mr backstrom elucidates the economic situation in sweden and describes the consequences it may have for future monetary policy speech given by mr urban backstrom, governor of the sveriges riksbank at foreningssparbanken, ulricehamn on 1 september 1999. * * * first a word of thanks for the invitation to visit ulricehamn and talk about something that is close to the heart of a riksbank governor, namely sweden ’ s economic situation. i shall be describing the situation as i see it and saying something about the consequences it may have for future monetary policy. unexpectedly strong trend the new statistics in recent months show that economic activity is stronger than most forecasters had foreseen as recently as in the spring. the growth of both domestic and external demand has been higher than expected. relative to the first half of 1998, the gdp growth rate for the first six months of this year is an estimated 3. 7 %. most observers are in the process of revising their forecasts upwards, if they have not already done so. in the inflation report last june the riksbank judged that growth this year would reach 2. 5 %, followed by 3 % next year as well as in 2001. when the executive board discussed monetary policy on 12 august, however, our assessment was that this year ’ s growth rate would be 3. 5 %. we also saw grounds for an upward revision of growth in the next two years, though the prospects for that period are more uncertain. it is not just total output that has exceeded expectations. the same applies to employment. in the first half of 1999 there were approximately 100, 000 new jobs compared with the same period last year. much of the increase occurred in the private sector. this has been accompanied by decreased unemployment, if one disregards the temporary seasonal upturn during the summer. however, the reduction of unemployment is less marked than the increase in employment because many people are returning to the labour market now that jobs are becoming available. meanwhile, price increases have been moderate. the underlying rate of inflation ( undix, which measures inflation excluding interest expenditure, indirect taxes and subsidies ) fluctuated during the spring between 12 - month figures of 1. 0 and 1. 5 %. other indexes also point to low inflation, despite an increase in some commodity prices, oil in particular. altogether, then, the swedish economy is developing very well. we are now entering the seventh year of favourable economic growth –

far can unemployment be reduced without firms encountering recruitment problems more generally? even with the high unemployment at present, it is, for example, already difficult to recruit computer consultants and some other occupational categories. the situation in certain segments of the stockholm labour market is also tighter than in other parts of sweden. but so far, the bottleneck problems seem to be fairly restricted. as yet there are no indications of more widespread shortages. it is a positive sign that the matching of job seekers and job vacancies is still running comparatively smoothly, as it is that although the shortages of skilled workers in manufacturing have grown, the level remains relatively low. to date this year, moreover, the wage drift statistics show increases that are lower than expected. good credibility promotes price stability experience from the 1990s and earlier periods demonstrates that the relationships which are discernible in economic models have to be constantly questioned and reviewed. above all, they can never be adopted uncritically when forecasting the future. so much happens in different economies, not least as regards economic policies, that earlier truths have to be reassessed continuously. inflation has been subdued in recent years for a number of reasons. imported inflation has been low because of subdued commodity prices in connection with the asian crisis. productivity growth in sweden has been better than before. another major factor is the increased confidence in monetary policy and economic policy in general. all the survey data, as well as the underlying trend in market prices, show that no one expects inflation in the somewhat longer run to be anything but 2 %. the inflation target accordingly seems to constitute a clear anchor for price formation. in the 1970s and 1980s, inflation prospects did not depend on the level of domestic economic activity alone. relatively abrupt shifts in more long - term inflation expectations also played a part. today, there are no abrupt shifts of that kind. economic players simply count, with good reason, on the riksbank acting if signs of rising inflation were to appear. in such a world, overall price formation centres above all on the level of economic activity. the improved credibility is thus a further factor that may have contributed to a level of inflation that is lower despite relatively strong growth. at the same time, the riksbank has the major responsibility of keeping a close eye on the more long - term inflation expectations in order to maintain the credibility that has been built up in recent years. demand assessments difficult a question that naturally has to be included in the assessments is whether the stronger growth of demand