Hints on global and regional economy growth from Nordic Financial Group

POHJOLA'S ANALYSTS: YIELDING RETURNS IN A SLOW GROWTH ENVIRONMENT

There is a fragile global economic recovery underway. Emerging economies, led by China, will once again remain the main engines of global economic growth while developed countries will plod along. The US economy will slow to around 2% and the euro area expects zero growth. The fiscal policy is still a drag on growth in developed countries. Fiscal policy adjustment has advanced more in the euro area than in the USA. The current extremely easy global monetary policy will help compensate for the negative effects of fiscal policy on growth.

- In asset allocation, we will overweight equities and corporate bonds and underweight government bonds. Our recommendation for the allocation of commodities is close to neutral. According to the analysts, the recommendation is affected by reasonably positive attitude to risk appetite, return potential in equities supported by accelerating profit growth and dividends, expectations of higher long-term rates in the USA and the higher return/risk potential of high-yield corporate bonds in dollars than bonds in emerging markets.

The overweight equity exposure is justified by the fact that the gradual global economic recovery will give some support to companies' profit performance. Companies in Europe and the USA are revising down their profit forecasts to a lesser extent.

- Stocks have gained considerably but the continued decline in equity risk premiums as the euro crisis eases, declining trend of corrections to negative forecasts and low return expectations of alternative investments argue for our positive view of equities, explains Jarkko Soikkeli, Equity Strategist.

- Our favourite sectors for early 2013 are energy, consumer goods and construction. When it comes to other sectors, we take a more cautious view of media, forest industry and healthcare. Our favourite stocks for early 2013 are Metso Corporation, Metsä Board, Neste Oil Corporation, Nokian Tyres Plc and YIT Corporation. At the same time, we recommend avoiding the following stocks: Orion Corporation, Pöyry PLC, Sanoma Corporation, Tieto Corporation and UPM-Kymmene Corporation, continues Soikkeli.

In the bond market, Pohjola's analysts expect the Riksbank to cut its key rate twice by 25 basis points and the ECB once by 25 basis points. Economic fundamentals in both Sweden and the Eurozone also argue for lower money market rates and short swap rates. With respect to long-term rates, the greatest upward pressure is on US interest rates. According to the analysts, the recommended duration in the Eurozone is seven years.

- We expect corporate bonds to continue to gain momentum and risk premiums to continue to decline moderately. In our asset allocation recommendation, we shift to an overweight in high-yield bonds and, to a moderate extent, Investment Grade bonds. We recommend maturities of over three years. When it comes to Finnish corporate bonds, our view is that Nokia Corporation and Nokian Tyres Plc exhibit the most attractive the risk/return potential, says Jukka Ruotinen, Head of Fixed Income and FX Research.

- Although we believe that the euro will strengthen against the US dollar in the long run, we expect the currency pair to weaken in the next few months, sent down by lowering euro rates. We also expect heightening expectations of interest rate cuts to weaken the Swedish krona. In the meanwhile, the Russian rouble will benefit from higher crude oil prices and the stabilisation of capital flows.

Our favourite commodity is crude oil due to geopolitical risks and the constrained demand/supply picture. A positive macroeconomic sentiment is also a driver for movements in crude prices. It is possible of investors to benefit from this because the forward curve for crude oil market price development is declining. The change of power in China will, for its part, foster developments in investments in the country and thus demand for base metals too. Pohjola's analysts keep, however, commodity allocation neutral because of the risks associated with the prices of natural gas and agricultural products.

Pohjola Bank plc

Pohjola is a Finnish financial services group which provides its corporate and institutional customers with a diverse range of banking, non-life insurance and asset management services and private individuals with an extensive range of non-life insurance and private banking services. 

Pohjola Bank plc (Pohjola) is part of OP-Pohjola Group, the leading financial services group in Finland. Pohjola acts as the Group's central bank and is responsible for the Group's international operations. OP-Pohjola Group consists of over 200 member cooperative banks and the Group's central institution, OP-Pohjola Group Central Cooperative, with its subsidiaries and closely-related companies, the largest of which is Pohjola.

source: Thomson Reuters One

Economic Outlook - Sweden 2013: Unemployment and business climate.

The significant decline in industrial production seen earlier in the fall continues. The business cycle will bottom out by summer 2013 followed by weak recovery. Unemployment will rise despite an unused labour market potential corresponding to one million jobs. Forecasted GNP growth for Sweden in 2013 is 0.3% lower. All this according to the Confederation of Swedish Enterprise economic outlook report for the fourth quarter entitled ‘The Million-wide Gap’.


