. gdp growth this year was therefore expected to be high, which was supported by both the national accounts figures for the first quarter and the economic indicators for developments during the second quarter. there were also signals from the labour market that economic activity was continuing to improve, with an increasing demand for labour. we could also note that inflation had begun to increase, after having been strikingly low. the high inflation rate was partly explained by rising energy prices, but prices of certain other goods had also been raised more quickly than before. our assessment was that inflation would not change very much over the coming year and would then gradually increase as economic activity improved and there was a rise in the rate of wage increase. our forecast was that inflation would be on target a couple of years ahead, on the assumption that monetary policy gradually became less expansionary in line with market expectations in june. international statistics received over the summer indicate that economic prospects look more favourable now than we had assumed in june. the signals regarding the us economy are mixed, however, and some indicate that growth will be weaker than expected next year. however, the picture for the euro area and other parts of the world is that developments have been slightly stronger than assumed in our earlier forecasts. with regard to the swedish economy, the national accounts for the second quarter have confirmed our assessment in june that growth would remain strong. the statistics show that gdp growth during the second quarter was actually higher than our forecast. however, the development in the number of hours worked and the number of persons employed was weaker than expected, which reflected the fact that productivity growth had been much higher than anticipated. the new indicators received point to continued stable economic activity and to an improvement in the labour market in future. all in all, this indicates that growth will be higher than we had assumed in june, even taking into account the fact that expectations of repo rate increases have been adjusted upwards over the summer. the upward revision in growth prospects has not led to any major revision in our inflation assessment. although the high gdp growth in itself indicates that inflation may rise more rapidly in future, the strong productivity growth is at the same time expected to contribute to cost pressures being lower this year than was assumed in june. cost developments in the somewhat longer term are very difficult to assess. if productivity continues to develop strongly, companies may postpone recruiting new staff, which would mean a delay in the labour market upturn and continued low cost pressures. however, there are a number of indications that the

called for. growth in the industrialised countries may thus be affected by the real economic crisis which has hit the emerging markets and resulted in a sharp fall in output there. the magnitude of such an effect will be highly dependent on confidence - confidence among households and firms so that they are prone to consume and invest, confidence among banks so that they are prone to provide credit. the riksbank ’ s appraisal in the riksbank ’ s most recent inflation report we counted on an oecd area growth rate of around 2 per cent in the years ahead. it should be borne in mind that this figure represented the latest in a series of downward revisions over the past twelve months. since the publication of the september report, our assessment of tendencies in the rest of the world has not changed. considering the mechanisms to which i have just referred, however, it is not surprising that our report highlighted the risks associated with the external situation. this situation is unusually difficult to evaluate and has to be followed closely. in the situation that has arisen, why doesn ’ t the riksbank lower the repo rate? after all, other central banks have done so. the answer is that our assessment includes all the factors which have a bearing on developments in sweden and future inflation. to date in 1998, economic development in sweden has been very good. at present, moreover, it is very difficult to foresee the krona ’ s future path. as i mentioned earlier, the economic fundamentals point to a definite appreciation. if that is not sufficiently marked, however, export production will be strongly stimulated. it is difficult to tell whether that in turn would alter inflation prospects for the period of twelve to twenty - four months that is relevant for monetary policy. that is something to which we will be returning when the international picture becomes clearer. it is also a consideration that has to be weighed in with the outlook for the domestic economy. a repo rate cut is not topical in sweden at present. how did it happen? why is it that the unrest in southeast asia and russia, with some tendencies to spread to latin america, is beginning to affect the financial system in the industrialised countries? what has gone wrong in the global financial system? there is no simple answer to these questions. but let me briefly mention a couple of factors. first, however, it is important to underscore the advantages that accrue from a global financial system of the type that has been developed in the past decade