Heikensten: September 11th is leaving its mark on the statistics

Addressing HSB Bank's Finance Day on Wednesday, First Deputy Governor Lars Heikensten spoke about economic developments.

"It is only a fortnight since the Riksbank published an Inflation Report, in which we counted on economic activity remaining weak in the coming year, in Sweden as well as abroad. An upturn was not expected until the second half of next year. In a historical perspective this is fairly normal; it is more or less how business cycles usually develop. But each period has its particular characteristics and qualities. The main argument for a weaker development and a more protracted slowdown lies perhaps in after-effects of the long upward period in the 1990s, with its associated imbalances in saving and investment as well as the adjustment to more reasonable share prices that has been going on since the spring of last year. On top of this there is, of course, the security policy developments after September 11th and their various effects on the world economy. This is countered mainly by an expansionary economic policy. In Sweden there is also the strong economic stimulus from the krona's low value," Mr Heikensten said.

"For monetary policy the picture is complicated by inflation being above the Riksbank's 2 per cent target. The major part of the increase can admittedly be attributed to transitory factors that are calculated to drop out during the spring. But even excluding those factors, inflation has moved up more than expected and has done so even though resource utilisation is lower - at least nowadays - than we counted on earlier. This raises questions about how high resource utilisation actually is and the economy's inflation propensity. Our view that inflation will fall back is shared by most economic observers. Moreover, inflation expectations are in line with our target. Another clear argument for a development along the paths we envisage is the weak international price trend, not least for raw materials. But there is a risk of the picture being disturbed by a persistently weak exchange rate. All in all, however, we counted on inflation being approximately 2 per cent in the latter part of our forecast period," Mr Heikensten continued.

"There has not been much new information since the Inflation Report was published. The figures for the United States show an economy that is in the process of loosing steerage-way. Growth there is negative for the first time since the beginning of the 1990th and unemployment is rising surprisingly rapidly. At the same time, households are becoming increasingly cautious and stepping up saving, with negative effects for consumption. There have also been some weak outcomes for Europe and Sweden. However, the picture conveyed by the statistics is broadly in line with our assessment. Moreover, much of the information that is now becoming available is strongly marked by the events of September 11th. So its importance should not be exaggerated when it comes to assessing the outlook in the somewhat longer run," Mr Heikensten went on.

"During the past year economic policy has been realigned quite markedly, not least in the United States. In Sweden the level of interest rates remains very low historically. Meanwhile, it looks as though the more expansionary shift in fiscal policy that began about a year ago is more opportune than seemed likely at the time. But it should be borne in mind that we know rather little about how our economies react to stimuli of this kind. Earlier experiences were not all that good and many of the objections to economic fine-tuning that have been put forward in recent decades still apply. Neither should we forget that it is a tough, frequently questioned budget consolidation and anti-inflation policy that have now given us some degree of highly welcome freedom of action. That is a lesson that should not be lost sight of when the economy turns upwards again," Mr Heikensten underscored.

"In conclusion, there are no grounds at present for changing the assessment that was presented in the Inflation Report a fortnight ago. The situation is still very difficult to assess and we do not have much new information," Mr Heikensten concluded.