New Nordic Outlook Predicts Deeper Recession Despite Aggressive Stimulus Policies

The latest Nordic Outlook published by SEB says that the most acute phase of the financial crisis is probably past, but the situation remains strained. The crisis is now having very potent contagious effects on the real economy. The world economic downturn is becoming more and more synchronised. Gross Domestic Product in the Organsation for Economic Co-operation and Development (OECD) countries will fall by more than 1% in 2009 – the weakest performance since World War Two.

Meanwhile, powerful, synchronised global stimulus policies are taking shape. Interest rates are being cut significantly as the threat scenarios of central banks are increasingly dominated by recession, financial crisis and deflation worries. In addition, fiscal policy is being used on a broad front to soften the downturn. Stimulus packages will contribute to a slight recovery in 2010, a year that will still be dominated by the economic slump.

The downturn in the Swedish economy is continuing at a rapid pace. Next year GDP will fall by 1.3%, and economic weakness will persist in 2010. The recession will have a growing impact on the labour market. The job market will shrink by nearly 150,000 people altogether, and unemployment will climb to nearly 10% by the end of 2010. The Riksbank will cut its repo rate at least to 1.5% next summer. The government will implement additional fiscal stimulus packages, and by 2010 Sweden’s annual surpluses in public sector finances will have turned into a deficit equivalent to 3.5% of GDP.

The consolidation of the global credit market will dominate economic developments in the next couple of years. The global economy will suffer on a broad front from tighter lending practices, falling asset prices, increased saving and reduced risk-taking. The US will undergo one of its deepest recession in modern times. Unemployment will climb to 9%. Lower resource utilisation will squeeze wages and prices. We expect a sharply declining Consumer Price Index for a while, and the battle against unemployment and falling prices will be the most important economic policy tasks. The Federal Reserve will cut its key interest rate one more time to 0.50 per cent before the end of 2008 and maintain this rate during both 2009 and 2010. The new Barack Obama administration will launch a large stimulus package, which will help soften the downward economic spiral, but this policy will meanwhile lead to major strains in public sector finances.

Economic developments in Western Europe are closely following US trends. Higher household savings and balanced foreign trade points towards somewhat greater resilience than in the US, but on the other hand, home prices in many European countries are at least as excessive as in the US. Economic stimulus measures will also be less aggressive in Europe. The European Central Bank will continue cutting its refi rate, which will reach 1% next autumn.


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