Lars Heikensten: The economic situation and inflation Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the Lund University, Malmö, 13 October 2005. *  *  *  Let me begin by thanking you for your invitation to Malmö. My intention today is to give a broad picture of how I view the economic situation abroad and in Sweden. By way of conclusion I will also say a few words about the inflation outlook and monetary policy. Continued strong international growth During the spring there were a number of signs that international economic activity had slackened. The assessment that we made in connection with the June Inflation Report was that it probably was a temporary slowdown in activity. The information flow during the summer and at the beginning of the autumn essentially suggests that this was a correct assessment. Both macro data and measurements of business expectations in a number of countries indicate that international economic activity has gained new impetus. A continued strong economic performance in the United States and continued rapid economic expansion in China and the rest of Asia are currently the engine driving global growth. The Japanese economy also seems more robust that it has done for a long time. The performance in the euro area, however, remains worrisome, particularly in the major economies. Recently, though, there have been some signs that growth is about to pick up there as well. These signs include a recovery in manufacturing activity.

In the previous decade, during a period of relative stability, Asia had focused on building and solidifying our financial system. Deep, diverse and progressive financial systems have contributed significantly to increasing the resilience of our economies. Looking ahead, the next phase of Asia’s transformation will see a rising and more affluent middle income population. There will also be massive investments required for infrastructure and development and for a higher contribution to growth by small and medium businesses. This will substantially increase demand for a wider spectrum of high quality financial products and services. The strategy is also for the intensification of financial deepening in Asia to meet the increased demands of domestic investors in the management of their surplus funds. A large part of Asian funds are still intermediated through the global financial markets and then recycled back into Asia. This increases Asia’s exposures to volatile capital flows. To reduce the existing gap between the supply of and demand for financial assets within Asia, it will require the development of a vibrant risk capital ecosystem comprising intermediaries, financial markets and the supporting financial infrastructure to facilitate the efficient allocation of savings to productive investments. Second is the strengthening of financial linkages and connectivity, within the Asian region, and between Asia and other economies including other emerging economies. Asia has reached the stage of development where its further advancement calls for deeper regional integration that will result in greater capital mobility across borders, facilitated by more interconnected financial systems.