”Exports to Europe shrink significantly due to cutbacks many countries have implemented to address their run-away national debt problems. Swedish manufactures were first out with redundancy notices, but this wave has spread to domestic sectors as household spending is negatively impacted by fears of rising unemployment,” noted Stefan Fölster, Chief Economist for the Confederation of Swedish Enterprise.

The current forecast shows increasing unemployment, which will remain high even as GNP growth begins to recover in the fall.

The report outlook also shows that Sweden has unused labour potential comparable to a million jobs annually. This potential includes currently unemployed, part-time underemployed, or those forced into early retirement. The unused potential in the Swedish markets is greatest in Örebro County and least in Gotland.

”The level of structural unemployment in Sweden has increased in every recession over recent decades. Unfortunately, redundancies issued today will also lead to lost jobs that never return. This trend can be reversed, though. To ensure these jobs remain after the current downturn, Sweden should invest in further legislative reforms promoting work and improving the business climate,” concluded Mr. Fölster.

An international review shows that a wave of such reforms is on the way in many countries Sweden competes with. The debt crisis has created the basis for significant structural reform throughout Europe, and in connection with debt reduction plans, many of these countries are preparing structural reforms to improve their international competitiveness and capability to create growth and new jobs.


Source: Svenskt Näringsliv

Understanding Finland's collateral deal with Spain

The euro crisis has had an impact on the man in the street, but many simply don't understand the convoluted arguments being waged by politicians, let alone the highly technical agreements being made in the name of ordinary taxpayers.

Dazed and confused? Read on for a deconstruction of the latest act in the euro crisis drama, the Spanish bank bailout. The main characters are Finland and Spain, with eurozone and European Union members cast as supporting players.

The Spanish problem: On June 25 the Spanish government turned to the EU for financial assistance with restructuring and recapitalization of its banks. The banking sector collapse was caused by a domestic credit boom that helped inflate a real estate and related construction bubble. When the wider euro economic crisis caused a recession and widespread job losses, huge defaults caused some banks to stumble. Flagging investor confidence also increased the cost of borrowing for banks, forcing the government to step in.

The European bailout proposal: European Union leaders meeting in Brussels at the end of June agreed to earmark up to 100 billion euros to help prop up the foundering Spanish banking sector. The precise sum to be loaned – to the Spanish government for the bank restructuring program – would be specified once due diligence tests had been conducted on the affected banks. The Spanish government would also have to agree to rescue only those banks deemed to be financially viable. Since the permanent EU bailout fund – the European Stability Mechanism or ESM – is still to come online, EU heads agreed to bankroll the Spanish bank bailout from the temporary European Financial Stability Facility, the EFSF.

Finland’s collateral deal

Finland’s government policy specifically requires the government to ask for collateral if the temporary bailout fund, the EFSF, is used for rescue packages. This is because loans from the EFSF do not enjoy seniority status, meaning, borrower states do not have to repay EFSF loans first, but can service other financial commitments, such as public and private sector debt.

The collateral requirement therefore ensures that Finland recovers some of its loan funds in the event that other loan commitments take precedence over EFSF repayments. Since both the Greek and Spanish bailouts were funded by the EFSF, Finland asked for – and received – collateral guarantees in both cases. The Spanish bailout was modeled on the Greek case one year earlier.

The Finnish bailout contribution: 1.925 billion euros

The Finnish collateral request: 40 percent of the Finnish loan contribution of 1.9 billion euros, or 769.92 million euros. The average duration of the loan is 12.5 years, not to exceed 15 years.

What Finland surrendered: The collateral deal came at a cost to Finland. Specifically, unlike other states that can pay their contributions in five installments, Finland will make its contribution in one payment. Finland also agreed to surrender its right to any interest earned on loans granted to Spain as part of the bailout.

How the collateral will be paid: The collateral will be paid into Finland’s collateral account once Finland’s contribution to the EFSF fund for the Spanish rescue package is paid to Spain. Finland will hold the collateral until Spain has repaid the loan. The cash will be paid out from Spain’s deposit guarantee fund, which essentially affords Finland the same level of protection as Spanish depositors.

Ratings agency vindicates Finnish collateral deal

In July the ratings agency Moody’s announced that it was downgrading the outlook for three of Europe’s strongest triple-A rated economies from stable to negative. At the same time, it affirmed the stable outlook for Finland’s triple-A economy, in the process knighting the small Nordic economy as the strongest in the European Union and the eurozone, in its view.

One of the reasons cited by Moody’s for maintaining Finland as “the sole exception among the Aaa-rated euro area sovereigns”, was the controversial collateral deals it negotiated in exchange for supporting an EU-led bailout of Greece last year, and the more recent rescue package for struggling Spanish banks.

