Per Jansson: Some aspects of the economic situation
Speech by Mr Per Jansson, Deputy Governor of the Sveriges Riksbank, at Nordea,
Stockholm, 13 March 2012.
* * *
Today, I will talk about the assessment of the economic situation in Sweden and abroad that
I and the majority of the members of the Executive Board made at the monetary policy
meeting in February. At the same time, I would like to go into a little more detail about three
aspects that were particularly important to my stance regarding the repo-rate decision. Two
of these relate to the management of the European debt crisis and one to the risks posed to
the Swedish economy by a low repo rate over an extended period of time.
Those of you who have read the press release or the minutes from the monetary policy
meeting in February know that I voted with the majority for a further repo-rate cut to the
current level of 1.50 per cent. Our decision to cut the repo rate was mainly due to the
weakening of the prospects for growth in Sweden, which in turn is a result of the impact of
weaker economic development abroad.
International outlook marked by the euro area's debt crisis
The fact that economic activity abroad has weakened recently primarily relates to
developments in the euro area. The euro countries are marked by the debt crisis and growth
prospects have deteriorated somewhat compared to the end of last year due to new
consolidation measures and a tighter credit situation. There are, however, a number of bright
spots in the US economy, where the labour market is improving and the housing market is
showing early signs of a positive turnaround. With regard to the global economy as a whole,
the Riksbank's forecast is that growth will continue to increase at a relatively good rate in the
years ahead, after having declined somewhat in 2012. This is shown in Figure 1.
Figure 1.
GDP in various regions and countries
Quarterly changes in per cent calculated as an annual rate,
seasonally adjusted data
6 6
4 4
2 2
0 0
-2 -2
The world
-4 -4
USA
Euro area
-6 -6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bureau of Economic Analysis, Eurostat, the IMF and the Riksbank
For some time now, an important assumption in the Riksbank's international forecast has
been that the euro countries, by implementing various measures, will succeed in reducing
the most acute anxiety about the debt problems in the euro area during the course of 2012. It
is expected that this will lead to an increase in the confidence of European companies and
households and thus to growth being able to recover towards the end of the year. I think this
is a reasonable assumption. Recent figures regarding, for example, the purchasing
managers' index for the manufacturing industry and household confidence, indicate that
pessimism has declined somewhat since the end of last year. Nevertheless, the economic
outlook for the euro area is still of course uncertain.
Consolidation measures required
Some of the uncertainty stems from the fact that we have still not seen the final effects of the
fiscal policy tightening that is now being implemented by the governments of the euro
countries. Some voices in the current debate claim that this tightening could have such
negative consequences for growth that the countries concerned should wait to implement it.
This brings me to the first aspect I would like to discuss. The fact is that I am more worried
about the reverse; that is that the countries are not dealing with their problems quickly
enough.
At present, most of the countries in the euro area have deficits in their public finances and
these deficits are expected to fall slowly over the next few years. Moreover, according the
IMF's latest assessment from January this year, the deficits are expected to fall even more
slowly than was predicted as recently as September last year.1 According to the IMF, the
advanced economies reduced their cyclically-adjusted deficits by an average of less than
one percentage point between 2010 and 2011, as shown in Figure 2.2 These deficits are
expected to fall by as much or, if you prefer, by as little, in 2012. If we look at the euro area
separately, the reduction between 2010 and 2011 was slightly larger, that is 1.3 percentage
points. However, it should be noted that a large part of this reduction was due to improved
public finances in Germany and not in the countries where such an improvement is needed
most. Despite a continued improvement during 2012, the assessment is that public finances
in the euro area will, on average, still be in deficit. Consequently, the average level of public
debt is expected to increase from almost 90 per cent of GDP in 2011 to 92.5 per cent in 2013
according to the IMF. In order to reduce the level of debt instead, several European countries
would need to transform the relatively substantial deficits of today into surpluses over a
period of several years.
Figure 2.
