Bergström: Sweden's economy performing strongly

‘Notwithstanding strong growth and an improved labour market, during the spring and summer we have been able to keep the repo rate unchanged at 3.75 per cent. This can be compared with rates of 6–6.5 per cent in the United Kingdom and the United States. And although the euro area is behind Sweden in the business cycle and has higher unemployment, the ECB’s instrumental rate is 4.5 per cent.

 

These observations were made by Deputy Governor Villy Bergström on Wednesday evening at Aktie Torget’s and Almi’s "Market Day" at Uppsala University.

 

‘Why is this so? To tell you the truth, we don’t really know but there are a number of hypotheses. Perhaps we have overestimated capacity utilisation, which would mean there have been more unutilised resources than we counted on. Or perhaps the economy’s reaction to a given capacity utilisation has changed and become less inflationary.

 

‘Perhaps the labour market is more flexible than we believed and labour supply has responded more smoothly to rising labour demand. It is also conceivable that with the new settlements that have been concluded in manufacturing as well as for the public sector, wage formation has become more restrained in relation to a given situation in the labour market. Numerous factors have probably interacted to keep inflation down.

 

‘This has enabled us to defer an increase in the interest rate but the fact remains that if the economy continues to grow at the same good rate, an increase will come sooner or later. Production capacity is calculated to grow at an annual rate of 2–2.5 per cent, while demand growth is on a higher path. More and more unutilised resources are being brought into production. Sooner or later demand growth will have to be curbed. Although Sweden is relatively well to the fore when it comes to IT, there is still no evidence that the new technology has had a marked impact on productivity. Stronger investment growth than we have had to date would be needed for that.’