Svante Öberg: The economic situation
Speech by Mr Svante Öberg, First Deputy Governor of the Sveriges Riksbank, to the
Västerbotten Chamber of Commerce, Umeå, 25 August 2011.
* * *
My message today can be summarised in four points:

Developments have been dramatic over the summer.

However, statistics for the Swedish economy received during the summer have
been in line with the forecasts made in July.

The turbulence on the financial markets has nevertheless increased uncertainty over
future developments.

We will discuss how this may affect monetary policy in September.
It is now the fourth year in a row that I have held a speech on the current economic situation
in the month of August. Normally, I give an account of the most recent forecasts from the
latest monetary policy decision in late June/early July and of the statistics received since
then. This year it seems justified to give just a brief account of the forecasts made before the
summer holidays and of the new statistics and to instead discuss events during the summer
and what future consequences they might have. I shall therefore begin with a brief
background, and then move on to discuss in more detail the turbulent developments in the
financial markets during the summer, concluding with a few words about the problems I
believe we will face at the next monetary policy meeting.
July monetary policy report
Continued recovery in the world economy as a whole...
We pointed out in the July Monetary Policy Report that growth in the world as a whole was
good. The forecast was that GDP growth in the coming years would be just over 4 per cent a
year, which is higher than the historical average. The emerging economies, including the
BRIC countries (Brazil, Russia, India and China), acted as motor (see Figure 1). We also
noted that inflation was relatively high in many countries, but that energy and commodity
prices in the world market, which rose substantially last year and had pushed up inflation,
had levelled off or fallen slightly this year (see Figure 2).
...but the recovery in the United States and euro area is sluggish
However, the international outlook was divided. The recovery in the United States and the
euro area was expected to be slow (see Figure 3).
GDP growth in the United States was expected to be just over 2 per cent this year and to
only gradually return to more normal levels of around 3 per cent. Unemployment had fallen
only marginally from the peak levels noted in the most acute phase of the financial crisis. The
impact of energy and commodity prices on inflation had been surprisingly large in the United
States, which had led to inflation being relatively high (see Figure 4). We also noted that the
United States needed to reduce the large deficits in its federal budget, which would entail
fiscal policy tightening over the coming years.
GDP growth in the euro area was expected to be around 2 per cent a year during the
forecast period. But there were substantial differences between countries. Germany, which is
the largest economy in the euro area, showed relatively rapid growth, driven by exports and
the upswing in world trade. At the same time, developments in southern Europe were
hampered by the sovereign debt problems. We also noted that inflation was still high in the
euro area and above the ECB's inflation target, partly because energy and food prices had
risen (see Figure 4).
Strong but declining growth and rising inflation in Sweden
GDP growth in Sweden was expected to be high this year, around 4.5 per cent, but then to
slow down to more normal rates of increase of around 2.5 per cent a year in the coming
years (see Figure 5).
All components of demand contributed to the positive development. Household consumption
was expected to increase by between 2 and 2.5 per cent a year over the coming years.
Exports benefitted from the upswing in world trade, but we assessed that export growth
would slow down in the coming period and approach more normal levels. A strong economic
situation, combined with historically-low investment levels, meant that investments in
Sweden were expected to increase substantially over the coming years.
Unemployment had fallen since 2009 and we expected it to continue to fall over the coming
years as economic activity recovers (see Figure 6).
CPI inflation was over 3 per cent prior to the summer. However, CPIF inflation, which
excludes the effects of interest rate adjustments on housing costs, was just below 2 per cent
and even lower if energy prices are excluded. Our assessment was that underlying
inflationary pressures would gradually rise as economic activity strengthens (see Figure 7).
Interest rate increases necessary to attain the inflation target
Against this background, we raised the repo rate in July from 1.75 to 2 per cent. We also
considered that the repo rate increases would need to continue in the coming period. This
was to stabilise inflation around the target of 2 per cent and resource utilisation around a
normal level. The forecast for the repo rate, the repo rate path, which includes two further
interest rate increases in autumn 2011, was therefore held unchanged. As usual, we pointed
out that there was considerable uncertainty in the assessment of the future repo rate and that
we would need to reconsider the monetary policy stance if conditions were to change
significantly (see Figure 8).
At the monetary policy meeting in July I said that I personally believed that the repo rate
would be raised at all three meetings this autumn, especially if the sovereign debt problems
looked to be resolved without any major negative effects on the financial markets.1 But so far
the management of the sovereign debt problems has not been particularly successful. I will
come back to this.