Cyclically-adjusted net lending
Percentage of potential GDP
0 0
-1 -1
-2 -2
-3 -3
-4 -4
-5 -5
2010
2011
-6 -6
Euro area Germany Advanced economies
Source: The IMF
The links that exist between the levels of debt, interest rates and growth also suggest that a
high level of public debt entails risks. For example, a high level of debt tends to lead to higher
long-term interest rates, as shown in Figure 3.3 A high level of debt may also lead to lower
growth due to increased vulnerability to future crises, or because taxes may have to be
increased to finance the debt.4 The higher the level of debt, the more the country must set
aside to make the interest payments on its debts. These are a couple of the reasons why
most studies show that fiscal-policy tightening, or consolidation measures, have positive
effects, at least in the longer term.
Figure 3.
It pays to consolidate
10-year government bond rates and gross debt as
a percentage of GDP 2011, per cent
20
18
16
Austria
rate
14
Belgium
bond Germany
12
Spain
10 Finland
France
government
8
Greece
Ireland
6
Italy
10-year
Netherlands
4
Portugal
2
0
0 50 100 150 200
Gross debt as percentage of GDP
Sources: Eurostat, Reuters Ecowin
The current account shows how important it is to consolidate
Of course, identifying an appropriate rate for budget consolidation measures is no easy task
in a situation in which deficits are large and growth is weak. One way of addressing the
question of when it is appropriate to consolidate is to look at the economy as a whole, not
just at the public sector. In this context, the current account is an important measure for
illustrating the state of the economy in relation to the rest of the world. A substantial
current-account deficit indicates that domestic expenditure is high in relation to domestic
production. A current-account deficit may be due to factors that are not necessarily negative.
However, it can also be due to domestic imbalances, for example to economic policy being
too expansionary. Another reason may be that competitiveness is weak, which dampens
exports. In such cases, it pays for the country to try to reduce its current-account deficit by
restraining domestic expenditure or increasing production.
Many of the euro countries that are having problems have had both current-account deficits
and deficits in their public finances. Probably the most effective way of reducing the deficit in
such cases is to improve competitiveness and reduce domestic expenditure at the same
time. Postponing consolidation in such a situation would only entail domestic demand
continuing to be higher than it should be. Figure 4 shows the current-account balance in a
number of euro countries last year.
Figure 4.
Current-account balances
Per cent of GDP, 2011
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
-8 -8
-10 -10
Source: European Commission
Like the Riksbank, most forecasters expect a tighter fiscal policy to dampen growth in Europe
in the period immediately ahead. It is difficult to assess the precise effects as these will
depend on how and when the measures are implemented. But the measures will of course
have an impact, particularly when several countries reduce their public spending and/or raise
their taxes at the same time. This will happen, furthermore, in a situation in which there is
little scope for monetary policy to further stimulate demand. But what's the alternative? As
the risks associated with a high level of debt are so high, it should be in the countries'
interests to shoulder a greater responsibility for improving their own situation. This brings me
to the second aspect I would like to discuss today, that is how the problems of
highly-indebted countries are handled.
Sustainable solutions require responsibility
It is now obvious that some European countries need support from the IMF and the EU and it
is good that this possibility exists. However, focusing too much on various support measures
undermines the incentives for the countries themselves to find sustainable solutions to their
problems. I suspect that at least one reason for the comparatively weak results achieved so
far with regard to budget consolidation and reforms at the national level is that altogether too
much energy has been expended on support facilities and too little on what is needed to
improve the preconditions for an economically strong Europe.
However, I am not a fanatic who claims that budget consolidation is the one and only
solution. The least painful way to strengthen a country's public finances is to work with
structural reforms that benefit the country's economic growth. This may relate to reforms of
the labour market and the pension system, reforms of the fiscal-policy framework and, in
some cases, fundamental institutional reforms. Many of the countries that now have
problems due to their weak public finances have weak economic-policy institutions and are
ranked at a relatively low level in various measures of institutional strength, for example the
degree of efficiency or corruption in the public sector. Figure 5 shows examples of this.5
Weak institutions in themselves undermine the potential for growth.6 By implementing
structural reforms, the countries can improve their public finances and increase their potential
for growth in the period ahead. However, despite the fact that there have been and still are
processes in the EU that aim to improve the workings of the economies and improve
competitiveness, for example the Lisbon Strategy or Europe 2020, it has proved to be easier
said than done to implement these reforms. A robust plan should therefore be based on both
structural reforms and consolidation.
Figure 5.