The collateral guarantee brokered with Spain came under heavy criticism locally in Finland, with opposition parties protesting the rescue of private banks by Finnish taxpayers. Further afield in Europe, tiny Finland’s insistence on receiving collateral for its minute contribution of just under 2 billion euros of the weighty rescue package was seen as obstructionist by other European states.

Some analysts are now speculating however, that following Moody’s seemingly implicit endorsement of the Finnish collateral position, other European states may now be reconsidering the pros and cons of a similar arrangement in the event of future bailouts.

Sources

 

Yle News/Denise Wall

Outlook for the economy remains fairly subdued

According to the Business Tendency Survey conducted by EK in April, Finnish business growth stabilised in the early part of the year following the increase in uncertainty last autumn. The current business situation is described as somewhat weaker than average in all the main sectors.

The business outlook for the coming months is cautious in all the main sectors but has improved from the January level. No substantial changes in the general economic conditions are expected in the next six months. 

Output and sales projections for the coming months predict very slow growth at best. Gradual acceleration of growth is expected to take place in late summer and autumn in manufacturing and services. However, employment expectations are very low, and the labour force is expected to decline in all but the service sectors. 

In April, the business outlook balance indicator for manufacturing was +9, up from -6 in January. In all, 18% of respondents expected an upturn during the summer and early autumn, while 9% felt that the economy would deteriorate during this period. 

The business outlook for construction improved to -5 in April from -32 in January. A total of 11% of companies anticipated an upturn, while 16% believed that the situation would deteriorate.

The business outlook for services improved to +2 in April from -8 in January. An upturn was forecast by 11% of respondents, while a decline was expected by just 9%.  

Output scarcely grew at all – expectations until late summer cautious
New orders received by manufacturing companies that responded to the survey remained at the same level during the first quarter as at the end of last year. In construction, the number of orders declined slightly compared with the end of 2011. In both manufacturing and construction, order books were reported to be slightly below average.  

Finished goods inventories decreased in manufacturing to normal levels. The volume of unsold dwellings owned by construction companies rose from low to average. 

Manufacturing companies that responded to the survey expect the number of new orders they receive during the second quarter to remain stable. In construction, however, the volume of orders is expected to continue to decline slightly. 

In manufacturing, output growth was rather slow at the beginning of the year, but slightly better than the low expectations of the previous survey. Output is expected to remain on the rise in the coming months, though the rate is expected to be sluggish. There are expectations of a tentative acceleration in growth in late summer and autumn. Construction output began to decline slightly in the early part of the year, and is anticipated to remain steady in the coming months. 

In services, sales were up moderately in the early months of 2012, as at the end of 2011. The rate was slightly quicker than forecast three months ago. Nevertheless, growth is predicted to remain slow in the coming months, but growth expectations for late summer are slightly better, as is the case for manufacturing. 

For manufacturing companies, the capacity utilisation rate recovered slightly from a dip in the autumn, but is still quite clearly below the long-term average. In April, 35% of manufacturing companies had unused capacity (43% in January). 

Employment expectations rather cautious – total labour force to decline
In the service sectors, the labour force growth almost stopped during the early part of the year. In construction, the total number of employees stayed the same, and in manufacturing it decreased slightly. Nevertheless, the employment trend as a whole was marginally better than forecast three months ago. 

Employment growth expectations are quite cautious. In both manufacturing and construction, the labour force is projected to decline slightly during the late spring and summer, and only service companies expect their labour force to remain steady. 

General picture lacklustre – but some companies suffering from labour shortages
Sales prices started to rise gradually in the manufacturing sector, and in services the rate of increase accelerated. In construction, sales prices remained unchanged. Costs rose quite strongly in all three main sectors. 

In the coming months, the rise in prices is forecast to slacken off in services. Prices are expected to rise slightly in manufacturing and construction. Cost pressures are expected to continue to be common despite an expected slowdown in the pace of cost increases in both manufacturing and services.

Profitability remained almost unchanged in all the main sectors during the early part of the year, and it is not expected to change substantially in the near future. 

In the construction and service sectors there are quite a number of companies experiencing insufficient demand and labour shortages, which is a reflection of the incoherence in the economy. In manufacturing, weak demand was clearly the most common factor holding back business activity. Over one third of manufacturing and construction companies reported weak demand, and in the service sectors the corresponding figure was one in five companies. A labour shortage was experienced by 7% of respondents in manufacturing, 15% in services and as much as 39% in construction. 

EK Business Tendency Survey
The Business Tendency Survey is published four times a year by the Confederation of Finnish Industries EK. The survey has been carried out regularly since 1966. 987 companies employing approximately 260,000 people in Finland responded to the April 2012 survey.