New statistics
The statistics received during the summer on the Swedish economy are largely in line with
the assessments we made in July. However, the international outlook appears weaker,
particularly in the United States. The statistics refer mainly to the second quarter and the
summer months of this year, and do not actually say very much about the forecasts for the
second half of the year and the coming years.
Weaker international developments...
Since July, we have received preliminary national accounts figures for the second quarter of
this year for the United States and the euro area.
GDP growth in the United States was 0.3 per cent in the second quarter of this year,
measured as a seasonally-adjusted quarterly change. This was slightly lower (0.1 of a
percentage point) than we were expecting in July. However, the national accounts for the
United States also contained a review of earlier figures, which shows that the decline in 2009
was greater and the GDP level this year lower than was previously assessed (see Figure 9).
The labour market improved in July, but not at a rate that points to a good recovery. CPI
inflation in the United States remained high in June and July, 3.6 per cent, which was
unchanged from May. Underlying inflation, excluding energy and food, was lower, but rose in
both months to a level of 1.8 per cent in July.
GDP growth in the euro area was 0.2 per cent in the second quarter of 2011, measured as a
seasonally-adjusted quarterly change, which was also slightly lower (0.1 percentage point)
than we were expecting in July. Inflation in the euro area fell from 2.7 per cent in June to
2.5 per cent in July, when measured as the HICP. Underlying HICP inflation excluding
energy and unprocessed foods also fell in July, to 1.5 per cent.
At the monetary policy meeting in July I said that developments in the United States were
troublesome. Both monetary policy and fiscal policy must be tightened there in the longer
run, which will subdue growth. A strong, self-supporting recovery is therefore needed, a
recovery that does not depend on short-term cyclical policy stimulation, to ensure a tangible
improvement in the labour market. We cannot see this type of strong growth yet. It is also a
common pattern that a financial crisis is followed by several years of weak growth.2 I also
noted at the July meeting that there was a tendency in the United States and Europe towards
stagflation, with low growth and high inflation at the same time. Developments over the
summer reinforce this image, but this does not mean that things will necessarily continue in
the same way.
...but developments in Sweden largely in line with the forecasts
In Sweden we have received the first preliminary national accounts figures for the second
quarter of this year, and new statistics for the labour market and inflation, for instance.
GDP growth was slightly higher in the second quarter than we were counting on in July.
Seasonally-adjusted quarterly growth came out at 1.0 per cent, against an expected 0.6 per
cent. Although both domestic demand and exports were marginally weaker than the
Riksbank had forecast, imports, which are a deduction item when calculating GDP, were
even weaker. This means that GDP growth was slightly higher than expected.
I expressed some concern at the monetary policy meeting in July that the second quarter
would be weaker than our forecast in the Monetary Policy Report. This was not the case,
which in itself is a good thing. But at the same time, more forward-looking indicators such as
the purchasing managers' index and the National Institute of Economic Research's economic
tendency surveys point to economic activity slowing down. This is something that we have
already counted on. However, the purchasing managers' index has fallen more than
expected, which indicates that the slowdown may be greater than estimated (see Figure 10).
The labour force survey statistics show that the labour market continued to improve in June.
Employment rose by just over 2 per cent, compared with the same month last year, and
unemployment fell, when seasonally-adjusted, to 7.5 per cent. This was a marginally smaller
improvement than we were counting on in July (unemployment 0.1 of a percentage point
higher).
CPI inflation was 3.3 per cent in July. CPIF inflation (1.6 per cent) and CPIF inflation
excluding energy (1.1 per cent) were much lower. All of these outcomes were marginally
(0.1 of a percentage point) lower than expected.
I said at the monetary policy meeting in July that there was still a risk that inflation would
increase more than we were expecting, particularly in 2012 and 2013. This was partly
because inflation had recently been held back extra hard by the strengthening of the krona. I
also pointed to the risk of rising energy and commodity prices in the world market, higher
wage increases than expected due to pressure in the labour market, and higher inflation and
wage expectations due to the high CPI inflation.
But so far, inflation has been marginally lower than expected and energy and commodity
prices have fallen. The outlook for 2012 and 2013 depends, for instance, on developments in
international economic activity and on the result of the coming wage bargaining rounds in the
labour market.
The financial markets during the summer
Developments in the financial markets have been dramatic over the summer. Share prices,
government bond yields and exchange rates have fluctuated substantially. This turbulence is
one factor that could have significance for future forecasts.
