Moreover, some of the transitory effects entail a risk of higher inflation, if anything, during 1999; tax cuts and lower interest rates leave households with more money to spend and the same applies to cheaper oil. But underlying inflation also shows signs of being weaker than expected even though economic activity seems to be relatively strong and in line with the paths we have counted on for some time, with a further increase driven by domestic demand and supported by strong activity in Europe. The better picture of prices comes from a variety of factors. The rate of wage increases is likely to be somewhat more advantageous than we counted on earlier, even though we have consistently been cautiously optimistic in this respect. Of greater importance is productivity, where good growth in recent years has helped to brighten prospects. Somewhat lower import prices together with a slightly stronger exchange rate also contribute. Work on our next Inflation Report is nearing completion. There are several indications that in the two years horizon that is relevant for monetary policy, CPI inflation may be somewhat below our target. The picture of underlying inflation is much the same. Neither are these positive inflation prospects modified by the various risks that lie ahead. In a perspective that extends to the middle of 2000 the element of uncertainty is obviously high; if anything, however, the main risk seems to be that international activity will be marginally weaker and inflation accordingly somewhat lower. This is a pleasant situation to be in.

*  *  *  BIS Review 47/1998  -8-  GDP growth 1980-1997 Index: 1980=100, seasonally adjusted  135  135 Trend: 1993-97  130  130  125  125 Trend: 1985-90  120  120  115  115  110  110  105  105  100  100  95  95 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Sources: Ecowin and the Riksbank  Budgetbalance: Sweden and EU-average Per cent of GDP, 1998-1999 forecast by NI and OECD  8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14  8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14  Sweden EU-average  90  91  92  93  94  95  96  97  98  99  Sources: OECD and National institute of Economic Research (NI)  BIS Review 47/1998  -9-  Wage curve: Sweden and EU area Wage/employee, annual percentage change, 1998-1999 forecast by OECD  14  14  12  12  Sweden  10  10  8  8  6  6 EU- area  4  4  2  2  0  0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99  Source: OECD  Inflationexpectations of labour market organisations Per cent 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5  Jan-95 Feb-96 Nov-97 Feb-98  94  95  96  97  98  99  May-98  00  01  4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5  02 03  Sources: Statistics Sweden and Prospera Research AB  BIS Review 47/1998  - 10 -  Market and administered price components of the CPI Annual percentage change  5.0  5.0  4.0  4.0  Administered prices  3.0  3.0 CPI  2.0  2.0  1.0  1.0 Market prices  0.0  0.0 95  96  97  98  -1.0  -1.0 Sources: Statistics Sweden and the Riksbank  Krona exchange rate with US dollar and German mark 8.5 8.3 8.1 7.9 7.7 7.5 7.3 7.1 6.9 6.7 6.5 jan-95  5.6 SEK/USD (left scale)  5.4 5.2  SEK/DEM (right scale)  5.0 4.8 4.6 4.4 4.2 4.0  jul-95  jan-96  jul-96  jan-97  jul-97  jan-98 Source: The Riksbank  BIS Review 47/1998  - 11 -  CPI and underlying rates of inflation Percentage 12-month change  12  12 CPI  10  10 8  8 UNDINH  6  6 UND1  4  4  2  2  0  0 90  91  92  93  94  95  96  97  98  Sources: Statistics Sweden and The Riksbanken  Average of CPI forecasts of external observers Annual change, per cent  2.5  2.5 Forecast for 1999  2.0  2.0  Forecast for 1998  1.5  1.5  1.0  1.0  0.5  0.5  Outcome for 1997  0.0 Aug-97  0.0 Oct-97  Dec-97  Feb-98  Apr-98  Jun-98  Note.