In Sweden we are now assuming that GDP will fall almost as much as during the crisis in the 1990s. At that time the crisis was domestically-generated with financial imbalances, high nominal interest rates and an overvalued currency. On this occasion much of the disruption comes from outside. Public finances are in a good condition to begin with, interest rates are low and we will probably continue to have a current account surplus. At the same time, exports are declining rapidly, which has negative repercussions on investment. Household consumption is subdued by the deterioration in the labour market and an increase in precautionary saving. The outcomes and confidence indicators in recent months emphasise the weak developments. The recession is assessed to be unusually deep, which affects the supply of credit. Although corporate borrowing is still increasing, loan terms for companies have been tightened. There are also signs that there has been some substitution from market borrowing to bank borrowing. It is the larger companies that are experiencing the biggest problems with funding in the market and taking up a rising share of bank loans, which contributes to smaller companies seeing themselves at a disadvantage. There are now clear risks that increased credit losses will subdue the banks’ lending to companies. There is also a risk that small and medium-sized companies will be pushed aside. Funding difficulties and weak international demand have led to companies revising down their investment plans. All in all, this points to the Swedish economy being weaker than was expected in February.

As the banking sector is a very important part of the way monetary policy affects the economy, it is essential to closely follow developments in the credit market. Indirectly it also means that it is important that the Swedish banks attend to their problems in the Baltic both forcefully and quickly. This is to avoid the domestic transmission mechanism being disturbed by the international uncertainty. Here monetary policy and financial stability merge. The Swedish National Debt Office and Finansinspektionen (the Swedish financial supervisory authority) have also taken measures to alleviate the financial crisis. The Government has raised the state deposit guarantee and extended it to cover all types of deposits in accounts, it has introduced a guarantee programme, established a stability fund and decided on means of capital injections to the banks. Large fiscal policy stimulus packages Governments in many countries have presented substantial fiscal policy stimulus packages, which have been supported by the countries’ parliaments. Large packages have been presented in China, Japan and the United States, but there is substantial fiscal policy expansion even in a number of European countries. These include Sweden, where there is greater scope, in the form of strong public finances to begin with, than in most other countries. However, it is difficult to determine exactly what effects the fiscal policy measures will have on individual countries and on the global economy. In addition to the positive effects from the recently decided measures, growth is being stimulated by what is known as the automatic stabilisers.