This is essentially due to renewed concern over sovereign debt problems in the euro area
and the United States. Focus has primarily been on four issues: public finances in Greece,
the risk of problems spreading to Spain and Italy, potential problems in the European banks
and the management of the debt ceiling and public finances in the United States.
New support package for Greece
At the beginning of the summer there was particular concern over developments in Greece.
After a series of meetings of various policy-making bodies within the EU as well as a vote of
confidence and a decision on budget-strengthening measures, structural reforms and the
sale of state-owned companies in the Greek parliament it was decided in mid-July that
Greece would receive a further support package from the euro area and the IMF. This led to
a slight fall in the yield on Greek government bonds from their extremely high levels (see
Figure 11).
Spain and Italy in the danger zone
At the beginning of August concern increased that the problems would spread to other
countries than Greece, Portugal and Ireland, who were already receiving support. Market
participants focussed on the sovereign debt situation in Spain and Italy, which caused
government bond yields to rise in these countries. Both countries have problems with their
public finances, but in different ways. Italy has a very large national debt, but not such a large
deficit in public finances, while Spain has a smaller national debt but larger public finances
deficit. Both countries have suffered declining competitiveness over the past ten years.
Recently, the lack of confidence has also begun to affect France.
The banks managed the stress tests
There is also concern that the sovereign debt problems will spread to the banking sector. On
15 July the European Banking Authority, EBA, reported the results of the stress tests of
91 European banks, which together account for 65 per cent of the EU's banking sector. This
showed that all the banks but 8 had sufficient resilience to manage a deterioration in the
scenario for the period 2011-2012, but that a further 16 banks almost did not pass the tests.
However, all four major Swedish banks passed the stress tests with flying colours.
The results were received with some scepticism, as they were not considered to be
sufficiently credible, but the markets nevertheless calmed down. European bank shares have
since fallen, however, as a result of concern that sovereign debt problems may spread.
US sovereign debt problems cause concern
The sovereign debt problems in the United States have also caused concern on the financial
markets. This rose gradually in July as the prolonged three-way negotiations between the
parties in Congress and the President were underway. At the beginning of August, a decision
was reached at the last minute to raise the debt ceiling and to implement greater cutbacks.
However, these decisions did not succeed in calming the market. Standard & Poor's lowered
the credit rating for the United States on 5 August from the highest level of AAA to the
second highest level AA+ with a negative outlook. The other two dominant credit rating
agencies, Moody's and Fitch, retained their AAA ratings. The poor statistics received during
the summer regarding the US economy have further increased the financial market
turbulence.
Sovereign debt problems create uncertainty
In my opinion, the public finance problems in the United States have remained fairly
unchanged since July. The deficit in US public finances is calculated by the IMF to
correspond to around 10 per cent of GDP this year. It should not be so difficult to decide on a
long-term programme that will bring down the deficit to a manageable level within a few
years in the way Sweden did in the mid-1990s. However, the decision-making system in the
United States is constructed in a way that makes it difficult to take the necessary type of
decision. Moreover, my impression is that the problems with the public finance deficit are
underestimated in the United States to the extent that they believe growth will resolve much
of the problems. On the other hand, they have now decided on certain budget-strengthening
measures and the United States usually succeeds in managing difficult problems in the end.
The sovereign debt problems in the euro area are actually smaller than the US problems.
The deficit in public finances in the euro area is calculated by the IMF to correspond to
around 4 per cent of GDP this year. All in all, there is thus less need of budget strengthening
measures in the euro area than in the United States and the tightening effects need not be
so great. But the deficit is unevenly distributed and some countries have very large deficits
and/or national debts. The problem is that even in Europe it appears to be difficult to reach
decisions on credible long-term programmes for consolidating public finances. Instead, many
countries have been forced by the markets to decide on further budget strengthening during
the summer to increase confidence.
However, even if the sovereign debt problems in the United States and the euro area are
essentially the same, the market turbulence may lead to the situation deteriorating. This
could lead to rising government bond yields and increased uncertainty regarding the future,
and thereby to lower GDP growth. It could make it harder to rectify the deficits in public
finances in the countries concerned. At the same time, the market turbulence would probably
decline if one succeeded in presenting credible programmes for managing public finances.
However, it is uncertain whether the decisions made during the summer will suffice to calm
the markets.
ECB buys government securities
A further problem is that self-generating processes can arise on the financial markets. If the
price of a particular type of asset, such as a certain country's government bonds, falls, this
can lead to this type of asset being sold, as those holding these assets may want to avoid
continued losses. This pushes the price down even further. It may be difficult to break such a
process.