Structural reforms are important
World Bank's governance indicators
100 100
Government Effectiveness
Regulatory quality
Control of Corruption
90 90
80 80
70 70
60 60
50 50
Sweden Portugal Ireland Spain Greece
Note. The bars show indicators of institutional quality in which 100 is the best possible
value and 0 the worst.
Source: World Bank Worldwide Governance Indicators
Some progress made
In the same way as the weak performance of the European economy today is undermining
the economic outlook for Sweden, better growth potential in Europe would benefit the
Swedish economy going forward. Eight of Sweden's 10 most important export markets are in
Europe and five of them are euro countries.7 It is of course therefore gratifying that work is
underway at the EU level to restore confidence in economic policy. In early March,
25 countries signed the so-called fiscal compact, which entails stricter monitoring of the
Member Countries' budget work and a greater possibility to impose sanctions on those
countries that have excessive debts or deficits. These are measures that can help to
increase the credibility of the countries' budget discipline and reduce the risk of future debt
crises. Progress has also been made in putting together a second support package for
Greece. At the same time, the decisions by the ECB in December and in February to offer
the banks in the euro area three-year loans against collateral have helped to stabilise the
situation on the financial markets.
So, although the situation in Europe is still problematic, we can see that progress is being
made at approximately the rate the Riksbank has estimated. In such a scenario we can
expect to see a recovery in the euro area, although a weak one, over the next few years.
Poorer performance abroad leading to slowdown in Sweden
The weak performance in Europe at the moment is affecting the Swedish economy in several
ways. First, the demand for Swedish exports is falling. This was also the main reason why
growth slowed down in the economy at the end of last year. Second, household and
corporate confidence in the economy is falling and this in turn is leading to a slowdown in
consumption and investment. The financial situation in Sweden is also affected by
developments abroad. The fall in share prices in 2011 reduced the financial wealth of the
households, which contributed to an increase in saving. It is unlikely that there will be any
significant decline in saving in the period immediately ahead as the low level of growth is
expected to reduce employment and increase unemployment.
Before I move on to my personal reflections on the situation in the Swedish economy, I would
like to say that I make the same assessment of the economic outlook in Sweden as that
made by the majority of the members of the Executive Board at the latest monetary policy
meeting. This assessment is that there will be relative low inflationary pressures and slow
growth in the period ahead.
It was expected that the Swedish economy would slow down at the end of last year, but the
slowdown was more severe than we believed it would be. In the December forecast the
Riksbank predicted that growth would decline and that there was some probability of a
further repo-rate cut in February. In February, our assessment was that the slowdown in
growth in late 2011 had been even more severe. This was because the indicators for
exports, among other things, suggested this. I therefore voted with the majority to cut the
repo rate by a further 0.25 percentage points.
Since then, we have learned that the outcome for GDP growth in the last quarter of 2011 was
even worse than we expected at the time of the monetary policy meeting in February. This is
largely because exports were even weaker than expected. However, we have also received
outcomes for foreign trade in January which indicate that exports strengthened again after
the turn of the year. We will receive further clues as to the current state of the economy
before the next monetary policy meeting in April and will then review how this new
information affects monetary policy.
As I said earlier, in the slightly longer term the Riksbank's latest forecast is that there will be
a gradual recovery in the euro area and the global economy following a weaker 2012. This
will of course affect Sweden too. It is expected that resource utilisation will increase, the rate
of wage increases will accelerate and underlying inflation will gradually rise as growth
improves. The latter is illustrated in Figure 6.
Gradually rising inflationary pressures
The CPI, CPIF and CPIF excluding energy, annual percentage change
5 5
CPIF excluding energy
CPIF
4 4
CPI
3 3
2 2
1 1
0 0
-1 -1
-2 -2
06 08 10 12 14
Note. The CPIF is the CPI with a fixed mortgage rate.
Sources: Statistics Sweden and the Riksbank
Low real repo rate for some time to come
We will need to gradually tighten monetary policy when inflationary pressures and resource
utilisation increase. The Riksbank's repo-rate path from February therefore indicates
repo-rate increases during the course of 2013 and 2014. Nevertheless, this forecast still
means that monetary policy will remain highly expansionary in the years ahead.
