Immigration a challenge for Europe

Thu, Dec 10, 2015 10:00 CET

Following a temporary slowdown this year, global growth is expected to bounce back over the next two years. The US economy continues to expand, although the business cycle is starting to move into a more mature phase. As for China, we believe that the authorities will manage to steer the economy toward a soft landing. While the eurozone is slowly recovering, several important emerging economies should at least stabilise next year and beyond. In the Nordics, Sweden remains at the top of the growth league.

Buoyed by the US and China, the global economy continues to expand, although at a slightly lower rate this year. In the US, growth is expected to stay at current levels in 2016 but decline thereafter. However, the labour market is expected to tighten steadily through 2017.

As capacity utilisation rises further, it is reasonable to expect upward pressure on wages and prices. In addition, the negative base effects on inflation from the fall in oil prices and the appreciation of the dollar will soon fade. As a result, inflation is likely to trend higher.

Against that backdrop, the Federal Reserve is likely to deliver a first rate hike next week. The central bank is subsequently expected to lift its policy rate further, although in a cautious manner. We are somewhat more pessimistic than the market about underlying growth in potential output, but we share its assessment of the output gap.

In the eurozone, there is more to worry about. While some encouraging signs have appeared – the Spanish economy, for instance, has turned the corner – new problems have popped up. The huge inflow of refugees to some countries will no doubt have important economic implications and pose challenges for countries with rigid labour markets.

Our growth projections for the eurozone are only slightly more pessimistic than the average for the forecast community. We share the view that the ECB must and will do more to weaken the euro, create room for higher corporate profits, and boost inflation. The euro faces renewed headwinds when the ECB delivers on that.

The UK economy is developing favourably, driven mostly by buoyant domestic demand. Inflation has fallen this year, and the outlook for 2016 and 2017 is not that challenging. The Bank of England can thus afford to stick to its guns. The referendum on the UK’s EU membership before the end of 2017 is a much bigger deal, with potentially far-reaching consequences, including for the pound.

Japan remains a disappointment. Growth remains anaemic and there is nothing to suggest a change for the better in the near future, despite rather expansionary financial policies. The problems are structural, not cyclical, and the authorities’ current approach is clearly inadequate.

Many observers seem to consider the problems in emerging economies as the main global risk for the time being. We agree that several large economies in that group are currently hard-pressed, but we do not think that the problems are severe enough to derail the global economy.

A number of commodity producers are in bad shape. Brazil and Russia entered into recession this year. Barring a material rebound in prices for their key exports, the outlook for the next couple of years is also rather gloomy.

In China, a key global growth locomotive, we think that the authorities will manage to achieve a soft landing for the economy. Even if growth declines over time, the country’s contribution to the global economy will increase steadily. There is also great scope for economic improvement in India. The rest of Asia is also likely to perform well.

The Nordic outlook is rather mixed. Growth in Sweden remains strong. The effects of the huge refugee influx are hard to assess. However, the short-term impact is likely to be quite expansionary. Spurred by rising capacity utilisation and the relatively weak krona, we expect inflation to approach the Riksbank’s mandated target by the end of 2016. The central bank is therefore likely to lift its policy rate earlier than commonly believed. The currency will react accordingly and strengthen during the course of 2016.

The longer-term outlook will depend on how society is able to adjust its structural policies to meet the challenges posed by changes in the workforce. While the discussion about that has only just begun, it seems clear that there will be a need to think anew about the labour market and the social safety net.

Norway is struggling with the consequences of the oil price fall. Further monetary policy easing is probably forthcoming during 2016, thus implying further headwinds for the krone. In Finland, there is so far no light at the end of the tunnel, while Denmark is performing in line with the eurozone.

For further information, please contact:

Jan Häggström, Chief economist, +46-8 701 10 97, +46 70 761 43 66
For more information on Handelsbanken, see: www.handelsbanken.se

Forecast for Sweden