for household ’ s propensity to consume. in the last few years, investments in the business sector have increased quite strongly in volume while it is only just recently that investments in housing construction have started to increase. the strong growth we have seen in recent years is higher than that sustainable in the long term. the riksbank makes the assessment that annual increases in production of 2 - 2. 5 per cent are possible in the long term. the amount that gdp can increase is determined by the increase in productivity and by how much employment can increase. the larger increase in production in recent years is primarily due to there being a lot of unused resources in the economy after the problem years in the early 90s, when there was a substantial drop in production. while the productivity of the business sector has increased, it has primarily been increased employment that has created scope for growth. if we compare with the high - inflation period – the 20 years from the mid - 1970s, we can, however, see that we have had a faster increase in productivity in the past five years. we should not therefore rule out the possibility that we are on threshold of a faster growth in productivity when it investments spread on a broad basis to the “ old economy ” in the same way as has happened in the united states. the strong increase in productivity in recent years has taken place without inflation accelerating. this has surprised many people – for even though the previously high unemployment, indicated that there were a lot of unused resources in the economy, there were many who doubted whether it would be possible for so many to return to the labour market so quickly. month after month, we have seen increases in employment of 80 - 90 000 persons on an annual basis, 70 per cent of which have taken place by an increased supply of labour. flexibility in the labour market has thus exceeded expectations. open unemployment is now down to around 4 per cent, which, while it is higher than that considered normal in the 1980s, is lower than what many people in the early 1990s feared would be normal. stable inflation expectations the stabilisation of inflation expectations at a low level shows that the riksbank ’ s inflation target has attained high credibility. a number of factors have contributed to confirming confidence in the price stability objective. high real wage increases despite moderate nominal pay increases are one factor that has undoubtedly increased the support of wage earners for the price stability objective. the fact that the price stability objective has been confirmed by law has also probably contributed to confirming confidence in

to invest less and save more. moreover, the debt position of households and firms now seems to be more tangible and perhaps more troublesome. the debt levels were possibly motivated earlier, when productivity, expected profits and wealth were continuously improving, but now that wealth stocks have collapsed, this is more difficult. there is a risk that instead of investing, firms use every cent they can find to strengthen solvency. a similar risk is that heavily mortgaged households will not be prepared to take advantage of lower interest rates. it is also conceivable that if activity slackens more than expected, the federal finances will not develop as favourably as many people believe at present. that could deliver another blow to confidence in the future. which of these scenarios seems most probable is debatable. but they are not mutually exclusive. the outcome may well consist of features from more than one of them. what looks at first like a v, for example, can change into an l. but some variant of the u scenario does seem most likely today. that would call for a clear downward revision of international economic activity in relation to the assessment in our main scenario in december. conclusions for the swedish economy in this situation it is a great help that after a number of years of good growth and low inflation, the swedish economy now stands on firm ground and that the public finances are in a much better state than at the time of the previous economic downturn. a series of years of effectively combating inflation and a restrictive budget policy have created a good initial position that makes an economic slowdown easier to handle. activity in the swedish economy slowed in the closing months of last year. the tendency was most evident in export sectors but it looks as though consumption also became more subdued. this is to some extent desirable. earlier last year, growth in sweden was so high that a continuation would presumably have pushed inflation up and thereby threatened economic stability. the signals received during january and february also point to domestic activity being somewhat weaker than calculated earlier. the change is not dramatic, however. the growth rate seems to falling back towards the level — between 2 and 2. 5 per cent — that the riksbank identified earlier as being what the economy can achieve in the longer run without generating higher inflation. turning to price tendencies, some increase has been noted in the rate of underlying domestic inflation ( undinhx ). this indicator excludes changes in interest expenditure, taxes and subsidies, and prices of imported goods. the increase is not