Figure 7 shows that the real repo rate is expected to be negative in 2012-2013; that is for a
substantial part of the forecast period. If this proves to be the case, won't there then be a risk
of monetary policy being too expansionary? Won't we perhaps risk overheating, a too high
rate of inflation or an unsustainable development of household debt?
This is of course not impossible, but at present I do not think that it is very likely. To explain
how I have reached this conclusion I would now like to briefly summarise how I view some of
the risks associated with a very low real interest rate.
Low real repo rate for some time to come
Real repo rate, per cent, quarterly mean values
3 3
December
February
2 2
1 1
0 0
-1 -1
-2 -2
06 08 10 12 14
Note. The real repo rate is calculated as a mean value of the Riksbank's repo rate forecast
for the year ahead minus the inflation forecast (CPIF) for the corresponding period.
Source: The Riksbank
Overheating - not a risk at present
The first risk thus relates to resource utilisation in the economy and the risk of overheating.
As I have already said, weak economic development abroad is having a significant impact on
the Swedish economy. On the other hand, Sweden is in a much better initial position than
many other countries. Sweden's public finances are in good shape and, unlike some other
countries; Sweden did not suffer a significant downturn on the housing market in connection
with the financial crisis of 2008-2009. It is rather the case that the Swedish economy grew so
quickly during the major part of last year that there was a risk of overheating and rising
inflationary pressures. The companies reported rising labour shortages, and other measures
of resource utilisation in the economy also increased. There were periods during the year
when several indicators were higher than normal.
However, there has been a turnaround in these indicators over the last few months.
Company surveys show that labour shortages are no longer as acute in most sectors.
Capacity utilisation in the manufacturing industry has declined and is somewhat lower than
the historical average. Other indicators, such as unemployment and the employment rate,
also point to more spare capacity than normal in the economy. My assessment was therefore
in line with the overall analysis in the February Monetary Policy Report, that is that resource
utilisation in the Swedish economy had declined and was below a normal level at the end of
last year. This is shown in Figure 8. I therefore think that there is very little risk of overheating
at the moment.
Resource utilisation lower than normal
The Riksbank's RU indicator, standard deviation
2 2
1 1
0 0
-1 -1
-2 -2
-3 -3
96 98 00 02 04 06 08 10
Note. The Riksbank's indicator for resource utilisation summarises information from
surveys and labour market data. It is normalised so that the mean value is zero and the
standard deviation is one.
Source: The Riksbank
Fewer risks of high inflation
The second risk relates to the rate of inflation. CPI inflation was high last year, which could
have led to a substantial increase in inflation expectations and to excessive wage increases
in the autumn round of collective bargaining. But this has not turned out to be the case, so far
anyway.
Long-term inflation expectations have declined and are now close to the inflation target of
two per cent two and five years ahead. In addition, wage agreements have now been signed
for large parts of the manufacturing industry. Providing that the new wage agreements for
other sectors are in line with the norm set by the manufacturing industry, it appears that total
wage increases this year will be around 3.5 per cent. This is actually a rather large wage
increase given the fact that unemployment is relatively high, but not so large that it is likely to
lead to any serious inflation risks. However, collective bargaining is still underway and it
remains to be seen exactly how the results of this process will affect monetary policy.
Rate of wage increases in line with the inflation target
Annual percentage change and percentage of labour force
12 12
Unemployment, aged 16-64
Unemployment, aged 15-74
Average 2001-2011, unemployment
10 10
Wages
Average 2001-2011, wages
8 8
6 6
4 4
2 2
0 0
93 95 97 99 01 03 05 07 09 11 13 15
Note. Preliminary outcomes in the short-term wage statistics in 2011. The broken lines
are the Riksbank's forecast in February 2012.
Sources: National Mediation Office and the Riksbank
Another relevant factor is that the rate of inflation measured in terms of the CPI has declined
since the autumn. In August last year, CPI inflation was as high as 3.4 per cent. It has fallen
significantly since then and in January the rate of inflation was just below 2 per cent. I expect,
in line with the assessment in February, that CPI inflation will fall further in the period ahead
when the interest expenditure of the households increases more slowly. Underlying
inflationary pressures are also low in the wake of a strong krona and lower resource
utilisation.
