SPEECH
SVERIGES RIKSBANK
DATE:
26/03/2018
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Deputy Governor Cecilia Skingsley
VENUE:
Handelsbanken, Södertälje
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
Thoughts on technology and the
economy*
Thank you for your invitation to visit Södertälje. Many people come here to spend
hours playing with their children at the science museum Tom Tits Experiment,
which can be found here in town. This is a place where you can experiment with
the laws of physics, puzzle over medical phenomena and observe chemical
effects. I dare say that many of today's and tomorrow's Swedish scientists had their
first insights into science there.
My speech today does not deal with scientific laws but with how important
technological advances are redesigning the playing field for the economy and thus the
way in which economic policy is conducted. I will also discuss how the Riksbank
assesses the current economic situation and its forecasts for the years ahead.
Finally, I will describe how monetary policy can facilitate economic development in
Sweden.
Technological breakthroughs transform our society.
We human beings constantly strive to make things a little better. When we
achieve technological breakthroughs, lives and entire societies are revolutionised.
Important examples include steam power, which made mechanised industries
independent of water power possible, followed by rail transportation. The internal
combustion engine enabled transportation independently of the rail network in
the form of motor vehicles and aircraft, and electricity has given us light, warmth
and the power of movement.
Now, at the start of the 21st century, we have to deal with all the opportunities,
but also challenges, brought by the Internet, digitalisation, robotics,
biotechnology and artificial intelligence. Experts often disagree over how revolutionary these
technologies will turn out to be for the economy in the long run, but we can see
how they affect us in our daily lives.
Take, for example, digitalisation, which is impacting sector after sector.
How many record shops are there these days? Where's the nearest video rental
store? How often do you find yourself keeping an eye on the time so as not to
miss a certain TV or radio programme?
Increasing numbers of us subscribe to streaming music and film services, read the
news on the Internet instead of in paper newspapers, listen to podcasts and use
catch-up TV services and YouTube channels. It's quite fun being a consumer these
days.
Also on the other side of the economy, the producing side, can we see markets
being reshaped and both the number and nature of jobs being changed. My
sector, the financial system, and my workplace, the Riksbank, are also being affected
by these changes.
In our monetary policy assignment of maintaining price stability in Swedish
kronor, specified as inflation of around 2 per cent, we need to understand not
only cyclical developments but also structural transformations in the economy.
This knowledge forms a precondition if we are to be able to make good forecasts
and calibrate a well-balanced monetary policy, thereby fulfilling our mandatory
task.
To make good forecasts, we need models, and models assume that economic
relationships are stable. It therefore becomes complicated when structural changes
delay or even transform old relationships. If important structural changes have
occurred, they turn up as so-called shocks in the models. For example, new and
better working methods should entail a positive shock in productivity. Another
structural change, for example increased e-commerce, means that competition
increases, putting pressure on companies' profit margins.
However, when data on productivity and companies' profit margins is studied, it is
difficult to observe larger changes. Productivity growth in recent years cannot be
described as remarkably high.1 In turn, this has an effect on wage development,
which I shall return to. My point, however, is that technological shifts do not
necessarily change the way the economy works.
But it is nevertheless clear that technological breakthroughs can push forward
changes in what have historically been fairly stable operations and open them up
for new participants.
For example, technological developments in society have contributed to the use
of cash, the money the Riksbank offers society, going into decline. If the present
trend continues, cash could actually be phased out as a means of payment in a
few years, as many banks and a growing number of retailers no longer offer
services involving cash.
Sweden is a world leader in developing electronic means of payment. This is
positive. But, at the same time, the public sector in a wide sense needs to ensure that
everybody who lives in Sweden will continue to have access to secure and
efficient payment services. Consequently, over the last year, the Riksbank has
prioritised the analysis and strategic development of the payment market. The
Riksbank has also proposed that, via legislation, Sveriges Riksdag, the Swedish
parliament, should clarify the banks' responsibilities for supplying cash.2
Financial crises, technology and competition have restrained
wage increases
In a city like Södertälje, with, for example, the vehicle manufacturer Scania, the
pharmaceutical manufacturer AstraZeneca and the Port of Södertälje, there is
long experience of working in the global economy and of technological shifts. For
you, change is nothing new.
If we zoom out to the entire Swedish economy, we have also been quite good, as
a country, at managing change.
But let me start in the present day, where we can see that the international
economy is growing increasingly strong. The United States is in one of the longest
phases of rising GDP of the post-war period and, last year, the euro area had the
highest growth in ten years. However, it takes time for the strong economic
activity to affect inflation.
Although the recovery has come far after the years of financial crises and low
growth, wage increases have been unexpectedly low in many advanced
economies. In large economies such as the United States, Canada, Germany, Australia,
as well as in Sweden, unemployment is close to or below levels at which wage
growth, historically speaking, tends to pick up.
