Persson: The Swedish economy after the EMU referendum
Deputy Governor Kristina Persson gave a speech on Monday at the Business economists club in Sundsvall under the heading "The Swedish economy after the EMU referendum".
"The referendum concluded in an unambiguous result, which means that the Riksbank will continue to conduct its monetary policy within the established framework. The result will not have any major impact on the economic assessments we make for the near future. However, in the longer term, my personal conviction is that the euro would have provided the right conditions for higher growth in Sweden, due to reduced financial uncertainty, lower interest rates and increased trade," said Kristina Persson.
"We are now focussing on assessments of the economic cycle and future inflation in preparation for the Inflation Report to be published in October. We can observe that there has been growing optimism recently with regard to future economic growth, particularly in the US. However, the question is how stable is this growth engine and will a single engine suffice to provide impetus for the global economy? This is an important factor in the Riksbank's assessments of the future, as the Swedish economy is strongly dependent on developments in international economic activity," observed Mrs Persson.
"One consequence of the increasing optimism is that long-term interest rates have begun to rise again as investors find their way back to higher risk investments. However, there is reason for vigilance with regard to future developments in interest rates, particularly in the US economy. US household savings are at a low level, and public finances are weighed down by large and growing deficits ensuing from the very stimulative fiscal policy conducted in recent years. At the same time, households currently have a higher level of indebtedness than has been the case following earlier economic downturns, particularly as the low interest rates have encouraged households to increase their borrowing during the slowdown. The positive development in prices on the property market has largely reinforced this trend; refinancing of mortgages at lower interest rates has enabled households to increase their borrowing and thereby their consumption," said Mrs Persson.
"If the financing of the budget deficit in the US were to lead to a steeper rise in long-term interest rates, it is likely that the property market would slacken or even begin to fall. There would then be a risk of households being forced to cut back on their consumption and instead increase their savings. As household consumption has been the engine driving the US economy in recent times, I believe there would then be a risk of the economic upturn coming to a halt," said Mrs Persson.
"It should also be noted that there is growing uncertainty over the effects of the US current account deficit and the development of the dollar. If the dollar were to fall too far, and too fast, the stability of the financial markets could be affected. A weaker dollar could also have negative consequences for growth in other parts of the world, not least the euro area," observed Mrs Persson.
"Another issue central to the Riksbank's assessment of future inflationary pressure is how Swedish wages will develop. We have seen lower wage increases in recent times than many people feared, which is probably due to the slackening in the labour market. If we look at the most recent statistics from August, notices of redundancy are still at a high level and employment in the public sector has also begun to fall. Although economic prospects have brightened somewhat, there is little sign at present of any recovery in the labour market in the near future. The next wage bargaining rounds will therefore take place in a fairly negative environment, which should be reflected in the outcome for wage increases," said Mrs Persson.
"All in all, the economic situation looks slightly brighter now than it did earlier this summer, when the Riksbank cut its repo rate on two occasions. The risks of continued weak growth have declined somewhat, but not dispersed entirely; they are now mainly associated with the question marks regarding the US economy and the international economic recovery. In my opinion, developments in the Swedish labour market may also restrain tendencies towards rising inflationary pressure. This should be weighed against the risk of higher inflation from rising prices on electricity and oil. We are currently working on how this should be balanced with the improved outlook for economic activity, and will return with our assessments in the next Inflation Report," concluded Mrs Persson.