Low interest rates and household indebtedness
I would like to conclude by saying something about my view of household indebtedness.
However, before I discuss the last of the three risks that I associate with a low real repo rate I
would like to clarify a matter of principle.
I am one of those who believe that a long period with low interest rates can lead to various
imbalances. Such imbalances can arise, for example, if credit growth is too rapid, if asset
prices increase too much or if the price of financial risk is set too low.8 Unbalanced
development is characterised by the fact that, for one reason or another, an excessive level
of indebtedness arises in the economy. If the economy has fallen into a recession following
such a period, the recovery may be very slow as households and companies will spend a
larger part of their incomes on amortization payments rather than on consumption and
investment. The financial crisis of 2008-2009 is the latest example that clearly demonstrates
how important it is to avoid such a situation. The US economy fell into recession in early
2008 as a result of problems on the housing market and an excessive expansion of credit in
the household sector. Four years later, employment in the United States has still not
recovered more than approximately one third of the fall that occurred during the crisis. To
refer back to what I said earlier, one could say that Europe's debt crisis is a variation on the
theme of excessive indebtedness, although primarily for the public sector in this case.
Figure 10 shows how much unemployment has increased in several other countries that
have suffered a downturn on the housing market. I have included Sweden and the OECD as
a whole for the purposes of comparison.
Figure 10.
Large increase in unemployment in countries affected by
a downturn on the housing market
Unemployment, index 2007=100
350 350
OECD
Ireland (-30.8 per cent)
Spain (-14.8 per cent)
300 300
Denmark (-19.4 per cent)
UK (-13 per cent)
USA (-17.5 per cent)
250 250
Sweden (-0 per cent)
200 200
150 150
100 100
50 50
0 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Note. The figures in brackets present the fall in real housing prices from the peak to the
trough. The broken lines represent OECD forecasts.
Source: The OECD
The high costs associated with reducing indebtedness in the economy means that situations
can sometimes arise in which there may be a desire to take factors such as the level of
indebtedness into account in monetary policy, as well as inflation and the real economy. How
often this actually happens depends on how effective the oversight and supervision of risks
in the financial system as a whole are. If this so-called macroprudential supervision is less
effective, it is probable that monetary policy must take such factors into account to a greater
extent than otherwise.9
After having clarified this matter of principle, I will now discuss the development of household
indebtedness in Sweden. In 2011, the Riksbank pointed out that a gradually rising repo rate,
apart from stabilising inflation and resource utilisation, may also have the positive side effect
of helping to slowdown household borrowing. Credit growth in the household sector, which is
closely linked to the development of the housing market, has gradually declined since 2010.
Household indebtedness is still high, but it levelled off last year. This suggests that the risks
in this area are limited, at least at the moment. However, I believe that it will be important to
monitor developments in the period ahead to check that new risks do not arise.
Figure 11.
Decline in lending to households
Credit growth, annual percentage change
20 20
Companies
Households
15 15
10 10
5 5
0 0
-5 -5
-10 -10
99 01 03 05 07 09 11
Source: Statistics Sweden
Conclusions
Today, I have discussed three aspects that were particularly important to my assessments
and my stance when the repo-rate decision was made in February. Two of these relate to the
debt crisis in the euro area. My view is that it is taking too long to improve public finances
and that the risks associated with a high level of indebtedness mean that the debt-ridden
countries themselves must assume a greater responsibility for resolving their problems. The
third aspect relates to the risks that can arise when the real interest rate is low for an
extended period of time. This can, for example, lead to overheating tendencies or a too rapid
increase in indebtedness. My conclusion is that, in the current situation at least, these risks
are limited. This was one of the important reasons why I was able to vote for a repo-rate cut
at the latest monetary policy meeting.
A lively public debate is currently underway on a couple of the issues I have addressed here.
This applies, for example, to the need for consolidation and which strategy is best for finding
solutions to the debt crisis in the euro area as quickly as possible. The question of what role
the central banks should play in counteracting an excessive expansion of credit and
indebtedness is also often debated, and the members of the Executive Board of the
Riksbank also have different opinions about this. I don't find this strange at all, on the
contrary it is entirely natural. Hopefully, this debate will contribute to constructive solutions
going forward.
Thank you.