The Euro-zone drags on Swedish Economy

The Swedish central bank forecasts a slowing in the Swedish Economy due to weakness in the euro area. Meanwhile the Swedish Trade Council, also forecasts poor economic development in important trading partners. Not least, the Euro zone is expected to tip into recession, with two consecutive quarters of negative growth. With exports standing for 50 percent of GNP, Sweden will be strongly affected.

The Swedish central bank lowered its interest rates against a background of less inflationary pressure and weaker economic expectations. Their press release states, “the worsened outlook is causing households and businesses to delay consumption and investment,” and points to significant uncertainty about future economic developments.

Against this background, the central bank’s Executive Board indicates that additional changes to interest rates can be necessary if the problems experienced in the Euro area deteriorate, stating, “the public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy. In this situation, the repo-rate path may need to be lowered.”

As well, forecasted growth in Swedish GNP is cut for coming years, including growth of 1.3 percent for 2012, compared to the previous forecast of 1.5 percent.

The Swedish Trade Council also issued new forecasts where they still expect a slight increase in exports for 2012, though a smaller increase than forecasted in September. “The debt crisis in the Euro zone has forced austerity policies that act as downward pressure on the economy, which can cause lower public revenues as households and businesses lose confidence in economic developments. The greatest risk looking forward is that insufficient measures are taken to resolve the debt crisis in the Euro zone,” notes the Swedish trade council Chief Economist Mauro Gozzo.

The Trade Council forecasts an economic recession in the Euro zone, which also will affect Central and Eastern Europe. Export markets in Scandinavia are expected to grow 3 percent, but in West Europe by 1.5 percent, and in Central and East Europe by 5.5 percent. Moreover, China, currently the most important locomotive in the global economy, shows initial signs of contraction.

The impact of the crisis in Sweden

The European debt crisis has reached Sweden. Many forecasters, including for the Swedish government, believe this downturn will be short. But nothing supports this scenario. On the contrary, reality has caught up to the European economies, so Swedish growth recovery won’t return to normal for several years. For 2012 The Confederation of Swedish Enterprise expect growth of only 0.2 percent.

“We are not seeing an ordinary recession, but rather a structural debt crisis, which will remain deep for long. Any recovery will demand significant political reform. But in the best of scenarios, we see normal growth returning to Europe and Sweden only in a few years,” comments Stefan Fölster, Chief Economist at the Confederation of Swedish Enterprise.

The downturn in the Swedish economy will be substantial in the coming quarter, starting with larger companies, especially those exporting to Europe. But, we see those that export to China and Asia doing better. As suppliers to European exporters become affected, the negative spiral of the crisis will spread throughout the Swedish economy.

Industrial regions will experience the greatest negative effects in 2012, except for regions with significant mining industries.

Many local governments have been entirely too optimistic in their budgets, and will be forced to cut back when tax revenues don’t meet forecasts. But we do see that local governments who have worked to improve the local business climate are now facing the crises with greater stability,” concluded Mr. Fölster.

The Confederation of Swedish Enterprise Q3 Economic report is titled “Reality check”.

2011-10-04
Confederation of Swedish Enterpriseshttp://www.svensktnaringsliv.se/english/long-road-to-reach-end-of-tunnel_141275.html

Economic experts warn of hard times ahead

Finnish economic experts are split into two camps in their predictions on economic trends in the near future. Sixten Korkman, managing director of the Research Institute of the Finnish Economy (ETLA) and Pasi Holm, the head of Pellervo Economic Research predict that the economy will experience negative growth.

Meanwhile, Seija Ilmakunnas, head of the Labour Institute for Economic Research, and Juhana Vartiainen, head of research at Sweden’s National Institute of Economic Research, expect slight economic growth in 2012.

     

The European Commission expects Finland to reach 1.4 per cent growth, whereas the average growth for all countries in the eurozone is forecast at 0.5 per cent. The forecast is based on information that was available before the crises in Greece Italy flared up.

Some experts actually expect the spring to bring new life to the economy, but the growth will be significantly weaker than the Finnish government had previously assumed.

     

The first signs of crisis consciousness are already apparent. The economic journal Talouselämä wrote on Thursday that the Ministry of Finance has urged other ministries to prepare for further cuts in the upcoming framework talks.

“We are currently drawing up various contingency plans, because nobody knows what the economy will look like a month from now”, said Minister of Finance Jutta Urpilainen (SDP).

The framework for state finances for 2013-2015 will be set in March.