To avoid this situation arising, the ECB began to buy Spanish and Italian government
securities on the secondary market in August, which has pushed down interest rates for
these countries. In addition, the European Council has agreed to increase the flexibility of the
European Financial Stability Facility (EFSF). This facility will be able to grant loans to
governments and - in exceptional cases - to buy government bonds on the secondary
market. Formal approval by the respective countries is required for these changes to be able
to come into force, and this process should move quickly. In July the euro countries signed
an agreement to establish a permanent rescue funding programme, the European Stability
Mechanism (ESM), which will replace the EFSF in the middle of 2013.
Sweden has strong public finances
In this context it is worth pointing out that public finances in Sweden are relatively strong.
This is partly the result of the problems we faced and succeeded in managing in the
mid1990s. Regulations regarding expenditure ceilings, surplus targets and balance requirements
for the municipalities have contributed to the good situation we have now. Our strong public
finances also mean that there is no need for the fiscal policy tightening in Sweden that
several other countries will have to implement.
Important questions at the September meeting
The turbulence on the financial markets has increased uncertainty regarding international
economic developments in the coming period, and ultimately regarding developments in
Sweden. I shall conclude with a few words on the problems I consider we will thus need to
discuss at the next monetary policy meeting in early September.
Sweden affected through foreign trade...
International economic developments affect developments in Sweden in two main ways:
through foreign trade and through the financial markets. Exports are dependent on
developments in world trade. During the summer we have seen lower growth than expected,
particularly in the United States. Lower international growth usually also leads to lower
growth in Swedish exports. An important task here will thus be to assess GDP growth in
various parts of the world and what significance it has for the Swedish export market. One of
the most difficult questions in this context is to assess how increased uncertainty abroad will
affect international developments.
Inflation in Sweden is also affected by trade with other countries, for instance, when the
prices of goods imported into Sweden are adjusted in the world market. As I have already
pointed out, energy and commodity prices have fallen since last spring, which we will also
have to take into account in our inflation forecasts.
...and via the financial markets
The Swedish economy is also affected through the financial markets. Interest rates abroad
have fluctuated substantially and this also affects Swedish interest rates. This is clear from
the strong covariation between government bond yields in the United States, Germany and
Sweden. Developments during the summer have entailed falling interest rates in Sweden,
which is in itself positive for growth (see Figure 12).
At the same time, share prices have fallen and the stock market is very volatile. Since the
Monetary Policy Report was published on 5 July, the Stockholm Stock Exchange has fallen
by around 20 per cent until the beginning of this week (see Figure 13). This could mean that
households increase their precautionary saving and that companies postpone investments.
We must also take a stance on how this may affect our forecasts. But then one must also
take into account the fact that we have already counted on a significant slowdown in GDP
growth, from around 4.4 per cent in 2011 to around 2.2 per cent in 2012, which is a much
lower growth rate than the 3.8 per cent the government was anticipating for 2012 in its Spring
Budget Bill.
Economic developments in Sweden can also be affected by developments in the Swedish
krona. History shows that the Swedish krona usually weakens in times of turbulence, which
was clearly demonstrated during the financial crisis. One effect of the severe krona
weakening in 2008-2009 was that the price of imported goods rose. In this way, inflation in
Sweden was stabilised; otherwise there was a risk that it would have been too low. Even
during the most acute phase of the crisis, CPIF inflation remained close to the target of 2 per
cent. The krona has also weakened during the financial turbulence this summer, but so far
the depreciation has been modest (see Figure 14). We will also take into account the
consequences of this in our inflation forecasts.
At the same time, the recent financial market turbulence, with falling share prices and interest
rates, may suddenly be reversed. My experience is that one should be cautious in
interpreting fresh events when one is shaping economic policy. Our repo rate decisions are
aimed at the future. Although uncertainty has increased, and economic activity abroad so far
has been slightly weaker, the Swedish economy has developed largely in line with the outline
we sketched in July. Moreover, the repo rate is still low.
Swedish banks are stable
The Riksbank has two main tasks. The first is to conduct monetary policy with the objective
that inflation shall be low and stable. The second is to safeguard financial stability. The
Riksbank therefore closely monitors developments in the financial markets. During the
summer we have extended out monitoring as a result of the international turbulence.
Swedish banks are still financially strong. They currently have good access to funding on all
of the markets they normally use. The Riksbank's stress tests also show that they have a
good capacity to manage increased loan losses. But as the Swedish banks obtain funding
largely through market borrowing in foreign currency, they are of course vulnerable to
problems abroad. We currently have daily contacts with the banks and we have access to
data on their funding. So far, there is nothing to indicate that it will be necessary for us to
lend money to the banks.
