Rosenberg: Clearer picture of weaker economic activity

Deputy Governor Irma Rosenberg today spoke at a seminar arranged by Öhman Fondkommission about the current situation in the Swedish economy and inflation prospects.


"In the March Inflation Report, the Riksbank's assessment was that a war in Iraq would be short in duration and that international economic activity would recover gradually during 2003. The armed conflict passed quickly and the associated inflationary risks can now be discounted. With that, the focus has once again been shifted to the strength of the global recovery. The financial markets' reaction to the end of the war has thus far been cautious, which could be interpreted as a signal that the uncertainty surrounding the force of the recovery and when it can be expected to occur still remains," said Mrs Rosenberg.

"International economic developments have been weaker than anticipated in the March Inflation Report, as concluded by the Riksbank at the Executive Board meeting in April. Labour market developments have been a disappointment in both the United States and the euro area. Together with a somewhat slower rate of increase in household income, this is expected to subdue consumption. However, expansionary economic policy in the United States by way of low interest rates and tax cuts will continue to provide support, thus alleviating the effects on demand. A corresponding alteration of policy has not occurred in the euro area due to weak government finances and a different assessment of inflation risks. All in all, it is expected that the recovery will be protracted and that international price pressure will be relatively low. Allow me also to mention the respiratory illness SARS. A substantial reduction in tourism and corporate travel has been evident in several of the affected countries, Asia in particular. So far, the effects on the world economy have been difficult to assess, and I can not presently see any sustainable effects on the picture of inflation in Sweden," said Mrs Rosenberg.

"Due to lower international demand, Swedish export growth is expected to be weaker than anticipated by the Riksbank in March. Corporate sector investment dropped sharply at the end of last year. It therefore appears that the rise in investment that was expected to accompany the anticipated increase in demand will be delayed. All in all, it seems that growth in the Swedish economy will be somewhat weaker than the Riksbank's assessment in March," said Mrs Rosenberg.

"A quicker-than-expected fall in the price of oil has contributed to inflation being lower than forecast. After a sharp rise in electricity prices at the beginning of the year, these have continued to develop largely in line with the Riksbank's assessment. In April, annual CPI and UND1X were 2.3 and 2.4 per cent, respectively. Adjusted for electricity prices, UND1X has remained around 1.8 per cent in recent months," said Mrs Rosenberg.

"The risk of a sharp rise in inflation that could have resulted from a prolonged war and consequently high oil prices is now gone. However, the risks associated with domestic cost developments and the international economic climate have remained and must be weighed up against each other. Should electricity prices continue to fall, this will lead to a reduction in the risk of contagion effects. The upside risk from wage formation remains, however, as there is a risk that overly high wage increases in the areas currently involved in the conflict will lead to demands for compensation when the agreements in other areas of the labour market are negotiated in the autumn. In the short term, however, the labour market conflicts may entail some downside risk, if, for example, a large number of people have difficulty getting to work. The longer the conflict drags on, the greater the risk that the already weak economic activity will be subdued further. As before, the downside risks for inflation are mainly related to the risks of slacker international development due to the imbalances that have been caused by the share price bubble and structural problems in the euro area," said Mrs Rosenberg.

"All in all, it is my assessment that the picture of a slower international economic recovery has become clearer since the previous Executive Board meeting in April, in line with a gradual easing of the uncertainty that stemmed from the war in Iraq. There is therefore also reason to assume that economic activity in Sweden will be weaker. Energy prices have fallen, which in the long term will reduce the risk of contagion effects. Consequently, there is cause to expect a weaker inflationary trend, while there are also a number of clear downside risks. Resource utilisation in Sweden is expected to be lower compared to the April assessment. It is anticipated that this will subdue inflation, thereby creating scope for a more expansionary monetary policy. The extent of this scope will be examined by the Executive Board at the next monetary policy meeting on 4 June," concluded Mrs Rosenberg.

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