Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.

1. To the Point
Discussion on the economy, by the Chief Economist November 26, 2009
Cecilia Hermansson
Chief Economist
Economic Research Department
+46-8-5859 1588
cecilia.hermansson@swedbank.se
No. 2
2009 11 26
Beware of the bubbles
In the 1930s’ financial crisis, the world’s policy makers made the
mistake of not stimulating the economy sufficiently, leading to many
years of low growth, no inflation and weak confidence among
households and companies. This time, we may err on the other side,
by overstimulating the economy, providing a flood of money through
central banks and, on top of it, fiscal stimulus, leading possibly to a
buildup of new asset price bubbles, and also inflation at a later stage.
Investors are caught between the two risks of deflation and inflation:
record-low nominal bond yields signal a fear of deflation, while hot
stock markets and commodity prices suggest an appetite for inflation-
protected assets.
This months’ “To the Point” analyses the difficult trade-off between,
on the one hand, supporting growth in many of the OECD countries
especially hard hit by the financial crisis and the fall in world trade,
and, on the other, possibly providing too much liquidity, with the risks
of building up new bubbles on asset markets. However, there are
solutions!
There is still a case for keeping the stimulus
The good news is that the world economy is growing again, albeit
from low levels. We may have to revise up GDP growth rates upward
¼ -½ percentage point or so for 2010 and 2011 to some 3 and 3 ½ %,
respectively, not least because of stronger growth in China and India,
and perhaps in Japan and the US as well. We may even revise upward
the negative growth figure for this year, although marginally.
The bad news is that world economy is not capable of taking care of
itself on its own. Stimulus is needed to make sure demand continues
to grow, and to provide the necessary risk appetite for various actors
to invest in the future.
The polarisation between West (advanced or OECD countries) and
East (China, India and other parts of developing Asia) is very clear.
While China and India showed GDP growth of 8.9 % and 6.1 %,
respectively, in the third quarter in annual terms, GDP in the US,
Japan and Germany fell by of 2.5%, 4.5% and 4.7%, respectively.
This large difference in growth rates means that developing countries
and emerging economies’ share of the global economic cake will
increase from about half today to around two thirds within five-six
years. Or as they say, in China and India: this is not a crisis for all, it
is a crisis for the West.

2. To the Point (continued)
November 26, 2009
2
Chart 1: Annual GDP growth in
selected countries
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08
Procent
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Japan
EMU-area
Sweden
China
US
India
Germany
Russia
Chart 2: House prices in selected countries
99 00 01 02 03 04 05 06 07 08
75
100
125
150
175
200
225
250
S
DK
SP
USA
UK
N
SF
IRL
The need to keep the stimulus is more accentuated in the US,
Europe and Japan than in the emerging economies. However, it is
worth remembering that vulnerability is still great in all countries.
There are a number of reasons why continued support is
important:
1. The banking sector has not yet recovered. In the US, the key
problems are in mortgage- and consumer-related assets,
whereas in the euro area banks, the main complications deal
with Central and Eastern European loans and securities. Asian
banks, on the contrary, are quite sound. A period of
recapitalisation and strong earnings is still needed before
banks will be in general good health. According to the IMF’s
October Global Financial Stability Report, additional write-
downs of US$1.5 trillion are expected on top of the US$1.3
trillion already carried out.
2. The housing sector in the US (and in some countries in
Europe – mainly the UK, Ireland, Spain and the Baltics) has
not yet stabilised. Commercial real estate deterioration is in
full swing. There are some green shoots, but without the
stimulus, prospects would look much paler indeed.
3. The private consumption outlook in the US, Japan, and
Europe looks very weak. Unemployment is still on the rise,
wage developments have been dampened, and many are being
discouraged from searching for jobs, thus making us believe
that the unemployment situation is a lot worse than we can
tell from official statistics. Corners will be cut, which means
that consumers will change their spending habits. Smaller
houses, cheaper state universities, and cheaper food and
durables will have to be preferred. More cautiousness is
expected with regard to purchases of capital goods, such as
cars and home appliances. In the US, households used to
make up more than 70% of GDP, so surely a weaker
consumption outlook will hurt overall growth prospects.
4. Output gaps (the difference between the actual level of
production and the “potential output level”) are still between
some 5-8% for advanced or OECD economies. Stimulus is
needed to narrow this gap, and it will take several years
before the gap is closed. For the advanced economies, growth
rates will most likely stay below potential growth, even as
potential growth itself will slow when labour and capital are
used differently going forward.
Merely, looking at output gaps, unemployment, credit conditions
and other subdued demand factors discussed above, could have
prompted central banks to set negative policy rates. Since that
would have been difficult, they have opted for almost zero interest
rate policies, tried quantitative easing, and signalled that interest
rates will stay low for an extended period of time. Fiscal policy
has been focused on infrastructure projects, labour and housing
markets, and consumption to boost demand and confidence.

