase and even despite of the continuous strengthening of the Swedish krona, for which the group’s economists see ample capacity. The future of the export sector will be heavily influenced by collective salary negotiations starting in 2012, in which the position of trade unions has been considerably improved by a huge demand for labour during the last quarters. Authors of the report believe that a strained labour market and gradually mounting inflation expectations will force Sweden’s central bank to stay on its course of interest-increasing, which will not influence foreign currencies as heavily as a few years back, when the Swedish krona strengthened by about 20%, due to a similar policy of the European Central Bank. In the event of a setback Sweden’s economy is still backed up by a strong power reserve – its excellent financial state. This means that next year its government debt / GDP ratio will drop extremely low.

Economic growth in the Baltic countries is driven by export. Domestic demand is still inhibited by the repayment of loans. Compared to February, SEB decreased the economic growth prognosis of Latvia, specifically 0.7% percentage points for 2012 (it is true that a major cut was already made in the overview for Eastern Europe published in March).

Economic growth forecast for Estonia was not changed in comparison with the previous Nordic Outlook, but the yearly inflation prognosis for 2011 was increased from 4% to 5%, fuelled mainly by recent developments in the world oil market.