Bäckström: Swedish economy impressively strong
‘The Swedish economy has been impressively strong in recent years and is now, after the crisis, approaching its eighth year with a good economic trend. This is being combined with low inflation as well as wage increases that are compatible with a balanced development. The picture after the summer seems to confirm that growth and employment are continuing to develop favourably at the same time as there appears to be no immediate threat to price stability.’
These observations will be made on Thursday by the Riksbank Governor, Mr Urban Bäckström, at a breakfast seminar in Bangkok, arranged by the Swedish Chamber of Commerce.
‘But the Riksbank naturally has to be on its guard, particularly in view of the strong economic upswing. As monetary policy acts with a time lag, the Riksbank has to look fairly far ahead when deciding about the interest rate. Our deliberations focus on inflation prospects one to two years ahead.’
‘That the inflation propensity appears to have diminished during the 1990s is a good sign, as is the possibility that the Swedish economy is now capable of somewhat higher long-term growth than before. But if demand remains as strong as many observers now predict, a tighter monetary stance will probably be needed, though it is not clear when. Good conditions will thereby be created for the continuation of a favourable trend for production and employment.’
‘As I see it, it is primarily the situation in the labour market that may prove to be crucial for inflation prospects in the future and consequently also for the path of the repo rate. Total unemployment (the sum of open unemployment and participants in labour market programmes) has fallen substantially in recent years. If the current forecasts for 2001 hold good, total unemployment will have been halved from the level during the crisis in the first half of the 1990s.’
‘It is gratifying that economic policy in general has been able to generate conditions for the rapid growth of employment. Still, the present tendency is an indication that the economy is expanding more rapidly than is feasible in the longer run. As long as people with the requisite qualifications are in the right place and prepared to take the jobs that are available, labour demand can exceed the inflow to the labour market. It is when labour shortages and bottleneck problems arise that inflationary tendencies show up, with a risk of accelerating price and wage increases.’
‘The fact that some bottleneck problems have already appeared is an indication that there is now a limited number of people with the training and experience that the available jobs require. The problems are exacerbated in that much of the increase in production and thereby of labour demand has been concentrated to the metropolitan regions and university towns. More than 25 per cent of manufacturing companies, for example, report that they face labour shortages; in April this year the figure was around 20 percent and at the end of 1998 it was 10 per cent. The rising incidence of shortages shows that the time will come when employment cannot go on growing at the present annual rate.’
‘The situation as regards labour shortages is not yet as grave as it was during the years of overheating in the late 1980s. The proportion of manufacturing companies that reported labour shortages at that time was considerably higher than today. Other shortage figures showed a similar tendency. But although the problems are not acute, it is important that the Swedish economy is prevented in good time from landing in that situation again. In that way we can avoid an accelerating rate of price and wage increases that would break the present growth of production and employment.’
‘So, it is up to the Riksbank to ensure that Sweden’s vigorous upward economic trend turns into a growth path that can be sustained. This is not a simple matter and it calls for careful consideration so that a repo rate increase comes neither too early nor too late.’