Next decision is on 6 September
We are currently working hard on new analyses and forecasts for the monetary policy
meeting on 6 September. I have today attempted to outline events during the summer and
the issues I consider we will discuss at our next monetary policy meeting. My colleagues and
I will return to how this will ultimately affect monetary policy in the coming period in a couple
of weeks' time when our decision has been made. Moreover, we are constantly monitoring
developments in the financial markets.
Figures
1. World GDP growth
Annual percentage change, calendar-adjusted data
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
80 85 90 95 00 05 10
Sources: The IMF and the Riksbank
2. Commodity prices
Index 2005 = 100, USD
350 350
Metals
Other agricultural products
300 300
Food
250 Crude oil 250
200 200
150 150
100 100
50 50
0 0
00 01 02 03 04 05 06 07 08 09 10 11
Note. Data are updated with new outcomes after the publication of the July
Monetary Policy Report.
Sources: The Economist and Intercontinental Exchange.
3. GDP in the USA and in the euro area
Index 2007 Q4 = 100
115 115
USA
110 110
105 105
Euro area
100 100
95 95
90 90
85 85
80 80
75 75
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bureau of Economic Analysis, Eurostat, Statistics Sweden and the
Riksbank
4. Inflation
Annual percentage change
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
USA
-2 -2
Euro area
-3 -3
00 01 02 03 04 05 06 07 08 09 10 11
Note. Data are updated with new outcomes after publication of the July Monetary
Policy Report.
Sources: National sources
5. GDP growth in Sweden
Annual percentage change
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
80 85 90 95 00 05 10
Sources: Statistics Sweden and the Riksbank
6. Unemployment
Percentage of the labour force
10 10
8 8
6 6
4 4
2 2
0 0
04 05 06 07 08 09 10 11 12 13 14
Sources: Statistics Sweden and the Riksbank
7. Inflation
Annual percentage change
5 5
CPI
CPIF
CPIF excluding energy
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Note. The CPIF is the CPI with a fixed mortgage rate. The data are updated with
new outcomes after the publication of the July Monetary Policy Report.
Sources: Statistics Sweden and the Riksbank
8. Repo rate with uncertainty bands
Per cent, quarterly average
8 8
90%
75%
7 7
50%
Outcome
Forecast
6 6
5 5
4 4
3 3
2 2
1 1
0 0
04 05 06 07 08 09 10 11 12 13 14
Source: The Riksbank
9. GDP in the USA
USD billion, fixed prices
14000 14000
Earlier GDP
13500 13500
Revised GDP
13000 13000
12500 12500
12000 12000
11500 11500
11000 11000
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Bureau of Economic Analysis
10. Forward-looking indicators
Economic tendency indicator: index, average = 100, standard deviation = 10
Purchasing managers' index: seasonally-adjusted index
140 140
Economic Tendency Survey
120 120
Purchasing managers' index
100 100
80 80
60 60
40
40
20 20
0 0
00 01 02 03 04 05 06 07 08 09 10 11 12
Note. The broken line represents the average 2000-2011.
Sources: National Institute of Economic Research and Swedbank
11. Government bond yields
10 year maturity, per cent
20 20
Germany
18 18
Greece
Ireland
16 16
Italy
14 14
Spain
12 12
Portugal
10 10
8 8
6 6
4 4
2 2
0 0
06 07 08 09 10 11
Source: Reuters
12. Government bond yields
10 year maturity, per cent
6.0 6.0
5.5 5.5
5.0 5.0
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
USA
2.0 2.0
Germany
1.5 1.5
1.0 1.0
Sweden
0.5 0.5
0.0 0.0
06 07 08 09 10 11
Source: Reuters
13. Stock market developments
Index, 1 January 2006 =100
180 180
Sweden (OMXS)
Euro area (Euro Stoxx)
160 USA (S&P 500) 160
Emerging markets (MSCI)
140 140
120 120
100 100
80 80
60 60
40 40
04 05 06 07 08 09 10 11
Source: Reuters
14. Krona exchange rate, TCW index
Index, 18 November 1992 = 100
160 160
155 155
150 150
145 145
140 140
135 135
130 130
125 125
120 120
115 115
04 05 06 07 08 09 10 11 12 13 14
Note. The outcomes are daily rates and the forecasts refer to quarterly averages.
Data are updated with new outcomes after the publication of the July Monetary
Policy Report.
Source: The Riksbank