urban backstrom : the swedish economy speech by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, to the swedish shareholders ’ association, stockholm, 27 november 2001. * * * first a word of thanks for the invitation to this evening ’ s meeting. i intend to talk about the swedish economy and monetary policy. the past year has been marked by a successive weakening of economic activity in sweden as well as abroad. forecasters all over the world have made sizeable downward revisions to the prospects for growth both this year and next. consider the picture of the economic future that consensus economics compiles once a month from the predictions of 200 professional observers. at the beginning of this year the combined assessment was that in 2001 and 2002, gdp growth in the united states and sweden would amount to between 2. 6 and 3. 5 per cent. it was foreseen that the slowdown would be comparatively moderate and be followed by a quick recovery. today, growth in the united states is judged to be just a modest 1 per cent or so this year and even weaker in 2002. in sweden, gdp is now expected to rise 1. 4 this year and 1. 7 per cent next year. in other words, it now looks as though the slowdown will be both deeper and more protracted than many observers counted on less than a year ago. we are experiencing a simultaneous slowdown in all the leading economies. after the terrorist attacks on 11 september, moreover, there is an even greater risk of the cyclical decline being more pronounced and persistent. the almost simultaneous and marked change that occurred in the global economic climate in the latter part of last year was triggered to an important extent by rising energy prices, higher interest rates, falling stock markets and the abrupt swing in corporate investment. weaker demand led in turn to stock adjustments and thereby to further downward effects on orders and production. at the same time, falling asset prices, not least in stock markets, tended to subdue private consumption. on top of this, the terrorist attacks entailed a loss of production in the short run and postponed a cyclical upturn. in many respects, economic activity is following the normal cyclical pattern and is therefore not all that surprising. after a long period of expansion, sooner or later activity turns downwards while the economy gathers strength for a renewed upward surge. while there is nothing exact about the succession of cyclical phases

of next year ’ s profits. so the overall appraisal of the krona ’ s exchange rate and its stimulatory effect is not entirely self - evident. finally there is the question of economic policy ’ s aggregate impact on demand. what i have in mind is next year ’ s prospect of a relatively large increase in fiscal policy ’ s contribution to household disposable income, accompanied by low interest rates. an expansionary economic policy normally tends to stimulate cyclical activity, which implies that 2002 should be a fairly good year for domestic demand. however, there are at least two factors that could limit or counter this effect. one factor has to do with the lower share prices and the tendencies for house prices to stop rising and in certain cases to fall. in recent years, purchases of cars and other consumer durables have been stimulated by the appreciation of assets that feature in household wealth. conversely, falling asset prices during the past year have tended to subdue these purchases. the stimulus from economic policy may accordingly be dampened or delayed as long as asset prices continue to fall. of course, the situation will be reversed if share prices and property prices instead stabilise, or even begin to rise once again. another factor is connected with the risks in the labour market. the redundancy statistics suggest that employment will level out or even fall next year, which may involve an attendant increase in unemployment. households are already expressing such fears in statistics sweden ’ s surveys. besides the direct downward effect on household disposable income, a weaker labour market may make people in sweden more cautious when making purchasing decisions. conclusions for monetary policy all in all, growth prospects for the short term are somewhat more unfavourable than when we published our most recent inflation forecast. however, the major economic policy realignment in a number of important countries looks like paving the way for a recovery after a time. but this does presuppose that households and firms really do start to consume and invest. major risks here are saving imbalances and over - investment. in sweden, too, there has been an expansionary realignment of economic policy that is helping to strengthen household income. provided there is an international recovery, the weak krona should have a stimulatory effect on exports. as regards inflation, the rate since april this year has been above the riksbank ’ s target. the increase is mainly due to transitory factors and i envisage that it will,