Bäckström: Slight slowdown no problem for the economy

Governor of the Riksbank Urban Bäckström gave a talk under the heading "The Swedish economy and economic integration" at a seminar in Malmö organised by the Chamber of Commerce of Southern Sweden.

"The Riksbank's Inflation Report in March predicted a main scenario with demand in the Swedish economy beginning to adapt to a level more easily sustained in the long term, following the considerable expansion in recent years. This in turn is expected to lead to a relatively stable development of inflation around the Riksbank's target of 2 per cent over the next one to two years. This assessment is based on the assumption of a slowdown in the international economy following in the footsteps of the economic developments in the USA. In Sweden the order inflow and production are slowing down, which in turn subdues investment. Households are affected by falling optimism among firms and the decline on the stock exchange. This means that private consumption is now growing at a more moderate rate. The Riksbank emphasised the fact that the situation is difficult to assess when it presented the Inflation Report. The risk picture included in the Report also showed this clearly."

"The Executive Board decided at its monetary policy meeting on 26 March to adopt a 'wait-and-see' attitude, while maintaining readiness to act quickly if this should prove necessary. The minutes from the meeting show that the majority of the members of the Executive Board did not wish to give any signals on future interest rate decisions. Several members maintained that a lot could happen before the next meeting."

"Since the Inflation Report was published the statistics received from the USA have given mixed signals. Household consumption and activity in the construction sector have remained high, while financial unease has continued, and may have a subduing effect on demand. The US central bank lowered its key rate once again this week. It remains to be seen how quickly the less stringent monetary policy can bring the economy onto a more favourable course. The spread effects from the slowdown in the USA have become more evident in a number of European economies. It is difficult to assess developments in the near future, but it appears that Europe can look forward to a relatively good economic growth."

"Here at home the rate of increase in the retail trade has slowed somewhat during the early part of 2001, while household expectations have fallen and industrial activity is relatively weak. On the labour market, employment is still rising, although the number of new vacancies reported indicates that the growth in demand is beginning to slow down slightly."

"Nevertheless, according to the latest figures, both CPI inflation and UND1X inflation (the underlying inflation rate) have risen by 1.9 per cent on an annual basis. This is several tenths more than the Riksbank had assumed in its Inflation Report. The domestic underlying inflation rate (UNDINHX) also rose more than expected, increasing by 2.9 per cent in March compared with March 2000."

"Of course, we should not draw any hasty conclusions on the basis of individual monthly figures, but these developments need to be carefully monitored. The more rapid rate of price increase could partly indicate that demand and resource utilisation are so favourable that companies are taking the opportunity to try to improve their profit margins. The fact that demand is affecting part of the rise in the inflation rate indicates that the Swedish economy has had a relatively high level of resource utilisation over the past year and that the expected slowdown is not a disadvantage. In this way, demand can adapt to a level more easily sustained in the long term."

"It is not possible to say how extensive and prolonged the coming international economic slowdown will be and how this will in turn affect the Swedish economy. Some pieces of this jigsaw puzzle are still missing. It can be added that the Swedish repo rate is lower than the corresponding steering interest rates in most other industrial nations, which probably helps to counteract the effects of the slowdown in the global economy. Furthermore, it can be noted that the krona is still very weak, which currently stimulates the demand for exports and also limits repercussions."

"These are some of the indications of developments in the Swedish economy as they appear in spring 2001, and that my Executive Board colleagues and I will take into account as we sit at the meeting table on 26 April for the next monetary policy meeting at the Riksbank," concluded Urban Bäckström.