Economic growth has already peaked

| Source: Svenska Handelsbanken AB
We expect economic growth in most advanced economies to slow over the coming
years, partly due to a tightening of resource utilisation, as well as less of a
positive impact from cyclical factors. Structural factors, such as lower trend
growth in productivity and the labour force, also play a part. Our main scenario
for most advanced economies is an expectation of modest growth, subdued
inflation and low interest rates, albeit with high and increasing downside
risks. Uncertainty is prevalent, primarily due to political factors in Europe
and a looming cyclical downturn in the US.
The US economy continues to expand at a rate close to that of the underlying
trend in potential output. Given falling unemployment, low interest rates and
rising house prices, household spending will likely remain the main driver of
the economy. The contribution from investment will be more modest, a reflection
of stagnating profits as lower unemployment is lifting wages. The uncertainty
surrounding the presidential and congressional elections may have had some
effects. However, once the election is over, we do not anticipate any major
deviation from current trends and are confident that economic factors will
return to the limelight.

We expect that the Federal Reserve will increase its policy rate by a quarter of
a percentage point in December this year, provided that inflation rises in line
with the Fed officials’ expectation, which is close to our view. For the rest of
the forecast period through 2018, we anticipate interest rates being raised at a
gradual pace of 25 basis points per year, recognising that may be viewed as a
rather benign Fed outlook. Nevertheless, the dollar is expected to gain some
traction against the euro next year. It may soften again as the ECB starts to
catch up in 2018.

Although GDP growth in the eurozone is currently low, we believe that is as good
as it gets. We anticipate even lower growth and subdued inflation ahead.
Sluggish growth is largely due to structural factors, such as slowing
productivity and labour force growth, but cyclical factors also play a part. GDP
growth appears to have reached its peak for this cycle. The tailwinds that have
lifted growth over the past couple of years are now waning. There are also
reasons to worry about the political outlook. The upcoming elections in France
and Germany may well test European cohesion further.

We expect only minor adjustments to the ECB’s asset purchase programme in 2016.
In 2017, when growth slows, pressure on the ECB to take further measures is
likely to increase. In our view, a slowdown could lead to additional monetary
stimulus, despite the ECB’s current resistance to such projects.

With regard to the UK, the focus is on Brexit. Prime Minister May has indicated
that her government will initiate formal exit negotiations with the EU in March.
The EU’s free movement of labour will be a particularly difficult sticking
point. The UK government appears to be signalling a very restrictive stance. The
market is worried and the pound has dropped to record lows as a result. We
anticipate a slow and grinding deceleration in growth for the UK rather than an
economic collapse. We expect no further interest rate cuts from the Bank of

Growth in China has stabilised, as the likelihood of an economic hard landing
has decreased. Nevertheless, we continue to forecast that growth will decline
gradually over the next couple of years. The overheated property market and the
associated stock of credit is probably the main risk to our forecast. However,
we believe that the authorities are well aware of the risks and that they have
the necessary tools to avert a full-blown crisis.

In India, growth is likely to remain strong. Prime Minister Modi’s ambitious
reform agenda to increase competition and improve infrastructure is progressing
steadily. In contrast, commodity-dependent Brazil and Russia have been in
recession for the past two years. We think growth in those countries will turn
positive but remain low, thereby helping to lift overall growth in emerging

The Nordic countries are very dependent on the international environment. Partly
due to somewhat better prospects for the oil sector, Norway may look forward to
slightly higher growth during our forecast period. The Finnish economy is
trending sideways, while Denmark appears to be lagging even the eurozone.

In Sweden, we expect growth to be close to its potential rate in the coming
years. Household spending is likely to remain an important driver, which will be
supported more by wages than by strong job growth ahead. Employment already has
started to stall, while unemployment is rising. Immigration flows in recent
years twinned with poor integration is likely to lead to a greater skills
mismatch and higher permanent unemployment.

Inflation is expected to rise gradually as cost pressures increase. Our forecast
is for inflation to reach the Riksbank’s target of 2 percent by the end of 2018.
A major headwind is our forecast for a stronger krona, buoyed by robust growth
and a tightening of monetary policy. We believe that the Riksbank will start to
tighten monetary policy at the end of 2017 and that the policy rate will reach
0.50 percent by the end of 2018.

For further information, please contact:

Ann Öberg, Chief Economist, +46 8 701 2837, +46 76 135 5815
Jimmy Boumediene, Head of Forecasting, +46 8 701 3068, +46 70 532 5187

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