3. To the Point (continued)
November 26, 2009
3
Chart 3: Stock marets in Russia, China, India,
Japan and the US
Source: Reuters EcoWin
jan
06
maj sep jan
07
maj sep jan
08
maj sep jan
09
maj sep
Index
50
100
150
200
250
300
350
400
Russia
Japan
China
(Shanghai)
India (Mumbai)
USA (S & P 500)
Where will all this money go?
The buildup of the central banks’ balance sheets in the US, Japan,
and the Euro area has not increased the money supply. Bank
lending is subdued, and instead, banks’ balance sheets are
contracting.
But investors are looking for some return on their savings/capital.
They are buying stocks, bonds, commodity futures, emerging
markets equities and gold. They are borrowing in dollars or yen
where interest rates are low and looking for more lucrative
markets where yield is higher. They are ending up in the emerging
markets, where stocks and real estate prices are increasing more
than the fundamentals would indicate.
The money provided has been intended for the real side of the
economy, but so far it has mainly ended up in asset markets. The
monetary transmission mechanism is thus not working in the way
it was intended. Monetary policy needs to be expansionary, but
the side-effects could be cumbersome in the medium term.
Is a property bubble building up in Asia? An eye-catching deal
was recently transacted in Hong Kong where an apartment was
sold for US$439 million, or US$88 000 per square foot. Thus, it
replaced an apartment in London as the most expensive real estate
in the world. Hong Kong’s previous record was only US$23 000
per square foot. And property prices are soaring elsewhere in
Asia. In Shanghai, there is now a view that property prices are
higher than Tokyo’s.
China’s approach to keeping stimulus – providing liquidity
through state-owned banks and maintaining the peg to the dollar –
is thus also increasing the money supply, and having an impact
beyond its borders. This is because many of the economies in
Asia are more China-dependent than before.
Also, the possibility of a new stock market bubble in Shanghai
cannot be excluded. Stocks listed in Shanghai show p/e ratios of
35 on average, and since the beginning of the year, the stock
exchange has gained 80%. Stock and property markets are very
vulnerable to the economic policy measures, and without these
measures, market prices and demand would look very different.
Most central banks are not taking steps to burst these incipent
bubbles because they feel that it is better to create bubbles than to
create a new depression. It is perhaps easier to struggle with the
problem of higher asset values than of negative equity.
No need to be passive
The need to avoid asset bubbles may be less acute in advanced
countries, although Sweden could present a case for potential
problems as household lending is a bit too brisk, and house prices
are rising from already high levels.

4. To the Point (continued)
November 26, 2009
4
Chart 4: Central banks’ policy rates
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09
Percent
0
1
2
3
4
5
6
7
Sweden
USA
Euroland
UK
Japan
Economic Research Department
SE-105 34 Stockholm, Sweden
Telephone +46-8-5859 1000
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publishers
Cecilia Hermansson
+46-8-5859 1588
Even if monetary policy needs to be expansionary, there are other
measures that could be taken to cool asset markets. What can be
learnt from Asian countries in this respect? Three governments –
in Hong Kong, Singapore and China – have warned that they
might be forced to implement measures to deter speculation on
the property markets.
The Hong Kong Monetary Authority (central bank) has instructed
banks that loans for homes selling for US$2.6 million or more
must be capped at 60% (down from 70%). The Hong Kong
Mortgage Corp. is cutting its maximum loan size and will not
issue second mortgages.
Singapore has scrapped interest-only loans, and is providing more
land for development. Meanwhile, China is expected to raise
mortgage rates and introduce administrative measures to combat
prices increases. China could also place caps on the share of bank
lending for real estate and portfolio investments.
Also, in advanced countries, regulators should implement tools
that decrease the risk of building up of asset price bubbles. Even
if transmission mechanisms do not work properly, interest rates
may have to stay low for some time. Meanwhile, there is no need
to be passive. To wait for bubbles to burst and then to clean up
afterwards is not the way to go. Didn’t this crisis teach us that
lesson?
Cecilia Hermansson
To the Point is published as a service to our customers. We believe that we have used reliable
sources and methods in the preparation of the analyses reported in this publication. However, we
cannot guarantee the accuracy or completeness of the report and cannot be held responsible for
any error or omission in the underlying material or its use. Readers are encouraged to base any
(investment) decisions on other material as well. Neither Swedbank nor its employees may be
held responsible for losses or damages, direct or indirect, owing to any errors or omissions in To
the Point.