     

Prime Minister Jyrki Katainen (Nat. Coalition Party), Finance Minister Urpilainen, and all economic experts interviewed by Helsingin Sanomat agree that the government should not take fright and should not start scaring Finns with upcoming cost cutting measures.

The top ministers in the government insist that heads are cool. No further cost cuts are coming until the late winter.

Urpilainen says that the framework talks in March will be the right time and place to assess whether or not additional measures are needed.

     

Korkman and the other economic experts expect the government to take action in the spring to institute extensive structural changes.

“Working careers need to be extended and the retirement age must be raised for the employment level to rise and for the tax base to grow stronger”, Korkman says.

Vartiainen agrees, adding that Finland needs to recruit more labour from abroad.

     

Pasi Holm sees a need for extensive changes in the government’s policy programme. “The programme is based on an assumption of 2.5 to 3 per cent annual growth, which is not going to happen.”

Seija Ilmakunnas wants to see the framework agreement for the labour market to be put into shape. “After that we need to implement the municipal and service structure reforms. They will bring savings.”

     

Katainen and Urpilainen also emphasise the importance of the municipal reform.

The government programme includes a statement according to which state indebtedness needs to be reduced by 2015.

The way things look now Korkman does not expect this to happen because the economy will be shrinking and unemployment might rise.

     

Sixten Korkman is also worried about a “self-detonating trap” that he says lies hidden in the government programme.

The government has promised to cut spending and raise taxes if the debt does not go down.

“Therefore, the government must deepen the recession by tightening financial policy”, Korkman laments. 

HELSINGIN SANOMAT

INTERNATIONAL EDITION - BUSINESS & FINANCE

http://www.hs.fi/english/article/Economic+experts+warn+of+hard+times+ahead/1135269845729

Forecast for Spanish economy - The Economist

Spain

• Debt will be 68% of GDP by the end-2011.
Deficit falling from 11.1% in 2009 to 9.3% in 2010 and 6.5-7% in 2011.

• It should be held to 75% of GDP by 2016
But still danger of cycle of recession leading to falling revenue and wider deficits.

• But measures have been serious and sufficient political consensus.

© 2011 The Economist Intelligence Unit. All Rights Reserved.

Sweden falls back into recession

STOCKHOLM March 1 - Sweden unexpectedly fell back into recession in the fourth quarter, figures showed, tracking a growth blip suffered by several European economies and casting further doubt on the durability of the continent’s recovery.

Gross domestic product contracted 0.6 per cent in the fourth quarter from the third compared with expectations for growth of 0.3 per cent, statistics office data showed on Monday. The third-quarter figure was revised to a 0.1 per cent quarterly decline from an original 0.2 per cent gain.

”All of a sudden Sweden went from being best in test to worst in class,” said Henrik Mitelman, chief strategist at SEB.

”But I wouldn’t be too alarmed by today’s GDP report, because most indicators show we’re moving toward growth.

”What we’re witnessing right now is a pretty lacklustre trade environment around Europe.”

Inside the eurozone, German economic growth unexpectedly halted in the fourth quarter while Italy went into reverse and Spain stayed in recession, according to figures released last month.

The Swedish crown dropped to 9.77 a euro at in early afternoon from 9.707 before the number.

Sweden’s central bank said last month it expected to raise rates from an ultra-low 0.25 per cent in the summer or early autumn, sooner than laid out in a previous timetable.

The Riksbank had cited an improving economic picture as the rationale for tweaking its rate path, and many analysts have taken a bullish view of the recovery based on upbeat retail sales and improving consumer sentiment.

Analysts were divided over the GDP data, with some saying it would make the Riksbank more cautious about raising interest rates, while others said it made no real difference to Sweden’s economic outlook.

”This probably won’t influence the Riksbank as they look at the picture ahead and we can see that there is going to be stronger growth,” said Bengt Rostrom, economist at Nordea.

However, Swedbank economist Knut Hallberg said the data was more likely to reinforce the cautious view on recovery taken so far by the Riksbank.

”These figures are not a trigger for the Riksbank to raise rates,” he said. ”The recovery in Sweden is going to take time.”

Nordea’s Rostrom said he had expected a small rise in GDP in the fourth quarter.

”It was mainly private consumption and inventories which did not help the figure in the way we had hoped. Net exports were not much different from expectations.”

The downbeat GDP figures were somewhat offset by other data on Monday.

Sweden’s seasonally adjusted purchasing managers’ index fell marginally to 61.5 points in February from 61.7 points in the previous month, data compilers Silf and Swedbank said.

Analysts said the figure remained strong and pointed to robust growth in the current quarter and in the months ahead.

(Financial Times / FT.com / Europe)