In Sweden, we have had a number of years with a combination of low productivity
and low expectations of inflation and wages, which partly explains the low wage
demands up to now. Even if Sweden has had a strong employment trend in recent
years, technological innovations and international competition will entail a
transformation in which jobs will disappear and need to be replaced by new ones.
These forces, in combination with long-term stagnation in the euro area after the
financial crisis, are also leading to employees becoming more cautious with their
demands.3
It is feasible that the upheaval these forces cause at workplaces may also make it
difficult for individuals to assess whether they risk becoming unemployed and, if
so, what their position might be on the labour market. Low wage expectations are
a global phenomenon and can contribute towards those already in employment
becoming less interested in looking for a better-paid job. Thus, even in an
economic boom, employers can hold back wage increases without the risk of losing
valuable labour. Of course, these changes in wage formation may vary
considerably in different economies. But they interact with each other due to the global
market for goods and to a growing part of the service sector also being traded
globally.
The increase in the number of self-employed people, the many part-time
positions and the changed wage composition are factors that tend to crop up as
explanations for low wage growth in other economies but which I consider to be less
important for understanding wage formation in Sweden. On the other hand, what
is special for Sweden is that we have become many more on the labour market.
The number of persons between 15 and 74 in the labour force increased by just
over half a million between 2006 and 2016. This increase is largely due to high
immigration but the labour force is also growing due to changed rules and reforms
on the labour market and to tax, benefits and pension rules.4 A higher labour
supply leads to greater competition for vacant jobs, thus restraining the rate of wage
increases.
My assessment is that there are overarching cyclical forces that suggest wages will
rise during the forecast period, but that the rate of increase may remain low
despite the high level of resource utilisation.
When the effect on the economy from upheavals such as technological advances,
demographic changes or increased cross-border trade has worn off, employees
should be able to increase their pay again. However, this can take time and,
during the transition, the best contribution monetary policy can make is to facilitate,
via high resource utilisation and as far as is compatible with the inflation target,
the various adjustments demanded by structural transformation and
demographics.
Education and oversight of competition - to meet the future
However, if Sweden as a country is to be able to meet these challenges over the
long term, other policy areas than monetary policy will have to be used. Here, I
would like to name two important areas: education and oversight of competition.
In light of technological developments and population increases, opportunities for
life-long education and professional development will be completely decisive.
Even well-educated professional groups that have previously had low
unemployment have started to become aware of a growing risk of being automated out of
work. This applies, for instance, to investment advice, financial accounting and
legal support. Other experts can describe this area better and in more depth than I
do here, but to me it seems obvious that increasing numbers of us will have
develop our skills further several times in the courses of our professional lives.
The other important policy area is that of competition oversight and regulation.
New technology brings new actors and some of these have become very large
global actors. In markets characterised by high entrance barriers, synergies and
network effects, far too much power can easily be concentrated in the hands of a
few dominant actors. National politicians play an important part here: in
cooperation with other countries, they must oversee and, when necessary, regulate
different markets to safeguard the public interest.
The contribution of monetary policy
At present, we can observe that the very low level of interest rates and the
Riksbank's asset purchases have had clear effects. Inflation, which has shown a rising
trend since 2014, was around 2 per cent last year and long-term expectations are
anchored to the target.
The Swedish labour market is moving in the right direction and employment has
increased by 240,000 over the last three years. But unemployment for those born
abroad remains high. Refugees settling in Sweden often lack a strong link to the
labour market when they arrive. Only half of refugees are in employment after
eight years in Sweden. But it is positive that their establishment on the labour
market looks like it is starting to go faster.
As you know, there are no guarantees in the forecasting business. It has taken a
decade, but it seems as though the global economy has finally recovered enough
from the after-shocks of the financial crisis to start a new chapter and that central
banks in our part of the world will gradually be able to raise interest rates again.
For the small Swedish economy, with its reliance on foreign trade, altogether
premature or rapid rate rises would jeopardise the strong economy and
development of inflation.
For the Riksbank, it is a question of remaining vigilant. A prerequisite for inflation
to continue to develop in line with the target is that economic activity remains
strong and has an impact on price developments. Monetary policy therefore
needs to remain expansionary for a while. But if everything goes as expected, the
time to start normalising monetary policy will come closer. The assessment we
made in February was that it is probably time to slowly start raising the repo rate
during the second half of this year. But such a turnaround requires considerable
caution, in my opinion.
I occasionally hear somebody say that it feels wrong to have a negative policy rate
when the economy is going as well as it is now. But the Riksdag has assigned the
Riksbank to conduct a monetary policy that contributes to suitably low inflation.
Therefore monetary policy cannot be governed by how one or another interest
rate level might feel.
To finish where I began: In an experimental world, with many uncertainties, clear
game rules are needed so that all parties in the economy can take well-founded
decisions on economic transactions. Reliable price stability, in terms of purchasing
power, is one such game rule. The alternative, which would lead to inflation
developing more unsteadily, would be a poor contribution from monetary policy to
Sweden's changeable society.